C : Okay, before I move on to case solving, there are a couple of things that I’d like to clarify regarding the client. Firstly, where is our client’s bank based out of?
I : Our client’s bank has a pan India presence.
C : Alright. Secondly, What is the magnitude of decline and since when has this been happening?
I : It’s about 20% over the last 3 years.
C : Alright. I want to also understand the products/ services that our client is offering. I know that they provide loans, but I want to understand if there are other offerings, such as insurance, that they might be involved in and if there are different kinds of loans, such as home loans and vehicle loans, that they provide.
I : Our client’s division does provide insurance as well and it is definitely worth exploring the types of loans that they provide. They are into home loans & vehicle loans, but can you think of a few other types of loan that they might be offer?
C : Sure. I can think of personal loans and education loans.
I : That’s right but for the purpose of this case, let’s assume a category called other loans (which would include education) along with personal loans.
C : Okay sure. Do we have any information on the loan portfolio of our client, and I also wanted to know how competitors’ lending divisions are doing with respect to profitability in the same time frame.
I : That’s a good question. 50% of the loan portfolio is home loans, vehicle and personal loans constitute 20% each and the rest is other loans. As for the competition, they have also had a similar issue, but they have not been hit as hard as our client. Their profitability declined by 10%
C : That’s interesting. Do we know if the profitability issue is restricted to only one geography/loan type or is it present across?
I : We’re seeing the decline pan India, but it is only the home loans segment that’s contributing to the profitability decline. The rest are doing quite well.
C : Alright. I think I have enough information to move onto case solving now. So, I think profitability of home loan segment would be (profit/revenue) and hence would be a function of revenue and costs. I would like to understand if there’s any information on these component parts and then delve deeper into that component. Does that seem like a fair approach?
I : While your profitability definition would make sense in other cases, the lending division generally calculates profitability as Net income/ principal amount.
C : Okay I wasn’t aware of that. Thank you for correcting me. I’d like to revise my approach. In light of the new definition, I think profitability is governed by three factors. The principal amount given out, the revenue earned, and the costs incurred. Since the loan book of our client has been growing at 24% as opposed to industry average of 12%, I can infer that their profits have either declined or not gone up at the same rate as their loan volume or principal amount.
I : That’s a fair observation. The profit has not gone up at the same pace although it has in fact increased.
C : Okay so this could either be due to revenue not keeping up with the pace or costs increasing. Do we have any information on that?
I : It is majorly due to revenue not growing at a similar pace to the lending amount.
C : Alright. From what I understand, there could be two major revenue streams in the home loan segment-Interest income and home insurance premium. Do we know which of these is a concern?
I : Let’s focus on the interest income for now.
C : Interest income is # of customers X avg. interest rate per customer X avg. Principal amount per customer. Do we have any information on any of these parameters.
I : Is there any inference that you can make out of the info. that you have now?
C : Since the loan book is growing, I feel that the number customers and principal amount per customer are unlikely to be a major issue. This leads me to infer that interest rates are most likely an issue and that too specifically for home loans as the other loan types seem to be doing well.
I : That’s correct. The interest rate of home loans has decreased about three years ago. Can you tell me what factors could’ve influenced the interest rates?
C : There are a lot of macroeconomic factors that I can think of such as inflation and (perhaps consequentially) repo rates and reserve policies that could have affected this, but they would have affected the interest rates of all types of loans.
I : That’s right. I think you’re missing something here. What sort of stakeholders/actors could have affected this?
C : I think interest rates are largely determined by either the monetary policy decided by RBI or the govt. policies. In this case since only the home loan interest rates have been affected, it seems likely that it is because of government intervention to incentivize one sector.
I : That’s correct. I think you’ve correctly figured out what happened. Our client is in a hurry and wants to understand your findings so far. Can you synthesize them for him?
C : Sure. I think that the profitability decline is largely due to slower rate of revenue increase in the home loans category because of a decline in home loan interest rates as mandated by the government. This has affected us more than our competitors most likely due to our loan portfolio which is heavily dependent on home loans
I : Alright. We can end the case here. Thank you!