Tying Bank Loans To Other Service Essay

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Updated: Mar 13th, 2024

Introduction

In this era of globalization where the standard of living of the people has improved a lot, the banks have become the inevitable part of the daily life of the human beings. The number of people who have not gone to a Bank to avail of any banking service would be very negligible. The banks provide real assistance in matters of financial requirements like borrowing money, depositing cash, withdrawing money.etc.

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Ethical issues in tying bank loans to other services

Let us take the case of an individual approaching a bank for availing a bank loan. Some banks while willing to advance the loan may put forth a condition that if they were to provide the loan the customer has to necessarily buy some other products of the same bank, say credit cards, or the products or services of some other organization with which the bank may have a tie ups. Tying up is “a situation where one benefit is tied to the person or entity doing something else.” (Guard, & Guru, 2003)

This raises a question of ethical issue that is, whether banks could rightly practice this policy or not. This is discussed below with the help of SWOT analysis.

Strengths

The banks can argue that, if they are tying up the loan allotment to other service it can help the customers to know about and get other services of the bank with ease. For example if a customer needs a bank loan, the bank may put forth a condition that the customer must have to buy the credit cards of the bank. But from customers’ point of view this cannot be treated as advantageous to the customers. That is, the customers will become the holder of a credit card if he is taking the loan. From the banks point of view the tying is advantageous to banks as they can sell their other products easily. Sometimes the customers may not have any other option but buy the product or service thus forced on him by the bank along with the product that is actually required by them.

Weakness

The customers are not idiots to agree and buy whatever products the bank sells. They will use their thinking power and discretion to analyze a situation like this and take apt decision whether to continue with the bank or not.

“Banks often force corporate customers to buy investment-banking services in exchange for loans.” (Finance execs report illegal bank tying, 2009)

From ethical point of view this tying is unethical. Because one cannot say that if a person wants to buy a product he must have to buy some other product or products also. The customer may opt for some other banks if such banks can fulfill the requirements of the customers.

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Opportunities

If the bank properly made the customers aware through different campaigns, then the banks can easily and successfully run the process of tying bank loans with other services. With the help of this practice the banks can easily promote and market its other products or services. They also can enjoy the benefit of increase in business thereby improving the overall performance of the bank.

Threats

The main threat to tying the bank loan facility to other service is that, the customers most probably will react against such practices of the bank. This may cause the bank to lose their existing customers and also it may prevent the prospective and potential customers to join the bank. From the social point of view it is not a good practice to compel a customer to a buy a product in which the customer is not interested, in most cases, in order to buy a service or product which the customer actually requires.

The government also may put restrictions on such practices. “Since 1970, U.S. law has prohibited banks from tying their loans to other non-banking products, even if the bundle of services is offered at a discount to customers.” (A law that’s out of date: anti-tying restrictions on banks, 2009). To conclude, it is clear that the practice of tying bank loans to other services is not ethical. In other words compelling customers to buy a product or service that the customer is actually not interested in is not a good practice. Though the banks can possibly derive lots of benefits out of this practice, it is not fair to do this. From the customers’ or society’s point of view it is against the ethics.

Reference

A law that’s out of date: anti-tying restrictions on banks. (2009). Brookings. Web.

. (2009). CFO. Web.

Guard, M B., & Guru, B. (2003). Anti- typing requirements: Answer. Bakers Online. Web.

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IvyPanda. (2024) 'Tying Bank Loans To Other Service'. 13 March.

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IvyPanda. 2024. "Tying Bank Loans To Other Service." March 13, 2024. https://ivypanda.com/essays/tying-bank-loans-to-other-service/.

1. IvyPanda. "Tying Bank Loans To Other Service." March 13, 2024. https://ivypanda.com/essays/tying-bank-loans-to-other-service/.


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IvyPanda. "Tying Bank Loans To Other Service." March 13, 2024. https://ivypanda.com/essays/tying-bank-loans-to-other-service/.

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