Shriram Group

Lending Process AT Shriram City Union Finance (SCUF )

Shriram Group: Genesis of the Shriram phenomena! The 30000 Cr Shriram Group has its humble beginning in the Chit Fund over three decades ago. R Thyagarajan , AVS Raja and T Jayaraman the “three musketeers” who ventured into these business from April 5, 1974. Not many in the financial services thought at that time, this small Chit fund Business in Chennai would indeed be the foundation for the financial conglomerate that Shriram in today. The Shriram Way!

Shriram Group‟s businesses strive to serve the largest number of common people. Consider these: Commercial Vehicle Financing, Consumer and Enterprise Finance, Retail Stock Broking, Life Insurance, Chit Funds and Distribution of Investment and Insurance Products. Our presence in commercial vehicle.

1


GROUP COMPANIES

1

• Shriram Transport Finance

2

• Shriram City Union Finance (SCUF)

3

• Shriram General Insurance

4

• Shriram Life Insurance

5

• Shriram Chits Pvt Ltd.

6

• Shriram Insight

7

• Take Solutions Solutio ns

8

• Shriram EPC

9

• Shriram Properties

10

• Shriram Panorama Hills

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• Shriram Financial Service Ltd

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• Shriram Trade Finance

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• Shriram Capital 2


The Company: Shriram City Union Finance was established in 1986, and is part of the three decade old Chennai-based Shriram Group. As deposit accepting non banking financial company (NBFC), Shriram city is today‟s premier financial services company, specializing in retail retail finance. Shriram City has a comprehensive range of offerings comprising financing for two wheelers, three wheelers, four wheeler finance (both new and pre-owned passenger and commercial), Personal Loans (PL), Small business Loan and Loan Against Property (LAP).

This has made Shriram City a dominant player in the field and the only NBFC offering a wide range under one roof. With over 1000 Business Outlets across the country, Shriram Finance enjoys high credit rating, as well as listing on BSE, NSE and Madras Stock Exchange.

Mission: Striving to serve serve the largest largest number of common common people.”

“

We shall strive at all times to build Shriram City into the very best organization, by maintaining the highest standards of Corporate Governance, Personal Behavior of Employees, and through timely delivery of quality Non-Banking Financial Services, finance (predominantly pre-owned), is again a strong expression of this commitment.

Industrial Investments: Shriram group has also made investments in manufacturing sectors, such as Engineering projects and Construction, Pharmaceuticals, Packaging, Information Technology, Property Development and recent foray into non-conventional energy. 3


Corporate Social Responsibilty: Education will become the centre of the knowledge society and schooling, its key

"

institution” - Drucker Shriram Foundation understood that education is the key to economic prosperity and that such education both at the primary school as well as at the secondary school level should be given to the children, especially girls. The Foundation sought to achieve this objective through several initiatives: Running schools for the underprivileged childr Give Life, an aid program for deprived children en in remote areas of the Country

Branches: Shriram City Union Finace in all has 18 branches: STATES CHHATISGARH

LOCATIONS RAIPUR

GUJRAT

AHMEDABAD BARODA JAMNAGAR JETPUR MORBI RAJKOT SURAT VERAVAL

MADHYAPRADESH

INDORE BHOPAL

MAHARASHTRA

AURANGABAD MUMBAI NAGPUR NASHIK PUNE

WEST BENGAL

KOLKATA 4


ORGANISATIONAL STRUCTURE:

President-

Mr.Ravi Subramanium

National Sales Manager/VP-

Siddhatha Pakrasi

WEST (MAHARASHTRA)

Location Head SalesMr. Ritesh Chipde

Mr. Jiten Ojha

CREDIT ADMIN

Mr. Sarvesh Gupta

EAST (WEST BENGAL)-

WEST (GUJRAT)Mr. Ram Chandran Nair

Mr. Prasanjit Roy

Location Credit HeadMr. John Tuscano

Mr. Chandrakant Srimath

Mr. Saurabh Srimath

Operations TeamMr. B Srinivasan Rao

Mr. Imran

CREDIT ASS.

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NON BANKING FINANCIAL COMPANIES (NBFCs) According to Reserve Bank (Amendment act, 1997) ―A Non Banking Finance Company (NBFC) means: A financial institution which is a company. 1. A non banking institution which is a company and which has as its principal business the receiving of deposits under any scheme or arrangement or in other manner a lending in any manner. 2. Such other non banking institution or class of such institutions as the bank may with the previous approval of the central government specify. The definition excludes financial institutions which carry on agricultural operations as their principle business. NBFCs consists mainly of finance companies which carry on functions like hire purchase finance, housing finance, investment, loan, equipment leasing or mutual benefit financial operations, but do not include insurance companies or stock exchange or stock broking companies. In other words NBFCs is a company registered under the Companies Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc They also provide products/service sthat includes margin funding, leasing and hire purchase, corporate loans, investment in non-convertible debentures, IPO funding, small ticket loans, venture capital etc. NBFCs are classified into four categories1. i.

Hire- Purchase Leasing2.

ii.

Loan Company3.

iii.

Investment Company4.

iv.

Equipment Leasing Company 6


From December 6, 2006 NBFCs registered with RBI have been reclassified as i.

Asset Finance Company (AFC)

ii.

Investment Company (IC)

iii.

Loan Company (LC)

iv.

Infrastructure Financing Companies( Since 12 February 2010) Till March 2010 there were 15,167 NBFCs .NBFCs are required as they have a greater

reach to various markets and have great efficiency immobilizing funds. Generally banks to reduce their operational costs establish NBFC. NBFC enjoys many liberal policies by RBI in comparison with the commercial banks. However this scenario is changing. RBI now has strict measures for NBFCs also. NBFCs are different from Banks are as follows:-



NBFCs cannot accept demand deposits ( Demand deposits are funds deposited in an institution, that are payable immediately on demand e.g.: Savings account, Current account etc)

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A NBFC cannot issue cheques, to their customers and is not a part of the payment and settlement system.

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Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation (DICGC)is not available for NBFC depositors.

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They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.

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They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. (Currently the ceiling rate is 12.5%).

