Credit Risk Management in HDFC Bank

A STUDY ON RISK MANAGEMENT BY HDFC BANK ON PERSONAL
LOANS
HDFC BANK LIMITED
DEPARTMENT: PERSONAL LOAN
Submitted By:
Ayesha Mathur (18020241018)
MBA-IB 2018-20
Symbiosis Institute of International Business
Under the guidance of -
Project Guide: Mr. Vikram Kachru, Branch Manager, (Sangvi, Pune)
Contact: 9819082022
Email: Vikram.kachru@hdfcbank.com
Ayesha Mathur 30th May 2019 Page 1

CONTENTS
1. Acknowledgement ……………………………………………………………………3
2. Executive summary …………………………………………………………………..4
3. Organization profile…………………………………………………………………..6
4. Context of study……………………………………………………………………..12
5. Literature review…………………………………………………………………….15
6. Objectives and methodology………………………………………………………...19
7. Results and analysis ………………………………………………………………...20
8. Conclusion…………………………………………………………………………..36
9. Recommendations…………………………………………………………………..38
10. Annexure……………………………………………………………………………39
11. References…………………………………………………………………………..43

ACKNOWLEDGEMENT
The internship opportunity that I had with HDFC Bank Limited provided me a great chance
for learning and professional development. During this time period I learned a lot about Banks,
Banking practices and Banking products.
Bearing this in my mind I would first like to thank Mr. Vikram Kachru, Branch Manager
(Sangvi Branch, Pune), for his in- depth knowledge, experience, guidance and constant
monitoring that helped me complete my project.
I am grateful to staff of Personal loan department-Mr. Mayur Tiwari (), Mr. Sachin Mane (),
Ms. Gayatri Khairnar (TSE, Personal Loan) for their leadership and mentoring throughout the
internship period.
I also want to express my deepest gratitude to the staff of HDFC Bank Limited, Sangvi Branch
– Ms. Tejaswi Prakash (PB-WD), Mr. Sameer Mulani (PB), Mr. Dheeraj Kalantri (Teller-
Authoriser), Ms. Swati Sulakhe (Teller), Mr. Praveen Kumar (Teller), Mr. Amit Sinha (PB-
Authoriser), Ms. Shivangi Singh (PB), Mr. Sharad Mapari (RM), Mr. Prafull Mane (ABM-
Current Accounts) for their teachings and support.
Most importantly I would like to thank Ms. Neha Patvardhan for providing me with direction,
guidance and support that made this project a success.

EXECUTIVE SUMMARY
The HDFC Bank Limited (Housing Development Finance Corporation) is an Indian banking
and financial services company headquartered in Mumbai, Maharashtra. HDFC Bank is India’s
largest private sector lender by assets.
The bank has a vast portfolio of assets ranging from savings accounts and deposits to
investments and insurances.
This study primarily focusses on Personal Loans and the credit risk management processes
undertaken by the bank.
Personal Loan is an unsecured loan taken by individuals from a bank or a non-banking financial
company (NBFC) to meet their personal needs. Unlike a home or a car loan, a personal loan is
not secured against any asset. As it is unsecured and the borrower does not put up collateral
like gold or property to avail it, the lender, in case of a default, cannot auction anything the
borrower owns.
Personal loans, however, are less risky for borrowers but highly risky for banks since they are
unsecured. In case of default, banks have very few means to recover their amount.
Personal loans form a part of retail lending. For India’s three largest lenders — State Bank of
India, HDFC Bank and ICICI Bank— retail accounts for more than half of their loan books.
Over the past few years, there has been a structural shift in banks’ loan books. The share of the
retail portfolio has risen evidently.
HDFC bank’s personal loans are done in 10 seconds and 50-60% credit cards are done within
10 seconds if the customer has an offer. In semi-urban and rural areas, all its products are
available in feature phone in 11 languages.
The Bank has various Personal Loan alternatives, such as:
i. Offers – 10 seconds (minimum amount ₹50,000, maximum amount depends on the
salary; Tenure: 1-5 years; Online Application; Disbursal in seconds)
ii. Top Up 10 Seconds (Top up loan on an ongoing 10 seconds offer of Personal Loan)
iii. Top up F4 (Physical login)
iv. Green channel (Physical login)
v. PQ (Bank Statement, KYC, Physical login)

Since, the personal loans form a part of unsecured lending segment of the bank, the bank faces
a high credit risk.

The Bank’s credit risk management on Personal Loan consists of three main phases:
i. Precautions before application
The Bank, before extending a loan needs to ensure recovery of its funds. Therefore,
certain eligibility criteria are laid down to ensure that the applicant can be
considered creditworthy and would make timely repayments of the loan amount.
This section contains the eligibility criteria which determines whether the loan or
the particular amount of loan can be extended to that customer.
Following are the main considerations by the bank:
a. Customer profiles
b. Age
c. Minimum Net Monthly Salary
d. Loan Amount
e. Tenor
f. Number of years in current residence
g. Telephone at residence and office
h. Years in employment
i. Multipliers
ii. Precautions before approval
After the physical or online application is filled, the Bank does a background check
on the customer on its own discretion. This is done to ensure the genuineness of the
documents and other information given by the applicant.
The following are a part of this process:
a. RIC unit
b. CIBIL Score
c. Verification
d. Salary criteria
e. Stability in employment
f. Job profile
iii. Consequences of default of payment
On default of payment of even a single EMI, the bank can send third party recovery
agents in order to recover the amount and charge some amount on default or delayed
payment.
Also, the CIBIL score of the customer gets affected due to non-payment of an EMI.

ORGANISATION PROFILE
I. Industry Profile
The HDFC Bank is an important part of the Banking Sector of the Indian Economy.
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently
capitalized and well-regulated. Credit, market and liquidity risk studies suggest that
Indian banks have withstood the global downturn well.
The Banking Industry has recently witnessed the roll out of innovative banking
models like payments and small finance banks.
The Indian banking system consists of 27 public sector banks,21 private sector
banks, 49 foreign banks, 56 regional rural banks,1562 urban cooperative banks and
94,384 rural cooperative banks.
Image 1: Banking Sector in India
The major players in the Indian Banking industry are- Bank of Baroda, State Bank
of India, Kotak Mahindra Bank, Citibank, Standard Chartered, HSBC Bank, ABN
Amro, HDFC Bank, Punjab National Bank, American Express, etc.
Indian banks are increasingly focusing on adopting integrated approach to risk

management. Banks have already embraced the international banking supervision
accord of Basel II, and majority of the banks already meet capital requirements of
Basel III, which has a deadline of 31 March 2019.
During the period 2007-18, total lending increased at a CAGR of 10.94% and total
deposits increased at a CAGR of 11.66%.
India’s retail credit market is the 4th largest among the emerging countries. It
increased to US $281 billion on December 2017 from US $ 181 billion on
December 2014.

