Credit Risk Management In Hdfc Bank

A STUDY ON RISK MANAGEMENT BY HDFC BANK ON PERSONAL LOANS

HDFC BANK LIMITED

DEPARTMENT: PERSONAL LOAN

Submitted By: Ayesha Mathur (18020241018) MBA-IB 2018-20 Symbiosis Institute of International Business

Under the guidance of Project Guide: Mr. Vikram Kachru, Branch Manager, (Sangvi, Pune) Contact: 9819082022 Email: [email protected] Ayesha Mathur

30th May 2019

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CONTENTS

1. Acknowledgement ……………………………………………………………………3 2. Executive summary …………………………………………………………………..4 3. Organization profile…………………………………………………………………..6 4. Context of study……………………………………………………………………..12 5. Literature review…………………………………………………………………….15 6. Objectives and methodology………………………………………………………...19 7. Results and analysis ………………………………………………………………...20 8. Conclusion…………………………………………………………………………..36 9. Recommendations…………………………………………………………………..38 10. Annexure……………………………………………………………………………39 11. References…………………………………………………………………………..43

Ayesha Mathur

30th May 2019

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ACKNOWLEDGEMENT

The internship opportunity that I had with HDFC Bank Limited provided me a great chance for learning and professional development. During this time period I learned a lot about Banks, Banking practices and Banking products. Bearing this in my mind I would first like to thank Mr. Vikram Kachru, Branch Manager (Sangvi Branch, Pune), for his in- depth knowledge, experience, guidance and constant monitoring that helped me complete my project. I am grateful to staff of Personal loan department-Mr. Mayur Tiwari (), Mr. Sachin Mane (), Ms. Gayatri Khairnar (TSE, Personal Loan) for their leadership and mentoring throughout the internship period. I also want to express my deepest gratitude to the staff of HDFC Bank Limited, Sangvi Branch – Ms. Tejaswi Prakash (PB-WD), Mr. Sameer Mulani (PB), Mr. Dheeraj Kalantri (TellerAuthoriser), Ms. Swati Sulakhe (Teller), Mr. Praveen Kumar (Teller), Mr. Amit Sinha (PBAuthoriser), Ms. Shivangi Singh (PB), Mr. Sharad Mapari (RM), Mr. Prafull Mane (ABMCurrent Accounts) for their teachings and support. Most importantly I would like to thank Ms. Neha Patvardhan for providing me with direction, guidance and support that made this project a success.

Ayesha Mathur

30th May 2019

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EXECUTIVE SUMMARY

The HDFC Bank Limited (Housing Development Finance Corporation) is an Indian banking and financial services company headquartered in Mumbai, Maharashtra. HDFC Bank is India’s largest private sector lender by assets. The bank has a vast portfolio of assets ranging from savings accounts and deposits to investments and insurances. This study primarily focusses on Personal Loans and the credit risk management processes undertaken by the bank. Personal Loan is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it, the lender, in case of a default, cannot auction anything the borrower owns. Personal loans, however, are less risky for borrowers but highly risky for banks since they are unsecured. In case of default, banks have very few means to recover their amount. Personal loans form a part of retail lending. For India’s three largest lenders — State Bank of India, HDFC Bank and ICICI Bank— retail accounts for more than half of their loan books. Over the past few years, there has been a structural shift in banks’ loan books. The share of the retail portfolio has risen evidently. HDFC bank’s personal loans are done in 10 seconds and 50-60% credit cards are done within 10 seconds if the customer has an offer. In semi-urban and rural areas, all its products are available in feature phone in 11 languages. The Bank has various Personal Loan alternatives, such as: i.

Offers – 10 seconds (minimum amount ₹50,000, maximum amount depends on the salary; Tenure: 1-5 years; Online Application; Disbursal in seconds)

ii.

Top Up 10 Seconds (Top up loan on an ongoing 10 seconds offer of Personal Loan)

iii.

Top up F4 (Physical login)

iv.

Green channel (Physical login)

v.

PQ (Bank Statement, KYC, Physical login)

Since, the personal loans form a part of unsecured lending segment of the bank, the bank faces a high credit risk.

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The Bank’s credit risk management on Personal Loan consists of three main phases: i.

Precautions before application The Bank, before extending a loan needs to ensure recovery of its funds. Therefore, certain eligibility criteria are laid down to ensure that the applicant can be considered creditworthy and would make timely repayments of the loan amount. This section contains the eligibility criteria which determines whether the loan or the particular amount of loan can be extended to that customer. Following are the main considerations by the bank: a. b. c. d. e. f. g. h. i.

ii.

Customer profiles Age Minimum Net Monthly Salary Loan Amount Tenor Number of years in current residence Telephone at residence and office Years in employment Multipliers

Precautions before approval After the physical or online application is filled, the Bank does a background check on the customer on its own discretion. This is done to ensure the genuineness of the documents and other information given by the applicant. The following are a part of this process: a. b. c. d. e. f.

iii.

RIC unit CIBIL Score Verification Salary criteria Stability in employment Job profile

Consequences of default of payment On default of payment of even a single EMI, the bank can send third party recovery agents in order to recover the amount and charge some amount on default or delayed payment. Also, the CIBIL score of the customer gets affected due to non-payment of an EMI.

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ORGANISATION PROFILE

I.

Industry Profile The HDFC Bank is an important part of the Banking Sector of the Indian Economy. As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized and well-regulated. Credit, market and liquidity risk studies suggest that Indian banks have withstood the global downturn well. The Banking Industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. The Indian banking system consists of 27 public sector banks,21 private sector banks, 49 foreign banks, 56 regional rural banks,1562 urban cooperative banks and 94,384 rural cooperative banks.

Image 1: Banking Sector in India

The major players in the Indian Banking industry are- Bank of Baroda, State Bank of India, Kotak Mahindra Bank, Citibank, Standard Chartered, HSBC Bank, ABN Amro, HDFC Bank, Punjab National Bank, American Express, etc. Indian banks are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II, and majority of the banks already meet capital requirements of Basel III, which has a deadline of 31 March 2019. During the period 2007-18, total lending increased at a CAGR of 10.94% and total deposits increased at a CAGR of 11.66%. India’s retail credit market is the 4th largest among the emerging countries. It increased to US $281 billion on December 2017 from US $ 181 billion on December 2014. Ayesha Mathur

