CH1:- INTRODUCTION

The word “Bank” is derived from the word “Banque” which means bench. The Jews, who were
considered to be the early bankers, transacted their business on benches in the market. In India
Banking can be traced bank to Vedic period. This can be confirmed by the fact that the great
Jurist Manu has written about deposits advances and interest. During Moghul period, the
indigenous bankers contributed significantly in the development of trade and commerce by
lending money. Later during the days of East India company the banking business was taken
over by the agency houses.

A Home Loan is taken out from a bank or financial company in order to purchase/construct a
new house or reconstruct an existing mortgage. There are several different ways in which an
individual can get a home loan mortgage. Over the past few years, many new banks and housing
finance companies have opened up and are providing attractive and low lending rates. There are
many housing finance lenders which we work with who are ready to give you the latest
information about the bank of mortgage rates.

An individual who is looking for housing loans should be aware of all his requirements and then
he/she can search for housing finance services in India. Without knowing the requirements it is
difficult to understand the process of a home loan. A borrower who is ready to go for house loans
should check their monthly incomes and the location of the borrower. You will also want to look
into getting home insurance quotes for your new home. Given the present economic conditions,
the prices of properties are rapidly on the rise especially in the major cities across India. This is
making it difficult for middle class families to afford these huge investments. Keeping this fact in
mind, bank of mortgage services in India considered these facts and came up with attractive
mortgage interest rates so that the middle class families can take a home lending bank loans.
Borrowers should consider each and every aspect of home lending from selecting the property to
closing the finance loan amount. The borrowers will be maintaining a long-term relationship
with the finance company so it is wise to take a loan from a bank which you feel comfortable
with.

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Retail banking has been popular segment to enter into for many banks. In the retail banking,
housing sector has been most promising segment which is promising a Comprehensive growth
rate of about 30 per cent for the next five years. With the government keen on infrastructure
development and announcing various tax Sops housing loan segment has been a tempted area for
many banks to enter into housing sector can be bifurcated into organized and unorganized
segments with the unorganized segments accounting for over 75 per cent of the housing units
constructed.
Home loans work like an y other debt. That is, loans are simply specific money that
we borrow from a bank, a private lender, or some other type of lender. Afterwards, we must
repay our debts with interest. However, unlike other types of loans, home loans are different in
several respects. Owning a piece of land or property is a lifetime dream for every
individual.
House is a necessity to all human beings and owning a house is a dream for everyone. Earlier
only a few people had the privilege to have an own house but now with the availability of house
loans provided by banks many people’s dream has come true. These are loans which are
provided either to buy an already built ready to occupy a house or a flat or to construct a house.

Different Types of Banks in India

A bank is a financial institution whose purpose is to receive deposits and lend money to
individuals and businesses, disburse payments, invest funds in securities for a return, and
safeguard money. It services savings and current (chequing) accounts, provides credit to
borrowers in the form of loans and through credit cards, and acts as trustees of its clients. Banks
perform all of these functions or some of them depending on their nature.

Other important banking activities are providing foreign exchange services for customers,
financing foreign trade, operating in money market, and providing a wide range of financial-
cum-advisory services.

In India and other developing countries the term ‘bank’ is applied to a variety of institutions
which provide funds for various purposes. So banks are of different types: commercial banks,

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savings banks, investment (industrial) banks, merchant banks, land development banks, co-
operative banks and above all, central bank.

Different Types of Banks in India

We may now make a brief review of different types of banks in India.

Commercial banks:

Commercial banks are the most important types of banks. The term ‘commercial’ carries the
significance that banking is a business like any other business. In other words, commercial banks
are essentially profit-making institutions.

They collect deposits from the public and lend money to business firms (manufacturers), traders,
farmers and consumers. Commercial banks normally meets the working capital needs of trade
and industry and are a part of the money market.

The current account deposits of commercial banks are used as a medium of exchange, i.e., for
making transactions. Deposits of other banks are not so used. These are specialized institutions
which give loans to specific sectors of the economy. Here we are mainly concerned with
commercial banks. So we generally use the term ‘banks’ to refer to commercial banks.

Development banks:

Development banks are parts of a country’s capital market. In India they are called public
financial institutions. They are specialized financial institutions which supply long-term finance
to large and medium industries. They also perform various promotional functions for
accelerating the rate of capital formation in the country.

In this way they promote industrial development in particular and economic development in
general. IFCI, IDBI and ICICI are examples of such banks. These institutions have assumed a
crucial importance in providing an ever-increasing proportion of industrial finance and various
types of development assistance to business enterprises in India.

Co-operative banks:

The co-operative banks are set up under the provisions of the co-operative society’s laws of a
country. In India such banks have been set up to provide credit to primary agricultural credit
societies at low rates of interest. However, some co-operative banks also function in rural areas.

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Land development banks:

These banks (called land mortgage banks in India) provide long-term credit to farmers for land
development. They also give long-term loans to farmers for acquiring new land.

Foreign banks:

There are many foreign banks in India like the Citi Bank, the Hong Kong and Sanghai Bank and
the Bank of America. These are not nationalized institutions like Indian commercial banks.

Central bank:

The central bank is the bankers’ bank and is also the banker to the government. It controls the
entire banking system of the country. The Reserve Bank of India (RBI) is India’s central bank
and the Bank of England is that of England.

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ICIC Bank

HISTORY

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity
offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition
of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary
market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was
formed in 1955 at the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to create a development
financial institution for providing medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services group offering a
wide variety of products and services, both directly and through a number of subsidiaries
and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the
first bank or financial institution from non-Japan Asia to be listed on the NYSE. 84 After
consideration of various corporate structuring alternatives in the context of the emerging
competitive scenario in the Indian banking industry, and the move towards universal
banking, the managements of ICICI and ICICI Bank formed the view that the merger of
ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and
would create the optimal legal structure for the ICICI group's universal banking strategy.
The merger would enhance value for ICICI shareholders through the merged entity's
access to low-cost deposits, greater opportunities for earning fee-based income and the
ability to participate in the payments system and provide transaction-banking services.
The merger would enhance value for ICICI Bank shareholders through a large capital
base and scale of operations, seamless access to ICICI's strong corporate relationships
built up over five decades, entry into new business segments, higher market share in
various business segments, particularly fee-based services, and access to the vast talent
pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and

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 ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance
subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services
Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI
Bank in January 2002, by the High Court of Gujarat at Ahmadabad in March 2002, and
by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002.
Consequent to the merger, the ICICI group's financing and banking operations, both
wholesale and retail, have been integrated in a single entity. ICICI Bank has formulated a
Code of Business Conduct and Ethics for its directors and employees. ICICI Bank (BSE:
ICICI) (formerly Industrial Credit and Investment Corporation of India) is India's largest
private sector bank in market capitalization and second largest overall in terms of assets.
Bank has total assets of about USD 100 billion (at the end of March 2008), a network of
over 1,399 branches, 22 regional offices and 49 regional processing centers, about 4,485
ATMs (at the end of September 2008), and 24 million customers (at the end of July
2007). ICICI Bank offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and specialized
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance,
venture capital and asset management. (These data are dynamic.) ICICI Bank is also the
largest issuer of credit cards in India. ICICI Bank has got its equity shares listed on the 85
stock exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of
India Limited, and its ADRs on the New York Stock Exchange (NYSE). The Bank is
expanding in overseas markets and has the largest international balance sheet among
Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and
representatives offices in 18 countries, including an offshore unit in Mumbai. This
includes wholly owned subsidiaries in Canada, Russia and the UK, offshore banking
units in Bahrain and Singapore, an advisory branch in Dubai, branches in Belgium, Hong
Kong and Sri Lanka, and representative offices in Bangladesh, China, Malaysia,
Indonesia, South Africa, Thailand, the United Arab Emirates and USA. Overseas, the
Bank is targeting the NRI (Nonresident Indian) population in particular. ICICI reported a
1.15% rise in net profit to ` 1,014.21 crore on a 1.29% increase in total income to `
9,712.31 crore

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ICICI Bank is India's second-largest bank with total assets of ` 4,062.34 billion (US$ 91 billion)
at March 31, 2011 and profit after tax ` 51.51 billion (US$ 1,155 million) for the year ended
March 31, 2011. The Bank has a network of 2,752 branches and 9,225 ATMs in India, and has a
presence in 19 countries, including India. ICICI Bank offers a wide range of banking products
and financial services to corporate and retail customers through a variety of delivery channels
and through its specialized subsidiaries in the areas of investment banking, life and non-life
insurance, venture capital and asset management. The Bank currently has subsidiaries in the
United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong
Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in
United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The
UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares
are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited
and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange
(NYSE).

 ICICI Bank was the first private sector bank in India to offer PPF account facility at all
bank branches.

 Among the first banks to introduce account portability and also the only bank to offer
portability on two additional channels - Internet Banking and Phone Banking.

 ICICI Bank launches first Electronic Toll Collection project on NH-1. A first of its kind
project initiated by the Ministry of Road, Transport & Highways, National Highway
Authority of India (NHAI) and ICICI Bank

 . ICICI Bank receives approval from RBI to set up an Infrastructure Debt Fund. It is
the first debt fund to get government's go ahead.