In September 2018, the Government of India also started India Post Payments Bank
(IPPB) which has branches across 650 districts. This was done to achieve the
objective of financial inclusion.
As of Q1 FY19, total credit extended by commercial banks surged to Rs 86,976.2

billion (US$ 1,297.4 billion) and deposits grew to Rs 115,070.3 billion (US$
1,716.4 billion).
Total banking sector assets (including public and private sector banks) have
increased at a CAGR of 6% to US$ 2.2 trillion during FY13–18. FY13-18 saw
growth in assets of banks across sectors.
Public sector banks in India account for over 68.3% of interest income in FY18.
Their interest income growth during FY 09-18 was CAGR 6.6%.
The Indian Banking Sector has also been improving its technological base and
employing innovative banking products and services. The digital payments system
in India has also evolved. It has evolved the most among 25 countries, including
UK, China and Japan, with the IMPS being the only system at level 5 in the Faster
Payments Innovation Index (FPII). India stepped up to 28th position on the
government's adoption of e-payments ranking in 2018. Digital influence in the
Indian banking sector has been growing faster due to the rising digital footprint.
India’s digital lending stood at US$ 75 billion in FY18. India’s digital lending stood
at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion by FY2023 driven
by the five-fold increase in the digital disbursements.
With the rise in digital payments, the banks have started shutting down their ATMs.
As more and more people are transacting online, along with the government’s push
for a cash less economy, less people are making transactions through an ATM. The
cost of managing an ATM is quite higher than the cost of paying fees to a partner
bank whose ATM is already there in a location. As a result, the growth in the
number of Bank ATMs has reduced in the past few years.
The Indian Banking sector is also scarred by various frauds, scams and NPAs. A
survey by FIS, a financial services technology provider, showed that 18% of Indians
suffered from an online banking fraud. This was a higher percentage than any other
country. In comparison, only 8% of people from Germany reported a fraud followed
by 6% in the UK. According to Reserve Bank of India reports, during the past five
years more than 23,000 cases of fraud involving Rs 1 lakh crore have been reported.
Top Banking fraud cases are of over Rs 13,000-crore. Fraud in the Punjab National
Bank (PNB) allegedly committed by diamantaire Nirav Modi and his uncle Mehul
Choksi, the promoter of Gitanjali Gems. Vijay Mallya the Chairman of Kingfisher,
United Breweries and many other companies allegedly routed Rs. 9,000
crores (US$1.3 billion) in loans from 17 Indian Banks and ran away and is still at
large. Rs.600 Crore Loan Fraud in IDBI allegedly been committed by Aircel
promoter C Sivasankaran.

The gross NPAs of all banks in the country amount to Rs 8,40,958 crore in
December 2017 as per Government of India Reports. The NPAs are led by industry
loans followed by the services and agriculture sector loans. Rising volume of Bank
frauds is swallowing all the economic development and is causing financial
indiscipline in the country.
Enhanced spending on infrastructure, speedy implementation of projects and

continuation of reforms are expected to provide impetus to growth. Based on these
factors it can be said that India’s banking sector is poised for robust growth as the
rapidly growing business would turn to banks for their credit needs.
With entry of foreign banks, competition in the Indian banking sector has
intensified. Banks are increasingly looking at consolidation to derive greater
benefits such as enhanced synergy, cost take-outs from economies of scale,
organizational efficiency & diversification of risks.
India ranks among the top six economies with a GDP of US$ 2,597 in 2017 and
economy is forecasted to grow at 7.3% in 2018. The sector will benefit from
structural economic stability and continued credibility of Monetary Policy.
II. About the Company

HDFC Bank Limited (Housing Development Finance Corporation) is an Indian
banking and financial services company headquartered in Mumbai, Maharashtra.
HDFC Bank is India’s largest private sector lender by assets. As of 30 September
2017, the bank's distribution network was at 4,729 branches and 12,259 ATMs
across 2,669 cities and towns. HDFC Bank also has overseas wholesale banking
branches in Bahrain and Hong Kong, and representative offices in UAE and Kenya.
HDFC Bank Ltd Was incorporated on August 30, 1994 as Housing Development
Finance Corporation Ltd. was amongst the first to receive an ‘in principle’ approval
from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part
of RBI’s liberalization of the Indian Banking Industry in 1994.
III. Business Focus

HDFC Bank’s mission is to be a World Class Indian Bank. The objective is to build
sound customer franchises across distinct businesses so as to be the preferred
provider of banking services for target retail and wholesale customer segments, and
to achieve healthy growth in profitability, consistent with the bank’s risk appetite.
The bank is committed to maintain the highest level of ethical standards,
professional integrity, corporate governance and regulatory compliance. HDFC
Bank’s business philosophy is based on five core values: Operational Excellence,
Customer Focus, Product Leadership, People and Sustainability.

IV. Business Profile
HDFC Bank caters to a wide range of banking services covering commercial and
investment banking on the wholesale side and transactional / branch banking on the
retail side. The bank has three key business segments:
 Whole sale banking
The Bank’s target market is primarily large, blue-chip manufacturing

companies in the Indian corporate sector and to a lesser extent, small & mid-
sized corporates and agri-based businesses. For these customers, the Bank
provides a wide range of commercial and transactional banking services,
including working capital finance, trade services, transactional services, cash
management, etc.
 Treasury
Within this business, the bank has three main product areas - Foreign Exchange
and Derivatives, Local Currency Money Market & Debt Securities, and
Equities. These and fine pricing on various treasury products are provided
through the bank’s Treasury team. To comply with statutory reserve
requirements, the bank is required to hold 25% of its deposits in government
securities. The Treasury business is responsible for managing the returns and
market risk on this investment portfolio.
 Retail Banking
The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a one-
stop window for all his/her banking requirements. The products are backed by
world-class service and delivered to customers through the growing branch
network, as well as through alternative delivery channels like ATMs, Phone
Banking, Net Banking and Mobile Banking.
V. Product Line
HDFC Bank provides a wide range of banking products. These are mentioned
below:
i. Accounts and Deposits
 Savings
 Salary
 Current accounts
 Deposits
 Safe deposit locker
 Rural accounts
 Pension accounts

ii. Loans and Cards
 Personal loan
 Home loan
 Car loan
 Two- wheeler loan
 Business loan
 Loan against property
 Education loan
 Loans for professionals
 Smartdraft- Overdraft against salary
 Gold loan
 Loans against assets
 Government sponsored programs
 Rural loans
 Loan against securities
 Loans on credit card
 Pradhan Mantri Mudra Yojana
 Credit cards
 Debit cards
 Forex cards
iii. Demat
 Demat account
 2 in 1 account
 3 in 1 account
iv. Investment
 Mutual funds
 Invest Now
 Public Provident Fund
 Sukanya Samriddhi Yojana
 Atal Pension Yojana
 8% Savings Bonds
 National Pension Scheme
 Equities and Derivatives
 Sec 54 EC- Capital Gains Bonds
v. Insurance
 HDFC Life Cancer Care

 HDFC Ergo Critical Illness- Platinum Plan

 HDFC SL YoungStar Super Premium
 HDFC Ergo Health Suraksha
 HDFC Ergo Motor Insurance
vi. Forex
 Travel solutions
 Remittance products
 Forex exchange

CONTEXT OF STUDY
Banks in India have found new avenues and opportunities for deploying their funds. As a result,
they have been lending to the retail sector in a big way.
Retail lending can be defined as lending to individuals, as opposed to institutions. Retail
lending covers a host of loans: Home loan, Education loan, Credit Card, Consumer Durables
Loan, Auto Loan, etc. Personal loan is a part of this segment.
For the country’s three largest lenders — State Bank of India, HDFC Bank and ICICI Bank—
retail accounts for more than half of their loan books. Over the past few years, there has been
a structural shift in banks’ loan books. The share of the retail portfolio has risen from 18.3% in
2013 to 24.8% in March 2018 and the data for October 2018 put this share at 25.5%.
In the last four years, with corporate lending becoming unviable due to the rise in defaults and
losses, the push toward retail lending has become even stronger. Lending to retail has now
become somewhat safer as banks are heavily relying on credit bureaus that help them with the
credit history of borrowers and also help assess default risks. A study by credit bureau Trans
Union CIBIL notes that millennial and Generation X consumers are driving much of this
growth and comprise well over half of all retail accounts and balances.
Image 2: Share of retail loans in Banks’ loan books in non-food credit
Personal Loan is an unsecured loan taken by individuals from a bank or a non-banking financial
company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such
as income level, credit and employment history, repayment capacity, etc.
Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured
and the borrower does not put up collateral like gold or property to avail it, the lender, in case
of a default, cannot auction anything the borrower owns. The interest rates on personal loans
are higher than those on home, car or gold loans because of the greater perceived risk when
sanctioning them.

