what does retail banking mean

What Does Retail Banking Mean?

Retail banking is a banking service that is geared primarily toward individual consumers. Retail

banking is usually made available by commercial banks, as well as smaller community banks.

Unlike wholesale banking, retail banking focuses strictly on consumer markets. Retail banking

entities provide a wide range of personal banking services, including offering savings and

checking accounts, bill paying services, as well as debit and credit cards. Through retail banking,

consumers may also obtain mortgages and personal loans. Although retail banking is, for the

most part, mass-market driven, many retail banking products may also extend to small and

medium sized businesses. Today much of retail banking is streamlined electronically via

Automated Teller Machines (ATMs), or through virtual retail banking known as online banking.

It is typical mass-market banking in which individual customers use local branches of larger

commercial banks. Services offered include savings and checking accounts, mortgages, personal

loans, debit/credit cards and certificates of deposit (CDs).

Retail banking aims to be the one-stop shop for as many financial services as possible on behalf

of retail clients. Some retail banks have even made a push into investment services such as

wealth management, brokerage accounts, private banking and retirement planning. While some

of these ancillary services are outsourced to third parties (often for regulatory reasons), they

often intertwine with core retail banking accounts like checking and savings to allow for easier

transfers and maintenance.

What are Retail Loans in Retail Banking?

A retail loan is basically providing credit to individuals for non entrepreneurial activities. Some

of the features of retail loans are:

They are used towards consumption

They have to be repaid by borrower out of his/her own resources.

They do not generate income-generating assets.

There are exceptions like housing loan wherein house may generate rental income.

Evaluating a consumer Loan

http://www.investorglossary.com/online-banking.htm

http://www.investorglossary.com/retail-banking.htm





http://www.investorglossary.com/debit.htm



http://www.investorglossary.com/wholesale.htm




Retail lending has taken a prominent role in the lending activities of banks, as the availability of

credit and the number of products offered for retail lending has grown. The amounts loaned

through retail lending are usually smaller than those loaned to businesses. Retail lending may

take the form of installment loans, which must be paid off little by little over the course of years,

or non-installment loans, which are paid off in one lump sum.

Retail banking in INDIA

Retail assets are just 22% of the total banking assets of India

Contribution of retail loans to GDP:

o India 6%

o China 15 %,

o Thailand 24%

o Taiwan 52%

Indian population below 35 yrs of Age – 70 %

Reach of Formal Banking Channels – 20-25% of Indian population

Source: Cygnus Industry Insight


http://www.investorglossary.com/retail-lending.htm




Drivers of Retail Growth

CHANGING CONSUMER DEMOGRAPHICS

Growing disposable incomes

Youngest population in the world

Increasing literacy levels

Higher adaptability to technology

Growing consumerism

Fiscal incentives for home loans

Changing mindsets-willingness to borrow/lend

Desire to improve lifestyles

Banks vying for higher market share

Consumer Loans

Characteristics of Consumer Loans

Regarded as profitable credits with sticky interest rates

Consumer Loans are typically priced well above the cost of funding them, but

their contract interest rates usually don’t change with market conditions during

the life of the loan as do interest rates on business loans today. This means that

consumer loans are exposed to interest rate risk if the bank funding cost rises high

enough. That is why they are priced so high with risk premium built into them.

Cyclically sensitive

Consumer loans rise in the period of economic expansion and during downturn

the consumers become pessimistic and as such reduce their borrowings.

Interest Inelastic


Consumers are more concerned about the size of monthly payments required by a

loan agreement than the interest rate charged.

Evaluating a Consumer loan

STEP 1: Evaluating a loan using six c’s of credit

When a Consumer’s loan proposal hits a lender’s desk it will receive what we call “Hairy

Eyeball Test”. Essentially a lender will quickly assess:

Character and purpose

The key factor in analyzing any consumer loan application is the character of borrower and his

ability to repay. A credit bureau report (CIBIL) is used to check consumer’s credit history. Is the

stated purpose of loan consistent with bank’s written loan policy. If the borrower does not have

any credit record or poor credit record a cosigner may be requested to support repayment.

