SIP

“Determinants of Credit Risk”

SUMMER TRAINING PROJECT REPORT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE

POST GRADUATE DIPLOMA IN MANAGEMENT

AT

JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW

BY

Rohan Gupta

ENROLL NO: JL15PGDM096

SUPERVISOR:

Dr. Maneesh Yadav

Certificate from Faculty Mentor

This is to certify that the Summer Project Study Report, Titled “Determinants of Credit Risk”

submitted by Mr. Rohan Gupta as partial fulfilment of requirement of the two year PGDM

(2015-2017) is a bonafide work carried out by the student at our Institute.

This Summer Project Study is his original work and has not been submitted to any other

University/Institute.

Dr. Maneesh Yadav Dr. Raj K. Ojha

Project Supervisor Program Director- PGDM

Date:

Place:

DECLARATION BY THE STUDENT

I, Rohan Gupta, student of PGDM batch (2015-2017) declare that the project entitled

“Determinants of Credit Risk” is my own work conducted under the supervision of Ms.

Prabha Tiwari and Ms. Prapti Sharma as a partial fulfilment of Summer Internship Program

for the course of PGDM submitted to HDB Financial Services and Jaipuria Institute of

Management, Lucknow.

I further declare that to the best of my knowledge the project does not contain any part of any

work which has been submitted for any other project either in this institute or in any other

without proper citation.

Place:

Date:

Signature of the Candidate

ACKNOWLEDGEMENT

All successful work need large number of hands to accomplish any work. I acquire this

opportunity with much pleasure to thank all people who have helped me through the course of

my journey towards this project. I sincerely thank Ms. Prabha Tiwari (BCM- HDBFS, Kanpur

Fazalganj) and Ms. Prapti Sharma (MT- HDBFS, Kanpur Fazalganj) for helping me and

guiding me throughout this project. A sincere thanks to Mr. Ratanesh Shrivastav (Manager HR-

U.P. & U.K.), Ms. Parul Singh (GLE- HDBFS, Kanpur Fazalganj) and Mr. Mahendra Singh

(BOM- HDBFS, Kanpur Fazalganj) for guiding me throughout the project whenever needed.

I would like to thank my mentor, Dr. Maneesh Yadav. His caring and supportive attitude gave

me support in doing my project.

I would also like to thank Dr. Dheeraj Mishra for helping me with the research carried out in

this project.

Finally, this project would not have been possible without the confidence, endurance and

support of my family. My family has always been a source of inspiration and encouragement.

I wish to thank my family, whose love, teachings and support have brought me this far.

Executive Summary

In this project, I have undertaken a research on determinants of credit risk. This project report

deals with 12 factors which were chosen by my observation of credit process and proceedings

during my summer internship in HDBFS. I decided to take those 12 factors and test how much

they affect credit risk.

I chose this topic of credit risk since it is directly related to delinquency which is a major issue

for our company. This topic is of major importance and specially now when company is dealing

with a sharp rise delinquency rate. I was curious about as to what are the factors responsible to

constant rise in delinquency rates even though company has a very good appraisal process and

a very strict set of policies. I thought if I could find out common factors leading to increase in

delinquency, I could find out the causes of rising delinquency and maybe give some useful

recommendations to the company based on the findings.

This project utilizes a regression model to find out the strength of relationship of all 12 factors.

Out of all the factors considered, 4 came out to be having an effect on credit risk. Their

relationship with delinquency has been explained in detail in this project report and

recommendations have been proposed based on findings and result of analysis.

Table of Contents

Introduction ................................................................................................................................ 1

Credit Risk in Case of Individual Borrower (Personal Loan)............................................ 3

Additional Risk Factors affecting Credit Risk ................................................................... 3

How Financial Institutions Manage Credit Risk ................................................................ 4

Problem Statement ................................................................................................................. 7

Literature Review................................................................................................................... 8

Rationale of the Problem ....................................................................................................... 9

Methodology ........................................................................................................................ 10

Scope of the Study ............................................................................................................... 11

Limitations of the Study....................................................................................................... 12

Details of the Organization ...................................................................................................... 13

Financial Institutions ........................................................................................................ 14

Introduction to NBFC .......................................................................................................... 16

The Organization ................................................................................................................. 18

HDFC Bank ..................................................................................................................... 18

HDB Financial Services ................................................................................................... 19

Why the name HDB? ....................................................................................................... 20

Vision Statement .............................................................................................................. 20

Mission Statement ............................................................................................................ 20

Products & Services ............................................................................................................. 21

Unsecured Loans .............................................................................................................. 22

Secured Loans .................................................................................................................. 25

Schemes in Products giving us Competitive Edge: ......................................................... 33

Rates Applicable .............................................................................................................. 35

Process at HDB Financial Services...................................................................................... 37

Process Flowchart ............................................................................................................ 38

Defining the Process of Credit Appraisal ........................................................................ 39

Process of Credit Appraisal Explained ............................................................................ 41

Organisation Structure ......................................................................................................... 44

HR Practices......................................................................................................................... 46

Competition Analysis........................................................................................................... 47

Industry Analysis ................................................................................................................. 50

Market Size ...................................................................................................................... 50

Investments/Developments .............................................................................................. 51

Government Initiatives..................................................................................................... 52

Road Ahead ...................................................................................................................... 53

SWOT Analysis ................................................................................................................... 54

Michael Porter’s Five Forces Model- Financial Services .................................................... 55

Data Collection and Analysis................................................................................................... 56

Sampling Frame ................................................................................................................... 57

Data Collection Method ....................................................................................................... 57

Processing of Data for Analysis ........................................................................................... 57

Sources of Data Collection .................................................................................................. 57

Data Analysis and Interpretation ............................................................................................. 58

Choice of Data Analysis Techniques ................................................................................... 59

Outcomes and Interpretations of Outcomes ......................................................................... 60

Interpretation ........................................................................................................................ 61

Conclusion ........................................................................................................................... 64

Recommendations .................................................................................................................... 65

Brief Description of Recommendations............................................................................... 66

Details of Recommendations & Scheme of Implementation ............................................... 67

Concluding Remarks ................................................................................................................ 69

Summary .............................................................................................................................. 70

Gains from the Project ......................................................................................................... 71

Limitations of the Project..................................................................................................... 72

Scope for Further Work ....................................................................................................... 73

Conclusion ........................................................................................................................... 74

References ................................................................................................................................ 75

List of Tables

Table 1 CRISIL Rating .............................................................................................................. 5

Table 2 Report Methodology ................................................................................................... 10

Table 3 Property Slab LAP/IMPL ........................................................................................... 29

Table 4 Difference between LAP & IMPL .............................................................................. 33

Table 5 EBL ............................................................................................................................. 35

Table 6 LAP Floating............................................................................................................... 35

Table 7 LAP Fixed ................................................................................................................... 35

Table 8 Unsecured SE .............................................................................................................. 35

Table 9 Unsecured Salaried ..................................................................................................... 36

Table 10 Auto Loan ................................................................................................................. 36

Table 11 Gold Loan ................................................................................................................. 36

Table 12 SWOT ....................................................................................................................... 54

Table 13 Regression Output..................................................................................................... 60

Table of Figures

Figure 1 Products 21

Figure 2 Credit Appraisal Process 38

Figure 3 Organization Structure 44

Figure 4 Michael Porter's Five Force Model 55

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Introduction

Page | 2

According to Darrell Duffie and Kenneth J. Singleton1, Credit risk is the major challenge for

risk managers and market regulators. Banks, regulators and central banks do not agree on how

to measure credit risk and, more particularly, on how to compute the optimal capital that is

necessary for protecting the different partners that share this risk. Asking banks to keep too

much capital in reserve to cover credit risk can be a source of market distortion in risk

management behaviour.

According to Ken Brown & Peter Moles of Edinburgh Business School2, Credit risk can be

defined as ‘the potential that a contractual party will fail to meet its obligations in accordance

with the agreed terms’. Credit risk is also variously referred to as default risk, performance risk

or counterparty risk. These all fundamentally refer to the same thing: the impact of credit effects

on a firm’s transactions. There are three characteristics that define credit risk:

1. Exposure (to a party that may possibly default or suffer an adverse change in its ability

to perform).

2. The likelihood that this party will default on its obligations (the default probability).

3. The recovery rate (that is, how much can be retrieved if a default takes place).

1 Pricing, Measurement, and Management, Darrell Duffie & Kenneth J. Singleton

2 Credit Risk Management, Ken Brown & Peter Moles

Page | 3

Credit Risk in Case of Individual Borrower (Personal Loan)

The credit standing of an applicant for a personal loan is investigated intensively because it

indicates, within reasonable limits, the likelihood of repayment. It should not be assumed,

however, that a bank officer can say with certainty how faithfully a borrower will meet his

obligations, few applicants have economic prospects so bad that there is not some small chance

of repayment, and few are so well situated that there is not some possibility of delinquency or

even default. The selection of borrowers of personal loans must therefore rest on probabilities.

On the basis of experience, and to some extent intuition, the loan officer decides which

applicants are more likely to default than others or which loans are likely to involve collection

costs so great as to render the transaction unprofitable.

To reduce the lender's credit risk, the lender may perform a credit check on the prospective

borrower, may require the borrower to take out appropriate insurance, such as mortgage

insurance, or seek security over some assets of the borrower or a guarantee from a third party.

The lender can also take out insurance against the risk or on-sell the debt to another company.

In general, the higher the risk, the higher will be the interest rate that the debtor will be asked

to pay on the debt. Credit risk mainly arises when borrowers unable to pay due willingly or

unwillingly.

In assessing credit risk for personal loans, an institution must consider three issues:

Default probability: It means that what is the likelihood that the borrower will default

on its obligation either over the life of the obligation or over some specified horizon.

Calculated for a one-year horizon, this may be called the expected default frequency.

Credit exposure: It implies that in the event of a default, how large the outstanding

obligation will be when the default occurs.

Recovery rate: It means that in the event of a default, what fraction of the exposure may

be recovered through bankruptcy proceedings or some other form of settlement.

Additional Risk Factors affecting Credit Risk

Political risk arises when a country’s government is challenged externally or from

within national borders. Political risk is more problematic in long-term lending

agreements than for short-term transactions.

Economic risk means the declining economic stability in a country.

Currency Risk arises from fluctuations in the currency exchange rate of a foreign

currency.

Page | 4

How Financial Institutions Manage Credit Risk

Many banks, investment managers and insurance companies hire their own credit analysts who

prepare credit ratings for internal use. Other firms including CRISIL, Standard & Poor’s,

Moody’s and Fitch are in the business of developing credit ratings for use by investors or other

third parties. These firms are called credit rating agencies. Institutions that have publicly traded

debt hire one or more of them to prepare credit ratings for their debt. Those credit ratings are

then distributed for little or no charge to investors.

CRISIL rating3 is shown in table below.

CRISIL AAA

(Highest Safety)

Instruments with this rating are considered to have the highest degree

of safety regarding timely servicing of financial obligations. Such

instruments carry lowest credit risk.

CRISIL AA

(High Safety)

Instruments with this rating are considered to have high degree of

safety regarding timely servicing of financial obligations. Such

instruments carry very low credit risk.

CRISIL A

(Adequate Safety)

Instruments with this rating are considered to have adequate degree


instruments carry low credit risk.

CRISIL BBB

(Moderate Safety)

Instruments with this rating are considered to have moderate degree


instruments carry moderate credit risk.

CRISIL BB

(Moderate Risk)

Instruments with this rating are considered to have moderate risk of

default regarding timely servicing of financial obligations.

CRISIL B

(High Risk)

Instruments with this rating are considered to have high risk of


3 www.crisil.com

Page | 5

CRISIL C

(Very High Risk)

Instruments with this rating are considered to have very high risk of


CRISIL D

Default

Instruments with this rating are in default or are expected to be in

default soon.

