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8/3/2019 Retail Banking Processes
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Temasek Polytechnic School of Informatics & IT
RETAIL BANKING
Topic 3: Processes & Systems
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Agenda
Understand the misconception in creditmanagement
Explain the various stages in the credit cycle.
Understand the loan approval process.
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Balance Risk & Reward
Overall objective of all banks is to make profit
Does the bank always prefer a borrower whopay promptly?
If you are a risk manager..who is your favorite
customer?
Pays promptly & never late
Has capacity to pay but habitually late
Has cash flow problem & cannot pay
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Balance Risk & Reward
Which is the most profitable portfolio?
TYPICAL LOSS RATES*
* Source: David Lawrence, Arlene Soloman (2002). Managing a Consumer Lending Business. Soloman Lawrence Partners. p11.
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Balance Risk & Reward
Cost of funds 1%
Credit Line Mortgage
Interest 17.95% 3.15%
Loss Rate 3.20% 0.20%
Receivables $700,000 $700,000
Interest Revenue $125,650 $22,050
Cost of funds $7,000 $7,000
Spread $118,650 $15,050
Bad Debts $22,400 $1,400
Net Income $96,250 $13,650
Portfolios with a low loss rate might not necessary be more profitable.
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Retail Banking
Credit Risk Management Concepts
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Credit Cycle
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Plan
1. Define product
2. Select target customers
3. Know your competitors
4. Set profit targets
Pricing below the market
Pricing at the market Pricing above the market
5X rewards at Cafes,Cinemas, Nightspots,
Books/Music Stores
Exclusive privileges atZouk and other nightspots
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Know your competitors
Features Bank A Bank B Bank CMin Loan $100,000 $50,000 $200,000Max Loan $2mil $1mil $8milMin Tenure 1 yr 1 yr 1 yrMax Tenure 15 yrs 10 yrs 20 yrsPricing Bank A Bank B Bank CFixed 3yrs @ 4.5% 5yrs @ 3% 2yrs @ 2.5%Floating Prime + 2% Prime + 5% Prime + 3%
Enhancements Bank A Bank B Bank CFire Insurance Free 1 yr Free 3 yrs Free 5 yrsLegal subsidy Up to $5,000 Up to $3,000 Up to $8,000Shopping vouchers Metro $1,000 NTUC $500 Taka $2,000
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Credit Cycle
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Acquisition
Objectives:1. Attract target customers
2. Minimize fraud
3. Establish a fast and cost-effective approval
process
Methods:
Branch walk-in, advertisement, internet, cross-sell,
direct mail, take ones, purchase portfolio etc.
http://images.google.com.sg/imgres?imgurl=http://www.hamiltonmi.com/pics/loanapp_pic.png&imgrefurl=http://www.hamiltonmi.com/onlineapp.html&h=348&w=496&sz=301&hl=en&start=15&um=1&usg=__IdC1EpE0fflJCMf8BjwttvAe8Ps=&tbnid=_E7mUpPnfp_2ZM:&tbnh=91&tbnw=130&prev=/images%3Fq%3Dloan%2Bapplication%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Approval Process
1. Application2. Documentation
complete?
No
Yes
3. Prescreening
Credit policy
Reject
Approve
4. REVIEW
Debt burden ratio
Collateral assessment
Loan to value
Score / judgment
Fraud
Credit bureau
Existing credit records
Verification
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Step 1 - Application
Personal bankers help customers with a needsanalysis to help decide on the kind of loan that willbest meet their needs.
Check that information in loan application iscomplete.
Applications fail because
Important details are missing Information in application is inconsistent
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Step 2 - Documentation
Gather the necessary documentation for the loan
These documentation may include:
Application form Personal Identification
Income document
Purchase agreement (secured loans)
Others
http://images.google.com.sg/imgres?imgurl=http://www.steeplechasehomes.com/images/rules_doc.gif&imgrefurl=http://www.steeplechasehomes.com/information.htm&h=364&w=371&sz=20&hl=en&start=12&um=1&usg=__Cv1BQodgC0pUmqxnxuSCYJkZxHQ=&tbnid=VzjlWvj96XCi7M:&tbnh=120&tbnw=122&prev=/images%3Fq%3Ddocument%2Bicon%26ndsp%3D20%26um%3D1%26hl%3Den%26sa%3DX8/3/2019 Retail Banking Processes
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Step 3 - Prescreening
Quick review
