First National Corporation: Asset-Based Lending Impact Analysis

This report examines the impact of asset-based lending (ABL) on financial institutions, specifically analyzing its effects on the return on net worth (RONW) and return on assets (ROA). The report uses a case study of First National Corporation to illustrate how ABL can improve financial performance by providing funds at lower interest costs, increasing asset values, and enhancing the market value of shares. The analysis also explores whether the deposit composition of the financial institution necessitates the pursuit of higher-yielding earning assets. It assesses the relationship between deposit composition, the need for high-yielding assets, and the overall solvency of the financial institution. The report references various academic sources to support its findings, demonstrating the positive influence of ABL on financial metrics and the importance of deposit strategies in maximizing profitability and financial stability.

Running head: IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
Name of the Student
Name of the University
Author Note

1IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
Table of Contents
Response to question (1):...........................................................................................................2
Response to question (2):...........................................................................................................3
References:.................................................................................................................................5

2IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
Response to question (1):
The concept of asset-based lending means the process of providing credit to the
borrower against the property, inventory, any valuable equipment or account receivable
owned by him. This type of credit facility is provided to the business organisations when they
need fund at lower interest cost (Alan, Yasin, and Vishal Gaur 2018, 637-654). Since the loan
amount is secured by the asset, if the borrower defaults the loan amount, bank or the financial
institutions can recover it by selling the asset (Kinai et al 2017, p. 29).
The main purpose of this system of borrowing is to satisfy the demand of liquid cash
to maintain the activity of the business organisation. In other words, asset-based lending is a
method of lending facility where the less liquid business organisation need more fund and the
bank agrees to provide further assistance against the asset of the company (Suzuki et al 2016,
28-41 ). The terms and conditions of such security depend on the value of the asset kept as
security.
The main advantage of asset-based lending is to increase the performance of the
business by securing the internal capital of the business and increasing the inventory and
amount of receivables and the fixed assets of the business organisation (Ronald et al 2015,
52-64). Further, in the case of a banking institution, the asset-based lending helps to enhance
the financial position. It can be defined with the help of the given case study. According to
the given situation the asset lending system has affected the financial position positively.
According to the financial statement of First National Corporation, it is seen that the net
interest income has increased from $78,699 (1983) to $105119 since this system of lending
provides sufficient amount of fund to the borrowers at a low rate of interest thus more
business organisations preferred to avail such facility. Thus, as a result, there is an increasing

3IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
trend of net income is observed from the income statement of the organisation. Since the loan
is secured by the asset it indirectly helps to increase the amount of asset. As per the given
case study the increase in the net asset of the company which amounts to $3043513 in the
year 1985 as compared to the previous year 1983. Thus it can be said that the company the
asset-based lending increased the return on asset of the company. Therefore from the given
financial statement of First National Corporation shows that return on the average asset has
increased to 1.12% in the year 1985 as compared to the previous years 1983 and 1985. Since
the increase in demand asset-based lending increased the market value of shares of the First
National Corporation in the stock market thus, as a result, the return on net worth has
significantly increased. According to the given statement, it is identified that return on
average has increased to 14.19 in the year 1985 as compared to the previous years. The
increase in return on net worth helps to determine how efficiently the investment of the
shareholders are utilised. Since the RONW (Return On Net Worth) of First National
Corporation has increased thus it can be said that has efficiently utilised the funds raised
through the issue of shares.
Response to question (2):
Yielding on asset is a popular ratio that determines the solvency position of the
company by comparing the capacity of the earning income through the interest of a financial
institution. Higher yielding on earning assets determines the capacity of the firm regarding
how well a firm utilizing the assets of the company (Gordon, Jeffrey, and Christopher 2014,
313). Therefore it can be said that effective measure related to higher earning and the yield on
asset is important to determine the performance of the asset. The high yielding earning asset
represents an indicator that shows that the company has earned a large amount of dividend

4IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
income and earned a large amount of investment income for further growth and development
(Lu, Helen, and Ben 2016, 62-87).
Further high yielding earning on assets reflects that the financial institution is in a
sound financial position. Again, on the other hand, it can be said that if the company follows
lower-yielding earning asset it can be said that there is a risk of being insolvent within the
financial institution.
On the other hand, the composition of deposit in case of a financial institution refers to
a mixture of all the deposits such as time deposit, term deposit, demand deposit, and capital
stock. The composition of the fund is one of the most important factors that help to increase
the earnings of the financial institution. If the deposit composition of a particular financial
institution is lucrative then the borrowers would find it more beneficial and as a result the
profitability of that financial institution increases (Berger et al 2014, 48-65).
According to the given case study, it is observed that though there is an increase in
demand for asset-based base lending the First National Corporation has to bear high cost
regarding asset-based lending. Further, it is observed that the lenders were chasing a few
loans and the lack of efficient people and a decrease in profit may affect the overall condition
of First National Corporation. Therefore it can be said that the composition deposit helps to
increase the efficiency of the financial institution and the deposit composition makes it
necessary to find higher-yielding earning assets. The main objective of this higher-yielding
earning asset is to increase the solvency position of the First National Corporation. According
to the study, it is also identified that the total deposit of the company has increased as
compared to the previous year’s amount to $2254461 (1985). Thus it can be said that deposit
composition makes it necessary to find the high yielding asset.

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6IMPACT OF ASSET BASED LENDING IN FINANCIAL INSTITUTION
References:
Alan, Yasin, and Vishal Gaur. "Operational investment and capital structure under asset-
based lending." Manufacturing & Service Operations Management 20, no. 4 (2018): 637-
654.
Berger, Allen N., Thomas Kick, and Klaus Schaeck. "Executive board composition and bank
risk taking." Journal of Corporate Finance 28 (2014): 48-65.
Gordon, Jeffrey N., and Christopher M. Gandia. "Money market funds run risk: Will floating
net asset value fix the problem." Colum. Bus. L. Rev. (2014): 313.
Kinai, Andrew, Isaac Markus, Erick Oduor, and Abdigani Diriye. "Asset-based lending via a
secure distributed platform." In Proceedings of the Ninth International Conference on
Information and Communication Technologies and Development, p. 29. ACM, 2017.
Lu, Helen, and Ben Jacobsen. "Cross-asset return predictability: Carry trades, stocks and
commodities." Journal of International Money and Finance 64 (2016): 62-87.
Ronald, Richard, Justin Kadi, and Christian Lennartz. "Homeownership-based welfare in
transition." Critical Housing Analysis 2, no. 1 (2015): 52-64.
Savor, Pavel, and Mungo Wilson. "Asset pricing: A tale of two days." Journal of Financial
Economics 113, no. 2 (2014): 171-201.
Suzuki, Yasushi, and SM Sohrab Uddin. "Recent trends in Islamic banks’ lending modes in
Bangladesh: an evaluation." Journal of Islamic Accounting and Business Research 7, no. 1
(2016): 28-41.