Description
This is a presentation about retail banking scenario, retail banking in India, types of consumer loans, evaluating consumer loans, credit analysis, credit scoring a consumer loan and consumer credit regulations.
Retail Banking
• Retail banking includes a comprehensive range of financial products viz. deposit products, residential mortgage loans, credit cards, auto finance, personal loans, consumer durable loans, loans against equity shares, loans for subscribing to Initial Public Offers (IPOs), debit cards, bill payment services, mutual funds, investment advisory services. These products provide an opportunity for banks to diversify the asset portfolio with high profitability and relatively low NPAs Asset Side
? Various types of loans made by a
•
Liability Side
? ATMs, E-banking and tele-banking
retail bank.
where the bank has to make significant investments in infrastructure and technology.
Retail Banking Services
Retail Banking Services
Core Services
Facilitating Services
Supporting Services
Reason for being in the market
Assist the core services
To discriminate service package from services of competitors
Categorization of Retail Banking Services
Core Services Payment services Facilitating Services Supporting Services Cash Making payments at door step Foreign currency requirements Internet banking Traveler cheques Telephone banking DD/Bankers cheque TT (Telegraphic Transfer or Telex
Transfer ) EFT (Electronic Fund Transfer)
Current account and savings account
ATM card Standing instructions from customers for making payments Inter branch/ interbank transfer of funds Safety vault
Credit cards Debit cards Services to senior citizens Telephone banking Internet banking Conversion of excess balance to Time deposit
Core Services Loan products: Consumer loans, Personal loans, Housing loans, Educational loans
Insurance products: Life insurance, Pension schemes
Facilitating Services Supporting Services Current account Delivery of loan at promised time Savings account period Time deposit account Interest rate option: Fixed/ floating Flexibility in pre-payment of loan Counseling on Real-estate markets Legal services for documentation ECS for payment of loan installments Current account Additional insurance facility for Savings account family members Time deposit Counseling on post retirement Safety vaults savings.
Retail Banking in India
? Limited lending opportunities to banks ? Corporates with strong financials:
? loan prices linked to prices of government securities/or mark-up
? ? ? ?
over government paper bypassing banks and raising money through the debt market and commercial papers, which are cheaper than bank credit Strategy driven by fee based income in order to maintain asset growth and profitability Increase in per capita income, change in lifestyle and growing urbanization Banks are also securitizing loans to raise off-balance sheet resources and reducing the overall cost of funding.
Critical success factors of banks
The critical success factors of banks, which are aggressively moving in the retail banking segment are:
? wider distribution network, ? low cost of funding, ? low intermediation (operating) costs, ? marketing capability,
? large product portfolio,
? cross-selling , ? proper credit appraisal mechanism/risk assessment procedures, ? high service levels in terms of faster loan processing and disbursement, ? flexible technology across banking platforms,
? multi-distribution channels,
? strong brand presence and ? good recovery mechanism.
Advantages of Retail Banking
RESOURCES SIDE
? Retail deposits are stable and constitute core deposits.
? They are interest insensitive and less bargaining for additional interest.
? They constitute the low cost funds for the bank. ? Effective customer relationship management with the retail customers builds
a strong customer base.
? Retail banking increases the subsidiary business of a bank.
ASSETS SIDE
? Retail banking results in better yield and improved bottom line for a bank. ? Retail segment is a good avenue for funds deployment. ? The consumer loans are presumed to be of lower risk and NPA perception. ? Helps economic revival of the nation through increased production activity. ? Improves lifestyle and fulfills aspirations of the people through affordable
credit.
? Innovative product development.
? Retail segment involves minimum marketing efforts in a demand- driven
Technology in Banking
? Internet banking
The Internet banking is changing the banking industry and is having the major effects on banking relationships. It may be of several types:
? Transactional ? Electronic bill presentment and payment (EBPP) ? Funds transfer between a customer's own checking and savings accounts, or to
another customer's account ? Investment purchase or sale ? Loan applications and transactions, such as repayments
? Non-transactional ? Bank statements ? Mobile banking
Some banks have started offering information based services like balance enquiry, stop payment instruction of cheques, transactions enquiry, location of the nearest ATM/branch etc.
Retail Banking Strategies
1. Market Segmentation ? identify differences between groups of potential customers and
decide what kind of products can be served for such groups
2. Price bundling ? a selling arrangement where several different products are explicitly
?