The portion of unsecured loans has been increasing in bank’s books over the last few years.
According to the Reserve Bank of India (RBI) data, in May 2010, the total outstanding personal
loan amount with banks stood at ₹5.89 lakh crore. This amount as on June 2018 was ₹19.33
lakh crore. Due to slump in capital expenditure by the corporate sector, the demand for
industrial credit has decreased, but households and individuals continue to take fresh loans as
the services sector (of the Indian economy) continues to grow.
The use of technology has also helped deepen the customer reach for banks. HDFC Bank is
using virtual robots to substitute repetitive functions and save time. “We will distribute
digitally. We are giving loans in 10 seconds. It delights customers and changes my cost
dynamics,” says Aditya Puri (MD, HDFC Bank).
Image 3: HDFC Bank – Growth in Retail Assets
The Bank’s personal loans are done in 10 seconds and 50-60% credit cards are done within 10
seconds. In semi-urban and rural areas, all its products are available in feature phone in 11
languages. Most retail loan products, excluding home loans, earn banks a wider margin
compared to corporate loans.
The Bank has various Personal Loan alternatives, such as:
i. Offers – 10 seconds (minimum amount ₹50,000, maximum amount depends on the
salary; Tenure: 1-5 years; Online Application; Disbursal in seconds)
ii. Top Up 10 Seconds (Top up loan on an ongoing 10 seconds offer of Personal Loan)
iii. Top up F4 (Physical login)
iv. Green channel (Physical login)
v. PQ (Bank Statement, KYC, Physical login)

Image 4: Unsecured Lending at HDFC Bank
Since, the personal loans form a part of unsecured lending segment of the bank, the bank faces
a high credit risk.
However, defaulting on a personal loan reflects in borrower’s credit report and causes problems
when they apply for credit cards or other loans in future.
Personal loans, however, are less risky for borrowers but highly risky for banks since they are
unsecured. In case of default, banks have very few means to recover their amount.
This project, thus, attempts to analyze and identify the ways HDFC bank manages the risk on
personal loans extended by it. The Bank takes numerous steps before approving unsecured
loans. The credit standing of an applicant for a personal loan is investigated intensively because
it indicates, within reasonable limits, the likelihood of repayment.

LITERATURE REVIEW
The Banking sector has a pivotal role in the development of an economy. It is the key driver of
economic growth of the country and has a dynamic role to play in converting the idle capital
resources for their optimum utilization so as to attain maximum productivity (Sharma, 2003).
In all economic systems, banks have the leading role in planning and implementing financial
policy. The difference lies with prioritizing goals and their way of achievement. Based on the
neo-liberal model, achieving greater profits by using all means is an end in itself, while in the
socialistic systems bank operations also aim at improving economy in general and at satisfying
social needs.
Banking is considered to be a very risky business, but this risk should be taken cautiously
(Carey, 2001). Risk is the probability that the future real return will be lower than the expected
profitability (Halpern, P. et al. 1994). It is the difference between the expected result and the
result achieved. In banks the risk is the quantitative expression of an event of loss generator
(Tileagă, Niţu, & Niţu, 2013). Bank risk is the degree of loss suffered by a bank where the
counterparty (the client) bankrupts without being able to pay its obligations to the bank. Banks
face numerous risks – credit risk, liquidity risk, residual risk, counterparty credit risk, market
risk, interest rate risk, foreign exchange risk, country risk, operational risk, legal risk, etc. For
the purpose of this study, our focus is on credit risk. However, it should be borne in mind that
banks are very fragile institutions which are built on customers’ trust, brand reputation and
above all dangerous leverage. In case something goes wrong, banks can collapse and failure of
one bank is sufficient to send shock waves right through the economy (Rajadhyaksha, 2004).
Therefore, the banks should carefully identify the risks and analyze the degree of those risks
so as to be able to minimize the losses and be prepared for any kind of contingencies. The
bankers must also look at risk management as an ongoing process and must be undertaken with
utmost care.
The prime activity of a bank is to lend money and earn profits in the form of interest but by
doing so the money is exposed to the risk of default where the borrower is not able to pay the
money back in specified period or becomes insolvent. This is known as credit risk. Credit risk
can also be defined as the risk that either the interest or principal component of a loan will not
be paid as and when they fall due. Credit risk arises directly from the lending activities of the
banks (Indranarain Ramlall, 2018). A customer taking loan may or may not pay his installments
on time. This might result in a short-term loss for the bank if the there is a delayed repayment
or a long-term loss for the bank if the repayment stops and the loan asset turns into a Non-
Performing Asset (NPA). Credit risk is borne by all lenders and will lead to serious problems,
if excessive. For most banks, loans are the largest and most obvious source of credit risk. It is
the most significant risk, more so in the Indian scenario where the NPA level of the banking
system is significantly high (Sharma, 2003).
Credit Risk depends on both external and internal factors. The internal factors include – 1.
Deficiency in credit policy and administration of loan portfolio; 2. Deficiency in appraising
borrower’s financial position prior to lending; 3. Excessive dependence on collaterals; 4.
Bank’s failure in post-sanction follow-up, etc. The major external factors – 1. The state of
economy; 2. Swings in commodity price, foreign exchange rates and interest rates, etc. The
Credit Risk is generally made up of transaction risk or default risk and portfolio risk. The
portfolio risk in turn includes intrinsic and application risk. Balancing risk and return is not an

easy job as risk is subjective and not quantifiable whereas return is objective and measurable.
If there exist a way of adapting the subjectivity of the risk into a number then the balancing
exercise would be significant and much easier.
Risk can have a significant impact on a credit institution, both as an influence that is felt in
recorded direct losses, and an influence whose effects are felt on customers, staff, business
partners and even the bank authority. Conventionally, credit risk management was the main
task for banks. With liberal deregulation, market risk arising from opposing changes in market
variables, such as interest rate, foreign exchange rate, equity price and commodity price has
become relatively more significant. Even a small change in market variables causes
considerable changes in income and financial value of banks (Baber, 2016). Losses caused due
to negligence of the banks during the process of measuring ad analyzing the risks associated
with the loans extended by them, have impact not only on the banks but also on the economy
as a whole. There have been numerous instances where the governments had to step in for
Public Sector Banks in India so as to be able to minimize the losses incurred due to huge loan
assets turning into Non-Performing Assets (NPAs). Governments then take have to take
stringent actions against the culprits and also feed money into those Public Sector banks
affected by the frauds and defaults. However, the governments have also failed at certain points
in bringing the culprits to justice and there has been a huge loss of public money and trust.
Given the experience, banks agree that the most important cause of losses is the excessive
concentration of risk on a customer, industry or economic sector, a country. It is imperative
that a respecting bank strategy is to include programs and procedures regarding the
management of banking risks in order to minimize the likelihood that potential exposure risks
to affect the Bank (Tileagă et al., 2013). It is obvious that an efficient banking strategy should
include both programs and bank risk management procedures designed to actually minimize
the likelihood of these risks and potential exposure of the bank. This follows from the main
objective of these policies, namely to minimize losses or additional expenses incurred by the
bank, and the central objective of bank activity is to obtain a higher profit for shareholders.
Banks have learnt that it is difficult to recover dues from the loans extended to the Industry,
whereas it is quite easy to recover dues on retail lending. Since, the amount and duration of
loans is less in retail lending, the returns are faster. The credibility can also be easily
ascertained. So, in a hope to reap greater benefits from retail operations, the banks have been
keen on pushing for retail lending. In most cases the retail loans are secured by some asset, but
in few cases, such as in personal loans or business loans only the credibility of the borrower is
there to pacify the banks.
Since exposure to credit risk continues to be the leading source of problems in banks world-
wide, banks and their supervisors should be able to draw useful lessons from past experiences.
Banks should now have a keen awareness of the need to identify, measure, monitor and control
credit risk as well as to determine that they hold adequate capital against these risks and that
they are adequately compensated for risks incurred. Many banks now held the employees
accountable for any kind of wrongdoings. The employees have to acknowledge all the details
provided by the customer and put their seal and signature on the forms. If there are any
discrepancies, the employees are supposed to bring them to foreground and resist from
supporting such malignant practices. If, however, the bank on a later stage finds out of any
discrepancy in the application, it can cost the employee his whole life and career.
Risk management in Indian banks is a relatively newer practice, but has already shown to
increase efficiency in governing of these banks as such procedures tend to increase the