Table 1 CRISIL Rating

For personal loans, lenders mitigate credit risk in a number of ways, including:

Risk-Based Pricing- Lenders may charge a higher interest rate to borrowers who are

more likely to default, a practice called risk-based pricing. Lenders consider factors

relating to the loan such as loan purpose, credit rating, and loan-to-value ratio and

estimates the effect on yield (credit spread).

Covenants- Lenders may write stipulations on the borrower, called covenants, into loan

agreements, such as:

Periodically report its financial condition

Refrain from paying dividends, repurchasing shares, borrowing further, or other

specific, voluntary actions that negatively affect the company's financial

position, and

Repay the loan in full, at the lender's request, in certain events such as changes

in the borrower's debt-to-equity ratio or interest coverage ratio.

Credit Insurance and Credit Derivatives- Lenders and bond holders may hedge their

credit risk by purchasing credit insurance or credit derivatives. These contracts transfer

the risk from the lender to the seller (insurer) in exchange for payment. The most

common credit derivative is the credit default swap.

Tightening- Lenders can reduce credit risk by reducing the amount of credit extended,

either in total or to certain borrowers. For example, a distributor selling its products to

a troubled retailer may attempt to lessen credit risk by reducing payment terms from

net 30 to net 15.

Diversification- Lenders to a small number of borrowers (or kinds of borrower) face a

high degree of unsystematic credit risk, called concentration risk. Lenders reduce this

risk by diversifying the borrower pool.

Page | 6

Deposit Insurance- Governments may establish deposit insurance to guarantee bank

deposits in the event of insolvency and to encourage consumers to hold their savings in

the banking system instead of in cash.

Page | 7

Problem Statement

What are the factors that affect the credit risk?

The sustainability of microfinance institutions depends largely on their ability to collect their

loans as efficiently and effectively as possible. In other words to be financially viable or

sustainable, microfinance institutions must ensure high portfolio quality based on 100%

repayment or at worst low delinquency, cost recovery and efficient lending.

From my own observations in HDB Financial Services, the number of customers who have

taken loan and then failed to pay it back on time or pay it back at all has been rising with time.

I’ve observed various process and checks which are in place to keep delinquency rate in check

in this organization. They also seem to be enough but delinquency rate is still climbing

constantly month by month.

For ease of conducting a study, I’ve broken the above question in small parts.

Do physical characteristics effect the credit risk?

Does family and stability in life play any role in credit risk?

Does income and business stability effect credit risk?

Does having an experience of repaying loan effects credit risk?

Does meeting banking norms has any effect on credit risk?

Page | 8

Literature Review

Several theoretical explanations have appeared in the literature to explain credit risk. The most

common is strong competition among banks and other financial intermediaries affects margins

and puts pressure on bottom lines of banks. To compensate for declining profitability, bank

managers often sacrifice objectivity in credit evaluation standards and increase loan growth at

the expense of the quality of their loan portfolios. To the extent that such loans turn out to be

non-performing only with a lag, it might encourage further loan growth (Raghuram G. Rajan,

19944).

Credit granting procedure and control systems are necessary for the assessment of loan

application, which then guarantees a bank’s total loan portfolio as per the bank’s overall

integrity. It is necessary to establish a proper credit risk environment, sound credit granting

processes, appropriate credit administration, measurement, monitoring and control over credit

risk, policy and strategies that clearly summarize the scope and allocation of bank credit

facilities as well as the approach in which a credit portfolio is managed (Jhon H. Boyd, 19935).

Another one of the issue which comes to light is that collection officers or collection

department might slack off in collection of loan. As they get experienced, they get more and

more lethargic and collection part is neglected (Allen N. Berger & Gregory F. Udell, 20046).

Finally, collateral might also play a role in influencing bad loans. Rapid increases in asset prices

increase the availability of funds, forcing banks to increase lending, since it has an asset to back

the loan. This might lead to degradation of credit standards. (David A. Gabriel, 20067).

Credit Risk policy in any financial institution dictates the credit risk strategy. These policies

tell us that which are our target markets, risk acceptance level, risk avoidance levels, risk

tolerance limits, prefer levels of diversification and concentration, credit risk measurement,

monitoring and controlling mechanisms. These policies are needed to be paid more attention

so that credit risk can be kept in check.

4 Why Bank Credit Policies Fluctuate: A Theory and Some Evidence by Raghuram G Rajan, 1994

5 The Theory of Bank Risk-Taking and Competition Revisited by Jhon H. Boyd, 1993

6 A More Complete Conceptual Framework for SME Finance by Allen N. Berger & Gregory F. Udell, 2004

7 Neural Adaptations to Resistive Exercise by David A. Gabriel, 2006

Page | 9

Rationale of the Problem

It is very important for a financial institution, be it a bank or NBFC, to take care of their

investor’s money. If they do not deal with the problem of credit risk, they risk losing the

investments and trust of the investors. Thus they must be very careful when giving loans to

applicants. Various process checks and other measures must be taken to ensure that investor’s

money is not lost. This project will explore this area and provide a study of 12 factors taken

together. By the end of this project, we will know which of the 12 factors undertaken for

research determine credit risk.

Page | 10

Methodology

This is a quantitative research. This type of research methods requires quantifiable data

involving numerical and statistical explanations. Quantitative Research is used to quantify the

problem by way of generating numerical data or data that can be transformed into useable

statistics. It is used to quantify attitudes, opinions, behaviours, and other defined variables and

generalize results from a larger sample population. Quantitative Research uses measurable data

to formulate facts and uncover patterns in research. We are using correlation and regression

analysis in this research.

The steps involved in the process are mentioned below:

1. Problem Identification

2. Development of Approach to problem

3. Research design Formulation

4. Data Collection

5. Data Preparation and Analysis

6. Report preparation and Presentation

Research Design: Descriptive Research Design

Historical Data Method

Sampling Design:

Sample Size

Sample Place

200 Customers

Kanpur

Data Collection Method:

Historical Data of Customers

Analytical tool:

Descriptive data analysis

Table 2 Report Methodology

Page | 11

Scope of the Study

This study relates to customers who have taken unsecured loans from HDB financial

Services Kanpur Fazalganj branch in last 3 years.

This study has a sample size of 200 customers.

It has been conducted specifically for Kanpur Fazalganj branch of HDB Financial

Services.

These 12 factors have been considered as the determinants of risk in this research:

Age of Customer

Sex of Customer

Number of Dependents

Years at Current Residence

Residence Owned by the Customer

Scale of Business of the Customer

Business Premises being owned by the Customer

Number of Years in Current Business

Income of Customer

Loan History of the Customer

CIBIL Score of Customer

Average Bank Balance Norms being satisfied by the Customer

Page | 12

Limitations of the Study

Due to shortage of time, it is confined to only Kanpur Fazalganj branch.

Due to shortage of data, sample is only confined to 200 customers.

Some of the customers might have provided false data while filling their KYC.

The data availability is proprietary, not readily shared for dissemination and is highly

confidential.

Assumptions and projections are based on current market conditions and have not taken

into account the price volatility.

The staff although are very helpful but are not able to give much of their time due to

their own work constraints.

Page | 13

Details of the Organization

Page | 14

Financial Institutions

A financial institution is an establishment that conducts financial transactions such as

investments, loans and deposits. Almost everyone deals with financial institutions on a regular

basis. Everything from depositing money to taking out loans and exchanging currencies must

be done through financial institutions. Conventionally, financial institutions are composed of

organizations such as banks, trust companies, insurance companies and investment dealers.

Almost everyone has deal with a financial institution on a regular basis. Everything from

depositing money to taking out loans and exchange currencies must be done through financial

institutions. Financial institution is an institution that provides financial services for its clients

or members. One of the most important financial services provided by a financial institution is

acting as a financial intermediary.

Most financial institutions are regulated by the government. Financial institutions are

organizations that process monetary transactions, including business and private loans,

customer deposits, and investments. They're key to the financial intermediation process,

whereby financial institutions transfer funds from those who save money to those who borrow

money.

Various types of financial institutions are as follows:

Commercial Banks- Commercial banks accept deposits and provide security and

convenience to their customers. Part of the original purpose of banks was to offer

customers safe keeping for their money. By keeping physical cash at home or in a

wallet, there are risks of loss due to theft and accidents, not to mention the loss of

possible income from interest. With banks, consumers no longer need to keep large

amounts of currency on hand, transactions can be handled with checks, debit cards or

credit cards, instead.

Investment Banks- The stock market crash of 1929 and ensuing Great Depression

caused the United States government to increase financial market regulation. The

Glass-Steagall Act of 1933 resulted in the separation of investment banking from

commercial banking. While investment banks may be called "banks," their operations

are far different than deposit-gathering commercial banks. An investment bank is a

financial intermediary that performs a variety of services for businesses and some

governments. These services include underwriting debt and equity offerings, acting as

an intermediary between an issuer of securities and the investing public, making

markets, facilitating mergers and other corporate reorganizations, and acting as a broker

for institutional clients. They may also provide research and financial advisory services

to companies. Traditionally, investment banks do not deal with the general public.

However, some of the big names in investment banking, such as JP Morgan Chase,

Bank of America and Citigroup, also operate commercial banks. Other past and present

investment banks you may have heard of include Morgan Stanley, Goldman Sachs,

Lehman Brothers and First Boston.

Page | 15

Insurance Companies- An insurance company pools risk by collecting premiums from

a large group of people who want to protect themselves and/or their loved ones against

a particular loss, such as a fire, car accident, illness, lawsuit, disability or death.

Insurance helps individuals and companies manage risk and preserve wealth. By

insuring a large number of people, insurance companies can operate profitably and at

the same time pay for claims that may arise. Insurance companies use statistical analysis

to project what their actual losses will be within a given class. They know that not all

insured individuals will suffer losses at the same time or at all.

Brokerages- A brokerage acts as an intermediary between buyers and sellers to facilitate

securities transactions. Brokerage companies are compensated via commission after the

transaction has been successfully completed. For example, when a trade order for a

stock is carried out, an individual often pays a transaction fee for the brokerage

company's efforts to execute the trade

Investment Companies- An investment company is a corporation or a trust through

which individuals invest in diversified, professionally managed portfolios of securities

by pooling their funds with those of other investors. Rather than purchasing

combinations of individual stocks and bonds for a portfolio, an investor can purchase

securities indirectly through a package product like a mutual fund.

Non-Banking Financial Companies (NBFC) - NBFCs have rapidly emerged as an

important segment of the Indian financial system. Moreover, NBFCs assume

significance in the small business segment as they primarily cater to the credit

requirements of the unorganised sector such as wholesale & retail traders, small-scale

industries and small borrowers at the local level. NBFC is a heterogeneous group of

financial institutions, performing a wide range of activities like hire-purchase finance,

vehicle financing, equipment lease finance, personal loans, working capital loans,

consumer loans, housing loans, loans against shares and investment, etc.

Page | 16

Introduction to NBFC

A Non-Banking Financial Company (NBFC) is a company registered under the Companies

Act, 1956 engaged in the business of loans and advances, acquisition of

shares/stocks/bonds/debentures/securities issued by Government or local authority or other

marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business

but does not include any institution whose principal business is that of agriculture activity,

industrial activity, purchase or sale of any goods (other than securities) or providing any

services and sale/purchase/construction of immovable property. A non-banking institution

which is a company and has principal business of receiving deposits under any scheme or

arrangement in one lump sum or in instalments by way of contributions or in any other manner,

is also a non-banking financial company (Residuary non-banking company).

There are several notable differences between NBFC and a bank.

NBFC cannot collect deposits in the manner of a bank.

NBFC cannot issue checks drawn on itself.

NBFC cannot issue Demand Drafts like banks.

NBFC cannot indulge primarily in agricultural or industrial activity.

