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Project Description

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  1. Project Description • Business Background • Class Project

  2. Business Background • Loans Personal- Borrower receives money & pays back monthly Commercial- Borrower keeps the entire money (for a fixed period) Returns the Principal as a lump sum Regularly pays the interest • We will be considering Commercial loans

  3. Business Background-contd. • Most Important problem for Banks- Deciding to whom they should lend • Decisions- Processing information (Business plan/ Data about past loan workouts) • Lends money if the Probability of repaying loan is sufficiently high • If the borrower fails to make expected interest ( Default on the loan) • Bank has two options ( Objective-Profitability) - Foreclose loan - Loan Workout

  4. Business Background-contd. • Bank Forecloses a loan if Benefits of Foreclosure > Benefits of Workout • What is Foreclosure? Bank requires the borrower to pay back Principal+ Interest or Bank takes over ownership of the relevant assets & sells it (may put the borrower out of business)

  5. Business Background-contd. • Bank enters a Loan Workout if Expected Value Workout > Expected Value Foreclose • What is Loan Workout? Attempt to salvage the loan by setting up a new schedule or temporarily deferring such payments

  6. Class Project • John Sanders ( has failed to pay interest) • 7 years Experience • Bachelor’s Degree • Economic Condition- Normal • Full Value- $ 4,000,000 (Loan value) • Default Value- $ 250,000 (loan workout fails ) • Foreclosure Value- $ 2,100,000 (If bank Foreclose )

  7. Class Project • Acadia Bank (Merger of BR Bank/ Cajun Bank/ Dupont Bank) • Historical Data on Loan Workouts ( Assume similar Clients) • BR - Experience • Cajun- Education Status • Dupont- State of Economy

  8. Class Project • Using the Mathematical Tools (Eg: Basic Probability/Expected Values/ Conditional Probability…) • Need to create a Business Solution • Should Acadia Bank enter into a workout agreement with John, or should it foreclose on the loan?

  9. Project 1-assumptions • Similar clients-Each of the three former banks made loans to very similar populations of borrowers • Experience/Education Status/State of Economy are all independent of each other

  10. Preliminary Report • Preliminary Report – TBN • Teams & Data for Project 1 on Class website • 3-5 minutes PowerPoint presentation • You will be asked 1-2 questions about the presentation • You need to give me a copy of the PPT presentation (size 6X4) • Dress Code- Business Casual

  11. Preliminary Report-contd. • Read about report on MBD part1.ppt(Slide # 32) • Should start the presentation by introducing the team • A Discussion of the problem • Definitions • Project Assumptions • Study of Historical Data ( Loan Record.xls) • Tentative decisions (based on problem data/common sense/ business considerations) • Evaluation Form for the Presentation is posted on the class website