corporate governance of a financial institution. In times of volatility and fluctuations in the
market, financial institutions need to prove their mettle by withstanding the market variations
and achieve sustainability in terms of growth and well as have a stable share value. Hence, an
essential component of risk management framework would be to mitigate all the risks and
rewards of the products and service offered by the bank. Thus, the need for an efficient risk
management framework is paramount in order to factor in internal and external risks. Ayyappan
and Ramachandran (2011) conducted a study of 22 public sector and 15 private sector banks
to predict the determinants of the credit risk in the Indian Commercial banking sector by using
an econometric model. The outcome of the study is the non-performing assets had a strong and
statistically significant positive influence on the current non-performing assets. They opined
that the problem of NPA is not only affecting the banks but also the whole economy.
Risk management underlines the fact that the existence of an organization depends deeply on
its competences to forestall and get ready for the change rather than just waiting for the change
and respond to it. The objective of risk management is not to forbid or stop risk taking activity,
but to safeguard that the risks are deliberately taken with full knowledge, clear determination
and considerate so that it can be measured and moderated. It also averts an organization from
suffering intolerable loss causing an organization to flop or materially damage its competitive
position (Baber, 2016).
Choudhary and Navin (2011) designed and developed an internal credit rating model for banks
which improves their current predictive power of financial risk factors. They highlighted how
banks assess the creditworthiness of their borrowers and how can they identify the potential
defaulters so as to improve their credit evaluation.
The very appearance of credit risk is likely to experience a physical change in view of migration
of Tier- I borrowers and, more mainly, the entry of new segments like retail offering in the
credit portfolio. These developments are probable to contribute to the augmented potential of
credit risk and would range in their effects from awkwardness to disaster. To avoid being
blindsided, banks must develop a competitive Early Warning System (EWS) which combines
strategic planning, competitive intelligence and management action. (Prof. Rekha Arun Kumar
and Dr. G. Kotreshwar, 2008).
A cornerstone of safe and sound banking is the design and implementation of written policies
and procedures related to identifying, measuring, monitoring and controlling credit risk. Credit
policies establish the framework for lending and guide the credit-granting activities of the bank.
Credit policies should address such topics as target markets, portfolio mix, price and non-price
terms, the structure of limits, approval authorities, exception processing/reporting, etc. Such
policies should be clearly defined, consistent with prudent banking practices and relevant
regulatory requirements, and adequate for the nature and complexity of the bank’s activities.
The policies should be designed and implemented within the context of internal and external
factors such as the bank’s market position, trade area, staff capabilities and technology. Policies
and procedures that are properly developed and implemented enable the bank to: (i) maintain
sound credit-granting standards; (ii) monitor and control credit risk; (iii) properly evaluate new
business opportunities; and (iv) identify and administer problem credits.
Risk management underscores the fact that the survival of an organization depends heavily on
its capabilities to anticipate and prepare for the change rather than just waiting for the change
and react to it, a committee method may be adopted to achieve various risks. Risk Management
Committee, Credit Policy Committee, Asset Liability Committee, etc. are such groups that

handle the risk management features. The efficiency of risk measurement in banks depends on
well-organized Management Information System, computerization and networking of the
branch activities (R.S. Raghavan, 2003). Functions of risk management should actually be bank
precise dictated by the size and quality of balance sheet, complexity of functions, technical/
professional manpower and the status of MIS in place in that bank. There might not be one-
size-fits-all risk management segment for all the banks to be made applicable homogeneously.
Integration of systems that includes both transactions processing as well as risk systems is one
of the perquisites for effective risk management system.
The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit
risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks
should also consider the relationships between credit risk and other risks. The effective
management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking organization.
The success of risk measurement in banks depends on competent Management Information
System, computerization and networking of the division activities. The data warehousing
solution should effectually interface with the transaction systems like core banking solution
and risk systems to organize data. An objective and dependable data base has to be constructed
up for which bank has to examine its own past performance data relating to loan defaults,
trading losses, operational losses etc., and come out with standards so as to prepare themselves
for the future risk management activities (Baber, 2016). Banks also need to monitor actual
exposures against established limits. This can be done only with an effective management
information system to ensure that exposures approaching risk limits are brought to the attention
of senior management.

OBJECTIVES AND METHODOLOGY
I. Objective
Being a student of MBA (Finance), knowing more about the Credit Risk
Management undertaken by the bank was fascinating.
Since, I was assigned to the Personal Loan Department, I limited the scope of this
study to personal loans only.
The following objectives have been selected for this study:
i. To understand the concept of Personal Loan

ii. To understand the manner in which Credit Risk on Personal Loans is
managed by HDFC Bank
iii. To understand the precautions taken by HDFC Bank before approval of
Personal Loan to minimize the risk of default
iv. To understand the verification process undertaken by the bank before
approval of Personal Loan to minimize the risk of fraud
v. To identify the steps taken by HDFC Bank on default of payment of EMI of
Personal Loan
II. Methodology
This study is focused on creating an understanding of the ways in which HDFC

Bank minimizes its risk on Personal Loans.
For purpose of this study I have adopted the Descriptive Research methodology.
To conduct this study, data has been collected from Secondary sources. The
secondary sources include Websites, Newspapers, Journals, HDFC Bank
Publications, RBI publications and Research papers.

RESULTS AND ANALYSIS
I. PRECAUTIONS BEFORE APPLICATION
A. Eligibility Criteria
HDFC Bank has laid down certain eligibility criteria that need to be fulfilled for
application and approval of personal loan. These are given below:
A.Minimum Net
A.Customer A.Age
Monthly Salary
profiles Requirement
Requirement
A.Number of
A.Loan Amount A.Tenor years in current
Residence
A.Telephone at
A.Years in
Residence and A.Multipliers
Employment
office
Image 6: Eligibility Criteria
i. Customer profiles
 Salaried- Categorization as per Company

 Elite Personal Loans
 Government Segment
 Employees of BPO
 Employees of select NBFCs
 Employees of Aviation sector companies
 Employees of insurance companies
 Salaried Journalists
 Employees of ADFC
 Employees of HDB Financial Services
 HDFC Bank Staff
 Skilled Workers Policy
 Railways

 Defence personnel
 Police personnel
 Education Institutes and Entities
 High risk sectors & specific filters
ii. Age Requirement
 Age 21-60 years (Maximum age as on the maturity of the loan)
iii. Minimum Net Monthly Salary Requirement
Minimum net income required to avail personal loan for customers having
 Corporate Salary Account (CSA) with HDFC Bank is ₹15,000/- pm
 CASA with HDFC Bank or OM is ₹20,000/- pm
Any person’s eligibility is majorly determined by his income (Net Take Home
(NTH) salary).
An applicant’s capability of paying EMIs is calculated on the basis of his

income earned.
Maximum EMI payable = 70% of Net Monthly Income
iv. Loan Amount
Minimum loan amount: ₹50,000
Location Tier Maximum Loan Amount

Tier 1 ₹40 lakhs
Tier 2 ₹30 Lakhs
Tier 3 ₹20 Lakhs
Tier 4 ₹10 Lakhs
Tier 5 ₹10 Lakhs
Maximum Loan Amount (Subject to location caps):
 Super Cat A/ Cat A/ CSA Cat A - ₹40 Lakhs

 Cat B/ CSA Cat B - ₹10 Lakhs
 Cat C/ CSA Cat C - ₹ 5 Lakhs
 Cat D - ₹ 75000/- (Maximum of ₹1,00,000, by clubbing of spouse’s income)
 CSA Cat D- ₹1.5 Lakhs
v. Tenor
 Personal loan tenure varies from 12 months to 60 months.

