The impact of transforming bank advisory services to borrowers on non-interest revenue generation

Abstract

The challenges of revenue generation by banks are evident if one considers the accusations labelled against the banks of aggressive lending (Archaya & Naqvi, 2012), which basically centers on the pursuit of profits with minimum regard to risk management. If not read or if read in passing, loan terms can be used to destroy the reputation of banks when accusations of predatory loans surface. It is argued here that even if understood at the time of signing the acceptance of the loan, there is no guarantee that the terms are still top of mind of borrowers, especially those who borrow for a long term. Banks can use their advisory skills to periodically take borrowers through loan terms, confirm understanding, detect any wanton behaviors (WB) from borrowers’ financial activities that go against financial astuteness and may jeopardize repayment capabilities and offer advice on practices that are not counter to repayment capabilities. Banks can mitigate the challenges in interest income generation, particularly from a default point of view by periodically engaging borrowers to specifically advice on behavioral issues that manifest themselves in financial levers. Since borrowers stand to gain immeasurable value out of these engagements, banks can justifiably levy borrower advisory service fees (BASF) and wanton hazard fee (WHF). The authors show, through the application of the BASF and WHF, the potential income banks can generate. Using the BASF and WHF as sources of non-interest income, the potential benefit taking into account the credit loss as a function of BASF accruing to the bank is established.