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In September 2018, the Government of India also started India Post Payments Bank (IPPB) which has branches across 650 districts. This was done to achieve the objective of financial inclusion. As of Q1 FY19, total credit extended by commercial banks surged to Rs 86,976.2 billion (US$ 1,297.4 billion) and deposits grew to Rs 115,070.3 billion (US$ 1,716.4 billion). Total banking sector assets (including public and private sector banks) have increased at a CAGR of 6% to US$ 2.2 trillion during FY13–18. FY13-18 saw growth in assets of banks across sectors. Public sector banks in India account for over 68.3% of interest income in FY18. Their interest income growth during FY 09-18 was CAGR 6.6%. The Indian Banking Sector has also been improving its technological base and employing innovative banking products and services. The digital payments system in India has also evolved. It has evolved the most among 25 countries, including UK, China and Japan, with the IMPS being the only system at level 5 in the Faster Payments Innovation Index (FPII). India stepped up to 28th position on the government's adoption of e-payments ranking in 2018. Digital influence in the Indian banking sector has been growing faster due to the rising digital footprint. India’s digital lending stood at US$ 75 billion in FY18. India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion by FY2023 driven by the five-fold increase in the digital disbursements. With the rise in digital payments, the banks have started shutting down their ATMs. As more and more people are transacting online, along with the government’s push for a cash less economy, less people are making transactions through an ATM. The cost of managing an ATM is quite higher than the cost of paying fees to a partner bank whose ATM is already there in a location. As a result, the growth in the number of Bank ATMs has reduced in the past few years. The Indian Banking sector is also scarred by various frauds, scams and NPAs. A survey by FIS, a financial services technology provider, showed that 18% of Indians suffered from an online banking fraud. This was a higher percentage than any other country. In comparison, only 8% of people from Germany reported a fraud followed by 6% in the UK. According to Reserve Bank of India reports, during the past five years more than 23,000 cases of fraud involving Rs 1 lakh crore have been reported. Top Banking fraud cases are of over Rs 13,000-crore. Fraud in the Punjab National Bank (PNB) allegedly committed by diamantaire Nirav Modi and his uncle Mehul Choksi, the promoter of Gitanjali Gems. Vijay Mallya the Chairman of Kingfisher, United Breweries and many other companies allegedly routed Rs. 9,000 crores (US$1.3 billion) in loans from 17 Indian Banks and ran away and is still at large. Rs.600 Crore Loan Fraud in IDBI allegedly been committed by Aircel promoter C Sivasankaran. Ayesha Mathur

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The gross NPAs of all banks in the country amount to Rs 8,40,958 crore in December 2017 as per Government of India Reports. The NPAs are led by industry loans followed by the services and agriculture sector loans. Rising volume of Bank frauds is swallowing all the economic development and is causing financial indiscipline in the country. Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide impetus to growth. Based on these factors it can be said that India’s banking sector is poised for robust growth as the rapidly growing business would turn to banks for their credit needs. With entry of foreign banks, competition in the Indian banking sector has intensified. Banks are increasingly looking at consolidation to derive greater benefits such as enhanced synergy, cost take-outs from economies of scale, organizational efficiency & diversification of risks. India ranks among the top six economies with a GDP of US$ 2,597 in 2017 and economy is forecasted to grow at 7.3% in 2018. The sector will benefit from structural economic stability and continued credibility of Monetary Policy.

II.

About the Company HDFC Bank Limited (Housing Development Finance Corporation) is an Indian banking and financial services company headquartered in Mumbai, Maharashtra. HDFC Bank is India’s largest private sector lender by assets. As of 30 September 2017, the bank's distribution network was at 4,729 branches and 12,259 ATMs across 2,669 cities and towns. HDFC Bank also has overseas wholesale banking branches in Bahrain and Hong Kong, and representative offices in UAE and Kenya. HDFC Bank Ltd Was incorporated on August 30, 1994 as Housing Development Finance Corporation Ltd. was amongst the first to receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of RBI’s liberalization of the Indian Banking Industry in 1994.

III.

Business Focus HDFC Bank’s mission is to be a World Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the bank’s risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, corporate governance and regulatory compliance. HDFC Bank’s business philosophy is based on five core values: Operational Excellence, Customer Focus, Product Leadership, People and Sustainability.

Ayesha Mathur

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IV.

Business Profile HDFC Bank caters to a wide range of banking services covering commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. The bank has three key business segments: 

Whole sale banking



The Bank’s target market is primarily large, blue-chip manufacturing companies in the Indian corporate sector and to a lesser extent, small & midsized corporates and agri-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. These and fine pricing on various treasury products are provided through the bank’s Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.

 Retail Banking The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a onestop window for all his/her banking requirements. The products are backed by world-class service and delivered to customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. V.

Product Line HDFC Bank provides a wide range of banking products. These are mentioned below: i.

Accounts and Deposits       

Ayesha Mathur

Savings Salary Current accounts Deposits Safe deposit locker Rural accounts Pension accounts

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ii.

Loans and Cards                   

iii.

Demat   

iv.

Mutual funds Invest Now Public Provident Fund Sukanya Samriddhi Yojana Atal Pension Yojana 8% Savings Bonds National Pension Scheme Equities and Derivatives Sec 54 EC- Capital Gains Bonds

Insurance  

Ayesha Mathur

Demat account 2 in 1 account 3 in 1 account

Investment         

v.

Personal loan Home loan Car loan Two- wheeler loan Business loan Loan against property Education loan Loans for professionals Smartdraft- Overdraft against salary Gold loan Loans against assets Government sponsored programs Rural loans Loan against securities Loans on credit card Pradhan Mantri Mudra Yojana Credit cards Debit cards Forex cards

HDFC Life Cancer Care HDFC Ergo Critical Illness- Platinum Plan 30th May 2019

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  

vi.

Forex   

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HDFC SL YoungStar Super Premium HDFC Ergo Health Suraksha HDFC Ergo Motor Insurance

Travel solutions Remittance products Forex exchange

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CONTEXT OF STUDY

Banks in India have found new avenues and opportunities for deploying their funds. As a result, they have been lending to the retail sector in a big way. Retail lending can be defined as lending to individuals, as opposed to institutions. Retail lending covers a host of loans: Home loan, Education loan, Credit Card, Consumer Durables Loan, Auto Loan, etc. Personal loan is a part of this segment. For the country’s three largest lenders — State Bank of India, HDFC Bank and ICICI Bank— retail accounts for more than half of their loan books. Over the past few years, there has been a structural shift in banks’ loan books. The share of the retail portfolio has risen from 18.3% in 2013 to 24.8% in March 2018 and the data for October 2018 put this share at 25.5%. In the last four years, with corporate lending becoming unviable due to the rise in defaults and losses, the push toward retail lending has become even stronger. Lending to retail has now become somewhat safer as banks are heavily relying on credit bureaus that help them with the credit history of borrowers and also help assess default risks. A study by credit bureau Trans Union CIBIL notes that millennial and Generation X consumers are driving much of this growth and comprise well over half of all retail accounts and balances.

Image 2: Share of retail loans in Banks’ loan books in non-food credit

Personal Loan is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc. Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it, the lender, in case of a default, cannot auction anything the borrower owns. The interest rates on personal loans are higher than those on home, car or gold loans because of the greater perceived risk when sanctioning them.

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The portion of unsecured loans has been increasing in bank’s books over the last few years. According to the Reserve Bank of India (RBI) data, in May 2010, the total outstanding personal loan amount with banks stood at ₹5.89 lakh crore. This amount as on June 2018 was ₹19.33 lakh crore. Due to slump in capital expenditure by the corporate sector, the demand for industrial credit has decreased, but households and individuals continue to take fresh loans as the services sector (of the Indian economy) continues to grow. The use of technology has also helped deepen the customer reach for banks. HDFC Bank is using virtual robots to substitute repetitive functions and save time. “We will distribute digitally. We are giving loans in 10 seconds. It delights customers and changes my cost dynamics,” says Aditya Puri (MD, HDFC Bank).