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Lending Process AT Shriram City Union Finance (SCUF ) 

They cannot offer gifts/incentives or any other additional ben efit to the depositors.



They should have minimum investment grade credit rating, from the credit rating agencies. The banking sector has undergone major transformation since the liberalization process

and the implementation of the key recommendations of the reports of the M Narasimhan headed Committee on Banking Sector Reforms in 1991 and 1998. The announcement by the finance minister during the Budget speech that the Reserve Bank of India (RBI) will issue additional banking licenses to private sector players, including non banking financial companies (NBFC)that meet the RBI eligibility criteria, came as a cheer to several market participants, especially the large NBFC players. The government hopes that the policy liberalization will extend the geographic coverage of banks and improve access to banking services to the unbanked Indian population. It is widely expected that the RBI will revise the eligibility criteria for entry of new banks in the private sector including the conversion of NBFCs into private sector banks. The present guidelines for conversion of NBFCs into banks were laid down by the RBI in 2001. The key criteria for conversion of NBFCs into banks included for instance good track record of performance and compliance, minimum net worth of Rs 200 crore to be increased to Rs 300crore within three years of conversion, the NBFC should not have been promoted by a large industrial house or owned/controlled by public authorities, capital adequacy of at least 12% and net NPA of less than 5%. The guidelines also stipulated that the NBFC on conversion into a bank will have to comply with capital adequacy ratio and all other requirements such as lending to priority sector, promoters„ contribution, lock -in period for promoters„ stake, etc, as applicable to banks.

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Evolution of the NBFC sector Although NBFCs have a legacy in India, they came into the limelight in the late 1980s.Liberalization and fresh avenues of operations in areas such as housing and investment spurred growth of NBFCs in the country. Non-banking financial companies or NBFCs have become an integral part of India„s financial system. In recent times, NBFCs have emerged as lenders to both companies and individuals. When it comes to lending, NBFCs are generally regarded to be complementary to banks and are often able to offer better services and products to their customers. Initially intended to cater to the needs of the small investors and savers, NBFIs have developed into institutions that can provide services similar to those of commercial banks. In the sixties, the reach of the institutional financial intermediaries was quite limited, wherein the magnitude of deposits with the banks and NBFCs was of small order. While the commercial banks have expanded their reach in the post-Nationalization era, because of the special features of the NBFCs, a large segment of the borrowers looked upon them for their credit needs. It was NBFCs which fuelled the automobile sector growth because banks ventured into auto-financing only about 5 years back. Besides the lending risk associated with different segments vary widely. For instance, risks are perceived to be higher in the automobile finance sector, where the collateral is movable, and the consumer finance b usiness. NBFC have demonstrated that their strength has been in creation of productive national assets through leasing and other modes of financing. In fact, most developed economies have relied heavily on lease financing route in their developmental process. NBFC have been playing a major role in promoting leasing, hire-purchase, loan disbursals etc. in different economic activities, be it infrastructure creation or developing key support services for such infrastructure. 9


The Indian economy today is observing a phase of phenomenal growth. We have seen year on year growth rate of about 8-9% in last 3-4 years. Financing requirement is also increasing commensurately and will continue to increase in order to support and sustain the tremendous economic growth led by asset creation. NBFCs have been playing a complementary role to the other financial institutions including Banks in meeting the funding needs of the economy. In fact diversification of financial markets is an important component of financial sector reforms. The increased consumerism in the Indian economy in past decade or so has been possible only because of the availability of credit to retail customers which has been largely supported by NBFCs and banks later joined the league. NBFC play a very useful role in channelizing funds towards acquisition of commercial vehicles and consequently aid in the development of the road transport industry. They are engaged in creation of assets like financing transportation and infrastructure construction equipments and projects. Road Transport Sector today is the lifeline of our economy and is responsible for creating self-employment opportunities – both direct and indirect - in semi-urban and rural areas. The Road Transport Industry carries a major chunk of freight and passengers. NBFC provide 80% to 90% of funding for the Road Transport Sector. Almost 95% of the Commercial Vehicles are acquired under financing. NBFC hence have a strong presence in the rural markets where they are engaged in financing farming machinery such as tractors, and LCVs and three-wheelers used for transportation of agricultural produce. Given the necessity of increasing agricultural growth through improvements in productivity and also of generating employment in rural areas, assetfinancing companies will continue to play a vital role in meeting these objectives. Regulatory arbitrage potential has been frowned upon both at international level and national level. IMF has 10


framed principles for regulation of the financial sector, where it suggests that institutions performing similar functions should be subject to similar regulations and there should be no scope of taking advantage on the basis of this disparity. Factors that lead to growth of NBFCs:



NBFCs are characterized by their ability to provide niche financial services in the Indian economy to customers who have not availed any loans with banks (and are often referred to as „unbankable‟ customers). Hence they work complementary to banks, catering to a market not supported by these commercial money-lending institutions.

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They fulfill the need of all customers for ‗financial inclusion„by providing them a source of funds beyond the traditional money-lender.

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They are able to provide fast customized services to suit every need of their client.

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Due to the relatively lower degree of regulation over NBFCs as compared to banks, there is less documentation and uncomplicated terms while processing the loan.

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NBFCs are believed to be the more „customer -oriented‟ version of the commercial banks, which are primarily seen as profit-making machines„ even if it comes at the cost of the customer„s interest.

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NBFCs were majorly boosted due to the higher return on deposits that they offered as compared to banks.

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Also the monetary and credit policies in place in the early seventies marginalized some of the small borrowers from the banking system.

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Product innovation in the form of used vehicles financing, small ticket personal loans, three wheeler financing, etc. has given a competitive edge to most NBFCs.

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Substantial employment generation can be contributed to the NBFCs, which has lead to increased wealth creation, as well as economic development.



The economy needs at least two pillars for ensuring that even if 1 pillar falls, the economy is not drastically affected so both Banking and Non -Banking systems are equally relevant.

