Loan approval procedure and rejection criteria-a conceptual study in PMC bank Rekha MFA II year, Jyoti Nivas College Autonomous PG Centre, Bangalore, India B.Percy Bose Associate Professor and Head Department of MFA Jyoti Nivas College Autonomous PG Centre, Bangalore, India ABSTRACT Banks act as intermediary who transfers the funds from the savers to the investors through grants to the various other sectors of society who are in great need of funds. The cooperative banks in India started functioning almost 100 years ago. In India cooperative banks play an important role even today in rural finance. Banks have its frame work that has been set by the RBI while providing loans to its customers and the customer who fulfill those requirements will get a loan. Many a times customer fails to fulfill the requirements due to which there is a rejection of loan applications. At PMC bank the rejection rate of loan applications was too high hence the study was carried out in order to know the core reason for the loan application rejections. Key words: Loan, approval procedure, rejection criteria. INTRODUCTION Banks over the years have become a significant aspect of an economy. With the financial depression, the position of the banks have become all the more important in the course of working of the money market and hence the economy of a nation. The banking sector forming a portion of the financial sector primarily works as a financial intermediary generating money supply. BUSINESS OF BANKING MONEY SURPLUS UNITS MONEY INTERMEDIARY (BANK) MONEY DEFICIT UNITS Banks are institutions that accept various types of deposits and use those funds for granting loans. The business of banking is that of an intermediary between the saving and investment units of the economy. It collects the surplus funds of millions of individual savers who are widely scattered and channelizes them to the investors. Banks acts as intermediary who transfers the funds from the savers to the investors through grants for business, commerce, education, housing and other purposes. They perform the basic purpose of intermediation through the following transformation mechanism: liability asset transformation, size transformation, maturity transformation, risk transformation. PUNJAB AND MAHARASHTRA CO-OPERATIVE BANK LIMITED (Multi state scheduled bank) Punjab & Maharashtra Co-operative Bank, one of the leading Multi-State Scheduled Urban Cooperative Bank presently operates from the States of Maharashtra, Delhi, Karnataka and Goa. The Bank started its operations on 13th February, 1984 in a humble room at Sion as single branch Bank. In IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 100
a span of 30 years the Bank has reached a Multi State status operating in four states from 95 locations. The Bank stands among top 10 co-operative banks of the country. VARIOUS TYPES OF LOAN PROVIDED BY THE PMC BANK HOME LOAN Home loan as name itself suggests it is the loan against buying property. Every individual currently have dreams to have their own home. To make affordable best option is home loan. Again there are sub categories of home loans which are as below: Home loan for residents. Loans for repairs and extension. Land purchase loan. Top up loans. Loan against property. PERSONAL LOAN It is the loan granted to fulfill your expenses which ranges from buying some expensive electronic gadgets to booking air tickets etc. People are used to use this facility for anything they can. Usually rate of interest on such loans will be higher than other types of loans. CAR OR VEHICLE LOAN This is usually used to meet the requirements when one is planning to have his dream care or bike. It is usually a secured loan where collaterals are the vehicle and in case of default lender may recover it by taking back the customers vehicle. But some lenders offer unsecured loans where the customer s credit scores matters more. EDUCATION LOAN If the customer needs a financial support to pay for higher education, education loans can be a great help. To get an education loan, the customer should be an Indian resident and aged between 16 and 35 years. GOLD LOAN This was one of the easiest and fastest ways of loan when gold rate was at its peak. But currently lot of lenders may not feel it better collateral due to falling in gold price, especially gold loan companies. LOAN AGAINST BANK FDS This is one form of loan where your collateral is your bank FD itself. Suppose if a customer have bank FD of around ten lakh, then he is eligible to get loan up to eight lakh. But interest rates will 1-2% higher than the FD rate. But still this form of loan is also fastest and best way. LOAN AGAINST PROPERTY A loan against property comes under the category of loans against security. This is a loan which the borrower can avail against any property which he own. This property is then used as a security for the bank or lender on the loan. IMPORTANCE AND NEED OF THE STUDY Cooperative banks get money from the general community and provide loans to all sections of people. Their motto is not profit alone, but service. Whenever a customer approaches the bank with his loan proposal, the bank cannot assure and accept the proposal on the day one itself instead the bank have its loan sanctioning procedure that has to be fulfilled by both the parties i.e. the bank as well as the customer. The study is more focused towards the loan approval procedure and to identify the core reasons behind the loan application rejections. IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 101
