Credit in Tractor Finance - The World of the Watchdog

Originally written on May 21, 2017

During one of our tea session discussions, one of my team mates asked " We have multiple functions attached to a Retail Loan - Sales/Business, Credit/ Underwriting,  Policy Drafting, Product Management, Operations, Collections, Customer Service, Marketing etc. Which amongst these would be most critical and why ?"

The choice would be Credit - The prime reason being the fact that Credit is the point where actual exposure / risk taking is initiated. It is the entry point into the financier's system. We are looking at the this from the traditional function based assessment.

Many organizations have their credit, which have become more or less rubber stamps endorsers to what the sourcing point records as facts. It pains to see this so, because the function of underwriting can be so much more enriching, if only the right perspective is present.

Let's take a few areas that ought to have been questioned in tractors. If you have a system that question at least 7 of these, you could say your system is in place. We have also defined the extent of detail in each criteria. So when assessing, please tick as "Already Exists" only if you are ask ALL aspects of a criteria.  :

1.       Margin Money Receipt    -    How much money has been paid by customer ?                                                         Mode of payment ? What are the components                                                         of the Margin Money Payment ? ( If only 1 item                                                         in how many parts was payment made ? )

2.       Implement Details             -  What were the implements being used by the                                                         customer earlier ? What are the implements                                                         freshly proposed to be bought ? What is the HP                                                         requirement of these implements ?

3.      Experience                          -   What has the customer been doing till date ?                                                          What Model has he been using ? Has he                                                    self-operated or used a driver ?

4.       Usage                                 -  What is the type of work the customer is                                                          involved in ? To just showcase the importance                                                          of this point we take an example

                                                         You receive a proposal with Agricultural usage                                                          and income source from a location where 85%                                                          of the people cultivate paddy. Here either as                                                          Captive use or Hiring Use, the max income time                                                          frame is 4 months. How many of us have                                                          actually stopped to ask, what happened to the                                                          balance 6 months ? ( Providing 2 months of                                                          Rainy Season )

5.       Pattern Check                    - Whether HP requested aligns with Activities ?                                                         Whether the HP requested is justified in line                                                         with the implements proposed to be used ?                                                         Does the HP align with the current market                                                         pattern for the particular activity ? Does the                                                         customer say Agriculture and he is taking a                                                         50Hp tractor (The two would be a mismatch) ?                                                         Have you spoken to the customer to find out                                                         how he arrived at the Hp Value ?     

6.       Delivery Status                 -  Has the customer received his vehicle already ?                                                         If Yes, How long ago was the purchase effected?                                                         

7.       Subsidy Check                  - Is the chosen model part of a State / Central                                                        Government subsidy list ? If so, how much is the                                                          Subsidy Amount ? Has the customer applied for                                                          Subsidy ? What is the Subsidy Allotment ratio in                                                          the state ?  ( Application to Actual Allotment )

8.       Model Selection               - How did the customer select the particular                                                        model ? Why ? Who is his adviser ? If he is                                                        already been an owner, is there an exchange                                                        transaction involved ?

9.       Loan to Value (LTV)          - If funding is greater than 75%

                                                                a. Why is higher fund being asked ?

                                                                b. Why is Customer Participation lower ?

                                                                c.  Is customer under Duress

                                                            If funding is lesser than 50 %

                                                                a. Does he have all implements necessary                                                                     to functionally operate the tractor  ?

                                                                b. Source of Funds for the 50% Equity ?

                                                                c.  Purpose of taking the loan?

10.     Data Dedupe                   - Performance of cases sourced by Sales /                                                       Marketing staff proposing the case

                                                            a.  Lagged 12 - 24 Month

                                                            b.  Repayment Patterning

                                                            c.   Customer Type - Patterning

                                                            d.   Dealer - Customer Type and Block Referred

These are Top checks just to name a few. Yet, if we are diligently acquiring information for at least 7 of these, we will be able to take calls judiciously and fairly.

Many a time, inefficiencies in Credit is primarily due to LACK OF KNOWLEDGE . Once the facts placed in the open, most of us are able to take the right call. As much as knowing the subject / domain is important for the sales / product / marketing personnel, it is equally or more important for an underwriter to know his geography and domain.

There is one piece of information that should never be forgotten :

A.       First 6 months, if a customer defaults, 80% of Cases - Sales issues

B.       6 - 24 ( 3 Year Tenure ) / 36 (4 Year Tenure), if a customer defaults, 80% of cases - Credit issues

C.       Last 12 Months, if a customer defaults, 80% of cases Service / Operation /   Collection Issues

So, for a financier, while all links are important, the perspective of Credit is of utmost importance, and this has to function well. This is so for every retail finance product.