Puneet Dudeja_092_Retail Financial Services

BIRLA INSTITUTE OF MANAGEMENT TECHNOLOGY

2010

Summer Internship

Report Retail Sales in Financial Services:

Understanding and Improving the Mortgage

Product Process for Future Money

Puneet Dudeja, PGDM Finance, Roll No. 092

[ T Y P E T H E C O M P A N Y A D D R E S S ]

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Contents

Declaration..................................................................................................

Acknowledgement.....................................................................................3

Authors Note.............................................................................................4

Executive Summary...................................................................................5

Future Capital Holdings.............................................................................6 o Company Structure..........................................................................7 o Strengths & Weaknesses...............................................................10 o Financial Analysis...........................................................................13 o Ratio Analysis.................................................................................15

Future Money..........................................................................................18

The Business They Do..............................................................................21

Retail Credit in India: An opportunity for Future Money.........................22

Major Departments at Future Money.....................................................24 o Treasury.........................................................................................24 o Sales...............................................................................................27 o Underwriting.................................................................................31 o Operations.....................................................................................34 o Collections.....................................................................................39

Future Money’s Mortgage Process..........................................................45

Process Flow Charts.................................................................................51

Competition.............................................................................................53

Competition: A DSAs Perspective............................................................58

Future Money’s Good and Bad................................................................60

Recommendations...................................................................................62

Conclusion...............................................................................................63

References...............................................................................................64

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Acknowledgement

I express my heartfelt gratitude to Mr. Romil Pant, Vice President & National Head – Sales & Marketing, Future Money, for bestowing this wonderful opportunity on me and being a constant support, under whose guidance the project was done and completed. It was his suggestions at different stages of the project that helped me to understand the various aspects of Mortgage loan business in retail banking industry and achieving my learning objectives. I would like to make a special mention of Mr. Bipin Oberoi, Mr. Dheeraj Srivastava, Mr. Amit Kohli, Mr. Pushpinder Singh, Mr. Geetam Sobti, Ms. Pooja Virmani, Mr. Rajeev Kapoor, Mr. Dheeraj Bambroo from whom I learnt several aspects of underwriting, collections, sales, credit as well as developing an understanding of Mortgage Product policy framework. I would like to thank them all for providing inputs for the completion of this project report. I am sincerely thankful to my faculty mentor at Birla Institute of Management Technology, Prof. Manuraj Jain for his continuous support and useful feedback as well as all other employees and staff at Future Money, working with whom has been a great pleasure for me. Puneet Dudeja PGDM Finance Roll No. 092

Birla Institute of Management Technology

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Authors Note This Project at Future Money was handled by a team consisting of two people. I was working on this report along with a colleague from Birla Institute of Management Technology. We had divided our individual tasks and studied the various aspects separately and then came up with this detailed consolidated analysis. My individual tasks consisted the following:

Overview of Future Capital Holdings Business.

Overview of Future Money’s Business.

Understanding of the Sales and Collection departments at Future Money.

Role of the above in the Mortgage Product Program.

Understanding Competitors Mortgage Program Process.

Understanding Competition from the perspective of a DSA.

Collective Tasks carried along with my teammate:

Comparison of the findings about Future Money along with my study of the competition.

Coming up with Recommendations for Future Money for Process Improvement.

Thank You.

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Executive Summary

etail banking industry in India and across the globe in general witnessed high growth from 2001 onwards till the recent global turmoil hit the sector in 2008, though Indian environment was not all that bad as some

of the developed economies. Providing an easy access to loan, retail banking industry’s loan sector is revving up sales for itself as well as for the other industries through credit creation. This credit is driving consumerism in Indian markets to foster economic development of the entire country. Diversification of business lines in retail banking has helped many troubled firms survive the recent global economic crisis. Funds are readily available for loaning out to prospective customers and with a support from the government and RBI policies the sector has begun gearing up for another sustainable innings to further the growth story. This report deals with how an NBFC in India, doling out loans to customers in various segments operates. It covers functioning of each department depicting their roles, responsibilities and functions in conducting the overall business from sourcing a customer to dispatching him the loan and then collecting the repayments for the same. The report then goes on to give an explanation for some important metrics that are employed round the globe to measure the performance and monitor the portfolio of a company involved in giving out loans to customers. These metrics form the basis of comparing growth of a company’s portfolio vis-à-vis that of its competitors, as well as internally over the years. This report also contains an overview of the Home Equity loan process. A detailed explanation along with recommendations for process improvement is an integral part of this report. Then this report goes into comparing the current process at Future Money with its competitors in order to provide an understanding to achieve competitive advantage.

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Future Capital Holdings Ltd.

Future Capital Holdings Ltd is one of the premier investment advisors in India with domain expertise in private equity and

real estate. They are also building the infrastructure to create India's first 'consumer-centric' retailer of financial products and services by leveraging the distribution reach and customer base of the Future Group. The company is the part of the future group, which has pioneered and established a nation-wide chain of over 1000 retail stores in 61 cities and 65 rural locations across the country. The company is having three primary lines of business namely investment advisory services, retail financial services and research. They also provide private equity and real estate investment advisory services to onshore and offshore clients. Future Capital Holdings (FCH) was among the key enterprises that emerged within Future Group to drive innovation and value creation through a combination of capital, knowledge creation and world-class talent. It was designed to combine the entrepreneurial skills of world-class professionals with the extensive presence that Future Group has in the consumption and retailing space. The objective was to create a long-term sustainable business model that creates wealth for its customers, communities, investors and every stakeholder. Future Capital Holdings Ltd was incorporated on October 18, 2005 as KB Infin Pvt Ltd. In April 5, 2006 the company became the subsidiary of Pantaloon Retail (India) Ltd. The company was converted into a public limited company with effect from August 21, 2006 and in December 2006, the company name was changed to Future Capital Holdings Ltd. Kshitij Investment Advisory Company Ltd and Indivision Investment Advisors Ltd became the subsidiary companies from May 2006. In December 2006, Kshitij Investment Advisory Company Ltd became an investment advisor to Horizon Development Management. During the year 2006-07, the company incorporated two wholly owned subsidiaries namely Future Finmart Ltd and Future Hospitality Management Ltd. In May 2007, the company acquired Sivagami Finance and Investment Ltd. In June 2007, the company launched their financial retail offering, Future Money with the objective of becoming one of the leading retailers of financial products and services in India.

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In September 2007, the company made a joint venture agreement with Areroterm Mauritius Ltd for undertaking business of investment advisory services relating to logistics, warehousing facilities. In the same month, the company became the investment advisor to FHL Development Co LLC. In January 2008, FCH completed their initial public offering (IPO) of around 6.42 million equity shares, which represents 10.16% of the post issue paid up capital of the company. FCH Centrum Direct Ltd and FCH Centrum Wealth Managers Ltd became subsidiaries of the company from March 12, 2008. The company also entered into a marketing and distribution rights agreement with Future Finmart Limited (FFL), a subsidiary of the company. The company incorporated a subsidiary company namely Axon Development Solutions Ltd, towards undertaking development and leasing activities on behalf of the Kshitij Investment Advisory Company Ltd, a wholly owned subsidiary of the company. Company Structure FCH primary deals in the following divisions:

Investment Advisory - Private Equity The Investment Advisory’s Private Equity arm advises the Investment Manager of Indivision India Partners, which is a private equity fund focusing on businesses benefitting from consumption and its derivatives. As investment advisors, FCH follows a classic private equity mindset of conducting extensive due diligence, building in-house long-term views on industries and avoiding momentum plays.

Future Capital Holdings

Investment Advisory

Retail Financial Services

Wholesale Credit

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They work closely with the investee companies of the Indivision Fund not only to develop business strategy, but also to implement growth plans and create operational efficiencies to have a dedicated operations team provide assistance to these companies across a range of functions, including: marketing, organizational design, human resources and supply chain management.

Investment Advisory - Real Estate The Real Estate arm currently advises the Investment Managers of four funds in the real estate space: a retail-led real estate fund (Kshitij Venture capital fund), a retail-led mixed-use real estate fund (Horizon Realty LLC), a logistics fund (Indospace Logistics partners) and a hotel fund (Indus Hotel ventures LLC). There are over 100 dedicated employees working in the real estate investing platform and this division is distinguished as being an investment advisor with full real estate development capabilities. The Real Estate division has capabilities to span the entire real estate value chain, including: project evaluation, land acquisition, project conceptualization and design, leasing, property management and investment exits. IT also has a strong in-house team of lawyers that identifies and resolves legal issues that we may face when advising on real estate deals. Currently the division advises on the development of around 20 million square feet which is spread across 16 cities. Investment Advisory - Research Future Capital Research provides thought leadership to assist the process of value creation for FCH’s investing platform. This research combines macroeconomic analysis, survey-based fieldwork, in-house data and real-time business experience to provide a differentiated voice on India to produce longer-term thematic studies as well as shorter-term proprietary indicators focused largely on consumption trends. Recent researches focused on – Urban growth for rural India, Next urban frontier: cities to watch, Impact of working women on India’s growth. This arm helps in identification of growth opportunities in the sector of consumer finance as well as development of the retail space. A thorough reporting of consumer behaviour gives a good

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indicator about how the trend can be for the future strategic planning of the business. FCHL acts as the investment advisor to:

The Rs. 350 crore (approximately US$89 million) Kshitij Venture Capital Fund (the Kshitij Fund), an onshore SEBI-registered venture capital fund, whose main focus is developing retail malls in India.