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  ICICI Bank launches its official Facebook Page. First bank in India to offer one-of-its
kind "Your Bank Account" App, which allows access to bank account information on
Facebook

 Vision: - To be the leading provider of financial services in India and a major global
bank.

 Mission:- It will leverage the people, technology, speed and financial capital to:

Be the banker of first choice for the customers by delivering high quality, world-class
products and services.

Expand the frontiers of the business globally. Play a proactive role in the full realization
of India’s potential.

Maintain a healthy financial profile and diversify the earnings across businesses and
geographies.

Maintain high standards of governance and ethics. Contribute positively to the various
countries and markets in which we operate.

Create value for the stakeholders.

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HDFC BANK

HDFC Bank was amongst the first to receive an ‘in-principle’ approval from the Reserve Bank
of India (RBI) to set up a bank in the private sector from Housing Development Finance
Corporation Limited (HDFC), in 1994 during the period of liberalisation of the banking sector in
India. HDFC India was incorporated in August 1994 in the name of ‘HDFC Bank Limited’.
HDFC India commenced operations as a Scheduled Commercial Bank in January1995.

HDFC India deals in varieties of products like home loan, standard life insurance, mutual fund,
securities, credit cards, etc. HDFC has branch offices in all major cities in India like Calcutta,
Chennai, Delhi, Bangalore, Hyderabad, Ahmedabad apart from HDFC Mumbai.

Business Objectives

The primary objective of HDFCÂ is to enhance residential housing stock in the Country through
the provision of housing finance in a systematic and professional Manner, and to promote home
ownership. Another objective is to increase the flow of resources to the housing sector by
integrating the housing finance sector with the overall domestic financial markets.

Organizational Goals

Develop close relationships with individual households.

Maintain its position as the premier housing finance institution in the country,

Transform ideas into viable and creative solutions.

Provide consistently high returns to shareholders.

To grow HDFC’s main goals are

Through diversification by leveraging off the Existing client.

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Importance of Home Loan
 The need for home loans arises not because property prices are heading upwards all the time
but because home loans make great sense from a long-term savings perspective. Not only are
home loans a handy tool for the common man to own a roof over his head but they also help
save money in the long run.
 With skyrocketing real estate prices, people are increasingly opting for housing loans to acquire
their dream home. Interest rates are coming 76 down all the time and the banks and the
housing finance companies are literally falling over each other to lure the prospective home-
seekers.
 Notwithstanding the tax breaks and generous lending rates, a lot of people still cannot arrange
resources for the down-payment, which comes out to be at least 15 per cent of the property
value. Taking cognizance of the situation, Banks are coming up with home loan products called
‘zero down payment loans’ wherein 100 per cent funding is provided for select properties.
These lucrative offers are other major reasons for why people are opting for loans.
 Even if one can afford to buy a home with one's own money, home loans should be availed
because they act as good savings instrument. According to industry estimates, the long term
average return in investing in a home is about 20% p.a. while the average cost of borrowing
funds in the market today is about 7% p.a. (considering all tax breaks).
 For salaried employees, housing loans are the best way to avail of tax benefits. Many people
simply go for the home loans in order to avail these benefits. Interest payments up to 1.5 lakh
on housing loans are deductible from the taxable income and there is a further deduction of
taxable income maximum up to 1 lakh against repayment of principal portion per annum. In
case a person stays in a rented house, the cost of the loan will be nearly zero per cent since he
will be saving a decent amount on rent.
 All the banks offer many types of loan and advances to the customers like retail loan, term loan,
working capital finance, overdraft, export import finance and project finance.

Definition of 'Home Loan'

A sum of money borrowed from a financial institution or bank to purchase a house. Home loans
consist of an adjustable or fixed interest rate and payment terms.

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 ELIGIBILITY CRITERIA FOR HOME LOANS

How much can you borrow?

Griha Home Loans range from Rs.1lakh to Rs. 50lakhs. Your repayment period can vary from 1
year to 20 years depending upon your capacity to repay.

Eligibility:
Age: - Min: You should be at least 21 years of age.
Max: At the time of loan maturity, you should not exceed 65 years or your
retirement age, whichever is earlier.
Individuals:
You should have completed a minimum of 2 years of service (with a minimum of 1 year in the
current job)

Businesspersons/Self-employed professionals:
You must have an established business or professional practice of not less than 3 years, with a
positive net worth and must have posted a net profit for the last 2 years.
Note: Minimum net take home salary of Rs. 6000/- p.m. for salaried employees or annual
income of not less than Rs. 1.20lakh for businesspersons/ self-employed professionals.
(Spouse/co-applicant’s income can be included in the income computation).

1. Individuals who are salaried or self employed, professionals, businessmen are eligible.
Proprietary concerns, HUF, partnership firms or limited companies are not eligible for this loan,
where partners at their individual capacity are free to avail this loan.

2. As a customer to enhance the loan eligibility, all HFIs lay down conditions to who be co
applicants, al co owners to the property should necessarily be co-applicant. Income of the co
owners can be clubbed together to get higher loan eligibility. Minors are not eligible to become
co owners, as also friend and relative’s only blood relatives are eligible to take a property jointly.
Some of the acceptable relationships where loan clubbing is possible:

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Income clubbing of co – applicants

Combinations Income clubbing

Husband – wife YES

parent – Son YES (if only son)

Parent – Daughter YES (If only child)

Brother- YES (if currently staying together and intend staying together in the new
Brother property)

Brother – Sister NO

Sister – Sister NO

Parent – Minor child Not eligible for loan

3. The minimum age for the applicant and the co applicant to become eligible for the
commencement oft eh loan is 23 years, and co applicant can be of 18 years of age if their
income is not clubbed to calculate the loan eligibility.
4. The maximum age at the time of loan maturity for applicant or co-applicant is 60 years or
the retirement age whichever is earlier.

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 DOCUMENTS INVOLVED IN EVALUATION OF HOME LOAN:

The documentation requirement for various categories of applicants depends on their status. For
this purpose all HFIs segregate their employees in different categories. They are:

 Salaried
 Professional or Businessman
The criteria of evaluation changes according to their status.
The general documents, which remain same for all the categories, are as follows:
1. Proof of age
Any one of the following is considered for proof of age, they are:
 Passport
 Voter’s ID card
 PAN card
 Ration card
 Employer’s identity card
 School leaving Certificate
 Birth Certificate
2. Copy of bank statements for the last six months:
Bank statement for the last six months of all operating and salary accounts. Bank statements
for the last six months of all current accounts, if self employed. Any other photocopies of
investments held, if required by the HFIs
3. Copy of latest credit card statement.
4. Passport size photograph
5. Signature verification by your bankers.
6. Proof of residence:
 Ration Card
 PAN Card
 Passport
 Rent agreement if any, if you are currently staying on rent.
 Allotment letter from your company if you are residing in company Quarters.

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The documents required to be provided by the salaried class are as follows:
 Salary slips for the last one month.
 Appointment letter
 Salary certificate
 Retainer ship agreement, if appointed as consultant.
 From-16 issued by the employer in your name.

Proof of Employment:
The proof of employment is verified by the
 Identity card issued by the employer
 Visiting card.

Employer’s details (in case of private limited companies):

The employer’s details are to be provided in addition to the above documents for
documents for a private sector employee, they are:
 Name of promoters / Directors
 Background of promoters / Directors
 Number of employees
 List of branches / factories
 List of clients / Customers
 Turnover of your employer
 Annual reports of your employer for the last two to three years.

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THE LOAN PROCEDURE FOLLOWED AT ICICI BANK

The procedures involve in the disbursement of home loan by any bank entails the following
steps:

 Home loan application form is first submitted by the customer covering all
details.

 Checklist of requirements is requested for from the customer, and all documents
are required to be submitted (copies), they are then verified whether the details
are failed in correctly and whether all the documents are submitted.

 Additional loans, if any are applicable. Many banks provide for supplementary
loan as a part of their comprehensive home loan scheme.

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RISK CAPTURING MECHANISM

One of the important aspects in the home loan financing is to ensure that the loan seeker is
worthy and credible. ICICI follows the credit score model to male home loan disbursements.
Credit score model is a risk capturing mechanism, which is used to assess the risk perspective of
the loan seekers.
The prospective loan seeker is assessed on a number of parameters which helps in the evaluation
of his profile and each parameter is assigned a score based on which the decision is taken.
A score of 100 is fixed, and a score of 75 is considered to be good, score of 55 is considered
above average and score of 25 to be average. The prospective loan seeker on a scale of 100 is
expected to get 55 avail the home loan.

The parameters on which risk is assessed are:

1. DEMOGRAPHIC PROFILE

The demographic profile includes a number of sub-parameters they are basically:

 Age
 Educational Qualifications
 Number of Dependents
 Marital status
The demographic profile of the loan seeker is allotted a maximum score of 15.

2. RELATIONSHIP WITH ICICI BANK

The relationship with the bank is also considered for the benefit of its customers.
The sub-parameters considered here are:
 Value of relationship (in terms of deposits)
 Number of years
The relationship with the bank is given a weight of 10 on the total score of 100.

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3. INCOME MODEL
The income module of the bank includes parameters such as:
 Gross Eligible Monthly Income
 IRR ( Income to Installment Ratio)
 FOIR (Fixed obligations to income ratio)
 Net take home
The income model is given the highest score of 50 points.

