In consideration to the prior experience of the bank in credit, the expansion of the retail credit section of the bank, a plan by Dianne Ron, is an appropriate alternative. The bank will use credit to recruit more retail banking customers because there is a growing demand for credit for retail customers and businesses. Furthermore, there will be an assurance for return on capital lost from investing in the project from the increased number of customers. This is also because the project will rely on the existing credit approval of the bank for the expansion program due to its suitability. There will only be a need for an addition of the work force to serve the increased credit customers, a venture that the potential profit will be able to sustain.
However, Michael York proposes investing in advanced models for risk management. Although York suggests recruiting less credit employees to reduce labor costs, there will be a problem of a high ratio of customers to credit workers affecting service delivery. Extending the credit risk department with ten more employees to develop the models will also need more capital, proving the plan an expensive venture. Return on capital will similarly take long to materialize since there will be an increase in risk and provisions. However, since the bank has a history of low impact on the provision for retail customers, expanding the retail credit section of the bank is a strategic plan that is profitable and will guarantee a return on capital. At the same time, observation from competing banks indicates retail credit as a growth engine with high margins of profit; hence, a return on capital.
Total liability increase =15000+ 50000+ 50000= 115000
Credit after 4 times growth= 8.3 bn
Credit before growth = 8.3/4 = 2.075bn
If 2.075bn=19%
Revenue=2.075/0.19*8.3= 90.645bn
Profit= 2.075/0.11*8.3 = 156.568bn
Donnie alternative
Revenue=2.075/0.19*8.3= 90.645bn
Profit= 2.075/0.11*8.3 = 156.568bn
Return on capital= 90.645bn/156.568bn
=0.579
Risk probability = 0.579/1.5
=0.3860
Dan’s alternative
Revenue=2.075/0.19*8.3= 90.645bn
Profit= 2.075/0.11*8.3 = 156.568bn
Return on capital= 90.645bn/156.568bn*1.5
=0.8685
Risk probability =0.8685/1.5*0.65
=0.3764
Decision: Maintain the policy of the business and choose Donnie’s alternative because it has a higher risk averseness hence lower risk probability and more attractive returns