Indivision Capital Management, the offshore investment manager of the US$425 million (approximately Rs. 1,671 crore) offshore private equity fund, Indivision India Partners (the Indivision Fund).

Horizon Development Management, the offshore investment manager of the US$350 million (approximately Rs. 1,376 crore) offshore real estate fund, Horizon Realty Fund, LLC (the Horizon Fund).

FHL Developments Company LLC, the offshore investment manager of the US$200 million (approximately Rs. 786 crore) offshore hotel fund, Indus Hotel Ventures LLC (the Indus Fund)

Wholesale Credit Wholesale Credit business of Future Capital Holdings taps a large and relatively unaddressed market of mezzanine, promoter, project and acquisition financing, and other special situations related financing. Their strong due diligence capabilities across asset classes—private equity, real estate and special situations—allows them to appropriately analyze risk. This capability coupled with their risk management and credit systems and our access to entrepreneurs and developers through the FCH-Future Group eco-system of partners and suppliers favourably positions FCH to grow this business. The wholesale credit division along with the Retail Division does due-diligence for portfolios of other companies as a part of the securitization process to either buy the portfolio through an appropriate bid or suggest withdrawal from bid process if deal is not found favourable for company’s profitability. Retail Financial Services

FCH launched their retail financial services offering in June 2007, pursuant to an agreement with Pantaloon Retail India Ltd. (PRIL), under which we have the exclusive right to provide financial products and services at present and future malls, stores and retail outlets in India which are owned, controlled or

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managed by PRIL and its subsidiaries. The retail financial services business, housed under a 100% subsidiary of FCH; Future Capital Financial Services Ltd (“FCFS”) is operated through 2 verticals; Retail Credit & Distribution. The Retail Credit business is operated under the Future Money brand. The products offered by our Retail Credit business are Personal loans, Consumption loans, Home equity loans and Credit cards; under the name Future Card, through an agreement with ICICI Bank. The products presently distributed are Future Money loan products & Future Cards, Life and Non-Life Insurance products (as a corporate agent of Future Generali), third party mutual fund products and fixed deposit programs. Like every other new business, FCH also has got its strengths and vulnerabilities that are to be tackled effectively to achieve targets. Strengths of FCH

FCHL believes that the experience and expertise of its management team and its finance, operating and investment professionals provides it with a competitive advantage. FCHL’s business is supported by a talented and experienced pool of finance, operating and investment professionals with a variety of backgrounds in investment banking, private equity, real estate, management consulting, finance and treasury, legal and corporate finance, including in reputed organizations such as AIG, Coca-Cola, Colliers Jardine, Goldman Sachs, ICICI Venture, Jones Lang LaSalle and KPMG.

Deep understanding of the retail sector and the evolving needs of the Indian consumer: As one of India’s leading retail groups with over ten years of experience in meeting the needs of Indian consumers, the Future Group has developed a deep understanding of the retail and consumption-led sectors in India. The Future Group’s insights into consumer behaviour have contributed to FCHL’s advice on investments in these sectors. The Future Group’s understanding of the retail and consumption-led sectors is augmented by the research. The Future Group’s knowledge of consumer behaviour contributes not only to the approach FCHL adopts in its investment advisory business but also to the development of products and services in its retail financial services business. By leveraging the expertise of the Future Group, FCHL has sought to identify certain gaps in the market for retail financial services

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and has developed its product and service offering to address those gaps.

Synergy with the Future Group: FCHL benefits from substantial synergies across its businesses and the businesses of the Future Group. In the area of retail financial services, FCHL has the exclusive right to provide financial products and services at present and future malls, stores and retail outlets in India which are owned, controlled or managed by PRIL and its subsidiaries. Also, FCHL’s relationship with the Future Group provides it with access to the experience and capabilities of its employees, whose deep understanding of the retail and consumption-led sectors FCHL leverages in advising on investments in consumption-led sectors and retail and hotel related real estate investments. In particular, FCHL believes that the experience of its founders, including Kishore Biyani, has benefited it. Mr. Biyani has over 25 years of experience in the retail and consumption-led sectors and was primarily responsible for the emergence of PRIL as one of the leading multi-format retailers in India. In addition to the intellectual capital that its relationship with the Future Group provides them, FCHL also has access to the industry contacts and the pan-India distribution network of PRIL, which aids FCHL in evaluating investment and also benefits the investee companies of the private equity fund whose investment manager FCHL advises.

Has over US$ 1.5-billion of assets under management within two years of operation. Has strong group synergies and well-experienced management team with talented pool of professionals.

Minimal customer acquisition cost due to agreement with PRIL, giving exclusive right to provide financial products and services at retail outlets owned, controlled or managed by PRIL and its subsidiaries. This provides access to PRIL’s approximately 400 stores across 40 cities and its large customer base.

Weaknesses of FCH

Has a limited operating history, devoid of any earning track record. Incurred a consolidated loss of Rs 12.43 crore in the six months ended

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September 2007, primarily reflecting start-up costs of the new Future Money business.

The new retail business focuses on consumption and personal loans as well as credit cards. With many matured players already existing, competition is high in this segment. Also, since these loans are unsecured and the group has little experience in financial services, the delinquency ratio can shoot up in future.

FCHL is dependent on the Future Group and if its position in the Indian retail sector was to decline or the exclusivity agreement with PRIL were terminated or held unenforceable, FCHL could be adversely affected.

FCHL’s business is vulnerable to interest rate risk. Lending to retail customers could result in higher non-performing loans.

Being a rapidly growing company, FCHL may require further equity issuance, which may lead to dilution of equity and thus earnings.

Retention of key management personnel is critical to FCHL’s success and growth.

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Financial Analysis

There has been a constant growth in the revenues and profits of FCH. Expenses have also shown a rising trend commensurate with rise in workforce levels due to expansion of business.

The above graphs show the figures depicting a rise in revenue, expenses and profits for the 3 fiscal years in which the company was in operation. There was large growth in NPAT to the tune of 5456.25% from 2007 to 2008 due to large expansion in business and only a marginal growth of 4.72% in 2008-2009 owing to contracted markets in line with global economic turmoil. However, there was a larger growth in revenue and expenses during the same period.

0

50

100

150

March 07 March 08 March 09

9.27

81.37

135.8

9.03

72.1

125.9

Rupees (In Crores)

Year Ending

Income / Expenditure

Income Expenditure

0 2 4 6 8 10

March 07

March 08

March 09

0.16

8.89

9.31

0.24

9.18

9.85

Rupees (In Crores)

Year Ending

Profits

PBIT PAT

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The below graphs depict how the total assets of the company rose in its period of operation and amount spend on building capital of company. There has been a steep rise in assets due to accumulation of customers to whom funds have been loaned out. During 1st year it rises, due to opening of new branches and rapid initial development, but in the 2nd year of operation due to slowdown in business because of recessionary business environment, there has been a negligible buying of capital assets with many branches closing down. With business prospect bound to increase in the future, things will definitely look up.

107.72

931.29

1282.64

0

500

1000

1500


Rupees(In Crores)

Total Assets

Total Assets

3.36

14.6

8.12

0 01.72

0

2

4

6

8

10

12

14

16


Rupees (In Crores)

Total Cash Expenditure Total Non Cash Expenditure

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Ratio Analysis

There has been a decline in current ratio over the years and an increase in the debt-equity ratio. This means that current assets are decreasing with respect to current liabilities

0

0.5

1

1.5


0

1.2

0.380

1.2

0.25

Debt Equity Ratio

Debt Equity Ratio Long Term Debt-Equity Ratio

0

2

4

6

8

10

12


Current Ratio

Current Ratio

0

1

2

3

Debt Equity Long Term Debt Equity

Current Ratio

1.66 1.4

2.640.38 0.25

2.79

Ratio Comparison with Industry Mar'09

Industry

FCH

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Comparing the ratios of FCH with the industry average for the period of March 2009, the debt-equity ratio of FCH is much less and thereby healthy with less debt to be serviced from the earnings. The current ratio of FCH is more than the industry average, depicting a stronger financial picture, with higher current assets.

There has been a negative ratio in year ending Mar-2008 due to introduction

of new business of Future Money in Jun 2007, which required funds for setting-

up operations and infrastructure. Subsequently, in Mar-2009 ratios have again

shown improvement, with business returning revenues even in recessionary

time.

