Vanshika Kajaria

Banking & Insurance

Professor Mark Deane
29th November 2022

Mid Term Test

Question 1
a)
Mary was a proprietor and the juice business was her sole source of income in the town.
She had many competitors against her and if she took even a small risk with her business would
cause her problems. The township where her business operated had customers who were mostly
unemployed. Being unemployed, the customers did not have a source of income and they
would survive with their savings from the past. This means that if the customers continued to
use up their savings and spend money, there would be a time when they would be left with no
money. Mary started a marketing campaign in which she asked her customers to pay 25% cash
up front and the rest later. Even though Mary maintained a ledger of the balances of each of
her customers, she did not realize that their unemployment could be a huge problem in the
coming time. This was the first mistake that she made which would result in the crisis. Mary
increased her sales by raising the sale price. Since her customers had no restrictions on paying
cash at the time of purchase, her sales volume increased massively.
Mary had a term loan and working capital limit at a local bank. The vice-president of
the bank considered Mary’s customers’ debts as valuable assets and, on that basis, increased
her borrowing limit. However, he did not realise that the customers were unemployed and that
these debts would consequently result in bad debts which would not be recoverable in the long
run. This was a second mistake resulting in the upcoming economic crisis.
The customer loans were then converted into tradable secured bonds by the bank’s bond
trade figures and were traded internationally rated as AAA bonds. The banks thought that these
bonds were very profitable and would give them good returns as and when the naïve investors
traded. The inexperienced investors who do not know much about these bonds, bought them
rapidly and the prices of the bonds kept increasing continuously. It became the hottest-selling
products in brokerage houses. These AAA rated bonds were actually doubtful debts of the
customers and not current assets. These bonds were imaginary since the customers did not have
the money to pay their dues to Mary. This was the next step leading towards economic crisis.
 The risk manager gave Mary a verbal and written notice regarding the repayment of the
dues from her customers. When Mary asked her customers to pay their dues, they could not
since they were unemployed. It was not wasting time and money to take them to the court or
the debt recovery tribunal. The business went into bankruptcy since the owner could not fulfil
her obligations and fifteen employees lost their jobs. This created more unemployment in the
township. Unemployment results in the downgrade of the economy.
The prices of the bonds fell drastically overnight and they were declared as junk bonds.
This resulted in the freezing of granting loans in the society and the liquidity position falls.
Banks could not function properly and the management was to be blamed for it. They did
suspicious activities fooling the new investors which led to the downfall. The supplier had to
write off bad debts and close the business that lasted for three generations. 150 more people
got unemployed. This result in social unrest and the spending power decreased which in turn
resulted in less money circulation. New taxes were imposed in order to bail out the executives
of the bank and brokerage house. The general employed public had to bear these taxes even
though they were unaware about the juice brand. This is a representation of the government
who does injustice to the public in order to get their work done.
All these events resulted in the downfall of the economy resulting in crisis.
b)
Mary was well aware that her customers were unemployed. The juice business was her
only source of income, and she took a huge risk with her sole source of income. There were
many competitors in the market. If her customers were employed, it was a good way to increase
sales, but since that was not the case, Mary should have taken at least 75% of the upfront cash
payments from her customers. This would ensure that her business was at least meeting the
costs of production and earning minimal profits. For the remaining 25%, she should have set a
time limit for repayment of the debt to ensure that she gets the money back. Mary had granted
loans to her unemployed customers without keeping anything as collateral. She did not realize
that the loan amount was increasing and could cause her trouble in the future. If she had kept
her customers' assets as collateral, the economic crisis would not have happened and her
business would not have fallen into bankruptcy. Mary had increased the sales price but still
collected only 25% cash up front. Even though her sales volume was increasing, she did not
have the profits in her hands and was mostly giving loans. Since her customers were
unemployed and could not pay the full amount at the time of purchase, Mary could have
introduced smaller versions of the juices, which would be more affordable for her customers.
In this manner, her sales demand would increase, and her customers could have paid the
purchase price in advance. She could have also introduced some offers and schemes when she
saw that her customers' dues were increasing. She could give an instant 5% discount on full
payment; this would prompt her customers to pay the full amount in order to get some discount.
The vice president of the bank should not have increased her working capital limit because she
did not have proper collateral against the loans. It was just the debts of her unemployed
customers. It was a case of misrepresentation, and the new and inexperienced investors fell into
the trap, causing more problems that ultimately led to an economic crisis. Mary focused on
increasing her sales rather than collecting her dues. Her competitors, though they were not
selling as much as Mary was, did not have their due collections pending, even though some
copied her "Drink Now, Pay Later" strategy.