RESEARCH OBJECTIVES 1. To study the criteria for loan approval and its procedure. 2. To identify the reason for the loan rejection. PURPOSE OF THE STUDY: The purpose of the study is to have a proper understanding of the various lending schemes provided by the bank and the procedures used by the bank to approve the customer s loan applications and to know the reason behind the rejection of the loan application of the customer by the bank. The study also concentrates on the interest rates provided by the bank to its customers on various lending scheme and it also compares the profitability of the PMC bank s interest rates on loans with its competitor s bank. SCOPE OF THE STUDY The scope of the study is narrow since the data available is limited to the branch office situated in Bengaluru i.e. at attibele branch. PROCEDURE OR STEPS FOR LOAN APPROVAL STEP 1: The application- At this time the bank make every effort to obtain all pertinent documentation so unnecessary problems and delays may be avoided. STEP 2: Ordering documentation- Within few days, the bank request for a credit report, an appraisal on the property, verifications of employment and funds to close, mortgage or landlord ratings and any other necessary supporting documentation. STEP 3: Awaiting documentation- As the bank receive the supporting documentation, they check for any problems that might arise and request additional items they need. During this time, the bank keeps the applicant and the realtors informed as to the loan s progress through weekly status reports. STEP 4: Loan submission- Once all the necessary documentation is in, the loan officer reviews the bank s current programs to insure their clients, the best rate and terms. The loan processor then puts the loan package together and submits it to the underwriter for approval STEP 5: Loan approval- Loan approval generally takes quite long time. All parties are notified of the approval and any loan conditions that must be received before the loan can close. The loan approval is the beginning of the closing process. STEP 6: Documents are drawn - Within few days after the loan approval; the loan documents are completed and sent to the tile company. The escrow officer calls the borrower to come in when the papers are ready for final signature. At this time, the borrower is told how much money they will need to bring in to close the loan. STEP 7: Funding- Once the parties have signed the loan documents, they are returned to the lender who reviews the package. If all the forms have been properly executed, the cheque is issued to fund the loan. STEP 8: Recordation- When the title company receives the funding cheque from the lender, they make the lender s security for the loan a matter of public record. They do this by recording the note and deed of trust at the country recorder s office. REASONS WHY THE BANK REJECT THE LOAN APPLICATIONS Many entrepreneurs looking for bank loans have been turned away. There are many reasons why the banks reject loan applications; some are easy to fix whilst others may take a substantial amount of time and energy. Ability to repay The worst case scenario for a bank is losing the initial capital lent to the borrower. For this reason the bank need to be absolutely sure that you can repay the loan amount. The bank may wish to know more about the loan applicant s job experience and his ability to repay the loan amount along with the interest. IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 102
Ability to make a profit Banks are not charities, they lend money to its customers in order to make more money in return. If the banks are not confident enough that the borrower can make a profit on the loan amount then it s unlikely they ll lend money to the borrower. So it is very important to demonstrate Business model or plan Bank managers must be convinced by the borrower s overall business strategy as well as the reason why the borrower needs investment. If the business model is not sound then that can have a knock on effect to the bank manager s confidence in any part of the borrower s loan application. Risk Banks are wary of investing money in businesses that pose too much risk. Removing as much risk as possible is often a key to securing a bank loan. So the borrower should take out adequate insurance, back-up plans to assure the bank manager that the borrower s business model has many different chances of succeeding. Too much risk is one of the commonest reasons for turning down the loan applications. Borrower s demeanor and presentation Bank managers must have confidence