Two Applicants, One Credit Officer
Rupali Bank is evaluating two loan applications. Applicant X seeks ৳8,00,000 for a retail shop, offering collateral worth ৳9,50,000, with monthly net income of ৳55,000 and existing loan instalments of ৳18,000. Applicant Y seeks ৳12,00,000 for a small garment unit, offering collateral worth ৳10,00,000, with projected monthly net income of ৳95,000 and no existing loans. The bank's policy requires a maximum loan-to-value of 75% on collateral and a debt service ratio (total instalments to net income) of no more than 50%. X's proposed instalment is ৳22,000; Y's is ৳32,000. The branch manager favours Y because the amount is larger and there is no existing debt.
1. Test each applicant against the LTV and debt service ratio limits.
Read the worked answer
Applicant X:
- LTV = 8,00,000 / 9,50,000 = 84.2%, above the 75% cap. Maximum loan = 0.75 × 9,50,000 = ৳7,12,500, so X is ৳87,500 over.
- Debt service ratio = (18,000 + 22,000) / 55,000 = 40,000 / 55,000 = 72.7%, above the 50% cap. Maximum total instalment = ৳27,500, leaving ৳9,500 for the new loan after existing debt.
Applicant Y:
- LTV = 12,00,000 / 10,00,000 = 120%, far above the 75% cap. Maximum loan = ৳7,50,000.
- Debt service ratio = 32,000 / 95,000 = 33.7%, within the 50% cap.
So X fails both tests and Y fails LTV badly while passing the income test. Neither application can be approved as submitted.
2. Recommend how the branch should proceed, and critique the manager's reasoning.
Read the worked answer
The manager's preference for Y rests on size and absence of existing debt, but size is not a credit criterion and Y's collateral covers only 83% of the requested amount before applying the 75% cap. Y's maximum loan is ৳7,50,000, which is ৳4,50,000 short of the request; the shortfall must be met by more collateral, a guarantor, or a smaller loan. Y's income test passes comfortably, so restructuring is viable.
X needs both a smaller loan (maximum ৳7,12,500 on LTV) and a lower instalment (maximum ৳9,500 on income). A loan of about ৳3,00,000–৳3,50,000 over a longer tenor might satisfy both, but it does not meet X's stated need.
Recommendation: offer Y a ৳7,50,000 facility with additional collateral or a guarantee for the balance; decline or substantially resize X. Document the LTV and debt service calculations in the credit memo, and note that projected income for Y should be verified against the business plan before approval.