1. RETAIL CREDIT AND ROLE OF BRANCH MANAGER
Chapter-11
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RETAIL CREDIT AND
ROLE OF BRANCH MANAGER

2. 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

3. 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

4. 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)

5. 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

6. 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 lakh (keeps on changing from time to time),
Depends upon the income, with very attractive interest rate and easy repayment plan.

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. 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

13. 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

14. 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.

15. 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

16. 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.

17. 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).

18. 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

19. 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

20. 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

21. 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

22. 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

23. '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

24. '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).

25. 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

26. 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);

27. (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

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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

43. 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.

44. 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.

45. 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.

46. 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

47. Objectives of Post sanction inspection are:
To ensure proper end-use of funds;
To check that the security charged to the bank represents what it has been declared to be both in quality and quantity;
To ensure compliance of all the terms and conditions of the sanction;
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;
To find out whether the loan amount sanctioned is adequate. Also, if there is any possibility of diversion of funds

48. 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.

49. 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.

50. 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.

51. 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.

52. 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

53. 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.

54. 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.

55. 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.

56. 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

57. 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