c)
If I take on Mary’s role, I feel she did try her best to make sure that her business went well and
that her sales kept on increasing. She thought that her customers will pay the dues and that her
marketing technique was very effective and would help her. If the customers paid, then her
marketing campaign would be a success and her efforts would pay off.
If I was on Mary’s place, I would have put a time limit on the repayment of dues and would
have collected more cash up front. If the customers did not pay their dues on time, I would stop
future supply to them unless they paid in full. I would also keep their asset as collateral to
ensure that I would not go into bankruptcy. I would try to come up with better schemes for my
customers which they would afford and at the same time prove beneficial for my business.

Question 2
As the team leader, I would take steps to make sure that the customers are finding it
easy and convenient to use the product and that the product will reap the maximum benefits for
both the customers and the bank. My main aim would be to attract more customers towards the
bank to increase deposits which in turn will help the bank to increase their loan giving capacity.
Since the bank’s current liability portfolio is declining, it is necessary to take steps to improve
them. The demand for loans is rising and there is severe competition in the market. I have to
increase the Credit Deposit Ratio and the CASA Ratio in order to expand the bank’s market
share.
My bank can increase the interest rate on savings account. This will tempt the customers
towards choosing this bank over the other competitor banks. Since more customers will deposit
in this bank, the deposit for my bank would increase which in turn will help my bank to grant
loans and meet the demand of increasing loans. The customers will get high yield, and they can
withdraw the money anytime they wish to. We will also have a very minimal balance in the
account which will attract customers from all financial backgrounds, even people from below
poverty line, and will let them create an account in good banks. We will do proper background
check and require government verified documentation in order to be sure of no frauds in future.
This will increase the banks trust and the customers will be attracted towards it.
One of the ways in which I feel I can improve this situation is by providing e-deposit
facility to the customers. We will educate customers how easy it is for them to make automatic
payroll deposits and transfers. Customers can deposit their cheques simply by clicking a picture
and uploading it. By enhancing technology, it will improve the bank’s performance and the
customers will get a sense of security and safety. This will give them faith and will enable them
to make huge deposits. This will improve the term base deposit of the bank and also boost the
current account saving account ratio by bringing new customers. We will offer our customers
special services regarding online credit monitoring which will help them to protect themselves
against identity fraud and will help them to improve their credit score. Customers who have a
savings account with our bank can avail special services in relation to their goals such as
education, housing, retirement etc.
Customers who have a savings account in our bank can get special discounts and offers
on their travel, shopping and dining plans. We, as a bank, would collaborate with companies
like makemytrip, Zomato, myntra, amazon, grofers and such similar companies. In doing so,
the customers will be able to save money on their day-to-day expenses. This will tempt them
to open an account in our bank to avail such schemes. We will also do programmes to educate
our customers on how to improve their financial conditions and educate them about products
in which they can invest to earn maximum returns. This will attract customers since they would
want to be financially independent and have knowledge about the investments in future. We
will make sure that customer service us available 24*7 and our application is user friendly and
easy to use. People with no technology experience can also use our mobile application and get
their work done sitting at home. The terms and conditions of the policies and other documents
will be explained to each customer in a simple language so that they are well aware and do not
create any mistakes. Each customer can contact their bank relationship manager in order to get
details and explanations about a particular thing. We will ensure efficient working at our
branches so that there is less waiting period for our customers and they do not regret choosing
our bank.
 All these measures will ensure more deposits in our bank and will increase the deposit
limit. This will in turn increase the bank’s ability to grant loan to its customers, thus, increasing
the credit deposit ratio of the bank. The saving’s account of the bank will perform better and
help in improving the CASA ratio.
In order to make sure that all these initiatives work properly and efficiently, we will
employ more people to cater to these services, and this increase employment as well. We will
make sure that all the employees are well trained and have the required knowledge. We will
try to not delay account opening process and get all papers and documentation on time.