NBFC cannot engage in construction of immovable property.

NBFC cannot accept demand deposits.

While banks are incorporated under banking companies act, NBFC is incorporated

under company act of 1956.

Now question arises that what is the need of a NBFC when we already have banks? Well there

are several advantages a NBFC offers over a bank. Some of them have been listed below-

1. First and foremost is the size of the Equated Monthly Instalments (EMI), which boils

down to interest rates. Though banks are supposed to offer the cheapest deals thanks to

their access to low-cost funds, in the case of home loans, we found equally competitive

offers from NBFCs too.

For instance, SBI is among the banks offering the lowest priced home loans at an

interest rate of 10.15 per cent (floating rate), but that is matched by the largest NBFC

home loan provider, HDFC. Both do not have differential rates for different loan sizes.

NBFCs such as Tata Capital Housing Finance also offer loans starting at 10.15 per cent,

but the rates could vary as loan sizes increase. Banks such as ICICI Bank and Axis

Bank offer similar terms.

2. Interest rates apart, processing charges are another key variable. While processing fees

of up to 1 per cent of the loan amount are common, SBI takes a processing charge of

0.25 per cent of the loan amount subject to a limit of ₹10,000. In fact, under an ongoing

Page | 17

offer, SBI is waiving off such charges for loans taken until March 2015. For a loan from

HDFC, the processing charges come to 0.50 per cent, subject to a cap of ₹10,000. LIC

Housing Finance, on the other hand has a flat processing charge, i.e., ₹10,000 for loans

up to ₹75 lakh and ₹15,000 for loans exceeding ₹75 lakh.

3. There is one count on which NBFCs have a clear advantage over banks. While

calculating the loan amount, an NBFC can assess the value of a property inclusive of

statutory charges such as stamp duty and registration. This could entitle you to a higher

loan amount. But banks have to exclude such charges.

4. One could also save on the time taken in loan processing. For instance, HDFC takes

two to seven days and LIC Housing Finance takes 4-7 days to process a home loan. For

SBI, the processing time taken could be 12-14 days if the loan is being taken for a bank-

approved project, or up to three weeks if the project being financed lies outside the

approved builder tie-up. With Axis Bank, the process could take five days for a salaried

person and seven days for a self-employed person.

Page | 18

The Organization

HDFC Bank

HDFC Bank ltd is commercial bank of India, incorporated in August 1994, after the Reserve

Bank of India allowed establishing private sector banks. The bank was promoted by the

Housing Development Finance Corporation, a premier housing finance of India. HDFC Bank

has 1,412 branches and over 3295 ATMs, in 528 cities in India, and all branches of the bank

are linked on an online real time basis. The bank had total assets of INR 1006.82 billion. The

bank has reported net profit of INR 2,244.9 crore, up 41% from the previous fiscal year. Total

annual earnings of the increased by 58% reaching at INR 19622.8 crore in 2008-09.

HDFC Bank was incorporated in the year 1994 by Housing Development Finance Corporation

Limited (HDFC). India’s premier housing finance company. It was among the first companies

to receive ‘In Principle’ approval from the Reserve Bank of India (RBI) to set up a bank in the

private sector. The bank commenced its operations as a scheduled commercial bank in January,

1995 with the help of RBI’s Liberalization policies.

HDFC has 1725 branches spread in 771 cities across India. All branches are linked on an online

real time basis. The Bank went on to cross-sell and up-sell its products aggressively, growing

into India’s largest bank. But HDFC was not only looking at banking. This was the just the

beginning followed by several mergers, acquisitions and joint ventures followed HDFC is one

of the leading private sector banks in India, which combines financial strength with a reputation

for innovation and a universal culture that embraces change.

HDFC, a colossal presence on the Indian financial scene, has an element of enormity in all that

it does from ambition to projections and achievements. Ranked as the number one bank in India

several times, this institution appears virtually unstoppable, but can it, in fact, fall prey to

weakness? HDFC’s impressive rise over the last couple decades cannot be denied, but now as

the brand starts to over extend with a dizzying array of products and services, one worries that

an impressive fall may follow. HDFC Bank is preferred because it offers the entire banking

experience under one roof. Amazing offers, customized solutions, minimum paperwork and

quick turnaround times are some of the hallmarks of HDFC Bank that has made it the banker

of choice in India.

Page | 19

HDB Financial Services

HDB Financial Services Limited (‘HDBFS’) is engaged in retail asset financing. It is a non-

deposit taking non-bank finance company (NBFC). Apart from lending to individuals, the

company grants loans to micro, small and medium business enterprises. It also runs call centres

for collection services to the HDFC Bank’s retail loan products. The Company is promoted by

HDFC Bank Ltd which has 97.42% shareholding in the Company as on 31 March 2015. As of

March 31, 2015, HDBFS had 425 branches in 265 cities. During the FY 2014-15, HDBFS had

turnover of INR 2,527.26 crores and profit after tax of INR 349.45 crores.

HDB Financial Services Limited provides financing, collection, and insurance services in

India. The company operates through Lending Business and BPO Services segments. It offers

unsecured loans, including business and personal loans; loans against properties, gold

jewellery, securities, and shares; loans for ESOPs; and enterprise business, consumer durables,

car, construction equipment, and commercial vehicle loans as well as end to end collection

services through collection call centres. HDB Financial Services Limited is a subsidiary of

HDFC Bank Limited. The Company is a registered insurance Corporate Agent having license

vide no. HDF 4684721 from Insurance Regulatory & Development Authority (IRDA). The

Company sells life and general insurance products of HDFC Standard Life Insurance Company

Limited and HDFC Ergo General Insurance Company Limited respectively. The Company has

a contract with HDFC Bank to run collection call centres and collect over dues from borrowers.

The Company has set up call centres across the country with a capacity of over 2600 seats.

These centres provide collection services for the entire gamut of retail lending products of

HDFC Bank.

The Company offers end to end collection services in over 400 locations through its calling

and field support teams. The markets will continue to grow and mature leading to

differentiation of products and services. Each financial intermediary will have to find its niche

in order to add value to consumers. The Company is cautiously optimistic in its outlook. Your

Company has taken various steps to improve the effectiveness of its service delivery and drive

consistency of customer experience across its delivery channels. To ensure prompt redressal of

customer grievances, the Company has put in place a grievance redressal process. A customer

service committee chaired by the Managing Director undertakes a monthly review of all

complaints. The focus of the review is to identify root cause for complaints and to make process

changes and identify training needs. A quarterly report is also placed before the Audit

Committee.

All these initiatives have helped in consistent reduction in the total number of customer

complaints. Your Company has established a very strong and dispassionate review mechanism

for complaint resolution in this year. To strengthen its internal processes the Company

implemented a quality management system in its centralized operations at Hyderabad and

Chennai.

Page | 20

A strong, well-capitalized business, it enjoys CARE AAA rating for long-term bank facilities

and PR1+rating for short term debt and commercial papers. They are a strong, stable, well-

capitalized NBFC. Their business model is sound and flexible, fortified to protect against near-

term risks.

Value System: HDB Financial Services maintains a strong commitment to ethical conduct.

Transparency is ingrained in the structure of our Code of Ethics and our compliance policies

to ensure that the highest standards of professional conduct are consistently reinforced and

embedded in every corner of our organization.

People: Core values at HDB Financial Services are honesty, integrity and respect for people.

They respect people’s individuality and diversity, encouraging them to develop their careers in

a stimulating environment in keeping with our values. At last count they are 12000 employees

and growing.

Why the name HDB?

This name was taken by HDFC Bank as this is the name by which HDFC bank has been

registered by in New York stock exchange. This acronym has no possible full form and is

known as HDB Financial Services.

Vision Statement

Sell like crazy, rake in the dough, buy lots of cool stuff.

Mission Statement

To be India’s most admired NBFC, through great execution, driving simplicity & developing

humanity.

Page | 21

Products & Services

Figure 1 Products

Loans

Unsecured

Loans Secured Loans

Personal

Loans

Business

Loans

Loan against

Property

Loan against

Shares

Loan against

Securities

Loan against

Gold

Car Loans Construction

Equipment Loans Commercial

Vehicle Loans

Page | 22

Unsecured Loans

An unsecured loan is a loan that is issued and supported only by the borrower's

creditworthiness, rather than by any type of collateral. An unsecured loan is one that is obtained

without the use of property as collateral for the loan, and it is also called a signature loan or a

personal loan. Borrowers generally must have high credit ratings to be approved for certain

unsecured loans.

1. Personal Loans (PL): Personal loan, a loan to meet your current financial needs, is also

referred to as an unsecured loan as there is no security against it. It is usually taken by

borrowers who are looking for quick and easy loans with manageable interest rate and

minimum documentation. Client can use a personal loan as per his/her convenience

without being monitored for the actual end usage.

Features of PL:

Loans up to INR 20 Lakhs

Tenor ranging from 12 to 60 months

No guarantor/security required

Convenience of doorstep service

Quick and Speedy processing

Attractive Rate of Interest

Minimum/Hassle free Documentation

Special offer for employees of select companies

Eligibility Criteria:

Minimum age of Applicant: 22 years

Maximum age of Applicant at loan maturity: 65 years

Years in business: Minimum 3 years.

Minimum Annual Income: INR 100000/- p.a. for Metro Locations & INR

75,000/- p.a. for non-metro locations.

Documents Required (KYC):

Proof of Identity: Passport / Voters ID / Driving License/PAN Card/Aadhar

Card /Photo Ration Card

Address Proof: Ration card /Driving License/ Voter ID/ Utility Bill (anyone

within last 3 months) / Registered Rental Agreement / Passport

Page | 23

Date of Birth Proof: Driving License / Pan Card / Passport Copy / Birth

Certificate / 10th / 12th mark sheet bearing date of birth

Gas Connection

Bank Statements: Latest 3 Months bank statements / 1 year bank passbook. If

having CC (Cash Credit) Account then a CC Limit Letter is required.

Latest 3 year ITR along with computation of income, B/S & P&L a/c for the

last 2 yrs. certified by a CA only in case above 7.5 Lac

Proof of continuation: Trade license /Establishment /Sales Tax certificate

Other Mandatory Documents (Sole Prop. Decl. Or Cert. Copy of Partnership

Deed, Cert. Copy of MOA, AOA & Board resolution.) Only in case of

Partnership and in case of company.

2. Business Loans (BL): A business loan is a loan specifically intended for business

purposes. As with all loans, it involves the creation of a debt, which will be repaid with

added interest. Businesses require an adequate amount of capital to fund start-up

expenses or pay for expansions. As such, companies take out business loans to gain the

financial assistance they need. A business loan is debt that the company is obligated to

repay according to the loan’s terms and conditions.

Features of BL:

Loans up to INR 30 Lakhs


No guarantor/security required

Convenience of doorstep service



Special offer for self-employed Doctors

Eligibility Criteria

Minimum age of applicant: 22 years

Maximum age of applicant at loan maturity: 65 years

Years in business : Minimum 3 years

Minimum Annual Income: INR 1, 00,000 p.a. for Metro locations & INR 75,000

p.a. for other locations.

Page | 24

Documents required:

Proof of Identity: Passport / Voters ID / Driving License/PAN Card/Aadhar

Card /Photo Ration Card

Address Proof: Ration card /Driving License/ Voter ID/ Utility Bill (anyone

within last 3 months) / Registered Rental Agreement / Passport

Date of Birth Proof: Driving License / Pan Card / Passport Copy / Birth

Certificate / 10th / 12th mark sheet bearing date of birth

Bank Statements: Latest 3 Months bank statements / 1 year bank passbook. If


Latest ITR along with computation of income, B/S & P&L a/c for the last 2 yrs.

certified by a CA

Page | 25

Secured Loans

Investments not only help grow your wealth, they also come in handy when you need

immediate financing solutions. A secured loan, is a loan in which the borrower pledges some

asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed

to the creditor who gives the loan.

