Chapter-11

RETAIL CREDIT AND

ROLE OF BRANCH MANAGER
 Objective

Objective of this chapter is to understand:

• Know what is retail credit
• Understand the process of retail credit lending at the branch
• Acquaint with what is priority sector lending
• Familiar with the process of priority sector lending at the
branch
• Deliberate on recovery and remedial management of retail
and priority sector lending
 Retail credit/ lending at the branch

Products and services:

• Home Loans;
• Auto/Vehicle Loans;
• Personal Loans;
• Consumer Durable Loans;
• Educational Loans;
• Credit Cards;
• Debit/ ATM Cards; and
• Travel Cards
 Home Loans
• To purchase a Plot for construction of a House, to purchase/
construct house/flat, as well as for renovation/ repair/
alteration/ addition to house/flat, furnishing of house.
• Maximum loan amount is Rs.500 lacs and repayment ranges
up to 20 years, with reasonable margin and nominal
processing charges. No commitment /administrative charges.
• The competitive rates of interest.
• Prepayment of Loan permitted
• Interest is calculated on daily balance basis
• Loan to NRIs as well as Persons of Indian Origin.
• Simplified application form/procedures
• Free Personal Accident Insurance cover
• Life Insurance Cover to borrowers for Loan
Protection(optional)
 Auto/Vehicle Loans

• Auto/ vehicle loans are those retail credit products where the
bank lends to an individual to help him/her to buy a two
wheeler (bicycle/ scooter/ motor cycle) or a car
• At competitive Interest rate
• Convenient Repayment schedule
• Long term duration
 Personal Loans

• Personal Loan Scheme provides loan to meet various Personal

requirements
• Bank offers loans for marriage expenses, medical expenses,
educational expenses, purchase of consumer durables etc.
• Maximum quantum of advance is Rs.15.00 lakh (keeps on
changing from time to time),
• Depends upon the income, with very attractive interest rate
and easy repayment plan.
 Educational Loans

• The Educational Loan product aims at providing financial

support from the bank to deserving/ meritorious students for
pursuing higher education
• In India and abroad
• The main emphasis is that every meritorious student is
provided with an opportunity to pursue education with the
financial support on affordable terms and conditions.
• No security
• Parents guarantee- may be obtained
• Convenient long term repayment period
• Concessional rate of interest
 Credit Cards