Comparing ratios with the industry data for March ‘09, we observe that profit ratios (PBIDTM% & PBDTM %) are more than industry avg. indicating good

March '07 March '08 March '09

PBDTM (%) 10.78 -22.31 3.34

PBIDTM (%) 30.33 -21.37 3.34

Interest Coverage 0 -25.05 1.37

Debtors Turnover 4.07 9.04 11.61

-80-60-40-20

0204060

Other Ratios

0

20

40

Debtors Turnover

Interest Cover

PBIDTM PBDTM ROCE

30.85

2.159.34

5.111.36

11.61

1.37

30.34

10.783.52

Other Ratio Comparison with Industry

Industry FCH

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sign. But, the debtor’s turnover ratio is less, indicating lack of efficient collections, which might lead loaned funds to become delinquent in future. ROCE (Return on capital employed) is less than industry avg., showing fewer returns on investment. The Future for FCH The perception of credit in India has changed significantly, and retail credit is now being used as a means to fulfil the aspirations of India’s large and growing middle class. This is particularly true with regard to consumers under the age of 30, who represent 61% of India’s total population. Increases in disposable incomes, as well as low interest rates and competition among borrowers, have helped to fuel demand for retail credit. Thus, the buoyant industry scenario augurs well for companies like FCHL.

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Future Money: Your Financial Supermarket

Future money is the retail financial service division of the FCH and caters to the need of individual customers or small business

owners. They offer loans in 3 categories, viz. Consumer loans (consumer durables, furniture, electronics, etc); Personal loans (individual and small business); and Home Equity (home loans for individuals). There are different schemes available to customers from time to time as a promotional exercise to extend the reach & grow the business. FCH promotes future money as a 'Consumer-centric' retailer of financial products and services and not a product-led business. FCH launched 'Future Money' in June 2007 with the aim of building a 'consumercentric' retailer of financial products and services. Since its inception, Future Money has grown to 135 points of presence across 39 cities in India, providing consumer credit, offering the Future Card (a credit cum loyalty card of the Future Group) and distributing life insurance and general insurance products for Future Generali and/or acting as agents for other insurance houses. While the Future Group creates formats to service every expense item on the P&L of the customer, Future Money intends to service the balance sheet of the customer by providing loan products including credit cards, and distributing insurance and mutual fund products. Future Money will also provide–through strategic partnerships– wealth management, foreign exchange and money transfer services. Future Money focuses on customers across Tier I and Tier II cities, both of which continue to be underserved by other players due to customer acquisition challenges. This business leverages the large customer base and retail network of the Future Group to efficiently serve these segments with relative cost savings. The retail financial services offer consumer finance and distribution of financial services products. Currently Future Money employs 606 (including agency staff) personnel. During the year, it had disbursed loans of Rs. 3,279 million. For the year ended March 31, 2009, this business has generated Rs.704 million of income, which comprises of interest income of Rs. 605 million, processing fees and other fees of Rs. 99 million. The increase in income is due to an

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increase in the loan book to Rs.4,351 million as at March 31, 2009 from Rs. 665 million at the beginning of the year. Revenue has increased manifold from the retail banking business of Future Money when seen vis-à-vis the total revenue generation from all the segments of businesses in FCH. This can be depicted from the below pie chart illustration:

Increase in the national presence and consumer insights of the Future

Group to achieve scale in the retail credit segment of the business.

Future Money has the exclusive right to provide financial services in all

present and future outlets of the Future Group.

Apart from having a dedicated team for Wholesale Credit within FCH (with total work experience of over 50 years in the Indian market) FCH has also capitalized on its strong network of relationships with entrepreneurs & developers. They have coupled this relationship access with the expertise of the in-house investing platform capabilities around due-diligence, credit assessment and structuring to evaluate trades in the Wholesale Credit segment of the business. For this purpose, the analytics team of future money has also played a vital role.

Recognizing headwinds in the industry early, future money has proactively revised its strategy towards this business and key actions have been initiated – tightening underwriting standards, right sizing points of presence, shifting loan sourcing to variable cost model to achieve long term sustainable growth of the business.

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A simple model to depict the new planning process is:

A focused approach for a powerful and sleeker organization by rationalizing

costs and consolidating & simplifying the credit business resulted in a stronger

and nimbler company, better prepared to take advantage of emerging

opportunities. Most importantly, these measures were taken without

compromising on core values, world-class talent base or the strong reputation

enjoyed with bankers, financial institutions and international investors.

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The Business They Do

Retail banking refers to banking in which banking institutions execute

transactions directly with consumers, rather than corporations or other banks.

Services offered include: savings and checking accounts, mortgages, personal

loans, consumer loans, debit cards, credit cards, and so forth.

Types of Banking

Commercial bank has two meanings, viz. a normal bank to distinguish it from

an investment bank and secondly a bank or a division of a bank that mostly

deals with deposits and loans from corporations or large businesses, as

opposed to normal individual members of the public (retail banking). It is the

most successful department of banking.

Other than banks there are many non banking firms called Non Banking

Financial Company (NBFC) existing in market. An NBFC is a company registered

under the Companies Act, 1956 and is engaged in the business of loans and

advances, acquisition of shares/stock/bonds/ debentures/securities issued by

government or local authority or other securities of like marketable nature,

leasing, hire-purchase, insurance business, chit business, but does not include

any institution whose principal business is that of agriculture activity, industrial

activity, or sale/purchase/construction of immovable property. NBFCs are

doing functions akin to that of banks; however there are a few differences:

An NBFC cannot accept demand deposits;

An NBFC cannot issue credit cards to people;

An NBFC is not a part of the payment and settlement system and as such

an NBFC cannot issue cheques drawn on itself;

Deposit insurance facility of Deposit Insurance and Credit Guarantee

Corporation is not available for NBFC depositors unlike in case of banks.

Their number is rising fast owing to availability of funds in the market and

demand from the customers. NBFCs are regulated by RBI under its special

guidelines for them. Major NBFCs operating in India are Religare, Citi Financial,

GE Money, DBS Cholamandalam, Tata Capital, Reliance Capital, Indiabulls,

Fullerton, Future Capital Holdings, etc. Retail banking industry had been

growing at an immense pace till it was hit by recession. Many big players either

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reduced lending or made stricter rules to loan out funds or even closed some

operations due to credit crunch they faced. Dwindling resources, tight money

market, rising delinquencies, fewer fee based opportunities together had

started haunting NBFCs.

Retail Credit in India: An opportunity for Future Money

Growth in the Retail Credit industry slowed to 12% compared to 30% CAGR

between 2004-2007, as a result of high interest rate scenario in the first half of

2008 and the knock-on effect of the global liquidity crunch followed by

restrictive lending by Banks & NBFCs in the second half of the year. This

deceleration continues as most lenders are going through a consolidation

phase.

The credit business in India is set to experience steady growth in the next

twelve to fifteen months, given the overall under penetration of credit within

India. However, we expect NPAs will continue to rise in the Retail Credit

business. Some other facts supporting growth in retail banking NBFCs are,

increasing number of millionaires in India is increasing the scope of Wealth

Management Services, and bankable households in India are estimated to

move up at a CAGR of 28.10% during 2007- 2011, recent pay commission hikes,

giving more liquidity in hands of potential customers.

The growth in India’s economy, which has been above 8% during the last three

fiscal years, has led to significant job creation, which has in turn led to rising

disposable incomes. As a result, consumption has increased rapidly. Although

growth in disposable incomes has been the main driver of higher consumption,

population growth and a decline in the number of joint family households are

also expected to contribute to growth in consumption. If these trends continue

to prevail, McKinsey Global Institute projects that over the next two decades

income levels will almost triple and India will become the world’s fifth largest

consumer market by 2025. The potential for growth in India’s consumer

market translates into a significant opportunity for investments in the retail

and consumption-led sectors.

As these sectors grow, the number of companies engaged in activities in these

sectors could increase.

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Availability of credit, its affordability and consumer confidence will be the

three short-term growth drivers for this business. India stands on a path to

growth and prosperity which reflects in the policy and budget presented by the

current stable government. This is definitely going to boost consumerism once

again and forge economic stability in this part of the world too. This success

story shall be shared all throughout the corporate world of India which shall

witness growth to raise its head above the global giants.

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Major Departments at Future Money

Retail banking business consists of different functions inter-related at each

level operation. The loan sector of retail banking deals specifically with loaning

out the funds to individual customers or to the small-business owners for

different needs.

Treasury

Treasury forms an important part of any organization, because that is where

the money is. Basic responsibility of this department is to maintain

asset/liability ratio as per the standards set in the company policy and decide

upon the desired IRR. Treasury department collects, manages and disburses

funds for an efficient distribution and operation of the company. Treasury

operations are carried onto to make funds available for loaning out as well as

to sustain the company’s operability.

The treasury department also performs other related functions, such as

managing the company's reserve and risk capital requirements, funding the

company's balance sheet, and managing the institution's insurance

requirements – property and casualty, directors and officers, etc.

