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Medium Profitability Operations

Bank Loan Operations

#Financial Services
ProHub Comment

This case tests profitability analysis and mental math rigor. The interviewee must carefully structure a comparison of expected profits between two systems, accounting for approval rates, bad loan rates, and operational costs. The non-obvious insight is that despite lower approval rates and higher per-loan costs, the new system generates higher profits due to dramatically reduced bad loans.

Estimated Time 25 minutes
Difficulty Medium
Source Cornell
10 / 100
Your client is a bank that is considering changing their loan issuing operation to a new system. They would like you to evaluate the pros and cons of each system, and advise them on how to proceed.

Clarifying Information

  1. The bank receives about 1,000 loan applications per year
  2. The average value of a loan is $10,000
  3. The proposed program has a 40% acceptance rate
  4. The original program resulted in about 10% bad loans
  5. The proposed program would result in only 5% bad loans (due to higher scrutiny at the central office)
Mock Interview
Interviewer

Your client is a bank that is considering changing their loan issuing operation to a new system. They would like you to evaluate the pros and cons of each system, and advise them on how to proceed.

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
Score coming soon
Practice this case with AI Mock Interview

A bank is evaluating whether to eliminate branch-level background checks and consolidate all screening at the central office. The new system has higher per-application costs ($110 vs $100) and lower approval rates (40% vs 45%), but results in fewer bad loans (5% vs 10%). The candidate must calculate expected profits for each system and recommend whether to proceed.

Key Insights:

  1. Expected profit for original system: $485,000; expected profit for new system: $550,000
  2. The new system’s profitability advantage comes from quality improvement (5% bad loans vs 10%), not from volume
  3. Beyond financials, consider non-financial factors: regulatory requirements for multiple checks, training needs for centralized staff
  4. Mental math discipline is critical—tracking multiple percentages and multiplications can easily lead to calculation errors