Group 7Nivesh Arora (081037)

Radhika Gupta (081040)Rajat Pahwa (081042)

Evaluating Consumer Loans

Retail BankingMass Market drivenIndividual consumersServices

Saving and checking accountsBill paying servicesDebit and Credit cards

Additionally push into investment servicesWealth ManagementBrokerage accountPrivate Banking

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Retail Loans

Credit to individual for Non entrepreneurial activities

Used towards consumptionThey have to be repaid by borrower out of

his/her own resources.They do not generate income-generating

assets.There are exceptions like housing loan wherein

house may generate rental income.

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Break Up Of Retail Loans in India

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Why are interest rates so high on consumer loans ?

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Most costly and risky to make per rupee out of the loanable funds !

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Characteristics of consumer loanRegarded as profitable credits with sticky

interest ratesHousehold borrowings appear to be relatively

interest inelastic

Priced high Sufficiently large risk premium is built in loan rates

Cyclically sensitive Rise in the period of economic expansionDuring downturn the consumers become

pessimistic ; as such reduce their borrowings

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If you are lending the money what are the first things that you will check for ?

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Evaluating a consumer loanCharacter and Purpose

Key factors in analyzing any application are character and ability to pay

Credit bureau – Consumers credit history is checked

Purpose – What the customer plans to do with the money ?

Cosigner may be asked for in case of no credit history or poor track records

Income levels Size and stability of incomePrefer the take home pay as a parameter

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Deposit balancesIndirect measureDaily average deposit balances ( gives an

indication of stability)Verification of the account from the bankRight of offset – Call any loan which is in default

and seize any checking or savings deposit

Employment and Residential stabilityDuration of employmentLength of residence

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Pyramiding of debt – When an individual draws credit at one lending institution to pay the otherPiling up of debt relative to income

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Can you now tell what are the positive factors for a loan officer to lend ?

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Home ownershipRegular and stable incomeTelephone Strong deposit balancesLoan officers also look for inconsistencies in

application form while asking questions

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Loan Evaluation Process

Group 7 Evaluating Consumer Loan14 04/08/23

6 C’s of lending Subjective Lending

CharacterCapacityCashCollateralConditionsControl

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Credit scoring model to evaluate Objective approach

Banks today use such models to evaluate the loan applications

Based on discriminant model or related techniques

Several variables are picked up from the application formUsed jointly to establish a numerical score or rankingDecide on critical cut off limit; only beyond this limit

the loan is offeredCut off limit on past behavior of loans lentRepeatedly and timely revisedCredit_scoring_dummy.xls

Microsoft Office Excel 97-2003 Worksheet

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ExampleCase of Retail Loans.doc

Microsoft Office Word 97 - 2003 Document

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What is the customers past payment record ?

Is the identity of the customer established ?

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Analyzing application using 6 C’sCharacter

Credit rating - No credit history as such other than the loan from the employer and an insurance policy

Purpose - ok ; higher studies and furnishingCustomer’s income level should increase post the

courseAunt as a guarantor – raises question on why not

someone from immediate family (parents)Capacity - Ok

Customer of legal age (26 years)Identity established – DL furnished. As it is

customer and guarantor are existing customers

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Cash Cash flows.xlsBarely able to meet his expenses

Collateral Furniture which is bought Personal guarantee of auntWhy not the collateral from the immediate

familyNeed more information on parental house

and telephone connection at that place

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Microsoft Office Excel 97-2003 Worksheet

04/08/23

What according to you should be asked for in documentation?

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ConditionsEconomic slowdown, near revision in salary might

not be muchDefaults in consumer loans have risen in the past

few years. There have been job cuts in the last year or so.

ControlDocumentation required

Permanent address proofSalary SlipBank already has the deposit details and identity proofVerification of assets of guarantor

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Evaluation using credit scoring modelCredit_Scoring_model_Rajan_soni.xls

Microsoft Office Excel 97-2003 Worksheet

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DecisionDeny the loan on present terms asked by

the customerBarely able to meet expensesEMI & obligations will shoot to 30% of the

current take home incomeGuarantor past history only averageNo clarity on permanent residenceContactibility –Not reliable. Assuming Mobile

phone connection is prepaid Decision.xls Microsoft Office

Excel 97-2003 Worksheet

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Consolidate and change termsAlternative

Ask for guarantee of someone from immediate family and with better credit history

Ask for permanent residence and landline or at least post paid connection

Consolidate the outstanding loan from the employerLoan amt of 90,000 to have the part cheque

towards the employerChange the term from 12 to 24 monthsFore\IVth_semester\MOCB\Evaluation\Alterna

tive terms.xls25 Group 7 Evaluating Consumer Loan 04/08/23

Education loan evaluationGo ahead with the education loan if the

details asked for are furnished and the terms are changed:Change the term to 48 months – Assuming

interest rate at 14% per annum Debt obligation to net take home comes out

to be at 22 - 25% which is still acceptableAlternative terms.xls

Microsoft Office Excel 97-2003 Worksheet

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Winning Strategy

The bank that best addresses and

anticipates customers needs, delivers

consistently higher quality service and

connects to the customer via their

channel of choice wins

Y.Y.Chin, OCBC Bank

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Thank You !

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