What Is an Amortizing Loan?

With the deepening of the reform of commercial banks and the popularity of consumer credit, the concept of retail banking has entered people's lives, but the theoretical basis of the commercial banking industry in China has been less discussed. The theory about retail business can be traced back to the theory followed by British commercial banks in the 18th century to determine the direction of bank funds distribution, namely the theory of commercial loans. With the change of economic environment and the development of banking business, the management theory of commercial banks has gone through different stages of development, from "real bill theory", "conversion ability theory", "expected income theory", "excess money supply theory" to " "Asset Structure Theory", the theoretical basis of retail banking has gradually been established. From real note theory to conversion capability theory, retail banking's business has been expanding.

Personal retail banking market

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With the deepening of commercial bank reform,

(Real-Bill Theory), also known as Commercial Loan Theory, originates from "Study on the Nature and Causes of National Wealth" published by Adam Smith in 1776, and is based on the practice of British banks in the 17th century In development, these loans were mainly inventory loans or working capital loans. According to this theory, commercial banks should not issue securities loans, real estate loans, consumer and personal loans, and long-term agricultural loans. Even if these loans are made, they should be limited to the bank's own capital and existing savings deposit levels. The theory holds that in the early stages of bank development, commercial banks should focus on maintaining a high degree of liquidity when allocating funds. Because the bank's main source of funds is demand deposits with high liquidity. Because the deposit decision is external, the business is mainly focused on short-term self-pay loans, and does not issue long-term loans and consumer loans. This theory is also called Self-Liquidation Theory. This theory is mainly concerned with the liquidity and security of commercial banks, emphasizing the stability of commercial banks' operations, and the corresponding loss of profitability. Although there are many disadvantages to the commercial loan theory, it still has considerable influence on the regulatory behavior of monetary authorities and the management of commercial banks.

(Shiftability Theory) was proposed by American Morton in the article "Commercial Banking and Capital Formation" published in the Journal of Political Economy in 1918. The crisis of the banking industry at the time showed that liquidity does not depend on the type of loan issued, but on the Shiftability or Saleability of the assets held by the bank. This theory is based on people's new understanding of maintaining the liquidity of commercial banks. They believe that the assets of commercial banks are not necessarily limited to short-term self-repaying loans. A considerable portion of them can be distributed to securities assets that can be sold immediately when money is needed. As a result, the scope of assets of commercial banks has been expanded, and commercial banks have increased their profits on the basis of ensuring a certain level of liquidity and security. This theory does not completely replace the commercial loan theory, but a further development of the commercial loan theory. The premise of this theory is that the price of securities on the secondary market is relatively stable. The theory of conversion capacity adapted to the rapid expansion and development of the capitalist economy. With the encouragement of the asset conversion theory and the coordination of social conditions at the time, the proportion of discounted bills and short-term government bonds in the asset portfolio of commercial banks increased rapidly.

The emergence of expected income theory promotes the generation of retail asset business

In the traditional bank loan policy, the consumption area has always been a restricted area. American financiers proposed the Anticipated Income Theory in the book "Regular Lending and Bank Liquidity Theory" in 1949. The basic idea of the theory is that the liquidity state of a commercial bank is based on future income in the final analysis, and is positively related to its income. The term of the loan is not an absolute controlling factor. As long as the expected future income is guaranteed, long-term project loans and consumer credit can also protect the bank's liquidity through the form of repayment; on the other hand, if future income is not guaranteed, even short-term loans are also available. Unrepayable risk. The theory argues that commercial banks should use the expected income of borrowers as a measure of their ability to repay their loans, and use this to realign the relationship between profitability, liquidity, and security. This theory also argues that the expected income of borrowers is affected by the distribution of loan maturities. As a result, banks can issue long-term commercial loans, real estate loans, and consumer loans because these loans are amortized or repayable in the form of potential liquidity.