4. STABILITY AND CONTINUITY

The stability and continuity factors are based on
 Organization Profile : Govt. / public sector companies / public limited or private limited
companies or partnership or others
 Length of service in Present job / organization.
This module is provided with maximum score of about 15 points.

5. ASSET MODULE
The asset module include factors like
 Margin
 Net-Worth ( Total assets – Total Liabilities)
The asset module is given a weight of 10 on a scale of 100.

The various parameters of the credit score model and their respective weights are depicted
in the following chart.

The abbreviations of the above term are:

DM – Demographic profile
RICICI – Relationship with the ICICI
IM – Income Module
SC – Stability and Continuity

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 SCRUTINY OF THE DOCUMENTS

The retail processing is a procedure, which involves careful scrutiny of accounts. ICICI Bank
uses a specialized system to go through the accounts, before dispersing the loan to the customer.
The basic groups set up in the process of loan application are:

RETAIL MANAGER ENTERER GROUP:

This group does the data entry. Upon completion of the data entry the group forwards the same
to the RM Verifier group to verify and resends it to the former in case of tiny discrepancies for
editing.

The Loan officer enterer group and the RM Verifier group should ensure, confirm and verify the
following:
 The organization is in the appropriate list.
 The organization is not in the negative list
 The property location is not in the negative list.

Applicant Details:
 Name and the personal details
 Identity details Address
 Employment details – salaried
 Financial details: Income asset ownership, Existing bank account details and credit card
details
 Employment details: Business
 Financial details: Existing bank accounts and credit card details.

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Existing Loan details:
The name of the financial institution (in case of take over) type of loan, purpose of loan
amount etc, as per the home loan application form.

Loan request:
Including the disbursement details.

Acquisition details:
Gee details, loan amount recommended, name of the customer preferred branch.

Reference details:
Entry of at least one reference is mandatory.

Property details:
The RM enterer group and the RM Verifier group shall affix their initials on the home
loan process note.

Upon completion of the above activities, the field investigation, legal opinion and the technical
appraisal process shall be initiated by the RM.

The basic scrutiny checks followed by the bank:

 Field investigation study.
 Technical Feasibility
 Legal Feasibility

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Field Investigation Study:
The manager RM shall go through the documents and inform the same to the field
investigation agency the details:
a. Field Investigation Report:
 Residence and Reference (Tele – Check)
 Name, Address, Office or Business telephone number of the applicant and
 Co-applicant.
 Income Tax return.

The reports are to given on the letterhead of the respective approved agency by their authorized
employee with agency’s rubber stamp. The RM should ensure from the field investigation
agency in case of Residence and reference (Tele-check)
The details in the report should match with the information given in the home loan application
form.

IT-Return:
It should be tallied as per the office records.
The manager RM shall make a tele-check to cross verify the investigation made by the agency in
case, for the salaried applicants where the disbursement is greater than 10 lacks and in case of the
businessman where the disbursement is greater than 10 lacks.

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2. LEGAL FEASIBILITY

The bank should arrange for the legal opinion.

The manager RM should forward it to the bank’s empanelled lawyer various documents for
scrutiny.
Some of the documents required for the scrutiny by the lawyer are:

 Sale agreement duly registered

 Own contribution receipts
 Allotment letter
 Land documents indicating ownership, if applicable registration receipt
 Possession letter
 Lease agreement, if applicable (Property bought from a development authority)
 No objection certificate from the developer, society or development authority.
 In case of the construction of the house the agreement of construction of the house
between the land owner and the contractor.

The above are the list of documents to be referred to by a lawyer. The manger has to provide the
copies of the documents should be provided by duly specifying the name of the applicant,
particulars of property and list of documents attached.

All correspondence with regard to the legal opinion must be carried forward between the lawyer
and the RM only.

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3. FINANCIAL SCRUTINY

Prior to disbursement, the HFI also conducts a site visit to the customer’s property to ensure the
following:
In case of under construction property:

 Stage of construction is the same as that mentioned in the payment notice given to the
builder.
 Quality of construction
 Satisfactory progress of work.
 Lay out of the flats and area of property is within the permission granted by the
governing authority
 Requisite certificate have been received by the builder to start the construction at the site.

In case of ready / Resale construction:

 External maintenance of the property.

 Internal maintenance of the property.
 Age of the building
 Whether the building will last the tenure of the loan
 Quality of construction
 There is no existing lien or mortgage on the property

The list of valuation engineers empanelled by the bank need to take up these various documents
and ensure that the report is furnished in the prescribed format and that loan amount requested by
the applicant is sufficient to complete the project. The details in the property report given by the
technical term and compare it with the legal opinion and application and ensure that there are no
discrepancies. After completion of the above checks and scrutiny the manager RM must forward
the home loan process not along with the home loan application and other enclosures Legal
opinion, technical appraisal report, for further processing to the Loan Manager term, after
retaining in the customer’s file, copy of the following papers:

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  Home loan application
 Legal opinion with all enclosures
 Technical appraisal report
Loan Department has to send the documents and papers to the RM for further scrutiny and
processing of the proposals. This would increase the turnaround time, of processing and also
additional charge towards the courier charges and also losing the documents in transit, In order to
avoid the above discrepancies the documents are verified by the document imaging system.

Newgen document imaging system is introduced to facilitate electronic transmission of

documents for processing of proposals by RM.

 It facilitates scanning and maintenance of scanned images.

 It also provides the provision of linking the documents if the same document is required
for multiple loans
 Provisions to make remarks, on the document without disturbing the original.
 Scanned images can be attached to any mail

This facilitates easy transmission of data and other documents and also provides the flexibility in
loan processing and helps in fast transmission of data, these all advantages helps in easy
disbursement of loans.

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Research Methodology

To know the strengths of the and also those which can be daily to strength the brand image.

Research Design: A research design is the specification of methods and procedures for acquiring the
information needed. It is the overall operational pattern or framework of the project that stipulates what
information is to be collected from which source by what procedures. Research design denotes the
description of the research design. The aim was to collect relevant information, which fulfill our
requirement and can be analyzed at a later stage of study without any problem. This was to be done in
minimum expenditures and least efforts and in a set period of time. For my research I select
‘DESCRIPTIVE RESEARCH DESIGN’ to know the Comparative Study Of The Home Loan
Scheme Offered By ICICI Bank And HDFC Bank and Assessing The level of Consumer
Satisfaction in Patiala City. This helped us in having enough provision for protection against bias and
maximizes reliability. Descriptive study, as its name implies, is designed to describe something –for
example, the characteristics of the users of a given product, the degree to which product use varies with
income, age, or other characteristics.

Advantages of Descriptive Study:

 Involve relatively large number of observations.

 Analysis is more objective.
 Averages and percentages are calculated.

Data Collection Method

The methodology reveals the methods of data collection. There may be primary sources or secondary
sources of data collection.

Collecting Secondary Data:

After deciding my objective I looked for collecting and studying secondary data. It included extensive
study of literature available in reports of HDFC bank and ICICI Bank, articles, newspapers, journals,
magazines, handouts, pamphlets describing the banks.

Study of secondary data gave me an insight into the problem into hand. It also provides me with clues
and helped in designing primary research. It provided us a more accurate picture about the functioning of

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various service providers in the Patiala city. Extensive use of secondary information in the form of
magazines, journals, Comparative study of housing loan of HDFC and ICICI Bank Page newspaper
clippings, such as Business World, Business Today, Business India, Economic Times, etc. Internet
websites of HDFC Bank and ICICI Bank.

Collecting Primary Data

The objective of Primary data is formulated on the basis of research objectives. Objectives set the
guidelines and directions of research planning .Formulating the objectives offers the best feasible means
of solution. The primary data for my study was being collected by conducting survey. To analyze buying
behavior and in order to gain an insight into the buyer need-satisfaction level, a questionnaire was
formulated and administered among 100 people. The tools for data collection used were following types:

Telephone interview:

The telephone interview is used in lieu of personal interviews. It is used because information has to be
collected quickly and inexpensively. By it I asked the customer about their satisfaction about HDFC Bank
and ICICI Bank Home Loan procedure. The direct and structured questions are asked by customers.

Questionnaires:

This method of data collection is quite popular, particularly in case of big enquiries. A questionnaire is a
method of obtaining specific information about a defined problem so that data, after analysis and
interpretation, results in a better appreciation of the problem. In order to motivate respondents and to get
best of the information from them, I was tried to build questionnaire that is interesting, serve my
objective, unambiguous and easy to complete and is not burdensome. The aim was to enable ease in
analysis and facilitate easy classification of response to get meaningful outcome within acceptable limits.

A few were in disguised, where the true purpose was hidden but was sufficient to bring in the right
information from respondents. Depending on the requirement, the questionnaire was prepared. The
sequence of questions in questionnaire was kept in a logical order. It included questions based on Simple
Category scale, Multiple Choice Single Response scale, Liker Scale and Rank Order scale. After
following a series of Trial and changes the finally evolved questionnaire was being used for survey work.

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Execution of survey work:

The survey work is that was done to collect primary data. I conducted “Consumer Survey” by using
questionnaires. I individually approached to individuals and got the questionnaire filled by them. The
individuals were randomly chosen.

