Reference no: EM133046304

Respond to the following either agreeing or disagreeing

Any financial institution needs to have a well-balanced credit policy to be successful and profitable all while trying to minimize the occurrence of lending to the riskier borrowers. If the credit policy is too strict, this could minimize the lending opportunity of bringing in additional customers that may otherwise be approved and cost the company profits. On the flip side of the coin, if the credit policy is too lax, then it could increase the risks of lending to customers that may not have been approved elsewhere and cause additional losses.

In the beginning our bank remained in the middle group until we were more familiar with how the simulation worked. After the first quarter, we noticed certain loans had a higher charge-off rate than the others, so we made that policy stricter than the others to try to minimalize losses. The results of that choice had an adverse effect as it had less approvals and lost more in new money than the reduction of loans charging off. After this we slowly began making each of the policies laxer as to allow for more loans being made to bring in additional interest income. We now have each of our policies lax enough so we may still lend to more customers than our more restrictive competitors and with only a small increase to our overall losses. I believe it has been a successful decision since the overall increase in the accrued interest has exceedingly outweighed the minor increase of losses.