Income Levels

Size and stability of income is taken into consideration while evaluating a consumer loan

application. Generally consumers net income or take home pay is preferred which is also verified

with employer.

Deposit balances

The daily average balance maintained by a consumer also gives a fair idea of size and stability of

income. A bank is granted the right of offset against the consumer’s deposit as additional

protection against the risk of consumer’s lending.

Employment and residential stability

The duration of employment and length of residence also plays an important role to find the

stability in personal situation. Frequent change of address is a strong negative factor in deciding

whether to grant a bank loan.


Pyramiding of Debt

When the individual draws credit at one lending institution to a pay another it is called

pyramiding of debt. It is frowned upon by most bank loan officers as are high or growing credit

card balances and frequent returned checks drawn against the customer’s deposit account. These

are indicators of Money Management skills.

Ways to Improve one’s chances of getting a Bank Loan

Home ownership

Regular and stable income

Telephone

Strong deposit balances

Loan officers also look for inconsistencies in application form while asking questions

The challenge of consumer lending is that the default rate on consumer loans usually is several

times higher than that for many types of commercial loans.

Framework for Loan Evaluation


After Hairy ball test the lender will determine if your deal has half a chance. If yes then the

assessment will move on to six C’s of Credit. A person who is considered a good credit risk

usually meets six basic qualifications. These qualifications include character (credit reputation),

capacity, capital, conditions, collateral, and control.

CHARACTER (Credit Reputation)…A person with a good character is one who willingly and

responsibly lives up to agreements. One distinctive sign of a good character is a responsible

attitude toward paying bills and meeting obligations on time. The first thing that loan officers

look for when reviewing a proposal is evidence of your trustworthiness. Your loan application

can be rejected without even reviewing your proposed business idea if loan officers find any

evidence in your background indicating lack of integrity. The following factors are taken in

account:

Customer’s past payment record

Experience of other lenders with this customer


http://www.powerhomebiz.com/vol2/6c-credit.htm

Purpose of loan.

Credit rating.

Presence of cosigners.

CAPACITY…The ability to repay a loan or make payments on merchandise with present income

is known as capacity. Creditors want to make certain that you will have enough money left over

each month after other fixed expenses have been met to pay your credit debts. The factors

considered are:

Identity of customer and guarantors

Copies of Social security number, driving license, legal structure, nature of operations

etc.

CASH…..It is basically cash in hand or liquid securities or funds available with consumer. It is

considered on the basis of following factors:

Take home pay

Adequacy of past and projected cash flow

Turnover of payables

Expense control

Coverage ratios

Management quality

COLLATERAL…Property or possessions that can be mortgaged or used as security for payment

of a debt are known as collateral. If a debt is not paid as agreed, the collateral is repossessed and

sold to pay the debt. Your collateral is important, but banks put more premium on the potential

profitability of your business proposal. Your collateral represents an "escape hatch" for your

bank, and banks normally want it to be large enough to be able to cover their losses (if at all) and

easily convertible to cash. From your projected cash flow and list of assets, bankers will ask


"How can you be sure of your ability to repay the loan? What can you offer the bank as an

alternative source of repayment? Here the bank will consider the following factors:

Ownership of assets

Vulnerability of assets to obsolescence

Liquidation value of asset

Guarantees and Warranties issued to others

Probable future financing needs

CONDITIONS…All other existing debts, stability of employment, personal factors, and other

factors that might affect a person’s ability or desire to meet financial obligations are important

conditions to be considered. For example, a person who has moved six times during the past

year might not be considered a good risk because of living conditions that indicate some type of

problem. The actors which will be considered here are:

Customer’s current position in industry and expected market share.

