Evaluating Consumer Loans

Group 7
Nivesh Arora (081037)
Radhika Gupta (081040)
Rajat Pahwa (081042)
 Retail Banking
Mass Market driven
Individual consumers
Services
Saving and checking accounts
Bill paying services
Debit and Credit cards
Additionally push into investment services
Wealth Management
Brokerage account
Private Banking

2 Group 7 Evaluating Consumer Loan 12/08/21

 Retail Loans

Credit to individual for Non entrepreneurial activities

Used towards consumption

They have to be repaid by borrower out of his/her own
resources.
They do not generate income-generating assets.
There are exceptions like housing loan wherein house
may generate rental income.

3 Group 7 Evaluating Consumer Loan 12/08/21

 Break Up Of Retail Loans in India

4 Group 7 Evaluating Consumer Loan 12/08/21

 Why are interest rates so high on consumer loans ?

5 Group 7 Evaluating Consumer Loan 12/08/21

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

6 Group 7 Evaluating Consumer Loan 12/08/21

 Characteristics of consumer loan
Regarded as profitable credits with sticky interest rates
Household borrowings appear to be relatively interest
inelastic

Priced high
Sufficiently large risk premium is built in loan rates

Cyclically sensitive
Rise in the period of economic expansion
During downturn the consumers become pessimistic ; as
such reduce their borrowings

7 Group 7 Evaluating Consumer Loan 12/08/21

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

8 Group 7 Evaluating Consumer Loan 12/08/21

 Evaluating a consumer loan
Character and Purpose
Key factors in analyzing any application are character
and ability to pay
Credit bureau – Consumers credit history is checked
Purpose – What the customer plans to do with the money
?
Cosigner may be asked for in case of no credit history or
poor track records

Income levels
Size and stability of income
Prefer the take home pay as a parameter

9 Group 7 Evaluating Consumer Loan 12/08/21

 Deposit balances
Indirect measure
Daily average deposit balances ( gives an indication of
stability)
Verification of the account from the bank
Right of offset – Call any loan which is in default and
seize any checking or savings deposit

Employment and Residential stability

Duration of employment
Length of residence

10 Group 7 Evaluating Consumer Loan 12/08/21

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

11 Group 7 Evaluating Consumer Loan 12/08/21

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

12 Group 7 Evaluating Consumer Loan 12/08/21

 Home ownership
Regular and stable income
Telephone
Strong deposit balances
Loan officers also look for inconsistencies in
application form while asking questions

13 Group 7 Evaluating Consumer Loan 12/08/21

 Loan Evaluation Process

14 Group 7 Evaluating Consumer Loan 12/08/21

 6 C’s of lending
Subjective Lending
Character
Capacity
Cash
Collateral
Conditions
Control

15 Group 7 Evaluating Consumer Loan 12/08/21

 Credit scoring model to evaluate
Objective approach
Banks today use such models to evaluate the loan
applications

Based on discriminant model or related techniques

Several variables are picked up from the application form

Used jointly to establish a numerical score or ranking
Decide on critical cut off limit; only beyond this limit the loan
is offered
Cut off limit on past behavior of loans lent
Repeatedly and timely revised Microsoft Office
Excel 97-2003 Worksheet

Credit_scoring_dummy.xls

16 Group 7 Evaluating Consumer Loan 12/08/21

 Example
Case of Retail Loans.doc

Microsoft Office
Word 97 - 2003 Document

17 Group 7 Evaluating Consumer Loan 12/08/21

 What is the customers past payment record ?
Is the identity of the customer established ?

18 Group 7 Evaluating Consumer Loan 12/08/21

 Analyzing application using 6 C’s
Character
Credit rating - No credit history as such other than the
loan from the employer and an insurance policy
Purpose - ok ; higher studies and furnishing
Customer’s income level should increase post the course
Aunt as a guarantor – raises question on why not
someone from immediate family (parents)
Capacity - Ok
Customer of legal age (26 years)
Identity established – DL furnished. As it is customer
and guarantor are existing customers

19 Group 7 Evaluating Consumer Loan 12/08/21

 Cash
Cash flows.xls
Barely able to meet his expenses Microsoft Office
Excel 97-2003 Worksheet

Collateral
Furniture which is bought
Personal guarantee of aunt
Why not the collateral from the immediate family
Need more information on parental house and telephone
connection at that place

20 Group 7 Evaluating Consumer Loan 12/08/21

 What according to you should be asked for in
documentation?

21 Group 7 Evaluating Consumer Loan 12/08/21

 Conditions
Economic slowdown, near revision in salary might not be
much
Defaults in consumer loans have risen in the past few years.
There have been job cuts in the last year or so.

Control
Documentation required
 Permanent address proof
 Salary Slip
 Bank already has the deposit details and identity proof
 Verification of assets of guarantor

22 Group 7 Evaluating Consumer Loan 12/08/21

 Evaluation using credit scoring
model
Credit_Scoring_model_Rajan_soni.xls

Microsoft Office
Excel 97-2003 Worksheet

23 Group 7 Evaluating Consumer Loan 12/08/21

 Decision
Deny the loan on present terms asked by the customer
Barely able to meet expenses
EMI & obligations will shoot to 30% of the current take
home income
Guarantor past history only average
No clarity on permanent residence
Contactibility –Not reliable. Assuming Mobile phone
connection is prepaid
Decision.xls
Microsoft Office
Excel 97-2003 Worksheet

24 Group 7 Evaluating Consumer Loan 12/08/21

 Consolidate and change terms
Alternative
Ask for guarantee of someone from immediate family
and with better credit history
Ask for permanent residence and landline or at least
post paid connection
Consolidate the outstanding loan from the employer
Loan amt of 90,000 to have the part cheque towards the
employer
Change the term from 12 to 24 months
Fore\IVth_semester\MOCB\Evaluation\Alternative term
s.xls

25 Group 7 Evaluating Consumer Loan 12/08/21

 Education loan evaluation
Go ahead with the education loan if the details asked
for are furnished and the terms are changed:
Change the term to 48 months – Assuming interest rate
at 14% per annum
Debt obligation to net take home comes out to be at 22 -
25% which is still acceptable
Alternative terms.xls

Microsoft Office
Excel 97-2003 Worksheet

26 Group 7 Evaluating Consumer Loan 12/08/21

 Winning Strategy

The bank that best addresses and anticipates

customers needs, delivers consistently higher
quality service and connects to the customer via
their channel of choice wins

Y.Y.Chin, OCBC Bank

27 Group 7 Evaluating Consumer Loan 12/08/21

 Thank You !

28 Group 7 Evaluating Consumer Loan 12/08/21