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Introduction to SME Finance

SME finance is the funding of small and medium sized enterprises, and represents a major function of the general business finance market – in which capital for different types of firms are supplied, acquired, and costed or priced. The economic and social importance of the small and medium enterprise (SME) sector is well recognized in academic and policy literature. It is also acknowledged that these actors in the economy may be under-served, especially in terms of finance. This has led to significant debate on the best methods to serve this sector. Although there have been numerous schemes and programmes in different economic environments, there are a number of distinctive recurring approaches to SME finance.



Collateral based lending offered by traditional banks and finance companies is usually made up of a combination of asset-based finance, contribution based finance, and factoring based finance, using reliable debtors or contracts.

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Information based lending usually incorporates financial statement lending, credit scoring, and relationship lending.

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Viability based financing is especially associated with venture capital.

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Reliable for the entire small ticket loan.

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NEED FOR STUDY (will be added later)

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OBJECTIVES

1. Understanding the lending process at Shriram City Union Finance.

2. Determining factors in the entire Lending process.

3. Documents Required For SCUF Lending Process

4. Evaluating major factors that lead to rejection of files.

5. Delinquent Customer Analysis – Market vs SCUF.

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RESEARCH METHODOLOGY Research Design

As the research is about understanding the lending process at SCUF and determining various factors, Descriptive Research and Explanatory Research Methodology will be opted for. Descriptive research attempts to describe systematically a situation, problem, phenomenon, service or programme, or provides information about , say, living condition of a community, or describes attitudes towards an issue. Explanatory research attempts to clarify why and how there is a relationship between two or more aspects of a situation or phenomenon. Descriptive Research describes the lending process at SCUF. It also describes the compliances relating to lending market that should be known to the stakeholders. The data used for the research would secondary. The secondary data would be obtained with the help of Company website, internal reports, verification report and discussions with senior personnel in the Credit Admin Department.

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Data Collection

The secondary data shall be obtained from



Company website



Internal Reports



Verification Reports



Discussion with Senior Personnel in Credit Admin department

Data Analysis The data collected shall be analyzed with the help of Excel in order to make pie charts, graphs etc.

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LENDING PROCESS AT SCUF

LOGIN

Minimum Criteria Met

NO

YES

Eligibility Criteria Met

NO

YES

Underwriter

Reject File Storage

18


Personal Discussion

Reject

Approve

Credit Admin

Disbursal Documents

Internal Audit

Operation

DISPATCH

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1. Login Stage:

The files are first sourced from the Direct Sales Agent (DSA) and the Direct Sales Team (DST) offices, from where the documents then come in the SCUF office for the initial Minimum Credit Parameters (MCP) check. Here, KYC norms (PAN card, offices and residence address proof, years in business (YIB), stability, etc.) 2 years ITR, 6 months Bank Statement of primary banking are checked. If the files do not meet the MCP norms they are rejected and sent back to the DSA with the pending document list. If the files are OK then Credit Information Bureau (India) Limited (CIBIL), Fraud Control Unit (FCU) and verification reports are fired. Once all the necessary checks are done the Credit Admin team goes ahead with entering the necessary data in the eligibility sheet i.e. the internal excel sheet that helps in the eligibility calculation of the customer. Here KYC details, customer liabilities (other loans if any), banking of all the Business related accounts and financials of previous three years are entered. The objective of preparing the eligibility sheet is to determine the maximum loan amount that can be funded/sourced to the customer by analyzing the following:

1. The customer should have a minimum average banking so that he is eligible to pay the EMI. 2. The Total Sales, Net Profit, Cash Profit should have an upward trend. 3. There should be no EMI bounces in the previous 6 months. 4. There should be no DPD‟s in the CIBIL report.

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Once all the above norms are met the file is then forwarded to the underwriters. Here the underwriters reevaluate all the documents and the eligibility sheet. They analyze the following: 1. The repayment track of the customer is checked for EMI bounces. If bounces are seen in the previous 3-6 months there is an outright rejection of the file. 2. CIBIL reports are checked to see if there are any DPD‟s in the EMI payment and if there is any overdue in the loan track. 3. Eligibility sheet is checked where in banking of the client is analyzed, if the customer has more than one business related account. If yes then any amount that is internally transferred is removed, this gives a clearer picture of the total credit amount. The total credit amount has to match the total sales turnover of the firm. 4.

The client should have an Average bank balance so that he is capable enough to pay EMI if the loan is sourced.

5. Financials of the firm are checked wherein the sales turnover, Gross Profit, Net Profit and Cash Profit should have an upward trend. This shows that the firm is in a good state and is having a rising trend every year. 6. The underwriters also perform a sector/industry analysis in which the firm operates. Here some important characteristics of the sector are traced and a check on the firm is done to see if it meets the same. 7. If the applicant has any other business the financials are analyzed, to check if the firm has a good performance.

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If any of the above mentioned points are not met and do not meet the company‟s policy the file is rejected outright. But if all the conditions are met the underwriters go ahead and fix an appointment with the client for a personal discussion.

2. Personal Discussion (PD): Personal Discussion plays a very crucial part in the entire lending process. The earlier stages do not involve any customer interaction as only the banking, financial, etc. are analyzed. Personal discussion helps the Credit Manager decide whether the customer should be funded or not. In this stage the Credit Manger and the Underwriters look for two main aspects in the entire discussion f irst irst the „INTEGRITY‟ and second the „CAPACITY‟ of the customer. The Underwriters and the Credit Manager analyze the following: i.

Personal

ii.

Loan Payment

iii.

Business

iv.

Financial

v.

Banking

i.

Personal:

INTEGRITY

CAPACITY

Credit Manager and the Underwriters mainly ask questions that would give personal details of the customer. As SCUF is mainly into processing Business Loans (BL) and Loan Against Property (LAP) both the products mandatorily need proper information of the customer. Questions that are mainly asked here are: 

Details about the customer, his background, qualification, an d details about his family. 22


If there are any partners in the business their details are also taken and also the t he percentage of the share holding of every partner is also made note of.



Customer‟s residence details are also questioned so that they confirm if the residence where they live is on rent or owned by the customer.

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Occupation details of the customer family members are also taken.

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Information about customers owned property (office/residence), also the number of years that they have been operating/residing opera ting/residing in the specified address.

ii.

