The impact of the spike can have both negative and positive effects on the risk profile of the Motor Vehicle loans. Having/haven considered both these effects, the advice I would give the credit manager is that, notwithstanding the high risk profile of Motor Vehicle loans, an increase to the portfolio allows the Bank to realize greater profits at/for/in a shorter period of time. When extending credit to customers for car loans, Banks' favour offering a higher rate of interest in the range 9% to 12% usually for a period of five (5), six (6) or seven (7) years, for instance. A higher rate of return on higher risk products allows for the compensation for the increased profitability of loss (MGMT3081, Unit 3, p. 53). The higher rate of interest, therefore allows the Bank to earn more money for a shorter period of time thus boosting its interest income. .
The bank should however, moderately increase the lending portfolio of its Motor Vehicle loans since too high an increase, can cause the bank to be exposed to greater risk of credit default - credit risk. Credit risk, according to Joseph (2006), can be defined as 'the probability of loss (due to non-recovery) emanating from the credit extended, as a result of the non-fulfillment of contractual obligations arising from unwillingness or inability of the counter-party or for any other reason'. .
The bank must remain cognizant, that over time, the value of motor will depreciate given the depreciating factor of motor vehicles. For instance, the Bank's present Motor Vehicle loan portfolio is at 30%, which can be a representation of five hundred thousand dollars ($500K) on the 'books'. However, if a review is done on the actual Motor Vehicle loan portfolio value, the Bank would realize that the 'book' value of five hundred thousand dollars ($500K) is actually four hundred thousand dollars ($400K), which is one hundred thousand dollars ($100K) shy of the overall Motor Vehicle loan portfolio.
