1

HOME LAONS
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER V
ACEDEMIC YEAR 2015-16
SUBMITTED
IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF DEGREE
OF BACHELOR OF COMMERCE
BANKING & INSURANCE
BY
MST. VIRAL BOHRA
UNDER THE GUIDANCE OF:
PROF KAPIL BUDHDEV
SEAT No.
JAI HIND COLLEGE
A ROAD, CHURCHGATE, MUMBAI 400 020

DECLARATION

I, Ms. CHARMI AJMERA, student of B. Com. BANKING &

INSURANCE Semester V (2015-16) hereby declare that I have
completed the Project on BANKING OMBUDSMAN SCHEME.

The information submitted is true & original to the best of my

knowledge.

Signature
Ms. ___________
SEAT NO.

JAI HIND COLLEGE

A ROAD, CHURCHGATE, MUMBAI - 400 020

CERTIFICATE
This is to certify that VIRAL BOHRA of B.Com. BANKING &
INSURANCE Semester V (2015-16) has successfully completed the
project on HOME LOANS under the guidance of Prof.
KAPIL BUDHDEV.

Course Co-ordinator

Principal

Internal Examiner
Examiner

External
College Seal

ACKNOWLEDGEMENT

I am indeed thankful to all the people who have helped me to complete

the project.

I am gratefully indebted to Prof. KAPIL BUDHDEV, my project guide,

for providing me all the necessary help and required guidelines for the
completion of my project and also the valuable time she gave me from
her schedule.

I also feel heartiest sense of obligation to my library staff members &

seniors, who helped me in the collection of data & resource material &
also in its processing as well as drafting manuscript.

Last but not the least I am thankful to all my friends, who have been a
constant source of inspiration and information for me. I thank the
Almighty for showering his blessings.

INDEX
Sr No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
13

Contents
TYPES OF LOANS
INTRODUCTION TO HOME LOANS
CHARECTERISTICS OF HOME LOANS
TYPES OF HOME LOANS
BENEFITS OF HOME LOANS TO BORROWERS
STEPS IN PLANNING FOR A HOME LOAN
POINTS TO REMEMBER
FAIR PRATICE CODE TO BE FOLLOWED BY BANKERS
PROCEDURE OF A HOME LOAN
DOCUMENTATION
INTREST RATES AND THEIR CALCULATION
SECURITY FOR HOME LOAN
REPAYMENT OPTIONS
HOME LOAN WITH INSURANCE COVER
RECOMMENDATIONS FOR BANKERS
COMPARISON BETWEEN HOM E LOANS
SURVEY
CONCLUSION
Reasons for rejection of complaints

EXECUTIVE SUMMARY

Banking system in the world has emerged many centuries ago and in India it rooted
its seed with t h e e x i s t e n c e o f t h e G e n e r a l B a n k o f I n d i a i n t h e y e a r
1 7 8 6 . I n e a r l i e r d a y s b a n k s w e r e t h e Financial Institutions dealing
in day to day services i.e. accepting deposits and lending money. B u t
now it has spread its wings to various others sectors like it first
started lending to
b i g business entities and has also entered into the retail banking sector i.e. it starte
d lending for purchasing car, for education, marriage and most importantly for
purchasing a house. To own a house is every mans desire. But more than
that, shelter is a basic human need next only to food and clothing in
importance. Yet every year more and more people continue to be added to
the category of homeless. Though a basic need of all a significant section of the
society is severely handicapped in getting shelter at affordable cost. This
need for housing finance for individuals was only fulfilled with the
advent of National Housing Bank (NHB), Housing and Urban
Development Corporation (HUDCO), Housing Development Finance
Corporation, etcand most particularly with the entry of commercial banks in the
housing finance sector. In Tune with the conservative traditions in lending,
commercial banks played a very limited
rolei n p r o v i d i n g h o u s i n g f i n a n c e t i l l t h e e a r l y s e v e n t i e s . H o w e v e r
, n o w a s p e r R e s e r v e B a n k guidelines, housing finance is part of
priority sector lending schemes for banks. There has been progressive
increase in housing finance disbursed by commercial banks since
1979.T h e h o u s i n g f i n a n c e i n d u s t r y i s g e t t i n g i n c r e a s i n g l y c o m m o
d i t i s e d . C o m p e t i t i o n w i t h i n t h e sector is ensuring that players offer
consumers flexibility and features to choose from.
Featuress u c h a s a d j u s t a b l e r a t e p l a n s , l o w e r p r o c e s s i n g f e e s / m o n t

h l y r e s t / i n t e r e s t r a t e s / E M I / m a r g i n money, no pre- payment penalty

have become common across the industry.

AIM
My aim through this project is: To understand the working of HOME LOANS for better use in future.
To suggest improvements or changes required.
To spread awareness about HOME LOANS.

TYPES OF LOANS
Loan refers to a sum of money borrowed at a particular interest rate.
More generally, it refers
toa n y t h i n g g i v e n o n c o n d i t i o n o f i t s r e t u r n o r r e p a y m e n t o f
i t s e q u i v a l e n t . A l o a n m a y b e acknowledged by a bond, a
promissory note, or a mere oral promise to repay. Banks grants 3 types of
loans which are as follows:Commercial loans or Industrial loans, Consumer loans
and Mortgage loans
1)Commercial loans:
Commercial loans are mainly provided to the business and industrial firms.
These can be divided into:
Short term loans:
Short term loans are mainly given for a period up to 1 year and
usuallygranted to the business and industrial firms to meet the working

10

capital requirements. For e.g.: Cash credit, Bank overdraft etc. (loans to finance
the purchase of material or labour)
Long term loans:
Long term loans are granted for a period above 5 years and are granted
tomeet capital expenditure. For e.g. project finance, Education loan etc.
(loans to purchasemachinery and equipments). Most commercial bank
offers a variable interest rate on theseloans, which means that the interest rate
can change over the course of loan. Sanction of loand e p e n d s u p o n t h e cr e d i t
a n d l o a n hi s t o r y o f t h e b o r r o w e r, t h e b or r o w e r a b i l i t y t o
m a k e scheduled loan payment, the amount of capital the borrower
has invested in the business, thecondition of the economy and the value
of the collateral the borrower pledges to give the bank if the loan payments
are not made.

2)Consumer Loans:
One of the important areas of bank financing in recent years is
towards purchase of consumer durables like TV sets, Washing Machines etc. Ban
ks also providel i b er a l c a r f i n a n c e . Th e s e d a y s b a n k s a r e c o mp e t i n g
w i t h o n e a n o t h e r t o l e n d m o n ey f o r these purposes as default of
payment is not high in these areas as the borrowers are usuallysalaried
persons as default of payment is not high in these areas as the borrowers
are usuallysalaried persons having regular income. Further, banks
interest rate is also higher. For e.g.Housing Loan, Medical Loan, Car Loan,
Education Loan.

11

There are two types of consumer loans:

Closed ended credit :
Closed ended loan are for fixed period of time, fixed amount of
loan, but not for a fixed purpose. The items purchased by the consumer serve
as collateral for theloan.
Open ended credit :
Open ended loan are for variable amount of money and it does
n o t r e q u i r e t h e b or r o w e r t o s p e c i f y t h e p u r p o s e o f t h e l o a n . F o r
e.g. Credit cards. Most open e n d e d l o a n s c a r r y f i x e d i n t e r e s t
rate and it requires no collateral but interest or
o t h e r penalties or fees may be charged. Open end credit interest rates usually
exceed close end rate because open end loans are not backed by collateral.
3)Mortgage loans:
T h e s e ar e u s u a l l y l o n g t e r m l o a n s a n d t h e i n t e r e s t r a t e s c h a r ge d
c a n b e e i t h e r a v ar i a b l e or a fixed rate for the term of the loan which
often ranges from 15- 30 years. These loans are used to purchase land or
building such as household and factories which serves as the collateral for theloan.

Classification of Loans:
Loans given by bankers can also be classified broadly into the following
categories on the basisof security:

12

1.Clean Loans:
Advances for which are given on the personal security of the
d e b t o r, f o r which no tangible or collateral security is taken; this type of given
either when the amount of t h e a d v a n c e i s v e r y s m a l l , or w h e n t h e
b o r r o w e r i s k n o w n t o t h e b a n k e r a n d b a n k e r h a s complete confidence
in him.
2.Secured Loans:
Loans which are covered by tangible or collateral security. Bank
providessuch loan against different types of securities which a banker may accept
for such advance.
INTRODUCTION TO HOME LOAN
The sun at home warms better than sun elsewhere
.
Tru e i s n t i t , w h e r e e l s e d o y o u f i n d t h a t c o m f o r t t h a t m a k e s y ou
f e e l s o s p e c i a l e v er y d ay. Undoubtedly owning a house is the most important
phase in ones life. Not long ago, turning thisdream into a reality was a daunting
task for the common man with property rates going north allthe time. But now,
thanks to the proliferation of home loans and housing finance companies, onecan
aspire to own a roof over one's head. Many think it is an expensive affair
and beyond reach.Well, thats not always true. It takes a little planning and
awareness to get to that home you wantto call your own.Buying a home for the
first time can be daunting to any person but in todays time various banksa r e
l e n d i n g a h e l p i n g h a n d t o t h e p e o p l e t o p ur c h a s e t h e i r d r e a m
h o u s e . Th u s p e o p l e l o o k forward towards choosing a home loan.

13

. The primary concern of a housing finance company is todetermine the loan

amount that the borrower is comfortably able to repay. The most
popular method of financing a home purchase is with a mortgage. This is
a loan that is secured over thehome. There are a number of different
mortgage suppliers and people will have to shop aroundin order to get the
best deal.Home Loan is one of the fastest growing retail and mass banking area. It
forms an important partof the countrys priority in 5 year plans. Almost all
public and private sector banks are offering h o m e l o a n s a t a t t r a c t i v e
r a t e s f o r p ur c h a s i n g t h e i r dr e a m h o me . H o me l o a n u s u a l l y c o v er a
variety of types. All Banks have come out with home loan products
studded with features andvalue additions that make the schemes not only
attractive but also serve as a substantial source to the borrowers for owning
their dream home. B a n k s a s f i n a n c i a l s e r v i c e p r o vi d e r s a i ms a t
providing financial support from the bankingsystem to the needy
f o r p ur c h a s i n g a h o me t o t h e r e s i d e n t I n d i a n s a s w e l l a s n o n r e s i d e n t Indians. The main emphasis is that every needy person is provided with
an opportunity to pursueh o m e l o a n w i t h t h e f i n a n c i a l s u p p o r t f r o m t h e
b a n k i n g s y s t e m w i t h a ffo r d a b l e t e r ms a n d conditions

14

CHARACTERISTICS OF HOME LOAN

Home Loans are the consumer loans.
Home loans are long term loans provided by various banks.
T h e s e ar e l a rge a mo u n t l o a n s w h i c h pr o v i d e f i n a n c i a l s u p p o r t t o
t h e p e o p l e w h o w a n t t o purchase their dream home.
Home loans are secured loans.
T h e b o r r o w e r s g e t t o o w n t h e i r d r e a m h o m e a n d p a y f o
r i t i n e a s y a n d a f f o r d a b l e installments.
Banks and Financial Institutions offers home loans at cost-effective rates.
Tax concessions make home loans more attractive than other loan products.
The borrowers can get tax deduction on repayment of the principal amount of a
loan taken to buy or construct a house.
The interest paid on a loan is deductible from 'income from property',
even if it has not been paid during the year.
I n t e r e s t p a i d o n a n e w l o a n t a k e n t o r e p ay t h e o r i g i n a l h o u s i n g
l o a n i s a l s o a l l o w e d a s deductio

15

TYPES OF HOME LOANS

Lending institutions like banks offer different types of home loans for a
wide gamut of housingactivities. Some of the popular home loans are:
Home Purchase Loans:
There are the basic home loans for the purchase of a new
home.
Home Improvement Loans:
T h e s e l o a n s a r e g i v e n f o r i m p l e m e n t i n g r e p a i r w o r k s a n d ren
ovations in a home that has already been purchased by the borrower.
Home Construction Loans:
These loans are available for the construction of a new home.
Home Extension Loans:
T h e s e a r e g i v e n f o r e x p a n d i n g or e x t e n d i n g a n e x i s t i n g h o me .
F o r example addition of an extra room, etc.
Land Purchase Loans:
These loans are available for purchase of land for both
h o m e construction or investment purposes.
Bridge Loans:
Bridge Loans are designed for people who wish to sell the existing home
and purchase another. The bridge loan helps finance the new home, until a buyer
is found for the oldhome.