Competitive climate for product

Impact of inflation

Long run industry or Job outlook

CONTROL…..last but not the least is what control you can exert on loan application. Here the

various factors which are accounted for are:

Applicable banking laws

Adequate documentation

Consistency of Loan request

Inputs from Non credit personnel

STEP 2: Evaluation using Credit scoring model

Once the lender has done subjective assessment of the consumer using Hairy ball test and Six C

criteria then we move to evaluation of application using credit scoring model to arrive at final

decision.


What is Credit scoring?

A credit score is a numerical expression based on a statistical analysis of a person's credit files,

to represent the creditworthiness of that person. A credit score is primarily based on credit report

information, typically sourced from credit bureaus.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk

posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit

scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use

of credit or identity scoring prior to authorizing access or granting credit is an implementation of

a trusted system.

Fair Isaac Corporation's credit scoring system, known as a FICO score, is the most widely used

credit scoring system in the financial industry. Lenders use credit scoring in risk-based pricing in

which the terms of a loan, including the interest rate, offered to borrowers are based on the

probability of repayment. In general, the better a person's credit score, the better the rate offered

to the individual by the financial institution.

Every credit scoring model, FICO®, VantageScore® -- you name it – is actually a series of

smaller models referred to as scorecards. Scorecards are models that are designed to best

evaluate the credit risk of some sort of homogenous subpopulation, like those who have very

young credit histories or have filed bankruptcy, for example. The purpose for this multi-scorecard

architecture is to yield the most powerful credit-scoring tool regardless of the type of credit report being

scored.

When your credit file is pulled, and before it is scored, the credit-scoring model decides which

scorecard it’s going to use to calculate your score. Don’t make this more complicated than it

needs to be. Think of a bowling scorecard or a baseball scorecard. You add up points and at the

end of the game you have a final score. This is no different, but instead of tallying runs and pins,

the model is tallying the number of points you’ve earned for various credit characteristics. Oh,

there I go...more technical. What’s a characteristic?


http://www.credit.com/products/credit_reports/

http://www.credit.com/rs/vol36.jsp

http://www.credit.com/rs/vol36.jsp

http://en.wikipedia.org/wiki/Trusted_system

http://en.wikipedia.org/wiki/Identity_scoring

http://en.wikipedia.org/wiki/Interest_rate

http://en.wikipedia.org/wiki/Bad_debt

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Credit_bureau

http://en.wikipedia.org/wiki/Credit_report

http://en.wikipedia.org/wiki/Creditworthiness

A characteristic is a component of every scorecard. In fact, there are many characteristics in

every scorecard. Think of a scorecard as a question that the model is asking your credit report.

For example, “Mr. Credit Report, how many late payments do you have?” Another example

could be, “Mr. Credit Report, how many inquiries do you have?” Those are all characteristics,

and they each have an answer. The answer is referred to as a variable because the answer can

vary from consumer to consumer and from credit report to credit report.

Each variable (answer) to the characteristic (question) is going to have a value or a weight. The

weight is simply the number of points you earn for that particular question. Example: Let’s say

you have five inquires on your credit report. That “variable” might equal 25 points (weight). To

summarize, every credit report is broken down into characteristics, variables and weights. Once

all of the weights are calculated, you end up with your final score.

Credit scoring systems usually select between 7 and 12 items from a customer’s credit

application and assign each a point value from 1 to 10.

Sample Credit scoring System

S.No. Factors Point value1 Customer's occupation and line of work Professional or business executive 10 Skilled worker 8 Clerical worker 7 Student 5 Unskilled worker 4 Part time employee 2 2 Housing status Owns home 6 Rents home or apartment 4 Lives with friend or relative 2 3 Credit rating Excellent 10 Average 5


No record 2 Poor 0 4 Length of time in current job More than one year 5 One year or less 2 5 Length of time at current address More than one year 2 One year or less 1 6 Telephone in home or apartment Yes 2 No 0 7 Number of dependents reported by the customer None 3 One 3 Two 4 Three 4 More than three 2 8 Bank accounts held Both checking and savings 4 Savings account only 3 Checking account only 2 None 0

The highest score customer can have in this credit scoring system is 43 points and lowest is 9 points.

