Question Tag: Loan portfolio

Bank of Ghana (BoG) recently announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company, has been affected by the increase in players in the Micro Finance Industry, which has seen a reduction of its loan portfolio and an increase in loan default rate. A statement of financial position recently prepared by Capital Link is provided:

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

• Scheme 1 – Close Down Mission:
  Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
• Scheme 2 – Rescue Mission:
  Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

• Current borrowing rate is 14%.
• The present value of GH¢1 receivable at the end of each year is:

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)