Image 3: HDFC Bank – Growth in Retail Assets

The Bank’s personal loans are done in 10 seconds and 50-60% credit cards are done within 10 seconds. In semi-urban and rural areas, all its products are available in feature phone in 11 languages. Most retail loan products, excluding home loans, earn banks a wider margin compared to corporate loans. The Bank has various Personal Loan alternatives, such as: i. ii. iii. iv. v.

Offers – 10 seconds (minimum amount ₹50,000, maximum amount depends on the salary; Tenure: 1-5 years; Online Application; Disbursal in seconds) Top Up 10 Seconds (Top up loan on an ongoing 10 seconds offer of Personal Loan) Top up F4 (Physical login) Green channel (Physical login) PQ (Bank Statement, KYC, Physical login)

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Image 4: Unsecured Lending at HDFC Bank

Since, the personal loans form a part of unsecured lending segment of the bank, the bank faces a high credit risk. However, defaulting on a personal loan reflects in borrower’s credit report and causes problems when they apply for credit cards or other loans in future. Personal loans, however, are less risky for borrowers but highly risky for banks since they are unsecured. In case of default, banks have very few means to recover their amount. This project, thus, attempts to analyze and identify the ways HDFC bank manages the risk on personal loans extended by it. The Bank takes numerous steps before approving unsecured loans. The credit standing of an applicant for a personal loan is investigated intensively because it indicates, within reasonable limits, the likelihood of repayment.

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LITERATURE REVIEW

The Banking sector has a pivotal role in the development of an economy. It is the key driver of economic growth of the country and has a dynamic role to play in converting the idle capital resources for their optimum utilization so as to attain maximum productivity (Sharma, 2003). In all economic systems, banks have the leading role in planning and implementing financial policy. The difference lies with prioritizing goals and their way of achievement. Based on the neo-liberal model, achieving greater profits by using all means is an end in itself, while in the socialistic systems bank operations also aim at improving economy in general and at satisfying social needs. Banking is considered to be a very risky business, but this risk should be taken cautiously (Carey, 2001). Risk is the probability that the future real return will be lower than the expected profitability (Halpern, P. et al. 1994). It is the difference between the expected result and the result achieved. In banks the risk is the quantitative expression of an event of loss generator (Tileagă, Niţu, & Niţu, 2013). Bank risk is the degree of loss suffered by a bank where the counterparty (the client) bankrupts without being able to pay its obligations to the bank. Banks face numerous risks – credit risk, liquidity risk, residual risk, counterparty credit risk, market risk, interest rate risk, foreign exchange risk, country risk, operational risk, legal risk, etc. For the purpose of this study, our focus is on credit risk. However, it should be borne in mind that banks are very fragile institutions which are built on customers’ trust, brand reputation and above all dangerous leverage. In case something goes wrong, banks can collapse and failure of one bank is sufficient to send shock waves right through the economy (Rajadhyaksha, 2004). Therefore, the banks should carefully identify the risks and analyze the degree of those risks so as to be able to minimize the losses and be prepared for any kind of contingencies. The bankers must also look at risk management as an ongoing process and must be undertaken with utmost care. The prime activity of a bank is to lend money and earn profits in the form of interest but by doing so the money is exposed to the risk of default where the borrower is not able to pay the money back in specified period or becomes insolvent. This is known as credit risk. Credit risk can also be defined as the risk that either the interest or principal component of a loan will not be paid as and when they fall due. Credit risk arises directly from the lending activities of the banks (Indranarain Ramlall, 2018). A customer taking loan may or may not pay his installments on time. This might result in a short-term loss for the bank if the there is a delayed repayment or a long-term loss for the bank if the repayment stops and the loan asset turns into a NonPerforming Asset (NPA). Credit risk is borne by all lenders and will lead to serious problems, if excessive. For most banks, loans are the largest and most obvious source of credit risk. It is the most significant risk, more so in the Indian scenario where the NPA level of the banking system is significantly high (Sharma, 2003). Credit Risk depends on both external and internal factors. The internal factors include – 1. Deficiency in credit policy and administration of loan portfolio; 2. Deficiency in appraising borrower’s financial position prior to lending; 3. Excessive dependence on collaterals; 4. Bank’s failure in post-sanction follow-up, etc. The major external factors – 1. The state of economy; 2. Swings in commodity price, foreign exchange rates and interest rates, etc. The Credit Risk is generally made up of transaction risk or default risk and portfolio risk. The portfolio risk in turn includes intrinsic and application risk. Balancing risk and return is not an Ayesha Mathur

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easy job as risk is subjective and not quantifiable whereas return is objective and measurable. If there exist a way of adapting the subjectivity of the risk into a number then the balancing exercise would be significant and much easier. Risk can have a significant impact on a credit institution, both as an influence that is felt in recorded direct losses, and an influence whose effects are felt on customers, staff, business partners and even the bank authority. Conventionally, credit risk management was the main task for banks. With liberal deregulation, market risk arising from opposing changes in market variables, such as interest rate, foreign exchange rate, equity price and commodity price has become relatively more significant. Even a small change in market variables causes considerable changes in income and financial value of banks (Baber, 2016). Losses caused due to negligence of the banks during the process of measuring ad analyzing the risks associated with the loans extended by them, have impact not only on the banks but also on the economy as a whole. There have been numerous instances where the governments had to step in for Public Sector Banks in India so as to be able to minimize the losses incurred due to huge loan assets turning into Non-Performing Assets (NPAs). Governments then take have to take stringent actions against the culprits and also feed money into those Public Sector banks affected by the frauds and defaults. However, the governments have also failed at certain points in bringing the culprits to justice and there has been a huge loss of public money and trust. Given the experience, banks agree that the most important cause of losses is the excessive concentration of risk on a customer, industry or economic sector, a country. It is imperative that a respecting bank strategy is to include programs and procedures regarding the management of banking risks in order to minimize the likelihood that potential exposure risks to affect the Bank (Tileagă et al., 2013). It is obvious that an efficient banking strategy should include both programs and bank risk management procedures designed to actually minimize the likelihood of these risks and potential exposure of the bank. This follows from the main objective of these policies, namely to minimize losses or additional expenses incurred by the bank, and the central objective of bank activity is to obtain a higher profit for shareholders. Banks have learnt that it is difficult to recover dues from the loans extended to the Industry, whereas it is quite easy to recover dues on retail lending. Since, the amount and duration of loans is less in retail lending, the returns are faster. The credibility can also be easily ascertained. So, in a hope to reap greater benefits from retail operations, the banks have been keen on pushing for retail lending. In most cases the retail loans are secured by some asset, but in few cases, such as in personal loans or business loans only the credibility of the borrower is there to pacify the banks. Since exposure to credit risk continues to be the leading source of problems in banks worldwide, banks and their supervisors should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. Many banks now held the employees accountable for any kind of wrongdoings. The employees have to acknowledge all the details provided by the customer and put their seal and signature on the forms. If there are any discrepancies, the employees are supposed to bring them to foreground and resist from supporting such malignant practices. If, however, the bank on a later stage finds out of any discrepancy in the application, it can cost the employee his whole life and career. Risk management in Indian banks is a relatively newer practice, but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the Ayesha Mathur