 Customers have an option of fore closure after 12 months

vi. Number of years in current Residence
 Super Cat A/ Cat A/ CSA Cat A – 6 months

 Cat B/ CSA Cat B/ Cat C & CSA Cat C – 1 Year
 Cat D & CSA Cat D – 2 Years at current residence and 3 years in the city
for rented accommodation
(Not applicable if house is owned by self or immediate family member)
Above norms are not applicable for Super Cat A, Cat A, B, C and CSA A, B, C
if:
 CIBIL Score > 765

 PL F4 Eligible
 Owned House
 Current employment of 3 years in the same company
 Minimum Net Take Home (NTH) salary of ₹35,000 for Super Cat A/
Cat A/ Cat B/ CSA A/ CSA B
 City stability of 3 years (proof to be provided)
vii. Telephone at Residence and office
 Residence Telephone Norms

Landline/Post Paid or Pre-Paid mobile at residence
 Office Telephone Norms

Landline phone at office is a must for all customer segments (employees
of telecom operators like Airtel, RCom, Vodafone etc. are exempted)
Contact ability related risk-based approvals waived off (for cases where
either or both office/ residence telephone norms are not met), in case any
of the below conditions are met:
 Owned house/ government allotted quarters or F4 limit, or

 CIBIL score >=756, or
 Good match cases for CIBIL score 700-764
 At least one prepaid mobile of the customer is mandatory in all cases.
viii. Years in Employment
 Super Cat A/ Cat A/ CSA Cat A- 2 years in employment and 1 month in

current
 Employment with first month salary credit in new organization
 Cat B/ CSA Cat B/ Cat C/ CSA Cat C- 2 years in employment and 1
year in current employment
 Cat D/ CSA Cat D- 3 years in employment and 1 year in current
employment

Above norms are not applicable for Super Cat A, Cat A, B, C and CSA A,
B, C if:
 1st salary credit for professionally qualified in Super A

 Professionally qualified for other than Super A (PG degree or
engineering degree) with total work experience of at least 18 months
 Minimum NTH of ₹25,000 for Super Cat A/ Cat A/ CSA A/ Cat B/
CSA B with 1-month salary credit in the bank account
 CIBIL Score >765 with 1 salary credit
 PL F4 eligible with 1 salary credit
 Total employment of 3 years
 Only for total employment norms- Earning Co-applicant (family
members) meeting norms
ix. Loan Eligibility Multipliers
The Loan Eligibility Multiplier determines the maximum amount that any
customer can apply for.
For determining the appropriate multiplier, following steps need to be

undertaken:
i. Determine the company category

ii. Determine the NTH monthly salary of the customer
iii. Check the tenure of Personal Loan
iv. Identify the corresponding multiplier (See Annexure A)
v. Multiply it with the NTH Monthly salary of the customer to arrive at the
maximum loan amount that can be approved for that customer.
For example:
Suppose a customer working in TATA technologies earning a monthly salary
of ₹65000, applies for a personal loan of ₹3,00,000 for 36 months (3 Years).
The maximum amount of loan that can be disbursed to that customer will be
determined in the following manner:
i. Company Category- Super Cat A
ii. NTH- ₹59000 (after deducting
iii. Tenure-36 Months
iv. Multiplier – 13
v. Maximum loan amount = 13*59000= ₹767000
Thus, loan application for this customer can be approved.

B. Eligibility Criteria – Other requirements
i. Banking
 Latest 3-month bank statements/ computerized passbook (with 1st

page)
 In case of manual passbooks- 1st page of the passbook and
transactions for the last 6 months
 3 months’ salary credits to be reflected in this documentation
ii. Repayment
SI/ECS form all RECS locations and PDCs from other approved locations.
iii. Documentation
 Address proof – ADHAAR Card, Voter ID, Passport, Driving

License
 Identity proof – PAN Card, Passport
 Signature proof- PAN Card
 Latest salary slip (Salary slip waiver for Super Cat A company
employees with 6-month salary credit in bank; bank statement to be
documented)
iv. Cheque salary
If the salary is credited by a way of cheque as against direct credit to the

account, following filters should be applicable:
 Bank credit amount by cheque should be as per the Net Salary

amount mentioned in the latest pay slip.
 The variance in salary credit should not be more than 10% for the
latest 3 months
 Pay slip and Bank statement should be verified by the RIC
 Minimum 6 months banking to be considered
v. Educational qualification
 Graduate
 In case of Cat D/CSA D/Pvt Ltd companies- Proof to be provided
vi. Co-applicant requirement
Co-applicant requirement for bachelor and shared bachelor accommodation

in Software and Non- Software profiles is as follows:

Category Software Profile Non- Software Profile
Co-applicant is not required
if any of the following
conditions are met:
 Passport copy with
Teller Verification
(TVR) on permanent
address or with CPV
Super CAT A Co-applicant is not required
at permanent address
 CIBIL Score >= 765
 Customer with F4
limit
 CSA and more than
3-month salary
credits
Co-applicant is not required
if any of the following
conditions are met:
 CIBIL score >= 765
CAT A/B, CSA A/B  Customer with F4 Co-applicant is not required
limit
 CSA and more than
3-month salary
credits
Co-applicant is not required Co-applicant is not required
if any of the following if any of the following
conditions are met: conditions are met:
 CIBIL Score >= 765  CIBIL Score > 765
CAT C/D, CSA C/D  Customer with F4  F4 pre-approved
limit customer
 CSA and more than  CSA and more than
3-month salary 3-month salary
credits  NTH > ₹25000
Co-applicant is not required Co-applicant is not required
if any of the following if any of the following
conditions are met: conditions are met:
 CIBIL Score >= 765  CIBIL > 765
 Customer with F4  F4 pre-approved
CAT C/D, CSA C/D
Limit customer
 CSA and more than  CSA and more than
3-month salary 3-month salary
credits credits
 NTH > ₹25000
If the above-mentioned norms are not met, the case has to be processed as a risk-
based approval depending on CIBIL Score. However, risk-based approval need not
be taken if, any of the following conditions are met:

 CIBIL Score of the applicant > 800
 Co-applicant meeting norms is provided in the case
 Permanent address proof with Teller Verification (TVR) or CPV at the
same
vii. Factoring of Credit Card Obligations and Other Obligations
 Credit card outstanding to be considered on the basis of CIBIL score
Limit Outstanding Treatment as obligation

Not considered for eligibility
Up to 3 Times NTH
consideration
5% of the total credit card
outstanding to be treated as EMI
3-6 times of NTH
and factored for eligibility
calculation
Case to be rejected.
Can be considered with obligation
to be factored at 5% with following
>6 times criterions being met:
i. Customer NTH > ₹25000
ii. CIBIL Score >= 765
iii. FOIR to be capped at 70%
 All loan EMIs to be factored as obligation from NTH. If there are

any loans with 2 balance EMIs, they need not be considered as an
obligation
viii. FOIR Norms (Fixed Obligation to Income ratio)
Total existing EMI obligations + Card