? ? ?
marketed together at a price that is dependent on the offer. offers economies of scale, utilization of the existing capacities and reaching wider population of customers. Bank can get the benefits of information and transaction. lengthens the relationship with a customer reduces the need of resources to be put on acquiring new customers and saves time of the bank. may cause less aggressive competition
Retail Banking Strategies
2. Price bundling ? Step 1: Select the Customer segment, targeted to choose a strategic objective. Comprehensive strategic objectives for the different customer segments: ? Cross-selling to customers who buy only one of the products ? Retaining customers who had already bought both the products. ? Acquiring new customers who buy neither product for the time being. Strategic Objectives for Price Bundling in Order to Enhance Demand YES Retain Customers Cross-Sell to Existing Customers Product A No Cross-Sell to Existing Customers Acquire New Customers Yes Product B No
Cross Selling
? Calculated by number of products sold per customer or profitability per
customer
? Advantages
? reduces customer acquisition costs ? servicing, marketing and communication costs ? substantially increases spreads for banks ? cheaper finance for the customer and reduced exposure to the
business cycle for the bank
Retail Banking Strategies
3. Customer Relationship Management ? base on which the structure of retail banking will evolve ? retail banking largely involves ? fixed costs ? customer-driven costs ? high relationship origination costs ? cost differences in serving the customers through the different distribution channels ? Alignment of technology, human resource management and strategy are very essential for the success of retail banking
Types of Consumer loans
1. Installment Credit ? require the periodic payment of principal and interest ? typical maturity ranges from two to five years ? Installment loans can be either direct or indirect: ? A direct loan is negotiated between the ultimate user of funds and the bank. The user must formally make the loan request and support with personal financial information to borrow from the bank. ? An indirect loan is funded by a bank through a separate retailer such as an automobile dealer who sells merchandise to the customer fixed costs ? Types of installment credit: ? Housing loans ? Educational loans ? Personal consumption loans
2. Credit cards or revolving credit lines ? tied to checking accounts ? overline is a prearranged loan to cover overdrafts of checking accounts ? higher risk adjusted returns than other types of loans
? Card issuers earn income from three sources:
? charging cardholders fees ? charging interest on outstanding loan balances ? discounting the charges that merchants accept on purchases
Overdraft protections and open credit lines – authorizes qualifying individuals to write cheques in excess of actual balances held in a checking account up to a pre-specified limit – open credit lines provide customers, whether or not they have an existing account relationship, with special cheques that activate the loans on its presenting for payment.
3. Non-installment Loans
? Require a single principal and interest payment.
? Borrowing needs are temporary.
? Credit is extended temporarily in anticipation of a well-defined future
cash inflow
? Quality of the loan depends on the certainty of the timing and the
amount of the anticipated net cash flow for the sale
Characteristics of Consumer loans
? These loans are of small amounts while they need large staff to handle
them.
? Consumer loans are more attractive for the banks due to higher
spreads and also because commercial loans have become less profitable.
? Most of the loans have been freed of usury limits. ? These loans foster loyalty in customers by lending money to a depositor,
which can contribute to stable core deposits.
? They are the most costly and most risky of bank’s portfolio. ? They are cyclically sensitive and interest inelastic.
? Variables deciding consumer installment credit:
? Interest rate
? Maturity ? Amount Financed ? Loan to value
Comparison of Interest Rates
? Simple Interest rate ? Add-on rate
? When the add-on interest method is used, interest is calculated on
the full amount of the original principal ? When multiple repayments are used in add-on interest, the effective lending rate becomes higher than the nominal rate
? Discount rate
Evaluating Consumer Loans
? Issues to be addressed: ? the character of the borrower ? the use of loan proceeds ? the amount needed, and ? the primary and secondary sources of repayment.
• Credit Analysis
? ? ?
The objective of consumer credit analysis is to assess the risks associated with lending to individuals Credit analysis is distinct for each type of loans The six 6’s of credit to be evaluated: ? Character Capital ? Capacity Conditions ? Collateral Compliance • 2 additional C’s: Customer Relationship and Competition
Evaluating Consumer Loans
? Credit Scoring ? With a pure quantitative credit scoring analysis, the banker grades the
loan request according to statistically determined accept/reject thresholds. ? The method produces a “score” that a bank can use to rank its loan applicants or borrowers in terms of risk.
