On the Choice of an Efficient Way of Organizing the Bank Borrower's Cash Flow to Repay the Loan

The article focuses on the procedure of selecting a cost-effective method for the commercial bank borrower's repayment of principal and interest in servicing the loan. In the context of possible multi-variant parameters and conditions of credit transactions, namely, the amount, the duration, the amount of interest rates; periodicity of the borrower's repayment of the debt (monthly, quarterly, semi-annually, etc.); the type of loan currency; the bank's additional costs for the organization and management of the given credit transaction (if any), commercial banks should select the method thoughtfully and carefully. Operating in market conditions requires an understanding of changes in the value of money over time, which is influenced by various factors (inflation, money's capability to generate income when invested in real projects; risk), and an obligatory account of money's value in time when making financial decisions, especially in long-term operations. In the analysis of the variety of competing ways of organizing the borrower's cash flows to repay the loan, the author proposes to use a method based on the concept of discounting. When the creditor bank selects an effective way to organize the borrower's cash flow to repay the loan, the bank is recommended to identify and take into account the maximum discounted (current, modern, real) earnings and its own minimum discounted expenditure on the organization of the credit transaction. The author presents an algorithm for the bank to select an effective option for organizing the borrower's payments on the loan. Practical aspects of the use of this algorithm are illustrated by calculations using real data in the context of the differentiated payment and annuity payment methods with monthly and quarterly repayment schedules. The Excel-based algorithm is clear and easy to use, it allows to easily change the input parameters of the credit transaction. By making such calculations, the bank is able to make a more informed credit decision in terms of its own benefit, which seems relevant for modern credit management and important in a difficult economic situation.

Keywords

Authors

References