Suppose from past records analysis bank finds out that customers scoring 28 points or less, 40% of them

become bad loans that had to be written off as a loss. There were 10% customers scoring 28 points or

less who turned as good. Suppose losses average $600 per credit account and total loss is $72,000 .from

good loans we get $18,000. So, if we decide 28 points as the cutoff point bank can save loss of $54,000.

Points can also decide amount of credit to be extended. For example;

Point score value or range Credit Decision

28 Points or less

Reject

application

29-30 Extend Credit upto $500







STEP 3: Decision

Using both the subjective( Six c’s of lending) and objective (Credit scoring model) finally a

decision is taken whether the consumer should be granted loan or not.


CASE ANALYSIS


The case has been attached at the end.

Analysis: Using Hairy Ball test the application looks not so bad even. So we will now move on

step by step

Step 1: Evaluation Using six C Model

Character – Need more information on current outstanding 18000/-

No past credit history as such except debt from the employer (which might be

getting deducted from the salary)

Purpose – Furnishing and for higher studies

Customer’s income level should increase post the course

Credit rating – no past credit history though nothing adverse in the credit

investigations

Aunt as the guarantor

Capacity – Ok

Identity - Driving Licence, presently both the applicant and guarantor are

customers of the bank

Both the applicant and guarantor are in their respective occupation from past from

past 3 years

Cash – Need more information in terms of expenses

Salary - 24000/- per month

Assets – Mutual funds, Insurance policy (Cash value – 30000/-)

Expenses – Barely able to meet the expenses from current salary (need more

information…)


Has 7500/- in hand

Collateral – Need more information on parental house and about parents and phone

connection.

Personal guarantee of Aunt (she herself has average credit history)

No fixed landline number? Is the mobile phone connection post paid? (if yes,

need bills for residential address confirmation)

Mutual funds

Insurance policy – cash value – 30,000

Is the earlier address permanent address? If not, is there a permanent address?

Conditions –

Economic slowdown, near revision in salary might not be much

Currently only able to meet the expenses

Defaults in consumer loans have risen in the past few years. There have been job

cuts in the last year or so.

Control –

Documentation should, it seems, be available as the applicant is already a

customer of the bank

Evaluation


On the first glance the application does not look as to be one which should be rejected out

rightly, though the customer has not supplied any permanent residence and the guarantee is that

of someone whose own credit history is average.

Still, since the customer has been in the current job from more than 1 year and is himself the

customer of the bank, the application can be re looked with other information furnished as

mentioned above.

Step 2: Evaluation Using Credit scoring Model and cash flows

Following is the credit scoring model prepared for Mr. Rajan soni. Two additional factors have been

added which are guarantor’s credit history and relationship with guarantor.

S.No. Factors Point value Rajan Soni example1 Customer's occupation and line of work Professional or business executive 10 Skilled worker 8 Clerical worker 7 7 Student 5 Unskilled worker 4 Part time employee 2 2 Housing status Owns home 6 Rents home or apartment 4 4 Lives with friend or relative 2 3 Credit rating Excellent 10 Average 5 5 No record 2 Poor 0 4 Length of time in current job More than one year 5 5 One year or less 2 5 Length of time at current address More than one year 2 2


One year or less 1 6 Telephone in home or apartment Yes 2 No 0 0 7 Number of dependents reported by the customer None 3 3 One 3 Two 4 Three 4 More than three 2 8 Bank accounts held Both checking and savings 4 Savings account only 3 3 Checking account only 2 None 0

9 Gurantor's credit history Excellent 10 Average 5 5 No record 2 Poor 0

10 Relation with the guarantor Immediate family Yes 2 No 0 0 Total 34

Maximum score for this model comes to 54 points

Minimum score is 9 points.

