Credit and Lending Decision Analysis: Risk Assessment for GMMC

This report examines the risks associated with credit and lending decisions, focusing on line of credit and letter of credit arrangements for GMMC and Motor City National Bank. It explores the different types of risks faced by banks and companies, including fraud, political, and financial risks. The report highlights the potential dangers of variable interest rates, loss of collateral, and non-compliance with credit conditions. It also discusses the responsibilities of both the bank and the company in managing these risks, emphasizing the importance of careful assessment before approving credit. The report references several academic sources to support its analysis and provides a comprehensive overview of the complexities involved in credit and lending decisions, offering insights into how these risks can be mitigated. The report concludes that Motor City National Bank should carefully evaluate both line and letter of credit requests due to the significant risks involved.

Running head: CREDIT AND LENDING DECISION
Credit and Lending Decision
Name of the Student
Name of the University
Author note

1CREDIT AND LENDING DECISION
Answer 3
There are different kinds of risk involved in approving the letter of credit as well as
the line of credit by GMMC.
Line of credit is the kind of commitment from bank to make payment on the behalf of
customers. This is the kind of arrangement between the financial institutions as well as
between the different customers that helps in establishing maximum balance of loan that the
lender will permit the borrower in order to maintain or access ( Ru, Hong and Antoinette
2016).
On the other hand, letter of credit is the kind of letter from a particular bank that
guarantees the payment of the buyers to the seller that will be received on particular time for
correct amount as well. The letter of credit is balanced method of payment in terms of
different risks for both the bank as well as the companies. The entire responsibility of the
letter of credit is on the banks and the responsibility is one such party who bears the risk in
the transactions related to the letter of credit as well. There are different kinds of risk that is
involved in the letter of credit as well as line of credit for the company as well as the banks
(Jia et al. 2016).
There are different kinds of risk that are involved in the bank as well as in the
different companies such as GMMC as well. The main risk is involved with the bank as these
are the ones who pay the amount and issue the letter of credit on the behalf of the companies.
The risk involved with the bank is regarding the amount that is paid by the bank has to be
controlled as well as this can be a large issue in the future as well. On the other hand, there
are different kinds of risk that are involved with the company as well when the amount is not
being able to be refunded by them, then the property of the company will be seized by the
bank as well (Emekter et al. 2015).

2CREDIT AND LENDING DECISION
Risks involved in line of credit in case of Bank
In case of bank, there are different kinds of risk that has to be borne by the bank when
the customer is not being able to pay off the amount that has been paid by the bank on behalf
of the respective customer. The dangers or risks that are involved in such cases are as
follows:
 The line of credit is based on the interest rate that is variable in nature. When the
customer is not being able to pay the specific amount, this will be risk that will be
borne by the respective bank as per the conditions of the market that will change
accordingly (Tirole 2014).
 There can be loss of collateral when the payments are not made on time by the
customers to the respective bank. This is a kind of dangerous risk that can be borne by
the bank and this will permit the bank in seizing the property of the individual who
has not been able to pay the amount to the bank that has been paid by the bank in
behalf of the customer (Bluhm et al. 2016).
These are the different kind of risks that has to be properly borne by the bank in
behalf of the individual (Souza 2014). This line of credit risks has to be properly handled by
the bank as this will help both the company along with the company with proper maintenance
of the interest rates involved in it as this will help in achieving the amount by seizing the
property of the respective customer or the company who has taken such line of credit from
the bank.
The Motor City National Bank should not increase as well as approve both the line as
well as letter of credit as this will be a huge risk for the respective bank as well as the
company.

3CREDIT AND LENDING DECISION
Risks involved in letter of credit in case of Motor City National Bank
There are different risks involved in the letter of credit towards banks such as fraud
risk as well as political risk. The letter of credit can create issue for the banks, beneficiary as
well as to the applicants as well. For the beneficiary, main factors of risk are generally unable
to properly comply with the conditions of the letter of credit and for the bank the risk
increases when there is increase in the responsibility as well.
These are the different kinds of risk that has to be properly managed by Bank by
understanding the degree of coverage of the payment that has been guaranteed by the
customers or the company to the respective bank. Such risks have to be properly handled by
the bank by knowing the differences that can create risk for the bank (Allen et al. 2014).
GMMC COMPANY
On the other hand, the company can face different risks in case of letter of credit as
well as in line of credit as they are the parties on behalf of whom the bank is paying the
amount and signing the letter of credit as well. The companies borne different kinds of risk as
borne by the bank as they are the ones who will be suffering the most when the amount that is
paid by the bank on behalf of them will not be refunded properly, their property will be
seized by the bank and they will not be having any kind of complaints at that point of time as
well (Weiss 2014).
On the other hand, the letter of credit has different risks for the applicant as well as
beneficiary as well along with the respective bank. In the letter of credit, the main factors of
risk that are faced by the beneficiary as well as the applicant includes non delivery along with
the goods that will be received by them will be of inferior quality and there will be risk in the
exchange rates as well. This can also lead to the issuing the bankruptcy risk of the bank.

4CREDIT AND LENDING DECISION
Furthermore, the beneficiaries risk includes the whenever the beneficiaries are not being able
to comply with the letter of credit with the bank, there will be issue relating to the political
risk of the entire country as well.

5CREDIT AND LENDING DECISION
References
Allen, Liz, Amy Brand, Jo Scott, Micah Altman, and Marjorie Hlava. "Credit where credit is
due." Nature 508, no. 7496 (2014): 312-313.
(https://www.nature.com/polopoly_fs/1.15033!/menu/main/topColumns/topLeftColumn/
pdf/508312a.pdf?origin=ppub)
Bluhm, Christian, Ludger Overbeck, and Christoph Wagner. Introduction to credit risk
modeling. Crc Press, 2016. (https://books.google.co.in/books?
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Emekter, Riza, Yanbin Tu, Benjamas Jirasakuldech, and Min Lu. "Evaluating credit risk and
loan performance in online Peer-to-Peer (P2P) lending." Applied Economics 47, no. 1 (2015):
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Jia, Tao, Feng Lin, Zhengwen He, and Nengmin Wang. "Line-of-Credit Payment Scheme and
Its Impact on the Retailer’s Ordering Policy with Inventory-Level-Dependent
Demand." Mathematical Problems in Engineering 2016 (2016).
(https://www.hindawi.com/journals/mpe/2016/4027454/abs)
Ru, Hong, and Antoinette Schoar. Do credit card companies screen for behavioral biases?.
No. w22360. National Bureau of Economic Research, 2016.
(http://www.nber.org/papers/w22360)
Souza, Tanisha. "Enhancing income using line of credit sweep account." U.S. Patent
8,788,409, issued July 22, 2014. (https://www.google.com/patents/US8788409)
Tirole, Jean. "Comment." NBER Macroeconomics Annual 28, no. 1 (2014): 279-286.
(http://www.journals.uchicago.edu/doi/full/10.1086/674602)
Weiss, Russell. "System and method for generating a virtual credit score and a respective
virtual credit line." U.S. Patent Application 14/582,692, filed December 24, 2014.
(https://www.google.com/patents/US20150178829)