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Retail

Lending

Introduction
Risk assessment in Retail loan
products viz., Auto-loans,
Personal Loans, Consumer
Loans, etc
Appraisal of loan/ credit card
application
Managing Credit Exposure
Controlling Frauds

Topics to be covered

Sourcing Channels
Application Screening
Credit Scoring
Verification
Risk Appraisal
Behavioral Scoring
MIS
Collections

Five Cs of Risk
Assessment
Character
Capacity
Capital

The Willingness to Repay


The Ability To Repay
Borrower Has sufficient
Stake in the Loan

Security
in
the
event
the
Collateral
borrower does not pay
Matching of cash inflow
Cash Flow
to repayment terms

The Credit Cycle


PRODUCT
PLANNING

MIS
COLLECTIONS

WRITE
OFF

RISK
MANAGEMENT

ACCOUNT
MAINTENANCE

CREDIT
ACQUISITIONS

Sourcing Channel
Individuals, Retailers, Whole salers,
Corporates, PSUs, Prof.& self employed
etc
Profiling of the employees of the
organisations
Reference checks other Banks &
Financial Institutions
Physical Verification at residence
Bio-data and ID proof

Application Screening
Completeness of application
Sourced from serviceable areas
Basic policy filters:
Documents (ITR/ Form16/ Salary
certificates)
Profile (Age, Occupation, Type of
Residence, Marital status, Phone etc)
Income (Min income cutoff)

Existing relationship, if any

Credit Scoring
Statistical tool used to quantify
repayment probabilities
Supports objective/ consistent risk
evaluation
Cost efficient processing marginal
profiles are eliminated- upfront basis
score
Enhances accuracy of loss forecasts

Credit Verification
Prevent Application Fraud
Verify Customer Information
(Contact information, Income,
Identity etc)
Customer contact point
verification to prevent application
fraud Office and Residence
Telephonic verification, Income
Document verification

Credit Verification
Collateral verification and lien
marking
Review Collateral Documents
Credit Bureau CIBIL-Check
References
Need to balance cost of
verification versus risk

Verification Methods/
Issues
Verify original identity documents can be
time consuming
Use of internal staff vs external agencies
quality control issues
Physical verification of addresses may be
expensive & create customer
dissatisfaction
Neighbour verification
Random vs 100% verification
Telephone verification to confirm details

Risk Appraisal 5 Cs

Character Check Previous Behavior


Capacity Check Income
Capital
His Margin
Collateral Ensure Sufficient
security in
case of
Default
Cash Flow
Ensure timing of
customer cash flows
match repayment
terms

Debt Burden Analysis


More difficult with revolving
lines of credit
Dependant on customer
disclosing all debt
Debt capacity can worsen over
time when customer contracts
more debt

Credit Exposure
Multiples of monthly net/ gross
income are used to determine loan
eligibility/ credit limits
Credit lines are pegged at 2.5 to 3
times the gross monthly income
For loan products the EMI should not
exceed 40% of net monthly income

Management Information
Systems
What is MIS?

Continuous Process of transforming


Data into information which will be
used in the decision making
process. Directed towards
Optimizing results
Risk vs Rewards Trade-off

MIS 6 Ps
Product
Portfolio
Performance
Productivity
Profitability
Projection

MIS- Coincident Indicators


Shows Present performance of
accounts
Point in time snapshot
Trends of a segment or program
Comparison of different
segments/programs at the same time.
Possible external factorsseasonality , economic shifts

Collection What is it?


Procedure aimed at obtaining
the repayment of debt (ie.
Principal, interest, Late
Payment Fees, etc) after the
obligation due date.

Collection Reason for


Delinquency

Products-Target Market

Deficient
Planning

Internal Procedures
Capacity
Collection system

Environment

DELINQUENCY

Unexpected events

Economic
Political
Social

Damage to
Payment
Capacity

Deficient
Buying
Credit Policy
Inadequate Sales
Data entry
Verifications

Weak
Maintenance

Labor Changes
Debt Over Burden

Maintenance
Decisions
Updating information
Signs of deterioration

Collection- Strategy
Consider:
One Staff member to work on one
set of accounts through all stages of
delinquency (Cradle to Grave)
OR
Teams of staff members work on a
given stage of delinquency (Front
End, Mid Range, Hard Core,
Recovery)

Collection- Strategy
To decide the type of collection
activity to be performed
Telephone call, emails, Letters,
Visits
Frequency of contact with
customers

To determine who will collect


In House
Regular Recovery camps

Thank You