Retail Lending

Introduction

Risk assessment in Retail loan products viz., Auto-loans, Personal Loans, Consumer Loans, etc Appraisal of loan/ credit card applicationManaging Credit ExposureControlling Frauds

Topics to be coveredSourcing ChannelsApplication ScreeningCredit ScoringVerificationRisk Appraisal Behavioral ScoringMISCollections

Five Cs of Risk AssessmentCharacterCapacityCapital

Collateral

Cash Flow

The Willingness to RepayThe Ability To RepayBorrower Has sufficient Stake in the LoanSecurity in the event the borrower does not payMatching of cash inflow to repayment terms

The Credit CycleRISK MANAGEMENTPRODUCTPLANNINGACCOUNTMAINTENANCECREDITACQUISITIONSWRITEOFFMISCOLLECTIONS

Sourcing ChannelIndividuals, Retailers, Whole salers, Corporates, PSUs, Prof.& self employed etcProfiling of the employees of the organisationsReference checks other Banks & Financial InstitutionsPhysical Verification at residenceBio-data and ID proof

Application ScreeningCompleteness of applicationSourced 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 evaluationCost efficient processing marginal profiles are eliminated- upfront basis scoreEnhances accuracy of loss forecasts

Credit VerificationPrevent Application FraudVerify Customer Information (Contact information, Income, Identity etc)Customer contact point verification to prevent application fraud Office and ResidenceTelephonic verification, Income Document verification

Credit VerificationCollateral verification and lien markingReview Collateral DocumentsCredit Bureau CIBIL-Check ReferencesNeed to balance cost of verification versus risk

Verification Methods/ IssuesVerify original identity documents can be time consumingUse of internal staff vs external agencies quality control issuesPhysical verification of addresses may be expensive & create customer dissatisfactionNeighbour verificationRandom vs 100% verificationTelephone verification to confirm details

Risk Appraisal 5 CsCharacter Check Previous BehaviorCapacityCheck Income CapitalHis MarginCollateralEnsure Sufficient security in case of DefaultCash Flow Ensure timing of customercash flows match repayment terms

Debt Burden AnalysisMore difficult with revolving lines of creditDependant on customer disclosing all debtDebt 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 limitsCredit 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 SystemsWhat 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 PsProductPortfolioPerformanceProductivityProfitability Projection

MIS- Coincident IndicatorsShows Present performance of accountsPoint in time snapshotTrends of a segment or programComparison of different segments/programs at the same time.Possible external factors- seasonality , 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 DelinquencyDELINQUENCYWeakMaintenanceDeficientBuyingEnvironmentDeficient PlanningDamage toPaymentCapacityProducts-Target MarketInternal ProceduresCapacityCollection systemUnexpected eventsLabor ChangesDebt Over BurdenMaintenance DecisionsUpdating informationSigns of deteriorationQuality of serviceCredit PolicyInadequate SalesData entryVerificationsEconomicPoliticalSocial

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

Collection- StrategyTo decide the type of collection activity to be performedTelephone call, emails, Letters, VisitsFrequency of contact with customersTo determine who will collectIn HouseRegular Recovery camps

Thank You

HDFC BankHDFC BankDesign as application formInformation required from the customers will be derived from the min eligibility criteriaShould capture data that can be used fro future marketing and risk management purposes