Lending Decision

Coles Group Limited Formerly known as Coles Myer Limited. The Group's principal activities are carried out through the following business segments: Food, Liquor & Fuel, Kmart, Target and Office works. Food, Liquor & Fuel involves retailing grocery, liquor and fuel products. Kmart and Target involve retailing apparel and general merchandise. Office-works involves retailing office supplies.

Major brands include Coles, Bi-Lo. Liquor-land, Vintage Cellars, 1st Choice, Theo's, Coles Express, Kmart, Target and Office-works. It operates around 2,600 stores in Australia and New Zealand. It also has branch offices located in China. On 31 March 2006, the Group acquired Sydney Drug Stores Pty Ltd (trading as Pharmacy Direct). On 2 June 2006, it disposed of its Myer business. On 14 June 2006, it completed the acquisition of the Hedley Hotel Group. On 9 November 2006, it divested its Mega-mart stores

The most common claim with regard to the importance of money in our everyday life is the morally neutral if comically exaggerated claim that makes the world go round'. Equally exaggerated but showing a deeper insight is the biblical warning that 'the love of money is the root of all evil', neatly transformed by George Bernard Shaw into the fear that it is rather the lack of money which is the root of all evil.

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However, whether it is the love or conversely the lack of money which is potentially sinful, the purpose of the statement in either case is to underline the overwhelming personal and moral significance of money to society in a way that gives a broader and deeper insight into its importance than simply stressing its basically economic aspects, as when we say that money makes the world go round'.

Consequently whether we are speaking of money in simple, socalled primitive communities or in much more advanced, complex and sophisticated societies, it is not enough merely to examine the narrow economic aspects of money in order to grasp its true meaning. To analyze the significance of money it must be broadly studied in the context of the particular society concerned. It is a matter for the heart as well as for the head: feelings are reasons, too.

National currencies are an inadequate form of world money, but at least their use in international transactions avoids the faults of commodity-money. A monetary standard based on strategic commodities, no matter whether gold alone or some combination of raw materials, will always suffer from their relatively inelastic and uncertain supply conditions. Producers of the money commodity will have an outright advantage over others in the marketplace.

Even if we reduce the role of the money commodity to that of last-resort reserve and numeraire for exchange rates, as was the case with the gold exchange standard of Bretton Woods, such a hybrid system is prone to break down. Commodity-money and credit-money are essentially incompatible forms of money and do not coexist easily with each other. One or the other will dominate, and each form of dominance will cause its peculiar sources of instability (e.g., inadequate supply of liquidity, loss of convertibility, inequitably distributed adjustment burdens).

National currencies are an inadequate form of world money, but at least their use in international transactions avoids the faults of commodity-money. A monetary standard based on strategic commodities, no matter whether gold alone or some combination of raw materials, will always suffer from their relatively inelastic and uncertain supply conditions. Producers of the money commodity will have an outright advantage over others in the marketplace.

Even if we reduce the role of the money commodity to that of last-resort reserve and numeraire for exchange rates, as was the case with the gold exchange standard of Bretton Woods, such a hybrid system is prone to break down. Commoditymoney and credit-money are essentially incompatible forms of money and do not coexist easily with each other. One or the other will dominate, and each form of dominance will cause its peculiar sources of instability (e.g., inadequate supply of liquidity, loss of convertibility, inequitably distributed adjustment burdens).

By some measures, the real backbone of world commerce and global employment is made up of the millions of unsung small enterprises that farm small plots of land, cook food, provide daycare for children, make clay pots or straw mats by hand, do piecework for apparel makers, and carry out the countless other tasks that larger businesses don't do. In the cities of developing countries, for example, a growing percentage of the working population - sometimes estimated as high as 50 percent - is engaged in microenterprise activity.

In the seven countries of southern Africa, there is evidence that small, unregistered enterprises provide work for substantially more people than the "regular," legal ones do. In Latin America and the Caribbean, more than 50 million microenterprises employ more than 150 million workers. Even in a wealthy country like the United States, more than a quarter of all employees work for establishments of fewer than 20 people, and those businesses constitute 87 percent of all U.S. business establishments.

The tasks these businesses perform cover the whole range of human activity, from the basics of housing and farming to the luxuries of entertainment and tourism. In many parts of the world, microenterprises frequently have only one employee - who is also the owner - or they benefit from the work of family members who are not really employees at all. In wealthy countries, many microenterprises may be larger, up to 10 or 20 people, for example, but still small in comparison to many of their competitors.

But throughout the world, what most of these businesses do have in common is a lack of access to resources. They get little help from lawyers or accountants; often they are not able to afford retail space; many of them are not even legally registered as businesses.

At almost all American banks, the board delegates loan approval authority to the professional banking staff. Such delegation permits assistant branch managers up to the president to have varying loan authority, from $5,000-$10,000 unsecured to $250,000, $500,000, or even $1 million secured. On top of this, the board often delegates still-higher authorities to loan committees or combinations of loan officers.

