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Can a bank call back loan without warning and bankrupt its business clients?

Discussion in 'General Chat' started by helpme, Aug 31, 2017.

  1. helpme

    helpme

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    In this video below from 60 minutes, it was alleged that Commonwealth Bank bankrupted the CEC Group (listed on ASX in the past) by calling back loans without warning in 2008. CEC claims that it has never defaulted any loans in the past.

    This is scary to any businessmen who carry bank loans. Technically, a bank can bankrupt almost any business by calling back the loans without warning if one fine day, some banker decides that the client business is too risky even if the customer has never defaulted before.

    Does this apply to people who have mortgages with the bank? What if the bank decides that Sydney property prices are crazy and decides to reduce risk exposure quick one day? Can the bank call back the mortgage loans without warning? Wouldn't that result in several bankruptcies among property owners?

    Does the standard bank loan contract allow a bank to call back loans without warning? Can someone in the know shed some light on this risk? If so, better avoid bank loan as much as possible from today onwards.



    https://www.msn.com/en-au/news/aust...rns-destroyed-by-commonwealth-bank/ar-BBEvLY0
     
  2. tech/a

    tech/a No Ordinary Duck

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    Yep
    NAB attempted to do it to me in 87
     
  3. helpme

    helpme

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    This is a terrible risk to bear. Technically, if someone offends their banker, the banker can bankrupt him. May I ask how did you survive from the NAB bankers in 87? Did they suddenly regain their conscience and decide to be kinder to you? Was it after Oct 1987 when U.S stock markets crashed >30% in a single day?
     
  4. willy1111

    willy1111

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    Typically it is more likely to happen aften some general financial instability in markets, such as the gfc, the recession we had to have, 87 crash. If they believe a business has significant risk they will look to wind down the risk (ie reduce the lvr) which is effectively the same as calling in a loan.

    I would suspect the company in the 60 minutes vids share price took a hamering in the gfc, so the bank wanted them to reduce the loan limit to reduce the lvr, effectively like a margin call. The bank was managing their exposure.

    For a homeowner with an average size mortgage and lvr under 80% it would be pretty unlikely to be called in.

    If you have a million plus mortgage over 80% lvr and we have some instability in the market place, chances are you might get asked to reduce your lvr (kinda like a margin call).

    The bank will assess the riskier loans and address those first, think the higher $ amount and higher lvr loans. They will leave their bread and butter / safer loans to be.
     
  5. tech/a

    tech/a No Ordinary Duck

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    Was back when interest rates were 18%
    The geniuses who found I couldn't service my property debt at 18% hit me with an extra 6 % making it 24% that was a real help.
    I had a lot of commercial property and Tennent were going out of business
    I was another statistic.

    Had some good legal people and Ernts Young got involved
    Managed to sell 90% including PPR but managed to keep my business property
    Satisfying LVR and ability to pay ---- brutal.

    Basically started again and learnt plenty.
    Got it right in the end.
     
    pinkboy likes this.
  6. McLovin

    McLovin

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    Yes. It's a unilateral variation clause which is pretty much standard in any loan contract, including 99% of mortgages. If the customer has a good credit rating then they could refinance relatively easily. It costs a bank a lot of money to put a company into administration and recover whats left – they will usually flog the debt at cents on the dollar rather than try and work through administration – so they don't do for sh!ts and giggles.

    People can't repay the bank, the loans become impaired and the bank creates a huge problem for itself as it has to raise capital to cover the loss on the loans that it's trying to call in. So they won't do it. They can reassign the mortgage though to another lender if they want to reduce exposure to Sydney.
     
  7. SirRumpole

    SirRumpole

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    Can bank customers buy insurance to cover this ?
     
  8. McLovin

    McLovin

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    Well you can buy insurance for anything if you really want to, but there's no off the shelf product that I know of, although I haven't really looked. This sort of thing is extremely uncommon. Unless you present some sort of reputational risk to the bank they won't call in your loan, and even if you're distressed they'd rather work through it than have the cost of winding you up. So you'd be essentially asking an insurer to guarantee the viability of your business. God knows what that would cost, or if it's even possible.
     
  9. Hodgie

    Hodgie

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    To the OP. It honestly shouldn't be something that concerns you. A bank won't call back a loan for no reason. Unless your a duck. There is usually more than enough warning. They want to stretch the loan out as long as possible.
     
  10. Hodgie

    Hodgie

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    Btw. 60 minutes is a terrible source of information. They take one story and blow it out of proportion.
     
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