New Zealand Bank Lending Practice - Research Proposal Example

Introduction Banks are in the business of lending and taking deposits. In effect the funds they take as deposits are channeled through to those who are perceived to be the optimal users of those funds in the form of lending made by the banks. However as banks evolved in their managerial practices and efficiencies, the lending expertise allowed them to lend at higher rates and in many unconventional market segments to generate returns for themselves. The lower interest rates scenarios in most of the developed economies also allowed banks and finance companies to free their hands and to lend generously. Thus the excess liquidity in the market coupled with low interest rates allows finance companies to tap the areas where the return is maximum. Personal Lending is one such area where the lending rates are higher as compared to other conventional users of banking thus finance companies tend to bet more on them and in the process sometimes violate their own lending criterion. This research would study and analyze as to why finance companies in New Zealand tend to lend personal loans against their own lending policies. General Overview Finance Companies in New Zealand are continuously heating up the personal lending market by allowing generous limits to the consumers. In this process they tend to violate their own lending policies also. This research will undertake to analyze the reasons behind the violations of the lending policies by Finance companies in New Zealand. The current subprime crisis in US clearly suggest that finance companies including Banks have tended to avoid exercising general prudence while making lending decisions. Getting consumer credit through various financial institutions especially banks requires consumers to maintain a certain degree of credit rating in order to qualify for those loans. Unlike large corporate companies, consumers or rather individuals pose a different challenge and dynamics to financial institutions to cater their needs for credit and formal funding requirements of these individuals. It is because of this reason that various banks and financial institutions have developed their internal rating methodologies which they assign to various consumers asking for credit. Banks than through their internal as well external credit scores or ratings decide to whom they should provide the credit. These criteria of credit rating often are designed to be tough since Banks in order to avoid defaults, tighten their criteria to extend the credit to these customers. However, due to increasing needs of those customers, whose credit history or their credit ratings do not fall under the criteria laid down by the banks, banks try to accommodate them also. Most of the banking groups within Australia and New Zealand have therefore entered into practices which defy the most basic precautions when lending in personal loan market. This is now resulting into increasing provisions from the banks. (Verrender, 2008) Statement of the Purpose and Significance of the study The study is significant in the sense that it would be one of its kinds to study the qualitative reasons behind this phenomenon and may lead us to the indications of the financial procyclicality impacts on the financial sector of New Zealand. The so called KiwiSaver rules have allowed banks to charge interest rates much beyond the normal rates despite the fact that Card debits especially in case of Credit Cards, Mortgages as well as personal loans are tied up with the mortgages of the customer. In this way, they get extra and in order to earn extra, they loose or violate their lending practices to accommodate the borrowers. (Stock, 2008) Further, to this, Finance Companies in the country are considered to be more aggressive while making lending decisions which in turn put pressures on the overall liquidity position in the financial sector thus effectively straining the resources of the nation. It is believed that the Finance companies in New Zealand have not yet fully developed the credit scoring models also to effectively calculate the risks involved in such kind of lending relationships. (Ministry of Economic Development, 2008). Through this study, we aim to study as to how the same can be avoided by studying the behavior of finance companies while making lending decisions against their lending criteria. The most important benefit which can be derived from this study would be the fact that it can outline the factors behind the over-lending to traditional non-conventional lending subjects and can provide an acute insight into the role of market dynamics in deciding the business targets of the various finance companies in terms of personal lending and subsequent violation of their own lending policies in that process. Problem Statement The current subprime crisis in US clearly suggest that finance companies including Banks have tended to avoid exercising general prudence while making lending decisions. The surge in the mortgage market was a result of generous monetary policy stance adapted by FED in order to ease the recession caused by the dot com bubble. Due to this reason, the interest rates were lowered by Federal Reserve Board (FED). This reduction in interest rates also induced