RETAIL CREDIT LENDING PROCESS AT

BANK BRANCH

Submitted By: SHRADHA TRIPATHI

HPGD/JA18/0120
SPECIALIZATION: BANKING, INVESTMENT & INSURANCE

WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

Year of Submission: JUNE 2020
 1.RETAIL LENDING
• Retail lending is the segment of retail banking
which offers various loan products to the
customers.
• Housing loans, loan for durable purchases, credit
cards, automobile loan and education loan are some
of the typical product offered in retail lending.
•It results in better yield and improved bottom line
for the bank
•Aids in creating a diversified portfolio huge
customer base which are of lower risk and NPA
perception
 Types of facilities
1.2 Features of Retail Credit

Secured/unsecured facilities
Interest
Tenure
Loan to Value Ratio
Loan Eligibility
Credit Scoring
 1.2.1Types of Facilities
Various types of Facilities are

a) Loans: Loans are the finance facility of a fixed amount extended

to meet a one time requirement of an individual .
- Loans are issued for a fixed tenure, and repaid over a period in installments.

b) Overdrafts: Overdraft Loan is issued to meet the emergency

requirement of the borrower.
- This means bankers allow the customers to withdraw more than the credit
balance in the customers current account or give a temporary loan in the current
account itself.

- Overdraft loan may be of two types i.e Temporary Overdraft(TOD) & Permanent
Overdraft(POD)
 1.2.2Secured/Unsecured Facilities
These facilities include the secured and unsecured facilities.


Secured Loans: Loans that are always secured by an underlying asset against which funding is extended. This
a)
lending is also called Asset based lending.
-Advantage of secured loan-Banker has the right to take possession of the assets and sell it to recover the
loan in case default
-The charge included in secured loans are of two types
i) Mortgage-immoveable properties
ii) Hypothecation-Moveable properties
-There are various types of secured loans. Such as
i) Mortgage finance
ii) Vehicle Loans
iii) Construction and material handling equipment loans
iv) Professional equipment loans such as loans for medical and office equipment.
v) Loans against securities.

Unsecured Loans: Loans that do not have any underlying securities and are extended purely based on the
b)
creditworthiness of the organization.
-This lending is also called Non-assets based lending.
-The various types of unsecured loans are:
i) Personal Loans
ii) Credit Cards
 1.2.3Interest
 There are two types of Interest

a) Fixed Rate of Interest: Under the FRI interest is charged

throughout the tenure of the loan at the rate fixed at the time of
granting the loan. The borrower has to pay interest at the
contracted rate if whether the rate of interest in the market
goes up or down.

b) Floating Rate of Interest: The rate at which interest is

charged on a loan varies from time to time according to movement
of the interest rate in the market is called Floating rate of
interest.
Floating rate of interest is based on liquidity position of the
financial institution.
 1.2.4Tenure
 The tenure depends upon the amount of the loan and the
repayment capacity of the borrower. However, the maximum
tenure permitted depends upon the period over which the assets
financed could depreciate completely.
 That mean tenure of depreciate assets is lower in compression of
non depreciate assets.
 For example, in case of hire purchase loan i.e for four wheeler-
the maximum tenure generally permitted to five to eight years.
 In case of a loan to purchase a two-wheeler the maximum tenure
is usually three years.
 In case of housing loans maximum tenure is usually 15 year and in
some cases even 20 years.
 1.2.5Loan to value Ratio
 Loan to value ratio(LVR) refers to the maximum percentage of the
value of the assets that is given as a loan.

 For example- LVR of 80% means that the maximum loan that can be
considered for purchase of the assets is limited to 80% of the value of
the assets. If the value of the assets is Rs. 100Lakhs, not more than
Rs.80 Lakhs is given as loan against it.

 LVR varies according to the nature of the assets and the rate at which
the assets is expected to depreciate or reduce in value. Like-In case of
Vehicle LVR may be low while for house it may be high

 LVR= Maximum Value of Assets after valuation*100%

Actual(Full) Value of Assets

Higher The LVR higher the risk.
 1.2.6Loan Eligibility
 Loan Eligibility determine the maximum extent of the loan amount
that can be given to the customer.

 Loan eligibility is determined on basis of capacity to repay and

liquidity to repay.
 1.2.7Credit Scoring
 Method of predicting the creditworthiness of applicants for credit facility.
 Credit scoring helps to judge the credit worthiness of an individual.
 Credit scoring should be award winning.
 Scoring helps in managing risk better, prompt decision-making regarding lending the loan,
and lowering the turn around time(TAT)
 In Nepal credit scoring is done by credit information bureau.(CIB)
 Bank adopt two method in making decision related to the creditworthiness of applicants-
Manual Judgment or statistical scoring method.
 Credit scoring can be done on the basis of:
i) Past history
ii) Net worth
iii) Earning
iv) Liabilities
v) Family background
vi) Profession
vii) Age
viii) Education background
 2.Financial Intermediation
 Process of transferring the funds from the savers to the entrepreneurs is called
intermediation.
 Financial intermediaries play an important economic function by facilitating the
productive use of the community’s surplus money.
 Some questions:
- How does it happen?
- Will the savers voluntarily pass on their savings to entrepreurs ?
- If not, what kind of risks they face?
- How do they want to protect themselves from such risk ?
Answered only when the process of transfer takes place and the roles played by a
third agency- called financial intermediary.
. Need for financial intermediary arises because the savers would not voluntarily come
forward to lend directly fearing certain risks.
. Intermediation is the management of risk. Such risks are as follows.
i) Credit risk:
ii) Liquidity risk
iii) Interest rate risk
Banking Parlance: Rate charged to the borrower(-)Rate paid to the depositors
 Types of financial intermediaries
 The following figure shows the various types of financial intermediaries.
Financial
Intermediaries