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corporate governance of a financial institution. In times of volatility and fluctuations in the market, financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. Hence, an essential component of risk management framework would be to mitigate all the risks and rewards of the products and service offered by the bank. Thus, the need for an efficient risk management framework is paramount in order to factor in internal and external risks. Ayyappan and Ramachandran (2011) conducted a study of 22 public sector and 15 private sector banks to predict the determinants of the credit risk in the Indian Commercial banking sector by using an econometric model. The outcome of the study is the non-performing assets had a strong and statistically significant positive influence on the current non-performing assets. They opined that the problem of NPA is not only affecting the banks but also the whole economy. Risk management underlines the fact that the existence of an organization depends deeply on its competences to forestall and get ready for the change rather than just waiting for the change and respond to it. The objective of risk management is not to forbid or stop risk taking activity, but to safeguard that the risks are deliberately taken with full knowledge, clear determination and considerate so that it can be measured and moderated. It also averts an organization from suffering intolerable loss causing an organization to flop or materially damage its competitive position (Baber, 2016). Choudhary and Navin (2011) designed and developed an internal credit rating model for banks which improves their current predictive power of financial risk factors. They highlighted how banks assess the creditworthiness of their borrowers and how can they identify the potential defaulters so as to improve their credit evaluation. The very appearance of credit risk is likely to experience a physical change in view of migration of Tier- I borrowers and, more mainly, the entry of new segments like retail offering in the credit portfolio. These developments are probable to contribute to the augmented potential of credit risk and would range in their effects from awkwardness to disaster. To avoid being blindsided, banks must develop a competitive Early Warning System (EWS) which combines strategic planning, competitive intelligence and management action. (Prof. Rekha Arun Kumar and Dr. G. Kotreshwar, 2008). A cornerstone of safe and sound banking is the design and implementation of written policies and procedures related to identifying, measuring, monitoring and controlling credit risk. Credit policies establish the framework for lending and guide the credit-granting activities of the bank. Credit policies should address such topics as target markets, portfolio mix, price and non-price terms, the structure of limits, approval authorities, exception processing/reporting, etc. Such policies should be clearly defined, consistent with prudent banking practices and relevant regulatory requirements, and adequate for the nature and complexity of the bank’s activities. The policies should be designed and implemented within the context of internal and external factors such as the bank’s market position, trade area, staff capabilities and technology. Policies and procedures that are properly developed and implemented enable the bank to: (i) maintain sound credit-granting standards; (ii) monitor and control credit risk; (iii) properly evaluate new business opportunities; and (iv) identify and administer problem credits. Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it, a committee method may be adopted to achieve various risks. Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc. are such groups that Ayesha Mathur

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handle the risk management features. The efficiency of risk measurement in banks depends on well-organized Management Information System, computerization and networking of the branch activities (R.S. Raghavan, 2003). Functions of risk management should actually be bank precise dictated by the size and quality of balance sheet, complexity of functions, technical/ professional manpower and the status of MIS in place in that bank. There might not be onesize-fits-all risk management segment for all the banks to be made applicable homogeneously. Integration of systems that includes both transactions processing as well as risk systems is one of the perquisites for effective risk management system. The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. The success of risk measurement in banks depends on competent Management Information System, computerization and networking of the division activities. The data warehousing solution should effectually interface with the transaction systems like core banking solution and risk systems to organize data. An objective and dependable data base has to be constructed up for which bank has to examine its own past performance data relating to loan defaults, trading losses, operational losses etc., and come out with standards so as to prepare themselves for the future risk management activities (Baber, 2016). Banks also need to monitor actual exposures against established limits. This can be done only with an effective management information system to ensure that exposures approaching risk limits are brought to the attention of senior management.

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OBJECTIVES AND METHODOLOGY

I.

Objective Being a student of MBA (Finance), knowing more about the Credit Risk Management undertaken by the bank was fascinating. Since, I was assigned to the Personal Loan Department, I limited the scope of this study to personal loans only. The following objectives have been selected for this study: i. ii. iii. iv. v.

II.

To understand the concept of Personal Loan To understand the manner in which Credit Risk on Personal Loans is managed by HDFC Bank To understand the precautions taken by HDFC Bank before approval of Personal Loan to minimize the risk of default To understand the verification process undertaken by the bank before approval of Personal Loan to minimize the risk of fraud To identify the steps taken by HDFC Bank on default of payment of EMI of Personal Loan

Methodology This study is focused on creating an understanding of the ways in which HDFC Bank minimizes its risk on Personal Loans. For purpose of this study I have adopted the Descriptive Research methodology. To conduct this study, data has been collected from Secondary sources. The secondary sources include Websites, Newspapers, Journals, HDFC Bank Publications, RBI publications and Research papers.

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RESULTS AND ANALYSIS

I.

PRECAUTIONS BEFORE APPLICATION A. Eligibility Criteria HDFC Bank has laid down certain eligibility criteria that need to be fulfilled for application and approval of personal loan. These are given below:

A.Age Requirement

A.Minimum Net Monthly Salary Requirement

A.Loan Amount

A.Tenor

A.Number of years in current Residence

A.Telephone at Residence and office

A.Years in Employment

A.Multipliers

A.Customer profiles

Image 6: Eligibility Criteria

i.

Customer profiles             

Ayesha Mathur

Salaried- Categorization as per Company Elite Personal Loans Government Segment Employees of BPO Employees of select NBFCs Employees of Aviation sector companies Employees of insurance companies Salaried Journalists Employees of ADFC Employees of HDB Financial Services HDFC Bank Staff Skilled Workers Policy Railways 30th May 2019

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    ii.

Defence personnel Police personnel Education Institutes and Entities High risk sectors & specific filters

Age Requirement  Age 21-60 years (Maximum age as on the maturity of the loan)

iii.

Minimum Net Monthly Salary Requirement Minimum net income required to avail personal loan for customers having  Corporate Salary Account (CSA) with HDFC Bank is ₹15,000/- pm  CASA with HDFC Bank or OM is ₹20,000/- pm Any person’s eligibility is majorly determined by his income (Net Take Home (NTH) salary). An applicant’s capability of paying EMIs is calculated on the basis of his income earned.

Maximum EMI payable = 70% of Net Monthly Income iv.

Loan Amount Minimum loan amount: ₹50,000 Location Tier Tier 1 Tier 2 Tier 3 Tier 4 Tier 5

Maximum Loan Amount ₹40 lakhs ₹30 Lakhs ₹20 Lakhs ₹10 Lakhs ₹10 Lakhs

Maximum Loan Amount (Subject to location caps):      v.