? Figure: Factors of Credit Scoring
Common Credit Scoring Models
? MDS bankruptcy score: Scores range from about 0 to 1300
higher scores = higher risk of default
? FICO score: Scores range from about the 300s to the 900s
higher scores = lower risk of default
? Most Indian banks use “Judgmental Scoring Models”.
? Scoring methods ? Linear probability models
? Logit models
? Probit models ? Discriminant analysis ? Options-pricing theory models ? Neural networks
Limitations of Credit Scoring Models
? Accuracy is very important ? Data on which the system is based needs a rich sample of both well-
performing and poorly performing loans
? Data should be up to date ? The models should be re-estimated frequently ? Thee new pool of applicants must behave similarly
? Credit scoring model does not reveal to the lender with certainty what
the future performance of an individual loan will be
Risk Management and Retail Banking
• •
There is a conflicting interest between risk management and marketing, both should work towards a common measurable target, which combines both
The risks include the following: a. Deficiencies in lending policies, b. Incorrect product structuring, c. Inadequate loan documentation, d. Deficiencies in credit appraisal, e. Absence of post sanction surveillance and monitoring, f. Inadequate risk pricing, g. Inadequately defined lending limits, and h. Weak collection strategy. • Banks should adopt proactive retail credit risk management processes to be able to achieve healthy growth in terms of both volumes and profitability
? Risk Return Characteristics of Consumer Loans
? Individuals hold small balances and move deposit accounts less
frequently providing a more stable deposit base. Thus, liquidity risk declines as a bank’s retail deposit base increases.
? Revenues from Consumer Loans
? Usury ceilings have been eliminated, banks can raise consumer loans at
their own conditions ? In declining interest rate scenario consumer loans earn larger spreads compared to banks borrowing cost. ? When the short-term rates rise the spread narrows until the banks raise loan rates ? Banks generate substantial non-interest revenues from consumer loans
? Consumer loan losses ? Losses on consumer loans are normally the highest among all categories
of bank credit, due to the cyclical patterns in personal income as well as extensive fraud. ? Losses are due to the mass marketing efforts pursued by many lenders particularly with credit cards
doc_327007020.ppt
This is a presentation about retail banking scenario, retail banking in India, types of consumer loans, evaluating consumer loans, credit analysis, credit scoring a consumer loan and consumer credit regulations.
Retail Banking
• Retail banking includes a comprehensive range of financial products viz. deposit products, residential mortgage loans, credit cards, auto finance, personal loans, consumer durable loans, loans against equity shares, loans for subscribing to Initial Public Offers (IPOs), debit cards, bill payment services, mutual funds, investment advisory services. These products provide an opportunity for banks to diversify the asset portfolio with high profitability and relatively low NPAs Asset Side
? Various types of loans made by a
•
Liability Side
? ATMs, E-banking and tele-banking
retail bank.
where the bank has to make significant investments in infrastructure and technology.
Retail Banking Services
Retail Banking Services
Core Services
Facilitating Services
Supporting Services
Reason for being in the market
Assist the core services
To discriminate service package from services of competitors
Categorization of Retail Banking Services
Core Services Payment services Facilitating Services Supporting Services Cash Making payments at door step Foreign currency requirements Internet banking Traveler cheques Telephone banking DD/Bankers cheque TT (Telegraphic Transfer or Telex
Transfer ) EFT (Electronic Fund Transfer)
Current account and savings account
ATM card Standing instructions from customers for making payments Inter branch/ interbank transfer of funds Safety vault
Credit cards Debit cards Services to senior citizens Telephone banking Internet banking Conversion of excess balance to Time deposit
Core Services Loan products: Consumer loans, Personal loans, Housing loans, Educational loans
Insurance products: Life insurance, Pension schemes
Facilitating Services Supporting Services Current account Delivery of loan at promised time Savings account period Time deposit account Interest rate option: Fixed/ floating Flexibility in pre-payment of loan Counseling on Real-estate markets Legal services for documentation ECS for payment of loan installments Current account Additional insurance facility for Savings account family members Time deposit Counseling on post retirement Safety vaults savings.
