The problem with bank loans is this: the cheaper it gets, the harder it is to obtain one. It is a common belief that a cheaper item is easier to acquire than those that are more expensive. This is true, but only in cases where you are expected to spend your money. Bank loans are the opposite. Because the banks are the ones that will give you some financial support, those that are cheap – that is, with low interest rates – are often the most difficult to obtain. Here are some of the reasons.
According to a senior banker who deals mainly with businesses, there had been an increase in the number of bad loans that affected the banking industry in the past years. With the recent economic crisis, companies are starting to face severe financial problems. This led to the decision of most banks to tighten its measures with regard to the granting of bank loans – lenders are afraid of the possibility that many of the loans that they would grant will not payoff.
This is consistent with what the other bankers are saying. In one survey of the Federal Reserve, only a small percentage of senior loan officers said that they easing their credit standards (9.5% for large and medium companies; 4.9% for small companies). Many admitted that they have started to tighten their standards following the recent recession.
Because of this, bankers report very low number of applications from high quality borrowers. It appears that the banks are fighting amongst themselves over the few good companies that need financial support. And instead of easing their standards to allocate other borrowers, the banks preferred to implement desperate schemes to lure these high quality borrowers. For instance, banks are willing to lower their interest rates and give away cheap loans than enter a very risky deal with a company that has a low credit rating.
Recent data showed the decrease in the interest rate spreads of many financial institutions. Spread refers to the difference between what the bank charges borrowers and the amount the bank needs to get the funds for the loan. The latest figures showed that 60% of large and medium business and 46% of small businesses report decreasing interest loan spreads.
This situation must be used by borrowers with good credit rating to their advantage. They should realize that banks have excess funds and that they – the borrowers – have the power to pit one lender against the other. It is high time for high quality borrowers to seal good deals with these financial institutions. Unfortunately, however, this statement is not true in the case of businesses that have bad credit ratings. But at least they now know what they have to do – obtain that high quality category to acquire loans that have very low interest rates.
In case of the lenders, banks have very few options. For instance, offering loans with lower interest rates are indeed better than having a risky deal with low quality borrowers. In the long run, however, banks must face the reality that they have to somehow increase their market. Financial institutions must explore various possibilities such as opening their doors to a specific niche while avoiding deals with companies outside their expertise.
The situation is not expected to get better soon. And the best way to deal with it is to adapt and use the available resources to achieve stability and success in light of the effects of the most recent recession.
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