Introduction to Retail Loans

India has emerges as one of the largest and fastest growing economies of the world during the last decade. The strengthening of the economy in India has been fuelled by the convergence of several key influences, like growth of the key economy sectors, liberalization policies of the government, well-educated work force and the emergence of a middle class population. India, having the second largest population in the world, is on its way to become the world's fourth largest economy in a span of 2 decades. Due to the restrictive regulatory environment and strict policies of the government of India until the early 1990's the public sector banks and other scheduled banks were the major lenders. Even with the entry of private banks, in the initial phase, there was limited competition between the public sector banks and private banks. Also, the thrust was not on developing the economy consistently through credit growth. Hence, banks did not feel the need to foray into the sectors that were under served. In the current scenario, banks have been thriving on retail lending. The focus of banks now, is to increase the probable profits while limiting possible losses. An increase in market penetration brought about a change in the business environment and in the way banks conducted their business. There was a change in terms of innovation in products as well as processes to cater to the demands of the new age customer on one hand and to protect the bank from multiple risks on the other. Retail exposure of banks includes various types of retail credit, such as residential mortgages, consumer credit cards, automobile and personal loans, loans against securities, and small business loans. Retail Loans - Characteristics

These are small size loans These loans meet the needs of a large number of customers with well diversified portfolios The target customers are generally individuals or small organizations These loans offer standard products to customers. Very rarely a customer's requirement is customized The operations of retail credit are centralized in most of the banks Bankers can make quick credit related decisions because of decentralization These loans are designed to cover varied segments of risks High volume business High number of transactions

Salient features of retail loans

Types of facilities:

Loans are the finance facility of a fixed amount extended to meet a onetime requirement of a customer, for a fixed tenure, to be repaid over a period in installments. To enable customers to meet their emergency requirements, bankers permit them an overdraft [OD]. This means that bankers allow the customer to withdraw more than the credit balance in the customer's current account or give a temporary loan in the current account itself.

Secured/Unsecured facilities: Secured loans are always secured by an underlying asset against which funding is extended. This lending is also known as asset based lending. A specific charge is created against such an asset. This gives the banker/lender the right to take possession of the asset and sell it to recover the loan in case of default. Unsecured loans do not have any underlying security and are purely extended based on the creditworthiness of the borrower. This is also known as non-asset based lending.

Interest: On a loan given at a fixed rate, interest is charged throughout the tenure of the loan at that rate which is fixed at the time of granting the loan. The customer has to pay interest at the contracted rate irrespective of whether the interest rate in the market goes up or down. In case of floating rate of interest, the rate at which the interest is charged on the loan varies from time to time according to the movement of interest rate in the market.

Tenure: The tenure for a loan depends upon the amount of the loan and repayment capacity of the customer. However, the maximum tenure permitted depends upon the period over which the asset financed could depreciate completely.

Loan to Value ratio: Loan to Value ration [LVR] refers to the maximum percentage of the value of the asset that is given as a loan. It varies according to the nature of the asset and also the rate at which the asset is expected to depreciate or reduce in value.