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Medium Profitability Operations

Bank Loan Operations

#Financial Services #Banking
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 15 minutes
Difficulty Medium
Source Cornell
50 / 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)