System Of Research Methodology:

Instrument Used Questionnaire

Technique of Survey Personal Interview

Sampling Unit Customer

Sampling Extent Patiala, Region

Sampling Random

Method Used For Research Survey Method

Sampling size 100

Findings:

According to my study home loan availing procedure is very much difficult for the people who
demanding it. According to my research maximum people prefer fixed rates on home loans. Quality of
service and minimum rate of interest are important criteria which are been seen by people before taking
home loan.

According to the respondents they are satisfied from the institution or the bank from where they taking
the home loan.

People get knowledge about home loans from television, internet, or families and friends. According to
the respondents, interest rates of HDFC bank are lower than ICICI. Respondents are agreeing on the
statement that easy availability is an imp. factor for taking the home loan from particular bank.

ICICI easily provide the home loan, according to my study maximum people say that.

HDFC has flexible repayment period, according to my study maximum people say that.

According to the respondents miscellaneous expenses affect their selection of home loans.

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Processing fees of HDFC bank is lower as compare with ICICI. Respondents are agreeing that they take
into consideration the way, They are treated by banks. According to the respondents ICICI provide good
treatment as compare to HDFC. According to the respondents reputation of banking institution is to be
taken into consideration. On the question of reputation of bank some people consider HDFC, some ICICI
and some say other banks, so reputation of all the banks is likely to be same. According to my study
respondents say that tenure of home loan affects their selection. According to many respondents
procedure period of home loan from 15 to 20 year is better. According to my research, Maximum people
grade HDFC loan procedure as excellent. According to my research, Maximum people grade HDFC loan
procedure as good.

Suggestions:

Rate of interest should be competitive with other financial institutions. Free accident insurance cover for
home loan customers should be provided. Proper credit appraisal of the customers should be done. Daily
reducing option should be introduced. Relevant information should be provided to customers time to
time. Emphasis should be given on retaining customers. People who deal with customers should have
complete knowledge about the housing finance industry. To penetrate in the rural market. To provide
plans for the low-income group. To decrease the training fees compare to Competitors (fees of advisors
training). To increase the incentive package. To open more number of branches in different cities.
Limitations: This research study was time bound and due to this only few topics were taken up for study.
This research study was taken in a limited area only and findings may vary if the area of study is
increased or changed. Some of the respondents might have been biased in their responses as such the
analysis could vary to some extent. While analysis of data, some human errors could have been possible.
Sample drawn through convenience sampling, for customer survey cannot be well associated with the
attributes of population. Here I got the questionnaire filled from people selected arbitrarily. Our
neighbors, our friends, etc.

The majority of the respondents were from educated middle class and perhaps this is the section of
society which is being targeted by the Home Loan Companies. This is because of two reasons:

a) The huge size of middle class population.

b) Their increasing need and awareness for home loans in this class. Thus the sample drawn here was not
a true representative of the people of Patiala city but was fairly a sample of the segment targeted as
potential customers by the Home loan providing institution

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ADVANTAGES OF HOME LOANS

The various benefits of home loans arising to the customers are:

 Help in owning a home

 Tax benefits of home loans
 Attractive interest rates
 Long term loan
 Repayment schedule on the basis of Earning Capacity of the borrower.
 Facility of joint loan and the advantages to the bank offering home loan are also
profitable. Moreover, since the larger part of this loan is given against mortgages of
personal properties, the propensity of default is low. Efficient management of Loans and
Advances portfolio has assumed greater significance as it is the largest asset of the bank
having direct impact on its profitability.

DISADVANTAGES OF HOME LOANS

The main disadvantages of home loans are high lightened as below:

 High processing fee Delay in processing

 Fluctuating interest rate
 Problems in disbursement
 The above mentioned disadvantages or limitations can be removed by providing good,
prompt and efficient services to the customers.

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FOCUS OF THE STUDY

The resent years have witnessed significant developments in international banking. Competition,
disintermediation, new services and unique promotion schemes are some of the emerging features of
changing international banking scenario. The globalization of financial markets has been further
accelerated by the development of technology particularly in the field of information technology and
electronic banking system. Now the customers are also more informed and learned to choose a better
bank for themselves. Again, on the managerial side, the Narasimham Committee has made a strong plea
for full autonomy of the commercial banks in India with RBI as supervising and controlling authority.

So, the major problem before the commercial banks is their long-run survival and forging way ahead by
retaining their valued customers.

SIGNIFICANCE OF THE STUDY

With the entry of new generation tech-savvy private banks and expansion of operations of foreign banks,
the banking sector has become too competitive. The ‘one for all’ and ‘all for one’ syndrome is being a go-
by. To deal with the emerging situations, bankers have to shed a lot of old ideas, change their practices,
develop customer loyalty programmers, and adopt a distinct approach to meet the challenges ahead. It is
desirable for banks to develop a customer-centric approach for future survival and growth. The awareness
has already drawn that prompt, efficient and speedy customer service alone will tempt the existing
customers to continue and induce new customers to try the services offered by a bank.

In the light of the research findings, interest in service quality is, thus, unarguably high. Poor quality
places a bank at a competitive disadvantage. If customers perceive quality as unsatisfactory, they may be
quick to take their businesses elsewhere. Thus, it is clear that service quality offers a way of achieving
success among other competing services.

Bank employee’s commitment and concern for customers needs can make or mar the growth of the bank.
This is where the bankers have an important role to play. It is necessary that the customers should be
made educated on new services introduced by the banks.

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 SYNOPSIS ON THE STUDY OF HOME LOANS
The home loan scheme of the ICICI bank is named “ICICI Home” and for Salaried persons
“Griha Sewa”. It has been a successful product launched by bank’s retail assets division. The
home loan disbursement procedure followed by the bank has been undertaken.

The various documents involved and the intricacies in taking a home loan have also been
highlighted as a part of my study.

The home loan segment has number of added extensions to its portfolio because of increased
competitiveness among the HFIs. An attempt has been made to understand the various
extensions and new concepts and the benefits extended by the banks.

HOME LOAN SCHEME AND ITS EXTENSIONS

A home loan scheme is generally offered to the person to accommodate finance for purchasing
the house or for renovation or extension of the existing house.
The various extensive schemes, which are included in the home loan portfolio, are:

Home Purchase Loan:

This is the basic home loan for the purchase of a new home.
Home Improvement Loans:
These loans are given for implementing repair works and renovations in a home that has already
been purchased by you.
Home Construction Loan:
This loan is available for the construction of a new home.
Home Extension Loan:
This is given for expanding or extending an existing home.
For eg: addition of an extra room etc.
Home Conversion Loan:
This is available for those who have financed the present home with a home loan and wish to
purchase and move to another home for with some extra funds are required. Through home

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conversion loan, the existing loan is transferred to the new home including the extra amount
required, eliminating the need of pre-payment of the previous loan.

ICICI offers:

 Attractive loan interest rates.

 Home Loan amounts starting from Rs.2 lacks and ends up to 20lakhs.
 Tern loans up to 20 years.
 Free personal Accident Insurance (Terms & Conditions).
 Insurance options for your home loan at attractive premium.
 Special 100% funding for select properties.
THE PARAMETERS INVOLVED IN HOUSING LOAN EVALUATION

There are a number of parameters on which the housing loans are built:
They are:

1. TENURE
The tenure of the home loan refers to the time limit for a customer to repay the loan
Generally, the maximum tenure of home loans is 20 years, with a few lenders offering tenure of
20 years or more (ICICI has recently launched a 30 years loan). The longer the tenure, more a
customer pays in total interest, but monthly payments will be less.
So depending on the earning potential and bank balance of the customer, an appropriate can be
chose. An important requirement of most banks/ HFIs is that they pay up the entire loan before
you retire. The customer can always prepay the entire loan amount before it is due.
As long as the tenure goes up a customer pays more interest which is up to 0.25 – 0.5%,
generally above the home loan rates.

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2. AMOUNT PAID BY THE FINANCER/ MARGIN REQUIREMENTS

The financer does not pay the entire amount of the loan, they request the customer to maintain
margin, most banks go in for a 85% funding of the property value including the stamp duty and
charges, it however varies among various banks.
This is also treated as the margin money or own contribution required to be put by the
prospective loan seeker as the contribution towards the purchase of the house. Most HFIs believe
the amount paid is upfront before they release any disbursement.
As a rule of thumb, depending upon the HFC, the prospective loan seeker has to cough up 15% -
20% of the loan amount as a down payment. For smaller amounts, this may not be much. But for
figures running into lacks, this could make loads of difference.
For example: An apartment costing Rs. 10lacss may get 85 per cent financing. So, customer has
to arrange for the remaining Rs 1.5lacs.
Some banks however make way for the payment for 90% of financing and about 100% financing
for some new projects, however they are subjected to a large number of factors and constrains.

3. INTEREST RATES
Without doubt the most important parameter to factor into home loan calculations. The interest
rates may vary from institutions to institutions and generally range from about 7.25% - 7.75% to
around 9% Repayment is in the form of EMIs (Equated Monthly installments). The longer the
tenure, the more you pay in interest, but your monthly payment will be less.
The two kinds of interest rates available to a customer are:
 Fixed interest rates
 Floating interest rates
Fixed interest rates remain fixed over the tenure of the loan.
Floating interest rates are affected by the rates in the market, they fluctuate according to the rates
issued or changed by the RBI from time to time.