Obligations (as applicable) + Proposed
HDFC Personal Loan EMI
FOIR =
Net Take Home salary (before obligating
existing EMIs)

FOIR Cap
NTH Income Company Category FOIR Cap
<₹25000 All company categories 60%
70%
>= ₹25000 & ₹35000 All company categories
Super A, CAT A/B/C,

>= ₹35000 NA
CSA A/B/C
CSA D, CAT D, GA,

>= ₹35000 70%
GB
Example (1) of FOIR calculation:

Applicant is working with Infosys Technologies Limited (Company Category-
Super Cat A); NTH as per last pay slip: ₹24000
Obligations:
 Personal loan EMI= ₹4000 (12 EMIs paid out of a total of 48 EMIs)
 Auto loan EMI= ₹4000 (14 EMIs paid out of total of 36 EMIs)
Total credit card outstanding as per CIBIL = ₹50000*
*not taken as an obligation since the total outstanding is within 3 times of the
applicant’s NTH
Eligible Income = Income-EMIs

= ₹24000- (₹4000+₹4000)
= ₹16000
Tenor opted= 60 months
Loan amount eligibility = ₹ 240000 (₹16000*15)
Proposed EMI- ₹5900 (@16.50% Rate of interest)
₹4000+₹4000+₹5900
FOIR = X 100 = 58%
₹24000
Hence, as FOIR is within 60%, the applicant can be funded the maximum loan
amount as per his eligibility.
Example (2) of FOIR calculation:

Applicant is working with Infosys Technologies Limited (Company Category-
Super Cat A); NTH as per last pay slip: ₹24000
Obligations:
 Personal loan EMI= ₹4000 (12 EMIs paid out of a total of 48 EMIs)
 Auto loan EMI= ₹4000 (14 EMIs paid out of total of 36 EMIs)
Total credit card outstanding as per CIBIL = ₹100000
As total credit card outstanding is lies in the range of 3-6 times the applicant’s
NTH, 5% of the Total Credit Card Outstanding to be treated as EMI and is
considered for eligibility calculation.
Hence, Credit Card EMI = 5% * ₹100000 = ₹5000
Eligible Income = Income- EMIs
= ₹24000 - (₹4000+₹4000+₹5000)
= ₹11000
Tenor opted= 60 months
Loan Amount eligibility= ₹165000 (₹11000*15)
Proposed EMI = ₹4056 (@16.50% Rate of Interest)
₹4000+₹4000+₹5900+₹4056
FOIR = X 100 = 71%
₹24000
Since, FOIR is in excess of 60%, the loan amount to be capped is calculated as

follows:
60%* ₹24000 = ₹14400
Total of existing obligations = ₹4000+₹4000+₹5000 = ₹13000
Therefore, proposed EMI can be = ₹14400-₹13000 =₹1400
Hence, the applicant can be funded a maximum of ₹56946 for 60 months
(16.50% Rate of interest)
ix. Non-Target Segment
Personal loans are not given to any Salaried Individual who is, either
engaged in or besides his current employment, engaged in any of the
following Businesses/Professions:
 Class IV government employees

 Cops/ Politicians
 Artists from film industry/ Producers/ Film Industry/ Film
Financiers/ Television Artists/ Professionals in Television
Production (except approved companies)
 Employees of Collection Agencies
 Employees of Private Security Firms
 Employees of small transporters
 Employees of Car Brokers/ Car Rentals (except approved
companies)
 Employees of Small Brokers/ Financial Securities Firm/ Small
NBFCs/ Credit Societies/ Chit Fund/ Private Financiers
 Employees of valuators
 Manpower consultants (those who arrange for overseas jobs/ visits)
 Employees of plantation companies
 Employees of cable operators
 Journalist
 Advocates
 Employees of RTO agents
 BPT employees
 Employees of small media companies/ entertainment agencies/
event management firms
 Employees of small travel agents and tour operators (Except
approved companies)
 Employees of small proprietary courier companies
II. PRECAUTIONS BEFORE APPROVAL
i. RIC
The Research and Intelligence Control (RIC) Department of a bank is

responsible for document processing and identifying frauds at application
level itself.
The RIC manager drives key processes laid down as part of the fraud
prevention, detection and investigation strategy across all Retail Asset
Products which has to be achieved by framing superlative Risk Processes
across all stages.
The RIC Manager ensures the genuineness of the following in order to

detect any fraud activity at the application stage:
 Documents (Identity proof, address proof, cheque)
 Banking (checks with the respective bank that whether the applicant
has an account there or not, checks the bank statement, etc.)
 Salary slip

The RIC department also keeps on monitoring the activities of the loan
account and the applicant in order to ensure no fraud takes place.
CASE: Bank Fraud Case (Mumbai, February 2009)
The Tardeo Police cracked a case of bank fraud with the arrest of a gang
that set up a bogus company and applied for loans under fake names. The
gang set up a fake company in the name of ACIL Industries and had even
rented an office. They also opened a website to attain credibility.
The gang members possessed fake PAN Cards, Blank Ration Cards and
Driving Licences. The gang members had used fake documents to apply for
loans in the names of seven persons and duped a bank of ₹29.5 Lakhs.
The officials at the Risk Intelligence and Control (RIC) wing of the HDFC
Bank first detected the fraud in November 2008 when they received two
loan applications from persons who bore the same address and were
employed in the same company.
The verification of the documents by the RIC unit revealed that both
applicants were employees of one ACIL Industries in Malad and had the
same residential address. Their loan application was rejected on the ground
that the documents were faulty. However, a cursory check revealed that five
more employees of the same company with similar addresses had applied
for loans in 2008.
The RIC unit also checked the company website for genuineness. The
website bore a logo of one Anil Industries in Jaipur and their representatives
said that they had only one branch in Jogeshwari. The RIC wing, then filed
a complaint with the Tardeo police.
Thus, the RIC Department of the HDFC Bank was vigilant enough to detect
the fraud and stopped it from rising up to unmanageable limits.
The guidelines and policies regarding the documents have become stringent
in order to prevent such misuse and frauds.
ii. CIBIL Score

The banks, as loan providers, need to know which applicants are most and
least likely to honor their obligations. The CIBIL score is a credit- scoring
model that gives banks a predictive insight into consumer risk behavior so
that they can make more strategic lending decisions.
The Credit Information Bureau (India) Limited (CIBIL) is the most popular
of the four credit information companies licensed by Reserve Bank of India.
There are three other companies also licensed by the RBI to function as
credit information companies. They are Experian, Equifax and Highmark.
However, the most popular credit score in India is the CIBIL score.