The main functions performed by Treasury are:

Generate funds from the market

Equity

Taking debt from market

Taking loan against

property

Collect funds coming from payment of loans

by customers

Normal collections

Settlement collections

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Generate funds from the market through the following channels:

o Equity (IPO/FPO/Rights Issue): Future Money went for an IPO in

January 2008 to raise a gross sum of Rs 4,913.42 million. This was

one of the biggest IPOs from a financial firm. This capital raised

was used for making provisions for funds for operating the firm

and also to loan out the funds to consumers.

o Taking debt from market (banks/financial institutions): Like most

of the firms, Future money also goes for raising funds through the

debt route. It has raised loans from banks and other financial

institutions on long-term basis to service its customer’s loan

demands.

o Taking loan against property: Future money has also raised funds

by means of loans against property from the markets. This is a

shorter term loan with a security.

Collect funds coming from payment of loans by customers:

o Normal collections: These include all the payments which are

being received as per the regular tenure payments for each

month. These payments come as a regular flow. There may be

default payments also but as long as the customer does not cross

180 days limit, the payments that are made come under normal

collections flow. They also include the subvention amounts

obtained from the goods manufacturers, which is a type of

commission.

o Settlement collections: These payments are collected once the

defaulter crosses the 180 days limit of non-repayment, as per the

guidelines of Indian GAAP and company policy. Only after the limit

is crossed, the process of settlement is initiated against the

customer, wherein the customer is pressed to release as much of

principal amount as possible to minimize the losses. The amount

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may not be recovered in full but still helps the company to

backtrack the losses by some extent, to improve the figures in

books.

o Give target to the sales: Based on the available funds, the treasury

fixes a target amount for disbursing the loans to ensure maximum

utilization, maintaining adequate liquidity and growth in business.

This figure is release for review by higher management and

accordingly targets are set on monthly basis. It is also important to

maintain some level of liquidity in the overall portfolio to service

loan requirement of large value customers, company functioning

and loan requirements of the internal employees, but the liquidity

percentage is maintained low.

o Fulfil the requirements of the company’s finances: There are

several expenses incurred for running a company which are

administrative or operations based in nature. To service these

requirements, it is important to allocate necessary funds and

avoid any breakdown of administrative services. Funds also need

to be allocated to the other departments like personnel (HR),

advertising, travel, legal, etc.

o Management of excess funds: This is one of the most complex

tasks handled by the treasury department, and in this it is

important that any fund lying unutilized with future money is

adequately invested in instruments to fetch more money than the

usual bank deposits. For this reason, there is investment made in

open-ended and liquid mutual funds of debt orientation and inter-

corporate debt/corporate debt along with some funds in bank

deposits. All the investments are made under the guidelines and

framework of corporate policy, which is drafted as per the

industry standards.

Basically, the treasury ensures fund regulation to keep business running

and have enough liquidity to offer loans to the consumers. Policies are

P a g e | 27

set so as to get required returns while following the industry standards

and legal guidelines which have been laid down by the government &

RBI. The department has to maintain a continuous flow of funds from

markets to service expenses of company, to fulfil consumer’s loan

demands and to maintain profitable assets by collecting the funds

received back from the customers.

Sales

Sales are the Front End of Future money. It is the face with which the

customer interacts first. Sales Team are divided under 2 categories:

Direct Sales Teams (DST): These can be found at the Future group

retail stores & malls. These are employees on either on role of

future money or are a part of direct outsource (on contractual

basis), but wear future money uniforms. They approach the

customer directly and offer them the consumer and personal

loans by explaining different loan products available with their

scheme and benefit information.

Dedicated loan disbursal branches: Branches help in establishing a

place where a consumer can visit, see and get his/her loan

approved with convenience and personal attention to get clarity

on the products available for the consumers.

Referrals: This form of sales takes place with known contacts in

the industry to sell the product. The network of employees and

Direct Sales Points

Indirect Sales

Point

Direct Sales Teams

Direct Sales

Agents

Branches

Power Partners

or Sub Brokers

Referrals

Call Centres

P a g e | 28

sales agent plays an important role for referral sales. It can be also

said to be a type of viral marketing.

Call Centres: This was being used earlier to call up prospective loan

takers and offer them different products to serve the customer

needs. However, call centre operation was closed owing to the

additional costs involved and lower conversion rate in the time of

recession. But this method to sell company’s financial products

shall be started again once there are signs of improvement in

state of economy.

Direct sales agents (DSA): DSAs include the 3rd party agents which

sell the products of future money. This can be explained with a

small example like, there is a branch or a sales agent employed by

XYZ bank, and he goes on to sell the loan products of not only XYZ

bank but also the other banks or financial institutions like future

money. For selling the product of future money, DSAs get a fixed

commission which is target-based. DSAs form an increasingly

important role in shaping out the future of sales in this

economically weak era, where 1 sales agent sells the products of

different companies to customers. Future money also acts as a

DSA for many other banks and financial institutions, wherein it

sells the products offered by other financial institutions.

Power Partners or the sub-brokers: These are large houses which

offer to sell the product of future money either on a revenue

sharing model or on commission basis. Sometimes there is a

mutual understanding also to sell each other’s products.

Direct sales agents (DSA): DSAs include the 3rd party agents which

sell the products of future money. This can be explained with a

small example like, there is a branch or a sales agent employed by

XYZ bank, and he goes on to sell the loan products of not only XYZ

bank but also the other banks or financial institutions like future

money. For selling the product of future money, DSAs get a fixed

P a g e | 29

commission which is target-based. DSAs form an increasingly

important role in shaping out the future of sales in this

economically weak era, where 1 sales agent sells the products of

different companies to customers. Future money also acts as a

DSA for many other banks and financial institutions, wherein it

sells the products offered by other financial institutions.

Power Partners or the sub-brokers: These are large houses which

offer to sell the product of future money either on a revenue

sharing model or on commission basis. Sometimes there is a

mutual understanding also to sell each other’s products.

Functions & obligations of Sales

Obtain targets from treasury: Based on the volume of funds available with treasury department, there is a target set & conveyed to management according to liquidity and expense requirements to sell the loans to consumers. Sales department has to work accordingly to fulfil the target and generate the desired revenues for company.

Associate with marketing: As explained earlier, marketing and sales go hand-in-hand and complement each other. Sales points also add

Obtain targets from treasury

Associate with marketing

Generate business by getting customers

P a g e | 30

to the marketing through interaction and advertising by means of prints on their clothing, banners at outlets, other signboards, etc.

Generate business by getting customers: Sales is the point where the actual revenue for the company is generated. This is the place where customers are identified, scrutinized and sent for case login approvals to the underwriters and hence business is brought for the firm. Sales force plays an important part in fetching the right customers who will not default in payments, and there should be provisions made beforehand to avoid bad customers and prevent any unnecessary losses in future.

The above figure shows how the sales department has to discover a customer, evaluate his/her eligibility, make them to purchase the product and then arrange for after sales support for further getting new customers. Sales department brings in revenues for the company and so it is highly paid job and there is large amount of commission involved. Sales incentives are given to encourage the sales people to achieve more than the targets and better the business of the firm. However, it is felt that to get more incentives, sales agents go on rampant selling and care less for the customer’s pay-back capacity (which became one of the major causes for the US crisis). Hence it is very important to maintain policies for the company sales officials and get good customers to run the business profitably.

New / Existing

Customer

Discover

Evaluate

Purchase

Support

P a g e | 31

Underwriting An important part of retail banking industry, underwriting checks the credibility of the customer and checks whether or not to disburse the loan. Basic work of an underwriter is to verify the credibility and eligibility of a customer for loan he/she has applied. The whole of underwriting is based on checking, analyzing, verifying and validating of different proofs to establish TWO important aspects for a customer before taking the final decision to either permit the disbursal or reject application for his/her loan.

Check for Genuinity: An underwriter has to check the identity, residence proofs, earlier records, etc to check if the customer is genuine or not. If it is found that the customer has got all records new, then it might be that this customer does not intend to pay back the loan and is a fraud. Basically, after checking all these records and emphasize on time frame, one can come to know about the customer’s intentions.

Check for Ability: To verify the ability to pay, an underwriter needs to

check the customer’s bank statements, income proofs, family size,

spending patterns, etc. After a careful analysis, a customer’s net saving is

found. Inference on his/her expenses is also found based on customer’s

demographics and then we can know if he/she will be able to service the

loan instalments from whatever he is earning and saving. Ability checks

whether the customer will be able to pay back the loan or not.

Underwriting

Case Login into system

Check for ability

Check for Genuinity

Approve case and pass to Operations

P a g e | 32

File information login: The customer information obtained from the sales

teams are fed into the system as per a specified format which is the

given fields in the system made for this purpose. This task is carried out

with help of outsourced data-entry operators.