Loan Repayment: Customers provide SCUF with all that the Bank Statements and sanction letters of the

previous loans availed by the th e customers. With the help of the bank statements we get to know if the customer does on time payment of his loans, for EMI bounces if any the customer has to justify the same. The details of the credit cards and the loans availed by the customer are also found in the CIBIL reports. If any additional loans details are found in the CIBIL then the same will be further probed by the underwriters. If there are any Days Passed Dues (DPD‟s) seen in the reports the customer is questioned. From the above two points we get information that is clearly related to the INTEGRITY of the customer. If the customer is punctual is his previous EMI payment, it is inferred that the he is clear in his intentions for repayment. And hence this stands out to be a positive parameter for the Credit Manager to sanction the loan request.

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iii.

Business: Any bank or NBFC before lending to SME, mid corporate or corporate find out the

number of years the business is operating. It is important to know when was the business established and how long have they survived. This will help in knowing their market stand and also how their business activities are being operated. Hence it is important for the underwriters and the Credit Manager to question them in a way that the above details can be obtained. Hence when they question the customer the following points are covered.

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Details about the business/profession (if an individual was a salaried person before entering stating the business).

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History about the business.

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How did the customer start the business.

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Number of years that he has been running the business. If the owner, partners of the company have any other business or are partners in any other business.

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If the customers spouse is running any other business.

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Details about the area/shop where the business is b eing operated.

iv.

Financials: Financials of any firm clearly states the functioning and profitability that the firm

earns every year. It is important that the customer who is applying for the loan should have a stable/increasing sales turnover. Apart from the sales turnover we can also find the Net Profit (NP) that the firm has been earning year on year. The Credit mangers also look into the Cash 24


Profit (CP) of the firm. The cash profit should also have a increasing trend. A dip of around 3%5% is allowed both in the NP and the CP of the firm. Cash Profit=

(PAT + Depreciation + Partner/director salary + partner interest)

The financial that are calculated in the eligibility sheet also show the equity share capital (ESC) invested in the firm. It is important that the ESC should be the same or should be increasing year on year. For firms whose ESC is withdrawn and has a dip of more than 20% the file is out rightly rejected. The financials also show the debtors and the creditors of the company. The data extracted from the financials help in calculating the following ratios:



Gross Profit: Should have an increasing trend. But a dip of around 5% is allowable for

loans up to 10 lacs. 

Net Profit: Should have an increasing trend. But a dip of around 5% is allowable for


Cash Profit: Should have an increasing trend. But a dip of around 5% is allowable for


Current Ratio: Should be standard as per the Indian Accounting Standards.



Debtor Days: Should not be more that 120 days (Can vary with the industry standards).



Stock Days: Inventory should move as quickly as possible higher stock days indicate

slow movement of goods. 

Creditors Days: they should be paid off As Soon As Possible.

After the above mentioned observations the Credit Manager asks the customer the following questions if applicable.

25

Lending Process AT Shriram City Union Finance (SCUF ) 1.

If there is a dip in the Sales turnover in a particular year and the firm has again raised its sale in the following year: The customer should be questioned for the dip in the sales.

2. NP and CP are important while analyzing the financials. There might be instances that even with an increase in sales turnover there is a huge dip in the NP and CP. This might happen because of increase in the direct expenses: Reason for the increase in the direct

expenses should be asked. 3. If there is a decrease/ increase in the ESC the customer should be questioned. If there is a decline it is a negative point for the firm and if there is an increase in the ECS it might be because the applicant has a some other firm and due to the winding of the business the money is transferred in the applicants firm: Reason for the drastic increase/decrease

should be questioned. 4. Debtor days like mentioned should not be more than 120 days. But if the firm has debtor days more than 120 days the customer should be first questioned about the huge delay rather than rejecting the file outright, as the debtor days vary depending on the industrial sector in which the firm operates and nature o f business. Eg: If the firm is into manufacturing of goods the days may be high but if it is in a service industry it not possible for the debtor days to be high: Reason for high debtor days

should be clarified. 5. Stock days should not be high but there are instances where the customer applies for a CC/OD facility, in such a scenario he will maintain a certain amount of inventory:

Clarification about the high stock days should be taken from the customer.

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v.

Banking: Banking of the firm assists in tracing the EMI‟s that the applicant pays every month.

This also helps in creating a loan track to check whether the customer pays his EMI‟s every month on the specified dates. It is very important that underwriters and the credit managers check if the total sales and the total credit amount match. If it does not match the sales turnover, the customers should be questioned for the same. Banking helps in tracing the number of cheque returns in the assessment year and identifying the average balance that the customer maintains. In case of CC/OD accounts if the limit has been exceeded underwriters need to understand reasons for the same. The number of times the limit has been exceeded also needs to checked/clarified. The above five point‟s gives detailed explanation of all the points that are covered by the Credit Manager and the underwriters before initiating the personal discussion. For LAP customers apart from the above mentioned points, few additional checkpoints as stated below need to be verified by the underwriters. 1. Valuation reports: 2. Legal Report: 3. Title search report: 4. Vetting Report: 5. Property Papers: This completes the personal discussion stage. This is the final stage where in the Credit Manager decides whether to approve or decline the case.

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3. Operation: If the Personal Discussion goes well and the Credit Manager is sure about the customers Integrity and Capacity. A go ahead is given for the loan to be processed. The Credit Admin team after the PD, gets some important documents ready. These Loans Documents are as below: i.

Sanction letter

ii.

Deduction Letter

iii.

Application Letter

iv.

Co-borrower Letter

v.

Post Dated Cheques/ Electronic Clearing System (ECS)

vi.

