Description
The PPT describing about Retail Banking in India.
RETAIL BANKING
Topics to be covered
• • • • • • • Retail Banking Scenario Retail Banking in India Types of Consumer Loans Evaluating Consumer Loans Credit Analysis Credit Scoring a Consumer Loan Consumer Credit Regulations
Introduction
• • • • Focus on Corporate Clients in the past. External environment affecting borrowing. Banks are forced to look at Retail Segment. Securitization Bill gave banks and institutions muscle to recover bad debts
Financial Products
deposit products auto finance residential mortgage loans personal loans credit cards consumer durable loans debit cards loans against equity shares loans for subscribing to Initial Public Offers (IPOs)
bill payment services
mutual funds
investment advisory services
• Opportunity for banks ---• To diversify the asset portfolio ?With high profitability and ?Relatively low NPAs. • Commercial loans dominated the banks portfolio ? they generated high net yields ? with low credit risk. • Consumer loans in contrast involved ? smaller amounts, ? large staff to handle accounts and ? high default rates. They were considered substandard by the banks.
• Forces that are driving and shaping consumer lending: • Competition, • Securitization, • Automation • Regulation
Retail Banking In India
• The stagnation in the Indian economy ?poor credit absorption for > long-term funding to big-ticket projects > as well as working capital. • Big corporate are bypassing banks • Raising money through the debt market and commercial papers • Cheaper than bank credit
• Corporate Banking ---- Maturity phase • Relying on fee based income in order to maintain asset growth and profitability. • The ratio of non-interest income to total funds has already increased for some banks. • Foreign banks are also securitizing vehicle loans to raise off-balance sheet resources and reducing the overall cost of funding.
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 • Better yield and improved bottom line for a bank. • 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 economy.
With growth of Online services banks will have to:
• Banks need to align their systems with three functions. • Collate channel interaction across the front office so customers receive a consistent service. • As open finance providers, they will depend on workflow management systems that span the enterprise, customers and partners. • Open architectural bed that enables them to manage and integrate whatever product specialists come on board.
Retail Banking Strategies
• Market segmentation • Price bundling • Customer Relationship Management
Strategic Objectives for Price Bundling in Order to Enhance Demand Product A YES Retain Customers No Cross-Sell to Existing Customers
Yes
Cross-Sell to Existing Customers
Product B Acquire New Customers No
• Customer service delivery is pivotal for the success of retail banking. • This is not possible only through technology. • Process consistency within and across service channels is paramount. • Alignment of technology, human resource management and strategy are very essential for the success of retail banking.
Types of Consumer Loans
• • • • • • INSTALLMENT CREDIT HOUSING LOANS EDUCATIONAL LOANS PERSONAL CONSUMPTION LOANS CREDIT CARDS OR REVOLVING CREDIT LINES OVERDRAFT PROTECTIONS AND OPEN CREDIT LINES • NON-INSTALLMENT LOANS
For Subprime loans
• Subprime lenders offer loans to lower-income borrowers with high credit risk. • Because the risk is higher, the interest rate and fees are generally higher than those paid by customers with better credit records. • Given the higher inherent risk of subprime lending, institutions engaged in this activity should hold capital against these portfolios well above that for prime portfolios.
A Comparison of Interest Rate Quotes
• Simple Interest Rate • Add-on Rate(Compound) • Discount Rate
EVALUATING CONSUMER LOANS
• Consumer loans are peculiar in the sense that the bank cannot gauge the creditworthiness of the borrower, as there is no readily available information.
Measurable aspects of consumer loan requests: • The character of the borrower • The use of loan proceeds • The amount needed, • The primary and secondary sources of repayment.
Credit Analysis
• Assess the risks associated with lending to individuals. While evaluating loans the banker cites the six Cs of credit: • Character • Capital • Capacity • Conditions • Collateral • Compliance
Credit Scoring
Methods: • Judgmental : subjectively interprets • Quantitative : according to statistically determined accept/reject thresholds Statistical method used: • multiple regression analysis • multiple discriminant analysis.
Information Considered
• The score commonly called a FICO score from one of the bureaus which is derived from how much money is owed and whether payments have been made on time. • salary data or • for how long the person has been employed
• FICO score:375 to 900 • 650 or above --- good credit history.
five factors that comprise each credit score
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
• Statistical credit scoring is superior to judgmental scoring • Objective number – accurate estimate • Calculate expected loss and profit • Guide the decision on the rate of interest
• Most Indian banks use “Judgmental Scoring Models”.
Judgemental Model
• predefined rules and standards for loan approvals. • collective experience of many credit analysts • Provide more consistency than individual credit analysis • Help reduce the decision time for credit lending. • Advanced economies have moved beyond judgmental models to “Statistical Credit Scoring”.
Statistical methods are used to develop credit-scoring systems
• Probability model --- linear relationship between the probability of default and the factors; • logit model --- probability of default is logistically distributed; • probit model --- probability of default has a (cumulative) normal distribution
• Discriminant analysis: borrowers into high and low default-risk classes
Newer Methods
Options pricing theory models • borrower’s limited liability is comparable to a put option written on the borrower’s assets, with strike price equal to the value of the debt outstanding. Neural networks • relationship between borrower characteristics and the probability of default and to determine which characteristics are most important in predicting default.
