Lending Products for Individual

Borrowers

Subject
Credit Management
Submitted To:
Sir, Afzal Mehmood
Submitted By
Muhammad Younas
Roll No.
MBK-M-12-03

MBA (B&F) Morning

6thsemester

ALFALAH INSTITUTE OF BANKING AND

FINANCE
BAHAUDDIN ZAKARIYA UNIVERSITY
MULTAN

Introduction:
In Pakistan all banks & DFIs works under the supervision of the State Bank of Pakistan, the four
major sectors in which SBP has divided banks operations are Corporate, SME, Agriculture and
Consumer. SBP provide regulations according to which all banks should work & continuously
keep a track that banks are complying through the regulations or not.
In recent years, Consumer Banking has made tremendous progress and has played a positive role
in boosting the economy and in meeting the needs and requirements of the consumers. Whether
large or small bank, multinational or local, each one of them is geared towards making its mark
in an already competitive environment that is the outcome of consumer banking. The growing
economy and further improvements in the level of household income have created many
opportunities for consumer banking.

Consumer Financing:
Financial difficulties are all too common in this storm-tossed economy and finding a way out can
be an extreme burden. Frequently individuals are in need of funds to pay for expenses or
purchase of assets, which they cannot afford to pay at present. One of the only solutions is to
apply for financing from bank and even then you could run into some obstacles.
The term consumer financing refers to any kind of lending to consumers by the banking sector
and financial institutions. In simple words, it is a type of service that is designed to provide the
individuals with necessary finance for personal purchases ranging from buying a car, shopping
purchases, to buying a house. The concept of consumer financing is based on the need for an
institutional arrangement that provides consumers with financing support to enhance their
consumption and, as a result, improve their standards of living.
According to the Regulations, consumer financing means any financing allowed to individuals
for meeting their personal, family or household needs. Thus, corporate or commercial
consumers are excluded from this definition.
Banks have requirements for individuals applying for bank loans. They generally look at the
trend of the individuals income, stability of cash flows, expenses and the individual ability to
sustain the loan and the cost.

Lending products for individual customers

Categories of loans:
To ensure the safety of funds lent, the first and most important factor considered by a bank is the
capacity of borrowers to repay the amount of loan; the bank therefore, relies primarily on the
character, capacity and financial soundness of the borrower. But the bank can hardly afford to
take any risk in this regard and hence it also has the security of tangible assets owned by the
borrower. In case the borrower fails to repay the loan, the bank can recover the amount by
attaching the assets.
It can sell the assets offered as security and realize the amount. Thus from the view point of
security of loans, we can divide the loans into two categories:
a)
b)

Secured/assets- based loans

unsecured/clean loans

Secured loans/clean loans:

These are those which are granted against the security of tangible assets, like stock in trade and
immovable property. Thus, while granting loan against the security of some assets, a charge is
created over the assets of the borrower in favor of the bank. This enables the bank to recover the
dues from the customer out of the sale proceeds of the assets in case the borrower fails to repay
the loan.
There are various types of securities which may be offered against loans granted, but all of those
are not acceptable to the banks. The types of securities generally accepted by the bank are the
following:

Tangible assets such as plant and machinery, motor-van, etc.

Documents of title to goods, like Railway Receipt (R/R), Bills of exchange, etc.
Financial Securities (Shares and Debentures)
Life-Insurance Policy.
Real estates (Land, building, etc).
Fixed Deposit Receipt (FDR).
Gold ornaments, Jewellery etc

Unsecured loans/asset-based loans:

It is a kind of loan that is issued and supported only by the borrower's creditworthiness, rather
than by a type of collateral. An unsecured loan is one that is obtained without the use of property
as collateral for the loan. Borrowers generally must have high credit ratings to be approved for
an unsecured loan.
Because an unsecured loan is not guaranteed by any type of property, these loans are bigger risks
for lenders and, as such, typically have higher interest rates than secured loans (such as a
mortgage). Although the interest rates are higher, the rates may still be lower than those of credit
cards. Unlike mortgage loans, the interest on an unsecured loan is not tax deductible.
An unsecured loan may be a good option for individuals who do not have enough equity in their
homes to be approved for a home equity loan. An unsecured loan may have a fixed interest rate
and be due at the end of a specified term, or it can exist as a revolving line of credit with a
variable interest rate.

