Personal Lending is one such area where the lending rates are higher as compared to other conventional users of banking thus finance companies tend to bet more on them and in the process sometimes violate their own lending criterion.
Finance Companies in New Zealand are continuously heating up the personal lending market by allowing generous limits to the consumers. In this process they tend to violate their own lending policies also. This research will undertake to analyze the reasons behind the violations of the lending policies by Finance companies in New Zealand.
The current subprime crisis in US clearly suggest that finance companies including Banks have tended to avoid exercising general prudence while making lending decisions. Getting consumer credit through various financial institutions especially banks requires consumers to maintain a certain degree of credit rating in order to qualify for those loans. Unlike large corporate companies, consumers or rather individuals pose a different challenge and dynamics to financial institutions to cater their needs for credit and formal funding requirements of these individuals. It is because of this reason that various banks and financial institutions have developed their internal rating methodologies which they assign to various consumers asking for credit. Banks than through their internal as well external credit scores or ratings decide to whom they should provide the credit. These criteria of credit rating often are designed to be tough since Banks in order to avoid defaults, tighten their criteria to extend the credit to these customers. However, due to increasing needs of those customers, whose credit history or their credit ratings do not fall under the criteria laid down by the banks, banks try to accommodate them also.
Most of the banking groups within Australia and New Zealand have therefore entered into practices which defy the most basic precautions when lending in personal loan market. This is now resulting into increasing provisions from the banks. (Verrender, 2008)
Statement of the Purpose and Significance of the study
The study is significant in the sense that it would be one of its kinds to study the qualitative reasons behind this phenomenon and may lead us to the indications of the financial procyclicality impacts on the financial sector of New Zealand.
The so called KiwiSaver rules have allowed banks to charge interest rates much beyond the normal rates despite the fact that Card debits especially in case of Credit Cards, Mortgages as well as personal loans are tied up with the mortgages of the customer. In this way, they get extra and in order to earn extra, they loose or violate their lending practices to accommodate the borrowers. (Stock, 2008)
Further, to this, Finance Companies in the country are considered to be more aggressive while making lending decisions which in turn put pressures on the overall liquidity position in the financial sector thus effectively straining the resources of the nation. It is believed that the Finance companies in New Zealand have not yet fully developed the credit scoring models also to effectively