Retail Loan Life Cycle Objectives

In this session, you will learn to:

Understand the concept and various stages of retail loan life cycle

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Retail Loan Life Cycle Retail Revolution

A retail loan revolution happened in India between 1995 and 2005. The primary purpose of a loan is that it should earn interest. Where the repayment is not regular, the banks have to use collection agents for recovery. The retail loan has a life cycle consisting of the following processes:
Account acquisition Account verification Credit evaluation and sanction Account management Account collection

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Retail Loan Life Cycle Retail Revolution (Contd.)

The following figure shows the retail loan life cycle.
1. Account Acquisition

2. Account Verification 5. Account collection

Retail Loan Life Cycle

3. Credit evaluation and sanction

4. Account Management

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Retail Loan Life Cycle Retail Revolution (Contd.)

During retail revolution, the new public sector and foreign banks made innovative methods for customer acquisition. The methods used for account acquisition are:
DSAs Telecalling Tie-up with Organisations: Some of the tie-ups are:
Tie-up with housing companies Tie-up with auto manufacturers Tie-up with large employers

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Retail Loan Life Cycle Retail Revolution (Contd.)

The DSA collects the following documents from an eligible customer:
Loan application form Address proof Identity proof Income proof Photographs of applicant/guarantor Documents relating to assets to be acquired

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Retail Loan Life Cycle Retail Revolution (Contd.)

The documents collected from an eligible customer are verified using the following methods:
Field verification Telephone verification Reference checks Document verification Checking against negative list

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Retail Loan Life Cycle Retail Revolution (Contd.)

The verified documents are forwarded to the credit desk of the bank for sanction. The specialised desk officers does the credit appraisal before sanctioning the documents. Credit appraisal is of the following types:
Appraisal of the borrower/co-applicant Appraisal of the property/security

The aspects for appraising the borrower/co-applicant:

Applicants capacity to repay the loan Adequacy of income to pay the instalments of loan Available liquidity for repayment of the loan Past history of the applicant in repaying loans Adequacy of guarantors income and his credit standing

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Retail Loan Life Cycle Retail Revolution (Contd.)

The aspects for appraising the property/security:
Market value of the security Margin stipulation to cover possible fall in prices Saleability of the security Technological obsolescence

After evaluation, the loan is sanctioned by the designated officer. The details of sanction are communicated to the borrower. Along with the other documents, a set of Post-Dated Cheques (PDCs) are obtained from the customer to cover the future EMIs.

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Retail Loan Life Cycle Retail Revolution (Contd.)

Proper monitoring of the advance is one of the main conditions for an account remaining healthy. The account management is as important as account sanctioning, otherwise there will be increase in NPAs. The process of account management involves:
Ensuring regular repayment of the loan Keeping the loan documents alive Periodic physical inspection of property Keeping a tab on borrowers continued creditworthiness Portfolio analysis

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Retail Loan Life Cycle Retail Revolution (Contd.)

Banks classify their advances as:
Standard assets Non-performing advances

The collection managers play an important role in the bank for the recovery of funds not paid by borrowers. The action of the collection manager keeps the level of non-performing loans to the minimum. The steps in the collection process are:
Collection calling Demand notice Field collection Taking possession of security Filing suit

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Retail Loan Life Cycle

Check Your Understanding

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Retail Loan Life Cycle

Practice Questions

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Retail Loan Life Cycle Summary

In this session, you learnt that:
The are the five stages in retail loan life cycle are:
Account acquisition Account verification Credit evaluation and sanction Account management Account collection

Account acquisition involves appointment of DSAs by banks, tele-calling, tie-up with organisations, such as housing companies, auto manufacturers and large employers. Account verification involves checking up the veracity of the documents relating to address proof, identity proof, income proof and photographs of applicant/guarantor. Account verification also includes documents relating to assets to be acquired from the prospective borrowers.
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Retail Loan Life Cycle Summary (Contd.)

The process of credit evaluation and sanction involves credit appraisal, which can be bifurcated into:
Appraisal of the borrower/co-applicant Appraisal of the property/security.

Account management involves the processes of:

Ensuring regular repayment of the loan Keeping the loan documents alive Periodic physical inspection of property Keeping a tab on borrowers continued creditworthiness and portfolio analysis

Account collection involves collection calling, demand notice, field collection, taking possession of security and filing suit for recovery.

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