• “Credit card” refers to a plastic card assigned to a cardholder,

• Usually with a credit limit, that can be used to purchase goods and
services on credit or obtain cash advances.
• Credit cards allow cardholders to pay for purchases made over a period of
time, and to carry a balance from one billing cycle to the next.
• Credit card purchases normally become payable after a free credit period,
during which no interest or finance charge is imposed.
• Interest is charged on the unpaid balance after the payment is due.
• Cardholders may pay the entire amount due and save on the interest that
would otherwise be charged.
• Alternatively, they have the option of paying any amount, as long as it is
higher than the minimum amount due, and carrying forward the balance.
 Debit Cards
• A debit card (also known as ATM card) is a Plastic card
that provides the cardholder electronic access to his or
her Bank accounts at a financial institution.
• Some cards have a Stored Value with which a payment is
made, while most relay a message to the cardholder's
bank to withdraw funds from a payee's designated bank
account.
• The card, where accepted, can be used instead of Cash
when making purchases.
• In some cases, the Primary account Number is assigned
exclusively for use on the Internet and there is no
physical card.
• Unlike credit and charge cards, payments using a debit card
are immediately transferred from the cardholder's designated
bank account, instead of them paying the money back at a
later date.
• Debit cards allow for instant withdrawal of cash, acting as the
ATM Card for withdrawing cash.
• Merchants may also offer Cash back facilities to customers,
where a customer can withdraw cash along with their
purchase.
• Debit cards should be issued to customers having Saving
Bank/Current Accounts but not to cash credit/ loan account
holders.
 Retail Credit Risk Management tool
• In India the Credit Information Bureau (India) Ltd in
association with Dun & Bradstreet and Trans union has
developed a Credit Scoring Model to be used by the retail
banks operating in India. It is called the CIBIL Trans Union
score.
• It gives you a more robust, complete picture of your
applicants by drawing data from a wide range of lenders and
institutions covering the breadth of India’s financial services
marketplace.
• It gives you a more robust, complete picture of your
applicants by drawing data from a wide range of lenders and
institutions covering the breadth of India’s financial services
marketplace.
• The CIBIL score is a 3-digit numeric summary of the
customer’s credit history
• An individual’s credit score provides a lending bank with an
indication of the ‘probability of default’ of the individual
based on their credit history
• customer score is ranging from 300 to 900
• Limitations of Credit Scoring
• The accuracy of the scoring systems for underrepresented groups is
still an open question.
• The accuracy of a credit scoring system will depend on the care with
which it is developed.
• The data on which the system is based need to be a rich sample of
both well-performing and poorly performing loans.
• The data should be up to date, and the models should be re-
estimated frequently to ensure that changes in the relationships
between potential factors and loan performance are captured.
• If the bank using scoring increases its applicant pool by mass
marketing, it must ensure that the new pool of applicants behaves
similarly to the pool on which the model was built; otherwise, the
model may not accurately predict the behavior of these new
applicants
 Retail Loan approval process by Banks /
branches
• Except for personal loans and credit cards, the bank requires a
contribution from the borrower and their loans are secured by the
asset financed.
• Their retail credit product operations are sub-divided into various
product lines.
• Each product line is further sub-divided into separate sales and
marketing and credit groups.
• The Risk, Compliance and Audit Group, which is independent of the
business groups, approves all new retail products and product
policies and credit approval authorizations.
• All products and policies require the approval of the Committee of
Directors comprising all the whole time directors.
• All credit approval authorizations require the approval of bank’s
board of directors.
 Loan application Process:

• Loan application Process:

• In general, loan applications may be split into three distinct
types:
• Agent assisted (branch-based)
• Agent assisted (telephone-based)
• Broker sale (third-party sales agent)
• Self-service
Agent Assisted (Branch-Based) Loan Application
• In a branch, customers typically sit with a sales agent who will
assist the customer in completing the application form,
selecting appropriate product options (such as payment terms
and rates), collecting required documentation compliance
requirements must be met at this stage), selecting add-on
products (a home loan with a credit card or opening of a
savings account),and eventually signing a completed
application.
Agent Assisted (Telephone-Based) Loan Application/ Broker-
Sourced (Third Party Sales Agent) Loan Application/Self-
service Loan Application
• Self-service web applications are taken in a variety of ways,
and the state of this business has evolved over time.
• Print and fax applications or pre-qualification forms.
• Print, write or type data into the form, send it to the bank.
• Form fill on the web, print, and send to the bank (not much
better).
• Web forms filled out and saved by the applicant on the web
site, that are then sent to or retrieved by (ostensibly securely)
the bank.
• Many of the early solutions had a lot of the same problems as
general forms (bad work flows, trying to handle all manner of
loan types in one form).
The online application should perform:
• Present required disclosures, comply with various lending
regulations)
• Be compliant with security requirements (such as Multi
factor authentication) where applicable.
• Collect the necessary applicant data.
• Make it easy, quick, and friendly for the applicant (so
they actually complete the application and don't
abandon)
• Get a current Credit report
• Processing
• If the borrower has credit worthiness, then he/she can be
qualified for a loan.
• Recent changes in the market and industry have made stated
income and stated asset loans a thing of the past and full
income and asset documentation is now required.
• They seek to pay off the debt that is outstanding in amount.
• These debts are called "liabilities," these liabilities are
calculated into a ratio that lenders use to calculate risk.
• This ratio is called the Debt-to-Income ratio (DTI).
• If the borrower has excessive debt that he/she wishes to pay
off, and that ratio from those debts exceeds a limit of DTI,
then the borrower has to either pay off a few debts or pay off
just the outstanding debt
• Appraising Collateral:
• appraise the borrower's property that he wishes to have the
loan against. This is done to prevent fraud of any kind by
either the borrower or the DSA/DMA.
• This amount is divided by the debt that the borrower wants to
pay off plus other disbursements and the appraised value (if a
refinance) or purchase price (if a purchase) {which ever
amount is lower} and converted into yet another ratio called
the Loan to value (LTV) ratio. This ratio determines the type of
loan and risk the lender is put up against
• LTV for loans may or may not exceed 80-85% as the bank
would like to see that the borrower also brings in his/her own
contribution, called as margin in banking circle.
• LTV for loans may or may not exceed 80-85% as the bank
would like to see that the borrower also brings in his/her own
contribution, called as margin in banking circle.
• Pricing, including Risk-based pricing & Relationship based
pricing
Priority Sector Lending
• Priority sector refers to those sectors of the economy which
may not get timely and adequate credit in the absence of this
special dispensation.
• These are small value loans to farmers for agriculture and
allied activities, micro and small enterprises, poor people for
housing, students for education and other low income groups
and weaker sections.
Priority Sector includes the following categories:
• (i) Agriculture
• (ii) Micro and Small Enterprises
• (iii) Education
• (iv) Housing
• (v) Export Credit
• (vi) Others
'Direct Finance' for Agricultural Purposes
• Individual farmers, groups of individual farmers engaged in
Agriculture and Allied Activities, viz., dairy, fishery, animal
husbandry, poultry, bee-keeping and sericulture
• aggregate limit of Rs 2 crore per borrower
• for purchase of land for agricultural purposes
• Loans to distressed farmers indebted to non-institutional
lenders.
• loans to Primary Agricultural Credit Societies (PACS), Farmers’
Service Societies (FSS) and Large-sized Adivasi Multi Purpose
Societies (LAMPS) ceded to or managed/ controlled by such
banks for on lending to farmers for agricultural and allied
activities
• 'Indirect Finance' to Agriculture
(i) If the aggregate loan limit per borrower is more than Rs2
crore in, the entire loan will be treated as indirect finance to
agriculture.
(ii) Loans up to Rs5 crore to Producer Companies set up
exclusively by only small and marginal farmers under
agricultural and allied activities.
(iii) Bank loans to Primary Agricultural Credit Societies (PACS),
Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi
Purpose Societies (LAMPS).
Micro and Small Enterprises under priority sector
• Bank loans to Micro and Small Manufacturing and Service
Enterprises, provided these units satisfy the criteria for
investment in plant machinery/ equipment as per MSMED Act
2006
Education Loan under priority sector
• Loans to individuals for educational purposes including
vocational courses up to Rs 10 lakh for studies in India and Rs
20 lakh for studies abroad are included under priority sector.
Housing loans under priority sector
• Loans to individuals up to Rs 25 lakh in metropolitan centres
with population above ten lakh and Rs 15 lakh in other
centres for purchase/construction of a dwelling unit per
family excluding loans sanctioned to bank’s own employees
Loan to Weaker Sections under priority sector
Priority sector loans to the following borrowers are considered
under Weaker Sections category:-
(a) Small and marginal farmers;
(b) Artisans, village and cottage industries where individual
credit limits do not exceed Rs 50,000;
(c) National Rural Livelihood Mission (NRLM);
(d) Scheduled Castes and Scheduled Tribes;
(e) Beneficiaries of Differential Rate of Interest (DRI) scheme;
(f) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana
(SJSRY);
(g) Beneficiaries under the Scheme for Rehabilitation of Manual
Scavengers (SRMS);
(h) Loans to Self Help Groups;
(i) Loans to distressed farmers indebted to non-institutional
lenders;
(j) Loans to distressed persons other than farmers not exceeding
Rs 50,000 per borrower to prepay their debt to non-
institutional lenders;
(k) Loans to individual women beneficiaries up to Rs 50,000 per
borrower;
Rate of interest for loans under priority sector
• The rate of interest on various priority sector loans will be as
per RBI’s directives issued from time to time, which is linked
to Base Rate of banks at present
Role of Branch Managers as Lenders
As a branch manager you will have to play following roles:
1. A good lender and a recovery expert;
2. Should have capacity to identify credit worthy borrowers;
3. Can make proper assessment of their borrowing
requirements;
4. Should ensure that the amount lent is as per bank's norms,
policy and guidelines;
5. Should be able to ensure that the funds so lent will be repaid
in due time
Branch managers may have had experience in lending money in
their previous assignment in the bank, but their present role
has a different perspective where they become responsible
for the entire lending at their branches.
 Lending Decisions
• Lending decisions taken by branch managers based on
objective appraisal however remains a subjective
phenomenon.
• There will be occasions, where branch managers will be
required to say YES to one customer and NO to the other
though both have apparently submitted similar borrowing
proposals.
• Branch managers have to develop the art of saying NO where
they feel the lending will not be safe.
• Saying YES to a lending proposal is one of the easiest
decisions for branch managers.
• Their confidence should be based on the information
provided by the customer and a series of appraising
procedures followed at the branch before coming to a
decision.
• Also, they should discuss with their second-in-command and
the credit officer-in-charge.
Interview of the Borrower
• The interview should be carried out to fulfill basically two
objectives,
• First, to clarify matters out of the data received from the customer
and
• Second, to know more about the person/s behind the project and
how they view their own proposition.
Application Form
• Once branch managers are reasonably satisfied with their initial
encounter with the prospective borrower and decides to look at the
request of the borrower, the prescribed application form along with
the relevant annexure may be given. From the bank's point of view,
the application form is an important document.
Assessing the Credit Needs of the Borrower
• Branch managers are required to master the skills of
appraising credit needs of a vast range of clientele,
amount wise, sector wise, facility wise and segment wise.
• There is a prevalent tendency among customers to ask
for the amount they think the bank will lend than the
figure they consider realistically needed to see a project
through.
• Therefore, it is all the more important for the bank
managers/credit officers to find out the exact need of the
customer.
Branch Managers have to assess the credit need of the borrower
depending on the following factors:
1. Credit needed by the project/ business;
2. Margin brought forward/ available in the business;
3. Securities available to back-up the advance amount to ensure
safety in case the advance goes bad;
4. Credit available from the market;
5. Unsecured loans/ deposits raised by the borrower from family
members/ friends;
6. Likely cash accruals from the business.
• Pre-Sanction Inspection
• A pre-sanction inspection is very important from the branch
manager's/credit office’s point of view as it gives them inputs
to help them decide whether to lend or not.
• A visit to the proponent's place of stay and business is
essential before deciding on the credit proposal
• Branch managers/credit officers should return from the pre-
sanction inspection of both the places (residence and
business) and if satisfied themselves will help them further to
objectively decide whether to lend the money or not.
• Pre-sanction inspection, is must before deciding on an
advance. Without completing this aspect of credit appraisal,
no advance should be made.
• Preparation of Credit Proposals
• Once branch managers decide on sanctioning or
recommending an advance (if it is beyond their delegated
authority) a credit proposal is prepared.
• For every type of lending banks have formats for proposal
forms.
• These forms, in few sets, are required to be filled in by the
branch and the original with the sanction mark of the
sanctioning authority is kept along with the application form
and security documents.
• For sanction lying with higher authorities, a set of these
proposal forms are sent for their consideration and sanction.
• The recommendation (in case proposal is sent to higher
authorities) or comments (where the proposal is within the
sanctioning authority of the branch) is one of the important
section/part of a credit proposal
Inspection Report
• Branch managers/ credit officers are required to prepare
inspection reports for pre and post-sanction.
• It should be wholesome but not too long.
• But then, pre-sanction inspection reports for new units will
differ from existing ones.
• Similarly, post-sanction inspection reports for hypothecated
stocks will be different from pledged stocks and also from
hypothecated book debts.
• Again, post-sanction inspection of a transport vehicle is
different for a truck, trawler or boat/ferry.
• Pre-sanction and post-sanction inspections of dairy, poultry,
fishery, piggery etc., is altogether different from that of crop
loans and term loans for pump sets, dug wells, farm
machinery, land development, etc.
• Finalization of the Credit Proposal
• Once the interview is concluded and branch managers are
satisfied they may agree to sanction the proposal if it falls
within their delegated authority or else they may forward the
proposal to the appropriate controlling authorities for
consideration and sanction.
• Once the decision of the controlling authority is known,
positive or negative - branch managers should convey to their
customer as if it has been their own decision.
Unsecured Advances
• Branch managers have certain authorities to sanction
temporary overdrafts or temporary over limit business over
and above the sanctioned limits.
• Temporary clean overdrafts are termed as unsecured
advances.
• In considering an unsecured advance the bankers have to
realize that if they agree, not only will he be without a
security from where they may ensure repayment but also that
they have placed the bank's funds entirely in the hands of the
customer.
• If the borrower turns difficult and does not repay the advance
for any reason whatsoever, then the bank’s only recourse is
costly and possibly unsuccessful litigation.
Payments Against Un-cleared cheques
• Most branch managers in their day-to-day function face
situations where customers approach them for payment
against cheques which have either been presented in clearing
or have been sent for collection to upcountry branches.
• Normally, if a customer issues cheques before the bank has
had time to clear them then banks may dishonor these
cheques with the reason "effects not cleared".
• Payment of cheques drawn against unclear effects creates a
potential liability for the bank, if for any reason the cheques
being collected are dishonoured by the drawee bank and
consequently need to be debited to the customer's account
when they are returned.
• This may lead to temporary overdraft - an unsecured advance.
Kite-Flying
• Kite-flying is a phenomenon where customers would request
branch managers to allow payment against unclear cheques
drawn on accounts of the customer either in another branch
of the same bank or in a different bank.
• This is a very dangerous practice.
• New branch managers on taking over are the likely target of
customers of such unfair practices.
• It should never be allowed in the first place.
• In case any payment is permitted and kite-flying operations
are detected it should be stopped.
• Allowing such facility, though tantamount to giving a clean
overdraft, is not permissible and against policy guidelines for
advances.
The Art of Communicating with Borrower Customers
• Bankers have to acquire the ability to communicate with and
have the strength of the personality to act firmly, Branch
managers are required to communicate with virtually the
whole spectrum and have to adjust their manner and
approach to each sector.
• All customers, irrespective of background, need to make them
feel that they can relate to their banker and since, it is the
bank which wants business it is up to branch managers to
communicate effectively with customers.
• Banks business is bound to be adversely affected if customers
do not find themselves received by branch managers with
understanding and on an equal level
• Art of Good Lending
• Lending opportunity or request of a loan should be taken up
as a challenge by branch managers/ credit officers where their
prudence is put to test.
• Branch manager/ credit officers get an opportunity to learn
more about the customers, their business or industry, the
environment where the borrower functions.
• Supervision and Control of Advances at the Branch and
Sending a sanction letter
• Supervision of a sanctioned advance begins by
communicating to the borrower, in a formal letter, the terms
and conditions, of the advance so sanctioned.
• This will make sure that the customers are aware of what is
expected of them and chances of any misunderstanding
cropping up in future, if not eliminated, is at least minimized.
• Documentation and security
• Branch manager should ensure about the legal competence of
the borrower to borrow and then to execute the necessary
documents.
• All necessary documents are duly filled in correctly and
properly executed/ signed.
• Security charged is correctly valued i.e., marketability,
ascertainability, stability and transferability.
• The margin is properly maintained and there is proper
turnover of stocks.
• Insurance is adequate with policy duly assigned in banks
favour and with a pre-sanction report attached.
• Post-sanction Inspection
• Supervision of advances sanctioned is as important as the
good appraisal. The reason is simple.
• Branch managers have to ensure the safety of banks funds
along with proper end use.
• The next step, therefore, is a post-sanction inspection of the
borrower's unit/ business/ trade etc
Objectives of Post sanction inspection are:
1. To ensure proper end-use of funds;
2. To check that the security charged to the bank represents
what it has been declared to be both in quality and quantity;
3. To ensure compliance of all the terms and conditions of the
sanction;
4. To get an idea of how the unit is functioning and make
themselves aware of any problems faced by the proponent
so that timely remedial measures can be taken;
5. To find out whether the loan amount sanctioned is adequate.
Also, if there is any possibility of diversion of funds
Stock statements
• One of the main terms of sanction of advances (working
capital finance) is submission of regular stock statements by
borrowers.
• The periodicity ranges from fortnightly to quarterly, as the
case may be.
• Regular follow-up should be made to ensure obtaining of
stock statements from the borrowers, as per sanction terms.
Run of the account
• Another method of effective supervision of advances is close
scrutiny of the accounts.
• This means frequent scrutiny of the accounts themselves and
of the transactions passing through them.
• In case of borrowers with large limits as well as those having
not so satisfactory track record or showing signs of incipient
sickness the banker should make it a point to closely
scrutinize these accounts daily.
Insurance of security offered to the bank
• The securities offered to the bank to cover the advances
should be adequately insured against all probable risks.
• Goods and commodities hypothecated or pledged to the bank
should be ensured against fire, riot, strikes, civil commotion,
earthquakes, floods and malicious damage risks.
• Goods which are likely to be subjected to theft/ burglary
should be additionally covered for burglary risks.
• Primary or collateral security should be adequately insured for
fire, earthquake and flood risks.
• Goods which are likely to be damaged by explosions (fire-
works, match factories), should be covered by explosion risks.
• Vehicles hypothecated to the banks are insured for
comprehensive risks.
• Additional cover for riot and strike risk should be obtained for
riot/strike prone areas.
• Where advances are made against ships, boats, trawlers,
marine hull insurance is obtained.
• Goods exported or imported to/from overseas countries are
covered by marine insurance.
 Recovery of Loan at the Branch
• Recovery of Retail Loans
• The aggressive retail lending styles followed by several retail
banks resulted in to bad loans and therefore banks called for
equally aggressive recovery approaches.
• In addition to the usual follow up by phone and mail, three
main recovery approaches were employed by aggressive retail
banks. These were:
• Post-dated cheques or ECS debit authority
• Use of Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interests (Sarfaesi) Act to sell
properties
• Recovery agents
• Post-dated cheques (PDC)
• The basic idea behind taking PDCs is to use the threat of
criminal prosecution in case any of the cheque bounces.
• The mechanism of PDCs also creates a revenue opportunity.
• The bank where the borrower has an account recovers
charges for issuing such a large number of cheques, and also
levies penalties if any of the cheque has to be returned
unpaid.
• The bank which takes these PDCs also levies a penalty if the
cheque is returned unpaid.
• SARFAESI Act
• This approach is available only for secured loans, and has
been largely used for housing loans.
• It has been found to be especially effective against those
borrowers who are living in the residential houses purchased
out of loans.
Recovery agents
• Aggressive retail lending banks outsourced the recovery and
follow up activity also.
• Initially used for recovery of credit card dues, the practice
was expanded to cover unsecured personal loans and auto
loans later on.
• Beginning with a polite reminding phone call that an EMI or
card payment was overdue, the outsourced agencies followed
it up with more calls and sending agents to collect the dues
from the doorsteps of the borrower.
• These agencies were also entrusted with the job of taking
possession of hypothecated assets in case of persistent
defaults by the borrower.
 RBI guidelines:
credit card operations of banks
• The guidelines prohibit issue of unsolicited cards,
• defines what constitutes most important terms and
conditions (MITC) which need to be highlighted, advertised,
and sent separately to the prospective customers at all the
stages - marketing, at the time of application, at the
acceptance stage, and in important subsequent
communications.
• Detailed instructions with respect to wrong billing, debt
collection practices, code of conduct of DSAs and recovery
agents, reporting to credit bureau as a defaulter, dispute
resolution etc constitute these guidelines
• RBI guidelines on recovery agents
• Banks have been asked to have a due diligence process in
place for engagement of recovery agents,
• This include 'verification of the antecedents of their
employees, through police verification, as a matter of
abundant caution'.
• Inform the borrower about the details of recovery agents ,
who should carry the authorisation letter from the bank along
with their identity card.
• Conversation of recovery agents with the borrower will have
to be recorded.
• The methods followed by these recovery agents will have to
follow the guidelines issued by RBI on outsourcing of financial
services