in the borrower s ability to deliver as well as in his business plan. If the borrower s physical appearance matters a lot. The borrower should present himself in the best possible light; the bank manager must make a decision whether to invest a significant sum of money to the borrower. Making the best case the borrower can The borrower should not be afraid to commit significant time to preparing his loan application. If necessary, he can use a professional accountant to provide the most important figures and present them in the best possible light. Table No.1: Bank aids the customers by providing loan at the right time. RANKING NUMBER OF PERCENTAGE NOT AT ALL 17 34% SOMETIMES 10 20% FAIRLY OFTEN 12 24% ALWAYS 11 22% The above graph shows that 34% of the respondents feel that the bank stretches its helping hand to the customers at the right time, followed by 24% of the respondents say that the bank fairly often provides loan at the right time, then followed by 22% of the respondents say that bank provide loan to its customer at the right time always and 20% of the respondents feels that sometimes the bank provides with the loan to its customer at the right time. Table No.2 Reasons for the loan application rejection. REASONS NUMBER OF POOR CREDIT WORTHINESS 13 26% INADEQUATE COLLATERALS 16 32% PERCENTAGE IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 103
IMPROPER TAX PROCEDURE 11 22% UNDER CAPITALISED ASSETS 10 20% From the above table it is clear that, 26 respondents feel that poor credit worthiness is the reason for the loan application rejection, 32 respondents feel that inadequate collaterals is the reason for the loan application rejection, 22 respondents feel that improper tax procedure is the reason for the loan application rejection and 20 respondents feel that the undercapitalized assets are the reason for the loan application rejection and it can be interpreted that the core reason for the loan rejection is poor collaterals that are attached to the loan documents by the customer in order to borrow money. Table No.3: Salaried employees get a better chance of borrowing loans than a self employed person. RANKING NUMBER OF PERCENTAGE DISAGREE 5 10% CANNOT DECIDE 24 48% AGREE 17 34% STRONGLY AGREE 4 8% From the above chart it can be said that, 10 respondents strongly disagree on the mentioned statement, whereas 38 respondents feels that they cannot comment on the statement, 44 respondents feels that they agree that the salaried employee get an better chance of getting a loan, whereas 8 respondents strongly agree that there is a imbalance between the salaried and a non salaried employee to get an loan. We can conclude that the most the people feels that the above mentioned is true i.e. a salaried employee gets a better chance of getting loan than a self employed person. Table No 4: Job hopping is a reason for the customer s loan application rejection. RANKING NUMBER OF PERCENTAGE ALWAYS 20 40% NOT AT ALL 13 26% AT TIMES, BUT NOT ALWAYS 17 34% From the above table it is clear that, 40 respondents says that job hopping is the reason for the loan application rejection, 26 respondents totally disagree the above statement, 34 respondents feels that job hopping is the reason for the loan application rejection at times but not always. From the above data it is interpreted that most of the people feels that continuous job hopping of the person also affect the loan approval procedure. Banks think that job hopping of the person may not be able to repay his loan. IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 104
Table No 3.5: Showing the performance of PMC bank. RANKING NUMBER OF PERCENTAGE EXCELLENT 10 20% GOOD 22 44% FAIR 13 26% POOR 5 10% TOTAL 50 100 From the above graph it is clear that, 20 respondents out of 100 samples feels that the bank s performance is excellent in its locality, 44 respondents feels that the bank s performance is good, 26 respondents feels that the bank is doing a fair job, 10 respondents feels that the bank performance is poor. From the above table it can be interpreted that the bank is doing a good job in its performance when compared to other bank situated in the same locality. SUMMARY OF FINDINGS Most of the people who approach for the loan belong to the age category of 31-40. PMC bank provides its customers with better service by providing with detailed information regarding the loan procedure before approving it further. Before sanctioning loans, Bank checks the eligibility criteria, documents, certificates of the customers, their liquidity position and their ability to repay the loan amount and this task is done by the committee which includes panel engineers who checks the loan documents and these people are been appointed by the head quarters. The loan procedure is quite lengthy i.e. when the branch sends its customer s loan application to the zonal office, the zonal office takes bit long time to respond towards the loan application of its branch bank s customers. There are various reasons for the rejection of the loan application procedure such as