16

Balance Transfer:
Balance Transfer loans help the borrower to pay off an existing home
loanand avail the option of a loan with a lower rate of interest.
Refinance Loans:
These loans helps to pay off the debt the borrower have incurred from
privatesources such as relatives and friends, for the purchase of your present home.
Home Conversion Loans:
These loans are for those people who have financed the
p r e s e n t h o m e w i t h a h o me l o a n a n d w i s h e s t o p u r c h a s e / m o v e t o
a n o t h e r h o m e f o r w h i c h s o me e x t r a finances are required. In Home
Conversion Loan, the existing loan is transferred to new home including
the extra amount required, eliminating need for pre-payment of the previous loan.
Stamp Duty Loans:
These loans are sanctioned to pay the stamp duty amount that needs to
be paid on the purchase of property.

Loans to NRIs:T h e s e l o a n s a r e g i v e n t o t h e N R I s t o
build/buy a home in India.
BENEFITS OF HOME LOANS TO BORROWERS
Food, clothing, shelter -- these are the basic needs of every individual.
But to most, owning ahome is just a dream. The real estate boom and
steadily rising capital values are now making itnext to impossible for

17

most people to fund their own homes. Banks and financial institutions
areoffering aggressively competitive rates on home loans, making it
possible for more people toown the home of their dreams. Many builders have
tie-ups with banks or financial institutions sothat prospective buyers are
assured of housing loans without any hassles. Taking a home loanserves
two purposes. One, of course, is that the borrower gets to buy his/her
own home and payfor it in easy installments. The other is that the
borrowers get several benefits under the IncomeTax Act.
TAX BENEFITS
1) For Resident Indians
There are certain tax benefits for the resident Indians based
o n t h e p r i n c i p a l a n d i n t e r e s t component of a loan under the Income
Tax Act, 1961. It may help one get tax benefit up to Rs.50,490 p.a.
(approx) if interest repayment of Rs. 1, 50,000 p.a. is paid. In addition to
this, onealso is eligible for getting tax benefits under section 80C on repayment of
Rs. 1, 00,000 p.a. thatfurther reduces the tax liability by Rs.33.660 p.a.These
deductions are available to assesses, who have taken a loan to either buy or build a
house,under Section 24(b). However, interest on borrowed capital is deductible up
to Rs. 150,000 if thefollowing conditions are fulfilled:
Capital is borrowed for acquiring or constructing a property on or after April 1,
1999.
T h e a c q u i s i t i o n a n d c o n s t r u c t i o n s h o u l d b e c o m p l e t e d w i t h i n 3
y e ar s f r o m t h e e n d o f t h e financial year in which capital was borrowed.

18

The person, extending the loan, certifies that such interest is payable in respect of
the amountadvanced for acquisition or construction of the house.9

A loan for refinance of the principle amount outstanding under an earlier

loan taken for suchacquisition or construction.If the conditions stated above are
not fulfilled, then the interest on borrowed capital is deductibleup to Rs 30,000
though the following conditions have to be satisfied:
Capital is borrowed before April 1, 1999 for purchase, construction,
reconstruction repairs or renewal of a house property.
Capital should be borrowed on or after April 1, 1999 for reconstruction,
repairs or renewalsof a house property.
If the capital is borrowed on or after April 1, 1999, but construction
is not completed within3 years from the end of the year, in which capital is
borrowed.I n a d d i t i o n t o t h e a b o v e , pr i n c i p a l r e p a y m e n t o f t h e
l o a n / c a p i t a l b or r o w e d i s e l i g i b l e f o r a deduction of up to Rs 100,000
under Section 80C from assessment year 2006-07.
Terms and conditions for availing Tax benefits on Home Loans
1 . Tax d e d u c t i o n s c a n b e c l a i m e d o n h o u s i n g l o a n i n t e r e s t
p a y m e n t s , s u b j e c t t o a n u p p e r l i m i t of Rs 150,000 for a financial
year.2 . A n a d d i t i o n a l l o a n f o r
extension/improvement to the same house and
t h e i n d i v i d u a l ' s deductions on the existing loan are less than Rs
150,000; he can claim further benefits fromthe additional loan taken, subject
to the upper limit of Rs 150,000 for a financial year.3 . Tax b e n e f i t s u n d e r

19

S e c t i o n 2 4 a n d d e d u c t i o n u n d er s e c t i o n 8 0 C o f t h e I n c o me Tax
A c t c a n be claimed only when the payment is made. If an individual fails to
make EMI payments, hecannot claim tax benefits for the same.4.According to
the Income Tax Act, tax rebates can only be claimed by the loan
applicant.5 . T h e i n t e r e s t o n h o me l o a n s t a k e n f o r r e p a i r s , r e n e w a l s
o r r e c o n s t r u c t i o n , a l s o q u a l i f i e s f o r the deduction of Rs 150,000.6.A
husband and wife, both of whom are tax-payers with independent income
sources, get taxdeduction benefits, with respect to the same housing loan; to the
extent of the amount of loantaken in their own respective name.7 .I f a n
i n d i v i d u a l b u y s a h o u s e a n d s e l l s i t w i t h i n t h e s a me y e ar o r a f t e r
3 y e ar s , a n d i f a ny profit is made, then a capital gains tax liability arises on
the same for which the individual isliable to pay short-term capital gains tax
since the sale took place in the same year. But in10 c a s e , i f t h e s a l e h a d
t a k e n pl a c e a f t e r 3 y e ar s , t h e n a l o n g - t er m c a p i t a l g a i n s t a x
l i a b i l i t y would have arisen.8 . O n b e i n g p r o v e d t h a t t h e h o me l o a n i s
s i m p l y a n a r r a n g e m e n t b e t w e e n t h e l o a n - s e e k e r a n d the builder or
with a third party for the purpose of claiming tax benefits, then tax
benefitsw i l l n o t b e a l l o w e d a n d b e n e f i t s , p r e v i o u s l y c l a i me d , w i l l
b e c l u b b e d t o t h e i n c o me a n d taxed accordingly.Tax benefits on interest
on housing loans are allowable only for the original loan and accordingto
Section 24 (1), tax benefits can also be availed for a second loan taken
to repay the first loan but not for subsequent loans. This means that if the
borrower have already availed of one loan torefinance the original loan and
want to now avail a third loan to refinance the second loan, tax rebate on
interest payments will not be permissible.
2) For Non- Resident Indians

20

NRIs cannot claim tax benefits on home loans in India as they have to pay tax in t
he nationwhere they work and earn. Moreover, the borrowers need to file
tax returns to become eligiblefor home loans. However, if they pay tax in India
for income earned in India, they can claim taxrebate for the home loan.
STEPS IN PLANNING FOR A HOME LOAN
A)PURPOSE
The first step in planning for a home loan is to find out the purpose for which one
is planning totake the loan. Depending on the borrowers requirements,
home loans can be taken for a varietyof purposes such as to purchase a
new home, to implement repair works and renovations in ahome that has
already been purchased by the borrower, to construct a new home,
for expandingor e x t e n d i n g a n e x i s t i n g h o m e , t o p u r c h a s e l a n d f o r
b o t h h o m e c o n s t r u c t i o n o r i n v e s t m e n t purposes, etc. Hence finding out
the purpose of the loan is the first and foremost step in planningfor a home loan.
B)SELECTION OF A PARTICULAR HOME LOAN
The selection of a particular home loan depends on the affordability
position of the borrower.W h a t k i n d o f h o m e o n e c a n a f f o r d i s ,
m o r e o f t e n t h a n n o t , a f u n c t i o n o f h o w m u c h / t h e maximum one
can borrow?
How much one can afford/ the maximum one can borrow:
Banks follow a thumb rule whiledeciding the maximum a person can borrow:
the monthly repayment on the loan should not bemore than 40 per cent of
the net monthly income. This ratio is called the Income to
Installmentratio or IIR. Some lenders may even be more conservative.

21

One could expect to be allowed to borrow an even lower figure if they

consider an IIR of as low as 30 per cent of the net monthlyincome. They finance a
certain portion of the property value, typically 75-85 per cent. The rest isthe
borrowers contribution, usually called the down payment or the margin, and has to
come outof his (borrowers) own resources.
Down payment:
Another important determinant of the value of the house one can afford is
howmuch the borrower has saved up. Since banks only finance between
75 and 85 per cent of the property value, effectively the down payment can
determine the value of the home that one cang o f o r. O f c o u r s e , t h i s i s
s u b j e c t t o t h e l i mi t o n h o w m u c h o n e c a n r e p ay e v e r y m o n t h ,
a s determined by the IIR.

C)FINDING OUT COST OF THE HOUSE

Buying a home involves many financial considerations. Some home
buying expenses are one-t i m e c o s t s a n d o t h e r s ar e o n g oi n g
c o m mi t me n t s . I n a d d i t i o n , t h e r e a r e o t h e r c o s t s t h a t
t h e borrowers should take into consideration in calculating the cost of the house.
Below is ac h e c k l i s t o f a d d i t i o n a l e x p e n s e s t h a t t h e b o r r o w e r s n e e d
t o k e e p i n m i n d w h e n p ur c h a s i n g a home.
Home buying costsThe Down Payment:

22

A mi n i mu m d o w n p a y m e n t o f 1 5 % i s r e q u i r e d f o r a N o r ma l
H o u s i n g loan. The government offers Tax incentives for homebuyers.
The Payment:
A Home Loan Security is security for a loan on the property the borrower
own.It is repaid in regular monthly payments which are combined
payments. This means that
the payment includes the principal (amount borrowed) plus the interest (the charge
for borrowingmoney).
Checklist of Additional Expenses:
A d d i t i o n a l e x p e n s e s n e e d t o b e i n c u r r e d a f t e r o n e h a s moved in.
Maintenance costs:
T h e s e c o s t s a r e i n c ur r e d t o c o v e r t h e c o s t s o f a n t i c i p a t e d o r
u n e x p e c t e d repairs or replacement of such things as the painting or household
appliances.
Renovation and repairs costs:
These costs are incurred in cases where the need arises to repair the house
A home inspection may indicate that the home needs major structural repairs.
Property taxes
: Property taxes are always a certainty and needs to be taken into account
whenone plans to purchase a home.
Property insurance

23

: It is imperative for the borrowers to take insurance of the house they

plant o p u r c h a s e . Ad d i t i o n a l e x p e n s e s g o i n t o i n s u r i n g t h e h o u s e
l i k e p r e mi u m e x p e n s e s , l e g a l expenses, etc.
Service charges
: This includes the service charges levied by the banks and financial institutionsfor
processing the loan application.
Lawyer (notary) fees
: Even a straightforward home purchase requires a lawyer to review
theOffer to Purchase, search the title, draw up mortgage documents
and tend to the closing details.13
Lawyers fees for a Housing loan and purchase range widely depending
on the complexity of thedeal but will probably be at least Rs.500.
Moving costs
: This refers to the expenses incurred when one moves from one home to
another for example expenses incurred for hiring a truck..
Other Costs:
This is a list of possible extra costs involved in buying a home. Some of
them areone-time costs and others, such as maintenance fees and property
insurance, will be ongoingmonthly expenses.
D)SELECTION OF THE MOST SUITABLE BANK
Choosing the most suitable bank is a crucial stage in the home loan
process. It is imperative tochoose the financer with utmost care and

24

proper consideration of its past track record since thecustomer is entering in

a long-term relationship with the bank when he takes a home loan.A f t e r f i n d i n g
o u t t h e c o s t o f t h e h o u s e , o n e m u s t c o mp a r e b a n k s o n t h e b a s i s o f
c o s t t o s e e which loan is the cheapest. Besides cost factors, though, there
are some other factors that oneneed to consider. Evaluation of the lenders can
be done on the basis of the following factors:
Rate of interest:
This is where it all begins. Although the rate of interest offered by most
banksis more or less the same on paper, some degree of bargaining in
most cases, leads to a loweringo f r a t e s by a s mu c h a s 0 . 2 5 t o 0 . 5 0
p e r c e n t a g e p o i nt s a n d m o r e s o i f t h e b o r r o w e r s p r o f i l e happens to
match the requirements of the bank. The lowering of interest rate has a
significantimpact over the long term although the difference is not so
noticeable over the near term. Careneeds to be taken to ensure that the
difference is not being offset elsewhere by the bank under the guise of
other `charges'.