The finance minister’s diktat on home loans does not hold for private banks. India’s largest home
loan provider and second largest bank — ICICI Bank —on Tuesday hiked its home loan by 1%.

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The bank has also increased its depositrates.

As per the new rate structure, customer will have to pay 10.5% on the home loans with a floating
rate, while the fixed home loan will now invite an interest of 12.5%. With this increase, the
monthly installment on an Rs.1lakh loan for 20 years goes up by Rs70.
Some public sector banks do so only once in 12 months while some private sector lenders do it
as frequently as a quarter. Though the current interest rate quote maybe lower, over the life of the
loan, a customer will be able saved more in the case of a lender who resets your floating rate
more frequently.

The investors are also given the option of changing their option from fixed rate loan to a floating
rate loan, of course by paying a penalty.

4. MISCELLANEOUS CHARGES:
All banks charge certain amount of processing fee which cannot be ignored, it should be
understood that along with monthly payments, the customer should also ensure that he has to pay
these charges, so he should careful in choosing his HFC.
Miscellaneous charges generally range around 2.5% to 3%.
A 1% administration fee and 0.8% processing fee on, say RS. 5, 00,000 loan, would
amount to RS 10.000. Other times, it could be just one fee (either administration or processing)
but could yet work out to be much more if it is considerably higher at, say, 2.5 per cent or 3 per
cent. The various other fees, which you are required to be paid along with the margin amount,
are:

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a) Processing fee:
It’s a fee payable to the lender on applying for a loan. It is either a fixed amount not
linked to the loan or may also be a percentage of the loan amount. The loan amount received by
customer can be less than the processing fee. It is charged at the submission of the application
form and covers expenses incurred for processing the application form.
b) 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 the amount being pre paid.
c) Administrative Fees:
An administrative fee is charged by the HFI on the loan amount sanctioned to customer. This fee
is normally payable at a time of accepting the offer letter. It is charged mainly to meet the
operating expenses of the loan amount of the entire tenure.

d) Others:
It is quite possible that some lenders may levy a documentation or consultant charge.
In case of ICICI Bank the processing fee is 0.25% of the loan amount and the administrative fee
is approximately 0.50% of the loan amount.

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5. AMORTISATION
It means the method or the calculation by was of which the entire Principal amount/loan amount
is paid through the tenure of the loan.
This helps the customer to know what his outstanding principal is at any point of time. There are
two methods generally followed:
 Annual rests
 Monthly rests

Annual rests:
This is more commonly known as annual reducing balance of the principal/loan amount
lent to you. In an annual rest the EMIs (fixed monthly payment for the dispersal of the loan
amount) are calculated on a annual basis.
The component of interest is higher in the initial years and later on the component of principal
increases and the interest keeps reducing year after years. In other words, the interests in the EMI
will keep reducing year after year and the principal component keeps increasing.

Monthly rests:
This is called monthly reducing balance or principal. The calculation in the above method
remains the same as of the above except that the balance is calculated on a monthly basis and the
EMI is broken up every month to arrive at the opening balance of the principal for the next
month. It is always better for a customer to seek an HFI, which generally has monthly rests,
based system; this will reduce the amount of interest paid by the customer. Many banks have
adopted to the monthly rests system.

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6. REPAYMENT FACILITY
The bank has given three options for repayment of the loan to suit the convenience of
Borrower.
Equated Monthly Installments (EMI) uniform monthly installment, inclusive of interest, for the
entire repayment of only interest for the first five years, and thereafter in EMI for the next 10
years.
Repayment of only interest in the first five years, 30% principal plus interest in the next five
years, and balance 70% plus interest in the remaining period.
Repayment to start on completion of construction, but not later than 18 months from first
disbursement and in case built up houses after one month from disbursement. Interest during
gestation shall be paid as & when due. The repayment not to extend beyond the age of retirement
of the borrower or 70 years whichever is earlier, however where co-borrower is taken, a
maximum repayment period of 20 years may be considered provided the loan is liquidated within
the age of 70 years of the borrower/ co-borrower having capacity to service the loan.

THE LOAN PROCEDURE FOLLOWED AT ICICI BANK

The procedures involve in the disbursement of home loan by any bank entails the following
steps:

 Home loan application form is first submitted by the customer covering all
details.

 Checklist of requirements is requested for from the customer, and all documents
are required to be submitted (copies), they are then verified whether the details
are failed in correctly and whether all the documents are submitted.

 Additional loans, if any are applicable. Many banks provide for supplementary
loan as a part of their comprehensive home loan scheme.

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 The following diagram indicates the loan procedure at the bank

RISK CAPTURING MECHANISM

One of the important aspects in the home loan financing is to ensure that the loan seeker is
worthy and credible. ICICI follows the credit score model to male home loan disbursements.
Credit score model is a risk capturing mechanism, which is used to assess the risk perspective of
the loan seekers.
The prospective loan seeker is assessed on a number of parameters which helps in the evaluation
of his profile and each parameter is assigned a score based on which the decision is taken.
A score of 100 is fixed, and a score of 75 is considered to be good, score of 55 is considered
above average and score of 25 to be average. The prospective loan seeker on a scale of 100 is
expected to get 55 avail the home loan.

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 THE INNOVATIVE LOAN CONCEPTS

1. THE CONCEPT OF SURF

The new concept of SURF is the step up repayment facility, it is a scheme provided to young
professionals who have just begun their careers, considering that their repayment capacity will
increase steadily in the near future.

The scheme increases the repayment capacity of a customer, his loan eligibility increases as it
considers the increase in income of the customer over the next few yeas.

Corporation bank has introduced this SURF concept in its home loan scheme.

Corporation Bank has introduced ‘Corp Flexi Home Loan’ a variant of the housing loan with
attractive feature of Progressive Monthly Installment (PMI) i.e. Repayment linked to increase in
future salary earnings.

The scheme provides for “step-up installment facility” under Corp Home Scheme. The Corp-
Flexi scheme is offered with two options.

Option1: The borrower can opt for higher quantum of loan (130% of eligible amount under the
normal scheme) as per the present income criteria with a provision to pay the installments based
on current income initially and gradually increases over the latter part of repayment period.

Option 2: The loan shall be considered as per applicant’s normal eligibility with a provision to
pay lower installments initially (70% of the normal EMI) and installments are stepped up in the
later part of the repayment period.

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2. THE HOME SAVER LOANS

Home Saver is a revolutionary new concept in home loans designed to save you interest thereby
letting you pay off your loan faster.

The Standard Charted bank offers a special home loan named the “home saver advantage”, the
home saver advantage, where the interest rates vary from 7.75 per cent to 8 per cent.

Every month, all you need to do is deposit your surplus funds, be it your salary or other savings
into Home Saver, instead of letting them lie idle in different accounts. All this money then works
towards reducing you interest payable because the deposits automatically reduce the balance
outstanding on which the interest is calculated on a daily basis.

So, more the number of days you place your savings into Home Saver, greater is the interest
saving. There is also continuous access to your funds 24 hours a day with the globally valid
ATM cum debit card. The loan taker should maintain a deposit account with the bank to avail
the home saver advantage.

Unique Features of the home saver:

 Freedom to save more

 Freedom to reduce your loan period
 Freedom to access your money – anytime, anywhere

Home Saver is currently available in Bangalore, Chennai, and Delhi, Kolkata, Mumbai and pune.

Freedom to save more:

With Home Saver, there is more to save than a normal low-cost home loan. Because interest is
calculated on your daily balance, you can reduce your interest cons substantially even if your

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surplus savings are in the account for only a day. For each day that your outstanding balance
reduces, you pay les interest for that day.

Since that’s interest saved not earned, you save on taxes that you would otherwise pay on your
interest earned!

Freedom to reduce your loan period:

Home Saver gives you the flexibility and freedom to make excess payments so that you can
reduce the duration of your loan anytime, without penalties.

Freedom to access money – Anytime, Anywhere:

You have the flexibility of depositing and withdrawing cash just as you would your normal bank
account. Home Saver comes with a globally valid ATM-cum-Debit card, which allows you free
to access to your money from over 2000 ATMs across the country Anytime Anywhere.

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 FLEXI-SAVINGS ACCOUNT

Citibank also offers a flexi-savings account to reduce your cost of borrowing. The bank will
automatically open a Saving Account from which you can give standing instructions to deduct
the EMI payments for the loan. You can then prepay the loan at any point in time and be given
instant credit for the same, in case you get a large lump-sum annual bonus from your employer.

Should you require money in an emergency at any point you can avail of a over draft on this
savings account at an interest rate that is the same as that on your
Home loan. This works out much cheaper than taking an over draft on a normal savings account.

CUSTOMIZED REPAYMENT SCHEMES

HDFC which has been in the home loan segment since 1977 has also introduced a host of new
features to its home loan portfolio.

HDFC offers Flexible (Customized) Repayment Schemes, keeping in mind the fact that each
individual has a unique problem requiring unique solutions.

HDFC has developed various repayment options like:

 Step Up Repayment Facility

 Flexible Loan Installment
 Balloon Payment Scheme, Where the payment in the initial years is less and the later
years are more.