Enterprise Finance Agreement The Ops team also checks the following:



KYC



Financial/ banking



Verification Documents



Property Papers (in case of LAP)



Loan Documents All the above documents have to be self attested by the customers and also have to be

verified by the DSA and the DST by attesting a stamp on the documents. Once all the documents are Okay and pendency‟s if any are resolved the Operations team will upload the case onto UNO system where the customer details and loan details are entered. The loan account number/Reference Number for the customer is obtained after the case is disbursed on UNO. As soon as the case is disbursed a request mentioning the loan amount and 28


the cheque payable location is sent to the Cheque print department of SCUF. Once this request is processed by the cheque printing team, the cheques will be sent to the respective Axis Bank branches. This cheque is then sent to the customer and an acknowledgement for the same is taken. This acknowledgement is done by taking customers signature on the copy of the cheque. After the customer acknowledgement is obtained on the cheque copy the files are ready to be dispatched to Chennai.

4. Dispatch: Once

all

the

activities

are

completed

and

the

customer

gives

an

acknowledgement on the receipt of the cheque, the dispatch entry is entered in UNO and the dispatch number is generated. After this the customer files are sent to the archival team in Chennai. This completes the entire lending process.

5. Internal Audit: Once the files are disbursed by the Operations team, they can be picked up by the Internal Audit. Audit has to be done before files are dispatched to Chennai. The internal auditor randomly selects files for audit. The scope of this audit is to ensure that files are being disbursed as per the credit policy of SCUF. The audit also serves as a feedback mechanism for both Credit as well as Operations teams, so that improvements if any can be implemented. An audit report is prepared at the end of each month, which has details of audit cleared files and discrepant files.

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Determining Factors In The Lending Process

There are many factors that determine whether a file should be approved or declined. The entire process flows right from Login stage to Operations are important to the lending process. The main factors are highlighted below: One of the most important factor for any Financial Institution is KYC. KYC plays a crucial role in deciding whether a customer can be funded or not. Other documents include Income documents & Bank statements. The financials & Banking help in understanding the customer financial credibility & repayment capacity. A eligibility calculation sheet is also prepared for analysis purpose, which will help in deciding the credit program that customer can be funded under, the loan amount, EMI & ROI.

Under Business Loan Policy there are two Programs; BL Standard (loan is funded basis the financial eligibility) and Banking Surrogate (loan is funded basis a calculation on the Average Banking balances)

Based on the documentation provided by the customer & findings of the eligibility calculator, the credit team can decide the program that the customer should be funded under.

Once documentation & eligibility calculations are verified, the next important factor is the personal discussion. Here the Credit Officer will have to face personal discussion with the customer. The advantage of the PD is:

30


a)

It gives the Credit officer an opportunity to gauge the customer‟s reactions to the questions being asked

b)

It helps in understanding whether customer readily & honestly reveals business/banking/liability details or needs to be probed for the right answers

c)

The body language & the interest level of the customer can also be understood through the PD.

After the PD if Credit officer is Okay w.r.t all aspects of the case, the file will be moved to the Operations team for disbursal. This team will also check the file for documentation & verification reports. If everything is in order, the file will be processed. In case of pendency‟s, a mail will be sent to respective locations for resolution and once they are rectified, the file will be processed.

At times a loan request can also be cancelled, if customer is not happy with SCUF terms & conditions.

31


DOCUMENTS REQUIRED FOR SCUF LENDING PROCESS

The following documents are required: 

KYC



Financial/ banking



Verification Documents



Property Papers (in case of LAP)



Loan Documents

Below is a detailed breakup of the documents required for each of the above:



Know Your Customer (KYC)

Know Your Customer (KYC) is a very important and an integral process in any Bank and a Financial Institution. KYC is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information. The objective of know your customer guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. Know your customer procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. The following checks are needed before initiating the lending process:

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i.

Business Proof

ii.

Residence Proof

iii.

Ownership Proof

iv.

Signature Proof

v.

Identity Proof

vi.

Date of Birth

vii. viii.

Stability Proof Years In Business (YIB)

Below table gives a detailed breakup of the documents required for the above point.

1

Business Proof & Residence Proof Any one from the below mentioned documents: 

Latest Landline/WLL/Postpaid mobile bill



Latest electricity bill



Valid Passport



Valid driving license



Valid shop and establishment certificate (only for business address proof)



Gas book (only residence address proof)



Bank Statement with address proof for last 6 months.



Last leave and license agreement



Latest property tax bill

33


Property papers as Sale deed/ Share certificate or any



other doc related to property

2

Ownership Proof

Any one from the below mentioned documents: 

Latest Electricity bill



Latest Property tax bill



Property papers as Sale deed/ Share certificate or any other doc related to property

3

Signature Proof


Valid Passport



PAN card



Signature verified by bank from where repayment cheque is issued

4

Identity Proof


Valid Passport



PAN card



Valid Driving license



Valid Voter ID (only for co-applicant)



Valid Photo credit card



Bank pass book with photo stamped (previous 6 months) 34


5

6

Date of Birth

Stability Proof



Photo attested by bank



Property registered deed


Birth certificate



School leaving certificate



Valid Passport






Latest LIC premium receipt/ policy



PAN card



Any other valid Govt ID card


Postpaid mobile bill



Landline/ WLL phone bill



Electricity bill



Valid Passport






Bank statement with address



Property tax bill



Property papers as Sale deed/ Share certificate or any other doc related to property



Gas book 35


7

Years In Business (YIB)



LIC premium receipt/ policy



Valid Voter ID



Sales tax certificate



Service tax certificate



Shop & establishment certificate



Excise duty certificate



TDS certificates



Partnership deed (Registered / notarized) / MOA



Document issued by a government agency



IT Returns


Sales tax certificate



Service tax certificate



Shop & establishment certificate



Excise duty certificate



TDS certificates



Partnership deed (Registered / notarized) / MOA



Company PAN Card



Document issued by a government agency



IT Returns - should mention current business type (ITR filling date to be considered as YIB date and 36


not assessment/ financial year) 

Current Account opening date under same business name



Financial/ Banking: Last 3 years Income Tax Return is required. ITR must carry the ward no where it has been filed and also the serial reference number for filing. Difference between last 2 ITR filling date has to be minimum 6 months Mandatory. Audited Annual report, Tax audit report with annexure for last 3 years is required in cases where TO >=60 Lacs. Other documents required are audited annual report, Tax audit report with annexure for last 3 years is required in cases where TO >=60 Lacs. Statement of Income for tax computation, P&L Account & Balance sheet for last 3 years, current year financial provisional till date / latest VAT Return Bank statement for latest 12 months of the customer‟s primary banking should be submitted. If more than 1 bank account is there, then all bank accounts for the concern to be obtained. Customer having only saving account (does not have CC/OD account) not to be considered.