Identify fraudulent applications
Reject applications which fail to meetminimum standards
Min / Max age
Minimum income
Unacceptable collateral
Unfavorable credit records (both internal &
external)
http://images.google.com.sg/imgres?imgurl=http://www.lvpcchurch.org/lvpc/files/u1/magnifying-glass.gif&imgrefurl=http://www.lvpcchurch.org/lvpc/%3Fq%3Dnode/707&h=432&w=293&sz=40&hl=en&start=3&um=1&usg=__Fb8rW1f5fn7i08smMI60S7q_dSI=&tbnid=HXTxyjPCrqpw1M:&tbnh=126&tbnw=85&prev=/images%3Fq%3Dmagnifying%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Step 4 - Review
By who? Can be system or credit officer
Debt burden ratio < X%
All debts + New application
Monthly income
Loan to value ratio < X%
Loan Amount
Current Market Value
http://images.google.com.sg/imgres?imgurl=http://www.athleticsalberta.com/UserFiles/Image/approved_black.GIF&imgrefurl=http://uabchoirs.blogspot.com/2007/10/ireland-is-uab-approved.html&h=404&w=404&sz=20&hl=en&start=1&um=1&usg=__uRHxWh6db19j5wRK6VTFnPuUX6c=&tbnid=5IvosOusvZ9bCM:&tbnh=124&tbnw=124&prev=/images%3Fq%3Dapproved%26um%3D1%26hl%3Denhttp://images.google.com.sg/imgres?imgurl=http://www.dreamstime.com/rejected-rubber-ink-stamp-thumb157220&imgrefurl=http://goodthingscometothosewhowhine.blogspot.com/2007/11/coincidence-i-thinkso.html&h=300&w=300&sz=35&hl=en&start=4&um=1&usg=__ZmqpvAAWwgqGkke2QhUKfMxuDlY=&tbnid=vQPmulbszHPAJM:&tbnh=116&tbnw=116&prev=/images%3Fq%3Dreject%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Step 4 - Review
Credit Scoring
5 Cs of Credit
1. Character Profile of applicant
2. Capacity Income3. __________Applicants investment
4. Collateral Liquidate in case of default
5. __________ Match timing of receipt against repayment
http://images.google.com.sg/imgres?imgurl=http://www.crestcapital.com/Webdata/NewsArticle/4/Orig_equipment_leasing_credit.jpg&imgrefurl=http://www.crestcapital.com/Primary/NewsArticleDetail.aspx%3FNewsArticleID%3D4%26RC%3D1&h=334&w=250&sz=49&hl=en&start=1&um=1&usg=__0qU83WFpsSKTXzg3yyxFH-CsidE=&tbnid=48ETP2icv_EmkM:&tbnh=119&tbnw=89&prev=/images%3Fq%3D5%2Bc%2527s%2Bof%2Bcredit%26um%3D1%26hl%3Den%26sa%3DX8/3/2019 Retail Banking Processes
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Scoring
Credit Scoring a number derived based on statistical analysis
used to assess the credit worthiness of applicantsand also to predict the probability of default
2 types of scoring
_______________
Behavioral scoring
http://images.google.com.sg/imgres?imgurl=http://www.theweslyngroup.com/images/rycs_logo.bmp&imgrefurl=http://www.theweslyngroup.com/wst_page5.html&h=365&w=300&sz=321&hl=en&start=9&um=1&usg=__Z4biRdNqe0qVaO9k2Mk7cHZlu3Q=&tbnid=k_O60JQJ1MRo7M:&tbnh=121&tbnw=99&prev=/images%3Fq%3Dcredit%2Bscore%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Scoring Sample Score Card
Credit ScoringCharacteristics Classifications Points
Gender Male 10Female 20
Age (years) 21 - 29 50
30 - 39 60
40 - 49 70
50 - 59 4060 & above 10
Type of Housing HDB flats 3 - 4 room 20
HDB flats 5 room, executive 50
Condominium 80Landed 100
Housing Ownership Rent 30
Own 80
Live with parents 50Mortgaged 50
No of dependants 0 - 2 80
2 - 4 60> 4 40
Industry Accountancy 50
Banking & Finance 60
Education 20
IT & Telecommunication 40Medical & Law 20
No of years with 0 -2 10
current company 2 - 5 20
5 - 8 30> 8 40
No of credit cards 0 -1 30
1 - 3 50> 3 10
Good Bad
Score Percent Percent
500 92 8
450 86 14
400 81 19
350 76 24300 69 31
250 62 38
200 53 47150 21 79
Cut off Score 300
http://images.google.com.sg/imgres?imgurl=http://upload.moldova.org/economie/finance-credit/credit-score-breakdown.gif&imgrefurl=http://economie.moldova.org/stiri/eng/82587/&h=290&w=382&sz=21&hl=en&start=8&um=1&usg=__Jbv45qSMDlE37bARntCyt4e4NV8=&tbnid=_laNHfXbgyIEsM:&tbnh=93&tbnw=123&prev=/images%3Fq%3Dcredit%2Bscore%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Credit Cycle
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Post approval
Customers acceptance requiredAccept letter of offer
Personal Banker to explain terms andconditions
Eg Mortgage loan follow by otherdocumentations like fire insurance, lodgmentof title deeds
Actual disbursement
Customers acceptance not required; send outWelcome package
Terms and conditions
Line activation / disbursement
http://images.google.com.sg/imgres?imgurl=http://www.athleticsalberta.com/UserFiles/Image/approved_black.GIF&imgrefurl=http://uabchoirs.blogspot.com/2007/10/ireland-is-uab-approved.html&h=404&w=404&sz=20&hl=en&start=1&um=1&usg=__uRHxWh6db19j5wRK6VTFnPuUX6c=&tbnid=5IvosOusvZ9bCM:&tbnh=124&tbnw=124&prev=/images%3Fq%3Dapproved%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Post approval
