Recommendations: We should reprice our line of credit offerings. This will be seen as an unfavourable decision by our members but is a decision that we must make with confidence.
Analysis: The Dilemma In the wake of the 2008 financial crisis we find ourselves at a crossroads. As you know, the spread between our deposit interest rate and the rate on our lines of credit has narrowed to levels never seen before. We are now expecting a potential shortfall of $24 million on existing outstanding loans, or as much as $45 million should our customers choose to draw down their credit lines.
We must take action to prevent any expected shortfalls all the while keeping in mind where we stand as a company and the obligations we owe to our members and our community.
Alternative Actions: There are many alternatives available to you and ultimately it will be your decision. I have offered six alternatives for your consideration which are discussed below.
Do nothing This alternative is likely the favourite among our members as it has little or no immediate impact on them. Our members would continue to enjoy low interest rates on their existing and future lines of credit. This option however would all but guarantee a shortfall of at least $24 million for the company and would for us to fund these loans at the expense of other member needs. You should reject this option.
Call the lines of credit Our second alternative is to cancel all existing lines of credit. This would help mitigate the $24 million shortfall, but would be disastrous with regards to our member relations and our goals as a financial institution to be democratic, ethical and innovative. This option goes against our values as a company and should be rejected.
Maintain a higher prime rate This alternative would lead us to maintain a prime rate above that of other banks and financial institutions. It would remove our need to reprice the credit line portfolio and ensure interest income to cover our deposits. Although it would have a positive effect on our line of credit portfolio, raising our prime rate will affect all of our prime related products resulting in high-priced products out of line with competing financial institutions. We would be sending the message that we are charging higher rates than other institutions. You should reject this option.
Establish a distinct prime rate We could establish a prime rate unique to our line of credit portfolio to widen the spread between the interest we collect on our loans and the interest paid on our deposits. This would avoid any shortfalls from our lines of credit and would not have an impact on our other prime-related products. This seems like a viable option, but we do not have any history as a credit union of offering differential prime rates and no where in our customer agreements or promotional materials do we allow for such contrast in our rates. You should reject this option.
Reprice the line of credit portfolio We could reprice our line of credit portfolio. Repricing the line of credit portfolio would have no impact on our other products and would be specific to the lines of credit. This alternative would ensure a better spread between the interest on loans and the interest on deposits and will avoid the expected $24 million shortfall that would occur if we do not reprice our lines of credit. It will also ensure that we continue to safeguard the capital provided to us by our members. Some members may see this decision as a violation of trust and it could potentially damage the relationship that we have established with our members.
This is an alternative that has inherent risks involved, but it one where the benefits of the decision outweigh the risks. The risks of choosing this decision and the negative aspects it might create can be overcome with careful planning and transparent communication with our members.
Implementation: You should implement the decision to reprice the line of credit portfolio. You should begin by creating a customer contact plan, including all of our high priority members. These member should be contacted personally as they hold most of our outstanding loans. You should explain the situation to these high-priority members in a clear, concise and transparent manner: Describe the situation to the member in as objective a manner as possible, outlining the interest rate issues and the issues we are currently faced with Explain to the member how you arrived at the decision to reprice their credit line and how this will benefit member and their institution. Explain to the member the long term ramifications of not repricing the loan and how this could adversely affect not only us as a company but each and every member.
Remind the member that they are an owner of Vancity and that by ensuring Vancitys success as a financial institution, we are holding their best interests in mind. You should contact the remaining members by mail in a personal letter outlining the decision as you did with the high-priority members. You should encourage members to contact Vancity should they have any concerns or questions that were not addressed in the letter. You should ensure that you or your high-level assistants are on hand/phone to answer to these customers. The key to overcoming our customers feelings of distrust and betrayal will be in how you communicate with them now and in the future regarding any issues that may arise from this decision.
Conclusion: The decision to reprice our line of credit portfolio will enable Vancity to remain profitable as a credit union and it will allow us to continue to offer superior products to our members. This decision also means that we can continue to grow within our community and offer an alternative banking solution within the community.