Tot a l f i n a n c i n g c o s t :
This measure quantifies what the loan really costs. It
n o t o n l y incorporates interest cost but also combines the other costs
such as processing fees and other administrative charges collected
by lenders upfront. Looking for a bank not just with the lowestinterest rate
but the lowest total financing cost can help one in opting for the best deals.
National presence:

25

The bank should be present across the country or at least have branches
inall major metros and towns. This assumes importance if the current job
of an individual is of a14 transferable nature (e.g. bank jobs, defence
personnel) or if he needs to make long and frequentoutstation visits (e.g.
consultants, businessmen). The individual shouldn't be put through
theh a s s l e o f c o ur i e r i n g h i s c h e q u e s t o t h e r e s i d e n t br a n c h e v e r y
t i m e o r c o n t a c t i n g t h e r e s i d e n t branch each time he has a difficulty or
a query. So it helps if the bank is well networked acrossthe country.
Prepayment/Foreclosure benefits:
For many individuals, this plays a significant role in their decision to go
in for a particular bank. For example, many salaried individuals know for
a factthat their salaries would be revised every year. This means that they can pay
a higher EMI goingforward. Some of these individuals also know that they
would be getting a bonus, which theyc a n u t i l i s e t o p a y o f f t h e i r
home loan (either fully or partly). Some banks do not
c h a r g e individuals for making a prepayment/foreclosing his account.
Obviously such bank should get preference over other banks that do levy a
prepayment charge.
Calculation of the exact home loan amount:
Here the banks differ in their calculation of theloan amount to be
disbursed. Some banks calculate the amount to be disbursed on the basis
of,s a y , t h e g r o s s s a l a r y w h i l e s o m e b a n k s c a l c u l a t e i t o n t h e
n e t s a l a r y . T h i s m i g h t m a k e a difference to individuals as the loan
amount and the EMI will vary across banks. One needs tolook into this

26

and get a comparative analysis done across banks to understand which

bank offersthe best deal to the borrower.

Extent of funding:
Some banks fund only 60 to 75 per cent of the property value, while
othersf u n d h i g h e r a mo u n t s . I f t h e a m o u n t o f d o w n p a y m e n t o n e
h a v e s a v e d u p i s n o t e n o u g h , t h i s factor may tilt one lender's loan in ones
favour.
Flexibility of repayment plans.
S o m e b a n k s o ffe r s f l e x i b i l i t y i n t e r ms o f r e p ay me n t . Th ey could
have either have 'Step-up' plans in which the EMI is stepped up as the
tenure increases( s u i t a b l e f o r y o u n g b or r o w e r s j u s t s t a r t i n g t h e i r
c a r e e r s ) o r r e p ay me n t p l a n s t h a t a l l o w
t h e borrower to load payments upfront (suitable for borrowers who are close to ret
irement). Also,some banks allow borrowers to fix the monthly payment
themselves, especially when they take aloan far lower than what they are
eligible for and where repayments are very comfortable. Insuch a case,
the borrower himself can fix the loan tenure. If the profile fits one of
these cases,one can consider a bank who allows such flexibility.15

Property characteristics:
Some banks are wary about financing flats that are old (more than
30years). So it is important to check whether the bank will finance such a property.

27

Also, very few banks lend against properties that are sold by holders of power of
attorney on a property, rather than owners.
Collateral:
H o u s i n g l o a n s a r e a l r e a dy b a c k e d by c o l l a t e r a l - t h e h o u s e b e i n g
f i n a n c e d . I n addition to this, some banks ask for collateral such as life
insurance policies and fixed deposits.Since there are banks who will not
ask for such collateral and it is not particularly necessary tocough up
extra collateral, especially if the credit is good, one can look for a bank
that does notask for such collateral.
Service:
Some banks offer some extra services that make the loan process a whole
lot easier.They come to the applicants home and get the application form
filled by him; they drop thedisbursed check to the home or office of the
borrower. When there is a tie-up with the employer of the borrower, the
process becomes a whole lot easier.
Other factors:
Other factors like documentation, processing fees, document storage
facilitiesand several other factors can be considered. It is also important
to consider the time taken
to process the loan as well as special deals that a particular bank may have with a r
eal-estatedeveloper. For example, individuals do not like it if the
documentation is an irksome process or if the processing fees are exorbitant.
E) FOLLOW UP WITH BANKS PROCEEDS

28

After the application is submitted along with all supporting documents, the loan
officer conductsa formal interview where he assesses the creditworthiness
of the applicant and his repaymentc a p a b i l i t y, b a s e d o n t h e
i n f o r m a t i o n p r o v i d e d i n t h e f o r m a n d t h e a p p l i c a n t s
e x p l a n a t i o n s during the interview.The lender then conducts a credit
evaluation of the applicant, which also factors in the propertyvaluation
report from an independent valuer appointed by the lender himself. If the
loan officer has some queries, more documents and more explanations
may be needed. Based on the findingof the credit evaluation, a loan
amount is determined and sanctioned. A sanction letter is then sent to the
applicant who generally contains a disbursal plan.

POINTS TO REMEMBER ABOUT A HOME LOAN

1) The monthly installment or the EMI.
The housing loan is normally repaid by a monthlyinstallment. Usually
the monthly installment is an EMI (equated monthly installment),
an equalamount that, if paid every month over the tenure of the loan,
results in fully paying off the loant a k e n . P a r t o f t h e m o n t h l y
i n s t a l l m e n t i s i n t e r e s t ( c a l c u l a t e d a t t h e l o a n i nt e r e s t r at e o n
t h e principal outstanding for that month) and the remaining part is accounted for
as principal repaid.P r i n c i p a l r e p a i d i n t h e pr e v i o u s m o n t h i s r e d u c e d
f r o m o u t s t a n d i n g pr i n c i p a l a mo u n t e v er y month. Interest is calculated

29

in the above fashion on reducing principal. At the end of the loan tenure,
the principal reduces to zero.
2) The loan tenure:
Longer repayment tenure would mean more interest payments on the loan.B e f o r e
one sets out to complete the paperwork for a loan, the
c a l c u l a t i o n o f t h e E q u a t e d Monthly Installments (EMI) is important to
know how much one is expected to pay and whether the borrower have the
capacity to pay that in time.
3) How is the net monthly income calculated:
F o r a s a l a r i e d i n d i v i d u a l , t h e n e t m o n t h l y income is calculated as
salary minus all the statutory deductions. Statutory deductions are
itemslike insurance premiums, tax deductions, PF contributions, which
have to be deducted from
thes a l a r y o f a n i n d i v i d u a l . I n c a s e o f s e l f - e m p l o y e d p e r s o n
l e n d e r s l o o k f o r c a s h e a r n i n g s . T h e r e f o r e , t h e y a d d a p or t i o n o f
t h e d e p r e c i a t i o n c l a i m e d by t h e a p p l i c a n t t o t h e a p p l i c a n t s annual
net profit. This, divided by 12, gives the net monthly income for a self-employed
person. Not all lenders consider depreciation, though. So the loan amount may be l
ess than what onethought it would be if the lender does not consider
depreciation in the computation of net annualincome.

4) Monthly/Annual repayments:
It s important to know whether interest is being calculated onm o n t h l y r e s t s o r
a n n u a l r e s t s . Th e r e a s o n i s t h a t t h e b o r r o w er p a y s m o r e a s

30

i n t e r e s t o v e r t h e years in case of annual rests as compared to monthly

rests, even if the interest rate is the same.H o w d o e s t hi s h a p p e n? Th e
a n s w e r l i e s i n a s m a l l b u t i mp o r t a n t d i ffe r e n c e i n t h e m a n n e r i n
which principal repaid by the borrower as part of the monthly installment is
accounted for by the bank.In case of monthly rests, principal repaid in
the previous month is reduced from the
outstanding principal amount every month. Interest is calculated in
the above fashion on reducing principal.On the other hand, in case of annual
rests of principal, principal repayment every month is notaccounted for at
the end of every month but only credited at the end of the year. This
results inmore payment of interest by the borrower.If one bank quotes interest on
annual rests basis and another quotes on monthly rests basis, evenif the interest rate
is the same, effectively, the annual rests rate in monthly reducing terms
would be higher. So when banks give a rate of interest asking them the method of
computation would be helpful.
5) Fixed or floating rate of interest:
T h e b o r r o w e r s ar e o f t e n f a c e d w i t h a c h o i c e b e t w e e n w h e t h e r t h e
l o a n s h o u l d b e a t a f i x e d r a t e or a f l o a t i n g r a t e . Th e r e a r e
a d v a n t a g e s t o b o t h . Afixed rate loan means that one will have certainty
of payments and even if interest rates rise inthe future the borrower will
still be paying the older, lower rate. The right time to pick a fixedrate
loan is at the bottom of the interest rate cycle form where it looks like
the rates have onlyone way to go. And that is up. On the other hand, the
right time to pick a floating rate is wheninterest rates are at their highest and
the interest rates look like they are on their way down.

31

6) Total financing costs:Apart from knowing how the interest rate is calculated, it
is importantto understand the impact of processing and administrative costs on the
loan cost. They add to thecosts as they have to be paid upfront. The total
financing cost determines what the loan reallycosts the borrower. Hence, a
thorough study of the total costs is important.

7) Co-applicant:
Sometimes the income of the borrower may not be enough to secure the
loanamount required by him. In that case, one can consider applying for the loan
with a co-applicant.Clubbing a co-applicants income and applying jointly
can help get one a higher loan amount.When property is jointly owned,
most banks insist that joint owners have to be co-applicants for a l o a n
a g a i n s t s u c h a pr o p e r t y. Al s o s o me t i me s , t h e l o a n o ffi c e r m i g h t
h a v e a v i e w t h a t t h e borrower doesnt have much of a chance of getting the
desired loan on his own strength and alsoi s n o t c o n v i n c e d o f t h e r e g ul a r i t y
a n d s u s t a i n a b i l i t y o f t h e a p p l i c a n t s i n c o me . I n t h a t c a s e , clubbing a
co-applicants income might just put that loan within ones reach.18

8) Tax advantages:
A h o u s i n g l o a n c o m e s w i t h s o me t a x b e n e f i t s . Th e s e b e n e f i t s
f u r t h e r reduce the cost of the borrowing. There are two heads under
which a borrower can claim tax benefits. One is an exemption for interest
paid on a housing loan. This exemption is available upto an interest paid of Rs 1
lakh per year. And the other is a 20 per cent rebate on principal repaidin the year

32

subject to a maximum rebate of Rs 4,000. That is, a 20 per cent rebate is available
ona maximum principal repaid of Rs 20,000.
9) Identification of the property:
It is not always necessary for the property to be identified
thea p p l i c a t i o n p r o c e s s f o r t h e l o a n s t a r t s . I n f a c t , b o t h
t h e p r o c e s s e s c a n b e c o n d u c t e d simultaneously. When the
borrower is clear about the value of the property to be financed andhave
zeroed in on the bank, he can get a pre-approval on the loan. The loan
pre-approval is a process where the bank conducts the credit evaluation and
sanctions a loan amount for which
the borrower is eligible. The sanction is generally valid for six months, during whic
h period the borrower has to identify the property and execute the property docume
nts; the payment will be released after this. Pre-approval saves time and improves
the bargaining position with the seller.
10) Pre-payment dilemma:
I f t h e b or r o w e r d e c i d e s t o r e p a y t h e l o a n b e f o r e t h e
s t i p u l a t e d period, he will be pre-paying the loan. Few banks charge a 0.5-2% of
the amount the borrower is pre-paying as pre-payment penalty. Some
banks don't have a pre-payment penalty provided the borrower is not paying off
the entire loan amount. That means when the loan is pre paid partly;t h e r e m a y
n o t b e a n y p e n a l t y or c h a rge s . Th e r e f o r e i t i s a d v i s a b l e t o b o r r o w
f r o m a b a n k wherever the pre-payment clause or Loan Redemption charge is
not harsh.

33

COMMITMENTS AND RESPONSIBILITIES ON THE PART OFTHE BANKERS

1 . T h e b a n k s / F I s s h o u l d a s s u r e t h a t t h ey s h a l l a c t f a i r l y a n d
r e a s o n a b l y i n a l l t h e i r d e a l i n g s with the customers on ethical
principles of integrity and transparency in respect of servicesthey offer,
and in the procedures and practices their staff follow and make sure
the productsand services meet relevant laws and regulations.
2.The banks/ FIs shall help the borrowers
t o u n d e r s t a n d h o w t h e f i n a n c i a l p r o d u c t s a n d services work by
giving information about them. They shall also provide the
operationalguidelines for Govt. accounts like PPF / pension etc. The
salient features of the products /services including the financial implications
should be highlighted in the product profile
3 . B e f o r e p e o p l e b e c o me s a c u s t o me r, t h e b a n k s / F I s s h a l l g i v e
c l e a r i n f o r m a t i o n e x p l a i n i n g the key features of the services
and products which the people are interested in and give theinformation on
any type of account facility which they have to offer
4.The banks/ FIs shall tell the customers what
i n f o r m a t i o n t h e y n e e d f r o m t h e b o r r o w e r s , before opening any
deposit a/c, to prove their identity and address and to comply with
legala n d r e g u l a t o r y r e q ui r e m e n t s , a n d r e q u e s t f o r a d d i t i o n a l i n f o r
mation about them, their
business/ profession and their family. The Bank before opening an
y deposit account shall carry out due diligence as required
under "Know Your Customer" (KYC) guidelines
issued by RBI and or such other norms or procedures adopted by
the Bank. This will involve s a t i s fy i n g a b o u t t h e i d e n t i t y o f
t h e p er s o n , v er i fi c a t i o n o f a d d re s s , s a t i s fy i n g a b o u t

34

h i s occupation and source of income, obtaining introduction

of the prospective depositor from
a person acceptable to the Bank and obtaining recent photograph
of the person/s opening /operating the account. In addition to
the due diligence requirements, under KYC norms the B a n k
i s re q u i re d b y l a w t o o b t a i n Pe r m a n e n t Ac c o u n t
N u m b e r ( PA N ) o r G e n e r a l I n d ex Register (GIR) Number
or alternatively declaration in Form No. 60 or 61
as specifi ed under the Income Tax Act / Rule
If the decision to open an account of a prospective depositor requires
clearance at a higher level, reasons for any delay in opening of the
account shall be informed and the final decision of the Bank shall be
conveyed at the earliest.
5 . T h e b a n k s / F I s s h a l l g i v e u p f r o n t d e t a i l s o f a ny i n t er e s t a n d / o r
c h a r ge s a p p l i c a b l e t o t h e products chosen by the borrowers.
6.The banks/ FIs shall seek specific consent of the borrowers for giving
details of their names,a d d r e s s e s s e t c . t o a ny t h i r d p a r t y i n c l u d i n g
o t h e r e n t i t i e s i n t h e i r g r o u p , f o r m a r k e t i n g purposes.
7 . T h e b a n k s / F I s s h a l l m a k e s u r e t h a t a l l a d v er t i s i n g a n d
p r o mo t i o n a l m a t e r i a l i s c l e a r, f a i r, reasonable and not misleading.
8.To help manage their account and check entries on it, the banks/ FIs
shall give the borrowerstheir account statements at regular intervals or Pass
Book for the type of account they have.
9 . T h e b a n k s / F I s s h a l l t e l l t h e b o r r o w e r s a b o u t t h e c l e a r i n g cy c l e ,
i n c l u d i n g w h e n t h e y c a n withdraw their money after lodging collection
instruments and when they will start earninginterest.