Lending products under secured loan category

1. Auto loans
a) Car financing
b) Car leasing
2. Home loans/mortgage loans
3. Consumer durables

Auto Loans:
A car loan is a personal loan for the specific purpose of buying a new or used car. You borrow an
amount of money that you agree to repay within a certain period of time (called the term). This
can vary, but is usually 12 months to 5 years. You will have to sign a credit contract which will
specify the amount borrowed and how you will repay it.
In Pakistan auto loans are purchase of brand new or used, imported or local cars for private use.
Auto financing and auto leasing both facilities are offered by most of the banks. Salaried
Persons/Self Employed Professionals / Business Persons who meet the terms and conditions to
qualify for the finance are eligible for the loan. Some banks are also offering both variable rate &
fixed rate options for auto loans.
There are two types of auto loans being offered by the banks:

a) Car financing:
Car financing is a type of loan in which car is registered under the name of borrower and is
mortgaged to the bank as long as the consumer pays off the amount borrowed from the bank.
b) Car leasing:
In case of car lease, the car is registered in the name of the Bank and the original papers are also
in the name of the bank. Most of the banks offer car financing instead of leasing.
The financier buys the car and then leases it to the customer. This offers the immediate use of the
car with little or no capital outlay. These leases are available for individuals and businesses
where the car is for business purposes. The customer pays fixed, monthly rental payments and is
financially responsible for the maintenance and trade-in residual risk of the car. At the end of the
lease period, the motorist is given the option to refinance, return, sell or buy the car for the
residual amount.

Upside:

Immediate use of the car with little or no capital outlay.

Repayments are generally tax deductible, but GST is payable
Lease payment is made from pre-tax rupees.
Interest rate is fixed and is low because finance is secured against the car.

Home Loans:
The loans taken for Buying, Building or Renovating of house/land are classified as home loans.
For home loans both variable rate & fixed rate options are also available. The maximum duration
offered by banks for home loans is generally twenty years thats why banks conveniently give
loans to permanent employees of any firm to ensure strong repayment ability.
Home Loan is one of the fastest growing retail and mass banking area. It forms an important part
of the countrys priority in 5 year plans. Almost all public and private sector banks are offering
home loans at attractive rates for purchasing their dream home. Home loan usually cover a
variety of types. All Banks have come out with home loan products studded with features and
value additions that make the schemes not only attractive but also serve as a substantial source to
the borrowers for owning their dream home.

Characteristics of home loans:

The interest paid on a loan is deductible from 'income from property', even if it has not been paid
during the year.

Tax concessions make home loans more attractive than other loan products.

Home Loans are the consumer loans.

Home loans are long term loans provided by various banks.

These are large amount loans which provide financial support to the people who want to
purchase their dream home.

Home loans are secured loans

Consumer durables:
Consumer durables are a category of consumer products that do not have to be purchased
frequently because they are made to last for an extended period of time (typically more than
three years). They are also called durable goods or durables.
Consumer Durable loan is a finance option for purchase of household items like Washing
Machines, Refrigerators, AC, Color TV, LCD, Microwaves etc.

Lending products under unsecured/clean loan category

1.
2.
3.
4.

