Loan Origination

&

Appraisal Techniques
Mathew Joseph
Senior General Manager
Housing Development Finance Corporation Limited - India
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AUHF - 2007 AGM & Conference Program, Ghana - September 2007

Why do we appraise?
Is a Selection Tool Quantifies Risk
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Aids Decision Making Ensure Good Quality business with excellent creditworthiness

What is Credit Appraisal?

ABILITY
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INCLINATION

OBJECTIVE

SUBJECTIVE

KNOWLEDGE

EXPERIENCE

What are we Appraising?

PERSON: Capacity - The ability to service the loan by financial resources/ income streams. Inclination - Willingness to pay. PROPERTY: To check documents for creation of security. To ensure end use.
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Basis of Appraisal

Security Based or Repayment Capacity Based

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Appraisal Process
Involves Risks:
Identification # Information Acquisition # Documentation # Customer Interface Techniques Assessment # Identifying key risks # Identifying Mitigating mechanisms # Integration , Collation of data along with information gathered at the personal interview
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Appraisal Process

Controls/ Risk Mitigants # Policy related # System related # Level/ Limit related Case Representation # Culmination of the appraisal process
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Identification
Information Acquisition Stage # Carefully designed Application Form # Standard Document List # Credit Bureau Report # Customer Credit Verification Reports Documentation # Standard Check-lists # Standard Approach to Scrutiny, Perusal Customer Interface Stage # Rapport Building # Probing Techniques
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Assessment
Involves Extensive Evaluation of the following parameters 1] Current Financial Condition & Paying capacity # Income Source # Income Frequency # Income Consistency # Income Continuity 2] Inclination to repay # Family Background # Savings History # Repayment trend on other liabilities # End use of property # Authenticity of information & documentation provided
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Assessment
3] Specific Characteristics which may affect loan repayment 4] Current value and relaisability of security 5] Confirmation of the proposal with laid down credit norms 6] Adherence to Financial Ratios
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Case Representation
Has to be comprehensive as the representation captures the essence of the loan and forms the basis of approval 1] Output of the appraisal process in a standardized format 2] Describes the result of the credit assessment 3] Details the credit quality and risks 4] Makes the recommendation
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Controls - The Need

The credit appraisal process involves multiple steps to arrive at the final decision. It is imperative that the scope for errors/ omissions is minimized/ eliminated. Our controls operate in the current business environment and have to be dynamic in order to be effective.
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Type of Controls
Credit Controls:
1] Written polices & procedures for credit risk systems & controls 2] Standard Credit measures 3] Policies designed to identify problem loans
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Controls
System Controls:
1] Validations and prompts inbuilt into the loan processing systems
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2] System safe guards

3] Escalation mechanisms 4] Exhaustive Information Systems

Controls
Limit Controls:
1] Delegation of Approval powers 2] Mandatory Approvals of senior personnel in cases of loan amounts being greater than loan approvers sanctioning powers
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Pre-Sanction
Appraisers Responsibility:
Data Discipline Document Validity Loan Feasibility Case Representation
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Financial Terms & structure of loan

Pre-Sanction
Appraisers Responsibility:
Review of Verification Reports Residence Employer
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Tele-checks on above Validates disclosure made by applicant

Pre-Sanction
Appraisers Responsibility:
Review of Credit Bureau Report Comprehensive Credit Information Provides details pertaining to credit facilities already availed of by a borrower as well as his/ her payment track record.
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External Agent Reports

External Reports validate 4 Basic Types of Information Identification Information Employment Information Residence Information Payment History Inquiries raised by other lenders
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Pre-Sanction
Double-Checkers Responsibility:
Review of Quality of Appraisal of Appraiser Document/ Information Reliability & Compliance Compliance with established norms & policies. Second Level Credit Check
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Pre-Sanction
Approvers Responsibility:
Final Sanctioning Authorities Review of all aspects of loan w.r.t. Financial Terms Property Assessment Business Risk Government Policy Industry Outlook
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Post-Sanction Processes
Critical as these processes are a key to customer service and maintenance of a quality portfolio Legal Due Diligence Technical Due Diligence
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Post Sanction Processes

Legal Due Diligence:
Specialized in-house team to whet and scrutinize Property Master File documents. Post Approval, Generation of a unique property master which can be referred to by any office all over India. Property Database maintained exclusively by the specialized team.
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Post Sanction Processes

Technical Due Diligence:
Specialized in-house team to assess property structure and compliance with statutory approvals, plan. Outdoor, Indoor assessment of property. Disbursement subject to the Technical Approval.
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Preliminary Approval Generation of File No On Line & Physical file created Process of Scanning Detailed Data Entry Updation of Field Credit Investigations
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CONTROLS INCORPORATED

The recommendation process commences by scrutiny of the loan file and all supporting documents

Customer credit verification reports & Credit Bureau reports assessed & evaluated
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Income & property assessment Simultaneous procedure. Initiation of technical site visit if the property has been identified

Income , Obligations , assets , sources of own contribution updated on line

Updation of special conditions , remarks.

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Review of case with respect to data authencity , policy compliance

File recommended

Physical file handed over to the double checker

Files reviewed for the following : 1] Document validity , reliability 2] Data Discipline
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3] Quality of appraisal 4] Adherence to norms & polices

File Double checked

Approval Pool sanctions the double-checked loans

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Post sanction process initiated

Thank You!
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