1 CHAPTER- I

RETAIL LENDING 1.1 INTRODUCION Indian Banking Industry has witnessed a dramatic change in the last decade. After the nationalization of 14 major banks in 1969, whole focus was on productive credit only. Bankers were in short of funds even for productive purposes and many times credit squeeze was resorted to take care of statutory requirements of SLR and CRR imposed by Banking Regulation Act and RBI Act. There was ample demand of funds from the business as well as industry and banks never thought of the situation of surplus funds and the low off take of credit. Rate of SLR and CRR were higher than the minimum required under the law due to interventions of RBI for credit controls. Investments in government securities or other approved securities were kept at the minimum acceptable level and some time even less than the minimum required. Credit deposit ratio was high. In 1992-93 economic reforms process started with submission of Narasimham Committee Report on 16.11.1991. The phase of liberalization, privatization and globalisation started. RBI started reducing its interference and slashing of SLR and CRR to bring at the minimum required level, disintermediation also started empowering big corporate to access the market for their funds requirement, non banking finance companies were also encouraged to come in the market, increasing competition for commercial banks. A number of foreign banks and private sector banks also came in the fray. In all 19 foreign banks and 8 private sector banks jumped into the market after 1991-92. Market share of public sector banks started shrinking and customer loyalty started dwindling in the new environment of banking. At the times of half yearly credit policy of RBI fresh liquidity was pumped in every time. Security scam of 1992, shook the faith of general public from the share market and people who burnt their fingers in capital market started keeping their funds in bank deposits thereby increasing the deposits and liquidity of banks. Inflation rate was controlled and lowered and recession started in the industry due to world wide recessionary trends. It affected the industry badly thereby reducing its demand of funds for the productive purposes. Income tax rules started discouraging the savings of the people, so the public started using their own savings for their capital goods requirement thereby lowering the demand of funds from the banks. Bank finance for medium and large scale industries created huge NPAs, creating a block of non performing assets. About 80.5% of the total funds invested in sick units are under M & L Industry category and additional provisioning requirement started eating profitability of the Bank. Priority Sector lending also generated good number of NPA accounts, but being a statutory requirement, the minimum level of credit to this sector is a statutory binding. Lending under government sponsored schemes and lending to weaker section also have high percentage of NPAs, though the amount involved in

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absolute terms may be lower. So it can not for deployment of further surplus funds. be treated to be a safe area

Now, the question arises as to which are the areas, where the bank can deploy its funds. Probable areas for deployment of bank funds are as under:i. ii. iii. iv. Balances with RBI or other banks Investment in government securities. Investment in other approved sections. Investment in shares of corporates via primary market up to a certain limit i.e. 5% v. Leasing of assets to earn lease rentals still upto limited extent vi. Lending to : (a) Priority sector , agriculture, SSI, RT, RTO, PSE, SB. (b) M & L Scale Industries (c) C&I (d) Retail Lending. vii. Investment in commercial papers at a low return. viii. Investment in call money market uncertain and low return area If we go on analyzing the above avenues for deployment of funds, we find that balances with RBI is only a compulsion and return on the funds is zero or negligible. Investment in government securities and other approved securities are compulsion upto some extent through SLR. Yield on these assets is also low but in case no avenue is available the funds deployment under this head is better than any other area except advances. Therefore, deployment of funds in investments have been increasing every year. It has exceeded the minimum required deployment under SLR by Rs.1,35,162 crore as on 31.3.2001. Presently, yield on investment has declined substantially and it can not provide sufficient margin of profit on the average cost of deposits. So it can not be resorted to survive in the market. Investment in shares of corporate in the primary market is also a risky affair. Even if, it is profitable, there is a cap on the deployment of funds in this sector being sensitive area. Leasing also have limited scope for deployment of funds. Investment in commercial paper and call money market or low yield areas. Ultimately credit is the area having ample potential for the deployment of bank funds. In case of credit there are huge amount of NPAs in the medium and large scale industries as well as priority sector. Big borrowal accounts under C&I do not provide for diversification of risk and SSI and other priority sector areas are high NPA prone area. In view of above Retail Lending is an area emerging for absorbing ample amount of bank funds. Target borrowers under this sector are the middle class people and middle class people are low default area. Researches have shown that high class and low class people are more likely to default in repayment. Population of middle class people is increasing and break down of joint family system has created the scope of more requirement of household consumer durable goods. Opening of doors for the imported goods under WTO has resulted in flush of good quality consumer durables at reasonable prices, thereby increasing the demand from the public. It has created a scope of credit absorption for the bank. This sector of credit is subject to higher rate of interest providing ample yield to the bank along with