Unorganized Organized
Sector Sector

Money Other Non-banking Banking

Lenders Institutions Institutions Institutional

Commercial
Indigenous MFIs NBFCs banks
Bankers

Insurances Co-op bank

DFIs
Companies
Chit funds

Regional
Micro Finance DFIs Rural Bank
Nidhis

State Level
NGOs DFIs
Self Help
Group
Corporate Other DFIs

Types of Financial Intermediaries

 Retail Lending Life Cycle
The retail lending life cycle consists of Account Acquisition & Account Management

a) Account Acquisition
I. Lead generation& Sourcing
II.Collection of document
Verification Conducted
III.
IV.File prepared along with credit memorandum
V. Credit Evaluation & Decision
VI.Completion of various formalities

 Lead Generation and sourcing

Lead generation or sourcing is the process of identifying the prospective customer for selling the loan products.
Channels of identifying the prospective customer are:
 Tele-calling
 Product dealerships(Tye-up with authorized dealer)
 Marketing campaigns( such as loan mella)
 Repeat business of existing customer.
 Collection of documents as specified by the policy
When the customers have understood the terms and conditions of the loan and are interested in availing the loan
they are asked to submit some basic documents.
 Application form
 Address proof
 Identity proof
 Photograph
 Income proof
 Verification Conducted

o Verification includes:
 Field verification
 Tele –Verification
 Reference Check
 Document Verification
 Checking against negative list

 File prepared along with credit memorandum

The customer file is prepared along with the necessary documentation and credit memorandum.

 Credit Evaluation & Decision

 Based on the result of verification the RM or RO takes a credit decision of / on whether or
not to sanction the loan to the application .
 Credit evaluation and decision includes :
 Whether the applicant has the capacity to repay the loan?
 Whether the applicant has the required liquidity to [pay the installments on the due
dates?
 Whether the applicant's income is sufficient to cover the loan?
 Intention of applicants collateral as well as income sources are authentic?
 Completion of various formalities

 Sign loan documents/ legal

 Receive security papers
 Loan deed:- (This is non –registered security documents executed by
the borrower giving evidence of its acceptance of the bank loan
sanctioned)
 Legal – (Guarantee letter)
 Pay roll record

 Account management

 Document Storage
 Repayment Management/Collection
 Portfolio monitoring
 Account Termination
 Retail Loan Product
 The following are some of the popular retail assets products that are
offered to customers by banks:

 Personal overdraft
 Housing Loans
 Car Loans
 Motorcycle Loans
 Loan against securities
 Credit Card
 Education loans
 Traveling Loans
 Medical Facilities Loans
 Loans against fixed deposit
 Collection
 Collection means recovery of loan extended.
 Or, it is the process of collecting the amount in a form of installment from
the borrower.
 For recovery of loan special teams have been formed .
 The primary objectives of collection is to ensure maximum collection from
delinquent customers and keeping NPA level at a minimum.
 So in a bank there should be a separate special recovery team to handle
those delinquent customer.
 The collection team is structured to handle the volume and geographical
spread.
 Organization of collection teams and the nature of work performed by
each one of them vary from bank to bank, depending on the volume of
business, and the area to be serviced.
 To achieve the goal of controlling delinquency, it is important for the
collections team to maintain continuous contact and good relations with the
customer throughout the tenure of the loan.
 Role & Responsibility of
collection team
 Collection manager play an important role in the banks.
 They are responsible for delinquency management.
 (The relation of the customer with the bank starts with the
disbursement of the loan and continuous till the end of the loan
tenure. So to achieve the goal of controlling delinquency, it is
necessary for the collection team to maintain continuous contact and
good relations with the customer throughout the tenure of the loan)
 Define the geographical boundaries to control the delinquency. Or
define the negative area-where the loan is at risk.
 Gather information about defaulters.
 Maintain reports about daily collection.
 Make the environment for possessing of assets- based on the policy
of the bank or go through legal process.
Collection strategy
 Collection strategy is based on the nature of loan product and risk associated with
that product.
 Mainly collection is done through different tolls such as-
 Tele-calling
 Field-visit/field collection
 Door to door collection
 Legal notice or legal action should be initiated for all delinquent cases.

 ((((Main strategy includes)))

 Respect customer’s privacy.
 Contact customer at the appropriate time
 Contact customers ordinarily at the place of their choice.(like office or
residence)
 Provide the customer relevant information regarding amount outstanding and
its affect.
 Use professional and formal language.
 Collection Process

Awareness Calling

Collection Calling
Recovery through
legal process

Collection Process
Possession and Disposal of
Hypothecated Assets
Demand Notices

Field Collection
 Collection Process
Awareness calling
Under this, customer are aware of the date of payment of the dues to the bank.
Collection calling
This activity involves contacting the customers over the phone, making them
aware that they missed the due date and thereby requesting them to pay the
arrears at the earliest.
Demand Notice
In the case of verbal communication if the client ignore to make the payment of
his dues then written notice is issued to the client for the payment.
Field Collection
Physical meeting with the customer for the payment of dues.
Possession and disposal of Hypothecated assets
In the event of a customer failing to make good the arrears despite the
preceding steps, the moveable hypothecated assets is taken into possession
after following the due process of the law.
Recovery through Legal action
By fulfilling all the requirement of the law the assets capture from the
borrower are kept for the auction process and the same borrower are listed in
blacklist.