1.

1Meaning
Those types of loans that cover large Volume of Business-Such as Residential mortgages, consumer credit cards, loans against securities, automobile and personal loans, as well as some small business loans. The size of these types of loans are small. These types of loans meet the needs of a large number of customers with well diversified portfolios. (Welldiversified portfolio avoiding the risk associated with a certain customer segments, industry, geographic.) Target customers are usually either individuals or small organizations.

1.2 Features of Retail Credit

Types of facilities
Secured/unsecured facilities Interest Tenure Loan to Value Ratio

Loan Eligibility
Credit Scoring

1.2.1Types of Facilities
Various types of Facilities are
a) Loans: Loans are the finance facility of a fixed amount extended to meet a one time requirement of an individual .
- Loans are issued for a fixed tenure, and repaid over a period in installments.

b) Overdrafts: Overdraft Loan is issued to meet the emergency requirement of the borrower.
- This means bankers allow the customers to withdraw more than the credit balance in the customers current account or give a temporary loan in the current account itself.

- Overdraft loan may be of two types i.e Temporary Overdraft(TOD) & Permanent
Overdraft(POD)

1.2.2Secured/Unsecured Facilities
These facilities include the secured and unsecured facilities.
a) Secured Loans: Loans that are always secured by an underlying asset against which funding is extended. This lending is also called Asset based lending. -Advantage of secured loan-Banker has the right to take possession of the assets and sell it to recover the loan in case default -The charge included in secured loans are of two types i) Mortgage-immoveable properties ii) Hypothecation-Moveable properties -There are various types of secured loans. Such as i) Mortgage finance ii) Vehicle Loans iii) Construction and material handling equipment loans iv) Professional equipment loans such as loans for medical and office equipment. v) Loans against securities. b) Unsecured Loans: Loans that do not have any underlying securities and are extended purely based on the creditworthiness of the organization. -This lending is also called Non-assets based lending. -The various types of unsecured loans are: i) Personal Loans ii) Credit Cards

1.2.3Interest
There are two types of Interest
a) Fixed Rate of Interest: Under the FRI interest is charged throughout the tenure of the loan at the rate fixed at the time of granting the loan. The borrower has to pay interest at the contracted rate if whether the rate of interest in the market goes up or down. b) Floating Rate of Interest: The rate at which interest is charged on a loan varies from time to time according to movement of the interest rate in the market is called Floating rate of interest. Floating rate of interest is based on liquidity position of the financial institution.

1.2.4Tenure
The tenure depends upon the amount of the loan and the

repayment capacity of the borrower. However, the maximum tenure permitted depends upon the period over which the assets financed could depreciate completely. non depreciate assets.

That mean tenure of depreciate assets is lower in compression of For example, in case of hire purchase loan i.e for four wheeler-

the maximum tenure generally permitted to five to eight years. is usually three years.

In case of a loan to purchase a two-wheeler the maximum tenure In case of housing loans maximum tenure is usually 15 year and in

some cases even 20 years.

1.2.5Loan to value Ratio

Loan to value ratio(LVR) refers to the maximum percentage of the

value of the assets that is given as a loan.

For example- LVR of 80% means that the maximum loan that can be

considered for purchase of the assets is limited to 80% of the value of the assets. If the value of the assets is Rs. 100Lakhs, not more than Rs.80 Lakhs is given as loan against it. which the assets is expected to depreciate or reduce in value. LikeIn case of Vehicle LVR may be low while for house it may be high

LVR varies according to the nature of the assets and the rate at

LVR= Maximum Value of Assets after valuation*100%

Actual(Full) Value of Assets Higher The LVR higher the risk.

1.2.6Loan Eligibility
Loan Eligibility determine the maximum extent of the loan

amount that can be given to the customer. liquidity to repay.

Loan eligibility is determined on basis of capacity to repay and

1.2.7Credit Scoring
Method of predicting the creditworthiness of applicants for credit facility. Credit scoring helps to judge the credit worthiness of an individual.

Credit scoring should be award winning.

Scoring helps in managing risk better, prompt decision-making regarding lending the loan, and lowering the turn around time(TAT) In Nepal credit scoring is done by credit information bureau.(CIB) Bank adopt two method in making decision related to the creditworthiness of applicants-Manual Judgment or statistical scoring method. Credit scoring can be done on the basis of:

i) Past history ii) Net worth iii) Earning iv) Liabilities v) Family background vi) Profession vii) Age viii) Education background

2.Financial Intermediation
Process of transferring the funds from the savers to the entrepreneurs is called intermediation. Financial intermediaries play an important economic function by facilitating the productive use of the communitys surplus money. Some questions:

- How does it happen? - Will the savers voluntarily pass on their savings to entrepreurs ? - If not, what kind of risks they face? - How do they want to protect themselves from such risk ? Answered only when the process of transfer takes place and the roles played by a third agency- called financial intermediary. . Need for financial intermediary arises because the savers would not voluntarily come forward to lend directly fearing certain risks. . Intermediation is the management of risk. Such risks are as follows. i) Credit risk: ii) Liquidity risk iii) Interest rate risk Banking Parlance: Rate charged to the borrower(-)Rate paid to the depositors