35

10.The banks/ FIs shall keep original cheques paid from the customers
account or copies, for such periods as required by law. If, within a
reasonable period after the entry has been madeon their statement, there
is a dispute about a cheque paid from their account, the lenders/ financial
institutions shall provide the customers with the necessary information for
evidence-subject to a possible charge for the same.
11.In the event the cheque book, passbook or ATM/Debit card has been
lost or stolen, or thatsomeone else knows the customers PIN (Personal
Identification Number) or other securityinformation, the banks/ FIs shall,
on notification, take immediate steps to try to prevent these from being
misused.
12.The customer information collected from the customers shall not be
used for cross selling of services or products among the banks, their
subsidiaries or affiliates.
The banks/ FIs shalltreat all the personal information of their customers
as private and confidential (even whent h e y a r e n o l o n g e r t h e i r
customer), including entities in their group, other than in
t h e following four exceptional circumstances for which the banks/ FIs are
permitted to do so :-a . I f t h e y ( i . e . t h e b a n k s / FI s ) h a v e t o g i v e t h e
i n f o r m a t i o n b y l a w. b.If there is a duty to the public to reveal the information
in the interest of the public at large.

36

c.If their interests require them to give the information (for

example, to prevent fraud) but
the banks/ FIs shall not use this as a reason for giving information
about its customers or their accounts (including their name
and address) to anyone else, including other companies
intheir group, for marketing purposes.d . I f th e c u s t o m e r s a s k s
t h e b a n k s / F I s t o re v e a l t h e i n f o rm a ti o n , o r i f t h e
b a n k s / F I s h a v e t h e c u s t o m e r s p e rm i s s i o n to p ro v i d e
s u c h i n f o rm a t i o n t o t h e i r g ro u p / a s so c i a t e / e n t i ti e s
o r companies when the lenders/ fi nancial institutions have
tie-up arrangements for providingother financial service
products
PARAMETERS IN RELATION TO HOME LOANS
Home loans are an important means of social mobility. Under home loans, the
eligibility criteria,documentation, interest rates, quantum of loan, margin
requirement, security, repayment etc andsuch other important parameters are
put into consideration by banks and financial
institutionsw h i l e g i v i n g l o a n s t o t h e b o r r o w e r s . T h e p a r a m e t e
r s p u t d o w n b y b a n k s a n d f i n a n c i a l institutions vary from
i n s t i t u t i o n t o i n s t i t u t i o n . H o w e v e r, t h e o v er a l l g u i d e l i n e s
f o l l o w e d b y them are given as below:
ELIGIBILITY CRITERIA
1) For Resident Indians
Home loan eligibility for Resident Indians depends upon the repayment
capacity of the loanapplicant. The maximum loan that can be sanctioned

37

varies with the banks and other housingfinance companies (HFC) and
generally, the maximum loan amount granted is 80 to 85% of thecost of the home.
i) Increasing the Home loan tenure:
O n e o f t h e b a s i c p r o c e s s o f e n h a n c i n g t h e h o m e l o a n eligibility is
by opting for a higher tenure. This is so because the EMI, which an
individual hasto pay, starts to decline as the tenure increases while the
interest rate as well as the principalamount remains the same. What changes
though, is the net interest outgo, which rises with a risein tenure. And since the
individual is paying a lower EMI now, his 'ability to pay' and thereforehis
loan eligibility automatically increase.
ii) Repaying other outstanding loans:
There might be adverse effect on home loan eligibility f o r i n d i v i d u a l s
w i t h o u t s t a n d i n g l o a n s l i k e c a r l o a n s or p e r s o n a l l o a n s . I n d u s t r y
standardssuggest that existing loans with over
1 2 u n p a i d i n s t a l l m e n t s a r e t a k e n i n t o a c c o u n t w h i l e computing the
home loan borrower's eligibility. In such a scenario, individuals have the
optionof prepaying in part/full their existing loans. This will ensure that
their eligibility for the homeloan purpose is unaffected.
iii) Clubbing of incomes:
Home loan eligibility can also be enhanced by clubbing incomes
of spouse, children (son or daughter) staying with the applicant and
having regular income andeven earning parents (father or mother) living
with the applicant. The eligibility in such casesw i l l b e c a l c u l a t e d o n
t h e c l u b b e d i n c o me o f b o t h t h e a p p l i c a n t s e n h a n c i n g t h e
i n d i v i d u a l ' s eligibility to the extent of the co-applicant's income.
iv) Step-Up loan:

38

Individuals can also enhance their loan eligibility by opting for step-up loans.A
step-up loan is a loan wherein an individual pays a lower EMI during the
initial years and thesame is enhanced during the rest of the loan tenure. HFCs
usually consider the lower EMI of thei n i t i a l y ea r s t o c a l c u l a t e h i s l o a n
e l i g i b i l i t y w h i l e t h e i n i t i a l l o w e r E MI h e l p s i n cr e a s e t h e individual's
'capacity to borrow'.
v) Perks:
Salaried individuals must ensure that variable sources of income like
performance-linked pay among others are taken into consideration while
computing their income. This in turnwill imply that the loan amounts they are
eligible for stand enhanced as well.However, potential investors
and borrowers must work out solutions best suited for their profilea f t e r
speaking to their home loan consultant and only then consider
a c t i n g o n t h e o pt i o n s d i s c u s s e d . B e c a u s e , i n c r e a s i n g l o a n
e l i g i b i l i t y c a n h a v e a n i mp a c t o n o t h e r a s p e c t s o f t h e i r financial
planning
2) For Non- Resident Indians
The eligibility criteria of NRIs differ from Resident Indians based on a
few parameters. The parameters include:
Age:
The loan applicant has to be 21 years of age.
Qualification:
The NRI loan seeker has to be a graduate.
Income:

39

The loan applicant has to have a minimum monthly income of $ 2,000

(although,
thisc r i t e r i o n m a y d i f f e r a c r o s s H F C s ) . T h e e l i g i b i l i t y i s a l s o
d e t e r m i n e d b y t h e s t a b i l i t y a n d continuity of your employment or
business.
Payment options:
The NRI also has to route his EMI (Equated Monthly Installments)
chequesthrough his NRE/ NRO account. He cannot make payments from another
source say, his savingsaccount in India.
Number of dependants:
The eligibility of the applicant is also determined by the number
of dependents, assets and liabilities.A n N R I a p p l i c a n t i s e l i g i b l e t o g e t a
h o m e l o a n r a n g i n g f r o m a m i n i mu m o f R s 5 l a k h s t o a maximum of
Rs 1 crore, based on the repayment capacity and the cost of the property,
whichalthough is variable by the priorities of the home loan provider.
Also Home Loan Tenure for NRIs is different from Resident Indians. An
applicant will be eligible for a maximum of 85% of the cost of the property or
the cost of construction as applicable and 75% of the cost of land in case
of purchase of land, based on the repayment capacity of the borrower.However, a
NRI can enhance his loan eligibility by applying for home loans with a coapplicantwho has a separate source of income. Also, the rate of interest for
home loans to NRIs is higher than those offered to Resident Indians. The
difference is to the income. Also, the rate of interestfor home loans
to NRIs is higher than those offered to Resident Indians. The difference
is to theextent of 0.25%-0.50%. Some HFCs also have an internally
earmarked 'negative criterion' for NRI home loans. As such, the NRIs

40

who hail from locations that are marked as being 'negative'in the books of HFCs,
find it difficult to get a home loan.

FAI R P R A C T I C E S C O D E TO B E F O L L O W E D B Y
B A N K E R S WHILE GIVING HOME LOANS
With a view to setting out fair lending practices in a transparent manner,
the RBI has advisedBanks and Financial Institutions (FIs) to adopt the following
as Lenders Fair Practices Code.The Fair Practices code applies to the following
areas:
A) Applications for loans and their processing
1) Standard schedule of fee/ charges relating to the loan application depending on
the segment tow h i c h t h e a c c o u n t s b e l o n g s h o u l d b e m a d e a v a i l a b l e
t o a l l t h e p r o s p e c t i v e b or r o w e r s i n a transparent manner, along with
the loan application, irrespective of the loan amount. Likewise,amount of
fee refundable in the event of non-acceptance of the application,
prepayment optionsand any other matter which affects the interest of the
borrower should also be made known tothe borrower at the time of
application.2) Receipt of completed application should be duly acknowledged.3 )
T h e a c k n o w l e d g e m e n t s h o u l d a l s o i n c l u d e t h e a p p r o x i ma t e d a t e
b y w h i c h t h e a p p l i c a n t should call on the Bank for preliminary discussions, if
deemed necessary.4) All loan applications will be disposed of within a stipulated

41

period from the date of receipt of duly completed loan applications i.e. with all the
requisite information/papers.5) In case of rejection of loan application,
irrespective of category of loans or threshold limits,the same should be
conveyed in writing along with the main reason(s), which led to rejection
of the loan application. The time frame for conveying the reason/s of
rejection should be as per theSchedules.
B) Loan appraisal and terms/conditions
1) In accordance with Banks prescribed risk based assessment procedures, each
loan applications h o u l d b e a s s e s s e d
a n d s u i t a b l e m a r gi n / s e c u r i t i e s s h o u l d b e s t i p u l a t e d b a s e d o n s u c h
r i s k assessment and Banks extant guidelines, however without compromising on
due diligence.2) The sanction of credit limit along with the terms and
conditions thereof is to be conveyed tothe loan applicant in writing
and applicants acceptance of such terms and conditions should
beobtained in writing. Such terms and conditions as have been mutually
agreed upon between the bank and borrower prior to the sanction will only be
stipulated.
3) Copy of loan documents, along with a copy of all
r e l e v a n t e n c l o s u r e s s h o u l d b e m a d e available to the loan
a p p l i c a n t o n s p e c i f i c r e q u e s t . S t a n d a r d s a n c t i o n l e t t er w o u l d
i n c l u d e i n s t a n c e s o f a p p r o v a l , d i s a l l o w a n c e , e t c . Th e b a n k i s
u n d e r n o l e g a l o b l i g a t i o n t o c o n s i d e r increase/additional limits/facilities
without proper review/assessment.
4) In case of lending under consortium arrangement, the participating
banks would decide thetimeframe to complete appraisal of the proposal

42

and communication of the decision. The Bank will abide by the decision of
the consortium.
C) Disbursement of loans including changes in terms and conditions
1) Disbursement of loans sanctioned is to be made immediately on total
compliance of terms andconditions including execution of loan documents
governing such sanction.
2) Any change in terms and conditions, including interest rate and service
charges, should beinformed individually to the borrowers in case
of account specific changes and in case
of others by Public Notice/display on Notice Board at the branches/on the Banks
website/through Printand or other Media from time to time.
3) Changes in interest rates and service charges should be effected prospectively.4)
Consequent upon such changes any supplemental deeds, documents or
writings are requiredto be executed, the same shall also be advised.
Further, availability of facility will be subject toexecution of such deeds,
documents or writings.
D) Post disbursement supervision
1) Post disbursement supervision by Banks/ FIs, particularly in respect
of loans upto Rs. 2 lacs,should be constructive with a view to taking care
of any genuine difficulties that the borrower may face.2) Before taking
a decision to recall/accelerate payment or performance under
the agreement or seeking additional securities the Lenders should give
reasonable notice to the borrower.3) All securities pertaining to the loan
should be released by Banks/ FIs on receipt of full andfinal payment of

43

the loans subject to any legitimate right or lien and set off for any other
claimt h a t t h e B a n k / F i n a n c i a l I n s t i t u t i o n m a y h a v e a g a i n s t t h e
b o r r o w e r s . I f s u c h r i g h t i s t o b e exercised, borrowers should be given due
and proper notice with requisite details.