Average Bank Balance (ABB): To be prepared for last 12 months for day end balances on 1st, 4th, 10th, 15th, 20th, 25th of the month. For CC/OD account day end

37


balance to be total limit provided minus utilized amount on that date. Statement of Account (SOA) for loan repayment if available should be provided by the customer.



Verification Documents: For the KYC documents provided by the customer, verifications are carried out by authorized agencies on behalf of SCUF to authenticate the documents/details. Details of the verification documents are stated below.

i.

CIBIL:

CIBIL report is fired basis customer name, Date of Birth (DOB), PAN card number/Passport Number/Voter ID, Contact and address details. Once customer details are input CIBIL gives a detailed report of the credit cards and loans availed by the customer. Details such as EMI bounce, DPD, Write off, Settled. Etc.are all mentioned in CIBIL. ii.

Residence Contact Point Verification (CPV):

Residence CPV is the verification of the customers residence address. Customer‟s standard of living is known by this report. If during visit, customer house is locked then details can be confirmed by the neighbours.

iii.

Office CPV:

Office CPV is the verification of the customers office address. Customer‟s business, office structure, availability of stock, etc are verified in this report.

38


iv.

Fraud Control Unit (FCU):

Customers latest ITR, bank statements, KYC documents are sent to the FCU agency for Fraud Check. The FCU agency will check the authenticity of the documents and verify whether the given document is a fraud or genuine.

v.

Tele-verification Report (TVR):

In this report the contact number of the customer is verified.

vi.

Trade Reference Check (TRC):

TRC includes two independent references and two references given by the applicant. The Status of all the above verification reports should be positive.



Property Papers (in case of LAP) i.

Valuation reports:

Valuation of property is an important process for mortgage deals in order to determine the Fair Market Value (FMV) of the property. This report is prepared by an empanelled agency approved by SCUF. The report covers two main factors i.e. Value of the property (area of the property/land considered as collateral * current market value of property/land ) & detailed information about the property

(construction/ structure details, current age of property, estimated future life of property, etc). Thus valuation is an important parameter as risk on exposure will be

39


based on the value of the property accessed. This report will also include photographs of the property.

ii.

Legal Report:

Legal opinion from the empanelled lawyer is critical and an important process where the property is offered as collateral security to ascertain the following: i.

Clear and marketable title of the property without any encumbrance.

ii.

The actual owner of the property.

iii.

List of the original documents required for ceasing ch arge on the property.

iv.

Any other restrictions/state laws restricting charge and mortgage on the property.

iii.

Title search report:

Credit officer to submit following indicative documents to empanelled lawyer for conducting title search on the propert y and opine on the same. i. ii.

Latest sale deed executed in favor of borrower, duly stamped and registered. All previous chain of documents showing ownership transfers for the property.

iii.

Property tax receipt- latest.

iv.

Share certificate, if the society is formed.

v.

Any other documents required by the lawyer. The above documents to be collected in copies and should be submitted to the

lawyer. On receipt of the above indicative documents, the empanelled lawyer to conduct title search of the property offered as collateral and opine in the format 40


provided about the title of the property and whether the same can be acceptable as collateral security for SCUF. The title search has to be conducted for the last 13 years.

iv.

Vetting Report:

Based on the title search done by the lawyer, necessary property documents as suggested by the lawyer to be taken from the customer in original. These original documents should be checked and vetted by the empanelled lawyer in SCUF branch. Lawyer has to submit vetting report on his letter head which ensures that all the necessary property documents as required for collateral is complied with. This report has to be signed by the lawyer and countersigned by the Branch Manager/ Credit officer of SCUF.

v.

Property Papers:

This includes all the relevant property documents as reported by the lawyer.



Loan Documents:

i.

Sanction letter:

Sanction letter is a document that has details about the borrower all the details listed in this letter should match with those documents submitted by the customer in the Login Stage. This letter also enlists details about the loan amount sanctioned to the customer, the tenor of the loan, rate of interest, processing charges, pre installment interest, pre payment charges, cheque bounces charges, late payment charges, cheque swapping charges, stamp duty 41


charges, insurance, collateral details in case of LAP and the EMI payable by the customer. th

Emi of Shriram City Union Finance hits on the 5 of every month. Sanction letter has to be signed by the Borrower, Co-borrower and the Credit Manger of SCUF. ii.

Deduction Letter:

Deduction letter is a document that states the Net amount receivable by the customer after deducting the processing fees, stamp duty charges and Pre EMI charges. Deduction letter has to be printed on the customer‟s company letter head. This letter is to be signed by the customer.

iii.

Application Letter:

Application letter is a documents submitted by the customer which states details about documents submitted by him while applying for the loan. This letter is printed on the company‟s letter head and has to be duly signed by the main applicant.

iv.

Co-borrower Letter:

The co-borrower letter has to be signed by all the co-applicant of thelo an structure.

v.

Post Dated Cheques/ Electronic Clearing System (ECS):

Customer has the option to opt for either the PDC mode of repayment or ECS mode of repayment. In case of PDC post dated EMI cheques are signed and given by the customer. Number of PDC= Tenor (period for which loan amount sanctioned). E.g. IF EMI is Rs.

75456 and the tenor is 36 months then the customer will give 36 PDC‟s addressed to SCUF with the EMI amount mentioned. 42


Apart from this the customers also has to submit Security Post Dated Cheques (SPDC). In case of ECS mode of repayment the customer has to submit the following: a) ECS Mandate Form: In this form MICR code, Account number, effective date, tenor and installment amount has to be updated. The form should also be signed by the customer and the repayment bank. b) EMI amount Cheque: This PDC has the first EMI amount. c) 3 EMI’s Clubbed Amount Cheque:

The amount on this cheque is equal to EMI multiplied by 3. Full Loan amount cheque:

This cheque has the Gross Loan Amount. d) 50% of the Loan amount cheque:

The amount on this cheque is equal to 50% of Gross loan amount. e) 25% of the Loan:

The amount on this cheque is equal to 25% of Gross loan amount. f) Cancelled cheque:

The cancelled cheque is sent along the ECS mandate form so that the MICR code account number can be verified. vi. Enterprise Finance Agreement:

Enterprise Finance Agreement is a booklet which is duly signed by SCUF and the customer. This agreement contains all the legal aspect that has to be followed by the customer. It also has all the loan details, mortgage d etails.

