Loan pricing means determining the interest rate for granting loan to creditors. Individuals or business firms it is one of the most important. However difficult task in lending funds to business firms & other customers. Because it is always very difficult to exactly know what the actual loan risk a particular loan application is.
What is the importance of loan pricing
Generally the lender wants to charge a high enough rate to make sure that the loan will be profitable as well as it will covers enough compensation against the default risk. On the other hand loan price must be set low enough that helps the customers to find it easy for successful repayment of loan.
The pricing of bank loans is a complex and risky matter. It is not possible to determine the value of a loan by considering only one factor. Because there are many things involved with debt; Which is very difficult to divide from one to the other. That commercial bank has to determine the value of the loan by considering various factors.
The following are some of the factors that the loan pricing bank considers:
A, Internal matters
1. Debatable funds supply amount
2. Bank funding costs
3. administrative and transaction costs
4. Other costs
5. Debt supervision and collection costs
6, collateral maintenance cost.
7. Debt risk amount
8.Debt risk amount
9. Shareholder Expected Dividend Rate.
10. the cost of debt search and analysis
B. External Affairs |
1. Competitive situation
2. Loan demand
3. Other sources of debt.
4. Interest rate reduction-increase risk
5. Bank regulatory authority.
A, Intarnal factors:
1. Amount of supply of loan giving fund:
The first consideration of loan disbursement is to determine the amount of loan to be given. If the bank has a large amount of loanable funds in its hands, the bank provides low interest rate loans to repay the entire share. But if there is a shortage of creditworthy funds, the bank can easily demand more loans.
2. Cost of fund:
The bank considers the cost of funds in determining the value of the loan. If there is sufficient funds in the money market, the bank can collect it at a lower interest rate so that the bank can charge less interest on the loan. But if the money supply situation is unfavorable, the bank has to charge more interest for higher interest flow.
3, Administrative & transaction cost:
The skills of bank officers and employees. Reduces the administrative costs of the organization. Administrative costs have a direct impact on the pricing of loans. From the formula it is clear that banks set lower prices for lower administrative costs. Administrative inefficiency, on the other hand, increases administrative costs. As a result, banks charge higher interest rates.
If the bank arranges decorations to attract more customers, then there is a need to set another higher interest rate to cover the same expenses.
5. Loan supervision and collection cost;
The bank has to spend huge amount of money for supervising and collecting loan schemes and loan rules. These costs affect the value of the loan. The bank raises the value of the loan if it suspects that there is more to the cost of borrowing.
6. Security maintenance expenses:
Banks provide loans against collateral most of the time. If there is a possibility of incurring higher costs in maintaining the deposit, the bank is more inclined to reduce the cost. Determines. It is advisable not to take such loan in case of excessive maintenance cost.
7. Expenses of credit investigation & analysis:
Expenses of credit investigation & analysis: The financial viability of the proposed loan project, the reputation of the existing company and the character of the individual, the status of bank transactions, etc. The bank accepts the loan application considering. If the cost of the bank is high for performing all these functions, then the value of the loan is also high Is more.
8, Bank-customer relationship:
Bank-client relationship affects the price of the loan in different ways. If the client has a good relationship with the bank, the bank can provide the client with a special borrower rate facility. Also, the bank has a good idea about the client because of the long-standing identity. As a result, there is less risk in recovering the loan, so the value of the loan is also lower.
9. Anticipated dividend rate of shareholder:
Dividend is one of the producers of loan value. If shareholders expect higher rates of profit, the bank has to refrain from lending. As a result, the rate of debt increases. But if their expectations are below normal, it is possible to meet the desired goal by setting interest rates low.
10. Probability of alternative profit:
If the bank can earn more money from other sectors without investing in the loan sector, the borrowers will be discouraged from giving loans. If the bank has more such benefits, the bank demands higher interest on the loan. But the banker is willing to give loan at low interest even if there is a 1st chance of income.
B, External factors:
1. Competitive situation:
Competitive banks are less efficient in accepting deposits and providing loans. In order to retain the best customers, other banks should also adopt a competitive approach in pricing loans. Is. As a result, the relationship between the value of the deposit and the value of the loan can be seen.
2. Demand for loan:
If there is a shortage of loans in the overall banking market, each member of the banking market can be more profitable by providing loans at higher interest rates. But many banks cannot ensure maximum utilization of funds by smiling interest rates in adverse conditions.
3. Other Sources of loan procurement;
Debtors can also use the stock market, bill market, non-profit financial institutions, leasing companies, etc. to raise funds. Borrower. If the bank succeeds in obtaining adequate loans from such sources in a convenient way, the demand for loans increases. As a result, the bar is forced to pay less than the original loan.
In competitive market which of the variable and fixed pricing as a banker you would advocate
Determining the value of a loan is an important function of a bank. The profit of the bank depends on the smooth execution of this work. So in order to conduct banking business, it is necessary to determine the appropriate process for its loan.
Ordinary commercial banks follow an interest-based pricing process. However, there are different methods of determining interest-based pricing. One of the two methods is: “Variable loan pricing method” and “Fixed loan pricing method”.
In fact, the bank is a trader of borrowed money and loans. The people who borrow money from people as deposits are the ones who lend to others based on the minimum rate. However, in this case, the interest rate also changes all the time based on the minimum rate in terms of demand and availability of funds. In this case, a competitive market system is transformed and the loan pricing system appears to be more acceptable, realistic and effective than any other pricing process.
In particular, the modified pricing method is more effective in a competitive market system than the unchanged loan pricing method. Because. In the unchanged loan pricing system, the bank basically fixes the fixed term interest rate payable on the loan at the time of loan negotiation with its client. In this case, the interest rate does not change from time to time. As a result, both the client and the bank face the loss of potential problems.
Other banks that set unchanged lending rates cannot compete with unchanged lending banks. In this case, if the pricing of any bank is higher than that of other banks, the clients will move to another bank; But if the pricing process is less, the clients will remain in the concerned bank.
Moreover, in case of unchanged pricing, it is difficult for the client to bear the interest of the bank or if it increases, they are quick to look for alternative sources. Even then, from other sources in the money market, it is advisable to try to borrow the value of the loan offered by the valuing company.
Therefore, in a competitive market system, the modified loan pricing process or method is more effective and efficient than the unchanged loan pricing method. In such a process the determination of the loan value of the bank is fruitful for the concerned bank