A commercial bank is a financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts, certificates of deposit, credit and debit cards etc. (Investopedia, 2015). Lending accounts for a major portion of the activities performed by commercial banks. The loan portfolio is typically the largest asset and the predominate source of revenue (Comptroller's Handbook, 1998). .
A commercial bank's loan portfolio requires careful planning especially as the risk-return profile varies from one loan product to another. Different products carry different levels of risk and returns, with a higher rate of return required on higher risk products to compensate for the increased profitability of loss (MGMT3081, Unit 3, p. 53).
The aim of this case study is to provide the best advice possible to the credit manager of a commercial bank as to the impact of a spike in demand for car loans on the overall risk profile of the lending portfolio which currently stands at: .
Motor Vehicle loans: 30%.
Mortgage loans: 40%.
Credit Card Advances: 30%.
In addition, the credit manager is also advised of possible risks to consider in the structuring of motor vehicle loans, given the demand. According to the Comptroller's Handbook (1998), understanding the credit culture and risk profile of a bank is central to successful portfolio management. A bank's risk profile describes the various levels and types of risks in the portfolio. The profile evolves from the credit culture, strategic planning and the day-to-day activities of making and collecting loans. .
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Lending Portfolio of a Commercial Bank.
The lending portfolio ratio of a commercial bank is Motor Vehicle Loans - 30% to Mortgage Loans - 40% to Credit Card Advances - 30%, which I am of the opinion is reasonable. At present, the bank is faced with a spike in demand for car loans which has impacted its overall lending portfolio.