Académique Documents
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Agenda
Understand the misconception in credit
management
Explain the various stages in the credit cycle. Understand the loan approval process.
pay promptly?
If you are a risk manager..who is your favorite customer? Pays promptly & never late Has capacity to pay but habitually late Has cash flow problem & cannot pay
Interest Loss Rate Receivables Interest Revenue Cost of funds Spread Bad Debts Net Income
Portfolios with a low loss rate might not necessary be more profitable.
Retail Banking
Temasek Polytechnic School of Informatics & IT
Credit Cycle
Plan
1. Define product
2. Select target customers 3. Know your competitors
5X rewards at Cafes, Cinemas, Nightspots, Books/Music Stores
Bank A
$100,000 $2mil
Bank B
$50,000 $1mil
Bank C
$200,000 $8mil
Min Tenure
Max Tenure Pricing Fixed Floating Enhancements Fire Insurance Legal subsidy
1 yr
15 yrs Bank A 3yrs @ 4.5% Prime + 2% Bank A Free 1 yr Up to $5,000
1 yr
10 yrs Bank B 5yrs @ 3% Prime + 5% Bank B Free 3 yrs Up to $3,000
1 yr
20 yrs Bank C 2yrs @ 2.5% Prime + 3% Bank C Free 5 yrs Up to $8,000
Shopping vouchers
Metro $1,000
NTUC $500
Taka $2,000
Credit Cycle
Acquisition
Objectives: 1. Attract target customers 2. Minimize fraud 3. Establish a fast and cost-effective approval process Methods: Branch walk-in, advertisement, internet, cross-sell, direct mail, take ones, purchase portfolio etc.
Approval Process
No
1. Application 2. Documentation complete? Yes
4. REVIEW
Debt burden ratio Collateral assessment Loan to value 3. Prescreening Credit policy
Score / judgment
Fraud Credit bureau Existing credit records Verification Reject
Approve
Temasek Polytechnic School of Informatics & IT
Step 1 - Application
Personal bankers help customers with a needs analysis to help decide on the kind of loan that will best meet their needs. Check that information in loan application is complete. Applications fail because Important details are missing Information in application is inconsistent
Step 2 - Documentation
Gather the necessary documentation for the loan
These documentation may include: Application form Personal Identification Income document Purchase agreement (secured loans) Others
Step 3 - Prescreening
Quick review Identify fraudulent applications Reject applications which fail minimum standards
to
meet
external)
Step 4 - Review
By who? Can be system or credit officer Debt burden ratio < X%
Step 4 - Review
Credit Scoring
5 Cs of Credit
1. Character Profile of applicant 2. Capacity Income 3. __________ Applicants investment 4. Collateral Liquidate in case of default 5. __________ Match timing of receipt against repayment
Scoring
Credit Scoring
Credit Scoring
Type of Housing
Housing Ownership
No of dependants
Industry
No of credit cards
Classifications Male Female 21 - 29 30 - 39 40 - 49 50 - 59 60 & above HDB flats 3 - 4 room HDB flats 5 room, executive Condominium Landed Rent Own Live with parents Mortgaged 0-2 2-4 >4 Accountancy Banking & Finance Education IT & Telecommunication Medical & Law 0 -2 2-5 5-8 >8 0 -1 1-3 >3
Points 10 20 50 60 70 40 10 20 50 80 100 30 80 50 50 80 60 40 50 60 20 40 20 10 20 30 40 30 50 10
Good Percent 92 86 81 76 69 62 53 21
Bad Percent 8 14 19 24 31 38 47 79
Credit Cycle
Post approval
Customers acceptance required Accept letter of offer
Personal
conditions Eg Mortgage loan follow by other documentations like fire insurance, lodgment of title deeds Actual disbursement
Customers acceptance not required; send out
Welcome package Terms and conditions
Banker
to
explain
terms
and
Post approval
Others
Record transactions Process payments Handle inquiries
Handle disputes
Change address Inform customers of subsequent interest rate
change Restructuring of credit facilities / line increase Launch marketing campaigns / cross-sell
Credit Cycle
Collections
Identify high risk / low risk customers
Different strategy for different ageing / buckets
Reminder letters Phone calls
Credit Cycle
Write-off
Liquidate collateral
Foreclose properties
Q&A
1. Behavioral scoring is used to a. manage accounts already book. b. decide if an application should be approved. 2. Borrowers who never fail to pay on time are the best customers. a. True b. False
Q&A
3. Collateral assessment is important to determine a. liquidity b. depreciation / appreciation rate c. all of the above
4.
Retail Banking
Computation For Loans Payment
Temasek Polytechnic School of Informatics & IT
Simple Loan
Formula:
PMT = PV * i 1 1/(1 + i) n
PV = i = n = Present Value annual interest rate number of years
Fixed-Payment Loan
Calculate the monthly installment for 20 year mortgage of $100,000 at 5% interest rate p.a. Formula: PMT = PV * i 1 [1/(1 + i) n] 100,000 * (5%/12) 1 [1 / (1 + (5% /12))20*12]
=
=
Temasek Polytechnic School of Informatics & IT
Fixed-Payment Loan
Calculate the monthly installment for 20 year mortgage of $100,000 at 5% interest rate p.a. Using the Present Value Interest Factor of Annuity Table (PVIFA Table) Loan Amount = Pann(PVIFA5%,20) $100,000 = Pann(12.462) Pann = = Pmon = =
References
David Lawrence, Arlene Soloman (2002). Managing a Consumer Lending Business. Soloman Lawrence Partners.