Monday, 27 July 2009

Fixed Or Floating?

A long time solution for a bunch of loans or an overdraft that has become solid is a Consolidation Loan. With it the Bank gets reassurance that the debt is actually making progress, the customer gets a manageable outlay that is reducing their debt each month and sometimes the repayments can be less overall than what has been gathered along the way. It only works if it is done in time, collates all the debts into one package and is actually affordable monthly.
The banks are under pressure to build up their Balance Sheets after a period of loose living, but they are also under pressure to help the business community by lending more readily. The two things are incompatible forces and something is not right here. In the days when a local manager knew his customers and was largely responsible for keeping a paternal eye on their excesses he had a discretionary limit within which he was allowed to operate. There were checks, and monthly printouts and lending reviews of varying depth in which the manager’s lending was held to account and if necessary was placed under report to the Area Office.
During the last few years a drive for cost cutting involving a comprehensive move to centralised working has left the local manager with no discretion and the newcomers, without the skills and experience of old. No longer are the principles and canons of lending drummed home. The clipboard has taken over, certainly for the lower rankings. If the customer fits the latest criteria set, then help is available. If it does not, then there is no leeway. Unfortunately the lack of discretion has meant a lack of flexibility as well. In a strange paradox, while it is all centralised the policies could be set at a level but there is still a reliance on the local manager agreeing to put forward the proposition. Is he going to risk his career advancement with string of frilly business ideas?
But having frightened themselves the banks are not about to loosen the central lending reins anyway, no matter how many meetings the Chancellor hold for the chaps at the top. And the system is not flexible enough to do so quickly.
What they can do however is give out consolidation loans. Helpful sometimes, but I have recently observed a sting in the tail. The rates have been of the order of 7% above the Base Rate, which used to be considered a penal rate for commercial lending at one time. Lately I have seen that rate agreed as a floating rate. That means what still is a relatively expensive rate now, with Base Rates low, will become injurious when the rates rise again over the next few months. These are locked in for 3,5,or 10 year loans perhaps. It is not hard to see those rates approaching short term Credit Card rates when the Base Rates go up again. Those rates should be 7% FIXED. That means they will stay at 7% for the life of the loan which is quite a different matter.
The naive customer will be unaware that the nice Bank who has helped him out with his consolidation exercise has effectively stitched hi m up and built in a cushion of protection for its profits to help feather its balance sheet nest.
Bob Shepherd has contacts and an in depth knowledge of Banks in the Business community. He has lectured in Corporate Finance and written courses on the relationship of Business with its Bank. A number of articles on practical banking matters have been published and many appear in these pages. Using this knowledge and others Bob Shepherd Associates is in an excellent position to help with Business finance and relationships with the Bank.

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