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Vancity was an organization that was recognized for its commitment to social justice and community values. In 2009, its board was faced by a difficult decision to make. As a result of the financial crisis, the organization was considering repricing its line of credit offerings. However, this was an unpopular move among the customers who were also the owners of the organization due to its structure as a cooperative.
The problem that faced Vancity was that the decline of the lending rates had caused the margins on outstanding loans to decline significantly. In March 2009, its credit line portfolio was approximately $2.3 billion. $1.3 billion of this amount was in the form of secured debt but 83 percent of the debt was at or below the prime rate. Majority of other financial institutions had repriced their loans by raising the interest rates by one percent.
Unless vancity followed this practice, it risked incurring a loss of $24 million on the basis of the outstanding loans that existed. In the event that the customers drew their credit lines to the authorized maximum, the organization was bound to incur a loss of $45 million. Such a move by the customers was also expected to compel it to fund the loans at the expense of the needs of other customers.
Unlike many other commercial banks, Vancity could not reprice its credit lines without the consent of its customers. The contracts it had signed with the customers did allow it to simply send letters to them informing them of an increase in the lending rates. The organization had the capacity to cancel the loans but could not unilaterally change the credit terms. A threat to do so was also unacceptable hence it could not consider the option.
The decision on whether to reprice or not to reprice the loans became a contested issue among the board members. Some of them argued that such a move would have tainted the reputation of the organization while others argued that the unusual financial situations left the organization with no other alternative other than to reprice the loans. It had considered the option of maintaining a prime rate above the one that was charged by other organizations.
However, this posed a challenge in that the remainder of the Organization’s prime-related products was priced at a high price that was not competitive. Its attempt to set a prime rate for its credit line products separate from its regular prime rate was rejected. It recognized the fact that it was not possible to go back to their members and ask them to sign new contracts that reflected higher rates.
Recommendation 1
Vancity should reprice its loans to counter the problems of the financial crisis and prevent the organization from incurring huge losses.
Justification
As a result of the financial crisis, it is evident that the performance of Vancity has been adversely affected. Repricing the loans is the only option because if it does not embrace this practice, it is estimated that it will incur a loss of $24 million. In response to the increase in lending rates, all other financial institutions have adjusted their lending rates to cope with the financial crisis. Failure to reprice the loans will reduce its competitiveness and put the capital provided by the members at risk. It is its responsibility to ensure that the capital of the members is safeguarded.
Implementation
Vancity should first consider both the positive and negative impacts of repricing its loans. This is because if the move is made without the necessary considerations, irreparable damage might occur. However, the organization will be in a position to look for ways of dealing with some of the repercussions that may result from repricing.
Once this is done, it should determine the suitable margins with which to increase the rates. This should also be done with full knowledge of the lending rates of other competing organizations to ensure that they do not drive it out of the business.
Recommendation 2
Vancity should convene a meeting of all members to explain to them the need to change the credit terms in order to adjust the lending rates due to the effects of the financial crisis.
Justification
It is clear that unless Vancity adjusts its lending rates, it will make huge losses that will threaten its survival. Making reference to its financial records from 2004 to 2007, one can see the consistent decline in the net earnings.
For instance, the net earnings in 2004 were 57,187 but this amount continued to decline year after year until it reached 46,817 in 2008. However, the organization cannot simply increase the rates without consulting its members because they are its owners. This is why it must convene a meeting to discuss the move with them.
Implementation
Since all members might not share the same sentiments regarding the issue of repricing the loans, Vancity should first discuss the matter with high priority members who hold about 80 percent of the outstanding loans. This is because such individuals are crucial for the survival of the organization and their decisions and actions may have a great influence on it.
Once it discusses with the first group, the rest of the members should be invited to share their sentiments. The organization should then use factual information to convince members of the importance of repricing the loans then evaluate the views of all of them to make the right decision.
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