Fullerton Risk Analytics and Business

Strategy

Raghav Ajmani (MP15030)

Ranabir Mullick (MP15034)
Sudipta Chatterjee (MP15045)
 Introduction

Wholly owned subsidiary of Singapore-based investment company

Temasek
Loans to consumers and small enterprises in urban and rural India. Typical
loan size was small by developed country standards ($ 750 for consumer
loans and $ 1,500 for commercial loans)
Many of its borrowers did not have their credit history reported by the local
credit bureaus.
2009, the company had over 800 branches in 450+ locations
2010 that restricted collection activities by financial
institutions resulted in a significantly increased default rate of 15% in 2010
 Strategic Shift

The company reduced the number of branches from 850 to 340, reduced
headcount from 16,000 to 5,700, and reduced its presence from 450 towns
in India to 250.
Began targeting the under-served niche segments in its rural and urban
businesses between the segments served by the large private banks and the
micro finance institutions
Fullerton began focusing on relatively higher income earners (INR
400K1000K or $6,000 15,000 per annum) and the average loan size
increased from INR 50,000 ($1,042) in2009 to INR 180,000 ($3,529) in
2012.
Unsecured consumer loans (personal loans) and secured loans(loans against
property)
Quarterly profit increased to INR 6,578 million in 2011-2012, and to INR
7,587million in 2012-2013.
 Strategic Shift

DATA ANALYTICS CENTERED DECISION MAKING

Market segments created opportunities for high profit margins during

normal business cycles, but also increased risk during economic
downturns.
CEO Mr. Mitra believed that analytics would prove to be a strategic
asset, differentiating Fullerton from its competitors.
Data Analytics team was formulated
Major Key areas:
(i) market entry assessments, (ii) initial customer acquisition decisions, (iii) credit risk
management, (iv) distribution and channel management, and (v) employee and portfolio
performance analysis.
 Strategic Shift

Risk Analytics Framework

To properly assess risk exposure, financial firms have to assess the

inherent risk-return trade-offs in normal economic times
To measure the extent of losses it may incur in a recession scenario.
The major Indicators used in the case are
Economic capital (EC)
Risk adjusted return on economic capital (RARoEC).
The risk-return implications measured by risk adjusted returns (RAR) during normal
economic times.
Recession loss multiplier (RLM) which captures the vulnerability of the bank during
stress periods
Product And Geographical Mix In The Unsecured
Retail Segment
Product And Geographical Mix In The Unsecured
Retail Segment
 Projected Profit & Loss

Projected P&L Account

Particulars FY 13-14 FY 14-15 FY 15-16 FY 16-17 FY 17-18 FY 18-19

Interest Income 57% CAGR 15904 24940 39110 61331 96177 150821
Interest Expense 33% of Interest income 5248 8230 12906 20239 31739 49771
Net Interest Income 10656 16710 26204 41092 64439 101050
Non Interest income 21% of Net Interest income 2238 3509 5503 8629 13532 21221
Operating income 12894 20219 31707 49721 77971 122271
Operating expense -1.08% 4760 4709 4658 4608 4558 4508.997
Operating profit 8133 15510 27049 45114 73413 117762
Scenario Analysis of Portfolio
Exhibit 9
Scenario # 1
Particulars 2013 2014 2015 2016 2017 2018 Average
RLM 13014 26368 43278 63159 95437 141314 63762
RAR 3.30% 3.00% 3.50% 3.80% 4.20% 4.50% 3.72%
EC 12% 11% 11% 11% 12% 12% 11.50%
RAROC 28% 27% 32% 35% 35% 38% 32.27%

Scenario # 2
Particulars 2013 2014 2015 2016 2017 2018 Average
RLM 13014 26368 40573 58648 80754 117762 56186
RAR 3.30% 2.90% 3.30% 3.50% 3.90% 4.20% 3.52%
EC 12% 11% 10% 10% 10% 10% 10.50%
RAROC 28% 26% 33% 35% 39% 42% 33.81%

Scenario # 3
Particulars 2013 2014 2015 2016 2017 2018 Average
RLM 13014 26368 40573 54136 73413 105986 52248
RAR 3.30% 2.80% 3.10% 3.40% 3.80% 4.10% 3.42%
EC 12% 11% 10% 9% 9% 9% 10.00%
RAROC 28% 25% 31% 38% 42% 46% 34.92%