Others Record transactions
Process payments
Handle inquiries
Handle disputes Change address
Inform customers of subsequent interest ratechange
Restructuring of credit facilities / line increase
Launch marketing campaigns / cross-sell
http://images.google.com.sg/imgres?imgurl=http://i.ehow.com/images/GlobalPhoto/Articles/2059370/computer-main_Full.jpg&imgrefurl=http://www.ehow.com/how_2059370_maintain-speed-cpu.html&h=600&w=600&sz=51&hl=en&start=48&um=1&usg=__7Ch-cT7_7I1up3bljvE2INkuTLo=&tbnid=8nztswA-vLCiQM:&tbnh=135&tbnw=135&prev=/images%3Fq%3Dmaintain%26start%3D40%26ndsp%3D20%26um%3D1%26hl%3Den%26sa%3DN8/3/2019 Retail Banking Processes
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Credit Cycle
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Collections
Identify high risk / low risk customers Different strategy for different ageing / buckets
Reminder letters
Phone calls
Site visits (house / office) Legal actions
Can be in-house or out-sourced to collectionagency
Reward to performing collectors
http://images.google.com.sg/imgres?imgurl=http://www.afreshstart4u.com/images/a_fresh_start_business_card_001.jpg&imgrefurl=http://www.afreshstart4u.com/Tax_Controversy.html&h=1091&w=510&sz=178&hl=en&start=7&um=1&usg=__TquTzpmnFy8O92Nxk4kQHZU5nFM=&tbnid=X134dUFqGZz-3M:&tbnh=150&tbnw=70&prev=/images%3Fq%3Dcreditor%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Credit Cycle
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Write-off
Liquidate collateral
Foreclose properties
Repossess motor vehicles
Work-out repayment plan
Offer hair-cut
Recognize credit loss
http://images.google.com.sg/imgres?imgurl=http://www.robertsandhovenden.com/pictures/pastdue02.jpg&imgrefurl=http://www.robertsandhovenden.com/bankruptcy/claims.html&h=272&w=410&sz=17&hl=en&start=9&um=1&usg=__V-kKB44MnRYlymWU9LAuGuOlEBA=&tbnid=qdKfK8wjx2s8sM:&tbnh=83&tbnw=125&prev=/images%3Fq%3Dcreditor%26um%3D1%26hl%3Den8/3/2019 Retail Banking Processes
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Q & A
1. Behavioral scoring is used to
a. manage accounts already book.
b. decide if an application should be approved.
2. Borrowers who never fail to pay on time are the bestcustomers.
a. True
b. False
http://images.google.com.sg/imgres?imgurl=http://www.cheshirehome.org.sg/images/questionmark.jpg&imgrefurl=http://www.cheshirehome.org.sg/&h=66&w=95&sz=4&hl=en&start=58&um=1&usg=__PCVMcY86OvPyPIC47SGnEkkCKZk=&tbnid=XbsmrQbzPgBC5M:&tbnh=56&tbnw=80&prev=/images%3Fq%3Dquestion%2Bmark%26start%3D40%26ndsp%3D20%26um%3D1%26hl%3Den%26cr%3DcountrySG%26sa%3DN8/3/2019 Retail Banking Processes
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Q & A
3. Collateral assessment is important to determine
a. liquidity
b. depreciation / appreciation rate
c. all of the above
4. Judgmental approval is better than using creditscoring.
a. Trueb. False
http://images.google.com.sg/imgres?imgurl=http://www.cheshirehome.org.sg/images/questionmark.jpg&imgrefurl=http://www.cheshirehome.org.sg/&h=66&w=95&sz=4&hl=en&start=58&um=1&usg=__PCVMcY86OvPyPIC47SGnEkkCKZk=&tbnid=XbsmrQbzPgBC5M:&tbnh=56&tbnw=80&prev=/images%3Fq%3Dquestion%2Bmark%26start%3D40%26ndsp%3D20%26um%3D1%26hl%3Den%26cr%3DcountrySG%26sa%3DN8/3/2019 Retail Banking Processes
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Retail BankingComputation For Loans Payment
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Simple Loan
Formula:
PMT = PV * i
1 1/(1 + i) n
PV = Present Value
i = annual interest rate
n = number of years
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Fixed-Payment Loan
Calculate the monthly installment for 20 year mortgage of
$100,000 at 5% interest rate p.a.
Formula:
PMT = PV * i
1 [1/(1 + i) n]
= 100,000 * (5%/12)
1 [1 / (1 + (5% /12))20*12]
=
=
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Fixed-Payment Loan
Calculate the monthly installment for 20 year mortgage of
$100,000 at 5% interest rate p.a.
Using the Present Value Interest Factor of Annuity Table
(PVIFA Table)
Loan Amount = Pann(PVIFA5%,20)
$100,000 = Pann(12.462)
Pann =
=
Pmon =
=
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References
David Lawrence, Arlene Soloman (2002). Managing a ConsumerLending Business. Soloman Lawrence Partners.
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