Verify details: To verify the details, there are several checks made in the

system which may be summarized as:

o Internal Dedupe: This works on duplication logic to match the

entered profile with the internal database, if any other loan is

going on in the name of same customer, or a loan has been taken

by the customer in the past and has been fully repaid.

o External Dedupe: This is carried out with the CIBIL database, to

obtain detail about the customer’s credit rating and defaults. It

also gives an idea if the customer has taken loans from other

banks/institutions to prevent frauds.

o Physical Verification (CPV): Done by verifying the residential and

official addresses of the customer, and is usually done by a 3rd

party. By verifying address proofs, we can be assured that there is

a negligible chance of fraud by the customer.

o Telephonic Verification (TVR): Telephonic verification is also done

at both the official and residential numbers. It further reduces the

risk of frauds by supplementing the CPV.

o Personal Discussion: This is done by the on-roll staff of Future

Money, to obtain a detailed report from customer about his

income, expenses, Family details, etc. to finally reach a conclusion

if the customer will be able to service the loan instalments.

o Obtain Income documents: Credit people obtain the borrower’s

bank statements & ITR proofs to run a check on the customer’s

cash flows and his/her savings patterns.

Take decision on loan: It is here when a decision to offer loan is taken. It

is taken using following criteria for different type of the loans:

P a g e | 33

o Consumer Loans: Given only in future group format stores on consumer durables. Analysis is done based on amount of loan exceeding a figure set by the company policy. End use of the product is also to be checked, if the product is for self use or for the purpose of a gift, etc.

o Personal Loans: There are slabs defined to give loans and

accordingly the verification is carried out. Underwriter has to

decide whether to offer loans to sub-prime customers or not,

eyeing the risk and return involved. Being an unsecured loan, risks

associated are large here. There is financial analysis

(income/expenses) carried out along with a FOIR (Fixed obligation

to income ratio) analysis done on the customer to give him/her a

score and take a decision if the customer is eligible for a particular

loan amount or not. Again, this requires the check and validation

for end-use of the loan.

o Mortgage: There are two categories of loan associated here.

Firstly, home loans, which are offered to purchase a particular

property and secondly, LAP (Loan against property), where

property acts as a collateral and rest all is same as a personal loan.

Mortgage product is a safe bet, as it has got a security in the form

of property papers with future money. However, since the loans

have a long tenure and less rate of return, they do not involve

Personal Loan

• High Risk

Mortgage Loan

• Low Risk

Consumer Loan

• Moderate Risk

P a g e | 34

rigorous checks on the customer. Underwriting or Credit ensures

all risks in a transaction are captured before approving a loan,

which are:

o Credit risk

o Interest rate risk

o Structure risk

o Fraud risk

o Regulatory risk, etc.

Give status to operations: After running all the verification checks based

on type of loan & customer demographics, it is decided to accept or

reject the loan application of customer. If the loan gets accepted, there

is a sanction letter issued to the operations team and file is passed on to

be processed and further processing to disburse the loan.

Any lapse in the process of underwriting may lead to: o Delinquent portfolio: default cases increase o Credit losses: more number of bad debts o Penetration of frauds into system: fake cases o Wrong signals in the market: bad for investors o Increase in costs: to get loaned money back o Credibility of credit officers is questioned: lost reputation

An underwriter can also make exceptions to the policy to approve loans based on his/her experience. Depending on the market conditions, underwriter can ask the higher management to make desired changes in the policy to prevent loss of customers and maintain business continuity. Like in current recession, there are many decisions taken to avoid unsecured loans and get more secured loans, offer loans to prime customers only and relax or make stricter rules accordingly.

Operations Operations department for a retail banking industry does not function as a regular operations department of any other industry, but still acts as the backbone for this industry as well. It acts more as a caretaker of data-files, loan disburser, reporting an agent, implementer and fault finder. The work of operations team begins when the underwriter gives the approval to disburse the loan and goes on till the loan is disbursed, amortization schedules of the

P a g e | 35

loans are prepared, systems are updated and repayments are completed from the end of customer for each and every loan account in the company’s portfolio.

Front-end tasks: This involves interaction of operations department with other departments, branches and customer. Tasks of the front-end operations team include: o Authorizing: A process to verify the authenticity of files/cases

approved by credit, wherein a recheck is run on all the documents

received from the customer and authenticate with the policy if credit

has approved the file correctly or within the given exception rules or

not. If there is any discrepancy detected, case is sent back to credit (if

policy not followed) or sales (if file is incomplete) as the case may be

to get the corrected resolution. After all the data is found in order

files are updated, the case is considered approved and cheque of the

loan amount is disbursed to the branches to be given to customer.

o Repayment/Amortization schedule preparation : After disbursing the

cheque to the customer, the customer’s repayment schedule is

prepared according to the agreed rate of interest and tenure. This

schedule contains value of instalments for the entire tenure along

with the due date for the customer’s account. This is sent both to the

Operations

Front- end

Back -End

Reconciliation

Storage

P a g e | 36

customer as well as maintained in the system for any future

reference or restructuring for the loan account.

o Login of rescheduled cases: If the customer is unable to pay loan due

to some temporary problem, the loan is either extended in tenure by

giving a holiday of a month or two to the customer or the loan is

closed and a fresh loan is issued to the customer having reduced

EMI’s according to pay-back capacity of the customer.

o Foreclosure management: For long tenure loans, mostly Home loans

where a customer wants to switch to lower interest rate in another

bank, the operations team suggests the sales to pitch-in and offer

lower rate at their own end itself. For this there is approval from

credit based on customer’s delinquency status and then the loan’s

repayment is adjusted accordingly by operations team.

Back-end tasks: It is a time-bound operation done by operations team

which involves presentation of customer’s payments to the banks.

Basically this is repayment management activity that has interaction of

the operations department with the bank. Payments are received either

in the normal course (according to the repayment schedule) or

payments for the delinquent cases. If there are PDCs (Post-dated

cheques) available with the operations department then they are

presented to the bank for payment on a particular day (7th of a month

in future money) and if there is an ECS (Electronic clearing service)

agreement, then it is verified that the payment is made in the righteous

manner. To begin an ECS payment, it is the duty of operations

department to get the ECS lodged at customer’s bank, verify it and then

keep a tab on payments. To minimize the delinquent cases, there is a re-

presentation of any leftover cases which is done on the 15th of every

month. If there is any deviation, necessary reporting is done and

collections team is intimated about the same. This process basically acts

as a tracker for the money coming back to the organization. There is a

CCS (Cash and Cheque summary) generated to get a glance of all cases.

Reconciliation and proper updation: A month-end activity, this focuses

attention on removal of any discrepancies of accounts occurring due to

incorrect entries of payments received, wrong entry on debit/credit

sides, entry of a payment in wrong account. Aim of this activity is to

P a g e | 37

ensure that the payments received from customers, commissions from

the dealers, collection settlement proceeds, etc. all are sent to the

correct accounts and cash flow of future money is not faulty. Each and

every client’s record needs to be verified and checked for any wrong

entry. At the end of this activity, it is desired that all the credit entries

should tally and match with all the debit entries for any particular

customer’s account. The total company’s accounts should also be tallied

to verify their correctness.

Storage: Caretaker function of the operations department is managed

by this part of the operations team which is responsible for safe-keeping

of all the customer’s records, files and the PDCs issued by them. For this

purpose there is a special storage place where all physical records are

stored. To prevent the risk of damage due to natural calamities, all the

records are scanned and maintained in a soft copy also. This data is

maintained on main server and can be accessed anytime to get

information whenever desired. Having soft copy for the document also

enables future money to enable faster sharing of data amongst the

different departments.

In totality, the work done by operations may be summed up in following

points:

Operations

Disbursal of Cheques

Generation of Reports

Status of Collection

P a g e | 38

Booking cases sent by Credit: Once the credit approves the case, the file

is booked by operations after the necessary checks, editing and updation

of any changes in the system after verification with the company policy.

The system entries are made and thereby the cheque is issued and

signed by the authorized signatory for the company. Each cheque

prepared and disbursed to the branches is counted as one booking done

for the company and this in turn is used to monitor company’s

performance.

Disbursement of cheques: After booking a case, the cheque is disbursed

to the branch from where the case has been sent for all types of loans.

From there the cheque of applied amount is sent to the customer in case

of a personal loan and in case of consumer loan, the respective branch

(from where the consumer durable has been purchased by customer)

keeps the cheque and payment goes into its account.

Report Generation: For each booking and presentation cycle, there are

reports generated which provide data for the MIS to be created for

higher management & it is thus required that the data must be correctly

updated. All these numbers are used to tally the system generated

reports with data dumps created from daily transactions. Higher

management can then review the company’s performance by having this

data and records available with them at a glance.