Thank You
doc_644074708.ppt
The PPT describing about Retail Banking in India.
RETAIL BANKING
Topics to be covered
• • • • • • • Retail Banking Scenario Retail Banking in India Types of Consumer Loans Evaluating Consumer Loans Credit Analysis Credit Scoring a Consumer Loan Consumer Credit Regulations
Introduction
• • • • Focus on Corporate Clients in the past. External environment affecting borrowing. Banks are forced to look at Retail Segment. Securitization Bill gave banks and institutions muscle to recover bad debts
Financial Products
deposit products auto finance residential mortgage loans personal loans credit cards consumer durable loans debit cards loans against equity shares loans for subscribing to Initial Public Offers (IPOs)
bill payment services
mutual funds
investment advisory services
• Opportunity for banks ---• To diversify the asset portfolio ?With high profitability and ?Relatively low NPAs. • Commercial loans dominated the banks portfolio ? they generated high net yields ? with low credit risk. • Consumer loans in contrast involved ? smaller amounts, ? large staff to handle accounts and ? high default rates. They were considered substandard by the banks.
• Forces that are driving and shaping consumer lending: • Competition, • Securitization, • Automation • Regulation
Retail Banking In India
• The stagnation in the Indian economy ?poor credit absorption for > long-term funding to big-ticket projects > as well as working capital. • Big corporate are bypassing banks • Raising money through the debt market and commercial papers • Cheaper than bank credit
• Corporate Banking ---- Maturity phase • Relying on fee based income in order to maintain asset growth and profitability. • The ratio of non-interest income to total funds has already increased for some banks. • Foreign banks are also securitizing vehicle loans to raise off-balance sheet resources and reducing the overall cost of funding.
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 • Better yield and improved bottom line for a bank. • 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 economy.
With growth of Online services banks will have to:
• Banks need to align their systems with three functions. • Collate channel interaction across the front office so customers receive a consistent service. • As open finance providers, they will depend on workflow management systems that span the enterprise, customers and partners. • Open architectural bed that enables them to manage and integrate whatever product specialists come on board.
Retail Banking Strategies
• Market segmentation • Price bundling • Customer Relationship Management
Strategic Objectives for Price Bundling in Order to Enhance Demand Product A YES Retain Customers No Cross-Sell to Existing Customers
Yes
Cross-Sell to Existing Customers
Product B Acquire New Customers No
• Customer service delivery is pivotal for the success of retail banking. • This is not possible only through technology. • Process consistency within and across service channels is paramount. • Alignment of technology, human resource management and strategy are very essential for the success of retail banking.
Types of Consumer Loans
• • • • • • INSTALLMENT CREDIT HOUSING LOANS EDUCATIONAL LOANS PERSONAL CONSUMPTION LOANS CREDIT CARDS OR REVOLVING CREDIT LINES OVERDRAFT PROTECTIONS AND OPEN CREDIT LINES • NON-INSTALLMENT LOANS
For Subprime loans
• Subprime lenders offer loans to lower-income borrowers with high credit risk. • Because the risk is higher, the interest rate and fees are generally higher than those paid by customers with better credit records. • Given the higher inherent risk of subprime lending, institutions engaged in this activity should hold capital against these portfolios well above that for prime portfolios.
A Comparison of Interest Rate Quotes
• Simple Interest Rate • Add-on Rate(Compound) • Discount Rate
EVALUATING CONSUMER LOANS
• Consumer loans are peculiar in the sense that the bank cannot gauge the creditworthiness of the borrower, as there is no readily available information.
Measurable aspects of consumer loan requests: • The character of the borrower • The use of loan proceeds • The amount needed, • The primary and secondary sources of repayment.
Credit Analysis
• Assess the risks associated with lending to individuals. While evaluating loans the banker cites the six Cs of credit: • Character • Capital • Capacity • Conditions • Collateral • Compliance
Credit Scoring
Methods: • Judgmental : subjectively interprets • Quantitative : according to statistically determined accept/reject thresholds Statistical method used: • multiple regression analysis • multiple discriminant analysis.
Information Considered
• The score commonly called a FICO score from one of the bureaus which is derived from how much money is owed and whether payments have been made on time. • salary data or • for how long the person has been employed
• FICO score:375 to 900 • 650 or above --- good credit history.
five factors that comprise each credit score
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
• Statistical credit scoring is superior to judgmental scoring • Objective number – accurate estimate • Calculate expected loss and profit • Guide the decision on the rate of interest
• Most Indian banks use “Judgmental Scoring Models”.
Judgemental Model
• predefined rules and standards for loan approvals. • collective experience of many credit analysts • Provide more consistency than individual credit analysis • Help reduce the decision time for credit lending. • Advanced economies have moved beyond judgmental models to “Statistical Credit Scoring”.
Statistical methods are used to develop credit-scoring systems
• Probability model --- linear relationship between the probability of default and the factors; • logit model --- probability of default is logistically distributed; • probit model --- probability of default has a (cumulative) normal distribution
• Discriminant analysis: borrowers into high and low default-risk classes
Newer Methods
Options pricing theory models • borrower’s limited liability is comparable to a put option written on the borrower’s assets, with strike price equal to the value of the debt outstanding. Neural networks • relationship between borrower characteristics and the probability of default and to determine which characteristics are most important in predicting default.
Thank You
doc_644074708.ppt