Consumer Finance
Only if extended within accurately placed parameters, do the personal loans generate vast profits. On the other hand, the delinquency ratio may accelerate in high velocity causing sever losses if personal loans are extended haphazardly.
The INDICATIVE CREDIT SCORING SHEET is one component of a whole integrated system of operations; for it to be effective it must be put together in accord with the other components as highlighted hereunder.
The requisites of establishing a profitable and active personal credit portfolio are:-
A. INFRASTRUCTURE
The complexity of the personal lending operations and the necessity to maintain competitive standards of service warrant the establishment of an independent CONSUMER FINANCE DEPARTMENT that comprises of two sections; processing and collections. This is particularly true when the number of loans granted increases.
Specialized staff will then be needed to check the applications' documentation and process it accurately. The collection section (or Delinquency Control Unit) will be responsible for follow up and collection of delinquent loans.
B. PRODUCT PLACEMENT AND DELIVERY
There are many types of personal loans. Each type has its own unique features. To accommodate the differing needs of the personal borrowers, it would be savvy to avail all types of loans to the public. For ease of presentation, I have classified the different types of loans under two main categories; Classics and Non – Classics (with Indicative Credit Scoring Sheet).
Classics:-
These are the loans traditionally granted by banks to their customers against adequate securities and in accordance with the bank's personal credit policy. The security may be a lien over deposit, a mortgage over property or an acceptable guarantor. Such loans are typically, though not necessarily so, named as sundry loans.
The most common types of sundry loans are Fixed Term Loans, Irregular Installment Loans, Installment Loans, Straight Line Loans and Ex Hirer Loan. Overdrafts and Credit Cards are the revolving types of Classics.
In this category, it is vital to ensure that the entire loan's documentation are properly completed and presented to the bank in compliance with the bank's personal lending policy.
Non Classics (With Indicative Credit Scoring Sheet):-
This type of lending, if extended within carefully placed parameters and in accordance with an accurate credit policy specifically prepared for each country on its own, will generate vast profits for the Bank.
This is an UNSECURED loan for salaried people repayable by fixed monthly installments over a prearranged period.
The features of the Non Classic are:
1. No security required (occassionally a guarantor may be required by the bank depending on its personal credit policy). Borrower not necessarily an account holder.
2. Minimum and maximum loan amount fixed by each bank separately. Repayments by equal monthly installments each not to exceed a certain percentage of borrower's monthly salary (depending on the laws of each country).
4. Interest rate fixed by each bank on its own.
To qualify for the Non Classic, the applicant must meet a set of conditions placed by the bank. Such conditions have a direct impact on the quality of the credit portfolio; therefore, they must be derived from A FRESH SURVEY ON PERSONAL BANKING Market. The findings of the survey will dictate the action needed to design and deliver the bank's personal services and the action needed to promote its services.
The benefits of the Non-Classics are:
2. Efficient; Provided the application meets all the requirements of the bank, funds must be available within 24 hours, if not on the same day.
3. Flexible; Flexible repayment schedule to suit borrowers' repayment ability up to a maximum of 36 months.
CAUTIONARY NOTE:
This is a very profitable product; it is also a very risky one. Numerous banks have suffered severe losses because they were unable to extend it within a whole integrated system of operations; a system that is based on a carefully structured market related parameters.
International banks have developed the Credit Scoring Sheet specifically for the Non-Classic type of personal loans to assist them in making a fast and sound credit decision. The Credit Scoring Sheet is not effective for any other type of loans. In fact it is irrational to use it for the Classics as these are granted against adequate securities.
THE INDICATIVE CREDIT SCORING SHEET
This is a highly sophisticated statistical tool developed specifically for the Non-Classic Loan to weigh the credit risk of the applicant and thus determine whether or not he/she qualifies for a loan. It meant to replace the ordinary loan application evaluation process to expedite the loan approval. It comprises of three sections; Personal, Professional and Financial Performance. Each section contains numerous sub items detailing full information such as the applicant's age, monthly income, past performance, profession. Depending on the answer, the applicant receives preset grades WEIGHING THE CREDIT RISK of the borrower. Only if the applicant reaches the minimum score does he get an approval.
This is not a fixed statistical tool that can be used in all countries, in fact for it to be effective, it must be set to suit the working environment of each market on its own and must be based on the personal banking survey mentioned above.
Again, it is totally irrational to use this tool for the Classic Loans.
DOCUMENTATION
The loan application form, together with the full set of documents as required by the credit policy, must be presented upon application. It is also important to ensure the bank's forms and applications are not stale. In fact we have specialized expert bankers who can design modern forms for all departments of the bank including forms of account opening, remittances, loans, General Securities Agreement, General Agreement for Goods…etc and we would be pleased to review your current forms if you feel there is a need to do so.
THE PERSONAL CREDIT POLICY MANUAL (PCPM)
A manual that is absolutely vital for the construction of a personal lending environment conducive to achieving negligible OD Ratio (Minimal Delinquency Rates), optimum efficiency, strict operational controls and exemplary customer service.
The PCPM contains the bank's policies, procedures, lending guidelines, limits of authority, relative circulars and notes for general circulation.
The aims of the PCPM are:-
1. To control the bank's personal lending and to set down appropriate management policy guidelines, specifically:-
- Credit Presentation & Approval Process.
- Credit Monitoring & Control.
- Loss Prevention and Recovery Procedures.
2. To support the credit training needs of managers and staff.
3. To provide a ready source of reference.
DELINQUENCY CONTROL MANUAL
A vital manual containing the bank's strategy and procedures for handling delinquent accounts. It contains:-
1. Collection Strategy.
2. Delinquency Control Unit Function.
3. Recovery Strategy; Provisioning Policy and Branch Responsibility.
4. Daily Work Flow and Collectors Job Descriptions.
5. Legal Actions.
6. Abandonment and Termination of Collection Efforts.
7. Blacklisting.
8. Write Offs.
CREDIT CARD ISSUING POLICY MANUAL
Being an integral part of the personal lending environment, the credit cards operations should be highlighted. In this profit generating center, here again the risk is high in the absence of the Credit Card Issuing Policy Manual.The primary objective of such Policy Manual is to acquire and develop a portfolio of qualified cardholders through controlled and timely analysis of applicant's credit worthiness. And provide prudent and consistent guidelines for the effective management of Card Business.
In general, the policy sets down appropriate guidelines and procedures for the management and controls for the issuance of Cards, specifically for; 1. Credit Assessment, and 2. Credit Presentation and Approval Process.
It is only through the careful and accurate setting of each of the above elements, a bank can engineer an effective ongoing SYSTEM of OPERATIONS. Such system will guarantee the development of a handsomely profitable credit portfolio. There is no room for mistakes here, this system must be perfected and its operations must be mastered in order to eradicate danger. One erroneous parameter is adequate to lead to tragic consequences.
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