Status reporting to collections: After each presentation cycle, the

bounced payment report is given to collection department for their

action on the default cases to get the customers to pay up and avoid

being dropped into the delinquent bucket. This enables the collection

department to prepare for the awareness or settlement calls on time to

either get back the loan repayments or restructure of loans. In turn this

helps in minimization of the losses on company’s books. It is imperative

that operations department does act as a backbone to the retail banking

industry as well. Revalidation activity done by operations before

disbursal of cheques further reduces chances of a mistake or catch

frauds. Enforcement of company policy takes care of any undue

relaxation offered by credit department. Repayment management

ensures that regular funds keep flowing into the company’s treasury

P a g e | 39

accounts without fail & facilitates monitoring of all the defaults to take

further action.

Collections

The collection department looks after the recovery process for

delinquent customers and it is their duty to see that a customer’s

account does not flow into buckets. Their basic aim is Bucket

Management, wherein after reviewing the number of accounts in each

bucket, there has to be adequate effort from the collections team to get

back the loaned out funds. According to the delinquent buckets and

their amounts, collections department gets a target to recover funds

from defaulters. Collection process is directly linked to the amount that

would be written as bad debt in the company books, and therefore this

department’s aim is to recover as much as they can from the defaulters.

The functions of Collections department are:

Bucket monitoring: collections department has to continuously monitor

the bucket movement. They have to ensure that there is no adverse

Collections

Bucket Monitoring

Make Awareness/ Collection

calls

Decide on Loan

Structure

Initiate and enact

Settlement

Return funds to Treasury

P a g e | 40

movement and have to facilitate favorable movement as well. These

movements are:

o Adverse movement: When an account moves from a lower to

higher bucket, i.e. a customer is currently in bucket 2 (30+ days)

and he/she defaults another payment and hence moves to

higher bucket 3 (60+days).

o Favorable movement: When an account moves from a higher to

lower bucket, i.e. a customer is currently in bucket 3 (60+ days)

and he/she pays more than 1 instalment (1 for current month

and 1 for previous month then he/she is moved to higher bucket

2 (30+ days).

o No Movement: When a customer’s account is in a particular

bucket, say bucket 2 and he/she is making single payments, i.e.

paying only 1 instalment for the current month, then the

account is said to be having no movement and remains in the

same bucket.

Give awareness/collection calls: To prevent customer’s accounts

fromgoing into delinquent buckets, collections department gives calls to

such customers to make them aware about their payment due dates.

This helps in early detection of a defaulter and helps the collection

department to manage the case accordingly. They also call up the

customers in different buckets asking why they are not paying up, and if

necessary arrange for employees to visit the customer’s place and ask

for payments.

Decide on restructuring the loan: After making the calls to customer, it

rests on the judgment of the collection agent to see if there is a genuine

problem with the customer in repayments or the intention of the

customer is a fraud. If the customer is found to be making unreasonable

excuses, settlement and other collection procedure is initiated for

him/her, else if it is found that customer has a good track record and is

unable to pay instalments owing to a temporary problem, then based on

company policy there are provisions made to make following changes to

his/her loan:

o Re-age: This is done to increase the loan tenure and/or give a

holiday day period for repayment for a nominal fee. The loan

P a g e | 41

account remains in the system and after re-aging shows the new

end date for the loan. In this case the loan instalment remains the

same as for the original loan.

o Reschedule: This is done by closing the existing loan and offering

to the customer a fresh loan with revised instalment amount and

new tenure. As the instalment amount changes a fresh loan has

to be issued, thereby giving customer a relief from a higher

instalment amount which he/she was unable to pay. The changes

to the loan tenure and instalments are made only after verifying

that they will not default further and the problem faced by

customer is a genuine one.

Settlement: A procedure wherein the customer’s account has crossed

bucket 6 (180+ days), and there is minimal scope of instalment recovery

from the customer. According to Indian GAAP, the account which

crosses bucket 6 has to be written off as bad debt. Therefore, to

minimize the losses on company’s books, collection department sends

its representatives to the customer’s premises and ask for any amount

which can be given by the customer. This procedure may be explained

with an example, suppose there is a loan of Rs. 1 Lakh taken by a

customer, and after repayment of Rs. 25 thousand he did not pay any

instalment and has also crossed bucket 6. Now representative of

collections department visits his place and asks for settlement. There is

negotiation done to collect as much as the customer can shell out. If the

customer agrees to pay R. 50 thousand, then the collection guy would

give the customer a receipt of the same, take Rs. 50 thousand from him

and close the account. For each settlement procedure, there has to be

taken a proper approval from higher management. This amount will be

returned to company books and help it in minimizing losses. The

settlement procedure comes with a problem of having frauds by agents

sent for settlement, as in some cases the settlement amount collected

from customer by the agent may not be entirely returned by him/her to

the company books.

Return money to treasury: All the payments, both delinquent as well as

settlement payments are recorded by the collection department; these

are then disbursed to the treasury department and add up to the

P a g e | 42

revenue stream for the company. Collection department thereby helps

in minimizing the losses and generating revenue for treasury which

might have been lost as bad debt. Efficiency of collection department

directly impacts the profitability of the company by reducing bad debts

through bucket monitoring, awareness calls and settlements made with

the customer.

Mortgage: Buckets and Delinquency

Delinquency Grid for Mortgage Loans is given below. Since, these loans are for

long tenure and large ticket and are secured by an underlining asset the losses

are taken in trenches.

No.of Days Delinquent Bucket

NPA Stage

Age Code

Portfolio Category Remarks

Current 0 Regular A Current Portfolio

These are customers who have made good their monthly repayments and it will also consist of newly acquired customers.

0-29DPD 1 Regular B Front End Portfolio

This consists of customer where a full or partial payment is delinquent by 1 day

but less than 30 days.

30-59DPD 2 Regular C Delinquent

Portfolio

This consists of customer where a full or partial payment is delinquent by greater

than 30 days but less than 60 days.

60-89DPD 3 Regular D Delinquent

Portfolio

This consists of customer where a partial or full payment is delinquent by greater


90-119DPD 4 Regular E Delinquent

Portfolio



120-149DPD 5 Regular F Delinquent

Portfolio



150-179DPD 6 Regular G Delinquent

Portfolio



180-209DPD 7 Regular H Delinquent

Portfolio




Portfolio



P a g e | 43


Portfolio




Portfolio




Portfolio




Portfolio



360-389DPD 13 Regular I Delinquent

Portfolio




Portfolio




Portfolio




Portfolio




Portfolio




Portfolio




Portfolio




Portfolio




Portfolio




Portfolio




Portfolio



P a g e | 44


Portfolio



> 720DPD 25+ Charge

off J Written-off

Portfolio


than 720 days.

Loss Recognition Policy for Mortgage

At 180 DPD: Provision of 10% principal outstanding is maintained.

At 360 DPD: Provision up to 50% principal outstanding is maintained.

At 720 DPD: 100% write off to credit loss.

P a g e | 45

Future Money’s Mortgage or Home Equity Process Customer Segment: Salaried and Self employed (SEP)

Standard Product Norms:

Property Type o Ready Residential or Commercial properties only (i.e. 100%

complete).

Loan amount

o Minimum : Rs. 10 lacs

o Maximum : Rs. 2 Crores

Loan Tenor

o 12 months

o 144 months

Loan Pricing: ROI of 14% pa [floating interest rate] + 1% processing fee.

Initial Money Deposit

o Upto 50 Lacs-Rs. 1500/-

o Above 50 Lacs-Rs. 2000/-

Locations

o CAT A (Upto 2 Crores): Delhi+NCR, Mumbai, Pune, Bangalore,

Hyderabad, Chennai.

o CAT B (Upto 1 Crore): Ludhiana, Dehradun, Jaipur, Chandigarh,

Ahmedabad, Jallandhar.

o CAT C (Upto 50 Lacs): Nasik, Baroda, Surat, Nagpur, Lucknow.

Valuations

o CAT A Cities: One valuation upto 25 lacs.

o CAT B & C Cities: One valuation upto 15 lacs.

Loan to value (LTV)

o Self Occupied residential-65%

o Rented residential-55%

o Vacant residential-50%

o Self Occupied commercial-55%

P a g e | 46

o Rented commercial-50%

o Mixed used properties-55%

Age of property

o Maximum age of property at the time of application of loan = 35

years (excluding FM tenor).

o Residual Age of property (as certified by panel) should be more

than the tenor of the loan.

FOIR [Fixed Obligation to Income Ratio]

o FOIR = (EMI of Proposed HE loan + EMI of other Loans) / (Eligible

Monthly Income)

o Salaried: 55% (up to income of Rs. 25k pm else 60%)

o Self employed: VIP - Verified Income Program (100%), IAP (55%),

LIP (55%)

Key Credit Parameters

Age

o Min. 23 yrs and Maximum 65 at loan maturity – Salaried

o Min. 23 yrs and Maximum 70 at loan maturity – SEP

Minimum Property Area

o Residential: 500 square feet

o Commercial: 250 square feet

Properties not acceptable

o Plots & Under Construction property

o Warehouse / Godown / Factory / Industrial shed

o Properties used as public places (school/college)

o Bar / Farm house / Club / Resort

Minimum Income

o Salaried – Rs. 4.5 lacs p.a.

o SEP- Min. Net Profit of Rs. 1 lac p.a. (as per income tax return)

Borrower Constitution: Individual, Proprietorship firm, Partnership firm,

Pvt Ltd. Company and Closely Held companies.