Tenor  

Ayesha Mathur

Super Cat A/ Cat A/ CSA Cat A - ₹40 Lakhs Cat B/ CSA Cat B - ₹10 Lakhs Cat C/ CSA Cat C - ₹ 5 Lakhs Cat D - ₹ 75000/- (Maximum of ₹1,00,000, by clubbing of spouse’s income) CSA Cat D- ₹1.5 Lakhs

Personal loan tenure varies from 12 months to 60 months. Customers have an option of fore closure after 12 months 30th May 2019

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vi.

Number of years in current Residence  Super Cat A/ Cat A/ CSA Cat A – 6 months  Cat B/ CSA Cat B/ Cat C & CSA Cat C – 1 Year  Cat D & CSA Cat D – 2 Years at current residence and 3 years in the city for rented accommodation (Not applicable if house is owned by self or immediate family member) Above norms are not applicable for Super Cat A, Cat A, B, C and CSA A, B, C if:      

vii.

CIBIL Score > 765 PL F4 Eligible Owned House Current employment of 3 years in the same company Minimum Net Take Home (NTH) salary of ₹35,000 for Super Cat A/ Cat A/ Cat B/ CSA A/ CSA B City stability of 3 years (proof to be provided)

Telephone at Residence and office  Residence Telephone Norms Landline/Post Paid or Pre-Paid mobile at residence  Office Telephone Norms Landline phone at office is a must for all customer segments (employees of telecom operators like Airtel, RCom, Vodafone etc. are exempted) Contact ability related risk-based approvals waived off (for cases where either or both office/ residence telephone norms are not met), in case any of the below conditions are met:   

Owned house/ government allotted quarters or F4 limit, or CIBIL score >=756, or Good match cases for CIBIL score 700-764

 At least one prepaid mobile of the customer is mandatory in all cases. viii.

Years in Employment  Super Cat A/ Cat A/ CSA Cat A- 2 years in employment and 1 month in current  Employment with first month salary credit in new organization  Cat B/ CSA Cat B/ Cat C/ CSA Cat C- 2 years in employment and 1 year in current employment  Cat D/ CSA Cat D- 3 years in employment and 1 year in current employment

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Above norms are not applicable for Super Cat A, Cat A, B, C and CSA A, B, C if:       

ix.

1st salary credit for professionally qualified in Super A Professionally qualified for other than Super A (PG degree or engineering degree) with total work experience of at least 18 months Minimum NTH of ₹25,000 for Super Cat A/ Cat A/ CSA A/ Cat B/ CSA B with 1-month salary credit in the bank account CIBIL Score >765 with 1 salary credit PL F4 eligible with 1 salary credit Total employment of 3 years Only for total employment norms- Earning Co-applicant (family members) meeting norms

Loan Eligibility Multipliers The Loan Eligibility Multiplier determines the maximum amount that any customer can apply for. For determining the appropriate multiplier, following steps need to be undertaken: i. ii. iii. iv. v.

Determine the company category Determine the NTH monthly salary of the customer Check the tenure of Personal Loan Identify the corresponding multiplier (See Annexure A) Multiply it with the NTH Monthly salary of the customer to arrive at the maximum loan amount that can be approved for that customer.

For example: Suppose a customer working in TATA technologies earning a monthly salary of ₹65000, applies for a personal loan of ₹3,00,000 for 36 months (3 Years). The maximum amount of loan that can be disbursed to that customer will be determined in the following manner: i. ii. iii. iv. v.

Company Category- Super Cat A NTH- ₹59000 (after deducting Tenure-36 Months Multiplier – 13 Maximum loan amount = 13*59000= ₹767000

Thus, loan application for this customer can be approved.

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B. Eligibility Criteria – Other requirements

i.

Banking   

ii.

Latest 3-month bank statements/ computerized passbook (with 1st page) In case of manual passbooks- 1st page of the passbook and transactions for the last 6 months 3 months’ salary credits to be reflected in this documentation

Repayment SI/ECS form all RECS locations and PDCs from other approved locations.

iii.

Documentation    

iv.

Address proof – ADHAAR Card, Voter ID, Passport, Driving License Identity proof – PAN Card, Passport Signature proof- PAN Card Latest salary slip (Salary slip waiver for Super Cat A company employees with 6-month salary credit in bank; bank statement to be documented)

Cheque salary If the salary is credited by a way of cheque as against direct credit to the account, following filters should be applicable:    

v.

Educational qualification  

vi.

Bank credit amount by cheque should be as per the Net Salary amount mentioned in the latest pay slip. The variance in salary credit should not be more than 10% for the latest 3 months Pay slip and Bank statement should be verified by the RIC Minimum 6 months banking to be considered

Graduate In case of Cat D/CSA D/Pvt Ltd companies- Proof to be provided

Co-applicant requirement Co-applicant requirement for bachelor and shared bachelor accommodation in Software and Non- Software profiles is as follows:

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Category

Super CAT A

CAT A/B, CSA A/B

CAT C/D, CSA C/D

CAT C/D, CSA C/D

Software Profile Co-applicant is not required if any of the following conditions are met:  Passport copy with Teller Verification (TVR) on permanent address or with CPV at permanent address  CIBIL Score >= 765  Customer with F4 limit  CSA and more than 3-month salary credits Co-applicant is not required if any of the following conditions are met:  CIBIL score >= 765  Customer with F4 limit  CSA and more than 3-month salary credits Co-applicant is not required if any of the following conditions are met:  CIBIL Score >= 765  Customer with F4 limit  CSA and more than 3-month salary credits Co-applicant is not required if any of the following conditions are met:  CIBIL Score >= 765  Customer with F4 Limit  CSA and more than 3-month salary credits

Non- Software Profile

Co-applicant is not required

Co-applicant is not required

Co-applicant is not required if any of the following conditions are met:  CIBIL Score > 765  F4 pre-approved customer  CSA and more than 3-month salary  NTH > ₹25000 Co-applicant is not required if any of the following conditions are met:  CIBIL > 765  F4 pre-approved customer  CSA and more than 3-month salary credits  NTH > ₹25000

If the above-mentioned norms are not met, the case has to be processed as a riskbased approval depending on CIBIL Score. However, risk-based approval need not be taken if, any of the following conditions are met: Ayesha Mathur

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  

vii.

CIBIL Score of the applicant > 800 Co-applicant meeting norms is provided in the case Permanent address proof with Teller Verification (TVR) or CPV at the same

Factoring of Credit Card Obligations and Other Obligations  Credit card outstanding to be considered on the basis of CIBIL score Limit Outstanding Up to 3 Times NTH

3-6 times of NTH

>6 times

Treatment as obligation Not considered for eligibility consideration 5% of the total credit card outstanding to be treated as EMI and factored for eligibility calculation Case to be rejected. Can be considered with obligation to be factored at 5% with following criterions being met: i. Customer NTH > ₹25000 ii. CIBIL Score >= 765 iii. FOIR to be capped at 70%

 All loan EMIs to be factored as obligation from NTH. If there are any loans with 2 balance EMIs, they need not be considered as an obligation viii.