CIBIL Limited maintains credit files on 600 million individuals and 32
million businesses. CIBIL India is part of TransUnion, an American
multinational group. Hence credit scores are known in India as the CIBIL
TransUnion score.
The CIBIL score effectively predicts whether a potential borrower is likely
to default on one or more EMIs. The CIBIL score considers all the
borrower’s loans and obligations, secured and unsecured, enabling banks to
better manage risk, minimize losses and increase profitability.
The CIBIL score is a three-digit numeric summary of an applicant’s credit
history. The score is derived using the credit history found in the CIBIL
Report (also known as CIR i.e. Credit Information Report).
The CIBIL score plays a critical role in the loan application process. When
someone approaches a bank or a financial institution for a loan, the lender
first checks the applicant’s CIBIL score and report. If the CIBIL score is
low, the bank may not even consider the application further. If the CIBIL
score is high, the lender will look into the application and consider other
details to determine if the applicant is credit-worthy.
The CIBIL score works as a first impression for the lender, the higher the
score, the better are the chances of the loan being reviewed and approved.
The decision to lend is solely dependent on the bank and CIBIL does not in
any manner decide if the loan/credit card should be sanctioned or not
A CIBIL report has detailed information on the loans that an applicant has
availed, such as home loan, automobile loan, credit card, personal loan,
overdraft facilities.
A CIBIL report contains the following key elements:
 CIBIL Score
The CIBIL score is calculated on the basis of the applicant’s credit

behavior. It ranges between 300-900. A score above 700 is
generally considered good.
 Personal Information
Contains applicant’s name, date of birth, gender and identification

numbers such as PAN, Passport, etc.
 Contact Information
Address and telephone numbers are mentioned

 Employment Details
Monthly or annual income details as reported by the members-

Banks and Financial Institutions
 Account Information
This section contains the details of the applicant’s credit facilities

including name of lenders, type of credit facilities (home, auto,
personal, overdraft, etc.), account numbers, ownership details, date
opened, date of last payment, loan amount, current balance and a
month on month record (of up to 3 years) of payments.
 Enquiry Information
Every time an applicant applies for a loan or credit card, the

respective Bank or financial institution accesses his/her CIR. The
system makes a note of this in their credit history and the same is
referred as “Enquiries”
For the purpose of Personal Loan, a CIBIL score of at least 750 is required
by the bank for approval of the loan application.
iii. Verification
In order to prevent frauds, the bank officials verify the Residential and
Company addresses by making physical visits to the mentioned address.
The genuineness of the Identity Proof, Address Proof and Company

Identity Card is also checked.
iv. Salary Criteria
On the basis of the NTH salary, the rate of interest for an applicant is
determined. Lower the salary, higher the Rate of Interest and vice versa.
 If the salary is more than ₹35000, the minimum Rate of interest can be
11.5%.
 If the salary is less than ₹35000, the rate of interest is in the range of 14%-
16%.

v. Stability
The applicant’s job stability is also a major determinant that impacts the
approval of the personal loan application.
The applicant must, therefore, be working in the same company for at least
3 months in order to be able to get a personal loan.
vi. Job Profile
Job profile refers to the role, responsibilities and level, designation of the
applicant at work. It is a factor for determining the rate of interest on a
personal loan application. Better the profile, lower the rate of interest and
vice versa.
Also, job profile determines what kind of applicants can avail a personal
loan from HDFC Bank.
 Higher to middle level executives i.e. white-collar workers are eligible for
a personal loan approval.
 But lower level or blue-collar workers such as office boys and peons can
not be extended a personal loan.
III. CONSEQUENCES OF DEFALUT OF PAYMENT
i. Recovery Agents
The Bank outsources the job of recovering the loan amount to third party
organizations known as Recover Agents. The recovery agents get active
even if one EMI is not paid or delayed.
There are two ways through which Recovery Agents recover the loan
amount from the customers:
a. Tele-Calling
Usually if the debt is unpaid for a month, the collection team sends
reminder or calls the customer for recovery.
b. Visit
If even after multiple calls and reminders, the customer does not pay
his EMI (s), the bank sends the recovery agent to the place of residence
or the place of work of the concerned customer.

ii. CIBIL Score
There are a variety of factors that affect CIBIL score of an individual and
one such issue is missing to pay a loan instalment. When an applicant misses
out on a single personal loan instalment, his CIBIL score dips by a
significant number. Some of the prime consequences are as follows:
 CIBIL score gets deteriorated if an applicant misses even a single EMI.

 Missed as well as late payments get reflected in your credit report. The
major impact is caused to loan applications.
 Minimises applicants’ chances of getting a credit card loan application
approval.
Minor and Major Defaults
For customers, it is quite important to learn about the difference between

minor and major defaults, so as to gain better understanding about missed
payments and its effect on an individual’s credit score.
 Minor Defaults
The payments missed or delayed for a timeframe less than 90 days is

regarded as minor defaults. In this case, the CIBIL score would take a
permanent thrashing but is affected only on a temporary basis.
 Major Defaults
There are times when a person fails to complete his/her payments

beyond 90 days. In this situation, the individual’s account is tagged
under the NPA (non-performing assets) group. This is considered as a
major default and keeps the lenders at a distance due to poor financial
or credit repayment history.
One can easily infer that under both scenarios the loan worthiness of a
customer is hampered. However, it is important to note, in case of a minor
default, one can ensure that the payment of succeeding bills under the stated
time slot can help one to recover your one’s score.
On bounce of a single EMI, the CIBIL score reduces by 10 points.

iii. Charges
The bank also charges some amount from the customer on delay or default
payment.
 On default of even one EMI, the bank charges a flat amount of ₹650 for
each default payment.
 For delayed payments, the bank charges 2% of the EMI amount per
day.

CONCLUSION
HDFC Bank, the largest private sector banks in India, has been focusing a lot on retail lending.
Personal loans comprise the most important and largest part of the bank’s portfolio. The Bank
gives its branches monthly targets of personal loans of ₹1 crores and above. The bank officials
are pressurized to generate at least 10 leads a day and input 3 applications on the Digital
Application Platform (DAP). With so much focus on retail lending, the Bank surely has been
taking care of the recovery of funds.
Based on the above analysis of the risk management measures being employed by HDFC Bank,
it can be said that the Bank is taking utmost care while disbursing any personal loan. A lot of
customers are not allowed to apply for the loan if they do not fit the eligibility criteria.
Following are some of the cases that I faced while working at HDFC Bank:
a. Loan requirement of customer = ₹600000
NTH Salary = ₹ 15000
Customer not eligible for this amount.
b. Loan requirement of customer = ₹400000

10 seconds offer (without documentation; online disbursal) = ₹500000
Rate of interest on offer = 16.5%
Nature of business he is employed in: A Partnership firm
Wants lower rate of interest
Not eligible for a lower rate of interest since, he is employed by a
partnership firm.
c. Loan requirement = ₹700000

Eligibility criteria met.
But the application was rejected at approval stage due to low CIBIL
Score.
Thus, the measures that the Bank has put in place at every stage, provide a protection to the
bank from possible frauds. The eligibility criteria very clearly lay down the income, age,
residence, telephone, company and other requirements, which rejects an applicant at the initial
stage only. This saves both time and cost for the bank.
The secondary stage of approval is done without the customer noticing it. The Bank officials
make visits to the residence and work place of the applicant, do a proper back ground check,
ensure the originality of the documents submitted by the applicant. If any discrepancies are
found the application is outrightly rejected.
After approval and disbursement of the personal loan, the customer’s EMI payments are
monitored for timely repayments. Timely repayments enhance the customer’s CIBIL Score and
the bank’s system generates Personal Loan Top Up offer on his customer ID. If the customer
is willing to take a Top Up Loan, his balance of the previous loan is nulled and a new Personal
loan with lower rate of interest and the total loan amount is then calculated i.e. Balance on
previous Personal loan + Top Up loan amount.

