- 20 Marks
Question
James Addington has been your customer for the past forty years, and is due for retirement in the next three years. He has applied for a short term loan of three years to enable him to roof his building and internal fittings and painting of the house. He estimates that it would cost him GHC 80,000,00. He is currently residing in rented accommodation for which he is paying a monthly rent of GHC 1,500,00 per month. He is the Principal Director of the Ministry of Agriculture and earns a net monthly salary of GHC 12,000,00.
He has operated a satisfactory account until in recent times when his revolving overdraft of GHC 5,000,00 has been drawn to the hilt. His retirement home is a four bedroom storey building located close to Aburi. In addition to the revolving overdraft he has a car loan balance of GHC 18,000 with six months to pay. He is already in arrears of two monthly instalments. The monthly instalment on the car loan amounts to GHC 3,000,00.
You notice the following outgoings on his account with you:
Standing order to Hire Purchase Company 500,00
Electricity Bill 350,00
Water Bill 200,00
Life Insurance 300,00
Health Insurance 200,00
The following information is also gleaned from his personal loan application form
Petrol expenses 1,000,00
Housekeeping expenses 1,000,00 per week
You have observed that he uses two different cars, a Mercedez Benz, which your bank financed and an Opel cadet Car, which he indicates to you is ten years old. He has been a source of good business introductions to you and so you really wish to assist him. He has offered to support the application with a security over his share certificate in an unlisted company, Bonreve Ltd., a manufacturer of cocoa beverages. The shares have a nominal value of GHC 5.00 per share and he holds four thousand of the shares.
James is married and has seven children who are all still in school. The first three are in the university and he pays school fees of GHC 5.000.00 per semester for each of them.
The next three are in senior high school and he pays GHC 1.000.00 per semester for each of them.
The last child is in Junior High School and he pays school fees of GHC 1.500.00 per term.
He is pleading with you to consolidate all his outstanding loans with you as well as the facility owed the hire purchase company.
How would you respond to his proposition?
[20 Marks]
Answer
Using the CAMPARI framework, I will assess James Addington’s request for a GHC 80,000 three-year loan and consolidation of his overdraft (GHC 5,000), car loan (GHC 18,000), and hire purchase debt (GHC 500/month). The analysis complies with BoG’s guidelines for personal lending and considers risks highlighted in the 2017-2019 banking cleanup.
1. Character (4 marks):
- Strengths: 40-year banking relationship and business introductions demonstrate loyalty. As Principal Director at the Ministry of Agriculture, James has a stable income.
- Concerns: Recent overdraft overdraw and two missed car loan instalments indicate financial strain, potentially breaching BoG’s credit risk standards.
- Mitigation: Conduct credit bureau checks (e.g., XDS Data Ghana) to verify other debts.
2. Ability (4 marks):
- Income: Net monthly salary of GHC 12,000. Expenses include:
- Rent: GHC 1,500/month
- Utilities: GHC 550/month (electricity 350 + water 200)
- Insurance: GHC 500/month (life 300 + health 200)
- Petrol: GHC 1,000/month
- Housekeeping: GHC 4,000/month (1,000/week × 4)
- School fees: University (3 × GHC 5,000/semester × 2 semesters = GHC 30,000/year ÷ 12 = GHC 2,500/month); Senior High (3 × GHC 1,000/semester × 2 = GHC 6,000/year ÷ 12 = GHC 500/month); Junior High (GHC 1,500/term × 3 terms = GHC 4,500/year ÷ 12 = GHC 375/month). Total: GHC 3,375/month.
- Hire purchase: GHC 500/month
- Total expenses: GHC 11,375/month, leaving GHC 625 surplus (high risk).
- Debt: Overdraft (GHC 5,000), car loan (GHC 18,000, GHC 3,000/month × 6 months). Two missed instalments (GHC 6,000 arrears) signal repayment issues.
3. Margin (3 marks):
- Pricing: Base rate (2%) + 8% risk premium (personal loan, high expense ratio) = 10% interest. Include 1% arrangement fee.
- Profitability: Consolidation reduces multiple payments, but low surplus limits affordability.
4. Purpose (3 marks):
- Objective: GHC 80,000 for roofing and fittings aligns with personal housing needs. Consolidation streamlines debts.
- Risks: Retirement in three years may reduce income, impacting repayment.
5. Amount (3 marks):
- Assessment: Total request: GHC 80,000 + GHC 5,000 (overdraft) + GHC 18,000 (car loan) + GHC 6,000 (assumed hire purchase balance, 12 months × 500) = GHC 109,000. Monthly repayment for a 3-year loan at 10%: ~GHC 4,300 (PMT formula). Current surplus (GHC 625) cannot cover this.
6. Repayment (3 marks):
- Primary Source: Salary (GHC 12,000/month). Post-consolidation expenses (excluding consolidated debts) = GHC 7,875/month, leaving GHC 4,125. This barely covers repayment, risking default.
- Secondary Source: Sale of Opel car or other assets. Verify marketability.
7. Insurance/Security (2 marks):
- Security Type: Shares in Bonreve Ltd (4,000 × GHC 5 = GHC 20,000 nominal value) are weak due to unlisted status and uncertain market value. Prefer charge on Aburi property.
- Conditions: Insurance on property against construction risks.
Recommendation: Decline due to insufficient repayment capacity (DSCR <1.0x). Approve GHC 60,000 loan (roofing only) with property charge, subject to clearing arrears and reducing expenses (e.g., sell Opel car). Consolidation is risky without income diversification.
(Marks: 4 for Character/Ability, 3 for Margin/Purpose/Amount/Repayment, 2 for Security, totaling 20.)
- Topic: Advances to Personal Customers
- Series: OCT 2022
- Uploader: Samuel Duah