FOIR Norms (Fixed Obligation to Income ratio)

FOIR =

Total existing EMI obligations + Card Obligations (as applicable) + Proposed HDFC Personal Loan EMI Net Take Home salary (before obligating existing EMIs)

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FOIR Cap NTH Income

Company Category

FOIR Cap

<₹25000

All company categories

60%

>= ₹25000 & ₹35000

All company categories

>= ₹35000

Super A, CAT A/B/C, CSA A/B/C

NA

>= ₹35000

CSA D, CAT D, GA, GB

70%

70%

Example (1) of FOIR calculation: Applicant is working with Infosys Technologies Limited (Company CategorySuper Cat A); NTH as per last pay slip: ₹24000 Obligations:  

Personal loan EMI= ₹4000 (12 EMIs paid out of a total of 48 EMIs) Auto loan EMI= ₹4000 (14 EMIs paid out of total of 36 EMIs)

Total credit card outstanding as per CIBIL = ₹50000* *not taken as an obligation since the total outstanding is within 3 times of the applicant’s NTH

Eligible Income = Income-EMIs = ₹24000- (₹4000+₹4000) = ₹16000 Tenor opted= 60 months Loan amount eligibility = ₹ 240000 (₹16000*15) Proposed EMI- ₹5900 (@16.50% Rate of interest) FOIR =

₹4000+₹4000+₹5900 ₹24000

X 100 = 58%

Hence, as FOIR is within 60%, the applicant can be funded the maximum loan amount as per his eligibility. Example (2) of FOIR calculation: Ayesha Mathur

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Applicant is working with Infosys Technologies Limited (Company CategorySuper Cat A); NTH as per last pay slip: ₹24000 Obligations:  

Personal loan EMI= ₹4000 (12 EMIs paid out of a total of 48 EMIs) Auto loan EMI= ₹4000 (14 EMIs paid out of total of 36 EMIs)

Total credit card outstanding as per CIBIL = ₹100000 As total credit card outstanding is lies in the range of 3-6 times the applicant’s NTH, 5% of the Total Credit Card Outstanding to be treated as EMI and is considered for eligibility calculation. Hence, Credit Card EMI = 5% * ₹100000 = ₹5000 Eligible Income = Income- EMIs = ₹24000 - (₹4000+₹4000+₹5000) = ₹11000 Tenor opted= 60 months Loan Amount eligibility= ₹165000 (₹11000*15) Proposed EMI = ₹4056 (@16.50% Rate of Interest)

FOIR =

₹4000+₹4000+₹5900+₹4056 ₹24000

X 100 = 71%

Since, FOIR is in excess of 60%, the loan amount to be capped is calculated as follows: 60%* ₹24000 = ₹14400 Total of existing obligations = ₹4000+₹4000+₹5000 = ₹13000 Therefore, proposed EMI can be = ₹14400-₹13000 =₹1400 Hence, the applicant can be funded a maximum of ₹56946 for 60 months (16.50% Rate of interest)

ix.

Non-Target Segment Personal loans are not given to any Salaried Individual who is, either engaged in or besides his current employment, engaged in any of the following Businesses/Professions: 

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Class IV government employees 30th May 2019

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                 

II.

Cops/ Politicians Artists from film industry/ Producers/ Film Industry/ Film Financiers/ Television Artists/ Professionals in Television Production (except approved companies) Employees of Collection Agencies Employees of Private Security Firms Employees of small transporters Employees of Car Brokers/ Car Rentals (except approved companies) Employees of Small Brokers/ Financial Securities Firm/ Small NBFCs/ Credit Societies/ Chit Fund/ Private Financiers Employees of valuators Manpower consultants (those who arrange for overseas jobs/ visits) Employees of plantation companies Employees of cable operators Journalist Advocates Employees of RTO agents BPT employees Employees of small media companies/ entertainment agencies/ event management firms Employees of small travel agents and tour operators (Except approved companies) Employees of small proprietary courier companies

PRECAUTIONS BEFORE APPROVAL

i.

RIC The Research and Intelligence Control (RIC) Department of a bank is responsible for document processing and identifying frauds at application level itself. The RIC manager drives key processes laid down as part of the fraud prevention, detection and investigation strategy across all Retail Asset Products which has to be achieved by framing superlative Risk Processes across all stages. The RIC Manager ensures the genuineness of the following in order to detect any fraud activity at the application stage:  Documents (Identity proof, address proof, cheque)  Banking (checks with the respective bank that whether the applicant has an account there or not, checks the bank statement, etc.)  Salary slip

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The RIC department also keeps on monitoring the activities of the loan account and the applicant in order to ensure no fraud takes place. CASE: Bank Fraud Case (Mumbai, February 2009) The Tardeo Police cracked a case of bank fraud with the arrest of a gang that set up a bogus company and applied for loans under fake names. The gang set up a fake company in the name of ACIL Industries and had even rented an office. They also opened a website to attain credibility. The gang members possessed fake PAN Cards, Blank Ration Cards and Driving Licences. The gang members had used fake documents to apply for loans in the names of seven persons and duped a bank of ₹29.5 Lakhs. The officials at the Risk Intelligence and Control (RIC) wing of the HDFC Bank first detected the fraud in November 2008 when they received two loan applications from persons who bore the same address and were employed in the same company. The verification of the documents by the RIC unit revealed that both applicants were employees of one ACIL Industries in Malad and had the same residential address. Their loan application was rejected on the ground that the documents were faulty. However, a cursory check revealed that five more employees of the same company with similar addresses had applied for loans in 2008. The RIC unit also checked the company website for genuineness. The website bore a logo of one Anil Industries in Jaipur and their representatives said that they had only one branch in Jogeshwari. The RIC wing, then filed a complaint with the Tardeo police. Thus, the RIC Department of the HDFC Bank was vigilant enough to detect the fraud and stopped it from rising up to unmanageable limits. The guidelines and policies regarding the documents have become stringent in order to prevent such misuse and frauds.

ii.

CIBIL Score The banks, as loan providers, need to know which applicants are most and least likely to honor their obligations. The CIBIL score is a credit- scoring model that gives banks a predictive insight into consumer risk behavior so that they can make more strategic lending decisions. The Credit Information Bureau (India) Limited (CIBIL) is the most popular of the four credit information companies licensed by Reserve Bank of India. There are three other companies also licensed by the RBI to function as credit information companies. They are Experian, Equifax and Highmark. However, the most popular credit score in India is the CIBIL score.

