ABHINAV ANAND

E-mail: abhinavanand1507@gmail.com
Mobile Number: 6299782260

1. Facts:
2. ) average card balance is Rs 1000
3. ) each card has an interest rate of 15%
4. ) membership fee is Rs 20 per card
5. ) loss rate is 3% (NOTE: what are the interpretations of this ? state your assumption CLEARLY when solving )
6. ) Rs 25 operating cost per card
7. ) Rs 10 affiliation fee per card (cost to the group organization itself, so that their members get this awesome card
program)
8. ) 6.5% cost of funds (that credit card company must pay to the bank where it gets money)
9. ) bill/statement is issued on 1st of every month
10. ) credit-free period = 15 days from the bill/statement issue date
Let’s break it down,

- suppose there is a Organization

- For membership, fee is Rs 20
- Rs 10 for Organizational operations
- loss rate of 3%
- 15% is interest rate for each card
- total transaction amount is Rs 1000
- Credit Card company need to pay 6.5% of funds every month to the
bank where it get all of its fund (amount of fund can change month to
month)
- statement issue date is first of every month
- Credit-free period = 15 days from statement issue date (under credit
free period there is no intrest charge)

Let’s divide customers in

Group 1: who pays the bill within CFP

Group 2: who pays the bill in 30days after the last due date
Group 3: who pays the bill in 45days after the last due date
Group 4: who pays the bill in 60days after the last due date

Now let’s assume each group has 250 customers.

Scenario 1:

Intrest rate is simple intrest and all members are 1 year old so,

For Group 1 : intrest levied=0

For Group 2:intrest levied=(30-15)*1000*250*12*(15/100)*(1/365)=
Rs 1232.9 approx.

For Group 3: intrest levied=(45-15)*1000*250*12*(15/100)*(1/365)=Rs

2465.75 approx.

For Group 3: intrest levied=(60-15)*1000*250*12*(15/100)*(1/365)=Rs

3698.8 approx.

Answer 1)

Total profit= received amount – given amount

So if every member does full bill payment and no partial bill payment
then

Total Profit = total interest = Rs 1232.9 + Rs 2465.75 + Rs 3698.8 =

Rs 7397.4

Scenario 2:

Interest rate is compounded quarterly so interest rate will only

increase after 3 months (90 days approx.) and interest will be
calculated on monthly basis. Membership grows 5% every month and the
card balance of each member increase by 5%.

Month 1 has 1000 ,Month 2 has 1050 and Month 3 has 1102 customers.
Month 1 has 1000 ,Month 2 has 1050 and Month 3 has 1102 card balance
of each member.

Answer 1) let’s suppose that every customer took the loan only once a
year and Month 1 is January . Then there are 4 types of customers:

Group 1:
Month 1
Interest = 0
Group 2:
Month 1
Interest = (30-15)*1000*(15/100)*(1/31)=Rs 72.58 apprex. Per
customer
Total Interest = 250*2.387 = Rs 18145.16

Because we are supposing 250 customers in group1

Month 2
Interest = (30-15)*1000*(15/100)*(1/28)=Rs 80.36
Total Interest= 80.36*10 = Rs 803.6
 Because 10 customer are new membership
Month 3
Total Interest = (30-15)*15*(15/100)*(1/31)*1000 = Rs 1088.7
Because 15 customer are new memberships in march.
Group 3
Month 1
Total Interest=
(30-15)*1000*(15/100)*250*(1/31)
` Because of new membership Interest will get every month.
For calculation like this R or Python would be better tool to
calculate
Group 4
Same as group 3

Total profit = all the Interest – 6.5% of Total fund

Answer 2)

Group 4 members can be consider as borrowers default

So, Total borrowers default money = 1000*250 + 3698.8 = Rs 253698.8
(for Rs 1000 avg. card balance)

Loss 1 = 253698.8*(3/100)=Rs 7610.964(for Rs 1000 avg. card balance)

Total borrowers default money = 2000*250 + 7397.4 = Rs 507397.4 (for

Rs 2000 avg. card balance)

Loss 2 = Rs 15221.922 (for Rs 2000 avg. card balance)

Loss 2/Loss 1 =15221.922/7610.964 =2

We can see on avg. card balance*2 , loss will become *2

Answer 3)
Borrowers with low balance are less likely to default compared to
borrowers with high balance because borrowers with high balance must
have high interest amount even though interest rate is same. Interest
has direct co-relation with balance and default chances.

Answer 4) For credit card company,There are 10000 members in the

beginning but because of borrower default group 4 has been eliminated
so remaining members are 750
So the operation cost would be = 750*25=Rs 18750 (this amount will be
used to buy credit card customer)

Money paid to credit card company= 750*20=Rs 15000

Total profit= received amount – given amount

Profit = 18750-15000= Rs 3750

This profit would be only for starting organization’s own credit card

Answer 5) 6.5% fund goes to bank so

Total Fund = 1000*1000 = Rs 1000000 (for 1000 customer)
Fees to bank = 1000000*6.5/100 =Rs 65000

So for profit of credit card company we can say that

Total intrest > fees to bank

Total intrest = i*d*c*P

P= principal amount ,d= no. of days , c=no. of customer
We can’t control d,c & P but we can control P

So, i>65000/(1000000*d)

i>(0.065/d)

so for d=30 i need to be minimum (0.065/30)

for i to be maxm , d need to be minimum and vice versa

Answer 6) Company will have profit if customer delays the payment

after the due date because of the intrest.

Answer 7) Of course It is beneficial for the company if customer pays

the bill after the due date but the rate of profit can differ. For
example let a customer pays the bill 5 days after the due date then
the company won’t have any profit but if the customer pays after 15
days (credit free period) then every extra date has interest on
principle amount. Payment can also be done in partial so we can see
more variation in profit.
As a credit risk manager I would use 1) Income of customer 2) Ongoing
loan on customer 3) assets and recommendation as variable to
calculate the credit card limit and risk for individual customer. To
make decision we can use Bureau Score Scale. Bureau Score reflect the
probability of default. Lesser the score , Lesser the chances of
getting default and Bigger the chances of getting credit.