Retail Credit

Issues

What is Retail Credit?

How is it different from Wholesale Credit, Corporate Credit & Mid-Corporate Credit?

Why is Retail Credit being talked about as a separate segment or sector?

Why is Retail Credit important to banks in general?

Why is Retail Credit important to a bank.

 Regulatory definition of Retail Loan for a bank:-

 “Regulatory Retail Portfolio” must meet four qualifications:

Orientation Criterion: Individuals and small businesses having annual turnover of up to Rs. 50 crores.

Product Criterion: Simple Term Loans or simple CC/OD.

Granularity Criterion: Portfolio should be widely dispersed; no single borrower’s exposure should exceed 0.2% of the portfolio.

Low value of individual exposure: Exposure to a single borrower should not exceed Rs.5 crores.

 Characteristics of Retail Loans:-

Retail Credit is targeted at individuals and small businesses.

Small ticket Size; limited exposure per borrower.

Large volume of low-value accounts.

Standardized loan products (Schematic Loans): Easy loan processing; does not demand high credit skills.

Risk Management can be done at portfolio level; Hence, for the bank, Retail Credit is operationally easier to manage than wholesale credit.

 What does Retail Credit  include?

Loans to individuals:

Housing Loan & its variants

Vehicle Loans

Personal Loans, Consumer Durables Loans

Educational Loans

Gold Loans; Overdraft limit against gold ornaments

Loans against bank’s own deposits, NSCs, Life Insurance Policies.

Mortgage Loan to individuals

Loans to Small Businesses:

Mortgage-backed Loan/Overdraft for business purposes

Loan facilities for working capital purposes

Term Loan facilities for fixed assets in business

 What are the advantages of Retail Loans to a Bank?

Dispersal of Credit Risk: Risk of default gets dispersed over a large number of borrowers, demographic characteristics, business sectors & geographies.

Higher interest rate: Bank can price retail credit better than wholesale credit.  In wholesale credit, large borrowers have upper hand in price negotiations.

Opportunity for stable growth of bank’s overall credit portfolio: Probability of switchover by borrowers to other banks lower; better customer/ borrower loyalty.

Opportunity for cross-selling various other banking products & services.

Lower delinquency

Individual borrowers: If they are selected carefully after proper due diligence, and after verifying regularity of income & repayment capacity, repayment behavior will be better.

Business Borrowers: In retail business credit, security by way of mortgage of property will be an effective deterrent to default.

Challenges in Retail Loan to a Bank?

Requires more resources in terms of manpower, technology, and systems.

Retail Business credit requires close monitoring at branch level, requiring more manpower.

Bank has to operate in a highly competitive market.

Marketing of retail credit has to be supported by publicity, promotion & advertising at local, regional and even national levels.

Needs continuous product development and innovation.

May often involve intermediaries or outsourced agencies, which requires constant monitoring.

In the case of unsecured Personal Loans & Business loans, there may be higher delinquency.

 Retail Lending concepts:-

Products/Schemes/Schematic

Loan Tenure: What factors does it depend on?

Fixed Rate Loans & Floating Rate Loans

Security: When is retail lending done on secured/ unsecured basis?

For individuals

For businesses

Loan to Value Ratio (LTV).

Equated Monthly Installments (EMI):

Where is EMI concept used? Why?

EMI on flat balance and EMI on reducing balance.

 Retail Lending norms:-

Income norms (minimum income, verification, etc.):

Salaried individuals

Non-salaried individuals (Self-employed/Business Persons/Agriculturalists)

Business entities

Norms for calculating “eligible loan amount”:

Margin on assets value & LTV ratio

Net Income Multiple

Repayment Capacity:

Individuals

Business firms

 Retail Lending Process:-

Application Form (Bank’s standard format)

KYC and Due Diligence

Pre-sanction spot/unit inspection

Opinion Sheet in respect of Borrower/Guarantor

Processing Sheet

Sanction Letter, duly accepted by the borrower & guarantor

Consent clause by the borrower(s)/ guarantor(s);

Declaration on execution of documents.

Loan Documentation

Disbursement

Follow-up, Monitoring, use of PDCs or ECS Debit Authority

Redemption of security/secured assets by borrower.

Recovery (in cases of default)

 How is due diligence on a Retail borrower done?:-

KYC norms: Proof of Identity and Proof of Address, Borrower Profile.

Employer references/Third party references/Market Reports.

Salary slips/IT Returns/Sales Tax (VAT) Returns.

CIBIL Report:

For individuals - Consumer Bureau – CIBIL TransUnion Credit Score

For businesses - Commercial Bureau – Company Credit Report.

Confidential credit opinion / information report from the existing bankers (IBA format).

Scrutiny of account statements of other banks.