In this case study I am using the Corporate Alliance as a Case Study to demonstrate trends in Galactic Lending Standards.
Lending is the process in which one party, a Lender lends capital to another party, the Borrower. The amount of capital and terms are negotiated between the Lender and Borrower.
In terms of modern Galaxy, there are three primary categories:Peer to Peer, Government Stimulus, and Corporate Loan. A Peer to Peer lending situation is between individuals and often involves personal relationships, and constitute a significant amount of regular galactic lending, as evidenced by Holonet Traffic on Commercial Channels.
Government Stimulus is an injection of capital from a Government to support the economic development of an individual or corporate venture. In most cases, the venture is either a Government owned enterprise(Nationalized) or company owned by a citizen of that Government(one example being the Private Sector Affiliates, or PSA's, of the New Republic).
Corporate Alliance represents the final type, a direct loan, which are a smaller fraction of galactic lending. However, in a deflationary economy where Governments and wealthy individuals have become less generous, is there room for this type of lending to grow?
Examining the Corporate Alliance's lending policy, one notices a few aspects. First of all, the amounts that can be borrowed are based on tiers. Each Tier also involves a monthly interest rate that compounds for each month the loan remains unpaid.
CA also demands that assets equal to the amount to be borrowed be made over to them as Collateral.Collateral are assets held that can be seized to compensate the lender in the event of Default, in which the Borrower is unable or unwilling to pay. Corporate Alliance uses a formula of Average Centrepoint Market Value * .75 to determine of the collateral value. A 10% fee is immediately applied to the loan when it is borrowed, with the monthly interest rate applied each month the borrower still owes on the loan. After two months of failure to pay, the Loan is considered in Default and the Collateral is immediately seized. A minimum payment is half of the interest due for that month with any unpaid interest being applied to the existing debt.
The fundamental problem occurs due to the fact that the borrower is expected to make over assets equal to the capital value that is being requested. Factor in the Collateral Calculation, and the borrower is expected to giver CA 25% more Capital then the size the loan, and then have fees and interest applied. It is a good means for Corporate Alliance to mitigate scams, but does not encourage investment. Why go through the complexity of a Loan, when you can just sell the collateral on the open market to get the credits you need.
CA is applying the interest here as a series of fees, but there is nothing here that affects time preference. A good loan should answer the question: Why should a Lender lend to a borrower who can not repay the amount at this time?
Interest is intended to solve this problem by convincing the Lender to give up current money in exchange for a guarantee for greater future money. The Lender gets a return on investment, plus the profit from interest and the Borrower gets the capital that they need.
Another problematic aspect is the negotiability of repayment. With such low terms of repayment, the borrower has no immediate pressure to repay. Corporate Alliance profits immensely, but the borrower is hurt by the series of fees and the assets they had to makeover. While assets owned by someone else can still be used, most owners would consider such a situation a security risk to themselves and any employees or subordinates. This system tips the risk scale all in favor of the borrower, and allows CA to profit in every case. While the profit itself is not the problem, the fact that CA takes almost no risk from the loan and that the risk is mostly on the borrower will discourage many potential borrowers. Better to invest in real estate, ask for raise, or just trade on the open market, then get caught up in a complex loan.