E) Other general guidelines

1) The Banks/ FIs should refrain from interference in the affairs of the borrower
except for whatis provided in the terms and conditions of loan sanction documents
(unless new information, notearlier disclosed by the borrower, has come to
the notice of the Bank as lender). However thisdoes not imply that
Banks right of recovery and enforcement of security under Law as well
asappointment of nominee directors, where required, is affected by this
commitment.2) While lending Banks/ FIs should not discriminate on the
grounds of gender, caste or religionin its lending policy and activity.3 ) I n
t h e c a s e o f r e c o v e r y, B a n k s / FI s s h o u l d r e s o r t t o t h e u s u a l
m e a s u r e s a s p e r l a i d d o w n guidelines and extant provisions and should
operate within the legal framework.4) F o r t h e p ur p o s e o f r e c o v er i n g
l o a n s , B a n k s / F I s s h o u l d h a v e a M o d e l P o l i cy o n C o d e
f o r Collection of Dues and Repossession of Security. They should not
resort to undue harassmentviz. persistently bothering the borrowers at odd
hours, use of muscle power, etc.
5) In case of request for transfer of borrowal accounts, either
f r o m t h e b or r o w e r or f r o m a Bank/FI, the Banks consent or otherwise
should be conveyed within a stipulated period fromthe date of receipt of
request.

44

6)T h e B r a n c h O ffi c i a l s s h o u l d i m m e d i a t e l y t a k e u p t h e m a t t e r f o r
r e d r e s s a l i n c a s e o f a n y complaint/grievance from the applicant/borrowers.27

7) In case of complaints received, the branch should take into consideration the
matter with fulldetails within a stipulated period from date of receipt and
take all necessary steps to redress andresolve the grievance/dispute within a
proper time frame.

TIPS WHILE BUYING A HOME

Buying a home is a dream of a lifetime for most of the people. Before applying for
a home loan,here are some tips that will be helpful when the borrowers are looking
for a house of their own.
1) While buying a flat from a promoter or buildera) With respect to the location
i. A proper check should be done for proper approach roads.ii. One should ensure
secured electricity and water connectionsiii. Ensuring that well laid
out drainage, sewerage and garbage disposal arrangements have
beenmade.iv. Checking out whether there is any pollution due to industries etc. in
the areav. f i n d i n g o u t t h e l e v e l o f d e v e l o p m e n t a l a c t i v i t i e s o f t h e
a r e a - a d e q u a t e p u bl i c t r a n s p o r t facilities and other vital amenities like
educational institutions, hospitals and shopping avenues
b) With respect to approvals
i . O n e s h o u l d c h e c k i f t h e b u i l d er / p r o mo t e r h a s
b e e n gr a n t e d d o c u me n t e d a p p r o v a l s f r o m Municipal Corporation,
Area Development Authorities, Electricity Boards, Water Supply

45

&Sewerage Boards, Airport Area Authorities, etcii. Checking out if the

builder/promoter has secured approvals from Pollution Control
Boards,Agriculture & Forest Authorities
c) With respect to the property
i.

Checking out for proper Development Agreements and

the authority for conveyance of title infavour of builder/promoter ii.
Obtaining a clear and marketable title of the propertyiii. Ensuring
execution of proper sale agreements on the initial paymentsiv. Having a

ii.

look at the sanctioned planv. Registration of the property

vi. Verification of the plinth and carpet area of the property

d) With respect to amenities

i. Checking for the condition of the building and the future life expectancyii.
Finding out whether drinking water is availableiii. Checking for natural lighting,
ventilation, water connection & sanitary connection
i . V er i f i c a t i o n o f t h e s p e c i f i c a t i o n s g i v e n b y t h e b u i l d e r r e g
a r d i n g i n c l u d i n g q u a l i t y o f construction and availability of drinking and
potable water have been deliveredii. Assessment of the natural lighting, ventilation,
water connection & sanitary connection statusof the prospective propertyiii.
Checking up the common service area charged and their reasonability
2) While buying a flat from a second ownera) With respect to the location
i. Checking for proper approach roadsii.
Checking for electricity and municipal water connectionsiii.
Finding out whether well laid out drainage, sewerage and garbage
disposal arrangements aremadeiv.

46

Finding out whether there is pollution due to industries etc in the areav.
Checking for the developmental activities of the areaS.
Public transport facilities in the area.

vii. Checking for educational institutions, hospitals, shopping avenues

nearby, green belts &rainwater drainage
b) With respect to approvals
D o c u m e n t e d a p p r o v a l s f r o m C i t y C o r p or a t i o n , A r e a D e v e l o p m e n t
A u t h o r i t i e s , E l e c t r i c i t y Boards, and Water Supply & Sewerage Boards
c) With respect to the property
i. Title deeds of the vendor of the propertyii. Previous title deeds covering a period
of 13 yearsiii. Sanctioned planiv. Encumbrance certificate for the past 13 yearsv.
Upto-date tax paid receiptsvi. Valuation of the property from a registered
valuer vii. Checking out if the flat/apartment is free from tenancyviii. Registration
of the property
d) With respect to amenities
i. Checking for the condition of the building and the future life expectancyii.
Finding out whether drinking water is availableiii. Checking for natural lighting,
ventilation, water connection & sanitary connection
3) While buying an independent house from a promoter/ builder With respect to
the locatioN
i. Checking for proper approach roadsii. Checking for electricity connectionsiii.
Finding out whether municipal water connections are
presenti v . F i n d i n g o u t w h e t h e r t h e r e i s w e l l l a i d o u t d r a i n a g e ,

47

s e w e r a g e a n d g a r b a g e d i s p o s a l arrangement madev. Finding out

whether there is pollution due to industries etc in the areavi. Checking for the
developmental activities of the areavii. Finding out the availability of public
transport facilities in the
areav i i i . C h e c k f o r e d u c a t i o n a l i n s t i t u t i o n s , h o s p i t a l s , s h o p p i n g a v
e n u e s n e a r b y, g r e e n b e l t s & rainwater drainage
b) With respect to approvals
Checking out if necessary approvals from City Corporation, Area
Development Authorities,Electricity Boards, Water Supply & Sewerage
Boards, and Airport Area Authorities have beenobtained
c) With respect to the property
i. Sale deed of the vendor of the propertyii. Clear & marketable title of the
propertyiii. Sanctioned planiv. Encumbrance certificate for the past 13 yearsv.
Upto-date tax paid receiptsvi. Valuation of the property from a registered
valuer vii. Registration of the property

Procedure of home loan

T h e c r e d i t d o c u m e n t s c o mp r i s e d o c u m e n t s t o e s t a b l i s h i n c o me , a
g e , r e s i d e n c e , e mp l o y me n t , i n v e s t m e n t s , e t c . D ur i n g t h i s s t a g e , t h
e b a n k / f i n a n c i a l i n s t i t u t i o n c h e c k s t h e r e p ay m e n t c a p a c i t y o f t h e
c u s t o m e r. Th e r e p ay me n t c a p a c i t y i s d e t e r mi n e d by t a k i n g
intoconsideration factors such as income, age, qualifications, num
b e r o f d e p e n d a n t s , s p o u s e ' s income, assets, liabilities, stability and
continuity of occupation and savings history.

48

B. Personal Discussion with customer:

Some banks/FIs require the customer be present at thet i m e o f t h e
credi
a p p r a i s a l . S o me b a n k s / F I s m a y i n s i s t o n a p e r s o n a l i nt e r v i e w
w i t h t h e c u s t o me r a n d p e r f o r m a r e f e r e n c e c h e c k o n t h e r e f e r e n c e s
p r o v i d e d by t h e c u s t o m e r o n t h e application form. For the personal
discussion the customer needs to take with him all documents pertaining to the
information provided by him on the application form.:
c. field investigation by banks
The bank/FI validates
information provided by the customer on the application form. This stage revolve
s around two key aspects.Critically appraising the credit worthiness of the
customer and analyzing the risk in lending. It isn e c e s s a r y t o c a p t ur e a l l t h e
i n f o r m a t i o n r e q u i r e d t o c a t e r t o t h e s e a s p e c t s . I t i s i mp o r t a n t
t o verify that the information supplied by the customer is correct and
authentic. Banks achieve thismostly through external agencies. Also
the validity and authenticity of information can be donethrough
conducting checks on the residential address of the customer, the place
of employmentof the customer, and credentials of the employer,
verification of documentary proofs of income,age and other information. To
minimize the risk, it is necessary to check that the customer is nota fraud or black
listed within the bank or other institutions.
D. Credit Appraisal and loan sanction:

49

The next phase in the home loan process is the creditappraisal and loan
sanction. After checking the customer's repayment capacity, the
bank/FI setsnorms that define the customer's eligibility for a loan
amount. The loan then gets sanctionedalong with certain terms
and conditions. When evaluating the measurable aspects of home
loanrequests, an analyst addresses the following issues: the character of the
borrower, the use of loan proceeds, the amount needed, and the primary and
secondary sources of repayment. Therefore,the bank has to base its decisions more
on qualitative parameters rather than quantitative aspects.Credit analysis
therefore is distinct for each type of home loan scheme. Credit analysis is
themost popular methods of evaluating home loans.32
E. issue of offer letter of the customer
The bank/FI sends an offer letter tothe customer with the loan sanction details
which mention:
Loan amount
R a t e o f i nt e r e s t a n d w h e t h e r i t i s f i x e d / v a r i a b l e r a t e o f i n t e r e s t .
I f v ar i a b l e , p e r i o d a f t e r which the rate of interest would be reset - annual /
monthly reducing balance
Loan duration
Mode of Loan repayment
Scheme of the loan, if a special scheme has been offered to the customer
General terms and conditions of the loan

50

Special conditions, if any, which the customer needs to adhere to prior to

disbursement
Submission of the acceptance copy of the offer letter and a cheque for
administrative fees bythe customer
F. Submission of property / legal documents by the customer to the
bank/FI:
After the selection of the property, the customer is required to submit the original
documents pertaining tot h e pr o p e r t y b e i n g p u r c h a s e d or m o r t g a g e d ( i f
t h e p r o p e r t y p ur c h a s e d i s d i ffe r e n t f r o m t h e property mortgaged). The
bank/FI keeps the property documents as security for the loan amountgiven to
the customer till the time the loan is fully repaid.
G. Legal check on the property by the bank
: The bank/FI sends all the documents to their empanelled
Lawyer for a thorough scrutiny. On receiving the lawyer's report that the
documentsare clear, the bank/FI decides to disburse the loan
to the customer. If the documents sent to thel a wy e r a r e n o t e n o u g h t o
a r r i v e a t a j u d g me n t , t h e b a n k / FI r e q u e s t s t h e c u s t o me r t o
f u r n i s h additional documents.
H. Technical check on the property by the bank/financial institution:
Prior to disbursement,the bank/FI conduct a site visit to the customer's property to
verify the following:
In case of under construction property:

51

Quality of construction
Stage of construction: Whether it is the same as mentioned in the
payment notice given tothe customer by the builder 33

Progress of work
Layout of flats and area of property is within permission granted by the governing
authority
R e q u i s i t e c e r t i f i c a t e s h a v e b e e n r e c e i v e d b y t h e b ui l d e r t o s t a r t
construction at the site
In case of ready construction/ resale:

Age of the structure

Quality of construction
Whether the structure will last the tenure of the loan
External maintenance of the property
Internal maintenance of the property
Surrounding area (development)
R e q u i r e d c er t i f i c a t e s f r o m t h e g o v e r n i n g a u t h or i t y h a v e b e e n
r e c e i v e d b y t h e b u i l d e r f o r handing over possession of the flat
There is no existing lien or mortgage on the property

52

I. Disbursement:
After verifying that the property is legally and technically clear, the
bank/FIdisburses the loan amount on the basis of the stage of construction of the
property. The customer needs to pay the margin money from his own contribution
prior to the disbursement.
J. Repayment:
The repayment of the loan by the customer starts only
a f t e r t h e f u l l disbursement of the loan amount has been made by the
bank/FI. The loan is always repaid byw ay o f E MI s . Th e m o d e o f
r e p a y m e n t , h o w e v e r, d i ffe r s f r o m c a s e t o c a s e . I n c a s e o f a
l o a n r e p ay m e n t d o n e t h r o u g h D e d u c t i o n
A g a i n s t S a l ar y ( D A S ) , P o s t D a t e d C h e q u e s ( P D C s ) , Standing
Instructions (SI) and cash / Demand Draft (accepted only by some
banks/FIs). Thecustomer can deposit the amount of his EMI every month at the
bank/FIs office.