1. Loan against Gold (LAG): A gold loan is a loan in which money is provided to the loan

applicant on the basis of the quality of the gold that the person owns. An added

advantage of these Loans is that the person applying for these loans can even have a

poor credit score. The company do not ask for the income proofs or the previous credit

history of the customer.

Features of GL:

Tenor up to 48 months

Loan up to INR 20 Lakhs

Loan up to 75% the value of gold.

Attractive interest rates

Safety and security of your gold jewellery

Flexible repayment options

No hidden charges




Gold jewellery should be owned by the applicant or any of the family members.

Documents Required:

Proof of Identity - (Passport / Voter's ID / Driving License/PAN Card/Aadhar

Card)

Signature Proof (Passport /Driving License/Banker's verification)

Address Proof- (Ration card /Driving License/ Voter's ID / Utility Bill (anyone

within last 3months) / Registered Rental Agreement. / Credit Card Statement /

Passport )

Date of Birth Proof ( Driving Licence / PAN Card / Passport / Birth Certificate

/ 10th / 12th mark sheet bearing date of birth)

2 passport size photographs

Page | 26

2. Car Loan (AL): Car Loan is a loan given by HDB financial to its customer for the

purchase of new car and for refinance of used car.

Features of AL:

Funding for New & Old vehicles

Top up on existing vehicle loans

Loan up to 90% of the vehicle value


Quick and Speedy processing



Repayment through convenient EMI's




Years in business: Minimum 3 years in the same business

Minimum Annual Income: INR 200,000 per annum.

Documents required:

Proof of Identity: Passport / Voters ID / Driving Licence/ PAN Card/ Shops &

Establishment certificate/ Trade license certificate/ SSI registration certificate/

Sales Tax / VAT registration certificate

Address Proof: Utility Bill (anyone within last 3 months) /Shops &

Establishment certificate/Trade license certificate/ SSI registration certificate-

Sales Tax /VAT registration certificate/Ration card /Driving Licence/ Voter ID

/ Registered Rental Agreement / Passport

Bank Statements - Latest 3 Months bank statements / 1 year bank passbook. If


Latest 3 years ITR along with computation of Income and latest 2 years Audited

Financials required (if applicable) along with Audit Report.

If the Customer is taking loan to purchase a new car then we require an

Estimated current market value receipt given by showroom & then we Finance-

Page | 27

Up to 90% of value of Car depending upon customer position means whether

he is able to pay all instalment on time

Up to 140% of the current market value of car he is having.

ABB of the customer should be 1.5 times of EMI.

3. Loan against Property (LAP): Loan given or disbursed against the mortgage of

property. The loan is given as a certain percentage of the property's market value,

usually around 40 per cent to 60 per cent. Loan against property (LAP) is also known

as 'Home Equity Loans' and is basically a kind of loan against the security of one's

property. LAP is designed to meet the financial needs of a person who already owns a

house, which is free from any encumbrance (i.e. it is not given as security for any

purpose).

Feature of LAP:

Loans up to INR 8 Crore

Loan up to 60% of the market value of the property



Simple and speedy processing

Balance transfer facility - Lets you retire your high cost debt

Loan against Rent Receivables - Lease rental discounting

Loans to purchase a new shop or office for your business





Minimum Annual Income: N.A.

Minimum area of land in case of SORP (Self Occupied Residential Property) is

400 sq. ft. but in case of Mumbai it is 300 sq. ft.

Minimum area of land in case of SOCP (Self Occupied Commercial Property)

is 300 sq. ft.

Minimum Value of Land should be 35 Lac for Tier 1 cities (Mumbai, Delhi,

Bangalore, Hyderabad, Chennai, Ahmedabad, Pune, Surat, Kolkata, and Jaipur)

and other than these cities Minimum Value of Land should be 15 Lac.

13 Year complete and clear property chain should be there in property paper.

Application fees of INR4800 is required in per asset.

Page | 28

Documents Required:

Certified Financial Statement for the last 2 years.

Proof of Residence - Any one of Ration Card / Telephone Bill / Electricity Bill

/ Voters Card.

Proof of Identity - Any one of Voters Card / Drivers Licence / Employers Card.

Latest Bank Statement / Passbook (where salary / income is credited for the past

1 year).

Copies of all Property Documents.

4. Enterprise Business Loan (EBL): EBL is the funding for small and medium-sized

enterprises, and represents a major function of the general business finance market in

which capital for different types of firms are supplied, acquired, and costed or priced.

Capital is supplied through the business finance market in the form of bank loans and

overdraft, leasing and hire-purchase arrangements, equity/corporate bond issues,

venture capital or private equity; and asset-based finance such as factoring and invoice

discounting. Loan given or disbursed against the mortgage of property. The loan is

given as a certain percentage of the property's market value, usually around 40 per cent.

Features of EBL:

Loans up to INR5000000

Loan up to 40% of the market value of the property



Simple and speedy processing

Balance transfer facility





Minimum Annual Income: INR 200,000 per annum.

5 Year complete and clear property chain should be there in property paper.

Application fees of INR4800 is required in per assets.

Documents Required:

Certified Financial Statement for the last 2 years.

Page | 29

Proof of Residence - Any one of Ration Card / Telephone Bill / Electricity Bill

/ Voters Card.

Proof of Identity - Any one of Voters Card / Drivers Licence / Employers Card.

Latest Bank Statement / Passbook (where salary / income is credited for the past

1 year).

Copies of all Property Documents.

Table 3 Property Slab LAP/IMPL

Type of Property

% Financed

SORP (Self occupied

Residential Property)

up to 40 % of the value

RRP(Rented Residential

Property)


VRP(Vacant Residential

Property)


SOCP(Self Occupied

Commercial Property)


RCP(Rented Commercial

Property)


VCP(Vacant Commercial

Property)


Page | 30

5. Loans against Shares: While being part of the Employee Stock Ownership Plan (ESOP)

is a definite asset, you can now utilise it to meet your liquid cash requirements. Avail

of our Loan against Shares without parting with any of the benefits.

Features of LAS:

Loan of up to 70% of the value of shares

Option of EMI-based repayment or interest only payment

Instant credit


Shares can be pledged from any Depository participant across the country

Simple and hassle-free

Eligibility Criteria


Maximum age of applicant at loan maturity: 58 years (60 years for Central

Government employees)

Minimum employment: 3 years in total and a minimum 1 year in the current

organisation

Minimum Net Monthly Income: INR 7,500 per month (INR 10,000 in Mumbai,

Delhi & Bangalore)

Documents Required:

Proof of Identity (Passport / Voters ID / Driving Licence/PAN Card)

Address Proof (Ration card /Driving Licence/ Voter ID / Utility Bill (any one,

within the last 3months) / Registered Rental Agreement / Passport )

Date of Birth Proof ( Driving Licence / PAN Card / Passport / Birth Certificate

/ 10th or 12th mark sheet which bears the date of birth)

Bank Statements (The latest 3 month bank statement / 6 month bank passbook)

Latest 2 months’ salary slip, along with latest Form 16 / ITR / Appointment

Letter

6. Commercial Vehicle Loans: At HDB Financial Services, we understand our customers’

requirements and provide Commercial Vehicle loans which help him grow his business.

Our loan process is simple and hassle free. Our plans are easy to understand minus any

hidden costs.

Page | 31

Features of CV Loans:


Financing for bus, trucks, light commercial vehicles and small commercial

vehicles

Finance for used vehicles

Top-up on existing vehicle loans

Customised financing solutions to meet individual requirements

Simple documentation and easy processing

Assistance for purchasing the vehicle

Documents Required:


Card)


within last 3months) / Registered Rental Agreement / Passport )

Driving license, in case of First time users

Land holding proof, in case of Farmers

Income Tax (ITR) and financial statements for the last two years, complete with

schedules and P&L account.

Documents to prove relevant experience, in case of First time users.

Bank statements for the last six months

Fleet list details

Proprietorship declaration, partnership deed, memorandum/association of

article (MOA/AOA), board resolution

7. Construction Equipment Loans: HDB provide Commercial Equipment loans which

help him to pursue his own path to success. With greater thrust on Infrastructure

development in India, they cater to the growing needs of our customers with an array

of attractive finance schemes to suit their varying requirements.

Features of CE Loans:


Financing for a whole range of construction equipment, such as loader backhoe,

excavators, wheeled loaders, cranes, fork lift trucks, concrete machineries and

road equipment

Up to 100% finance on asset cost

Page | 32

Finance for used vehicles (Re-finance & Re-purchase)

Top-up on existing vehicle loans

Customised financing solutions to meet individual requirements

Simple documentation and easy processing

Documents Required:


Card)


within last 3months) / Registered Rental Agreement / Passport )

Driving license, in case of First time users

Land holding proof, in case of Farmers

Income Tax (ITR) and financial statements for the last two years complete with

schedules and P&L account.

Documents to prove relevant experience, in case of First time users.

Bank statements for the last six months

Fleet list details

Proprietorship declaration, partnership deed, memorandum/association of

article (MOA/AOA), board resolution

Page | 33

Schemes in Products giving us Competitive Edge:

1. Imperfect Collateral Property (IMPL or PLI): Suppose an applicant does not meet our

requirements of LAP due to some legal or technical problem but still has a very good

customer profile. We certainly cannot give him a LAP due to company policies. So

what do we do? Do we let such an applicant with a very good profile go? The answer

is no, for them we have IMPL. It is same as that of Personal Loan with a slight

difference, i.e., in this above case the customer will have to mortgage something like

property or any other asset. Other things are same as PL like eligibility criteria,

document required, etc.

This can be equated as: PL+LAP = IMPL

Legal Valuation

LAP Ok Ok

IMPL Not ok Not ok

Table 4 Difference between LAP & IMPL

2. Balance Transfer Scheme (BT): Suppose an applicant has an undergoing secured loan

from some other loan agency and wants to borrow from us as well. We can lend him

but we will need property papers which are with the other company for mortgage. For

such applicants, we have balance transfer scheme. Under this scheme, we clear off their

ongoing loan and then lend them the remaining amount when we obtain their property

papers from other loan agency.

To better understand the process, we should consider an example of Mr. C. Mr. C has

taken a loan of INR 8 lacs from XYZ Company against his property. After 2 years of

taking that loan, he comes to us to give him LAP against that same property. He still

has INR 6 lacs to pay before the loan is closed and Mr. C is given his property papers

back. We will contact XYZ Company and tell them that Mr. C wants to close his loan

and we will login the case of Mr. C under BT scheme. Suppose credit is comfortable

with lending INR 10 lacs to Mr. C. Then we will transfer the 6 lacs to XYZ Company

and get property papers of Mr. C’s property and then remaining 4 lacs will be disbursed

to Mr. C.

3. Top-up Scheme: This scheme is for our existing customers. How do we get our

customers to come back to us? How do we make them stick to us in case they need

additional funding for their business? We offer them top-up scheme. Under this scheme,

half of what ever loan amount was previously sanctioned is added to the loan of

customer and his loan is started anew. This also comes with rate benefits if applicable

to the amount.

Page | 34

To clearly understand the concept, let us again take example of Mr. C who took LAP

from us a year back. Now he needs additional funding and he has been making enquiries

with other loan agencies. When he comes to us, we tell him that it is possible that we

can simply give him a new loan with 1.5 times the amount of previous loan and write

off the previous loan undergoing and this will not have any effect on his CIBIL score.

This means we can lend him 15 lacs now (10 lacs * 1.5).

Note: Legal and technical valuations are done in LAP, IMPL, AL & EBL. RIC/FCU (Fraud

Control Unit) is mandatory in all cases and is done by 3rd party. Also FI (foreign investigation)

is done for all the cases.

