By Abdul Rauf Manager Centralized CIU- Secured-House Finance -Consumer Finance Group

Bank Alfalah

The Caring Bank

AR > April 14-2nd PPT 1

ByAbdul Rauf

Manager Centralized CIU- Secured-House Finance -Consumer

Finance Group

Risks Involved in Housing Finance Processing

Bank Alfalah

The Caring Bank


CONTENTS

A. Case Processing

B. Risk EvaluationC. Proposal Structuring

D. Credit Analysis1. Basic “C’s’’ of Credits2. Broader Review Principles & Policies

E. Prudential RegulationsF. Decision

Bank Alfalah

The Caring Bank


A – CASE PROCESSING Documents Checklists - Compliance of basics as per Bank’s

Policy (eligibility criteria's, mandatory documents & other requisites) & Prudential Regulations

Broad Eligibility Criteria Pakistani Nationals (Resident & Non-Resident – Both) holders of Pakistan Origin Card

are not eligible since were National and currently not. Age normally between 23 years to 60 years (vary for salaried and business class and from

bank to bank) at the time of application, subject to maximum age of 65 years at maturity of finance.

Min. Household Income (Documented & Verifiable) – Minimum take home income Rs.100,000 p/m- can be changed from time to time.

Job Tenure - Permanent salaried employees having total employment of at least 2 years and contractual employees having total employment of min 3 years.

Self employed - Practicing and conducting business for at least 3 years with satisfactory track record.

Business Individuals- Practicing and conducting business for at least 5 years with satisfactory track record.

Area – Easily marketable. Property Size – Preferably not below 5 Marla or equivalent and value not below Rs.5.0 M. Min. Customer Equity – 30% of the evaluated value should be contributed.

Bank Alfalah

The Caring BankCASE PROCESSING

Documents for Salaried

Complete ApplicationProcessing Fee Copy Of CNIC 2 Latest Photographs Six Months Bank Statements Basic Borrower Fact Sheet Personal Financial Statement Employment Certificate with Date of Joining, Current Designation and Gross Monthly Salary Latest Salary Slip attested by employer Employment Verification Form Repayment Schedule of Term Loans KYC Photocopies of property documents along with agreement to sell Property Visit Report Agreement to sell (In case of purchase case)


Bank Alfalah

The Caring Bank

Documents for Business Individuals/ Self Employed ProfessionalsProcessing FeeComplete ApplicationCopy Of CNIC 2 Latest Photographs 1 Year Bank Statements Copy of NTN Certificate 3- Years Tax Returns Sole Proprietorship Certificate Partnership DeedUndertaking from Remaining Partners Memorandum & Article of Association, Form-29, Form-C & Form-A (Latest) in case of Private Limited Copies of CNIC of Directors in case of Private Limited Company Signature Verification Form Basic Borrower Fact Sheet


CASE PROCESSING

Bank Alfalah

The Caring Bank

Personal Financial Statement Repayment Schedule of Term Loans KYC Property Visit Report

Documents for Expatriate Pakistanis

Complete Application Processing Fee Copy Of CNIC- attested by Pak. Embassy/Notarized Copy of Passport & Visa/Iqama attested by Pak Embassy/Notarized Credit History Report from Credit Rating Agency 2 Latest Photographs 1 Year Original Bank Statement (Salary Account) Signature Verification Form 3 Year Tax Returns Personal (Not Applicable in Middle East)


CASE PROCESSING

Bank Alfalah

The Caring Bank

For Rental Income Rent Agreement ( duly verified) along with copy of property

documents

For Agriculturist Copy of Property documents of Agri land along with Agri income

verification


CASE PROCESSING

Bank Alfalah

The Caring BankCASE PROCESSING

Initial checks initiated CNIC verification through NADRA (Verisys) E-CIB Data Check