K. Interest tax certificate:

This certificate is given by the bank/FI to the customer to avail of tax
benefits that accrue through a
. The customer can submit this to his employer or chartered accountant to
account it while calculating the customer's tax liability.
L.Prepayment by the customer:

53

The customer can either partly or fully prepay his loan at anygiven point
of time. The loan could be partly or fully disbursed when the customer
wishes to34 prepay his loan. Most banks/FIs, however, have a limit on the
number of times that a person can prepay his loan. There is, normally, also a
minimum amount that a customer has to prepay eachtime he wishes to do so.
Whenever a customer makes a prepayment, the customer has an optionof
reducing his EMI by keeping his tenure constant or to reduce his tenure
by keeping the EMIconstant

QUANTUM OF LOAN
The quantum of loan is assessed based on the net monthly/ net
a n n u a l i n c o m e w i t h a d i r e c t bearing on age factor of the borrower.
A person of age in the range of 21 to 45 years is eligiblefor a maximum amount of
60 times of his Net Monthly Income (NMI)/ five times of Net AnnualIncome. In
case the age is above 45 years the quantum will be restricted to 48 times
of NMI/four times of Net Annual Income. Many banks have put a ceiling
on the maximum amount of home loan at Rs.50 lakhs. In order to assess
the quantum of finance income of spouse or close relative can also be
reckoned, provided that person becomes a co applicant.
Documentation refers to the documents needed to legally enforce the
loan
agreementa n d p r o p e r l y a n a l y z e t h e b o r r o w e r s f i n a n c i a l c a p a
c i t y . D o c u m e n t a t i o n i s a n e s s e n t i a l component from the point of
view of the safety of an advance. The ability to control arises fromthe
documentation of provisions, which confirm understanding on the basis

54

of which a creditfacility has been sanctioned. Documents should

be properly drafted, stamped and executed withn e c e s s a r y l e g a l
f o r m a l i t i e s , i f a ny. An e ffe c t i v e l o a n a p p r o v a l p r o c e s s e s t a b l i s h e s
m i n i mu m requirements for the information and analysis upon which a credit
decision is based.There are certain sets of documents that need to be
submitted at the time of application for ahome loan. The document sets
will vary according to the individual status - either resident or non resident
in India, as also the type of loan that the borrower may want to avail of.
Resident Indians / non resident indians
Income documents
Property documents
Personal documents
Income documents
Property documents
Personal documents

1) For Resident Indians

Documentation refers to the specific documents to be submitted by
Resident Indians as theya p p l y f o r h o me l o a n . Th e s e d o c u me n t s a r e
v e r y m u c h n e c e s s a r y f o r t h e b a n k s t o a v o i d a ny dispute and
uncertainty. The documents to be provided by the resident Indians
include
income proof, property documents and personal identification documents, etc. whi

55

ch of course varies based on the borrowers financial status and the type of loan he
want to avail. And of courseevery resident Indian should follow
some eligibility criteria before applying for Home Loans
inIndia.However, there are some standard documents made mandatory for
a loan applicant to produces u c h a s t h e l o a n a p p l i c a n t ' s pr o f i l e ,
e a r n i n g l i f e o f t h e a p p l i c a n t a n d p r e s e n t f i n a n c i a l s t a t u s proof etc.
The Applicant's Profile refers to the bio-data of the applicant,
mentioning his address, age,family background and detail information.
The Earning Life of the Applicants' proof clarifies the capability of the loan
payment.
The Present Financial status gives the present capability of handling the
own contributionand other expenditures. This includes the mortgage to be
deposited against the loan amount.
1) Income documents
If you are employed
Verification of Employment form
Latest salary slip/salary certificate showing all deductions for at least the past 6
months
Form 16 from your employer for the past 3 years.
I f y o u r j o b i s t r a n s f e r a b l e , p e r m a n e n t a d d r e s s w h e r e c o r r e s
p o n d e n c e r e l a t i n g t o t h e application can be mailed.

56

If you have been in your present employment / business or profession

for less than a year,mention details of occupation for previous 5 years,
giving position held reasons for changeand period of the same.40
If you are self employed
Balance sheet and profit and loss account of the business/profession
along with copies of individual income tax returns for the past 3 years as
certified by a chartered accountant.
A note giving information on the nature of the business/profession, year
of establishment, present bankers, form of organisation, clients, suppliers etc.
Your net worth as an applicant/co-applicant.

2) Property documents
Purchase of a flat or apartment from a builder/promoter

title deeds of the builder/land owner for a period of at least 13 years.

Development agreement between the builder and land owner if applicable.
Power of Attorney executed in favour of the builder, if applicable.
An encumbrance certificate for the past 13 years.
The khata certificate. (Basic document indicating ownership of property
as entered in theregister of the government authorities.)
Up-to-date tax paid receipts of the property.

57

A sanctioned plan and license.

An agreement for sale and a construction agreement with the borrower.
In case purchase of house from second owner

Title deeds of land owner for a period of at least 13 years.

Encumberance certificate for the past 13 years.
Khata certificate (Basic document indicating ownership of property as entered in
the register of the government authorities).
Up to date tax paid receipts of the property.
Sanctioned plan and license.
Agreement for sale in favour of the applicant/applicants.41

FEES & CHARGES

he interest rates and EMIs are not the only cost factor that the banks and
financial institutionstake into account while giving Home Loans. The
certain other fees and charges that the bankslevy on the borrowers can be as
follows:
1) Processing Charge:
It's a fee payable to the lender on applying for a loan. It is either a
fixedamount not linked to the loan or may also be a percentage of the

58

loan amount. The loan amountreceived by the borrower can be less than the
processing fee

2) Interest Tax:
This is the tax payable on the interest paid on a home loan and not the principal.
This tax is some times included in the interest rate of the loan, or may be
chargedseparately as interest tax.
3) Documentation Fees:
B a n k s c o l l e c t f e e s f o r d o c u me n t a t i o n , a d mi n i s t r a t i o n , c o n s u l t a n t c
harge, valuation fees and legal fees from the customers as part of the application
processing.
4) Commitment Fees:
Some institutions levy a commitment fee in case the loan is not availed of
within a stipulated period of time after it is processed and sanctioned.
5) Prepayment Penalties:
When a loan is paid back before the end of the agreed duration
a penalty is charged by some banks/companies, which is usually between 1% and 2
% of theamount being pre paid.

6) Registration of mortgage deed

59

AGE CONSIDERATION FOR HOME LOANS

T h e m i n i m u m a g e r e q u i r e m e n t f o r a v a i l i n g a ny t y p e o f H o u s i n g
L o a n i s 1 8 y e ar s , a n d t h e maximum is 60 years. The maximum age can be
relaxed in deserving cases up to 65 to 70 years.
PENALTY FOR PRE-PAYMENT
When a loan is paid back before the end of the agreed
d u r a t i o n a p e n a l t y i s c h a r ge d by s o me banks/companies, which is usually
between 1% and 2% of the amount being pre paid.
EMI ( EQUATED MONTHLY INSTALMENT)
This is the installment amount the borrower has to make towards
repayment of his loan. TheE MI c o m p r i s e s o f b o t h t h e pr i n c i p a l
a n d i n t e r e s t . B a n k s / F I s c h a r ge a n E q u a t e d M o n t h l y Installment from
the borrower that is calculated on the basis of loan amount and the interest
ratec h a r g e d f o r t h e s a m e . R e p a y m e n t b y w a y o f E M I g e n e r a l l
y c o m m e n c e s f r o m t h e m o n t h following the month in which one
takes disbursement. It can be calculated either on the basis of annual
reducing rest, monthly rest or daily rest. In an annual rest the EMIs
(equated monthlyi n s t a l l m e n t s ) ar e c a l c u l a t e d o n a n a n n u a l b a s i s .
T h e i n t e r e s t i s c a l c u l a t e d o n t h e o u t s t a n d i n g principal at the beginning
of every year. Once the interest is calculated at the rate charged to the

60

customer for the entire year it is deducted from the EMIs received during
the year. The balanceEMI is taken as principal repaid during the year and this is
deducted from the opening balance of principal of the current year to arrive at the
opening balance of principal for the next year. Under this method, typically
the component of interest in the EMI is higher for the first few years
andlater on the component of principal increases and the interest keeps
reducing year after year. Ino t h e r w o r d s , t h e i n t e r e s t i n t h e E M I
w i l l k e e p r e d u c i n g y e a r a f t e r y e a r a n d t h e p r i n c i p a l component
in the EMI keeps increasing. This is commonly known as Annual Reducing
Balanceof the principal amount lent. In this case EMI becomes 1/12th the
Equated annual installment.In the monthly rest, principal repayments are
credited at the end of every month and interest is calculated on the
outstanding principal at the end of every month. In the daily reducing
principalrepayments are credited at the end of the day an installment is paid.T h e
EMI for the loan will begin after the loan has been disbursed in
f u l l . Til l s u c h t i m e
t h e borrower has to pay the interest for the loan. The amount of interest payable ev
ery month iscalled pre-EMI.In short the following four factors go into the
determination of EMI.
The principal amount
- Th i s i s t h e a c t u a l l o a n a m o u n t t a k e n . O b v i o u s l y t h e l a r ge r
t h e amount, the greater the EMI.
The rate of interest
- Another obvious one, the higher the interest rate, the higher the EMI.
The tenure

61

- The longer one take the loan for, the lesser the EMI. The faster one
want torepay it, the higher the EMI.
How the interest rate is calculated
- I t c o u l d b e c a l c u l a t e d e i t h e r o n a d a i l y r e d u c i n g o r monthly
reducing or on an annual reducing basis.
INTEREST RATES FOR HOME LOANS & THEIR CALCULATION
Interest rates charged by housing finance companies vary depending
upon your individual status- either resident or non resident in India,
the loan amount, scheme type, and are sometimes even based on the tenure
of the loan.The way banks / FIs charge interest to arrive at the value of
EMI can be broadly classified intoFlat rate system and Reducing balance
rate system. In the flat rate system, the rate of intereston the loan amount is
calculated over the entire duration of the loan and the principal plus the

interest is divided over the number of installments and the value arrived
is the EMI. But in caseof 'Reducing Balance system, the interest is
charged on the outstanding balance of the loan,which goes on reducing.The
reducing balance can be further classified into monthly reducing,
quarterly reducing anda n n u a l r e d u c i n g m e t h o d s b a s e d o n t h e n u mb e r
o f t i me s t h e p r i n c i p a l i s r e d u c e d / c r e d i t e d i n a year. Suppose the
principal is reduced 12 times a year, it is termed as monthly reducing
balancemethod, if the principal is reduced 4 time a year, it termed as quarterly
reducing balance methoda n d i f t h e pr i n c i p a l i s r e d u c e d 1 t i me a y e a r,
it known as annual reducing balance method.Annual reducing

62

b a l a n c e m e t h o d i s v e r y c o m mo n w i t h I n d i a n b a n k s a n d mo n t h l y
r e d u c i n g balance method is popular among the foreign banks and nationalized ba
nks, engaged in theactivity of housing finance.
Resident Indians / non resident indians
Buying a new house
Buying an existing house
House improvement
Buying a new house
Buying an existing house
House improvement
1) Interest rates for Resident Indians
Buying a new house from a builder/promoter
Banks and FIs offer resident Indians loans upto Rs 10,000,000 for upto
30 years for buying anew flat from a builder. The flat may be under construction
at the time of application.The table below offers a comparison of loan ranges
and corresponding interest rates applicableunder this scheme.
SBI FOR ALL LOAN AMOUNTS
Buying a house from a second owner
B a n k s a n d F I s o ffe r r e s i d e n t I n d i a n s l o a n s u p t o R s 1 0 , 0 0 0 , 0 0 0 f o r
u p t o 3 0 y e ar s u n d er t h i s scheme.The table below offers a comparison of
loan ranges and corresponding interest rates applicable under this scheme.

63

Company loan amount (rs.) floating rate (%) fixed rates (%)
Home Improvement
Banks and financial institutions offer non resident Indians loans upto Rs
1,000,000 for periodsranging from 1 to 10 years under this scheme.Home
improvement schemes allow the borrower to finance internal and external
repairs andother structural improvements in your home. Some of the
home improvements one can financeunder this scheme are:
External repairs
Waterproofing and roofing
Internal and external painting
Plumbing and electrical works
Tiling and flooring
Grills and aluminium windows

MARGIN AMOUNT FOR HOME LOANS

The difference in the total cost of the property and the loan amount
sanctioned is the marginamount. This money has to be invested by the borrower
of the property prior to the release of theloan amount in case of construction
of a house. In case it is for purchase of a ready house, theloan amount is
released on the day of registration of the property and the margin money
has to be invested by the borrower prior to the release. In case of purchase of flats

64

also, the release

will be made only on investment of the margin money by the borrower. A margin a
mount is theamount that the applicant pays through his/her pocket. As far
as home loans are concerned
a bank usually pays 85% of the total cost of the house to be purchased by the borro
wer. Them a rgi n i s u s u a l l y t h e a m o u n t n o t c o v e r e d b y t h e b a n k f o r
t h e p a y me n t o f t h e e s s e n t i a l a n d n e c e s s a r y f e e s f o r t h e p u r c h a s e o f
t h e h o u s e . I n m o s t o f t h e c a s e s , t h e m a r gi n a m o u n t o f 25% of the
purchase consideration has to be borne by the borrower in the case of purchase of
oldhouses/approved plots and 15% of the project cost in the case of loans for
construction/purchaseof new house/flat.