Retail Banking in India
? Limited lending opportunities to banks ? Corporates with strong financials:
? loan prices linked to prices of government securities/or mark-up
? ? ? ?
over government paper bypassing banks and raising money through the debt market and commercial papers, which are cheaper than bank credit Strategy driven by fee based income in order to maintain asset growth and profitability Increase in per capita income, change in lifestyle and growing urbanization Banks are also securitizing loans to raise off-balance sheet resources and reducing the overall cost of funding.
Critical success factors of banks
The critical success factors of banks, which are aggressively moving in the retail banking segment are:
? wider distribution network, ? low cost of funding, ? low intermediation (operating) costs, ? marketing capability,
? large product portfolio,
? cross-selling , ? proper credit appraisal mechanism/risk assessment procedures, ? high service levels in terms of faster loan processing and disbursement, ? flexible technology across banking platforms,
? multi-distribution channels,
? strong brand presence and ? good recovery mechanism.
Advantages of Retail Banking
RESOURCES SIDE
? Retail deposits are stable and constitute core deposits.
? They are interest insensitive and less bargaining for additional interest.
? They constitute the low cost funds for the bank. ? Effective customer relationship management with the retail customers builds
a strong customer base.
? Retail banking increases the subsidiary business of a bank.
ASSETS SIDE
? Retail banking results in better yield and improved bottom line for a bank. ? Retail segment is a good avenue for funds deployment. ? The consumer loans are presumed to be of lower risk and NPA perception. ? Helps economic revival of the nation through increased production activity. ? Improves lifestyle and fulfills aspirations of the people through affordable
credit.
? Innovative product development.
? Retail segment involves minimum marketing efforts in a demand- driven
Technology in Banking
? Internet banking
The Internet banking is changing the banking industry and is having the major effects on banking relationships. It may be of several types:
? Transactional ? Electronic bill presentment and payment (EBPP) ? Funds transfer between a customer's own checking and savings accounts, or to
another customer's account ? Investment purchase or sale ? Loan applications and transactions, such as repayments
? Non-transactional ? Bank statements ? Mobile banking
Some banks have started offering information based services like balance enquiry, stop payment instruction of cheques, transactions enquiry, location of the nearest ATM/branch etc.
Retail Banking Strategies
1. Market Segmentation ? identify differences between groups of potential customers and
decide what kind of products can be served for such groups
2. Price bundling ? a selling arrangement where several different products are explicitly
?
? ? ?
marketed together at a price that is dependent on the offer. offers economies of scale, utilization of the existing capacities and reaching wider population of customers. Bank can get the benefits of information and transaction. lengthens the relationship with a customer reduces the need of resources to be put on acquiring new customers and saves time of the bank. may cause less aggressive competition
Retail Banking Strategies
2. Price bundling ? Step 1: Select the Customer segment, targeted to choose a strategic objective. Comprehensive strategic objectives for the different customer segments: ? Cross-selling to customers who buy only one of the products ? Retaining customers who had already bought both the products. ? Acquiring new customers who buy neither product for the time being. Strategic Objectives for Price Bundling in Order to Enhance Demand YES Retain Customers Cross-Sell to Existing Customers Product A No Cross-Sell to Existing Customers Acquire New Customers Yes Product B No
Cross Selling
? Calculated by number of products sold per customer or profitability per
customer
? Advantages
? reduces customer acquisition costs ? servicing, marketing and communication costs ? substantially increases spreads for banks ? cheaper finance for the customer and reduced exposure to the
business cycle for the bank
Retail Banking Strategies
3. Customer Relationship Management ? base on which the structure of retail banking will evolve ? retail banking largely involves ? fixed costs ? customer-driven costs ? high relationship origination costs ? cost differences in serving the customers through the different distribution channels ? Alignment of technology, human resource management and strategy are very essential for the success of retail banking
Types of Consumer loans
1. Installment Credit ? require the periodic payment of principal and interest ? typical maturity ranges from two to five years ? Installment loans can be either direct or indirect: ? A direct loan is negotiated between the ultimate user of funds and the bank. The user must formally make the loan request and support with personal financial information to borrow from the bank. ? An indirect loan is funded by a bank through a separate retailer such as an automobile dealer who sells merchandise to the customer fixed costs ? Types of installment credit: ? Housing loans ? Educational loans ? Personal consumption loans
2. Credit cards or revolving credit lines ? tied to checking accounts ? overline is a prearranged loan to cover overdrafts of checking accounts ? higher risk adjusted returns than other types of loans
? Card issuers earn income from three sources:
? charging cardholders fees ? charging interest on outstanding loan balances ? discounting the charges that merchants accept on purchases
Overdraft protections and open credit lines – authorizes qualifying individuals to write cheques in excess of actual balances held in a checking account up to a pre-specified limit – open credit lines provide customers, whether or not they have an existing account relationship, with special cheques that activate the loans on its presenting for payment.
