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Loan Life cycle
Banking

Lifecycle of Loans: Inside Bank story

You would have commonly read about Lifecycle of Loans from a customer’s point of view, but today let’s see what happens inside a bank when customer applies for a Loan and different scenarios which occurs inside a Bank’s loan department.

Request for Loan:

Lifecycle of loans always starts with request for loan from the customer.
When customer applies for a loan, Banks determine the amount that the customer can borrow and regular monthly instalment based on Loan product type and conditions which are affected by below factors:

  1. Debt burden ratio (DBR)
  2. Monthly income (salary-profit-pension-bonus)
  3. Minimum and maximum loan amount
  4. Minimum age and maximum age on maturity
  5. Interest rate
  6. Minimum and maximum loan period
  7. Minimum employment period
  8. Any other credit obligations that customer is committed to fulfill 

All these factors Banks take into consideration while determining and calculating allowed loan amount and monthly instalment in loan.
Banks also calculate loan net balance that customer will take after deducting administrative charges, fiscal stamp duty, CIBIL score fee and any additional charge related to loan product.

Submission of required documents.

Bank’s Customer service representative will receive required documents from customer, make sure that documents meet legal requirements and product conditions and input customer data to the Banks systems.

Below are validations which most Bank systems have:

  • Debt burden ratio (DBR): (loan amount with Monthly income (salary-profit-pension-bonus) and any other credit obligations that are inputted to the system)
  • Maximum age on maturity (Birth date with loan tenor and maturity)
  • Minimum age
  • Then, Minimum and maximum loan period
  • Minimum and maximum loan amount
  • And Minimum employment period

Then CSR prints loan documents from the system and customer sign on documents and contract

Generate CIBIL & eligibility verification

CSR automatically extracts CIBIL report (based on AADHAAR id number and customer personal information) and RBI enquiry (based on first and second name) from the system, prints them and makes sure that the customer meets credit eligibility criteria.

After printing Credit report & RBI enquiry and completing case study if customer has accepted then banks print notice for approval and sign off.

Loan disbursement:

Lifecycle of Loan_Loan Disbursement

New Loan Disbursement

While officer executes loan disbursement process on Banking system, below are the backend validations:

  1. Validation on customer settlement account number and loan account number and make sure they belong to same customer.
  2. Linking loan account to settlement account to automatically deduct monthly installment.
  3. Adding interest variance in case of interest rate change while there were pending loan requests.
  4. Linking guarantors to loan account (employees-employer)
  5. Calculating remaining days’ interest of disbursement month (IOI) and automatically liening this amount to deduct it automatically at the end of the month when accrued and capitalized
  6. Ensuring that all documents are received according to each product.
  7. System must automatically deduct administrative charges, fiscal stamp duty, CIBIL fees and any other charges related to loan product, each one is directed to its internal account.
  8. Then checker authorizes the record.

Refinancing and repayment of existing loan before maturity

Banks existing loan repayment: After making same steps of loan disbursement written above, Officer executes loan repayment. System to automatically detect repayment rate upon reason of repayment whether it was for:

  • Refinancing from same bank
  • Refinancing from another bank
  • Repayment from customer own sources.

Each reason has different rate which will be determined by system after choosing reason of repayment and deducted automatically from customer settlement account.

System validates on customer repayment account number and loan account number and make sure they belong to same customer and then checker authorizes the record.

Other banks loan repayment: Repayment rate is calculated as mentioned above and banks have 2 means of repayment

  • By issuing cheque from settlement account
  • By ACH transfer from settlement account

Banks choose mean of repayment according to customer request. Block are made on amount that should be paid to bank and remaining amount for customer one by one till customer brings clearance certificate then banks remove block one by one as well. Then checker authorizes the record.

Refinancing without repayment of existing loan:

In this process banks make sure that all customer outstanding loan balances do not exceed the Debt Burden Ratio (DBR). While loan disbursement process if banks choose type of loan:

  • Refinancing without repayment of existing loan:
    In this process banks make sure that all customer outstanding loan balances do not exceed the Debt Burden Ratio (DBR). While loan disbursement process if banks choose type of loan:
  • New loan (Banks make sure that customer loan amount do not exceed the Debt Burden Ratio (DBR)).
  • Refinancing and repayment of outstanding loan (Banks make sure that customer loan amount do not exceed the Debt Burden Ratio (DBR) and exclude outstanding loan from DBR )
  • Refinancing without repayment of outstanding loan (Banks validate that all loan installments balances do not exceed customer new DBR ratio according to recently entered data and generate override). Then checker authorizes the record.

After loan disbursements processes banks generate 6 reports from system:
Daily report of customers who disbursed loan. (to send it to CIBIL and RBI department)
Salary transfer letter
Loans disbursed (today or from date To date)
Report for repayment penalty deduction
Report for loan accounts linked to settlements accounts that don’t belong to same customer.
Loan repayment schedule

Loan repayment

Lifecycle of Loan_Loan repayment

Partial repayment
Partial repayment will be the same as well. We choose partial repayment then system auto calculates partial repayment percentage as well as validation must be made on repayment account and settlement account and make sure they belong to same customer.

Arrears repayment
In case of arrears repayment, when customer makes a deposit, Bank system will automatically make lien on arrears amount then at COB it will be realized.

After repayment, settlement account will be auto closed in case that it’s not linked to any other credit obligations that customer is committed to fulfill such as credit card.
Clearance certificate to be printed from the system and delivered to customer and charges for certificate to be auto deducted.

Sudden Death of customer:

Once branch is informed that customer deceased, CSR does the following:

  • Activate posting restriction on customer CIF “customer deceased” which will stop transactions on all customer accounts
  • Terminate debit card.
  • Stop interest calculation with back value date (date of decease) even if this date was before capitalization of installment

After receiving compensation cheque from insurance company, it will be delivered to head office and a photocopy will be delivered to central operations to follow up cheque collection. Then branch will be informed to repay the loan and close settlement account.

Closing matured loans:

On the first day of each month, Banks checks on all opened settlement accountsThen auto Close matured loans settlement accounts in case that it’s not linked to any other credit obligations that customer is committed to fulfill such as credit card.

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