credit worthiness of the borrower, adequate collaterals, proper taxations, continuous job hopping of the employee who applied for loan, etc. Most of the people feel that inadequate collaterals and the poor credit worthiness of the borrower is the core reason for the customer s loan rejection. The interest rate on various loans is fixed based on prescribed interest rate of RBI and certain percentage is added by bank for its profitability. Hence the bank makes the profit by adding the base rate and mark up rate to earn its profits. The performance of the bank is good and healthy and it is performing well in its locality and hence it is gaining a positive response towards its customers. There are two important concepts which the bank considers when they do a loan proposal i.e. the prime lending rate which is determined for the term loans and the other one is the normal lending rate whereby the rate is decided by the bank based on the market rate. The rate of interest on loans provided by the banks should be between the deposit interest rate and the loan s interest rate say it may be 4% to 5%. The banks provide loans to the customers on the cushion rate which means the difference between the deposit rate and lending rate and also includes the cost of administration cost and other costs that are involved in the loan lending procedure and the bank has to ensure its profit within that limit. IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 105
SUGGESTIONS AND RECOMMENDATIONS The procedure of sanction of loan can be made simple so as to help the public. Review of document can be made faster and thorough by both the bank branch and its zonal office so that it may help the borrower to make use of the money at the right time. It is recommended that the interest rate of the mortgage loan and the domestic loan can be increased because there is more demand by the customers. The interest rate on the vehicle loan and business loan may be reduced so that the bank can attract more customers and can satisfy the needs of the customers at the right time. It is recommended that if the bank conducts a customer research study yearly to get more information about customer likes and dislikes so according to that bank may provide satisfaction to its customer. More publicity could have been done in order to attract more customers towards the bank. It is suggested that the bank may provide some special reduction in interest rates to existing customers so that bank can attract more customers and maintain a better relationship. Bank can also concentrate on the SME sectors added to other loan categories and it can also lend loans to such sectors in order to help the country to have an economic growth and development. It is suggested that the bank has to inform the customers in hand regarding the loan procedure so that the number of loan application rejections can be controlled. It is recommended that the bank has to reduce the interest rates in order to avoid default repayments. CONCLUSION India is one of the developing countries, loan is important for all the people. Banks are playing big role in providing the loan facility to the middle and lower class people. Loan will satisfy the needs of middle class people and the lower class people. Punjab and Maharashtra co-operative bank Limited (multi-state scheduled bank) provides different types of loans to its customer. The study was undertaken to know the various types of loans offered by the bank and the study also emphasizes on the loan department as a whole. The study tries to analyze the reason for rejection of loan application in this branch. Considering the low living standard of common man, imperfect markets and other socio political considerations it is the primary duty of the government to ensure that its citizens have easy access to co-operative credit. Punjab and Maharashtra co-operative bank Limited (multi-state scheduled bank) provide opportunity for public in savings as well as obtaining financial assistance to improve their economic strength. Bank lends money to those who have continuous assured income to repay the debts, as the recovery rate is good year by year. The overall profitability and financial position of the bank is good and positive. From the study it can be concluded that all the loan schemes provided by the bank to its customer s hold good features and the customers can make best use of the various schemes provided by the bank. BIBILIOGRAPHY http://articles.economictimes.indiatimes.com/2014-06-17/wealth/50651439_1_loanapplication-bank-credit-bad-loans http://profit.ndtv.com/news/your-money/article-eight-reasons-why-your-loan-request-can-beturned-down-320402 http://files.consumerfinance.gov/f/201402_cfpb_factsheet_sbrefa.pdf Banking theory and practice- K.C.Shekhar, Lekshmy Shekhar, Vikas publishing house Pvt Ltd, Ninteenth Edition 2005 Finding your way around borrowing- Freedom Finance The Loan officer s practical guide to residential finance- Thomas A. Morgan, 27 th printing. IRJBM (www.irjbm.org ) Volume No VIII, March 2015, Issue 4 Page 106