Work/Business Exp.: Minimum 2 years.

Credit check: De-duplication, CIBIL, FCU check should be positive.

Personal Discussion: Mandatory at Customer’s office by Credit

Officer/Manager

P a g e | 47

Negative area: Applicant residence and / or property offered as security

should not be in negative area.

Surrogate Programs

Verified Income Program

o Salaried:

Eligibility is based on Income verified from Salary Slip.

Maximum FOIR allowed is 55% for monthly salary upto

25,000/- and 60% for salary above Rs.25,000/-

Salary of upto three applicants can be clubbed to arrive at

eligibility. In such cases, obligations will also be clubbed

o Self Employed:

Eligibility is based on Income verified from ITR, Balance

sheets and P&L a/c.

Maximum FOIR allowed is 100%.

Repayment Track Record Program

o Eligible RT: Auto Loan, PL, Term Loan, HL/HE Loan

o LTV: Standard LTV is maintained

o RTR Multiplier:

MOB Multiplier on EMI

13-24 Months 1.6

>24 Months 1.8

o Obligations: All recent loans with <=6 MoB to be considered in the

obligations.

o FOIR and IIR: Not applicable in RTR program

o HE EMI Calculation: HE EMI = Sum of (Multiplier * EMI of loan

eligible) – EMI of any loan taken within last 6 months. i.e having

MOB of <=6).

Internal Assessment Program

o Applicable only for self employed profiles.

o Not allowed for salaried profiles.

P a g e | 48

o Used only when the eligibility is not possible under the Verified

Income program

o Standard LTV

o Internal Income Assessment: Credit will do PD and assess actual

business income based on various parameters like actual

turnover, industry margins etc.

o FOIR: 55%

o HE EMI calculation: Eligible Net profit is taken as per credit

assessment subject to 2.5 times net profit verified from

documents. All other income like depreciation, “other income” etc

are added as per VIP program. FOIR will be applied to arrive at

maximum HE EMI possible.

Liquid Income Program

o Use of LIP program is at the discretion of local credit manager.

o LIP program is not allowed for salaried profile. Only for self

employed.

o LIP agency will visit customer’s office to ascertain the “LI” i.e.

True net profit.

o Properties allowed: Residential/Commercial self occupied

properties

o Minimum income (PAT + depreciation): 1 lac (as per latest ITR)

o Standard LTV

o FOIR: 55%

o HE EMI calculation: Eligible Net profit = 70% of LI. All other income

like depreciation, “other income” etc are added as per VIP

program. FOIR will be applied to arrive at maximum HE EMI

possible.

Banking Program

o HE EMI calculation and LTV.

HE EMI = Multiplier * (Lowest of last 6 months average Bank

Balance)

P a g e | 49

Average bank balance for any month = (Bank balance as on

5th + 10th+ 15th + 20th + 25th + last day of the month)/4

(lowest and highest to be ignored).

Max. 4 bank a/c can be clubbed to arrive at avg. bank

balance.

All other loan obligations to be ignored in HE eligibility.

o FOIR and IIR not applicable.

o Multiplier

Type of Property Multiplier on EMI LTV

Residential property (Self Occupied) 1 65% Commercial Property (Self

Occupied) 1 60%

Mixed Usage 1 55%

o RTR Requirement: At least one RTR of MOB >=9 months OR credit

card repayment track of last 6 months required.

Balance Transfer Program

o Loans allowed to be taken over: Loans running against same

property, proposed for mortgage to Future Money.

o Multiplier

MOB Multiplier on EMI

13-24 Months 1.6 >24 Months 1.8

o HE EMI Calculation: HE EMI = (Multiplier * Existing property loan

EMI) – EMI of any loan taken within last 6 months.

Lease Rental Discounting

o Tenor

Tenor not to exceed balance period of lease agreement

Maximum tenor of LRD loan = 9 years

o HE EMI: HE EMI <= 90% of net lease rental as per current month.

Other loan obligations to be ignored.

o Leasee

Listed Indian Companies.

P a g e | 50

Indian subsidiary of MNC listed in its Parent Country.

o Lease Period and other norms

Lease agreement should have minimum lease period of 3

yrs.

If rental credit yet to start, we can consider subject to:-

Bank credit verification of security deposit/advance

rent.

Rent credit to start before first EMI due date.

Property is complete and possession given to Leasee.

Rent agreement is registered.

o Property related norms:

Property mortgaged to be the same as property given on

lease

LTV is as per standard grid of HE.

o Special norms on documents

Bank statement reflecting at least two rental credits

required.

Copy of lease agreement.

Special LRD documents. (Letter 1, Letter 2, Escrow

Agreement and Agreement for Assignment of Rental).

P a g e | 51

Process Flow Chart

Process with simpler details

Check File as per Credit Checklist

If Ok; File Login, Assign Reference

no.

De-dupe

Ok

CIBIL Check

Not OK

Login Reject (with reasons)

If not ok; RTS

P a g e | 52

Prepare Loan Sheet

Check Eligibility under:

o Verified Income Program

o Repayment Track Record

o Balance Transfer

o Banking Program

Send any pendency's of documents to Sales Team

Valuations of Property (By Agency)

Title initiate

Personal Discussion by Credit Manager at office

Approvals done after everything is ok.

CIBIL

Ok

Verifications

CPV: Residence

CPV: OfficeCPV:

CollateralTVR

Not Ok

Reject

P a g e | 53

Competition

Bajaj Finance

Bajaj Auto Finance Limited was incorporated on March 25, 1987 as Bajaj Auto Finance Private Limited got converted into a public limited Company w.e.f. September 24, 1988

The company is registered with the RBI as a Non Banking Finance Company (NBFC) with effect from March 5, 1998

The Company primarily deals in the financing consumer durables, personal and small business loans, loan against property, and loan against shares.

Loan against Property

Loan against Property is a Loan facility which a person or an entity avails by keeping property as collateral.

Bajaj Finance offers Loan against Property for all business and personal needs - business expansion, working capital, loan consolidation, and marriage in the family, children’s education or any other need.

The loans are available up to Rs.12.5 Crores and can be paid back over a comfortable term up to 15 years.

Products Offered: o Loan Against Residential Property o Loan Against Commercial Property o Loan for Purchase of Commercial Property o Loan Against Plot o Lease Rental Discounting

Programs: o Normal Income Program: Loan on basis of financial statements. o Debt Consolidator: If one has multiple loans running and wants to

consolidate to one single EMI. There is also a flexibility of availing additional loan under this program.

o Alternate Income Program: You can avail of loans upto Rs. 1 Crore under Low LTV and Banking programs.

o Exclusive benefits:

Nil Prepayment Charges: Flexibility of partially or completely repaying the loan at any point of time without any charges on partial (1 EMI or more) or complete closure of loan after repayment of 6 monthly instalments.

P a g e | 54

Prompt Repayment Reward: Reward for repaying loan in time. They pay 1% of the Equated Monthly Installment (EMI) paid in the first 12 months subject to timely clearance and no defaults.

Free Personal Accident Insurance up to Rs. 10 Lacs. Best in class Insurance Schemes. Group Suraksha from Bajaj Allianz. Home Safe Plus from ICICI Lombard

The prevalent Bajaj FRR is 17% effective 1st Dec 2008. Bajaj FRR is the benchmark reference rate of BAFL Loan against Property and is determined based on the prevalent market conditions and the cost of funds of BAFL. As the cost of funds reduces/ increases, Bajaj FRR may reduce/ increase.

Any revision in this rate would impact the interest rate on the floating interest rate loans. Re pricing would be done only for the loans booked under the floating rate scheme. For the loans which have been booked under the fixed rate scheme there will be no changes done for the fixed rate period.

The increase/ decrease in the Interest rate will by default increase/decrease the loan tenor.

In case of increase in interest rate, if one wants to retain his existing EMI/ Tenor, you will have an option of making a part pre payment and keeping your EMI/ Tenor at the same level. No additional charges would be levied on the part pre payment

Standard Chartered

The Standard Chartered Loan against property is a multipurpose loan which can be taken against residential or commercial property and is available for personal expenses like holidays, education, marriage etc, debt consolidation or even business expansion.

The loan can be as high as 70% of the market value of the property and is available to Salaried, Self employed individuals, partnership firms and private Ltd / closely held companies.

Features:

A multipurpose loan at very attractive interest rates. "No Income" document scheme available No guarantors required. High loan amounts. Minimum documents and speedy approval.

P a g e | 55

Interest Rates applicable range between 11-12% Foreclosure Rate of 3% Attractive Home Saver Plan: Instead of taking the loan in lump sum, a

current account is opened for the customers for withdrawing flexibility. Loan up to Rs. 5 Crore available.