3. Non-installment Loans
? Require a single principal and interest payment.
? Borrowing needs are temporary.
? Credit is extended temporarily in anticipation of a well-defined future
cash inflow
? Quality of the loan depends on the certainty of the timing and the
amount of the anticipated net cash flow for the sale
Characteristics of Consumer loans
? These loans are of small amounts while they need large staff to handle
them.
? Consumer loans are more attractive for the banks due to higher
spreads and also because commercial loans have become less profitable.
? Most of the loans have been freed of usury limits. ? These loans foster loyalty in customers by lending money to a depositor,
which can contribute to stable core deposits.
? They are the most costly and most risky of bank’s portfolio. ? They are cyclically sensitive and interest inelastic.
? Variables deciding consumer installment credit:
? Interest rate
? Maturity ? Amount Financed ? Loan to value
Comparison of Interest Rates
? Simple Interest rate ? Add-on rate
? When the add-on interest method is used, interest is calculated on
the full amount of the original principal ? When multiple repayments are used in add-on interest, the effective lending rate becomes higher than the nominal rate
? Discount rate
Evaluating Consumer Loans
? Issues to be addressed: ? the character of the borrower ? the use of loan proceeds ? the amount needed, and ? the primary and secondary sources of repayment.
• Credit Analysis
? ? ?
The objective of consumer credit analysis is to assess the risks associated with lending to individuals Credit analysis is distinct for each type of loans The six 6’s of credit to be evaluated: ? Character Capital ? Capacity Conditions ? Collateral Compliance • 2 additional C’s: Customer Relationship and Competition
Evaluating Consumer Loans
? Credit Scoring ? With a pure quantitative credit scoring analysis, the banker grades the
loan request according to statistically determined accept/reject thresholds. ? The method produces a “score” that a bank can use to rank its loan applicants or borrowers in terms of risk.
? Figure: Factors of Credit Scoring
Common Credit Scoring Models
? MDS bankruptcy score: Scores range from about 0 to 1300
higher scores = higher risk of default
? FICO score: Scores range from about the 300s to the 900s
higher scores = lower risk of default
? Most Indian banks use “Judgmental Scoring Models”.
? Scoring methods ? Linear probability models
? Logit models
? Probit models ? Discriminant analysis ? Options-pricing theory models ? Neural networks
Limitations of Credit Scoring Models
? Accuracy is very important ? Data on which the system is based needs a rich sample of both well-
performing and poorly performing loans
? Data should be up to date ? The models should be re-estimated frequently ? Thee new pool of applicants must behave similarly
? Credit scoring model does not reveal to the lender with certainty what
the future performance of an individual loan will be
Risk Management and Retail Banking
• •
There is a conflicting interest between risk management and marketing, both should work towards a common measurable target, which combines both
The risks include the following: a. Deficiencies in lending policies, b. Incorrect product structuring, c. Inadequate loan documentation, d. Deficiencies in credit appraisal, e. Absence of post sanction surveillance and monitoring, f. Inadequate risk pricing, g. Inadequately defined lending limits, and h. Weak collection strategy. • Banks should adopt proactive retail credit risk management processes to be able to achieve healthy growth in terms of both volumes and profitability
? Risk Return Characteristics of Consumer Loans
? Individuals hold small balances and move deposit accounts less
frequently providing a more stable deposit base. Thus, liquidity risk declines as a bank’s retail deposit base increases.
? Revenues from Consumer Loans
? Usury ceilings have been eliminated, banks can raise consumer loans at
their own conditions ? In declining interest rate scenario consumer loans earn larger spreads compared to banks borrowing cost. ? When the short-term rates rise the spread narrows until the banks raise loan rates ? Banks generate substantial non-interest revenues from consumer loans
? Consumer loan losses ? Losses on consumer loans are normally the highest among all categories
of bank credit, due to the cyclical patterns in personal income as well as extensive fraud. ? Losses are due to the mass marketing efforts pursued by many lenders particularly with credit cards
doc_327007020.ppt