For Example:
Personal loan amount = ₹16,00,000

Original rate of interest = 11.9%
Balance Principal left to be repaid = ₹9,00,000
Tenor = 60 months
EMI= ₹21,988
(The customer has approximately paid 8 EMIs)
Top Up offer = ₹5,00,000

Rate of interest on Top Up offer = 11.25%
Customer’s requirement for new Personal loan = ₹3,00,000
Tenor = 60 months
New loan amount = ₹9,00,000+ ₹3,00,000 = ₹12,00,000

New EMI = ₹26,241 (@11.25% of ₹12,00,000 for next 60 months)
The original loan amount outstanding stands null and a new loan of ₹12,00,000 comes into
existence for the next 5 years at a lower rate of interest.
Now, if there are delayed or default payments, the Bank sends reminders to the customers
through recovery agents who either make phone calls or visit the customer to recover the funds.
The bank also charges penalty for delayed payment. These measures create a scary image in
the minds of the customer. Along with this, the CIBIL score is also negatively impacted, which
prevents the customer from taking any further borrowings from any institution. This prevents
the customers from committing frauds.
But still some people find loopholes in the system and abscond with the bank’s money. Thus,
Bank has put full responsibility for any kinds of mistakes or wrong doings on its employees
who are in-charge of the whole process. If at any stage the bank suspects anything wrong, the
Bank summons the concerned employee who has signed and stamped the documents with his
name. This can cost HDFC bank employees their whole career and life. This ensures due
diligence and honesty in the work of Bank employees which is also major factor in protecting
the bank from probable losses.

RECOMMENDATIONS
Although the Bank has a full-proof system in place to prevent any kinds of losses, the bank can
take into consideration the following points:
a. Bank can make it mandatory to have a Guarantor in all cases so that more credibility
can be sought.
b. Bank can install a system of sending reminders to the customer when an EMI is due.
This will help both the customer and the bank in timely loan repayments.
c. Bank can also do a police verification of the applicant in order to ensure there are no
cases of thefts, frauds or forgery are going against him. This can further strengthen
bank’s case.
d. The Bank can extend discounts to such customers who repay their loan before the
maturity and decrease the loss of bad debts.

ANNEXURE
LOAN ELIGIBILITY MULTIPLIER
SUPER CAT A
Net Take Home Salary >= ₹25000
Tenure Multiplier
12 months 5
24 Months 9
36 Months 13
48 months 15
60 Months 18
Net Take Home Salary < ₹25000
Tenure Multiplier
12 months 5
24 Months 9
36 Months 11
48 months 13
60 Months 15
CAT A/ CSA A
Tenure Multiplier
12 months 5
24 Months 9
36 Months 13
48 months 15
60 Months 18

Tenure Multiplier
12 months 5
24 Months 9
36 Months 11
48 months 13
60 Months NA
CAT B
Tenure Multiplier
12 months 5
24 Months 9
36 Months 11
48 months 13
60 Months NA
Tenure Multiplier
12 months 5
24 Months 7
36 Months 9
48 months 11
60 Months NA
CAT C, D/ CSA D
Tenure Multiplier
12 months 5
24 Months 7

36 Months 9
48 months NA
60 Months NA
To give greater impetus to CSA customers of CAT B/ CSA B/ CAT C/ CSA C, higher
multipliers with income differentiation within the segment, are also provided:
CSA CAT B
Tenure Multiplier
12 months 5
24 Months 9
36 Months 12
48 months 14
Tenure Multiplier
12 months 5
24 Months 7
36 Months 10
48 months 12
CSA CAT C
Tenure Multiplier
12 months 5
24 Months 9
36 Months 11
48 months NA

Tenure Multiplier
12 months 5
24 Months 7
36 Months 9
48 months NA

REFERENCES
WEB REFERENCES
1. https://www.hdfcbank.com/aboutus/News_Room/hdfc_profile.htm
2. http://www.capitalmarket.com/Company-Information/Information/About-
Company/HDFC-Bank-Ltd/4987
3. https://www.business-standard.com/article/finance/personal-loans-account-
for-96-of-new-bank-loans-during-fy18-rbi-data-118041901316_1.html
4. https://economictimes.indiatimes.com/wealth/borrow/all-about-personal-
loans/articleshow/56352098.cms?from=mdr
5. https://economictimes.indiatimes.com/wealth/borrow/indians-lap-up-personal-
loans-how-much-should-you-borrow/articleshow/65782430.cms
6. https://en.wikipedia.org/wiki/HDFC_Bank
7. https://economictimes.indiatimes.com/industry/banking/finance/banking/retail
-loans-may-revive-indian-economy-banks/articleshow/67550031.cms
8. https://www.jstor.org/stable/4417967?seq=1#page_scan_tab_contents
9. https://www.thehindubusinessline.com/opinion/columns/c-p-
chandrasekhar/when-banks-return-to-retail-lending/article8929213.ece
10. https://www.hdfcbank.com/htdocs/common/pdf/corporate/Annual_Report_20
17_18.pdf
11. https://www.business-standard.com/article/pf/now-a-personal-loan-disbursed-
every-minute-from-hdfc-bank-115050600821_1.html
12. https://www.hdfcbank.com/personal/products/loans/personal-loans/eligbilty-
criteria
13. http://archive.indianexpress.com/news/nine-arrested-in-bank-fraud-
cases/421841/0
14. https://www.cibil.com/faq/understand-your-credit-score-and-report
15. https://www.transunioncibil.com/product/cibil-score
16. https://www.hdfcbank.com/personal/learning-center/borrow/what-is-the-cibil-
credit-score-and-why-should-it-matter
17. http://www.paisabazaar.com/credit-score/factors-that-affect-your-credit-score/
18. https://www.equitymaster.com/research-it/sector-info/bank/Banking-Sector-
Analysis-Report.asp
19. https://shodhganga.inflibnet.ac.in/bitstream/10603/9006/16/16_chapter%206.p
df
20. https://www.bis.org/publ/bcbsc125.pdf

BIBLIOGRAPHY
1. Indranarain Ramlall (2018), A Framework for Financial Stability Risk Assessment in

Banks, in Indranarain Ramlall (ed.) The Banking Sector Under Financial Stability
(The Theory and Practice of Financial Stability, Volume 2) Emerald Publishing
Limited, pp.29 - 117

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A STUDY ON RISK MANAGEMENT BY HDFC BANK ON PERSONAL

HDFC BANK LIMITED

DEPARTMENT: PERSONAL LOAN

Ayesha Mathur (18020241018)

Symbiosis Institute of International Business

Under the guidance of -

Project Guide: Mr. Vikram Kachru, Branch Manager, (Sangvi, Pune)

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iii. Top up F4 (Physical login)

iv. Green channel (Physical login)

v. PQ (Bank Statement, KYC, Physical login)

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i. Precautions before application

Following are the main considerations by the bank:

ii. Precautions before approval

The following are a part of this process:

iii. Consequences of default of payment

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Image 1: Banking Sector in India

Indian banks are increasingly focusing on adopting integrated approach to risk

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As of Q1 FY19, total credit extended by commercial banks surged to Rs 86,976.2

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Enhanced spending on infrastructure, speedy implementation of projects and

II. About the Company

III. Business Focus

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 Whole sale banking

The Bank’s target market is primarily large, blue-chip manufacturing

i. Accounts and Deposits

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 HDFC Life Cancer Care

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Image 2: Share of retail loans in Banks’ loan books in non-food credit

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Image 3: HDFC Bank – Growth in Retail Assets

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The following objectives have been selected for this study:

i. To understand the concept of Personal Loan

This study is focused on creating an understanding of the ways in which HDFC

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I. PRECAUTIONS BEFORE APPLICATION

Image 6: Eligibility Criteria

 Salaried- Categorization as per Company

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ii. Age Requirement

 Age 21-60 years (Maximum age as on the maturity of the loan)

iii. Minimum Net Monthly Salary Requirement

An applicant’s capability of paying EMIs is calculated on the basis of his

Maximum EMI payable = 70% of Net Monthly Income

iv. Loan Amount

Minimum loan amount: ₹50,000

Location Tier Maximum Loan Amount

Maximum Loan Amount (Subject to location caps):

 Super Cat A/ Cat A/ CSA Cat A - ₹40 Lakhs

 Personal loan tenure varies from 12 months to 60 months.