Pari Passu/Second Mortgage Arrangements: HDFC has a tie-up with a large number of Public
Sector Organizations and banks which enables us to offer loans to loan seekers with the
flexibility of their spouse also having a loan from his/her own employer.

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3. INCREASE IN THE TENURE PERIOD OF THE HOME LOANS

The home loans are provided for the period of 5 years to 20 years period.

ICICI is the first of its kind to introduce the home loan scheme for a 20-year period.
ICICI has been the largest private sector bank of the country. It has introduced the concept of
providing home loans for a 20-year tenure.

This 20year tenure home loan is available at only fixed rates of interest.

This interest rate structure for the 20-year tenure period for ICICI home loans is as follows:

Tenor Home Loans Floating Rates Fixed Rates

Band Upto Rs.10 lakhs Upto Rs.10 lakhs

A 1 to 5 years 7.25% 8.25%

B Above 5 years, but less than 10 years 7.75% 8.75%

C Above 10 years, but less than 20 years 8.00% 9.00%

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HOME LOAN FACILITIES WITH VARIOUS ADD-ON BENEFITS

The banks have buckled for the completion of the home loan products by providing various add-
on benefits, which has also become a key factor in the competitive era of home loans.
The banks have also tied up with various property insurance companies in order to make their
home loan competitive.
The ABN-AMRO bank which has entered the home loan segment in October 2003, launched its
product “All Smiles Home Loans” with the lowest interest rate of 6 percent in the first year and
6.5 per cent in the second year has added a number of value added services like:
 SMS alert to help the customers keep track of their loan sanctions and disbursement
status.
 The bank also offers its smart Gold credit card to the borrowers and concessional rates on
personal loans and auto loans.

GIC housing finance limited has offered the consumer loans for the purchase of home equipment
at the same rates of interest at the of the home loans and lower than the other consumer loans.
The tenure of consumer loans is restricted to the tenure of 5 years.
Many banks have also done away with the guarantor for provision of home loans for amount less
than RS.10 lakes, like HSBC housing loan scheme, ICICI bank.

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 THE FUTURE OF HOME LOANS

OUTLOOK:
In the last 3-4 years the retail finance disbursements are estimated to have increased at CAGR of
over 30 per cent to RS. 250 million in the year of 2001-02.

The yield in the housing fiancé is estimated at about 11-12 per cent. With the operating costs and
credit losses of 0.5-0.8 percentage points and 0.1 – 0.5 percentage points respectively.

The net margin in the business is expected to be at around 1-1.5 per cent.

Total direct housing disbursements is expected to grow at a CAGR of 2401 per cent during the
period 2001-02 to 2006-07 period, to RS. 734.92 billion.

The market share of HFCs is set to decline from 5902 per cent to 5401 per cent. The market
shares of the banks are expected to increase from 3408 per cent to 41.4 per cent during the
period.

THE FUTURE OF MARKET PLAYERS

The major players in the home loan market are HFCs and the commercial banks and the
scheduled commercial banks.

In 2001-02, the incremental disbursements of housing finance companies is estimated have

increase by over 17.3 per cent.

The disbursement of leading HFCs has increased over the previous years like HDFC, Can fin
homes, over the previous year. However the incremental disbursements of smaller and medium
size HFCs have declined by 3.9 percent,

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due to:

 Increased competition from the banks

 Lower availability of low cost funds
 Tightening interest spreads

The banks aggregate market share of all the banks, in incremental direct disbursement has
increased by 10.1 per cent, to 34.8 per cent.

The growth has been largely driven by the cost advantages of banks over HFCs and lower credit
off-take from the corporate segment

The banks have the advantage over the HFCs because of the

Access to lower cost retail funds (savings deposits)

The banking sector every year gets about 400 – 450 billion in savings and demand/current
deposits, out of which around 75-80 percent is considered core float and are largely long term in
nature.

This indicates the scope of increase in disbursements by the banks without significant maturity
mismatch risks in comparison to the disbursement by the housing finance industry.
CHANGES IN THE TREND

The market share of the HFCs and the banks in 2000-01 was HFCs holding
about 56 per cent and the banks about 44 per cent.

Currently the banks hold about 59 per cent and the HFCs hold about 41 per
cent

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Limitations of study:

 The study was restricted in understanding the home loan as concept so the practical
implications of the study have been difficult.

 The innovative features of the various HFIs as part of their home loan schemes but is not
a comprehensive study of their home loan schemes.

 The Take Over home loans of high interest rate for low interest rates and their inherent
risks on the banks lending profile has not been undertaken in the study.

 The mortgage home loans and its scope on the home loan lending portfolio were not
studied as this would lead into a relatively new kind of home loan segment.

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REVIEW OF LITERATURE

Housing finance all over the world are undergoing tremendous changes and have acquired great
significance in the present day context of liberalization, globalization and modernization of the
society. A good number of research works have been undertaken by individual researchers and
institutions invariably dealing with different aspects of housing finance. A brief review of the
major studies which are particularly pertinent for the present study is attempted here.

By analyzing the question of housing in the country, Ananda Bose, C.V (1996) emphasized the
need for propagating cost-effective and environment friendly building technology. He also
underlined the need for bringing out a new design and construction culture, avoiding costs and
eliminating wrong notions.

Lahiry, S.C (1996) observed that the rising cost has a dampening effect in the housing sector
and the need of the hour is to promote low cost and environment friendly technology and use of
indigenous products. He opined that the housing concept has undergone drastic changes and as
12 such the skills of the people to take-up new housing technologies have to be developed.

Kurana, M.L (1998) analysed the magnitude of the housing problem, housing finance
companies, legal aspects of housing cooperatives and procedural simplification of housing loans.
He suggested the necessity for education and training for the members of the housing co-
operatives and also the legal aspects including the adoption of model law formed by the Central
Government.

Krishna, R.R and V.V.Ganesh Murthy (1998) observed the views that there is a vast scope for
housing promotion in India and the banks and housing finance companies can play a vital role in
the promotion of housing. They suggested that reduction in the housing loan interest and
simplified procedure for sanctioning housing loan will boost the construction of houses.

Leelamma Kuruvilla (1999) throws light on National Housing Policy and new initiatives in
housing finance. She suggested that the change in the legal frame-work, simplifying the
procedure for housing finance and the active involvements of the Government in the housing
sector will definitely mitigate the housing problem.

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Mohinder Singh (1999) states the magnitude of the housing problem in the country and various
national housing policies of the Government. He reviewed the detailed statistical data and
suggested the following: a) sufficient loan amount free from corruption and a low rate of interest,
b) a country-wide survey to find out the real housing storage, c) standardization for low cost
housing and d) regular monitoring and follow-up action.

Parimal.H.Vyas and Sandip.K.Bhat (1999) who analyse the major housing finance institutions,
critical issues of housing finance, interest rates and the repayment techniques observed that the
restructuring of housing finance institutions by developing appropriate marketing orientation
programmes are necessary to face the challenges in the present day world of liberalisation and
globalisation.

Sharma,A.K.(1996) highlights the fact that the challenges of homelessness and urban slums are
largely the spill over problems of inadequate rural habitat. He stated that the housing is closely
connected with growth of population, modernisation, poverty, development and information and
the poor people of India, lack all basic facilities as they are incapable of meeting the rising cost
of building materials. He also 14 opined that Indians cannot solve the housing problem without a
strong political will and properly designed strategies.

Nair,K.N.S and S.G. Jayachandra Raj (1994) observed that Kerala stands unique in the realm of
growth and development. But, even in the wake of state’s rapid expansion in the social sector, it
is to be observed that Kerala projects a dichotomy picture of development comprising of feeble
economic structure along with developed social culture.

Mathurn (1993) opined that the financial burden of investment in housing is generally very
heavy when the owner does not have sufficient funds available to pay for the site and the entire
cost of construction. Hence, he must make arrangements to obtain funds from some other
sources.

Naik (1981) revealed that housing loans are usually advanced against the security of mortgage
of land and the building to be constructed with the loan. Housing finance is therefore mortgage
finance.

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According to Harichandran (1989), the objective of the National Housing Policy include
motivation to help people particularly the houseless to secure for themselves affordable shelter
and to promote 15 investment in housing in order to achieve a sustained growth of nation’s
housing stock.

Parekh (1988) reported that the future of housing finance is to enhance the loan origination
process for housing throughout the country to develop an institutional network that would
facilitate the origination process, to identify the potential resource base for the system as a whole
and to simplify the legal system with respect to risk management of housing finance institutions.

Usha Patel (1996) explained that at present housing through bank finance was a part of bank’s
priority sector lending. Besides, every nationalized bank is expected to allocate every year a
specified percentage of deposits and plan for its deployment for financing direct as well as
indirect housing programmes.

Thomas Paulose (1988) in his study narrated a true picture of housing policies and programmes
in Kerala. Deepak.Razdam (1990) reported that the sources of informal savings are seen to be
cash and bank deposits, assets like jewellery, loans from friends and relatives and to a small
portion of funds from money lenders. The Government plan to bring about appropriate changes
in the 16 approaches of the existing financial institutions so as to make them more responsible
and accessible to households.

Muthuram,P (1999) opined that housing finance, particularly retail housing finance is acquiring
great importance because of government’s incentives and stability in prices. Housing finance
offers safe, secured, profitable and diversified asset portfolio.