Scenario # 4
Particulars 2013 2014 2015 2016 2017 2018 Average
RLM 13014 26368 37868 49625 66072 94210 47859
RAR 3.30% 2.70% 3.00% 3.20% 3.60% 3.90% 3.28%
EC 12% 10% 9% 8% 8% 8% 9.17%
RAROC 27.500% 27.000% 33.333% 40.000% 45.000% 48.750% 36.93%
 Interpretation of Portfolio

Recession loss multiplier (RLM) which captures the vulnerability of

the bank during stress periods is minimum over the years for the 4th
scenario
RAR (Risk adjusted Return) is maximum for scenario#1 and
minimum for Scenario# 4.
Economic Capital is almost same for all the scenarios till 2015, after
2015 during the stress condition i.e. 2016 onwards there is slight
difference in economic capital. EC is maximum in scenario#1 and
minimum in scenario# 4.
RARoEC is another important determinant of capital implication and
we find that it is maximum for scenario# 4.

So, by analysing all the scenarios, scenario# 4 is observed to be the most preferable
scenario as it has the lowest RLM and the highest RARoEC.
APPLICATION SCORECARD AND BEHAVIOR
SCORECARD

An automated application scorecard to evaluate new customers risk-

graded

Using the historical data, the team created a logistic regression model
based on customer information available from the application form
and the credit bureaus.

For existing customers, the analytics team developed a behavioral

scorecard to assess their risk of default.

The variables used in the logistic regression model included customer

behavioral attributes on existing loan with Fullerton as well as the
customers performance on other loans with other banks. This was
helpful in estimating an existing customers propensity to default such
that pre-emptive actions could be triggered to mitigate losses.
Risk Analytics Framework
The Board of Directors approves the risk appetite
statement (RAS) that defines the metrics to assess
performance at Fullerton (for e.g., risk adjusted return,
loss volatility, operational risk, solvency, liquidity, and
reputation).
Two important outcomes of business planning are :

1) Capital implications-- measured by economic

capital (EC) and risk adjusted return on economic
capital (RARoEC).

2) Risk-return Implications- measured by risk

adjusted returns (RAR) during normal economic times,
and recession loss multiplier (RLM), which captures the
vulnerability of the bank during stress periods.
Product And Geographical Mix In The Unsecured
Retail Segment
From the projected Operating profit obtained for the FY 13-14, Recession
loss has been calculated based on the RLM given in the exhibit. Weightage
has been calculated while analyzing the recession loss across the different
tiers which shows that minimum loss will be encountered while providing
Personal loans to Tier 4 salaried consumers.
Personal Loan (Salaried Customers)
operating profit Recession loss
Mar Mar-13 Oct-13 RAR RLM ( in Rs) (In Rs) Weightage
Metro 4,661 4,683 6% 1 8133 8133 21.3%
Tier 1 3,410 3,367 6% 1.1 8133 8946.3 23.4%
Tier 2 2,020 1,989 10% 0.9 8133 7319.7 19.1%
Tier 3 1,747 1,743 11% 0.9 8133 7319.7 19.1%
Tier 4 4,650 4,672 9% 0.8 8133 6506.4 17.0%
Total 16,489 16,455 38225.1
Product And Geographical Mix In The Unsecured
Retail Segment
From the projected Operating profit obtained for the FY 13-14, Recession
loss has been calculated based on the RLM given in the exhibit.
Weightage has been calculated while analysing the recession loss across
the different tiers which shows that minimum loss will be encountered
while providing Personal loans to Tier 3 Self Employed customers
Personal Loans (Self Employed Customers)
operating profit Recession loss
Mar Mar-13 Oct-13 RAR RLM ( In Rs) (In Rs) Weightage
Metro 1,297 1,519 0% 2.8 8133 22772.4 36.8%
Tier 1 2,432 2,725 6% 1.2 8133 9759.6 15.8%
Tier 2 1,548 1,785 7% 1.2 8133 9759.6 15.8%
Tier 3 1,411 1,552 8% 1.1 8133 8946.3 14.5%
Tier 4 3,133 3,471 6% 1.3 8133 10572.9 17.1%
Total 9,820 11,052 61810.8