RETAIL BANKING

Topics to be covered
• Retail Banking Scenario
• Retail Banking in India
• Types of Consumer Loans
• Evaluating Consumer Loans
• Credit Analysis
• Credit Scoring a Consumer Loan
• Consumer Credit Regulations
 Introduction
• Focus on Corporate Clients in the past.
• External environment affecting borrowing.
• Banks are forced to look at Retail Segment.
• Securitization Bill gave banks and institutions
muscle to recover bad debts
 Financial Products

deposit products residential mortgage loans credit cards

auto finance personal loans consumer durable loans

debit cards
loans against equity shares loans for subscribing to
Initial Public Offers (IPOs)

bill payment services mutual funds investment advisory

services
• Opportunity for banks ----
• To diversify the asset portfolio
With high profitability and
Relatively low NPAs.

• Commercial loans dominated the banks portfolio

 they generated high net yields
 with low credit risk.

• Consumer loans in contrast involved

 smaller amounts,
 large staff to handle accounts and
 high default rates.
They were considered substandard by the banks.
• Forces that are driving and shaping consumer
lending:
• Competition,
• Securitization,
• Automation
• Regulation
 Retail Banking In India
• The stagnation in the Indian economy
poor credit absorption for
> long-term funding to big-ticket projects
> as well as working capital.

• Big corporate are bypassing banks

• Raising money through the debt market and
commercial papers
• Cheaper than bank credit
• Corporate Banking ---- Maturity phase
• Relying on fee based income in order to
maintain asset growth and profitability.
• The ratio of non-interest income to total funds
has already increased for some banks.
• Foreign banks are also securitizing vehicle
loans to raise off-balance sheet resources and
reducing the overall cost of funding.
 Advantages of Retail Banking
RESOURCES SIDE
• Retail deposits are stable and constitute core deposits.
• They are interest insensitive and less bargaining for
additional interest.
• They constitute the low cost funds for the bank.
• Effective customer relationship management with the
retail customers builds a strong customer base.
• Retail banking increases the subsidiary business of a
bank.
ASSETS SIDE
• Better yield and improved bottom line for a bank.
• Good avenue for funds deployment.
• The consumer loans are presumed to be of lower
risk and NPA perception.
• Helps economic revival of the nation through
increased production activity.
• Improves lifestyle and fulfills aspirations of the
people through affordable credit.
• Innovative product development.
• Retail segment involves minimum marketing
efforts in a demand - driven economy.
With growth of Online services banks will have to:

• Banks need to align their systems with three

functions.
• Collate channel interaction across the front office
so customers receive a consistent service.
• As open finance providers, they will depend on
workflow management systems that span the
enterprise, customers and partners.
• Open architectural bed that enables them to
manage and integrate whatever product
specialists come on board.
 Retail Banking Strategies
• Market segmentation
• Price bundling
• Customer Relationship Management
Strategic Objectives for Price Bundling in Order to Enhance Demand
Product A
YES No

Cross-Sell to
Retain
Existing Yes
Customers
Customers

Product B
Cross-Sell to
Acquire New
Existing No
Customers
Customers
• Customer service delivery is pivotal for the
success of retail banking.
• This is not possible only through technology.
• Process consistency within and across service
channels is paramount.
• Alignment of technology, human resource
management and strategy are very essential
for the success of retail banking.
 Types of Consumer Loans
• INSTALLMENT CREDIT
• HOUSING LOANS
• EDUCATIONAL LOANS
• PERSONAL CONSUMPTION LOANS
• CREDIT CARDS OR REVOLVING CREDIT LINES
• OVERDRAFT PROTECTIONS AND OPEN CREDIT
LINES
• NON-INSTALLMENT LOANS
 For Subprime loans
• Subprime lenders offer loans to lower-income
borrowers with high credit risk.
• Because the risk is higher, the interest rate
and fees are generally higher than those paid
by customers with better credit records.
• Given the higher inherent risk of subprime
lending, institutions engaged in this activity
should hold capital against these portfolios
well above that for prime portfolios.
A Comparison of Interest Rate Quotes
• Simple Interest Rate
• Add-on Rate(Compound)
• Discount Rate
 EVALUATING CONSUMER LOANS
• Consumer loans are peculiar in the sense that the
bank cannot gauge the creditworthiness of the
borrower, as there is no readily available information.

Measurable aspects of consumer loan requests:

• The character of the borrower
• The use of loan proceeds
• The amount needed,
• The primary and secondary sources of repayment.
 Credit Analysis
• Assess the risks associated with lending to
individuals.
While evaluating loans the banker cites the six Cs of
credit:
• Character
• Capital
• Capacity
• Conditions
• Collateral
• Compliance
 Credit Scoring
Methods:
• Judgmental : subjectively interprets
• Quantitative : according to statistically
determined accept/reject thresholds
Statistical method used:
• multiple regression analysis
• multiple discriminant analysis.
 Information Considered
• The score commonly called a FICO score from one of
the bureaus which is derived from
how much money is owed and
whether payments have been made on time.
• salary data or
• for how long the person has been employed

• FICO score:375 to 900

• 650 or above --- good credit history.
five factors that comprise each credit
score
COMMON CREDIT SCORING MODELS

MDS bankruptcy score:

• Scores range from about 0 to 1300
• higher scores = higher risk of default
FICO score: Scores range from about the 300s to
the 900s
• higher scores = lower risk of default
• Statistical credit scoring is superior to
judgmental scoring
• Objective number – accurate estimate
• Calculate expected loss and profit
• Guide the decision on the rate of interest

• Most Indian banks use “Judgmental Scoring

Models”.
 Judgemental Model
• predefined rules and standards for loan
approvals.
• collective experience of many credit analysts
• Provide more consistency than individual credit
analysis
• Help reduce the decision time for credit lending.

• Advanced economies have moved beyond

judgmental models to “Statistical Credit Scoring”.
 Statistical methods are used to
develop credit-scoring systems
• Probability model --- linear relationship between
the probability of default and the factors;
• logit model --- probability of default is logistically
distributed;
• probit model --- probability of default has a
(cumulative) normal distribution

• Discriminant analysis: borrowers into high and

low default-risk classes
 Newer Methods
Options pricing theory models
• borrower’s limited liability is comparable to a put
option written on the borrower’s assets, with
strike price equal to the value of the debt
outstanding.
Neural networks
• relationship between borrower characteristics
and the probability of default and to determine
which characteristics are most important in
predicting default.
Thank You