Types of financial intermediaries

The following figure shows the various types of financial intermediaries.
Financial Intermediaries Unorganized Sector Organized Sector

Money Lenders

Other Institutions

Non-banking Institutions

Banking Institutional

Indigenous Bankers

MFIs

NBFCs

Commercial banks

Chit funds

Insurances Companies

DFIs

Co-op bank

Micro Finance Nidhis NGOs Self Help Group Corporate

DFIs

Regional Rural Bank

State Level DFIs

Other DFIs

Types of Financial Intermediaries

Retail Lending Life Cycle

The retail lending life cycle consists of Account Acquisition & Account Management

a)

Account Acquisition I. Lead generation& Sourcing II. Collection of document III. Verification Conducted IV. File prepared along with credit memorandum V. Credit Evaluation & Decision VI. Completion of various formalities

Lead Generation and sourcing Lead generation or sourcing is the process of identifying the prospective customer for selling the loan products. Channels of identifying the prospective customer are: Tele-calling Product dealerships(Tye-up with authorized dealer) Marketing campaigns( such as loan mella) Repeat business of existing customer. Collection of documents as specified by the policy When the customers have understood the terms and conditions of the loan and are interested in availing the loan they are asked to submit some basic documents. Application form Address proof Identity proof Photograph Income proof

Verification Conducted Verification includes: Field verification Tele Verification Reference Check Document Verification Checking against negative list File prepared along with credit memorandum The customer file is prepared along with the necessary documentation and credit memorandum. Credit Evaluation & Decision Based on the result of verification the RM or RO takes a credit decision of / on whether or not to sanction the loan to the application . Credit evaluation and decision includes : Whether the applicant has the capacity to repay the loan? Whether the applicant has the required liquidity to [pay the installments on the due dates? Whether the applicant's income is sufficient to cover the loan? Intention of applicants collateral as well as income sources are authentic?

Completion of various formalities

Sign loan documents/ legal

Receive security papers

Loan deed:-

(This is non registered security documents executed by the borrower giving evidence of its acceptance of the bank loan sanctioned) Legal (Guarantee letter) Pay roll record

Account management
Document Storage

Repayment Management/Collection Portfolio monitoring Account Termination

Retail Loan Product

The following are some of the popular retail assets products that are offered to customers by banks:

Personal overdraft Housing Loans Car Loans Motorcycle Loans Loan against securities Credit Card Education loans Traveling Loans Medical Facilities Loans Loans against fixed deposit

Collection
Collection means recovery of loan extended. Or, it is the process of collecting the amount in a form of installment from

the borrower. For recovery of loan special teams have been formed . The primary objectives of collection is to ensure maximum collection from delinquent customers and keeping NPA level at a minimum. So in a bank there should be a separate special recovery team to handle those delinquent customer. The collection team is structured to handle the volume and geographical spread. Organization of collection teams and the nature of work performed by each one of them vary from bank to bank, depending on the volume of business, and the area to be serviced. To achieve the goal of controlling delinquency, it is important for the collections team to maintain continuous contact and good relations with the customer throughout the tenure of the loan.

Role & Responsibility of collection team

Collection manager play an important role in the banks. They are responsible for delinquency management. (The relation of the customer with the bank starts with the

disbursement of the loan and continuous till the end of the loan tenure. So to achieve the goal of controlling delinquency, it is necessary for the collection team to maintain continuous contact and good relations with the customer throughout the tenure of the loan) Define the geographical boundaries to control the delinquency. Or define the negative area-where the loan is at risk. Gather information about defaulters. Maintain reports about daily collection. Make the environment for possessing of assets- based on the policy of the bank or go through legal process.

Collection strategy
Collection strategy is based on the nature of loan product and risk associated with that product. Mainly collection is done through different tolls such as Tele-calling Field-visit/field collection Door to door collection Legal notice or legal action should be initiated for all delinquent cases. ((((Main strategy includes)))

Respect customers privacy. Contact customer at the appropriate time Contact customers ordinarily at the place of their choice.(like office or residence) Provide the customer relevant information regarding amount outstanding and its affect. Use professional and formal language.

Collection Process

Awareness Calling

Recovery through legal process

Collection Calling

Possession and Disposal of Hypothecated Assets

Collection Process Demand Notices

Field Collection

Collection Process
Awareness calling Under this, customer are aware of the date of payment of the dues to the bank. Collection calling This activity involves contacting the customers over the phone, making them aware that they missed the due date and thereby requesting them to pay the arrears at the earliest. Demand Notice In the case of verbal communication if the client ignore to make the payment of his dues then written notice is issued to the client for the payment. Field Collection Physical meeting with the customer for the payment of dues. Possession and disposal of Hypothecated assets In the event of a customer failing to make good the arrears despite the preceding steps, the moveable hypothecated assets is taken into possession after following the due process of the law. Recovery through Legal action By fulfilling all the requirement of the law the assets capture from the borrower are kept for the auction process and the same borrower are listed in blacklist.

Extra Activity
Marketing on Retail Lending/Selling of Retail product Hire-Purchase Housing Loan Quiz Context