SECURITY FOR HOME LOANS

In most cases, the property to be purchased itself becomes the security
and is mortgaged to thelending institution till the entire loan is repaid.
Interim security may be additionally required, if the property is under
construction Some companies may also require additional securities whichare
called collateral securities like the assignment of life insurance policies,
pledge of shares, NSCs, units of mutual funds, bank deposits or other investment

65

GUARANTOR FOR HOME LOANS

Guarantors are essential for sanctioning of loans. Usually, a guarantor is

required so that if theapplicant fails or becomes incapable of repaying,
the guarantor will be responsible for clearingthe debt. Generally most
banks do not insist on a guarantor when giving home loans but
somemight insist for 1 or 2 guarantors in certain cases. A guarantor is
equally liable to pay up theloan in case the borrower misses out on
repayments. By seeking a guarantor, the lender tries to enforce a moral
check that prevents the borrower from defaulting.I f t h e b or r o w e r i s a
s a l a r i e d i n d i vi d u a l w i t h a g o o d e mp l o y me n t r e c o r d a n d l a u d a b l e
d e b t repayment history, banks are assured of his/her financial stability
and credibility. In case oneruns a small business with low profits, the banks are
taking a risk. To safeguard their interests insuch circumstances, banks seek a
guarantor who is legally bound to make repayments in case of default.
The bank seeks a guarantor in case the loan applicant does not live in the
same city inwhich he is purchasing the property. If the nature of his job is
such that he will be constantlytransferred or could go abroad, the banks need a
guarantor.T h e s a m e i s t h e c a s e f o r s e l f - e m p l o y e d
i n d i v i d u a l s w h o l a c k r e q u i r e d p r o f e s s i o n a l qualifications.
Absence of a co-applicant for a loan sometimes calls for a guarantor. In
mostother cases, there is no personal guarantor required as home is an
investment to which peoplehave emotional bonding. And they are sure to
go to any extent to keep it. Any friend or family m e mb e r c a n b e a
g u a r a n t o r a n d c a n g u a r a n t e e t h e l o a n . A g u a r a n t or h a s t o f u l f i l l
t h e c r i t e r i a relating to age and income of a normal customer. The

66

minimum income criteria vary from onehousing finance company to

another. This is to ensure that since he is equally liable to pay the loan in
case of default, he has to be financially sound too like the loan applicant himsel
F.

67

REPAYMENT OPTIONS
1) For Resident Indians
Every bank/ FI have customized repayment options to suit every
individual's requirement andalso repaying capacity with some tax
benefits. They have thereby come up with more flexible and Multiple
Repayment Option. A few among them are:
Step-up Repayment Facility:
The objective of step-up repayment is to provide the borrower with a
repayment schedule, which is linked to expected growth in income. It not
only helps acustomer get a larger amount of loan as compared to the loan under
the normal housing loan; butthe customer can avail of a higher amount of loan and
pay lower EMIs in the initial years, whichis subsequently accelerated
proportionately with the assumed increase in his income.
Flexible Loan Installments Plan:
This repayment option offers a customized solution to suit the needs of
customers whose repayment capacity is likely to alter during the term of the loan.
Incases when a borrower is nearing retirement, the loan is structured in such a way
that the EMI ishigher during the initial years and subsequently decreases in
the latter part proportionate to thereduced income of the customer. This
option helps such customers combine the incomes and take a long term home
loan where in the installment reduces upon retirement of the borrower.
Tranche Based EMI:

68

C u s t o me r s p u r c h a s i n g a n u n d e r c o n s t r u c t i o n pr o p e r t y, n e e d t o p a y
interest (on the loan amount drawn based on level of
c o n s t r u c t i o n ) t i l l t h e pr o p e r t y i s r e a d y.Tra n c h e B a s e d E M I i s a
s p e c i a l f a c i l i t y o ffe r e d by s o me b a n k s t o h e l p c u s t o m e r s a v e
t h i s i n t e r e s t . C u s t o m e r s c a n f i x t h e i n s t a l l me n t s t h ey w i s h t o p a y
t i l l t h e p r o p er t y i s r e a dy. Th e 53minimum amount payable is the
interest on the loan amount drawn. Anything over and above the interest
paid by the customer goes towards principal repayment. The customer
benefits bystarting EMI and hence repays the loan faster.
Accelerated Repayment Scheme:
Accelerated Repayment Scheme offers the borrower a greato p p o r t u n i t y
t o r e p ay t h e l o a n f a s t e r b y i n c r e a s i n g t h e E M I . Wh e n e v e r t h e
b o r r o w e r g e t a n increment, increase in the disposable income or have
lump sum funds for loan prepayment, hecan benefit by:
Increase in EMI means faster loan repayment
Saving of interest because of faster loan repayment
O r i n v e s t l u m p s u m f u n d s r a t h er t h a n u s e i t f o r l o a n p r e p ay m e n t .
T h e r e t ur n f r o m t h e investments also gives the borrower the comfort of paying
the increased EMI.
Balloon Payment:
Balloon Payment is an augmentation tool offered by the banks/FIs,
whichhelps in increasing the loan eligibility of the customer without
increasing the EMI by assigningsecurities like National Savings
Certificate (NSC), LIC policies etc. The present value of the m a t u r i t y

69

a m o u n t o f a s s i g n e d s e c u r i t i e s i s c o m b i n e d w i t h t h e l o a n a mo u n t
t o a r r i v e a t t h e enhanced loan eligibility. Under this facility, the EMI is
calculated on the net loan amount (i.e.total loan less the present value of the
maturity value of the securities).
2) For Non- Resident Indians
The repayment option for Non-Resident Indians (NRIs) is done in EMIs,
and includes interestand principal amount calculated on monthly rests.
The borrower can pay EMIs by issuing post-dated cheques from the Non
Resident External (NRE)/Non-Resident Ordinary (NRO) or Non R e s i d e n t
( S p e c i a l ) R u p e e Ac c o u n t ( N R S R ) i n I n d i a ; o r a ny o t h e r a c c o u n t
a p p r o v e d b y t h e Reserve Bank of India (RBI).I n t h e c a s e o f p a r t disbursement of the
l o a n , t h e m o n t h l y i n t e r e s t i s p a y a b l e o n l y o n t h e disbursed
amount. EMI is payable every month, by the end of the month from the
date of eachdisbursement up to the date of commencement of EMI. Pre-EMI is
calculated at the same rate atwhich EMI is calculated.
Step-Up Repayment Facility:
B y t h e s t e p - u p r e p ay me n t o p t i o n , a b o r r o w e r c a n a p p l y f o r
ah i g h e r r a n g e l o a n b a s e d o n t h e p r o s p e c t s o f g r o w t h i n
i n c o m e f o r y e a r s t o c o m e . I n t h i s 54

r e p a y m e n t o p t i o n t h e l o a n e e h a s t o p a y l e s s E MI i n t h e i n i t i a l
y e ar s w h i c h i n c r e a s e a s t h e income grows with the coming years.

70

Flexible Loan Installments Plan:

In this mode of repayment, the borrower has flexible loaninstallment
facility where a borrower nearing retirement age can opt for paying
higher EMI inthe initial years and gradually move to paying lower installments
after reaching retirement age.
Tranche Based EMI:
Tranche Based EMI is a special facility offered to the customers so as
tosave their interest, in cases when customers purchasing an under
construction property need to pay interest (on the loan amount drawn based
on level of construction) till the property is ready.In such cases, customers can
fix the installments they wish to pay till the property is ready.
Theminimum amount payable is the interest on the loan amount drawn.
Anything over and abovethe interest paid by the customer goes towards
principal repayment. The customer benefits bystarting EMI and hence repays
the loan faster.
Accelerated Repayment Scheme:
A c c e l e r a t e d R e p a y me n t S c h e me f o r N R I s o ffe r s a g r e a t opportunity
to repay the loan faster by increasing the EMI. Whenever the NRI get an
increment,increase in the disposable income or have lump sum funds for
loan prepayment, the loanee can benefit by:
Increase in EMI, which means faster loan repayment
Saving of interest because of faster loan repayment and can invest lump
sum funds rather than use it for loan prepayment.A N R I l o a n e e c a n o p t f o r
repayment ahead of schedule, by remittances in abroad

71

t h r o u g h normal banking channels, the NRO / NRSR in India. However,

by regulations in many states inIndia, the Agreement of Sale between the
builder and purchaser is required to be registered bylaw. It is therefore
advisable to record the agreement for registration within four months of
thedate of the Agreement at the office of the Sub Registrar appointed by
the State Government,under the Indian Registration Act, 190
HOME LOAN WITH INSURANCE COVER
There are many individuals who worry about the adverse impact of the home loans
if somethingh a p p e n e d t o t h e m. Th i s i s w h er e a h o me l o a n i n s u r a n c e
p r o d u c t c o me s t o t h e r e s c u e . M a n y banks and financial institutions insist
on getting the home insured to safeguard their interest.
The borrower needs to ensure that the property is duly and properly insured for fire
and other appropriate hazards, as required by the bank and financial
institution during the period of theloan and will have to produce evidence
each year and/or whenever required by the lenders.
The bank/financial institution will be the beneficiary of the insurance policy.
There are various kindsof insurance covers available for a homeowner. The
various options may be insurance againstfire, against other disasters,
etc.Home loan insurance plans, also known as mortgage redemption plans are
policies that cover thehome loan liability. Though there are some minor
variants, most plans offer a sum assured thatreduces as the outstanding
home loan comes down every year. In such plans, it is not the
home but the loan that is covered should something happen to the borrower. For
instance, if a personhave taken a home loan of Rs 40 lakh and covered this
through a home loan insurance. If after ayear, the outstanding loan comes
down to Rs 39 lakh, then the sum assured also comes down toRs 39 lakh.

72

In short the sum assured is adjusted against the home loan liability.This insurance
is much like the term plan or pure risk cover plan that is available from
variousinsurance companies. There are exceptions like ICICI Bank
(through their tie-ups with ICICi lombard) home insurance loan where the
sum insured remains constant. And in the event of d e a t h o f t h e l i f e
a s s u r e d , t h e o u t s t a n d i n g h o me l o a n i s c l e a r e d o f a n d t h e r e s t i s
p a i d t o t h e family. Some characteristics of such plans include:
Low premiums, high cover
No maturity amount on survival of the term
Choice of one time premium or regular premiumsHowever, the cover in term
plans available in India are level term plans where the cover remainsthe same
whereas in the case of home loan covers, the amount keeps falling as the
home loanliability decreases. Also it is important to know that while most term
plans can be bought till thea g e o f 5 5 , h o m e l o a n i n s u r a n c e p l a n s
c a n b e b o u g h t t i l l t h e a g e o f 6 0 . H o w e v e r, t h e m e d i c a l underwriting
is stringent and it is only after adequate tests that these policies are
issued at thehigher age band. If one opts for a joint application then the premium
is double. And if any of the joint applicants die, the loan is paid off by the
insurance company. The premiums are calculated based on the medical
underwriting, based on the age and medical record. The conditions are:
Age of the life insured:
The premium increases with age. Medical tests increase with age andare
mandatory above 40 years. Below this age, a simple declaration is
good enough though thisdepends on each insurance company.
Medical record:

73

If the borrower of the loan is in a good health, the premiums will be

regular but if the insurance company's prognosis about the life assured is at highe
r risk, then the premiums will be higher. A past family history of early death or
critical illness will also increasethe premiums.

Loan tenure:
The premium will increase with the duration of the loan. A cover of Rs
50 lakhfor five years and a cover of Rs 50 lakh for 20 years will attract
different premiums, with thelatter being more expensive.Since this is a life
insurance plan issued by an insurance company, the premiums paid
towardslife insurance schemes are eligible for deductions under Section
80C. However, if the premiumis clubbed within the equated monthly
installment of the home loan, then the borrower will NOT
get the Section 80C benefit. Most banks have tie-ups with insurance
companies for the issuanceof such policies. There is always the question
that whether it is better to take a term plan andinsure the life that is going
to repay the home loan or go for home loan insurance. A factor that tilts
the argument in favour of term plans is the cost, which is much less and remains
constant aswell.However, a majority of the people should get thorough
needs analysis done and not just cover their home liability but other liabilities
as well, dependent goals (financial needs of children) anddependent income
goals (monthly needs of family if the borrower were to die) as well.
After t h i s , t a k i n g a t e r m p l a n f o r t h e r e q u i s i t e c o v e r n e e d e d i s
c o n s i d e r e d . F or t h o s e w h o c a n n o t undergo this exercise, opting for the
home loan insurance cover may prove helpful.

