A&A is a new business client for Citibank Malaysia and has asked for a one-year, RM20 million loan at an annual interest rate of 8%. The company plans to keep a 3 %, RM5 million commercial deposit with the bank for the loans duration. The loan officer in charge of the case recommends at least a 4% annual before-tax rate of return over all the costs.

Using customer profitability analysis (CPA), the loan committee hopes to estimate the following revenues and expenses which it will project using the amount of the loan requested as a base for the calculations:

Estimated Revenues	Estimated Expenses
Interest income from the loan (8%)	Interest to be paid on customers RM3 million deposit (3%)
Loan commitment fee (0.75%)	Expected cost of additional funds needed to support the loan (4%)
	Labour costs and other operating expenses associated with monitoring the customers loan (1%)
	Cost of processing the loan (1%)

Required

i. Evaluate whether the loan can be approved on the basis of the suggested terms. Justify with workings.

(13 marks)

ii. Propose the adjustments that can be made to improve this loans projected.

return?

(2 marks)

iii. Appraise how competition from other prospective lenders might impact the adjustments you have recommended.

(2 marks)