financial institutions to lower the interest rates on the mortgages also. With the lowering of interest rates, the demand for the homes increased which ultimately raised the prices for the new homes. In order to capture this rise in the property market, many financial institutions started easing off their standards to bring in more and more customers. This loosening in the standards allowed those borrowers to obtain mortgage loans who were otherwise not eligible to obtain the loans. Therefore the main research question is: "Why are Finance Companies in New Zealand lending Personal Loans against their lending policies" Carrying the same example forward, the major purpose of this research is to study the analyze the reasons behind the fragility of finance companies in New Zealand in personal lending thus to study as to why they violate their own lending policies while making lending decisions. Statement of Research Questions This study will conduct research based on following hypothesis: 1) H1 = Finance Companies in New Zealand lend at easier terms of the personal loans. H0 = = Finance Companies in New Zealand do not lend at easier terms of the personal loans 2) H1= Policies by Finance Companies are loose and allow violation easily Ho = Policies by Finance companies are now Loose. 3) H1= Loan Officers in Finance Companies are not adequately Skilled therefore policies are violated. H0 = Loan Officers in Finance Companies are adequately skilled. 4) H1 = Finance Companies violate policies because they have to generate sales. H0= Finance Companies do not violate policies just to generate sales. 5) H1= Finance Companies in New Zealand are new in the business therefore they have not generated internal capabilities to form good policies. H0 = Finance companies in New Zealand are well established companies with adequate internal capabilities. Statement on the design and research method of the study This study uses the survey methodology to examine whether finance companies in New Zealand violate their own lending policies while making personal lending therefore the data gathering efforts would mainly be concentrated on secondary data. For this purpose a questionnaire will be developed besides reviewing the lending policies of the banks if provided by them. The study will be conducted both in qualitative as well as quantitative terms but more qualitatively, because the research emphasizes the difference between people, using the inductive approach so as to better understand the nature of the problem. Qualitative data will be collected because the research requires the use of non-numeric and unquantified data. The qualitative data will be analyzed with grounded theory to build an explanation from the core theme that emerges from the data. Sampling A sample of 5 large banks of New Zealand will be taken to analyze their lending practices. These banks include Bank of New Zealand, Common Wealth Bank of Australia, Kiwibank Ltd, HSBC and ANZ National Bank Limited. This sample is based on the random selection of the Banks currently working in New Zealand. Data Collection Data collection will be done through questionnaire. An open and close ended questionnaire will be developed. This questionnaire will contain questions which will be general to specific in nature. Data Analysis The available data will be analyzed through any modern statistical software to test the hypothesis outlined above. The available data will be grouped and based on the collected data, the same will be analyzed using t-statistics. A Brief Exposition of Chapters This study will organized in the form of various chapters which include a brief introduction, literature review, survey of the existing practices of the finance companies in the country, discussion of the results and finally making recommendations. Bibliography Blanton, B. K. (2005, August 3). Dark side of subprime loans Mortgages for those with bad credit leap in popularity despite high foreclosure rate. Retrieved July 11, 2008, from boston.com: http://boston.com/business/personalfinance/articles/2005/08/03/dark_side_of_subprime_loans/ Lax, H., Manti, M., Raca, P., & Zorn, P. (2004). Subprime Lending: An investigation of Economic Efficiency. Housing Policy Debates , 15 (3), 533-571. Zealand, B. o. (2008). Advanced Personal Loan. Retrieved July 11, 2008, from https://www.bnz.co.nz: https://www.bnz.co.nz/Personal_Loans/1,1184,25-274,FF.html Development, M. o. (2008). Bank Lending Practices . Retrieved July 18, 2008, from http://www.med.govt.nz: http://www.med.govt.nz/templates/MultipageDocumentPage____946.aspx http://www.e.govt.nz. (2008). Trends. Retrieved July 10, 2008, from http://www.e.govt.nz: http://www.e.govt.nz/standards/e-gif/authentication/guide-multi-factor-auth/chapter9.html Stock, R. (2008). KiwiSaver fault exposes bank interest-rate ploy. Retrieved July 19, 2008, from Sunday Times: http://www.stuff.co.nz/4601320a20975.html Verrender, I. (2008, April 08). Another pile-up as bad lending practice. Retrieved July 15, 2008, from Business Day: http://www.businessday.com.au/business/another-pileup-as-bad-lending-practices-exposed-20080407-24cs.html Zealand, B. o. (2008). Advanced Personal Loan. Retrieved July 11, 2008, from https://www.bnz.co.nz: https://www.bnz.co.nz/Personal_Loans/1,1184,25-274,FF.html Read More