74

RECOMMENDATIONS FOR BANKERS

The entire housing finance sector thrives on a simple logic that the house
is the single largestinvestment made by a common man in his entire lifetime.
There is an emotional and sentimentalattachment towards his house property
wherein lots of personal money is involved. Hence, the r i s k i s v e r y
low to a lender since it would be a great loss to the
b o r r o w e r i f h e l o o s e s t h e possession of the house. This safest mode of
business has spurred many new entrants to join thef r a y. Ac c o r d i n g t o t h e
d e t a i l s g i v e n by t h e N a t i o n a l H o u s i n g B o a r d ( N H B ) p er t a i n i n g t o
t h e housing loan disbursements of banks and housing finance companies
as on June 29, 2006, theh o u s i n g f i n a n c e s e c t o r h a s s h o w n a n
e x p o n e n t i a l gr o w t h a s c o mp a r e d t o t h e o t h er a r e a s o f credit.

The housing finance sector even if it is showing an exponential growth is

not devoid of risks.The problem of bad loans has always been a matter of
concern for the entire industry. Since thecompetition among the players
in the housing finance sector is too high, all the
housing financecompanies maintain the interest rates in unison except for
public sector banks which operate onrelatively low rates of interest as
they concentrate more on retail business. Despite the low risk a t t a c h e d
t o t h i s s e c t o r a n d l e g a l s u p p o r t t o t h e l e n d e r s , pr o b l e m l o a n s ar e
c r e e p i n g i n t o t h e s y s t e m o v e r w h e l m i n g l y. I n o r d e r t o a v o i d t h e

75

p r o b l e m o f b a d l o a n s t h e b a n k s a n d f i n a n c i a l institutions may undertake

the following remedial measures for mitigation of risks:
1) PROPER SCRUTINY IN SANCTIONS AND DISBURSEMENTS
H o m e l o a n s a r e m a d e a v a i l a b l e by b a n k s a n d f i n a n c i a l i n s t i t u t i o n s
t o b o t h I n d i a n a n d N o n Resident Indian customers at floating and fixed
rates of interest and also with attractive EMI o p t i o n s . Th e l o a n s a r e
o ffe r e d f o r c o n s t r u c t i o n o f o r b uy i n g a n e w h o u s e , h o me r e p a i r s
a n d renovations, purchase of plots, against mortgage of property, etc.
Hence the banks and financialinstitutions should conduct a proper scrutiny
while sanctioning and disbursements of loans.
2) PROPER STUDY OF FINANCIAL STATEMENTS
M a n y a t i me s t h e b a n k s a n d f i n a n c i a l i n s t i t u t i o n s i n or d e r t o c o p e
with and to outsmart thecompetitors, they go to the extent of
l u r i n g t h e c u s t o me r s o f t h e i r c o mp e t i t or s by p r o vi d i n g attractve
schemes. Some companies even go to the extent of sanctioning the home
loan withouti d e n t i f y i n g t h e
p r o p e r t y a n d i mp r o p e r t i t l e d e e d s w h i c h i s t h e p r e r e q u i s i t e f o r e l i
g i b i l i t y.Waiving the processing fee, providing free accident insurance
and property insurance, waiving penalties, etc,. are some of the factors causing
reduction in the profit margin. Hence proper studyof financial statements and
analysis should be undertaken in order to increase the profitability.
3) END USE OF THE MONEY LENT
Banks and other housing finance companies have high rate of interests for nonresidential use of the loan. A study of the NPAs of these banks/FIs shows that
individuals who avail themselves
of l o a n s f o r r e s i d e n t i a l p r o p e r t i e s , d i v e r t t h e m f o r c o m m e r c i
a l o r a n y o t h e r p u r p o s e s . A n y fluctuations in the business

76

o p e r a t i o n s or m i n d s e t o f t h e b o r r o w e r s l e a d t o n o n - p ay me n t
o f interest. At times, it is very difficult for the lender to recover the loan amount if
the borrower has left the country. Hence, it is very important for
banks and fi nancial institutions to verify that theloan given
is utilized for the purpose for which it is sanctioned.

4) MARKETABILITY OF THE MORTGAGED ASSETS

Improper valuation and scrutiny of the documents tend to lead
the financier to invest more than100% of the value of the property. In
case, the loan is not serviced, he may not realize the claimamount. When
the borrower constantly defaults in servicing the loan, the lender has five types
of rights. Possession, lease, manage, reconstruct or sell. In practice the possessed
assets are in sucha condition that they can be neither sold nor managed nor
given for lease. To market them thel e n d e r o f t h e l o a n h a s t o i n c u r
further expenses adding to his risk of getting back his
f u r t h e r investment.
5) CONSTANT MONITORING
Once the loan is sanctioned, the job of the lender is not over. He has to
exercise vigilance andmonitor the payments of installments by the borrowers. It
is advisable to make periodical reviewof the borrowers financial position to ensure
his capabilities of prompt payment of installments.A c l o s e m o n i t o r i n g h a s t o
b e d o n e by t h e l e n d e r a b o u t t h e p e r f o r ma n c e o f v a r i o u s
i n d u s t r i a l units, changes in the socio-economic conditions in his areas of
operations, which will have a bearing on the repayment capacity if the
individuals.

77

6) TAKE OVER OF BAD LOANS

Most of the institutions play safe by handing over their doubtful
a n d r i s k y l o a n s t o t h e o t h e r institutions. These are taken over just to add a
feather to their asset portfolio in the balance sheet.As far as possible, taking
over of loans should be done only after a thorough study of the case a n d
t h e r e a s o n s o f h a n d i n g o v e r t h e l o a n . Ver i f i c a t i o n o f r e p ay m e n t
t r a c k a n d r e a s o n s f o r takeover are very important.
7) FAIR ASSESSMENT OF PROPERTY
While scrutinizing the valuations, it is very important for the lender to go by his
own assessmentinstead of being carried over by real estate boom. The
banks and financial institutions shoul
keep in mind the resale value of the asset rather than the market value.
Most of the cases suffer form the drawback of poor collateral. Condition
of the underlying asset also must be taken careof. Care should be taken to
see that the asset is sold very soon after seizing it. Or else, the resalevalue may
come down. Therefore, finding out the buyers to dispose of the asset is a
challengingtask for the banks and financial institutions.
8) INCREASING EMPLOYEE MORALE
The banks and financial institutions should protect the empl
o y e e m o r a l e b y p r o v i d i n g performance-based incentives as there is a tend
ency in any finance department to becomecorrupt. The sanctioning official must be
made directly responsible for the bad loans to a certain extent
ANALYSIS

78

The survey indicates that nearly 95% of the people are

aware about the Home loan facilitiesoff ered by diff erent
banks. But there are still 5% of people who are not much
educated and areunaware about the diff erent types of home
loan facility. For this banks should also target their lower
income group while making the publicity of their home loan
products and their shouldalso be a direct selling concept of
marketing their product and by this banks can increase
their customer base by providing loan to this particular section of
people by making them aware of it.Security and comfort in life
is a top priority for everyone. So everyone should be made
aware of this facility and enable them to take advantage of
it for which banks and fi nancial institutionsshould take care
of.
DEMAND FOR HOME LOANS
The survey conducted by me shows that 70% of the people
want to pursue home loan facility inthe future if required.
This shows there is an increase in the demand for
home loans. The reason behind this could be the boom in the
home loan sector in India. The real estate boom
has addedn e w d i m e n s i o n s t o t h e h o u s i n g fi n a n c e s e c
t o r. T h e n e w c l a s s o f y o u n g b u y e r s , w h o s e aff ordabili
ty are high, is spending a little more on paying Equated
Monthly Installments (EMIs)rather than spending huge

79

amounts on the rents, thereby, owns a house. Hence the

reasons foR Th e g r o w t h o f t h e h o me l o a n s m a r k e t h a s b e e n
m a i n l y f u e l l e d by certain fiscal, social andregulatory drivers such as:

Changes in demographic profile including increase in the rate of household

formation due tostructural shift from joint family system to nuclear family

Ever increasing middle class, migration of population and increasing urbanization

resultingin acute shortage of housing units

Increase in disposable income levels due to decrease in marginal tax rates

and increase intotal income levels

Tax b en e fi t s a nd o th er fi sc al in ce nt iv e s a nn ou nc ed in t he U
n i o n B u d g e t s t h e r e b y encouraging the sector

Increasing affordability of housing property purchase due to declining

interest rates andstable property prices

Decline in the average house cost to annual income ratio to around 45 from 11-14 duringthe last decade resulting in an affordable EMI as a
percentage of monthly income

Aggressive lending by banks to the housing sector due to lower

c r e d i t o ff t a k e b y t h e corporate sector, attractive spread and lower
non performing asset

80

EFFECTS OF PROPERTY RATES HIKE ON HOME LOANS

The home loan sector has been drastically affected by the
hike in the property rates.
T h e property prices have been rising and touching unprecedented heights. In fact
so much so, that property are again becoming out of reach of common man.
Whether the price rise is justified or i s i t j u s t a m a n i p u l a t e d b u b b l e
remains to be seen. Reserve Bank of India, in its
p o l i c y statements has time and again cautioned the banks to be extra
cautious before taking exposure.In fact RBI went to the extent of
increasing the risk weight age of the housing loans. ReserveBank of India
increased the risk weight on real estate exposure and hiked the risk
weight for lending to the real estate sector. The RBI has cautioned the banks to be
extra careful while goingall out to fund and finance the real estate sector.
According to reports, the property prices havecome to their saturation
and there is little scope for further increases. The price hike has
beenquite fast and unrealistic. The growth in infrastructure has not been
able to keep pace with the
increase in property prices. Hence property rates hike have led to an
increasing importance tohome loans but bankers have to be extra cautious on
their part.

81

CONCLUSION
In view of i ts backward and forward l inkages wi th ot her sectors of
t he econo my,housing finance in developing countries is seen as a social
good. In India, growth of housingfinance segment has accelerated in
recent years. Several supporting policy measures (like tax benefits) and the
supervisory incentives instituted had played a major role in this market.The
housing finance industry is getting increasingly commoditised.
Competition withint he sect or i s ensur ing that play ers offer
consu mer s flexi bi li ty and features t o choose
fr om. F e a t u r e s s u c h a s a d j u s t a b l e r a t e p l a n s , l o w e r p r o c e s
s i n g f e e s / m o n t h l y r e s t / i n t e r e s t rates/EMI/margin money, no prepayment penalty have become common across the industry.There is a
growing trend among Banks and FIs to include the cost of registration,
stamp duty.
society charges and other associated costs while sanctioning loans to
differentiate and make thehome loans products more attractive. This has
resulted in further lowering the threshold limit
for buying a house. For differentiation of their home loan products, banks are also
resorting tooffering of free add-ons such as life insurance, credit cards and
consumer loans at reduced ratesfor furnishing the house.Some of the maj or
play ers in t he housi ng fi nance indust ry have start ed
organizing property fairs, wherein the projects of different construction
companies are brought together
and bundled with a lower than normal interest rate loan product. Such initiatives ar
e expected toresult in a more organized housing market and more value for
the customer. On the servicesfront the banks/ FIs have begun addressing
concerns of borrowers through counseling and legaladvisory services on
matters pertaining to propertys title, its technical evaluation, and its
pricingetc. Banks/ FIs have been upgrading their technology and investing
in sophisticated systems for sourcing, processing and managing information
pertaining to home loan customers.Housing credi t has i ncr eased
substant ially over last few years, but fro m a very low base. Thus,
from miniscule amounts, the exposure of the banking sector to housing
loans has gone up.However, with growing competition in the housing
finance market, there has been a growingconcer n over it s l ikely i mpact
on the asset quali ty. Whil e no i mmedi at e financial stabi li ty concerns
exist, there is a need to put in place appropriate risk management systems,
strengtheninternal control procedures and also improve regulatory
oversight in this area. Banks also needto monitor their exposure and the

82

credit quality. In a fiercely competitive market, there may be some

temptation to slacken the loan scrutiny procedures and this need to be severely
checked.

BIBLIOGRAPHY
MAGAZINES

Professional Banker (The ICFAI University Press Release, June 2007 Publication)
BOOKS FOR REFERENCE

Merchant Banker by H. R. Suneja

OTHER SOURCES

Interview with Miss. Shubhangi Gaekwad (Assistant Manager), ICICI

Bank, Andheri( West) Branch and Mrs. Mit hi la Jadhav ( Chi ef
Manager) SBI Bank, Andheri (E ast) Branch