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CIBIL Limited maintains credit files on 600 million individuals and 32 million businesses. CIBIL India is part of TransUnion, an American multinational group. Hence credit scores are known in India as the CIBIL TransUnion score. The CIBIL score effectively predicts whether a potential borrower is likely to default on one or more EMIs. The CIBIL score considers all the borrower’s loans and obligations, secured and unsecured, enabling banks to better manage risk, minimize losses and increase profitability. The CIBIL score is a three-digit numeric summary of an applicant’s credit history. The score is derived using the credit history found in the CIBIL Report (also known as CIR i.e. Credit Information Report). The CIBIL score plays a critical role in the loan application process. When someone approaches a bank or a financial institution for a loan, the lender first checks the applicant’s CIBIL score and report. If the CIBIL score is low, the bank may not even consider the application further. If the CIBIL score is high, the lender will look into the application and consider other details to determine if the applicant is credit-worthy. The CIBIL score works as a first impression for the lender, the higher the score, the better are the chances of the loan being reviewed and approved. The decision to lend is solely dependent on the bank and CIBIL does not in any manner decide if the loan/credit card should be sanctioned or not A CIBIL report has detailed information on the loans that an applicant has availed, such as home loan, automobile loan, credit card, personal loan, overdraft facilities. A CIBIL report contains the following key elements: 

CIBIL Score The CIBIL score is calculated on the basis of the applicant’s credit behavior. It ranges between 300-900. A score above 700 is generally considered good.



Personal Information Contains applicant’s name, date of birth, gender and identification numbers such as PAN, Passport, etc.



Contact Information Address and telephone numbers are mentioned

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

Employment Details Monthly or annual income details as reported by the membersBanks and Financial Institutions



Account Information This section contains the details of the applicant’s credit facilities including name of lenders, type of credit facilities (home, auto, personal, overdraft, etc.), account numbers, ownership details, date opened, date of last payment, loan amount, current balance and a month on month record (of up to 3 years) of payments.



Enquiry Information Every time an applicant applies for a loan or credit card, the respective Bank or financial institution accesses his/her CIR. The system makes a note of this in their credit history and the same is referred as “Enquiries”

For the purpose of Personal Loan, a CIBIL score of at least 750 is required by the bank for approval of the loan application.

iii.

Verification In order to prevent frauds, the bank officials verify the Residential and Company addresses by making physical visits to the mentioned address. The genuineness of the Identity Proof, Address Proof and Company Identity Card is also checked.

iv.

Salary Criteria On the basis of the NTH salary, the rate of interest for an applicant is determined. Lower the salary, higher the Rate of Interest and vice versa.  

Ayesha Mathur

If the salary is more than ₹35000, the minimum Rate of interest can be 11.5%. If the salary is less than ₹35000, the rate of interest is in the range of 14%16%.

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v.

Stability The applicant’s job stability is also a major determinant that impacts the approval of the personal loan application. The applicant must, therefore, be working in the same company for at least 3 months in order to be able to get a personal loan.

vi.

Job Profile Job profile refers to the role, responsibilities and level, designation of the applicant at work. It is a factor for determining the rate of interest on a personal loan application. Better the profile, lower the rate of interest and vice versa. Also, job profile determines what kind of applicants can avail a personal loan from HDFC Bank.  

III.

Higher to middle level executives i.e. white-collar workers are eligible for a personal loan approval. But lower level or blue-collar workers such as office boys and peons can not be extended a personal loan.

CONSEQUENCES OF DEFALUT OF PAYMENT

i.

Recovery Agents The Bank outsources the job of recovering the loan amount to third party organizations known as Recover Agents. The recovery agents get active even if one EMI is not paid or delayed. There are two ways through which Recovery Agents recover the loan amount from the customers: a. Tele-Calling Usually if the debt is unpaid for a month, the collection team sends reminder or calls the customer for recovery. b. Visit If even after multiple calls and reminders, the customer does not pay his EMI (s), the bank sends the recovery agent to the place of residence or the place of work of the concerned customer.

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ii.

CIBIL Score There are a variety of factors that affect CIBIL score of an individual and one such issue is missing to pay a loan instalment. When an applicant misses out on a single personal loan instalment, his CIBIL score dips by a significant number. Some of the prime consequences are as follows:   

CIBIL score gets deteriorated if an applicant misses even a single EMI. Missed as well as late payments get reflected in your credit report. The major impact is caused to loan applications. Minimises applicants’ chances of getting a credit card loan application approval.

Minor and Major Defaults For customers, it is quite important to learn about the difference between minor and major defaults, so as to gain better understanding about missed payments and its effect on an individual’s credit score. 

Minor Defaults The payments missed or delayed for a timeframe less than 90 days is regarded as minor defaults. In this case, the CIBIL score would take a permanent thrashing but is affected only on a temporary basis.



Major Defaults There are times when a person fails to complete his/her payments beyond 90 days. In this situation, the individual’s account is tagged under the NPA (non-performing assets) group. This is considered as a major default and keeps the lenders at a distance due to poor financial or credit repayment history.

One can easily infer that under both scenarios the loan worthiness of a customer is hampered. However, it is important to note, in case of a minor default, one can ensure that the payment of succeeding bills under the stated time slot can help one to recover your one’s score. On bounce of a single EMI, the CIBIL score reduces by 10 points.

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iii.

Charges The bank also charges some amount from the customer on delay or default payment.  

Ayesha Mathur

On default of even one EMI, the bank charges a flat amount of ₹650 for each default payment. For delayed payments, the bank charges 2% of the EMI amount per day.

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CONCLUSION

HDFC Bank, the largest private sector banks in India, has been focusing a lot on retail lending. Personal loans comprise the most important and largest part of the bank’s portfolio. The Bank gives its branches monthly targets of personal loans of ₹1 crores and above. The bank officials are pressurized to generate at least 10 leads a day and input 3 applications on the Digital Application Platform (DAP). With so much focus on retail lending, the Bank surely has been taking care of the recovery of funds. Based on the above analysis of the risk management measures being employed by HDFC Bank, it can be said that the Bank is taking utmost care while disbursing any personal loan. A lot of customers are not allowed to apply for the loan if they do not fit the eligibility criteria. Following are some of the cases that I faced while working at HDFC Bank: a. Loan requirement of customer = ₹600000 NTH Salary = ₹ 15000 Customer not eligible for this amount. b. Loan requirement of customer = ₹400000 10 seconds offer (without documentation; online disbursal) = ₹500000 Rate of interest on offer = 16.5% Nature of business he is employed in: A Partnership firm Wants lower rate of interest Not eligible for a lower rate of interest since, he is employed by a partnership firm. c. Loan requirement = ₹700000 Eligibility criteria met. But the application was rejected at approval stage due to low CIBIL Score. Thus, the measures that the Bank has put in place at every stage, provide a protection to the bank from possible frauds. The eligibility criteria very clearly lay down the income, age, residence, telephone, company and other requirements, which rejects an applicant at the initial stage only. This saves both time and cost for the bank. The secondary stage of approval is done without the customer noticing it. The Bank officials make visits to the residence and work place of the applicant, do a proper back ground check, ensure the originality of the documents submitted by the applicant. If any discrepancies are found the application is outrightly rejected. After approval and disbursement of the personal loan, the customer’s EMI payments are monitored for timely repayments. Timely repayments enhance the customer’s CIBIL Score and the bank’s system generates Personal Loan Top Up offer on his customer ID. If the customer is willing to take a Top Up Loan, his balance of the previous loan is nulled and a new Personal loan with lower rate of interest and the total loan amount is then calculated i.e. Balance on previous Personal loan + Top Up loan amount. Ayesha Mathur