Verifications Internal – Tele-calls to Residence, Office & 2 references External - Genuineness of documents & personal

information Asset related

Purpose of asset usage should be Personal - (Refer Pr Reg. – Clause A-3-iii)

Valuation & appraisal of property through independent external agencies approved by SBP

Legal opinion of the property


Bank Alfalah

The Caring BankB- RISK EVALUATION

The facilities shall be subject to Bank’s Risk Management process. As per the Prudential Regulations of the State Bank of Pakistan the process may include:

Identifying source of repayment Assessing customer’s ability to repay Past dealings with the Bank/s Net worth of applicant/s Information obtained from Consumer Credit Information Bureau

In addition to above, the primary risks, in the real estate financing are centered in the title of property, valuation, creation of enforceable mortgage and erratic price fluctuation in the real estate market.


Bank Alfalah

The Caring BankRISK EVALUATION

In order to control and manage the risks, following stipulations but not confined to the same, may be considered:

Verifications of the borrower's income and other facts given in the applications

E-CIB Data Check Established source(s) of repayment and consistent

inflow Income Estimation Report where required


Bank Alfalah


Cash inflow and capacity to repay may be ascertained from

Bank statement and salary slip/certificate (in case of salaried person) Bank statement for one year, tax returns etc. for business

individual/professionals

Confidential report from other bank(s) / verification through Data Check System / Credit Reference Agency may also be done in addition to above

Total monthly amortization payments of consumer loans shall always be subject to SBP regulation

The facility would be subject to stress test in light of SBP guidelines


Bank Alfalah


Past or present over dues and defaults by the applicant if any (whether settled or pending) will be viewed subjectively and if required, customer explanations and clearance letters would also be obtained. Realistic valuation report from the bank's approved valuator on the property would be obtained. BOQ Report for construction cases. An estimate from the customer in case of improvement is to be obtained and verified by the approved surveyor/architect. Genuineness of the title documents should be vetted by the approved legal counsel.


Bank Alfalah


Property is not in the name of minor. In case of joint owners, none of them are minor(s) or any other person with no legal recourse.

Apart from quantitative criteria to be used for evaluating loan applications, the Bank will also take into consideration subjective factors (qualitative factors) which may be used to assess the applications. Quantitative criteria does not necessarily evaluate profile of applicants, therefore, subjective evaluation (nature of job, nature of business condition of earnings and near future threats/prospects for business etc.) of applicant is also necessary.


Bank Alfalah

The Caring Bank


C- PROPOSAL DRAFTING

Points to keep in mind while compiling & drafting loan proposal:

Compliance of basic eligibility criteria's Compliance of Prudential Regulations Type of loan & related aspects Verification results / remarks Debt Burden cushions Credit Score - to assess the eligibility scale Allowable - Financing tenor enhancement, suitable

Mark up rate options and Grace Period options (where applicable) used to assess the possibility of enhancement in loan eligibility

Bank Alfalah

The Caring Bank


D- UNDERWRITING / CREDIT ANALYSIS

CREDIT ANALYSIS – Means

Firstly - Evaluation of a loan application to decide whether it conforms to all the eligibility criteria’s required for that loan product & to decide on the case based on:

Verification of information & documents Review of credit history of the borrower Repayment capacity - current consumer exposures /

limits Nature of asset, its value and equity injection

The analysts should work independent of sales & should have the will, power and decision authority over the case

Bank Alfalah

The Caring Bank


CREDIT ANALYSIS

1. Basic “C’s” of Credit CREDIBILITY – Willingness to repay CAPACITY, - Sources to repay CREDIT- Ability to repay COLLATERAL

2. Broader review principles & policies Know Your Customer (KYC) Affordability Credit History Customer with No Credit History Clearly understanding customer’s requirement SBP Regulations Comprehension Recourse on delays / defaults Educating customer correctly at the initial stage Strong Verifications Net Worth of Individuals