Assumption: on the basis of example given in the literature we have assumed that consumers

scoring rating 60% or above of maximum i.e 36 in this case turns to be good. So, we decide cut

off as 36 points.

In this case rating of Mr. soni comes to 34 points which is below 36.


Analyzing Cash flows Of Mr Soni:

Assumptions:

As mentioned in the case that he is barely meeting his living expenses from his salary we are

assuming current expenses to be Rs 27,000 per month.

We are assuming 10% increase in salary every year on the basis of appraisals

3 year situation Post 3

yearsCash Flows

During studying in the course

After degree

Inflow 1st Year

2nd Yea

r

3rd Year

Gets an additional 10% jump post completion of

courseNet take

home30,000

33,000

36,300

39,930 43,923

Total 30,000

33,000

36,300

39,930 43,923

Outflow

Lease 6000

6,600

7,260

7,986 7986

EMI 2768

2768

2768

2768 2768

Insurance 2500

2500

2500

2500 2500

SIP Mutual

Fund

1000

1000

1000

1000 1000

Mobile expense

1000

1,100

1,210

1,331 1331

Electricity Expense

850 935 1,029

1,131 1131

Food & Clothing

6000

6,300

6,615

6,946 6946

Entertainment

2000

2,100

2,205

2,315 2315


Petrol & maintaina

nce

3000

3,150

3,308

3,473 3473

Total 25118

26,453

27,894

29,450 29450

Net 4,882

6,547

8,406

10,480 14,473

* Assuming 10% increase in salary and expenses each year


STEP 3: Decision

On the basis of above Six c analysis and credit scoring model we are rejecting both the consumer

durable loan and education loan to Mr Soni. The calculations for the following are as follows:

Consumer Durable Loan Remarks

Consumer durables loan generally have 0% interest but have fee income (eg.

Processing charges)

If loan is approved

Amt 90,000

Interest rate 0% Assumption

Tenor months 12

Processing fee 1800 2% of loan

amount

Disbursal 88,200

EMI 7500

EMI as a %age of take home 25%

The current situation of customer does not appear to be the one

where he can afford 7500/- on a monthly basis

Hence the consumer durable loan should be rejected on the

present terms

Education Loan

As per the prevalent rates in the market today, 14% is competitive

rate in the market

If loan is approved


Amt 360,000

Interest rate 14% per

annum

Tenor (months) 36

EMI 12330


The EMI as a %age of take home is on the higher side; also it is

based on the assumption that the salary would increase by 46%

from the base year i.e. around 15.5% annually

Thus the loan should be rejected on the present terms

ALTERNATIVE: Alternatively we can give both the loans to consumer with certain changes in

Terms and conditions. The terms and conditions and the calculations accordingly area s follows:

Consumer Durable Loan Remarks

Consumer durables loan generally have 0% interest but

have fee income (eg. Processing charges)

If loan is approved

Amt 90000

Interest rate 0% Assumption

Tenor months 24

Processing fee 1800 2% of loan amount

Disbursal 88200

EMI 3750 Only 982 additional burden

on the customer (assuming


that we will consolidate the

loan with 2768 EMI)


These terms are more acceptable as only 982/- is the

extra burden; obligation to Net take home is very less

Hence can be approved on these terms

Education Loan

If loan is approved as per the folowing details

Amt 36000

0

Interest rate 14% per annum

Tenor (months) 48

EMI 9837


EMI as a %age of take home (if last year income

revision is 10% instead of 20%)

25% If after 3 years the salary is

39930/- and not 43923/-

The EMI is more acceptable and the obligation to

salary is lower

Thus the loan can be accepted on these changed

parameters


what does retail banking mean

Documents

retail banking products

retail banks

virtual retail banking

retail banking entities

retail banking mean

retail lending

features of retail loans

core retail banking