The expected income theory starts from the fact that borrowers generally have regular fixed income and concludes that: first, the amount and time of the borrower's income can be expected; second, if a part of the income of each period is used to return the loan, Not only is the return of the loan guaranteed, but also the amount and timing of loan repayment are also expected; third, if the loan is repaid in installments, then the actual long-term loan can often bring liquidity within the term. This theory has not given up commercial loan theory and conversion theory, but just includes a broader portfolio of assets, such as long-term amortized loans and consumer loans. According to this theory, while maintaining a certain level of liquidity and security, the pursuit of maximum profit has increasingly become the main goal of its business management. The emergence of this theory has greatly promoted the generation of retail asset business, especially consumer credit business.

Development of debt theory promotes revolution in retail debt business

In fact, debt management already exists. The oldest debt management theory is the "bank bond theory", followed by the "deposit theory". The traditional deposit theory is mainly based on the safety and liquidity of commercial banks, and according to the wishes of customers Organize deposits, and arrange commercial bank loans and other asset businesses based on the status of the absorbed deposits, maintain high liquidity of assets, and prevent run-ups. Traditional deposit theory has been maintained at the expense of commercial banks' asset profitability. Liquidity of assets.

In the 1960s, interest rate controls made commercial banks feel that their ability to absorb funds was weakened. At the same time, the variety of financing methods made commercial banks feel that they were short of funds on the one hand and were under tremendous pressure from liquidity. A new theory has emerged in managementthe theory of debt management. Among them, the purchase theory and sales theory have a greater impact on retail liability management. These theories changed from the passive debt method that relied solely on absorbing deposits to the active debt method of outward borrowing, so as to find a new way to maintain the liquidity of commercial banks and improve the competitiveness of commercial banks.

It is believed that banks are not passive and incapable of debt. Bank liquidity can not only be obtained by strengthening asset management, but banks can also take the initiative to debts and purchase external funds. Therefore, banks do not need to maintain a large number of highly liquid assets, but should invest them in highly profitable loans or investments; once liquidity needs arise, they can be provided at any time through liability management. The purchase theory mainly includes: the basic purpose of the bank to purchase funds is to enhance liquidity; the purchase object and the fund supplier are very extensive; directly and indirectly raising the price of funds is the main means to achieve purchase behavior; the bank through the active purchase behavior to get rid of Limits on the amount of deposits (as shown).

Sales theory no longer focuses solely on funds. It is based on service, advocates the creation of financial products, and provides a variety of services to more customers. Its meanings include: customer first; financial products must be supplied according to the diversified needs of customers; the essence of any financial product is to help fund operations, and its casing or packaging may be other forms of goods or services; the sales of financial products rely mainly on information. Communication, processing and dissemination; the concept of sales is not limited to bank liabilities, but also involves bank assets. It is advisable to link the two aspects for systematic management.

Both the purchase theory and the sales theory are based on profitability. In order to meet the requirements of commercial banks in pursuit of maximum profit, they actively borrow funds from interbank financial institutions, central banks, international money markets, and financial institutions (that is, purchase), or to cater to The needs of customers, through efforts to promote the transfer of depository receipts, repurchase agreements, financial bonds and other financial products, expand retail bank funding sources, ensure liquidity, and improve the economic efficiency of banks. As shown in the figure, if the bank encounters sudden withdrawals of deposits or loans that require better liquidity, asset management methods generally rely on realizing secondary reserves to meet them. However, if a debt management approach is adopted, liquidity is supplemented by purchasing funds in the money market, and commercial banks can also use active liabilities to continuously adapt to the strategic expansion of profitable assets. The emergence of purchasing theory and sales theory has promoted the innovation of retail bank debt business, and some new retail debt business varieties (such as large transferable certificates of deposit, etc.) have emerged as the times require.

Hyper-money supply theory lays the theoretical foundation for the development of retail intermediate business

It is believed that the provision of money by banks is only one of the means to achieve business goals. In addition, it not only has a variety of means to choose from, but also has a wide range of goals that can be achieved simultaneously. Therefore, bank asset management should provide more services across the narrow perspective of currency. According to this theory, while purchasing securities and developing loans to provide currency, banks actively carry out investment consulting, project evaluation, market research, information analysis, management consulting, computer services, and commissioning and other supporting services, so that the banking business can achieve Unprecedented breadth and depth. The emergence of this theory has laid a theoretical foundation for the development of retail intermediate business.