Technical valuations are done by Chandresh and M. K. who are architects by

qualification.

Legal and vetting is done by Bharat Bhatnagar & Associates which is a law firm.

Foreign investigation (FI) is done by AGPO management.

RIC or RCU is done by Rishi Raj Management.

Page | 35

Rates Applicable

EBL

Loan Amount IRR Processing Fees RPM Waiver

< 5 lacs 22% 2.00% 2.00%

5 - 7.5 lacs 21% 2.00% 2.00%

7.5 - 10 Lacs 20% 2.00% 1%

10 - 15 Lacs 19% 2.00% 1%

15 Lacs + 18% 2.00% 1%

Table 5 EBL

LAP Floating Rate

Loan Amount Pricing SORP/SOCP Pricing Others Processing Fees RM Waiver

< 9.99 Lacs FRR 1% FRR 1% 2% 1%

10 - 34.99 Lacs FRR 2% FRR 1.5% 1% 1%

35 - 99.99 Lacs FRR 3% FRR 2.5% 1% 0.50%

100 - 300 Lacs FRR 4% FRR 3.5% 1% 0.50%

300 Lacs + FRR 4.5% FRR 4% 1% 0.50%

Table 6 LAP Floating

LAP Fixed

Loan Amount Pricing Processing Fees RM Waiver

< 9.99 Lacs 19% 2% 0.50%

10 - 24.99 Lacs 18% 1% 0.50%

25 - 99.99 Lacs 17% 1% 0.50%

100 Lacs + 16% 1% 0.50%

Table 7 LAP Fixed

Unsecured Loans Self Employed

Loan Amount Interest Rate Processing Fees

75000 - 100000 29% 2.50%

100001 - 150000 27% 2.25%

150001 - 300000 26% 2%

300001 + 24% 2%

Table 8 Unsecured SE

Page | 36

Unsecured Loans Salaried Segment

Customer Salary Band

Interest Rate Processing Fees

Company Cat A & B Others All Category

> 75000 16% 17% 2%

50001 - 75000 17% 18% 2%

35001 - 50000 17% 18% 2%

25000 - 35000 18% 21% 2%

< 25000 19% 21% 2%

Table 9 Unsecured Salaried

Auto Loan

Loan Amount Pricing Processing Fees

< 2 Lacs 23% 1%

2 - 3 Lacs 22% 1%

3.01 - 5 Lacs 21% 1%

5.01 Lacs + 20% 1%

Table 10 Auto Loan

Gold Loan

Loan Amount Interest Rate Processing Fees

25000 - 50000 28% 1%

50001 - 75000 28% 1%

75001 - 100000 25% 1%

100000 + 22% 1%

Table 11 Gold Loan

Page | 37

Process at HDB Financial Services

The process by which the lender appraises the credit worthiness of the prospective borrower is

known as credit appraisal. This normally involves appraising the borrower’s payment history

and establishing the quality and sustainability of their income. They satisfy himself of the good

intension of the borrower, usually through TVR and PD.

The credit requirement must be assessed by all financial institution or specialized

institution set up for this purposes

NBFC may also take up financing project independently/ exclusively in respect of

borrowers/ promoters of repute with excellent past record in project implementation

In such cases due diligence of the inability of the project are well defined and

assessed

The important thing to remember is not to be overwhelmed by marketing or profit centre

reasons to book a loan but to take a balanced view when booking a loan, taking into account

the risk reward aspect. Generally everyone becomes optimistic during the upswing of the

business cycle, but tend to forget to see how the borrower will be during the downturn, which

is a short sighted approach. Furthermore, greater emphasis is given on financials, which are

usually outdated this is further exacerbated by a fact that a descriptive approach is usually

taken, rather than an analytical approach, to the credit. Thus a forward looking approach should

also be adopted, since the loan will be repaid primarily from future cash flows, not historic

performance.

Page | 38

Process Flowchart

Figure 2 Credit Appraisal Process

MCP Check

TVR

File LoginPosidex and CIBIL Study

FI Initiation

CAM Prepration

Personal Discussion

Approval Raise

Disbursement

Page | 39

Defining the Process of Credit Appraisal

1. MCP Check: MCP stands for minimum credit parameters. This step involves checking

of all the documents listed for various cases. The file is returned to sales department in

case any document is found missing.

2. TVR: TVR stands for tele verification. In this step, a call is made to customer to check

if the number provided by him is genuine. Also the references provided by him are

verified and various questions are asked to check if they have a valid relationship with

the customer.

3. File Login: This step involves feeding of data in the application form and KYC to the

system. It consists of two steps:

Quick Data Entry (QDE): This involves the process of feeding basic

information of applicant name, address, work details and details of references

to the software. This step ends with creation of a unique loan account number

(LOS number) for applicant.

Detail Data Entry (DDE): This involves feeding all of the data received from

applicant in the form of application form and documents to the system software.

Data includes bank account details & income details of applicant and adding of

co-applicant’s details as well.

Software used by HDBFS is Finnone.

4. Posidex & CIBIL Study: These reports are automatically generated after 30 minutes of

login creation. SAS or Posidex report is generated from database of HDBFS and HDFC

combined to check if the customer is a returning customer and if he is, then provide all

the repayment details of his loan. CIBIL report is generated form ‘Credit Information

Bureau (India) Limited’. This report includes past loan track of the person and all the

enquiries he has made in their lifetime. We track enquires made by them in last 6

months for loans in any other financial institution.

5. FI Initiation: FI or foreign investigation is done prior to PD visit from an external

agency in order to verify address of home and business provided by applicant for

applicant and co applicant.

6. CAM Preparation- This step is initiated if FI report is positive. CAM stands for credit

appraisal memo. This is prepared by credit department.

Page | 40

7. Personal Discussion: This is a visit by BCM or CRM to the business premises of

applicant. They check the stock, inventory, business condition, etc. of applicant. Any

doubts are also discussed with the customer. Also a reference check is done from the

locality by person doing PD visit.

8. Approval Raise: This is the process of compiling all the information and facts of case

together and preparing a mail which is then sent to the higher credit authority who has

to approve the case. This is done on the LOS for the personal loans and is termed as

queue clearance.

9. Disbursement: This is done after all the documents are verified and credit department

approves the case for processing it further. Disbursement is the process of loan amount

being dispatched to the customer by the operations department.

Page | 41

Process of Credit Appraisal Explained

We get case files with documents of KYC and application form of applicant and co-applicant.

First step is checking if the form of applicant and co-applicant are duly filled or not. Each

section in the form should be filled, options ticked as applicable, also the photograph in the last

page should be latest and there should be a cross sign on the photograph. The sign on the

photograph and form should be as per the PAN card. In case it is not matching with the

signature on the PAN card, banker’s signature verification is required. Then documents

required as per the nature of case are checked. In case of any document missing, we return the

file back to sales department for completion of file. This completes the checking of minimum

credit parameters.

After checking MCP, we further do a tele-verification (TVR) check for the applicant. This

involves 3 calls being made, first to the applicant himself for mobile number verification and

other 2 calls to references provided by the applicant. The references are asked basic questions

about applicant just to make sure that references provided are genuine and not fake. This step

concludes the TVR check.

After this, if credit is comfortable with the previous checks, the file is logged in on the system

software. This requires the details of applicant including his residence address and work details

and address to be typed in on the software. References provided are also fed to the system

software. This process is called quick data entry. It ends with the generation of a LOS Id for

the application or case. After this comes detail data entry, which starts with feeding details of

sourcing of the case to the system software. Then various details of applicant are fed the system

software, his demographic details which include his income, address & bank details. After this,

co-applicants are added and their personal and demographic details are added to the system

software within the same LOS Id. in LAP, IMPL or any other secured loan’s case, details of

asset valuation and collateral are also fed to the system. This concludes the process of file login.

Mainly 3 types of reports are generated for all the cases:

SAS or Posidex Report

CIBIL Report

FI (foreign Investigation) Report

SAS report is generated after a day of login creation. SAS report, also known as Posidex report,

is an internal report of HDFC group. It checks if applicant has any loan history with HDFC

bank or HDBFS. Irrespective of loan history being there or not, it generates a report. If there’s

a loan history, then loan repayment details and loan id of case is in the report, otherwise it does

not generate any data. CIBIL report is generated from Credit Information Bureau (India)

Limited for applicant and each of the co-applicant. It normally takes 5 minutes for this report

to be generated. It contains previous and current loan repayment information and a CIBIL score

which summarizes their loan track. This also includes any credit cards person has & any

products bought by them on EMIs. This report also shows any loan inquiry made by the person

in their lifetime. At HDBFS, we give less importance to CIBIL score and more importance of

Page | 42

loan track of customer. If there are any DPD (days past due) in the repayment record. There

are 5 types of DPDs:

1. Standard (STD): Payments being made within 90 days

2. Special Mention Account (SMA): Special account created for reporting Standard

Accounts moving toward Sub-Standard

3. Sub-Standard (SUB): Payments being made after 90 days

4. Doubtful (DBT): The account has remained Sub-Standard for 12 months

5. Doubtful (DBT): The account has remained Sub-Standard for 12 months

We normally ignore DPDs in credit card. We also check for any inquiries made in the last 6

months by the applicant. If there are any enquiries, the applicant is asked the reason for not

getting/taking loan from those companies.

If we are satisfied with the CIBIL report, we initiate FI (Foreign Investigation) for the business

and residence address of applicant and residence address of all co-applicants. FI is done prior

to the PD to check the condition of house and business of an applicant.

CAM or credit appraisal memo is a crucial step in the process of credit appraisal. This computes

all the things which are needed for the analysis done further which is crucial for decision

making upon a case. A CAM computes following aspects of a case:

It computes average bank balance of customer which helps us to analyse if applicant is

meeting our average bank balance norms

It computes the total number of transactions and total amount of transactions made by

applicant in last 6 months allowing us to analyse if applicant is meeting our standards

It computes monthly income of the applicant

It computes monthly obligations of the applicant

It enables us to do financial analysis of the applicant

It helps us compute cash flow of the applicant

It help us check if the ITR filed are meeting our norms

It helps us to calculate EMI for applicant for the current loan amount applied

Page | 43

Financial analysis is done to understand and compute financial stability of the applicant and

his business. It includes computing of following ratios:

Current Ratio

Quick Ratio

Inventory Turnover

Days Receivable (Debtors)

Days Payable (Creditors)

Fixed Asset Turnover

Total Asset Turnover

Debt Ratio

Debt-to-Equity

Debt-to-Equity (Including Proposed Loan)

Interest Coverage Ratio

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Return on Total Assets (ROA)

Return on Equity (ROE)

Personal discussion or PD is done in between of CAM preparation or after that. It involves a

visit to the customers’ business address from BCM to check his financial stability and check if

his business is as stable as it appears on the papers. Any and all doubts are cleared by directly

asking applicant. This also helps in identifying if the applicant is a fraud.

This is the last step in credit department before the loan is moved to operations for

disbursement. This step involves taking necessary approvals and waivers (if any) and then

finally processing the case for queue clearance on system software.

Disbursement is the final step in the process of loan. This involves loan amount being

dispatched from operations department to applicant who’s now our customer.