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For Example: Personal loan amount = ₹16,00,000 Original rate of interest = 11.9% Balance Principal left to be repaid = ₹9,00,000 Tenor = 60 months EMI= ₹21,988 (The customer has approximately paid 8 EMIs) Top Up offer = ₹5,00,000 Rate of interest on Top Up offer = 11.25% Customer’s requirement for new Personal loan = ₹3,00,000 Tenor = 60 months New loan amount = ₹9,00,000+ ₹3,00,000 = ₹12,00,000 New EMI = ₹26,241 (@11.25% of ₹12,00,000 for next 60 months) The original loan amount outstanding stands null and a new loan of ₹12,00,000 comes into existence for the next 5 years at a lower rate of interest. Now, if there are delayed or default payments, the Bank sends reminders to the customers through recovery agents who either make phone calls or visit the customer to recover the funds. The bank also charges penalty for delayed payment. These measures create a scary image in the minds of the customer. Along with this, the CIBIL score is also negatively impacted, which prevents the customer from taking any further borrowings from any institution. This prevents the customers from committing frauds. But still some people find loopholes in the system and abscond with the bank’s money. Thus, Bank has put full responsibility for any kinds of mistakes or wrong doings on its employees who are in-charge of the whole process. If at any stage the bank suspects anything wrong, the Bank summons the concerned employee who has signed and stamped the documents with his name. This can cost HDFC bank employees their whole career and life. This ensures due diligence and honesty in the work of Bank employees which is also major factor in protecting the bank from probable losses.

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RECOMMENDATIONS

Although the Bank has a full-proof system in place to prevent any kinds of losses, the bank can take into consideration the following points: a. Bank can make it mandatory to have a Guarantor in all cases so that more credibility can be sought. b. Bank can install a system of sending reminders to the customer when an EMI is due. This will help both the customer and the bank in timely loan repayments. c. Bank can also do a police verification of the applicant in order to ensure there are no cases of thefts, frauds or forgery are going against him. This can further strengthen bank’s case. d. The Bank can extend discounts to such customers who repay their loan before the maturity and decrease the loss of bad debts.

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ANNEXURE

LOAN ELIGIBILITY MULTIPLIER

SUPER CAT A Net Take Home Salary >= ₹25000 Tenure

Multiplier

12 months

5

24 Months

9

36 Months

13

48 months

15

60 Months

18

Net Take Home Salary < ₹25000 Tenure

Multiplier

12 months

5

24 Months

9

36 Months

11

48 months

13

60 Months

15

CAT A/ CSA A Net Take Home Salary >= ₹25000

Ayesha Mathur

Tenure

Multiplier

12 months

5

24 Months

9

36 Months

13

48 months

15

60 Months

18 30th May 2019

Page 39

Net Take Home Salary < ₹25000 Tenure

Multiplier

12 months

5

24 Months

9

36 Months

11

48 months

13

60 Months

NA

CAT B Net Take Home Salary >= ₹25000 Tenure

Multiplier

12 months

5

24 Months

9

36 Months

11

48 months

13

60 Months

NA

Net Take Home Salary < ₹25000 Tenure

Multiplier

12 months

5

24 Months

7

36 Months

9

48 months

11

60 Months

NA CAT C, D/ CSA D

Net Take Home Salary >= ₹25000

Ayesha Mathur

Tenure

Multiplier

12 months

5

24 Months

7 30th May 2019

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36 Months

9

48 months

NA

60 Months

NA

To give greater impetus to CSA customers of CAT B/ CSA B/ CAT C/ CSA C, higher multipliers with income differentiation within the segment, are also provided:

CSA CAT B Net Take Home Salary >= ₹20000 Tenure

Multiplier

12 months

5

24 Months

9

36 Months

12

48 months

14

Net Take Home Salary < ₹20000 Tenure

Multiplier

12 months

5

24 Months

7

36 Months

10

48 months

12

CSA CAT C Net Take Home Salary >= ₹20000

Ayesha Mathur

Tenure

Multiplier

12 months

5

24 Months

9

36 Months

11

48 months

NA 30th May 2019

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Net Take Home Salary < ₹20000

Ayesha Mathur

Tenure

Multiplier

12 months

5

24 Months

7

36 Months

9

48 months

NA

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REFERENCES

WEB REFERENCES 1. https://www.hdfcbank.com/aboutus/News_Room/hdfc_profile.htm 2. http://www.capitalmarket.com/Company-Information/Information/AboutCompany/HDFC-Bank-Ltd/4987 3. https://www.business-standard.com/article/finance/personal-loans-accountfor-96-of-new-bank-loans-during-fy18-rbi-data-118041901316_1.html 4. https://economictimes.indiatimes.com/wealth/borrow/all-about-personalloans/articleshow/56352098.cms?from=mdr 5. https://economictimes.indiatimes.com/wealth/borrow/indians-lap-up-personalloans-how-much-should-you-borrow/articleshow/65782430.cms 6. https://en.wikipedia.org/wiki/HDFC_Bank 7. https://economictimes.indiatimes.com/industry/banking/finance/banking/retail -loans-may-revive-indian-economy-banks/articleshow/67550031.cms 8. https://www.jstor.org/stable/4417967?seq=1#page_scan_tab_contents 9. https://www.thehindubusinessline.com/opinion/columns/c-pchandrasekhar/when-banks-return-to-retail-lending/article8929213.ece 10. https://www.hdfcbank.com/htdocs/common/pdf/corporate/Annual_Report_20 17_18.pdf 11. https://www.business-standard.com/article/pf/now-a-personal-loan-disbursedevery-minute-from-hdfc-bank-115050600821_1.html 12. https://www.hdfcbank.com/personal/products/loans/personal-loans/eligbiltycriteria 13. http://archive.indianexpress.com/news/nine-arrested-in-bank-fraudcases/421841/0 14. https://www.cibil.com/faq/understand-your-credit-score-and-report 15. https://www.transunioncibil.com/product/cibil-score 16. https://www.hdfcbank.com/personal/learning-center/borrow/what-is-the-cibilcredit-score-and-why-should-it-matter 17. http://www.paisabazaar.com/credit-score/factors-that-affect-your-credit-score/ 18. https://www.equitymaster.com/research-it/sector-info/bank/Banking-SectorAnalysis-Report.asp 19. https://shodhganga.inflibnet.ac.in/bitstream/10603/9006/16/16_chapter%206.p df 20. https://www.bis.org/publ/bcbsc125.pdf

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BIBLIOGRAPHY 1. Indranarain Ramlall (2018), A Framework for Financial Stability Risk Assessment in Banks, in Indranarain Ramlall (ed.) The Banking Sector Under Financial Stability (The Theory and Practice of Financial Stability, Volume 2) Emerald Publishing Limited, pp.29 - 117

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