RETAIL FINANCING

Retail Finance
Retail finance is lending to retail customers who have a requirement for a short or medium term capital. This financing is generally in the form of a loan facility or overdraft, with fixed repayment periods.This is called an EMI. The purpose of this facility is to tide over personal needs and commitments which a customer may have.For e.g, renovation of house, buying of household items, vehicle loan, consumer durable loans, marriage in the family. Given the nature of its requirements the repayment is also within a shorter period. The most common repayment tenor is 36 months. Ticket size for these loans is on an average Rs 1.5 Lacs to Rs 2 Lacs.However, Financiers depending on the income of the borrower and capacity to pay may have the maximum loan amounts pegged to Rs 10 Lacs.

Retail Finance ( Cont. )

Retail Finance is mostly lower tickets with large volumes. Due to the above, the modus operandi for these loans is more like an assembly line production. Parameters are therefore defined for the total product and may not be a case to case criteria driven. The Retail Banking Department is therefore structured in a slightly different pattern when compared to other Banking units. External Agencies are employed for a range of services.

Common Products of Retail Bank

Secured Products

Housing Loans Auto Loans Advances against financial Assets.

Unsecured Products

Personal loans Credit Cards Overdrafts

The interest rates applicable vary according to the above. While the Secured Products attract an interest rates between 8 to % 8% ; the Unsecured Products have rates between 11 to 11 8 % % depending on the product and customer profiles.

Working of Retail Finance Department

Department
Product Management

Functions
Designing New Product features Benchmarking to competition. Providing Training. Support to the Sales units Responsibility of Product Profitability Selling the Product in the Market. Defining the Geographic reach. Putting in Credit filters in the Product design. Controlling Frauds. Customer risk Assessment. Booking of Facility on Bank System. Maintenance activity. MIS Generation. Account Monitoring. Collections Activities Legal Recourse.

Sales

Risk Management

Operations

Collections and Recovery

External Agencies
Services of External Service providers is utilized for the following activity

Acquisition : The Direct Selling Agents ( DSAs) are hired for account sourcing. Collections Agencies :They are responsible for customer visitation and for verification purposes. Chartered Accounting Firms : Their services are sought for scrutiny of applications. They are commonly called CPAs.

However Customer selection criteria or credit approval process rests with the Bank Officials.

Retail processes

The Application sourcing is done by the Direct Selling agent ( DSA) who does cold calling on the Target segments defined by the Bank. Once the customer is interested he completes the documentation. The Documentation is then sent to the CPA for checking if the credit parameters are in compliance. The balance documents and PDCs are picked up by the DSA. Once the application is complete, it reaches the Credit Officer who does a final level check to ensure all criteria are met. From the Credit officer the documents move to the Operations for final disbursal and account maintenance. If the account reaches a delinquent status, the Collections team takes over the case for follow-up. All Credit criteria are governed by the Product Paper which is made before the product launch with necessary approvals.

Credit Criteria
The Product paper generally talks of some key criteria which will make the customer eligible for getting finance.
Income Age Type of employment Employer Years in employment Other obligations. Banking habits

Almost all financiers have a Field Investigation conducted to determine the standard of living of the borrower. If all the above are satisfactory the loan is sanctioned. Generally a clean loan is a multiple of Net Income the borrower generates and on a 3 year tenor, is about 10 times. All checks are conducted by the CPA. Retail lending is a highly outsourced Function

Auto Loans and Consumer Durable Loans

These loans are secured in nature as the assets are hypothecated or lien marked in favor of the financier. This is the most common form of lending and almost all financiers are into this product.The recent trends in consumer patters reveal that this is one of the most common borrowed product.Besides Foreign and private sector banks, the nationalized banks have also actively started sourcing this product. Due to overcrowding in this product, there is a lot of competition thereby leading to new schemes and better packaging. Generally there are three parties involved in this financing viz., the Financier, the customer and the manufacturer/dealer. External Agencies are used for Acquisition, Verification, Processing and Collections.

Auto Loans and Consumer Durable Loans

Some very common schemes under which this product operates are defined below. Vanilla Advance EMI scheme 0 interest schemes. A Vanilla scheme is the oldest and most common , where the amount financed is the principle, the rate of interest is fixed and the tenor predefined. Based on a combination of this, an installment amount is generated which the customer needs to pay till the expiry of the tenor. For convenience all tenors are on a monthly rest. Some variants in this scheme are the step up and the step down, where the EMIs may either be more or less at the beginning of the scheme and keep changing.

Auto Loans and Consumer Durable Loans

Under the Advance EMI scheme a number of EMIs are taken upfront from the customer,which goes towards reducing the principal. The balance EMIs are then calculated on the remaining principle. Financiers use this method to communicate a lower interest rate to the customer. In certain cases of consumer durable finance almost 9 to 10 EMIs are taken in advance which makes the scheme look like a 0 interest scheme. Currently with customers being interest sensitive, lot of the financiers have tied up with Manufactures and dealers for financing their products. A deal is struck where the Manufactures/Dealers give discount on their products to the financier. The financier adjusts this discount towards the interest thereby making it a low interest or 0 interest scheme for the customer.The discount so obtained and adjusted is called subvention.

Auto Loans and Consumer Durable Loans

The difference between the Advance Interest scheme and the 0 interest scheme is that in the latter no upfront payment is sought from the customer. From an OPERATIONS front, the financier has to ensure that lien is marked on the asset, therefore customer level tracking has to be ensured. Care has to be exercised that the asset is insured. This makes the product labor intense and needs a strong backend support. There are a lot of External vendors who provide various services. Disposal of assets in case of bad debts may result on a loss as well. As the product is price sensitive and has a large operations cost,it makes good sense to be in this business, if there is scale and low NPAs.