Page | 44

Organisation Structure

Figure 3 Organization Structure

CFO MD Head of HR &

Operations

Business Head

Regional Head

Zonal Head

Cluster Head

Branch

Manager

Branch Credit

Manager

Collection

Officer

Branch Operation

Manager

Branch Sales

Manager

Credit Relationship

Manager

Credit

Relationship

Associate

Sales Manager

Sales Officer

Gold Loan

Executive

Area Credit

Manager

Regional Credit

Manager

Portfolio

Manager

Policy Head

Area Operations

Manager

Page | 45

Designations mentioned above are held by:

1. MD: Ramesh Ganesan

2. Chief Financial Officer: Haren D Parekh

3. Head of HR & Operations: Ashish Ghatnekar

4. Business Head: Sarabjeet Singh

5. Policy Head: Sharad Parekh

6. Regional Head: Mayank Sharma

7. Portfolio Manager: Manoj Rammurthy

8. Zonal Head: Pankaj Bhatia

9. Regional Credit Manager: Karamjeet Singh

10. Area Operations Manager: Krishna P. Puniya

11. Cluster Head: Siddhart Kanchan

12. Area Credit Manager: Amar Vikram Singh

13. Branch Manager: Yogesh Tripathi

14. Branch Credit Manager: Prabha Tiwari

15. Branch Sales Manager: Prasoon Gupta

16. Branch Operations Manager: Mahendra Singh

17. Gold Loan Executive: Parul Singh

18. Collection Officer: Deepankar Shukla

19. Credit Relationship Manager: Prapti Sharma

Page | 46

HR Practices

The company aims to align HR practices with business goals, motivate people for higher

performance and build a competitive working environment. Productive high performing

employees are vital to the company’s success. The broad values appreciate the contribution

and commitment of the employees towards performance of the company during the year. To

create the leadership bench and for sustainable competitive advantage, the company

inducted/promoted employees during the year. In pursuance of the company’s commitment to

develop and retain the best available talent, the company had organized various training

programs for updating skills and knowledge of its employees in different operational areas.

Apart from fixed salaries and perquisites, the company also has in place performance linked

incentives which reward outstanding performers who meet certain performance targets. It has

been sponsoring its employees for training programs, seminars, conferences organized by

reputed professional institution.

Working hours for all branches 9:30 am to 5:30 pm

Lunch Break 30 mins can be availed in the day

Weekly offs 1st and 2nd Saturdays and all Sundays off

Compensatory Offs Max 2 neither be accumulated nor encashed

Attendance muster- An attendance muster must be maintained in all branches

Page | 47

Competition Analysis

1. Bajaj Finserv:

About the Company: Bajaj Finserv Ltd. is a holding company for the various financial

services businesses. The Company's operating segments include insurance, Windmill,

Retail financing and Investments and others. It serves customers in the financial

services space by providing solutions for asset acquisition through financing, asset

protection through general insurance, family protection and income protection in the

form of life and health insurance, and retirement and savings solutions. The areas it

serves include lending and wealth management, and protection and savings. Its

subsidiaries include Bajaj Allianz Life Insurance Company Ltd., Bajaj Allianz General

Insurance Company Ltd., Bajaj Finance Ltd. (BFL), Bajaj Housing Finance Ltd., Bajaj

Financial Securities Ltd. and Bajaj Financial Holdings Ltd. Its BFL's business is

organized in five categories, such as consumer lending, lending to small and medium

enterprises, commercial lending, rural lending, and fixed deposits and third-party

products.

The financial services and wind energy businesses were transferred to Bajaj Finserv

Limited (BFS) as part of the recently concluded demerger from Bajaj Auto Limited,

approved by the High Court of Judicature at Bombay by its order dated 18 December

2007. The demerger was effective on 31 March 2007.

BFS is engaged in life and general insurance businesses through its joint ventures with

Allianz SE namely Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz

General Insurance Company Limited.

Bajaj Holdings has been registered as a Non–Banking Financial Company (NBFC)

under the Registration No. N–13.01952 dated 29 October 2009 with Reserve Bank of

India (RBI). The company is classified as a Systemically Important Non–deposit taking

NBFC as per RBI Regulations.

Key Competition Features:

Competitor in personal loan segment

Have more lenient credit process with less checks as compared to us

Prerequisite of CIBIL score 750

2. Magma:

About the Company: Magma Fincorp Limited (MFL) is a Kolkata based non-banking

financial company registered with the Reserve Bank of India as an Asset Finance

Company. The company operates more than 235 branches in 21 states and a union

territory and has a strong presence in rural and semi-rural India.

Magma Fincorp Limited (formally known as Magma Leasing Limited) was

incorporated in 1988 by Mr. Mayank Poddar and commenced operation in 1989. In

1992, the company merged with Arm Group Enterprises to strengthen its presence and

later in 1996 entered retail financing business for vehicles and construction equipment.

In the year 2000, with the Acquisition of Consortium Finance Ltd, Magma expanded

its network across Northern India. In 2007, Schrachi Infrastructure Finance merged

Page | 48

with Magma increasing the company's footprint in southern and western India. In the

same year, the company formed a joint venture with International Tractors Limited

(ITL) to enter tractor finance business. In 2008, Magma re-branded and renamed itself

as Magma Fincorp Limited. In 2009, Magma inked a joint venture with German insurer

HDI Gerling to enter general insurance business. The company has received its R1

license in April 2011. In the same year, Magma picked up 7% stake in the newly formed

Experian Credit Information Company of India Pvt Ltd, the Indian arm of the global

credit information services company. In 2011, Kohlberg Kravis Roberts – a large global

PE firm and International Finance Corporation, an arm of the World Bank Group

invested about $100 million in Magma.


Competitor in LAP segment

Have an added advantage of offering home loans over us

Get an added benefit for offering wider range of products

3. Deewan Housing Finance Group(DHFL) :

About the Company: DHFL was established by Late Shri Rajesh Kumar Wadhawan

(16th April, 1949-30th September, 2000), a visionary Indian businessman. Based in

India’s commercial capital Mumbai, DHFL strives continually to reach out to its

customers through its extensive network of 349 offices spread across the length and

breadth of the country. DHFL also has tie-ups with leading private sector banks namely

United Bank of India, Dhanlaxmi Bank and YES bank to provide home loans to

customers through a home loan syndication agreement. DHFL has also set up

representative offices in London and Dubai to serve the ever increasing NRI population

in these regions. DHFL has encouraged hundreds of thousands of people to make that

upward journey by simplifying financial access for them. By providing these

individuals with the privilege of home loan products, insurance services and unique

fixed deposit schemes tailor made to suit their needs.


Competitor in LAP segment

Also offer home loans

Benefit from wider range they offer

They offer advantage of low interest rate over us

4. Fullerton India: ROI More

About the Company: Since its launch in January 2007, Fullerton India has

successfully and strongly established itself, spread across the country's broad financial

landscape, with a network of over 478 branches and serving over a million customers.

Their primary services constitute financing of SME for working capital and growth,

loans for commercial vehicles and two-wheelers, home improvement loans, loans

against property, personal loans, working capital loans for urban self-employed and

Page | 49

loans for rural livelihood advancement, rural housing finance and financing of various

rural micro enterprises.

Fullerton India Credit Company Limited is a wholly owned subsidiary of Fullerton

Financial Holdings Pte. Ltd., which in turn is a wholly owned subsidiary of Temasek

Holdings Pte. Ltd., Singapore. Fullerton Financial Holdings invests in financial

institutions in emerging markets with its prime focus on Business and Consumer

banking.


Competitor in LAP and PL segment

We often get balance transfer cases from them

We have a competitive edge over them since they offer loans at higher rate than

us

Page | 50

Industry Analysis

India has a diversified financial sector undergoing rapid expansion, both in terms of strong

growth of existing financial services firms and new entities entering the market. The sector

comprises commercial banks, insurance companies, non-banking financial companies, co-

operatives, pension funds, mutual funds and other smaller financial entities. The banking

regulator has allowed new entities such as payments banks to be created recently thereby

adding to the types of entities operating in the sector. However, the financial sector in India is

predominantly a banking sector with commercial banks accounting for more than 64 per cent

of the total assets held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance

this industry. The Government and Reserve Bank of India (RBI) have taken various measures

to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These

measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises,

issuing guideline to banks regarding collateral requirements and setting up a Micro Units

Development and Refinance Agency (MUDRA). With a combined push by both government

and private sector, India is undoubtedly one of the world's most vibrant capital markets.

Market Size

Total outstanding credit by scheduled commercial banks of India stood at INR 72,606.11

billion (US$ 1.08 trillion). The Association of Mutual Funds in India (AMFI) data show that

assets of the mutual fund industry have reached a size of Rs14.21 trillion (US $ 210 billion).

During April 2015 to March 2016 period, the life insurance industry recorded a new premium

income of INR 1.38 trillion (US $ 20.54 billion), indicating a growth rate of 22.5 per cent over

the previous year. The general insurance industry recorded a 12 per cent growth year-on-year

in Gross Direct Premium underwritten in April 2016 at Rs105.25 billion (US $ 1.55 billion).

India’s life insurance sector is the biggest in the world with about 360 million policies, which

are expected to increase at a Compounded Annual Growth Rate (CAGR) of 12-15 per cent over

the next five years. The insurance industry is planning to hike penetration levels to five per

cent by 2020, and could top the US $ 1 trillion mark in the next seven years. The total market

size of India's insurance sector is projected to touch US $ 350-400 billion by 2020.

India is the fifteenth largest insurance market in the world in terms of premium volume, and

has the potential to grow exponentially in the coming years. Life insurance penetration in India

is just 3.9 per cent of GDP, more than doubled from 2000. A fast growing economy, rising

income levels and improving life expectancy rates are some of the many favourable factors that

are likely to boost growth in the sector in the coming years.

Page | 51

Investment corpus in India’s pension sector is expected to cross US $ 1 trillion by 2025,

following the passage of the Pension Fund Regulatory and Development Authority (PFRDA)

Act 2013.

Investments/Developments

International Finance Corporation (IFC), the investment arm of The World Bank, plans to

invest around INR 135 crore (US $ 20.3 million) via non-convertible debentures (NCD) in

GrameenKoota, a Bangalore-based microfinance company.

Synchrony Financial, a US-based consumer financial services company, plans to expand its

operations in India by investing US $ 12 million to set up centres of excellence, which can

develop finance, analytics and information technology solutions.

Thomas Cook India, an integrated travel and travel related financial services company, has

entered into a partnership with Western Union Business Solutions, with a view to assist Small

and Medium-sized Enterprises (SMEs) in India with their trade payments across borders.

Kotak Mahindra Bank Limited has bought 19.9 per cent stake in Airtel M Commerce Services

Limited (AMSL) for INR 98.38 crore (US $ 14.43 million) to set up a payments bank. AMSL

provides semi-closed prepaid instrument and offers services under the ‘Airtel Money’ brand

name.

Tata Capital, the financial services arm of Tata Group, plans to raise INR 2,000 crore (US $

293.4 million) for its real estate fund, from State General Reserve Fund (SGRF), the sovereign

wealth fund of Oman.

Ujjivan Financial Services Ltd, a microfinance services company, has raised INR 312.4 crore

(US $ 45.84 million) in a private placement from 33 domestic investors including mutual funds,

insurance firms, family offices and High Net Worth Individuals (HNIs), ahead of its planned

Initial Public Offering (IPO).

Insurance firm AIA Group Ltd has decided to increase its stake in Tata AIA Life Insurance Co

Ltd, a joint venture owned by Tata Sons Ltd and AIA Group from 26 per cent to 49 per cent.

Canada-based Sun Life Financial Inc. plans to increase its stake from 26 per cent to 49 per cent

in Birla Sun Life Insurance Co Ltd, a joint venture with Aditya Birla Nuvo Ltd, through buying

of shares worth INR 1,664 crore (US $ 244.14 million).

Nippon Life Insurance, Japan’s second largest life insurance company, has signed definitive

agreements to invest INR 2,265 crore (US $ 332.32 million) in order to increase its stake in

Reliance Life Insurance from 26 per cent to 49 per cent.

Page | 52

The Reserve Bank of India (RBI) has granted in-principle licenses to 10 applicants to open

small finance banks, which will help expanding access to financial services in rural and semi-

urban areas, thereby giving fillip to Prime Minister's financial inclusion initiative.