HDFC

Loan against Property (LAP): Loan against residential or commercial property. Loan to purchase Commercial Property (LCP) is a specially designed product to help expand business without reducing the capital from existing business.

Features & Benefits:

Loans from Rs. 2 Lacs onwards Borrow up to 50% of market value of the property. Flexibility to choose between an EMI based loan or an Overdraft: HDFC

offers overdraft against one’s self-occupied residential or commercial property and helps in saving money by paying interest only on the amount utilized.

High tenure loans for ease of repayment. Attractive interest rates. Simple and speedy processing. Specially designed products for Self Employed.

ICICI

Loan against Property: Loan is available at a reasonable rate and can be repaid comfortably over as many as 15 years.

Loan against property gives the owner of residential or commercial premises to leverage on the value of the property.

In case of Loan against Property the property should be self occupied by one of income considered applicants.

The security of the property ensures competitive rate of interest. The interest component of the EMI paid by Self Employed customers can be booked as expenses in their P & L.

P a g e | 56

Loans against Property can be availed by Resident Indian who is salaried or Self-Employed and also by Non- Resident Indian who are Salaried

Property Overdraft:

The Property Overdraft from ICICI Bank allows one to borrow money against the self occupied property. The overdraft facility comes with a multi-city cheque book and phone banking facility. The customer is charged interest only for the amount that he withdraws from the account. Whenever he deposits funds into the account, they go towards reducing the outstanding balance in the account. Property Overdraft can be availed by Resident Indians who are Self-Employed.

Some Features of Loan against Property

Loan up to 20 years provided the customer does not reach the age of 65 years or retire within that period.

Home Insurance plans to provide cover to Loan against Property in the face of any unforeseen event. In case of any of these happenings, the family will have the support of the insurance cover to pay for the outstanding Loan Against Property amount, without being burdened by the loan EMI's.

Citi Financial

Loan against Property Features:

Loans up to 60% of the market value of residential property. Loan against commercial property also available. Term of loan up to a period of 15 years. Loans from Rs. 2 Lakhs to Rs. 2 Crores. Flexible income criteria and loans against rented, vacant and self-

occupied residential properties. Loans can also be availed on property belonging to your family members.

Loan repayment term is available up to a period of 15 years and easy repayment on Equated Monthly Installments (EMIs) basis.

Special loan computation schemes for Self-employed Individuals. Easy income and property documentation criteria. Consolidation of all existing loans to one loan with an affordable

monthly EMI & comfortable long tenor option.

P a g e | 57

Buy over of existing Term Loans/ OD Facility with provision for EXTRA CASH.

Optional Insurance Plan also available to cover the risks.

Other Important Players:

Religare Money Line Kotak Mahindra India Bulls GE Money

P a g e | 58

Future Money’s Competition: A DSA’s Perspective

Best Selling Mortgage Programs:

o Standard Chartered: Rs. 225 Crore

o ICICI: Rs. 400 Crore

o Religare: Rs. 200 Crore.

o Bajaj Finance: Rs. 110 Crores.

o Future Money managed around Rs. 35 Crores during the same

period.

Key Competitive Points:

o Standard Chartered:

Mostly uses Net Profit as base to determine eligibility for

Loan.

Targets Cream Customers: Maintains quality of profile, thus

never entertains risky customers.

A big brand name hence, is able to attract big customers

because of its lower and flexible interest rates.

Home Saver Plan is very lucrative: Instead of taking the loan

in lump sum, a current account is opened for the customers

for withdrawing flexibility.

0

50

100

150

200

250

300

350

400

Standard Chartered

ICICI Religare Bajaj Finance

Future Money

225

400

200

110

35

Rs. Crores

Business Done for May '10

P a g e | 59

o ICICI:

Very Attractive for DSA’s.

Good Pay-out ratio and incentives.

o Religare:

The choice for DSA's because of their higher targets and

their attraction towards large ticket sizes of 5 - 10 Crore +.

Aggressive and hence cases which everybody else doesn't

approve, it approves.

Mortgage Residential, Commercial and even Industrial

Property.

Large Pool of Funds available after Ranbaxy takeover, thus it

is exploiting the market.

o Bajaj Finance:

Very Close to Future Money in terms of Programs.

Zero Foreclosure Charges: Flexibility of partially or

completely repaying the loan at any point of time without

any charges on partial (1 EMI or more) or complete closure

of loan after repayment of 6 monthly instalments.

Prompt Repayment Reward: Reward for repaying loan in

time. They pay 1% of the Equated Monthly Installment

(EMI) paid in the first 12 months subject to timely clearance

and no defaults.

The above two offer Bajaj a huge advantage.

An old and respected Brand.

P a g e | 60

Future Money’s Good and Bad

o Good

Surrogate Programs: They can attract many customer

profiles.

Easily suitable for any customer: 70 to 80% chances of

cases being booked.

Any amount can be paid in partly payments after 6

months: This is an attractive scheme as competitors allow a

certain percentage of the amount for the same purpose.

TAT for the whole process is very good: Below graph gives

the time take by the major players in the industry:

We can see above, Future Money takes only 7 days in

processing a loan, at distant second is ICICI with average

TAT of 10 days.

Disbursal system is very good and probably the best in the

industry. Because of the above TAT, Future Money enjoys

the advantage of speedy disbursals.

15

10

25

12

7

0 5 10 15 20 25 30

Standard Chartered

ICICI

Religare

Bajaj Finance

Future Money

Days

Turn Around Time

P a g e | 61

o Bad

Not a big Brand name: Nil in terms of brand awareness.

Low Targets: Hence has a lower average ticket size.

With Targets of just Rs. 50 Crores a month, Future Money is

way below other players. This leads to the incapability in

attracting higher ticket sized loans.

Easily Suitability for a customer comes along with higher

risk, leading to higher delinquency.

TAT and Disbursal good because Future Money handles

fewer cases than its competitors.

0

200

400

600

800

1000

250

1000

800

200

650

50

Rs. Crores

Targets for Mortgage Program

P a g e | 62

Recommendations for Future Money

Increase maximum loan amount: Need to increase loan amount from

the current Rs. 2 Crores. The move to increase it to Rs. 5 Crores is good,

but further increments needed in the future.

Improve Marketing: Some marketing needs to be done; to spread the

name of Future Money, to build awareness and this will definitely help in

increasing business.

Innovation in Programs: Certain new features needed to be adopted to

tackle competitors effectively and take advantage of the excellent

surrogate programs.

Improve Pay Outs and incentives: DSA’s don’t see much incentive in

giving cases to Future because other players offer much attractive

incentives. Bajaj offers 1-2%, Standard Chartered offers 1-1.45% as Pay

Out’s.

Reduce Interest Rates: This is not possible considering the cost of

capital, but this also calls for:

o Finding other cheaper source of funds.

o Work out a possibility to be more flexible in interest rates.

Improve De-dupe process: It throws lots of results and wastes time.

Implementation of new software is needed.

Speed up process:

o Approval takes a lot of time, this leads to rush at month end. Also,

it needs to be considered that lot of business in Home Equity is

from repeat customers and the relationship you build with them.

So, providing them with speedy disbursals, builds the trust.

o This might be possible if there is a rise in man power.

P a g e | 63

Conclusion

The has been considerable broadening and deepening of the Indian financial markets due to various financial market reforms undertaken by the regulators, the introduction of innovative financial instruments in recent years and the entry of sophisticated domestic and international players. A larger option for the consumer is getting translated into a larger demand for financial products and customization of services is fast becoming the norm than a competitive advantage. It is now undeniable that the face of the Indian consumer is changing. This is reflected in a change in the urban household income pattern. The direct fallout of such a change will be the consumption patterns and hence the banking habits of Indians, which will now be skewed towards Retail products. At the same time, the banking sector as a whole is seeing structural changes in regulatory frameworks and securitization. It is required by all players to integrate their existing systems into a faster and reliable system to cater to competition. Further, while much of the new wealth and consumption is expected to be created in urban areas, mid-tier and smaller cities are likely to emerge as attractive markets with substantial numbers of middle class customers. McKinsey Global Institute forecasts that almost two-thirds of India’s middle class opportunity will lie outside the top-tier urban areas (i.e., the eight main urban cities). This will create opportunities for investments in mid-tier and smaller cities and will lead to demand for organized retail formats, which will support further real estate development. The mortgage product program at Future Money is at par with competition, and being a new entrant in this industry of established players it still is being able to achieve its targets. A healthy interest rates with further strengthen its position, but to do that Future Money needs to procure funds at lower rates. This will be possible once Future Money improves its credit ratings. Considering, all findings we can say Future Money’s mortgage product will improve its market share in the coming years.

P a g e | 64

References

Future Capital Holdings website – www.fch.in

Capitaline database – www.caitaline.com

RBI website – www.rbi.org.in

Annual reports of Future Capital Holdings

HDFC Retail Research News Articles

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