4.

Financial institutions usually segregate their lending portfolios into the following

categories:-

a. Corporate loans

b. Commercial loans

c. Consumer loans

Discuss whether the above sectorial allocation of a loan portfolio is advantageous to a

financial institution.

The above sectorial allocation of a loan portfolio is advantageous to a financial

institution. This is because the sectorial allocation of a loan portfolio is for a different

scope of purpose to target business or customer as the difference of size of loan.

Example, corporate loans are for large corporations so the loan amount will be higher,

commercial loans are for smaller businesses and consumer loans are for personal

needs.

Furthermore, financial institutions are allowed to diversify the risk. As the

different sectors of the portfolio are aimed at different groups of business or

customers, the financial institutions have different types of customers which means

not putting all eggs in one basket. Example, the people are less interested in

purchasing cars or houses, this will lead to the bad effect on consumer accounts, but

the financial institutions are able to cover the loss through diversification.