The Reserve Bank of India (RBI) has also given in-principle approval to 11 entities to open

payment banks which are expected to result in widening the reach of banking services and

thereby improve the extent of financial inclusion as envisaged by the government. The setting

up of 11 new payments banks can potentially free up INR 1,400,000 crore (US $ 205.4 billion)

per annum to fund the infrastructure sector, as per a study by the State Bank of India.

India’s largest microfinance company Bandhan has set up Bandhan Bank Ltd, banking and

financial services company, post the receipt of license from RBI.

Government Initiatives

Several measures have been outlined in the Union Budget 2016-17 that aim at reviving and

accelerating investment which, inter alia, include fiscal consolidation with emphasis on

expenditure reforms and continuation of fiscal reforms with rationalization of tax structure.

The Union Budget 2016-17 has allowed foreign investment in the insurance and pension

sectors in the automatic route up to 49 per cent subject to the extant guidelines on Indian

management and control to be verified by the regulators.

Service tax on service of life insurance business provided by way of annuity under the National

Pension System regulated by Pension Fund Regulatory and Development Authority (PFRDA)

being exempted, with effect from April 01, 2016.

Capital gains tax exemptions have been extended to merger of different plans within a mutual

fund scheme, which is expected to benefit investors in case of merger of mutual fund schemes.

The Government of India plans to revise and improve few of its flagship schemes such as the

Atal Pension Yojana (APY), aimed at providing pension coverage, and Pradhan Mantri Mudra

Yojana, which funds small entrepreneurs, in Union Budget 2016-17 in order to increase the

number of beneficiaries covered by these schemes and overcome shortcomings in

implementation.

The Government has also announced several schemes to improve the extent of financial

inclusion. The Prime Minister of India has launched the Micro Unit Development and

Refinance Agency (MUDRA) to fund and promote Microfinance Institutions (MFIs), which

would in turn provide loans to small and vulnerable sections of the business community.

Financial Services Secretary Mr Hasmukh Adhia has announced that the ministry will launch

a campaign for loans under Pradhan Mantri Mudra Yojana (PMMY) in order to double loan

disbursement to the small business sector to over INR 100,000 crore (US $ 14.67 billion).

Page | 53

Government of India’s ‘Jan Dhan’ initiative for financial inclusion is gaining momentum.

Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 217 million accounts# have been opened

and 174.6 million RuPay debit cards have been issued. Government of India aims to extend

insurance, pension and credit facilities to those excluded from these benefits under the Pradhan

Mantri Jan Dhan Yojana (PMJDY). The Union Cabinet Minister has also approved the Pradhan

Mantri Suraksha Bima Yojana which will provide affordable personal accident and life cover

to a vast population.

The Union Cabinet has approved 100 per cent Foreign Direct Investment (FDI) under the

automatic route for non-bank entities that operate White Label Automated Teller Machine

(WLA), subject to certain conditions.

Minister of Finance Mr Arun Jaitley has formally declared the merger of Forward Markets

Commission (FMC) with Securities and Exchange Board of India (SEBI), which help

convergence of regulations in the commodities and equity derivatives markets.

The Insurance Regulatory and Development Authority of India (IRDA), as part of its

endeavour to increase insurance sector growth, has allowed a new distribution avenue called

the ‘point of sale’ person, who will be allowed to sell simple standardised insurance products

in the non-life and health insurance segments, which are largely pre-underwritten.

The Department of Industrial Policy and Promotion (DIPP) has allowed 100 per cent Foreign

Direct Investment (FDI) in asset reconstruction companies (ARC) under automatic route,

which will help to tackle the issue of declining asset quality of banks.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and

insurance sectors. The country is projected to become the fifth largest banking sector globally

by 2020. The report also expects bank credit to grow at a Compound Annual Growth Rate

(CAGR) of 17 per cent in the medium term leading to better credit penetration. Life Insurance

Council, the industry body of life insurers in the country also projects a CAGR of 12–15 per

cent over the next few years for the financial services segment.

Also, the relaxation of foreign investment rules has received a positive response from the

insurance sector, with many companies announcing plans to increase their stakes in joint

ventures with Indian companies. Over the coming quarters there could be a series of joint

venture deals between global insurance giants and local players. The relaxation in the foreign

direct investment (FDI) limit to 49 per cent can result in additional investments up to INR

60,000 crore (US $ 8.81 billion).

Exchange Rate Used: INR 1 = US $ 0.0149 as on May 16, 2016

Page | 54

SWOT Analysis

SWOT analysis is an acronym for strengths, weaknesses, opportunities, and threats—and is a

structured planning method that evaluates those four elements of a project or business venture.

A SWOT analysis can be carried out for a company, product, place, industry, or person. It

involves specifying the objective of the business venture or project and identifying the internal

and external factors that are favourable and unfavourable to achieve that objective.

Table 12 SWOT

SWOT Analysis

Strength

Brand image of parent company HDFC.

A very well managed and structured workforce.

Highly competitive rates.

A very big network registering its presence Pan

India.

Better sourcing as compared to competitors.

Weakness

Declining approval ratio in IMPL and EBL.

Declining conversion ratio in PL.

Internal Politics among staff.

Opportunity

There are many small businessmen in India as

compared to before.

There is a growth in youth which wants to be

entrepreneurs.

Urban businessmen are looking for financial aids

to increase and grow their business.

Threats

Strict economic measures by government and

RBI.

Ever changing economic conditions.

Discontent in employees due to company policies.

Page | 55

Michael Porter’s Five Forces Model- Financial Services

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies

in a business situation. This is useful, because it helps you understand both the strength of your

current competitive position, and the strength of a position you're considering moving into.

Figure 4 Michael Porter's Five Force Model

Threat of New Entrants

• Stringent regulatory norms prevent newentrants

• Customers prefer to invest their moneywith a reputed financial services companyoffering a wide range of services

Substitute Products

• Low threat of substitutes

• Less number of substitutes available forfinancial products

Competitive Rivalry

• Competitive rivalry between big players isintense in the industry

• Financial services companies oftencompete on the basis of offering lowerfinancing rates, higher deposit rates andinvestment services

Bargaining Power of Customers

• Medium bargaining power of customers.Although customers do not have muchbargaining power, they can easily switch toanother company based on the terms andquality of services provided

Bargaining Power of Suppliers

• Low bargaining power of suppliers as the industry is highly regulated by RBI

Page | 56

Data Collection and Analysis

Page | 57

Sampling Frame

The data was collected from records and archives of HDB Financial Services Fazalganj branch

in Kanpur. The size of sample is 200 customers. Out of which, 100 customers are defaulters

and other 100 customers are non-defaulters. Missing information was collected by directly

calling the customer on their provided number and asking them.

Data Collection Method

Secondary Data: This data was collected from past records of emails of HDB Financial

Services thus it qualifies as secondary data. Approval mails were required to be sent for

approvals of cases to be processed further. These mails contain all the 12 data parameters

needed for this research. Thus most of this data was extracted from these emails.

Primary Data: Whenever any data parameter was missing in the list, I called the customer

personally and asked him directly. Thus part of this data was collected in the form of primary

data.

Processing of Data for Analysis

Data collected initially was in the form of numeric value and other parameters. This data was

converted to binary format for ease of analysis.

Sources of Data Collection

Data were collected from emails which were sent for approval. Some of the missing data was

also collected directly from the customers.

Page | 58

Data Analysis and Interpretation

Page | 59

Choice of Data Analysis Techniques

My choice of technique to be utilized is regression analysis. Before I tell you why I chose

regression for this analysis, let me tell you what actually regression is. Regression is a statistical

measure that attempts to determine the strength of the relationship between one dependent

variable (usually denoted by Y) and a series of other changing variables (known as independent

variables).

The two basic types of regression are linear regression and multiple regression. Linear

regression uses one independent variable to explain and/or predict the outcome of Y, while

multiple regression uses two or more independent variables to predict the outcome.

Known also as curve fitting or line fitting because a regression analysis equation can be used

in fitting a curve or line to data points, in a manner such that the differences in the distances of

data points from the curve or line are minimized. Relationships depicted in a regression analysis

are, however, associative only, and any cause-effect (causal) inference is purely subjective.

Page | 60

Outcomes and Interpretations of Outcomes

Table 13 Regression Output

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.587383

R Square 0.345019

Adjusted R Square 0.302988

Standard Error 0.418484

Observations 200

ANOVA

df SS MS F Significance F

Regression 12 17.250945 1.43758 8.2087 2.48E-12

Residual 187 32.749055 0.17513

Total 199 50

CoefficientsStandard Errort Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%

Intercept 0.942166 0.1933293 4.87337 2.3E-06 0.560779 1.323552 0.5607792 1.3235524

Age -0.003016 0.0031924 -0.9446 0.34607 -0.009313 0.003282 -0.0093134 0.0032822

Sex -0.202575 0.0825994 -2.4525 0.0151 -0.365522 -0.03963 -0.3655217 -0.0396288

No of Dependents 0.008973 0.0246518 0.364 0.71627 -0.039658 0.057605 -0.0396581 0.0576048

Years at Current Residance0.002311 0.0040006 0.5777 0.56416 -0.005581 0.010203 -0.005581 0.0102034

Residance owned -0.032849 0.0625052 -0.5255 0.59983 -0.156155 0.090457 -0.1561554 0.0904565

Scale of busines 0.034185 0.0540313 0.63268 0.52771 -0.072405 0.140774 -0.0724046 0.140774

Business Premises Owned-0.019114 0.0604123 -0.3164 0.75206 -0.138291 0.100063 -0.1382909 0.1000633

Years in Current Business-0.00648 0.006641 -0.9758 0.33041 -0.019581 0.006621 -0.0195814 0.0066205

Annual Income (Lacs)-0.016372 0.0181985 -0.8996 0.36948 -0.052273 0.019529 -0.0522725 0.0195288

Loan History 5.70643 0.6818258 8.36934 1.3E-14 4.361371 7.051489 4.3613708 7.0514888

Cibil Score -0.007781 0.0009122 -8.5306 4.9E-15 -0.009581 -0.00598 -0.0095807 -0.0059818

Abb Norms Met -0.121129 0.0611323 -1.9814 0.04901 -0.241727 -0.00053 -0.241727 -0.000532

Page | 61

Interpretation

Value of R Squared: 0.3450 or 34.50%

This value tells us that how closely the data fits the regression line. It can be understood to be

the ratio of explained variation and total variation. This implies that 34.50% of variation in

delinquency is due to the 12 factors taken for regression. This means only 34.50% of values fit

the model (lie on regression line). This is expected since we are trying to find out the factors

which determine credit risk so not all the factors taken for study will have an effect on credit

risk.

Value of F (Anova): 8.20

This value tells us how much effect of residual variables is there. Our value tells us that there

is a high effect of residual values on this regression. This means that there are many other

factors that influence the delinquency of a customer other than these factors.

Hypothesis Testing

We use P value to support or reject our null hypothesis. P value represents calculated

probability. P value is used to test null hypothesis. If P value is less than our significance level

(alpha), null hypothesis is rejected.

So before we can analyse our P values obtained from regression, we must first formulate a null

hypothesis and an alternate hypothesis. Also we take our alpha value to be 0.05 or 5%.

H0: The factors undertaken do not have affect credit risk in any way.

where factor 1 is age affects credit risk

factor 2 is sex affects credit risk

factor 3 is number of dependents affects credit risk

factor 4 is years at current residence affects credit risk

factor 5 is owning residence affects credit risk

factor 6 is scale of business affects credit risk

factor 7 is owning business premises affects credit risk

Page | 62

factor 8 is years in current business affects credit risk

factor 9 is annual income affects credit risk

factor 10 is loan history affects credit risk

factor 11 is CIBIL score affects credit risk

factor 12 is that meeting average bank balance norms affects credit risk

H1: Factors undertaken affect credit risk.