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diversification of the risk because smaller loans are granted number of people. to a large

From the above discussion, it is clear that Retail Lending is the need of the hour and survival is very difficult, in its absence. Now question arises where to do Retail Lending. These are the schemes having potential in every area of the country. In case of rural/ semi urban areas, a good number of families are emerging as the prospective borrowers with the increase in rural electrification, education and connectivity with the cities. TV, Fridge and Scooter/ Motor cycle are the articles of daily use for them. People from villages getting jobs in nearby cities, usually commute daily for service and come to village in the evening, school teachers and other staff of the school and dispensary in the village can be prospective borrowers. Shop keepers and other small business people can also avail the loans under Retail Lending schemes. Some progressive families in the village can be tapped under the schemes for housing loans, education loans and other consumer goods items. In the urban as well as metropolitan areas, a lot of scope is available. A group of borrowers from the institutions, societies, clubs and government offices can be mobilized, students from the reputed educational institutions can be contacted, special packages may be given to borrowers availing loans under group financing with group guarantees, to build moral pressures on the borrower for proper repayment. Marketing of these schemes is an important factors to encourage the lending under this area. In case the branches are able to explore the potential in the existing customers, they can find a lot of scope for further financing. A systematic approach is required to tap the customers. Constant touch with the existing customers is very important to proceed. Customer meets and specific requests to the existing customers to provide some names of their friends and relatives can help to identify new borrowers. Marketing strategies are required with the help of entire team of branch staff. A survey of the area of operation by the staff members can help in identifying the need of the public, which can be contacted with a commitment to provide help, thereby increasing the image of the bank and marketing of the Retail lending products. Special occasions like festivals, celebrations, weekly markets, fairs and similar other functions can be exploited for publicity and marketing of these schemes. Each and every staff member should be educated through staff meetings or contests etc to know the schemes so that he can satisfy every customer on their enquiries and the person sitting on the counter should publicise the scheme to the customers visiting the branch. In case the bank is successful in exploiting this area, the problem of credit off take can be solved and increase in profitability with decrease in NPAs in the future, can be ensured.

1.2

INSPECTION OF SECURITIES Pre-Sanction and Post-Sanction inspection of the securities is of great importance in lending activities. Pre-sanction inspection ensures the correctness of various facts and figures submitted by the applicant, credentials and antecedents of the applicant. It also ensures the verification of Assets to be purchased from the Banks funds and following of the due diligence in appraising the loan application. Post- Sanction inspection is carried out to verify the end use of funds and physical verification of the assets created from the Banks funds. It will ensure quick and immediate detection of mis-utilisation of Banks funds. Periodicity of inspection is as per Annexure- I and proforma for Pre-sanction and Postsanction inspection is as per Annexure- II & Annexure- III respectively.

ANNEXURE-I SCHEDULE FOR INSPECTIONS: Sr. No Product Name Type of Inspection to be Carried out Pre Post sanction sanction (Asset verification) Yes Yes Periodicity of post Sanction inspection

Housing Loan

2 3 4

AAA O.D. against Property Consumer durable Two Wheeler P.C. Car Loan Baroda Family Loan Baroda Property Loan BOB Vyapar

Yes Yes Yes Yes Yes Yes Yes Yes Yes

N.A. N.A. Yes Yes Yes Yes N.A. N.A. Yes

With every disbursement, and thereafter, once in three years, if the account is regular. N.A. Once in 2 years N.A. Yearly N.A. Yearly N.A. N.A. Yearly in March

5 6 7 8

ANNEXURE-II PRE-SANCTION VISIT REPORT FOR RETAIL LOANS 1. 2. 3. NAME OF THE APPLICANT : : : Pin Code 4. 5.a) PURPOSE OF LOAN : NAME OF THE PRODUCT / ARTICLE TO BE PURCHASED : NAME OF THE SUPPLIER PURCHASE PRICE GENUINESS OF QUOTATION: VERIFIED DATE OF VISIT a) BY PERSONAL VISIT b) NAME OF THE PERSON CONTACTED

FATHERS/HUSBANDS NAME RESIDENTIAL ADDRESS

5.b)

6)

7)