Bank Alfalah

The Caring Bank


“C’s’’ OF CREDIT CREDIBILITY - Does the borrower has the reputation or

probability not to repay the loan ? – How to determine this: Nature of Profession Reputation Foreseeable probability of delay / default

CAPACITY: Does the borrower has the sources to repay the loan ? – How to determine this: Borrower’s Employment / Profession / Business Income,

Verifiability Type of Income Stability

CREDIT - Does the borrower has the ability to repay the loan

Review available credit history to know how well a borrower manages his/her current and prior debts through Existing history with the Bank E-CIB Data Check

Bank Alfalah

The Caring Bank


“C’s’’ OF CREDIT

COLLATERAl: What if the borrower does not repay the mortgage?

Collateral related recourse / aspects to look for: Type of asset, Value of the asset

Market Value Forced Sale Value

Probable Use of the asset – Personal or Commercial

Personal Equity / Stake A lower equity will erode in a volatile moving market, with

customer equity gone, he might stop paying A higher equity may not attract the customer to borrow

Bank Alfalah

The Caring Bank


BROADER REVIEW PRINCIPLES & POLICIES

Customer’s – KYC (Know Your Customer) -

Strong Verification of personal & income details

SBP Prudential Regulations - requirements should be thoroughly comprehended

Affordability Ability to continuously re-pay with potential of consistent

increase in income to offset – inflation and mark up rate increases & should have good cash or liquid investments to cover the off-season installments

Credit History - Banks own experience Market information Direct confirmations E-CIB & Data Check

Bank Alfalah

The Caring Bank


BROADER REVIEW PRINCIPLES & POLICIES

Customer with no previous Credit History; They may be assessed both ways and should be handled

carefully since they might be conscience re-payer but unaware of consequences

Net Worth of Individuals General Knowledge Assessment from available documents

Clearly understanding customer requirement If the customer is going to use the property for (personal use,

rent out or use for commercial purposes, etc.)

Educating and advising customer correctly at the initial stage The sales team should advice the borrower/s all the features,

rates, penalties so they can make an informed decision with regard to entering into financing

Bank Alfalah

The Caring Bank

E-PRUDENTIAL REGULATIONS-HOUSE FINANCE

R- 1- No Preferential terms and conditions allowed R –15 - Total monthly amortization payments of consumer loans,

inclusive of HF, should not exceed 50% of the Net Disposable Income R - 15 - Plot + Construct Cases, total sanctioned limit = up to 50% for

plot & remaining for construction in tranches R - 15 - A Realistic Construction Schedule obtained prior to allowing

financing for plot purchase R -15 - Construction financing structured for disbursement in tranches

as per BOQ R – 16 - Overall Debt to Equity Ratio doesn't exceed 85 : 15 R - 18 - Finance secured by Equitable or Registered Mortgage


Bank Alfalah

The Caring Bank

E-PRUDENTIAL REGULATIONS-HOUSE FINANCE

R - 19 - Property evaluated by Professionals Agency/ies R - 19 - Property title documents assessed by professional

lawyers (listed) R - 21 Transaction subjected to Stress Test viz a viz - Interest

Rates R - 22 Existing Finance, if overdue, is properly classified A-3-iii- Purpose of financing is residential Ops-1- Net worth of the borrower obtained Ops-2- Detail of existing Consumer Financing obtained


Bank Alfalah

The Caring Bank


F – DECISION

Approve or Decline

After receiving & reviewing all above related aspects of the loan, the analyst assesses the risks of the loan as a whole & decides

IN PRESENCE OF TIGHT CRITERIA FILTERS – IT BOILS DOWN TO SUBJECTIVE APPROACH –

Which may differ from person to person

Bank Alfalah

The Caring Bank


END OF PRESENTATION

THANK YOU

By Abdul Rauf Manager Centralized CIU- Secured-House Finance -Consumer Finance Group

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Transcript of By Abdul Rauf Manager Centralized CIU- Secured-House Finance -Consumer Finance Group