Leland and Leo Greller (1977) in their study on Government schemes on housing stated that the
housing boards and development authorities are the only responsible agencies to care for
housing.

Keith and John (1980) brought out a new picture of housing problems. They said that public
housing policy of one sort or another is obviously of great importance in advanced capitalist
systems.

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Ball (1980) reported that housing is unavoidably expensive to produce. Even the most minimal
dwelling occupies land and relatively large amounts of materials and labour for its production.

Holmans (1987) stated that most people cannot afford to pay the full cost of suitable
accommodation from income or savings, but neither have they postponed their consumption
even if they cannot afford to buy outright.

Paul Diamond, T (1998) observed the housing shortage in the country and highlighted the role of
the HFIs in national housing. His observations include introducing flexibility in designing
products and systems, development of mortgage market and development of suitable products to
satisfy wide range needs of borrowers.

Whitehead (1983) observed that housing is essentially a private good with few externalities.
Again, the advantages and disadvantages of housing largely accrue to the individual owner or
user of the property, rather than to the community at large. Whitehead concluded that, housing is
a readily marketable commodity suitable for private provision in a mixed economy.

Hadly and Hatch(1981) advocated a change of emphasis away from the traditional objectives of
state provided social services of uniformity, hierarchical, accountability and administrative
standardization to a system relying on community based organization and designed for
flexibility, accountability, to the consumer and dis professionalization.

Wilson and Aslam (1991) highlighted the problem of housing especially in Kerala. They made
an attempt to assess the outflow of 18 money from the state for construction. The financial
problems for salaried individuals in relation to investment on housing were also analyzed.

Josen Alex (1991) made an attempt to analyze the attitudes of the people towards low cost
housing. He also dealt with housing situations and problems and cost reduction aspects of low-
cost houses.

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RejiKumar (1992) in his study stressed the relevance of low-cost housing schemes, techniques
and building materials. He also analyzed the technical feasibility and financial viability of the
unit.

Kaul (1994) deals with a number of building materials and technologies which came up as a
result of continuous R & D efforts in the country. He argued that by adopting such innovative
methods of construction, cost of construction will come down and speed of construction will
increase.

Narayan and MohanKumar (1994) presented a paper analyzing the housing problem from the
resource base point of view and attempts to highlight the need for evolving contextual
technologies that use locally available materials that can act as alternative to the presently
popular building materials.

According to Gnanaharan (1994) a significant portion of the exploitation of nature owes its
origin from the demand of the housing sector to timber.

Agan (1966) opined that there are two ways to buy or to construct a house. One is to pay for it
outright in cash; the other is to make a down payment and to cover the balance with a mortgage
which will be paid out of future income.

Nickell and Dorsey (1996) opined that the three methods of financing home ownership are cash,
credit and contract method. According to Harichandran (1989) the objectives of the National
Housing Policy include motivation to help people particularly the houseless to secure for
themselves affordable shelter, to promote investment in housing in order to achieve a sustained
growth of nation’s housing stocks.

Bhalla (1991) observed that the present housing shortage in the country is estimated to be around
30 million dwellings. National Housing Bank, established in July 1988 aimed at meeting the
challenge by mobilization of household savings through Home Loan Account scheme,

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facilitating easy access to institutional credit for housing and the continuing concern for
affordability of housing by different income groups.

Pillai Kalathil,S.R.(1996) stated that it will be advisable for all governments and public sector
housing finance organization to have a central pool arrangement of counseling with would be
borrowers. Legalities will have to be simplified.

Gopikuttan, G (1988) studied the causes, consequences and dimensions of the changes in the
trend of house construction activities in Kerala. He observed that the emergence of socio-
political movements and growth of education have influenced greatly the housing pattern in the
state. However, he agreed that the housing boom did not stimulate the state economy and it did
not satisfy the shelter needs of the weaker sections of the society.

Peter Malpass (1996) depicts the need for housing finance. Housing is unavoidably expensive to
produce. He continued his argument by making a distinction between development finance and
consumption finance. The former refers to the ways in which the households meet the cost of
buying or renting.

Helen, A.P (2006), in her study, has made a comparative analysis of the schemes of HDFC and
KSHB and tried to see how far the economically weaker section in the three metro cities in
Kerala (Trivandrum, Kochi, Kozhikode) benefited the services rendered by these two
institutions. She also made an evaluation of the cost effective and conventional housing
examined the awareness of the low cost housing technology and recommended the need for cost
effective eco-friendly housing. She opined that in Kochi low cost housing means low quality
housing meant for the poor and hence there is urgent need to popularize low cost housing so as to
change the mind set of people.

Hasanbanu, S and Jeya Shree (2006) studied the various factors which influence the people for
availing housing loan from public and private sector banks. They concluded that there is vital
scope for housing promotion in India, and banks can play a vital role in promoting house
building activities in villages by introducing more dynamic and innovative housing loan
schemes.

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 Dangwal,R.C (1999) assessed the performance of various financial institutions and their
different housing finance schemes. He also assessed the further need of finance in order to fill up
the gap between the demand and supply of housing finance in India.

According to Carole Rakhodi (1991) the finance for house construction and purchase is in many
limited supply in the third world. The formal sector housing finance is only available to a small
portion of the urban population. This has led to increase in finance systems including surveys of
international literature.

Plavia,C.M (1969) stated that housing finance is not as self-liquidating as agricultural finance
and industrial finance.

Koshy George (2000) conducted a study among the salaried class in Kerala and examined their
house construction activities and the proportion of their investment in housing. He also examined
the socio economic impact due to the drainage of funds to other states in respect of employing
labourers from other states and importing building materials from other states Varghese, K.V
(1983) explained that the main housing problem is linked with financial sector. He opined that
housing is very expensive which needs heavy capital outlay.

David Drakakis (1981) speaks of the necessity of slum improvement programmes by stating that
approaches to the housing shortage of the third world, broadly encompasses government
subsidized programmes which are involved in varying degrees.

In the opinion of Claude Gruen (1970) urban renewal has not provided equivalent price standard
dwelling units to supplement competitive function of the slums. The economic determinants of
housing quality work within the parameters of income and willingness to spend for housing
exhibited by the population of urban area. As we find in Economic Review, Government of
Kerala (1995) Kerala State Co-operative Housing Federation is an apex financing agency in the
co-operative sector. It extends financial assistance for the construction of houses through its 207
affiliated primary societies.

Kerala State Nirmithi Kendra has been established with the objective of promoting low cost
housing and habitat development.

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Vijaya Bhole (1986) in her research thesis cites that the economic factors seem to have placed
severe impediments in the house building activity. Among the most important factors, rising land
value seems to be major constraints in house building activity.

Sivalingam,T (1999) in his study titled “A Study of the Performance of Multi-Agency Housing
Finance Institutions with 26 Particular Reference to HDFC, LIC and Housing Co-operatives”
analyzed the different loan schemes of HDFC, LIC and Housing co-operatives. He observed that
the proportion of investment in public sector housing has declined while the same in the private
sector has increased. He also observed that the borrowers of all the three housing finance
institutions were not satisfied with regard to the rate of interest charged by them.

Aron Chaze (2000) in his article on HDFC in the Financial Express stated that while HDFC has
reported a growth in business volumes, it does very little to inspire stock market. In his opinion,
the effect of lower lending rates has been absorbed and interest spreads have begun to improve.

Krishnamurthy, K.V (2002) in his article titled “Housing Finance: A Safer Avenue” raise a
question- why banks are keen on housing finance sector today? He highlighted the reasons for
this changed phenomenon as the present market condition which forces the banks to park this
surplus resources profitably; housing finance is relatively safe and secure gives better average
yield; to tap the potential as a result of change in life style wide publicity by banks and financial
institutions, demand from wider reach (smaller towns) all have resulted in attracting banks to
enter into this sector. He feels that there is small hope for business for the banks in housing
segment. Further, the mortgage-backed nature of housing finance helps the bank to look for
securitisation, which generate cash flow and thereby improve capital adequacy.

Mistry,K.M (2002) Managing Director, HDFC, in his article, “Future Perfect”, emphasizes the
importance of housing sector in the economy by stating that it has backward and forward
linkages with as many as 269 industries and is the second largest employment generator in the
country. He affirmed that HDFC is superior to Banks in terms of its ability to render expert
counseling and legal advisory services. He also stated that HDFC has an effective risk
management technique so that its spread remains protected. Though banks have access to low
cost funds, it is totally unstable and over a period of time it will face an issue of mismatch by
borrowing short and lending long.

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Gireeshkumar, G.S (2000) in his study analysed the views of member beneficiaries and
managerial personnel with regard to the various aspects of housing loan and examined the
problems faced by primary housing cooperative societies.

He suggested implementation of professionalism in management and reduction in the proportion

of share linking. 28 In the article titled, “Growth at a Brisk Pace”, Rao,R.V.S (2003), stated that
the housing finance sector has been growing at a brisk pace due to the increased demand for
housing consequent to the lowering interest rates, tax concessions and increasing incomes. To
meet the increased demand for housing and the lower probability of losses prompted varied
players to enter the sector. He opined that however, not all players are likely to succeed and to
withstand competition they should render technology-enabled value added services.