43


FACTORS THAT LEAD TO RJECTION OF FILES

Many SME‟s apply for loan at SCUF but not all files are selected and sanctioned with the loan amount requested by the customer. Even before the underwriters recheck the files and the Credit Manager goes ahead with the Personal discussion there are many files that are rejected in the LOGIN stage by the Credit Admin team. The reasons for the same could be KYC norms, Financial/Banking norms not being met.

At times the files can also be rejected after the Personal Discussion stage. Case lead to the rejection if the business activity not sighted at the time of visit, something suspicious found during the visit, customer comes out to be overaggressive and reactive on normal discussions, if the office set up is in shady area or in an area which could be a challenge for the collection. Here the main reasons for rejection could be that the underwriters and the Credit Manager are not satisfied with the customer‟s answers in the PD or at times the customer negotiates with the Credit Manger regarding the Emi amount, the rate of interest and the tenor. If the customer is unhappy with discussion he can take a step back and decline his request for a loan.

This rejection of files may be due to many reasons and to understand the reasons for this scenario, I have analyzed 50 Customer application files that came in at SCUF for the month of June. And below are major reasons for which files get rejected. We can also observe common traits for rejection from the below analysis.

A graphical representation has been used to explain reasons for file rejection: 44


As per the analysis done on the 50 files it was found that the main reasons for the rejection are due to Financial, Banking, CIBIL and Policy norms not being met. The „Financial norms not being met‟ is a major factor for file rejections.

Reasons For File Rejection

Financial 15%

33%

Banking

27%

Cibil

25%

Policy

45


Let‟s look into a further breakup of the factors that lead to these rejections.

The below diagram gives a further breakup of Financial that is one of the main reasons for file rejection. 20

19

18

Financial 17

16 14 14 12 12

11 10

10 8 6 4 2 0 CP

NP

Drs Days

Sales T/o

Crs Days

GP

The following is a detailed explanation for the reasons that lead to file rejection:

1. Cash Profit (CP):

46


CP is a very important aspect that is viewed in the financials of the applicant as this gives the actual profit or the actual cash inflow after deducting all the cash expenses and adding all the non-cash expenses to the Net Profit (NP) of the firm. If there is a dip in the CP of 5% or more in the previous three years the file is rejected. 2. Net Profit (NP):

Net profit is obtained after deducting all the Financial, Administrative and selling expenses of the firm from the Gross Profit (GP) of the firm. This value is obtained before all the taxes and interest are paid hence, it is important that NP should have an increasing trend. Even if there is a dip in the NP for 5% or more the file is rejected.

3. Debtors Days:

Debtor day‟s ratio measures how quickly cash is being collected from debtors. The longer it takes for a company to collect, the greater the number of days debtors. Debtor Days =

Debtors Total Sales

x no of days (365)

If debtors days for the firm is more than 120 days the file is rejected as it clearly indicates that the firm cannot recover cash from the debtors quickly and hence it can also be difficult for the firm to pay the EMI very month as the cash flow is very slow.

4. Sales Turnover:

Sales turnover is often expressed in monetary terms but can also be expressed in terms of the total amount of stock or products sold. 47


Turnover trend plays an important role in credit decision. If the turnover shows a declining trend year on year then it is a serious concern and must be reviewed in detail. We should have a justification on declining trend and incase same time if profits are also showing the dip then such cases are avoidable. If the turnover has a decline of more than 10% in consecutive three years the files is rejected. But if only one year has a dip in sales and the firm has again increased its sales in the next year clarification can be asked from the same.

5. Creditor Days:

Creditor days ratio measure the total number of days the firm takes to pay his creditors. Creditor Days =

Creditors Total Purchases

x

no of days (365)

Higher the creditors days, indicates the inefficiency of the firm to pay off his creditors and hence it is inferred that the firm will not be in a position to pay SCUF EMI in the near future.

6. Gross Profit (GP):

Gross profit is the profit earned by the firm after deducting direct ex penses from total sales. Files which have a decline in the GP of more than 10% are rejected. This leads to a further decline in the Net Profit and Cash Profit.

48


The below diagram gives a further breakup of Banking that is another factor that leads file rejection.

49

Lending Process AT Shriram City Union Finance (SCUF ) 40

35

Banking

30

25

20 35 15

10 15 5

10 3

0 Cheque Bounce

Min Bal

Over Utlisation T/o not equal to Financial

0 Negative Bal

0 Transfers

The following is a detailed explanation for the reasons that lead to file rejection:

1. Cheque Bounce:

If a firm‟s bank account does not have sufficient funds to pay off the debts it leads to cheque bounce. A cheque bounce indicates that the firm does not maintain a minimum cash balance. Hence the files are rejected as the customer must have sufficient balance to clear EMI on the date of presentation.

2. Minimum Balance:

50


It is necessary that the customer maintains a minimum bank balance.

3. Over Utilization:

Customers avail for CC/OD facility. This facility has a limit i.e the customer cannot exceed this limit. Hence if it found that the customer continuously over utilizes this facility in a period of one year the file is rejected.

4. Turnover not equal to sales:

Usually it is assumed that the customer‟s business dealings are done through banking and with the help of the same we try and establish the recent turnover of the company. Total turnover as per provisional will in turn reflect in 12 months banking assuming all the payments are remitted to the customer‟s account within stipulated time frame. We also acquire the VAT returns wherever possible to establish the recent sales figure. In rare cases the business also has the cash proportion where these basics cannot be implied. Therefore, if the banking turnover does not support the projected figures provided by customer then it should be questioned and in case of unsatisfactory explanation the case should be declined. The total sales should be equal to the Total banking turnover. It can exceed the sales but it cannot be less than the sale. If it is less it should be confirmed, as cash transactions also happen.