Using a hypothetical example, if the lending limit of the financial institution is $5 million per borrower, the directors may delegate from $1 up to $1 million to individual officers, officers in tandem, and loan committees. This leaves all loans above $1 million and under $5 million to be approved by the board itself. In essence, the board has set itself as approver of the most sophisticated, most risky, and most complex lending arrangements, while the professional loan staff handles the relatively inexpensive and less-risky loan approvals.

Add to this the fact that if the loans go seriously wrong, and the board has approved the loans, then the state and federal regulatory agencies may take remedial actions against the directors. Many financial institutions adopt in-house lending limits which are significantly lower than the lending limit to any one borrower that is legally available. For example, prior to the sale of First of America Bancorp to National City in 1998, the legal lending limit of First of America was $180 million to any one borrower. On the other hand, its board refused to make any loans in excess of $24 million.

The directors felt that $24 million was sufficient risk exposure. Several financial institutions have set their in-house lending limit equal to the professional loan committee's lending authority, thus for all intents and purposes eliminating the board as a source of loan approvals. Micro-enterprises are more flexible and mobile than the much larger, more complex and building-bound businesses.

They provide part-time work to women and men who also have to take care of families, and seasonal work in places where crops have to be harvested. They require little capital, office space, or startup title. They can thrive in rural areas, thereby slowing the rush to urbanization. Jobs in microenterprises are accessible to immigrants and disenfranchised people who need to moonlight or share jobs. And they are run by women at least as often as men, helping to reverse a pervasive global inequity.

Microenterprises also offer an alternative to the conventional strategy for bringing development to poor nations - making large loans to governments for massive power or infrastructure projects. Such project-oriented development has come under growing criticism from grassroots activists, who say the projects often benefit large contractors and central governments more than they help local people. More investment in smaller, local industries, they argue, could bring economic and social benefits at far less cost. Their view is reflected in an old Chinese saying, "many little things done in many little places by many little people will change the most of the world."

For years, the First National Bank of Omaha, Neb., had a board consisting exclusively of inside professional bankers who made all loan decisions. In these financial institutions the professionals make the loan approval decisions, not the amateurs.

Finally, it is up to the board to set the loan authorities and to review such loan authorities per loan officer on an annual or more frequent basis. The board must also revise lending authority by type of lending function, depending upon the size of the financial institution, so as to protect the institution from risky, inappropriate lending by staff members. The board in these cases normally reacts to the recommendations of senior management, especially the senior lending officer, who is in charge of the entire lending function.

As we transition away from the high growth years of the past two decades, it's an appropriate time to reflect upon the future of the banking industry. As the economy continues to slow from what has been a remarkable global expansion, the banking industry finds itself in the middle of a dramatic transformation.

Several significant trends are impacting key decision-makers of traditional financial institutions, and many are grappling with their role in the New World economy even as they try to reinforce the traditional attributes that have made them competitive. Financial institutions also face challenges on the services-side as there has been a proliferation in the number of customer touch points with the growth of the Internet, wireless, as well as traditional channels such as branches and telephone banking.

This has added further pressure on profitability and on increased efficiency. Many boards today are trying to reconcile the need for greater operating efficiency while realizing that traditional channels are not going away any time soon, and at the same time recognizing the need for newer distribution channels to serve the changing demographics.

There is also the need to be more creative in offering traditional and non-traditional banking and other products. This need complements the need for new revenue streams particularly non-interest fee income sources. Additionally, there is a keen acknowledgement that banks must know a lot more about their customers so they can serve them better and more profitably.

Most traditional institution brands are built around service, trust and community. These are fundamental attributes that financial institutions have enjoyed for over a century. Brand strength will become increasingly important as institutions compete for customers. Brand identity will become more important because choices among customers will increase, making it more important for your target audience to differentiate between competitors. Financial institutions will differentiate on service, trust or serving a particular community or demographic set. Their brand recognition and identity will be increasingly important to their customers and will enable them to filter through the competition.

REFERENCES

Micro-Enterprises, Magazine article by Hal Kane; World Watch, Vol. 9, March-April 1996

The Role of the Board in Lending, Part 1 of 3 Parts: Reexamining Directors' Role in the Lending Process, Journal article by Dr. Douglas V. Austin; ABA Banking Journal, Vol. 94, 2002.
The Future of Banking and the Role of Technology, Journal article by Louis Hernandez Jr., Michael D. Nicastro; ABA Banking Journal, Vol. 93, 2001.
The Role of Social Capital in Development: An Empirical Assessment, Book by Christiaan Grootaert, Thierry Van Bastelaer; Cambridge University Press, 2002
Competitive Industrial Development in the Age of Information: The Role of Cooperation in the Technology Sector , Book by Richard J. Braudo, Jeffrey G. Macintosh; Routledge, 1999

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