Personal loan
Running finance
Credit cards
Deposit accounts

Personal loan:
Personal Loans are generally unsecured type of loans but in certain cases when the amount of
personal loans increases the normal limit its remaining portion must be secured. Personal loans
include loans for the purpose of education, marriage, purchase of consumer durables, furnishing,
traveling, etc. Generally the limit for personal loans is maximum Rs.500, 000/Financial institutions offer a variety of personal loans. There are fixed interest rates, where the
monthly payment stays the same for the term of the loan. Variable interest rates may seem more
attractive at first, because the initial interest rate is usually lower than fixed rates. However, the
banks can adjust variable interest rate loans and if the interest rate rises, so does your monthly

payment. Unsecured loans do not require collateral from the borrower. If the borrower fails to
pay, the bank has nothing to repossess.
Most banks offer a variety of application methods including Internet, phone and hand written
applications at a branch office. Incentives may be offered to individuals to set up payments
automatically deducted from a bank account each month. Other banks send monthly statements
or provide a book of payment coupons. Internet banks may offer to direct deposit the amount
borrowed into a borrower's account at any financial institution, or pay off other debts directly.

Running finance:
Running finance facility is the form of lending where customer is allowed to borrow money from
a banker up to a certain limit either at once or as and when it is required. If it is availed and
withdrawn at different intervals and paid back on various occasions then the mark up levied there
on is worked out on daily product basis. The formula to work out mark up on daily product basis,
as per running finance, is calculated as per the following practice:
Balance outstanding X number of days X rate 365 in a calendar year
The markup in running finance facility is a revolving credit. It renews until the exhaustion of
amount of credit, the customer has the facility to draw it again when the limit is reached. Credit
is automatically reinstated after each drawing, within the limit. The limit is renewable credit,
until its full utilization.
Revolving credit is defined in the dictionary of banking and finance is a system where someone
can borrow money at any time, up to an agreed amount, and continue to borrow by still paying
the original loan. In simple terms it is defined as the loan that allows the customer to pay less
than the total amount due every month. Whatever balance is carried forward into the following
months is subject to the agreed upon finance charge. There is no charge for line of credit not in
use.
Thus it is observed that, when a loan, in the shape of running finance, is sanctioned up to a limit,
the customer can withdraw amounts according to his own choice. And there is no charge amount.
There are frequent transactions in such accounts as, to the payments and withdrawals; therefore,
markup on such transactions is leviable on daily product basis.

Credit-Debit Cards:
Credit cards include any card that a customer can use to make payments on credit, whereas ATM
cards are debit or cash cards used for transactions on bank account using cash machines. The use
of ATM and credit cards has increased manifold in Pakistan. As we said that credit Cards mean
cards which allow a customer to make payments on credit. Supplementary credit cards are
considered part of the principal credit card. Initially only foreign banks are offering credit cards
in Pakistan but now many local banks is also offering credit card facility. Credit Card is covered
by three networks VISA, Master Card & American Express.
Debit cards are issued to account holders of any bank in Pakistan almost all the banks are
offering debit card facility the amount used by the debit card holder is directly debited from the
account of the card holder. Debit cards are accepted at all ORIX Network in Pakistan and it can
also be used as ATM cards which are covered by 1-Link & MNET network in Pakistan.

Deposit Accounts:
All the commercial banks are offering different kinds of deposit accounts for individuals these
account ranges from customer to customer to fill the need of every type of customer. Few of the
accounts provide high interest while some pay low interest & some dont pay any interest. Some
major categories of deposit accounts are;

Current Accounts
Saving Accounts
Foreign Currency Accounts
Business Accounts
Term Deposits Accounts

Consumer Financing & Economic Growth:

Lending through credit cards, personal loans, auto loans, loans for durables and housing finance
emerged main streams of consumer finance. They shaped domestic demand and lending strategy
by the banking sector in quite subtle ways. Consumer finance has also brought social change
through higher circular of money and relaxation of income constraints for borrowing particularly
among those middle class segments that were eager to become part of growing economy and
keen to benefit from economic growth. Without consumer finance being in the driving seat of the
banking sector, a large number of people would not have benefited.

Significance impact on Consumer:

In a generic sense, institutional arrangements that provide consumers with financing support to
enhance their consumption and, as a result thereof, improve their standards of living, should fall
within the broad definition of Consumer Finance. These could range from Credit Cards, to
finance and operating leases, to housing finance. But the semantics of financial markets
generally tend to exclude housing finance from this range treating it as a distinct financing
product essentially because of its long-term nature.