PROOF FOR VERIFICATION OF RESIDENTIAL ADDRESS Ration Card No. Voters No. ID Card Passport Rent No./PAN Card Agreement No. Whether residing with parents/relatives

Electricity/Telephone bill (-1- bill older than 6 months and 1- latest bill)

Residence is

Owned

Rented

Leased

Provided by Employer

Place visited with Identification Landmark

8) OCCUPATION OF APPLICANT (GIVE DETAILS): A) i) ii) iii) iv) v) vi) SERVICE Name of employer Address Designation Working since Employee No. Whether confirmed / probation / or on contract basis Phone No. Office B) BUSINESS Name of the Firm Address Applicants position in the firm Established since Nature of Business

vii)

Residence

Mobile

C) i) ii) iii) 9.

SELF EMPLOYED & PROFESSIONAL Occupation Address Phone No. Office Residence Mobile

EMPLOYMENT DETAILS Details verified by / through Personal visit to Office on Name of person contacted GROSS ANNUAL / MONTHLY INCOME : Details verified from : a) Form No. 16 (for the financial year ended March 200 ) b) Last Salary Slip (for the month of ..) c) Income Tax Return for A.Y..(along with original copy of Tax challan period..) d) Number of dependants e) Total annual/monthly deduction Rs. f) Net annual/monthly income Rs.

10.

11.

PRESENT BANKERS Name of the Bank Type of A/c. Details of A/c. verified from Cheque returned number of times

12.

LOAN OUTSTANDING Name of the Branch Type of Loan Amount sanctioned Balance Outstanding Amount of Overdue, if any Asset classification

WITH OUR BANK:

WITH OTHER BANK:

13.

DETAILS OF THE PROPERTY TO BE PURCHASED (to be filled only in case of Housing Loans) Loan requested for ( Purchase Of Land Ready Flat ) Purchase of Old House Repairs & Renovation Take from Bank Over other Constructio n of House

Sale Amount Value as per Valuation Report, Value indicated in the sale deed may also be taken into account. In case of wide variation, comments required. Name of the person representing seller Contacted & details verified. Area in Sq.Ft. as per sale agreement Whether owner occupied or rented or Leased out a) b) c)

: :

: : :

Present state of construction Report / Valuation from Architect / Engineer obtained: Nearby land mark for identification :

Yes/ No

14 COMMENTS OF VISITING OFFICER

Place : Date:

Signature of Banks Official Name: Designation:

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ANNEXURE-III PERIODIC ASSET VERIFICATION REPORT (POST DISBURSEMENT) IN CASE OF RETAIL LOANS

1. 2.

Name of the Applicant Address of the place Visited : Residence/ Shop/office Phone No. Date of Visit Sanction details

3. 4. 5.

: : : : :

Purpose of Loan

Amount of Loan Rs.

Date of sanction

Details of last Disbursement made

: Date : Amount : Mode By Bankers cheque / DD No. Present outstanding dues if any Rs)

Favouring . balance Rs.(with over

Whether Invoice & Stamp Receipt YES/NO obtained? If yes: Invoice No. Dated. Issued by. Receipt No. Dated a Details of Goods / Articles / Furniture purchased & physically verified ) Description : Make/Model No. : Colour : Manufactured by : b In case of vehicle : ) Type of Vehicle-Scooter : /Moped/ M-Cycle / Car Make/Model No. Engine No. To be verified from Chasis No. the vehicle Colour of the vehicle Registration No. Condition of Vehicle Blank TTO forms obtained Whether Banks Lien Noted in RC book with RTO? Was the Vehicle brought to date : : : : : : : :

Yes/No Yes/No

Branch for Inspection Yes / No If, yes give

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Insurance : Name of Insurance Co. Valid up to Whether Banks clause is appearing in Insurance Policy : Yes / No Under comprehensive : Yes / No Purchas e of old house Repairs & Renova tion Take over From other bank Construc tion of house

8.

In case of Housing Loan : Loan availed for : Purch Ready ( ) ase Flat Of land

Location/address of the Property Present status/stage of construction Status of Occupation Value as per valuation report /approx. exp. Incurred on repairs/renovation Date of last Valuation Whether Insurance taken under Uni-Home Care Policy Date of Documents Last LAD obtained on Comment of visiting officer

: : : Self occupied Rented out Vacant

: Yes/No : : If Yes, date.

9
10

Place: Date:

Signature of Banks Official) Name: Designation: