NAME: DHARSHINI S

COLLEGE: SRI KRISHNA COLLEGE OF

TECHNOLOGY
TOPIC : BANKING
1. RETAIL LENDING
Retail lending is the process of disbursing any form of loan to an individual customer. The retail
lenders generally include banks, credit unions, savings, loan institutions. However, today, Fintechs are
also providing credit options to borrowers.
Process flow for retail lending:
•.Lending Dashboard
•Loan Creation
•Disbursement
•Change Interest
•Increase Commitment
•Payment Holiday
•Repayment
•Payoff
COMMERCIAL LENDING
Commercial Lending is when a business borrows money to pay for business expenses, real estate or
equipment purchases required to operate or expand. Loans can range from short term funding to
long term real estate loans reaching 30 years.
The Commercial Loan Process
•Loan origination, where the relationship team goes out and prospects for potential borrowing
clients. 
•Client discovery and credit structure is where the team of lenders (including the relationship
manager and the credit analyst) seek to understand the health of the business, what its specific
borrowing needs are, and how the deal might be structured and priced. 
•Analysis and underwriting occurs once the team has secured the client’s commitment to
move forward on a formal credit application. At this stage, the bank’s adjudication team (or
credit committee) must provide final approval of the proposed credit structure.
•Documentation and perfecting security begins once the deal has been approved, the 
loan agreement executed, and any liens against the business and its assets registered
correctly by the lender’s counsel. 
•And finally, the loan is advanced and the borrower gets access to the loan proceeds.
LOAN ORIGINATION
Loan origination is the process by which a borrower applies for a new loan, and a lender Processes
that application. Origination generally includes all the steps from taking a loan application up to disbursal
of funds (or declining the application). For mortgages, there is a specific mortgage origination process. 

Loan servicing covers everything after disbursing the funds until the loan is fully paid off.
Loan origination is a specialized version of new account opening for financial services organizations.
Certain people and organizations specialize in loan origination. Mortgage brokers and other mortgage
originator companies serve as a prominent example.
LOAN SERVICING
Loan servicing is the way a finance company (a lender) goes about collecting principal, interest, and
escrow payments that are due or overdue. The practice deals with all types of loans; however, mortgages are
the most common.
Mortgages are frequently backed by the government or an affiliated agency (a government-sponsored entity
or GSE). A private lender or GSE won’t usually service loans they purchase. The responsibility generally
falls onto the bank that originated the mortgage to do it, although the bank may outsource the servicing as
well.

LOAN COLLECTION
Debt collection is the process of pursuing payments of money or other agreed-upon value owed to a 
creditor. The debtors may be by individuals or businesses. An organization that specializes in debt collection
is known as a collection agency or debt collector. Most collection agencies operate as agents of creditors and
collect debts for a fee or percentage of the total amount owed.
 PERFORMING LOAN NON-PERFORMING LOAN

 Non-performing loan (NPL) is a bank loan which not expect

 Performing loan is the loan that banks expect to collect
to be collect in both principal and interest due to late
back from customers as they have paid both principal and
payment. The borrowers are not making proper payment of
interest on time.
principal or interest, they are highly likely going to default
 The last payment of this loan is less than 90 days base on
the loan.
the schedule.  The bank is receiving payment not more
 Base on the accounting standard, the loan will be considered
than 90 days base on the schedule.
as non-performing if they are more than 90 day past due.
 It means the borrower may pay late but it is not more than
However, the bank may consider the loan as non-performing
90 days. We consider that they are making proper
if they have enough information regarding the borrowers’
payment.
bankruptcy.
 Non-performing loan is not a good indicator for the bank, it
show that customers are having a financial difficulties and
may not able to pay back the loan.
BASEL ACCORD

The Basel Accords refers to a set of banking supervision regulations set by the Basel Committee on Banking
Supervision (BCBS). They were developed over several years between 1980 and 2011, undergoing several
modifications over the years. The Basel Accords were formed with the goal of creating an international regulatory
framework for managing credit risk and market risk.
Their key function is to ensure that banks hold enough cash reserves to meet their financial obligations and
survive in financial and economic distress. They also aim to strengthen corporate governance, risk management,
and transparency.
The regulations are considered to be the most comprehensive set of regulations governing the international
banking system. The Basel Accords can be broken down into Basel I, Basel II, and Basel III.
Objectives:
The Basel Convention aims to protect the environment by bringing measures to control and regulate
hazardous and other waste disposals. The negotiations for the convention were started in the late 1980s
under the auspices of the United Nations Environment Programme (UNEP).
Basel I
Basel I, also known as the Basel Capital Accord, was formed in 1988. It was created in response to the
growing number of international banks and the increasing integration and interdependence of financial
markets. Regulators in several countries were concerned that international banks were not carrying
enough cash reserves. Since international financial markets were deeply integrated at that time, the
failure of one large bank could cause a crisis in multiple countries.
Basel II
Basel II, an extension of Basel I, was introduced in 2004. Basel II included new regulatory additions and was
centered around improving three key issues – minimum capital requirements, supervisory mechanisms and
transparency, and market discipline.
Basel II created a more comprehensive risk management framework.
Basel III
The Global Financial Crisis of 2008 exposed the weaknesses of the international financial system and led to
the creation of Basel III. The Basel III regulations were created in November 2010 after the financial crisis;
however, they are yet to be implemented. Their implementation’s constantly been delayed in recent years and
is expected to occur in January 2022.
Basel III identified the key reasons that caused the financial crisis. They include poor corporate governance
and liquidity management, over-levered capital structures due to lack of regulatory restrictions, and
misaligned incentives in Basel I and II.
Probability of default (PD) is a financial term describing the likelihood of a default over a particular
time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its debt
obligations.
PD is used in a variety of credit analyses and risk management frameworks. Under Basel II, it is a key
parameter used in the calculation of economic capital or regulatory capital for a banking institution. PD
is the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of
default is derived by analyzing the obligor's capacity to repay the debt in accordance with contractual
terms. 
LOSS GIVEN DEFAULT
Loss given default (LGD) is the estimated amount of money a bank or other financial institution loses
when a borrower defaults on a loan. LGD is depicted as a percentage of total exposure at the time of
default or a single dollar value of potential loss. A financial institution’s total LGD is calculated after a
review of all outstanding loans using cumulative losses and exposure.
EXPOSURE AT DEFAULT
Exposure at default (EAD) is the total value a bank is exposed to when a loan defaults. Using
the internal ratings-based (IRB) approach, financial institutions calculate their risk. Banks often use
internal risk management default models to estimate respective EAD systems. Outside of the
banking industry, EAD is known as credit exposure.
•Exposure at default (EAD) is the predicted amount of loss a bank may be exposed to when a
debtor defaults on a loan. EAD is dynamic; as a borrower's risk and debt profile change, lenders
often reassess exposure risk.
EXPECTED LOSS
Expected loss is the sum of the values of all possible losses, each multiplied by the probability of
that loss occurring. Expected loss is the sum of the values of all possible losses, each multiplied by the
probability of that loss occurring.
In bank lending (homes, autos, credit cards, commercial lending, etc.) the expected loss on a loan
varies over time for a number of reasons. Most loans are repaid over time and therefore have a
declining outstanding amount to be repaid.
UNEXPECTED LOSS
Unexpected Loss is a formal Risk Measure that was introduced as part of the Basel II regulatory
reforms. It is used primarily in the context of estimating Risk Capital using internal models and it aims to
explicitly separate the related Expected Loss concept, (the idea being that expected losses are
provisioned for and unexpected losses must be explicitly insured against with other forms of capital).
Unexpected losses correspond to the unpredictable/unforeseeable losses that have a lower probability of
occurrence but may nevertheless occur. Statistically, for a given confidence interval of the Loss
Distribution Function, unexpected losses (UL) correspond to the difference between the maximum loss
incurred and expected losses (EL).
Debt-Service Coverage Ratio (DSCR)
The debt-service coverage ratio applies to corporate, government, and personal
finance. In the context of corporate finance, the debt-service coverage ratio (DSCR)
is a measurement of a firm's available cash flow to pay current debt obligations.
The DSCR shows investors whether a company has enough income to pay its debts.

DSCR=Total Debt Service / Operating Income
​where:
Net Operating Income=Revenue−COECOE=Certain operating expenses
Total Debt Service=Current debt obligations​
Current Ratio
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or
those due within one year. It tells investors and analysts how a company can maximize the current assets
 on its balance sheet to satisfy its current debt and other payables.
Formula and Calculation for the Current Ratio
To calculate the ratio, analysts compare a company’s current assets to its current liabilities.
Current assets listed on a company’s balance sheet include cash, accounts receivable, inventory, and 
other current assets (OCA) that are expected to be liquidated or turned into cash in less than one year.
Current liabilities include accounts payable, wages, taxes payable, short-term debts, and the current portion
of long-term debt.
Current Ratio = Current assets / Current liabilities
Debt-to-Equity (D/E) Ratio?
Debt-to-equity (D/E) ratio is used to evaluate a company’s financial leverage and is
calculated by dividing a company’s total liabilities by its shareholder equity. D/E ratio is an
important metric in corporate finance. It is a measure of the degree to which a company is
financing its operations with debt rather than its own resources. Debt-to-equity ratio is a
particular type of gearing ratio.

D/E Ratio Formula and Calculation

Debt/Equity=Total Liabilities / Total Shareholders’ Equity
Interest Service Coverage Ratio (ISCR)
Interest Service Coverage Ratio (ISCR) essentially calculates the capacity of a borrower to
repay the interest on borrowings. One can also call it an Interest Coverage Ratio. ISCR less than
1 suggests the inability of the firm’s profits to serve its interest payments due on debts and
obviously the principal amount of debts. ISCR is a tool for financial institutions to judge the
capacity of a borrower to repay the interest on the loan.

Interest Service Coverage Ratio (ISCR) = (PBIT + Non-Cash Expenses) / Interest

Profitability ratios
Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating costs,
balance sheet assets, or shareholders' equity over time, using data from a specific
point in time. They are among the most popular metrics used in financial
analysis.
Turnover ratios
Turnover ratios measure how efficiently the facilities, including the assets and liabilities
of the organization, are utilized. The turnover ratios formula includes inventory turnover ratio,
receivables turnover ratio, capital employed turnover ratio, working capital turnover ratio, asset
turnover ratio, and accounts payable turnover ratio.
Margin Ratios
Margin ratios measure a company’s ability to turn its sales into profits. Standalone figures provide
only a snapshot and are in some way meaningless without a benchmark. Margin ratios have
applications in valuation, credit analysis, and company performance.

Gross Margin
Gross margin tells us how much profit remains after removing the direct cost of sales, COGS, but
before less direct costs like sales and marketing. Typically, a company with high value add like a
service company will have a high gross margin, while a trading business adds less value to the
product and therefore typically has low gross margin.
Gross margin = Gross Profit / Sales
EBIT Margin
Earnings before interest and taxes (EBIT) is a figure which shows the profitability of a company from
its operations after excluding non-recurring items. Excluding these items can improve comparability
as well as providing a useful starting point for predicting future profitability.
EBIT margin helps to understand the profits generated from a company’s core operations and ignores
the effects of a company’s financing decisions and taxes.
EBIT Margin = EBIT / Sales
Net Margin
Net margin measures the company’s net income as a percentage of revenues.  is the profit after all
expenses have been deducted for the period. Net margin is calculated as:
Net margin = Net income / Sales
Net income can be affected by one-time gains or losses. For valuation purposes, an analyst will
“clean” the net income and remove the impact of non-recurring items.
Net Present Value (NPV)
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash
outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a
projected investment or project.

NPV is the result of calculations that find the current value of a future stream of payments, using the proper discount rate. In
general, projects with a positive NPV are worth undertaking while those with a negative NPV are not.
FORMULA:
NPV = Cash flow /​(1+i)t −initial investment
where:
i=Required return or discount rate
t=Number of time periods​
The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of
potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal
to zero in a discounted cash flow analysis
IRR calculations rely on the same formula as NPV does. Keep in mind that IRR is not the actual dollar
value of the project. It is the annual return that makes the NPV equal to zero.
Payback Period
The term payback period refers to the amount of time it takes to recover the cost
of an investment. Simply put, it is the length of time an investment reaches a 
breakeven point.