51


The below diagram gives a further breakup of CIBIL.

30

CIBIL

25

20

15 27

10 16

15

5 5 3 0 DPD

Overdue

Low Score

Write off

Suit File

52


The following is a detailed explanation for the reasons that lead to file rejection 1. DPD:

If continuous DPD‟s are seen in the CIBIL report the files rejected.

2. Overdue:

Applicant should not have any overdues from any financer at the time of SCUF loan offering. 3. Low Score:

If a score of less than 750 is seen the files is rejected. 4. Writeoff:

If CIBIL shows loan Writeoff the files are rejected. 5. Suit File:

If CIBIL shows a loan status as suit file, the file is rejected.

53


The below diagram gives a further breakup of Policy 16

15 14

14

POLICY

12

10

8

6 4 4

3

2

0 DTI

DSCR

Listed Firm

Neg Profile

The following is a detailed explanation for the reasons that lead to file rejection 54


1. Debt To Income (DTI):

If the DTI is more than 75% of the turnover, the file will be rejected.

2. Debt Service Coverage Ratio (DSCR):

DSCR should be between 0.85 to 1.10 if it is less than this ratio the file is rejected. 3. Listed Firm:

The firm that is to be financed should not be listed firm.

4. Negative Profile:

If the customer comes under the negative profile list as per SCUF Credit Policy, the case will be rejected. Few examples of negative profile are Politicians, Police Officers, liquor shop owners, Private money lenders, Journalist, Beauty parlor, etc.

55


DELINQUENT CUSTOMER ANALYSIS – MARKET VS SCUF

The failure to accomplish what is required by law or duty, such as the failure to make a required payment or to perform a certain action. A delinquent is an individual or corporation with a contractual obligation to make payments against a loan in a timely manner, such as through a mortgage, but payments are not made on time. In the case of a mortgage, the lender can initialize foreclosure proceedings if the mortgage is not brought up to date within a certain amount of time.

Sr. No.

COMPANY

1

Shriram City Union Finance (SCUF)

2

DELINQUENCY PERCENTAGE

0.53%

Dewan Housing Finance Ltd.

56


(DHFL) 3

1.30%

Housing and Development Board

4

(HDB)

11.56%

Religare Finance

1.61 %

14.00%

DELIQUENCY PERCENTAGE 12.00%

11.56%

10.00%

8.00%

6.00%

4.00%

2.00%

1.61%

1.30% 0.53%

0.00% Housing and Development Board (HDB)

Religare Finance

Dewan Housing Finance Ltd. (DHFL)

Shriram City Union Finance (SCUF)

57


The following analyses were done to on the delinquency rate for the above mentioned companies: Risk appetite on delinquency vary bank to bank/financial institute to institute. Organizations generally set their delinquency parameters along with the internal rate of return at the inception or every financial year as per the business demands. High internal rate of return mean the higher risk. Following are the few reasons which determine the business delinquency from the perspective of bank or financial institutes.



External Factors



Internal Factors

External factors are typically those which are not in a control of any banks or financial institute. Following can be termed as external factors.



Economic slowdown and recessions where customer looses the job or suffers heavy losses in business.



Natural calamity or an accident where customer or family member face a permanent physically disability or illness where incur major medical expenses.



Government policy change on interest rates or other loan terms. Internal factors are typically which are in control of banks or a financial institutes and they are same follows. 

Customer faces a service issues with the bank or financial institute where he rebel against his emi payment or disown the responsibility of liability.

58


Due to the lack of communication and wrong commitments from banks/financial institutes end up leading to a problem to customer and same become a cause of non payments.



Wrong assessment or an underwriting on loan can lead to the non-payment of the emi‟s from customers end.



Customers intentions of availing a loan for fraudulent activities lead to the delinquency.

FINDINGS AND INTERPRETATIONS 

The main factors considered while sanctioning a loan are not only the banking, financials, statement of accounts, etc but the integrity of the customer is of utmost importance in the entire lending process.



Not all files that come in through the DSA and the DST are approved and funded. Because of many reasons the files are rejected and only few file that meet the companies norms are funded with the loan requested by the customer.



I learnt that every company has a risk appetite, because of which they are able to tale certain risk while funding their customer. Even SCUF has a risk appetite but looking at the delinquency percentage I do not feel that they have taken a good amount of risk while funding their customer as this may have lead to decreasing their expected increase in sales.



Even if certain customers do not meet the norms/ policy requirements of the SCUF the credit manger takes a waiver for such cases and such customers are then funded with the loan amount that was requested. 59


I also noticed that not all files rejected by SCUF, at times the customer himself reject the proposal given by SCUF. The reasons may be better offering from competitors, customers may not always agree with the terms and conditions put forth by SCUF.

60


RECOMMENDATIONS



SCUF has its Business Loan policy defined for upto 20 lacs. During my internship at SCUF I noticed that SME‟s are also being financed for more than 20 lacs, hence the policy should also define separate parameters for loan amount more than 20 lacs.



Being an NBFC a lot of paper work is seen especially the documents that are taken from the customer. These are then sent to the archival team in Chennai once the loan is sanctioned. But if there is a delinquent customer or if certain customer document has to be rechecked/retrieved, the operations team will have forward a retrieval request to Chennai. This proves to be a very time consuming activity and chances of documents getting misplaced are high. Hence, SCUF should create a server where backup i.e. soft copies of the customer files are kept for easy reference.



SCUF should promote their products on television, business magazines, etc, so that they are more visible in the market. Competition is increasing among Loan providers. Moreover, the Internet is the best medium to spread awareness of the company and its products. However SCUF advertisements are not wide spread on the Internet as it should be. Hence advertisements should be made on sites like money control, yahoo finance, etc as it will help to gain the attention of many.



The UNO software used by the operations team should be more user friendly. As the details of the customer entered in one page of the software has to be entered again manually in the pages this is a rather cumbersome task. Hence they should be an option 61

Shriram Group

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