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

1. Risks Involved in Housing Finance Processing By Abdul Rauf Manager Centralized CIU- Secured-House Finance -Consumer Finance Group

2. CONTENTS A. Case Processing B. Risk Evaluation C. Proposal Structuring D. Credit Analysis • Basic “C’s’’ of Credits • Broader Review Principles & Policies E. Prudential Regulations F. Decision

3. 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. • Agenormally 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.

4. CASE PROCESSING • Documents for Salaried • Complete Application • Processing 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)

5. CASE PROCESSING • Documents for Business Individuals/ Self Employed Professionals • Processing Fee • Complete Application • Copy Of CNIC • 2 Latest Photographs • 1 Year Bank Statements • Copy of NTN Certificate • 3- Years Tax Returns • Sole Proprietorship Certificate • Partnership Deed • Undertaking 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

6. CASE PROCESSING • 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)

7. CASE PROCESSING • 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

8. CASE 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

9. B- 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.

10. RISK 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

11. RISK EVALUATION • 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

12. RISK EVALUATION • Past or present over duesand 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.

13. RISK EVALUATION • 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.

14. 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

15. 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

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

17. “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

18. “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

19. BROADER REVIEW PRINCIPLES & POLICIES • Customer’s – KYC (Know Your Customer) - • Strong Verificationof 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

20. 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

21. 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

22. 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

23. 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

24. END OF PRESENTATION THANK YOU