The impact of transforming bank advisory services to borrowers on non-interest revenue generation

Chekani Nkwaira,Jan Walters Kruger

doi:10.21511/bbs.12(4-1).2017.08

Abstract

The challenges of revenue generation by banks are evident if one considers the accusations labelled against the banks of aggressive lending (Archaya &amp;amp; Naqvi, 2012), which basically centers on the pursuit of profits with minimum regard to risk management. If not read or if read in passing, loan terms can be used to destroy the reputation of banks when accusations of predatory loans surface. It is argued here that even if understood at the time of signing the acceptance of the loan, there is no guarantee that the terms are still top of mind of borrowers, especially those who borrow for a long term. Banks can use their advisory skills to periodically take borrowers through loan terms, confirm understanding, detect any wanton behaviors (WB) from borrowers’ financial activities that go against financial astuteness and may jeopardize repayment capabilities and offer advice on practices that are not counter to repayment capabilities. Banks can mitigate the challenges in interest income generation, particularly from a default point of view by periodically engaging borrowers to specifically advice on behavioral issues that manifest themselves in financial levers. Since borrowers stand to gain immeasurable value out of these engagements, banks can justifiably levy borrower advisory service fees (BASF) and wanton hazard fee (WHF). The authors show, through the application of the BASF and WHF, the potential income banks can generate. Using the BASF and WHF as sources of non-interest income, the potential benefit taking into account the credit loss as a function of BASF accruing to the bank is established.

Highlights

We identify wanton behaviors (WB) which is self-destructive behavior, in borrower aggression and macroeconomic fundamentals that need to be highlighted as part of the levers that should be looked into periodically based on their implications as stated on loan terms
Using the borrower advisory service fees (BASF) and wanton hazard fee (WHF) as sources of non-interest income, the potential benefit taking into account the credit loss as a function of BASF accruing to the bank is established
By examining the effect of carrying out periodic assessments on borrower behavior that could work in tangent to loan terms, banks can benefit from two angles

Summary

INTRODUCTION

We identify WB which is self-destructive behavior, in borrower aggression and macroeconomic fundamentals that need to be highlighted as part of the levers that should be looked into periodically based on their implications as stated on loan terms. Wanton behavior shows up when due to neglect of managing risk borrowers aggressively chase profits by extending collection periods so as to entice more customers This scenario puts the borrower back in the same situation that may have prompted him to apply for the facility in the first place. Since the availability of cash is crucial in loan repayments to banks as demonstrated by the liquidity measure which establishes if a business is generating enough cash from day to day operations to cover all normally occurring expenses, including interest and debt amortization, it follows that businesses should safeguard against raising additional cash through further borrowings from unofficial channels such as the so called loan sharks in order to generate enough cash to repay the bank a situation akin to cash flow from financing activities.

OBJECTIVES

METHODS

Findings

CONCLUSION