In the article titled “Huge Untapped Potential”, Nitin Palany (2004) described the evolution of
housing finance industry and stated that there is a huge potential for housing finance which can
be tapped across the country. He also stated that there is room for every player in the housing
finance market. He opined that in the midst of the information explosion, borrowers sometimes
find it difficult to decide the right lender for which he has given a check-list to borrowers to take
a right decision.

In the article, “Housing Loans – Choose the Best Deal”, Kumar,M (2004) discussed the option
(fixed, floating or mixed) that may be considered as the best for the borrower. He opined that
mixed option might be the best in the present scenario as the market is highly uncertain so far as
change in interest rate is concerned. So borrowers should plan 29 their financial needs in an
effective manner to get the best deal and to decide the proportion depending upon the risk
bearing capacity.

Manoj, P.K. (2004) in his article, “Dynamics of Housing Finance in India”, made an attempt to
study the growth and development of housing finance system in India. He also emphasized the
importance of housing to the economy and prospects of housing finance industry. He examined
the risk factors and issues involved in aggressive lending to housing due to cut throat
competition and the peculiar features of the existing regulatory and legal system. He concluded

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that measures should be taken to promote active mortgage backed securitization market in India
which can further strengthen our Housing Finance System and make it more competitive.

Varghese, K.V (2004) in his article entitled “The Existing Housing Finance System”, viewed
that as a result of mal-allocation of funds, the finance is inadequate. This is mainly due to the
absence of country wide institutions to combine savings with the provision of housing finance.
He opined that housing is a costly commodity which requires huge investment. The present
housing finance system lacks facilities of mortgage loan and insurance for housing credit.

Poor people (pavement dwellers) are outside the purview of all financial institutions and hence
30 some sort of financial arrangement may be made to meet their financial requirement of
housing. In the article “Bank funds flow to rural housing”, Gupta,P.K (2005) made an estimate
of housing requirement in rural areas as million units as compared to 7.1 million units in urban
areas (taking into account replacement, new units and damages of houses due to vagaries of
nature).

He advocated that banks are expected to bring about a qualitative change in the lives of rural
individuals by giving effect to ‘Bharat Nirman’ plan, envisaged in the Union Budget 2005-06.
He also emphasized the importance of taking appropriate policy measures for accelerating rural
housing through public institutions participation. He opined that a healthy development of
housing finance system is an essential ingredient to fuel growth in a market-based economy, like
ours.

Jasmindeep Kaur Brar and J.S Pasricha, (2005) conducted a study to examine the opinion of the
customers regarding housing loan offered by five main institutions (HDFC, LICHFL, SBHF,
PNBHF and House Fed) in the state of Punjab. The study revealed that the customers of 3 out of
5 institutions were indifferent with regard to the services provided by the institution but the
customers of other institutions were indifferent with regard to the services rendered by the
institution. The customers of 31 all the institutions were of the view that despite the falling
interest rate regime, all the institutions charged high rate of interest.

Praveen Gupta (2005), in his article, “Housing Finance Companies – An Insight into Regulatory
Aspects”, stated that HFCs, both in public and private sectors, play an important role in

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providing housing finance in India. He critically evaluated some key regulatory aspects
pertaining to HFCs in the light of various directives and guidelines issued by the NHB.

Avtar Singh Sahota (2005) in his article, “Schemes on Rural Housing”, narrates the new demand
for dwelling units as a result of rapid growth of population and deterioration of old housing stock
and the Governments commitment to provide shelter to all. He also made an evaluation of the
various housing schemes for the rural poor and the initiatives taken by the state Governments. He
suggested that while searching for technology option in rural housing, certain predominant
aspects should be kept in view, such as, using locally available materials in abundance, using
traditional though validated construction practices and technologies, using improved construction
systems, and adopting options, which are least energy consuming and environment – sensitive.

Mani Pal (2005), in his article, “Panchayath Raj Institutions and Rural Housing”, providing a
brief account of the housing shortage in the 32 rural areas and the role of panchayats to meet the
requirements of houses in the rural areas as envisaged in the National Housing and Habitat
Policy 1998.

He opined that the Panchayats themselves should come forward to provide shelter to the villagers
in the shortest period and should implement the centrally sponsored schemes in an effective
manner by way of activating the Grama Sabha. In addition to this Panchayats should also take up
the construction of houses by investing their own resources as well as by borrowing funds for the
purpose from financial institutions.

In an article entitled “Is Housing Finance Safe as Houses?”, Srinivas Subbarao,P (2006)
explained the factors influencing the housing finance, advantages of housing finance to banks
and the drawbacks in housing loans. He highlighted the fact that Non-Performing loans in the
Indian housing finance sector are much higher than those experienced in a developed market
such as the U.S. This is a reflection of the industry’s aggressive marketing tactics and some
inadequacies in appraisal standards and systems. Banks therefore should concentrate on
providing loans within the prudent credit norms for eligibility and margin. If the Banks have not
taken the prudential norms for housing loans they have to conduct recovery mela instead of
present loan mela.

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The forgoing reviews try to light the gaps and deficiencies in the popular area of study. It is
noted that many of the case studies may not fit in for generalization in view of the nature of the
methodology adopted and many of the other studies are made on a uniform basis and hence
useful only for once. Since housing finance has got much significance in the present day context,
an intensive study on this popular area yields more results and gives better understanding of the
different aspects of housing finance. This can then become the basis for setting objectives and
design for the study.

Jagdish Khatav (2006)

In his article “Positive Growth Indications” highlights the global forum in the car industry. According to
him, there are four major growth drivers: (i) economic growth, (ii) falling interest rates and easy
availability of finance, (iii) development of road infrastructure, etc (iv) reduction in taxes. He states that
all these growth drivers are present in India too. The growth rate of the Indian economy has steadied,
more or less, at 7% per annum and is expected to be maintained for a medium term. Interest rates have
been lower than they were before. The finance has reached deeper to the nooks and corners, particularly
in the countryside. The successive Governments have focused on the development of road infrastructure
(Golden Quadrangle). Besides, the excise and custom duties have shown a downward trend. The author
classifies car buyers into three broad categories: (i) the first time buyers who normally buy entry level
cars, (ii) upgrades, who replace their existing cars for new ones, and (iii) those who buy additional cars
for their family members. According to him, nearly 25 million Indians have bought 2- wheelers in the five
years. They are the potential first time car buyers in the next few years. Faster upgradation of auto
vehicles and the expansion of 18 finance with declined interest rates simultaneously have helped in the
booming of business.

As far as exports of vehicles are concerned, in the recent past years, some car companies based in India
have spread their wings and started to tap the foreign market, particularly in Asian, Latin American and
even African countries.

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N. Janaradhan Rao (2005)

In his articles entitled, “Indian Financial Markets”, has thrown light on the new growth drivers of retail
banking. He has accounted for the loan portfolio of the banking companies consisting industrial loans,
retail loans and other purpose loans. In the financial year 2003, the share of retail loans was 51% of the
total loan disbursement, whereas the shares of industrial loan and other loans were 13.6% and 24.4%,
respectively. The industrial and retail loan segments amounted almost to 61% of the total bank loans. The
retail loans include a wide range of financial products, such as deposit products, residential mortgage
loans, consumer durable loans, credit cards, auto finance, personal loans, loans against equity shares,
loans for IPOs (Initial Public Offerings), debit cards, bill payment, mutual fund investment advisory
services, etc. The size of the retail market is Rs.50,000 crores (including credit cards spending of
Rs.10,000 crores). The markets for the rest of the sectors are while goods Rs.4,000 crores (10% CAGR),
auto loans Rs.75,000 crores (5% CAGR), home loans Rs.25,000 crores (30% CAGR), personal loans
Rs.4,000 corers (10-15% CAGR). The author further states that auto finance is on the rise, because of the
low interest rates, poor urban transport in many areas and the availability of finance for secondhand cars.
In fact, on account of liberal financing by banks, the production of passenger cars, motorbike and scooters
have a regained positive growth.

A.Ninan (2006)

In his article “Keeping Pace with Demand”, observes that the retail banking in India has witnessed a fast
growth due to the introduction of financial reforms. According to him, it has become broad-based
towards auto loans, housing loans and personal loans. He states that NPA in 19 respect of retail loan
segment is currently at a low level of just 2%. In 2004-05, the strong growth in retail advances increased
by 41.2% (Rs.77.947 corer) against the growth of 27.9% in overall loans and advances of scheduled
commercial banks. He further points out that though there is such a heavy growth seen in retail banking,
the performance of these banks has been the worst in comparison to that of foreign banks. The
scheduled commercial banks have yielded the loans efficiency of productivity of personal loans, whereas
the foreign banks have had their turnover per employee about five times more. In case of liquidity, the
credit: deposit ratio of banks has gone up from a low 50% till years ago to about 70%. Given that about
30% of banking funds are preemptied as reserve requirements, the banking system is almost on the limit
of its credit generation ability, Moreover, high government borrowing will continue to the crediting out
effect. While liquidity continues to be good, the system will have to ensure that the banking system is

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not lacking in funds for the medium term. As there has been an increasing globalization marking on
Indian corporate and global financial innovations have been affecting the economy, regulation needs to
be recognized and kept pace with. This means that guidelines are to be prepared to enable banks to
vitalize some of these globally accepted, sophisticated instruments.

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