Age: The P value comes out to be 0.34 which lies in area of insignificance. Thus we accept the

null hypothesis for age thus we conclude that age does not affect credit risk.

Sex: In this case, the P value comes out to be 0.015 which lies in significant area. Thus we

reject the null hypothesis and conclude that sex affects credit risk.

Number of dependents: In this case, P value comes out to be 0.71 which lies in insignificant

area. Thus we accept the null hypothesis and conclude that number of dependents does not

affects the credit risk.

Residence Owned: In this case, P value comes out to be 0.56 which lies in insignificant area.

Thus we accept the null hypothesis and conclude that years at current residence does not affect

credit risk.

Scale of Business: In this case, P value comes out to be 0.59 which lies in insignificant area.

Thus we accept the null hypothesis and conclude that owning the residence does not affect the

credit risk.

Business Premises Owned: In this case, P value comes out to be 0.52 which lies in insignificant

area. Thus we accept the null hypothesis and conclude that scale of business does not affect

credit risk.

Years in Current Business: In this case, P value comes out to be 0.75 which lies in insignificant

area. Thus we accept the null hypothesis and conclude that owning business premises does not

affect credit risk.

In this case, P value comes out to be 0.33 which lies in insignificant area. Thus we accept the

null hypothesis and conclude that years in current business does not affect credit risk.

Page | 63

Annual Income: In this case, P value comes out to be 0.36 which lies in insignificant area. Thus

we accept the null hypothesis and conclude that annual income does not affect credit risk.

Loan History: In this case, P value comes out to be 1.32 * 10-17 which lies in significant area.

Thus we reject the null hypothesis and conclude that having a loan history affects credit risk.

CIBIL Score: In this case, P value comes out to be 4.88 * 10-18 which lies in significant area.

Thus we reject the null hypothesis and conclude that CIBIL score affects credit risk.

Average Bank Balance Norms: In this case, P value comes out to be 0.049 which lies in

significant area. Thus we reject the null hypothesis and conclude that average bank balance

value affects credit risk.

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Conclusion

We can draw following conclusions from the above result:

1. Sex of applicant affects the credit risk. Coefficient of this factor comes out to be

-0.202 which implies a negative relationship. This means giving loan to females is less

risky while giving loans to male applicants is more risky.

2. Loan history affects the credit risk. Coefficient of this factor comes out to be 5.70 which

implies a strong positive relationship. This means that having a previous experience of

repaying a loan helps reducing the credit risk. More experience an applicant has of

repaying loans, less is the risk of credit default and applicant with no loan history should

be avoided.

3. CIBIL score affects credit risk. Coefficient of this factor comes out to be -0.0077 which

implies a negative relationship. This means giving loans to applicants with lower CIBIL

score increases the credit risk and giving loan to applicants with high CIBIL score will

reduce the credit risk.

4. Meeting average bank balance norms affects credit risk. Coefficient of this factor comes

out to be -0.12 which implies a negative relationship. This means that giving loan to

applicants who meet the average bank balance norms of organization would reduce

credit risk and on the other hand, giving loan to applicant who do not meet this norm

increases credit risk.

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Recommendations

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Brief Description of Recommendations

1. Introduction of a Covenant

2. Reducing of Concentration Risk by Diversification

3. Careful with First Time Borrowers

4. CIBIL Bottom Line

5. ABB norms should be mandated

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Details of Recommendations & Scheme of Implementation

1. Introduction of a Covenant: Company may write stipulation on the borrower, called

covenants, into loan agreements:

Periodically report its financial condition

Refrain from paying dividends, repurchasing shares, borrowing, further, or

other specific, voluntary actions that negatively affect the company’s financial

position

Repay the loan in the full, at the company’s request, in certain events such as

changes in the borrower’s debt-to-equity ratio or interest coverage ratio.

Feasibility & Implementation scheme: This recommendation is totally feasible and

according to me, its result should be good since we would be able to access our

customer’s financial condition periodically.

2. Reducing of Concentration Risk by Diversification: Company might face a high

degree of unsystematic credit risk, called concentration risk generated when company

gives loans to same kind of borrowers with same profile. Company can reduce this risk

by diversifying the borrower pool.

Feasibility & Implementation scheme: This recommendation actually might prove to

be highly useful since from what I observed, the branch in which I was working at

(Fazalganj branch, Kanpur) gets several customers who have very much similar profile

to each other and these are the customers who mostly contribute to the branch’s

delinquency. This recommendation is feasible since credit department of branch has a

mandate to do personal discussions with the applicants so they know what kind of

profile a customer is having. If we maintain a list of profile (which would include

several parameters) of customers we are lending to, we can further test this

recommendation’s feasibility.

3. Careful with First Time Borrowers: Company should refrain from giving loan to first

time borrowers or should have a higher interest rate for such borrowers since company

is taking higher risk when giving loan to an applicant with no loan history since we

cannot track how applicant’s previous loan tracks are.

Feasibility & Implementation scheme: Even though company has a few restrictions

in place already for first time borrowers, I still think that it is not enough. We offer the

same rate of interest to a first time borrower as to an existing customer or an applicant

who has a loan track. This does not yield us any extra profits even though we are taking

higher risk. With this recommendation in place, I understand how it might have an

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effect on our sales due to tough competition in the market but this still would be a little

extra for the extra risk we are taking.

4. CIBIL Bottom Line: Instead of paying little attention to CIBIL scores of applicants,

company should instead set a bottom limit on CIBIL score like some of its competitors.

This would certainly help in reducing delinquency and overall credit risk.

Feasibility & Implementation scheme: This recommendation is very much feasible.

In fact many of our competitors like Bajaj Finserv have this already in place.

Introducing this would certainly help in reducing our delinquency and overall credit

risk.

5. ABB norms should be mandated: More emphasis should be laid upon meeting the

average bank balance norms of the company and these should be not neglected unless

applicant’s profile is very good, in which case company can make an exception on

discretion and comfort of credit authority/department.

Feasibility & Implementation scheme: This is a norm which is a mandatory condition

for first time borrowers. I would recommend that this should mandated for all kind of

borrowers. Be it a first timer or not. Also I would recommend that ABB should be 1.5

times of EMI after reducing the monthly obligations and adding income.

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Concluding Remarks

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Summary

This project was undertaken to successfully determine the factors which affect credit risk in

HDB Financial Services. For this purpose, I have taken a sample of 200 customers out of which

100 are delinquent and other 100 are not delinquent. Then I ran a regression on them by taking

delinquency of customers as a dependent variable and other 12 factors, which I thought to be

contributing in increase in delinquency and credit risk, as independent variables. Out of these

12 factors, 4 factors came out to be having an effect on increasing delinquency and hence in

turn increasing credit risk of the company. I would say this research project has been highly

successful considering that I had only a very small sample from just one of the many branches

of HDBFS.

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Gains from the Project

1. This project provided me an insight into the functioning of a financial institution.

2. This project enabled me to understand the process of credit appraisal at HDBFS better.

3. This project enabled me to gain an insight in functioning of an NBFC and that too a

highly reputed one.

4. This project enabled me putting the concepts of financial analysis, regression, excel &

hypothesis, which I had just learned theoretically till now, to use. I learned their

practical applications.

5. I learned how to analyse the result of a regression test and how to justify a hypothesis

on its basis.

6. I learned about the various companies in the loan segment and gained an insight in the

market of loan agencies.

7. This project enabled me to learn how to write a research paper.

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Limitations of the Project

1. This project is only confined to Kanpur Fazalganj branch of HDBFS.

2. Due to shortage of data, sample is only confined to 200 customers (100 delinquent and

100 non delinquent).

3. Some of the customers might have provided false or biased data.

4. Assumptions and projections are based on current market conditions and have not taken

into account the price volatility.

5. The staff although are very helpful but are not able to give much of their time due to

their own work constraints.

6. This project deals with the data of customers who have been concentrated in a very

small area. This might have led to a few errors.

7. Very limited time of 8 weeks was available for project as well as learning the process

of credit appraisal. Given more time, I could’ve done much better.

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Scope for Further Work

1. This project was confined to a very limited customer base, it can be further taken to

national or regional level.

2. This project report is based on secondary data collection

3. I have no idea of how much information we have on clients thus this study might have

ended up with more factors if I had the correct knowledge.

4. Almost no face to face interaction with clients whom I have considered for this project.

Some interaction with the clients for this project would have helped me uncover a few

more factors which could’ve been taken into consideration.

5. This project has been done for the purpose of determining the factors affecting credit

risk. Many factors though have been missed out on and hence the high F value of 8 was

present in regression value. Given more time, I could’ve worked better and on a larger

scale.

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Conclusion

I was fortunate enough to get the opportunity to work in a leading NBFC company which is a

giant in financial services sector like HDB Financial Services I learned a lot about the financial

services industry. In this whole Summer Internship, learnt to use all theoretical knowledge in

practical manner. Way to put practical insights into the life and work in corporate world. Learnt

company’s and market’s insights as well as about various policies which are being using by

HDB Financial Services.

The two months which I spent in doing the study for the company taught me various aspects

of finance and credit. I learned about the behaviour of the applicants and customers as for the

company. I learned how to identify if an applicant is credible enough or not. How to take

decisions. I learnt about the factors one should consider before taking big decisions. I learned

how much pressure is there is when taking a huge decision of lending a huge sum to a customer.

I learned what office environment is. I learned how to cooperate with colleagues and co-

workers. I learned the art of credit.

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References

1. Financial Accounting, Narayan Swamy

2. Fundamentals Of Financial Accounting, Bringham And Houstan

3. Principles of Corporate Finance, Briley & Myers

4. Risk Management and Financial Insti tutions, Jhon C. Hull

5. Credit Risk Management, Ken Brown & Peter Moles

6. Credit Risk: Pricing, Measurement & Management, Darrell Duffie &

Kenneth J. Singleton

7. Why Bank Credit Policies Fluctuate: A Theory & Some Evidence by

Raghuram G. Rajan, 1994

8. The Theory of Bank Risk Taking and Competit ion Revisited by Jhon

H. Boyd, 1993

9. A more Complete Conceptual Framework for SME Finance by Allen

N. Berger and Henry F. Udell, 2004

10. Credit Risk Management in Indian Banks by Ms. Asha Singh,

2013

11. Determinants of Credit Risk in Indian State Owned Banks: An

Empirical Investigation by Abhiman Das and Saibal Ghosh , 2007

12. Credit Risk & Analysis Techniques by CRISIL Global Research

& Analytics

13. Credit Risk Management by GARP Risk Series

14. Understanding CRISIL’s Rating and Rating Scales, CRISIL

ratings

15. Determinants of Credit Risk in Indian State Owned Banks: An

Empirical Investigation by Abhiman Das & Saibal Ghosh, 2007

16. Credit Risk Management in Indian Commercial Banks - An

Empirical Investigation by Swaranjeet Arora, 2013

17. Hypothesis Testing in Multiple Regression Model by Ezequiel

Uriel , 2013

18. Commercial Banks & Consumer Instalment Credit by Jhon M.

Chapman & Associates. 1940

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19. Retail NBFCs: The Shine is Back, but will it last? by CRISIL

Insights, 2011

20. Determinants of Successful Loan Repayment Performance of

Private Borrowers in Development Bank of Ethiopia, North Region

by Kibrom Tadesse Gebremedhin

21. Effect of Credit Risk Management Techniques of The

Performance of Unsecured Bank Loans Employed Commercia l Banks

in Kenya by Prof. R.W. Gakure, John Karanja Ngugi, Peter Musangi

Ndwiga & Simon Maina Waithaka, 2012

22. www.ibef.org

23. www.crisil .com

24. www.hdbfs.com

25. www.nber.org

http://www.ibef.org/

http://www.crisil.com/

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http://www.nber.org/