The policies and practices of any company especially the financial sector have a significant impact on the sustainability of the business. Moreover, focus must be shifted to the customers as they are the main revenue of the business. The global financial crisis of 2008 still lingers fresh as it was caused by unregulated credit systems and acts as a caution for all those offering such services to be extra careful on the products they offer. Consumer Lending Corp being a national consumer loan company has various stakeholders; these include the shareholders as it is being traded in the NYSE; the managers and other employees (loan officers), and the customers.
The current practices involves offering loans and minimizing the delinquency rates; the company borrows the funds it uses to lend to consumers by selling commercial paper (in the form of promissory notes secured by the underlying consumer loans) to large institutional investors. In view of the fact that, a low delinquency rate has maximized profits for the company, the managers are more focused on it rather than being creative on other financial products. The payment system has also aggravated the issue given that it is based on 20 percent end of year bonus based on the total aggregate amount of loans generated by the office, and based on the delinquency rate. This has resulted to managers using more finances and aggressive means to reduce the delinquency rates so as to increase their earnings, despite the fact that such means are potentially harmful to the business.
Collection tactics frequently include initiating legal action at a cost to the company far in excess of the loan payments that are generated by the litigation. Simply put, managers do not care how much the collection activity costs the company so long as an account is kept off the delinquency list. Additionally the managers are not fined for using such methods. They also encourage the same customers to take up more loans than they can repay. This current practice only works to sustain the current situation otherwise it is a very risky and unsustainable method. It only serves the purpose to enrich the managers and loan officers rather than guarantying the company a future. It seems the managers have utilized and manipulated the system to favor themselves and make sure they earn huge sums of money as opposed to sustaining the company in business.
Definitely this is unethical; despite the action being legal; it does not maximize the shareholders value and has detrimental effects on the customers, environment and community. The managers have no right to manipulate the system for personal gains and hence need to refocus their strategies. They need to focus more on having more customers rather than advocating the current customers taking more loans; this would help to diversify and spread the risks. In addition, they should try and rebrand the product to accommodate other clients. The managers should eliminate the bonus based on delinquency rates to avoid harassment of clients since more money is involved in such procedures.
The current procedures do not guarantee long term benefits of the shareholders and must be reformed since may contribute to major defaults and hence huge losses for the company. Despite making profit in the short term, more focus should be focused on creating a culture of innovation, honesty and industriousness. Indeed, any company that does not pay attention to its customers is doomed to fail. For instance, the national consumer finance industry has recently been criticized for aggressive lending and collection practices. This cannot be a good strategy to retain and attract more customers. The ethical school applied is the utilitarian or the consequentialist; it focuses on the consequences of the current practices.