Home Loan Project black book

PROJECT REPORT
ON
Home Loan
SUBMITTED BY
Ms. Poonam R Wala
BACHELOR OF MANAGEMENT STUDIES
SEMESTER V (TYBMS)
(Academic year 2016 – 2017 )

REENA MEHTA COLLEGE OF COMMERCE AND
MANAGEMENT STUDIES
( Bhyander west )

CERTIFICATE

This is to certify that Mr Poonam R Wala student of REENA
MEHTA COLLEGE OF MANAGEMENT STUDIES has
completed her project work of “Home Loan” and
submitted the project in partial fulfilment of
“BACHELOR OF MANAGEMENT STUDIES ” of
Mumbai University of the academic year 2016-2017

He has worked under the guidance , the said project is in
bonafied information .

Project.co.ordinator Guide
(DR. Satinder Kaur Gujral) (Pro Arun Thanvi)

Signatiure Signatiure

EXTERNAL PROF Principal
(Dr B.S. Gaikwad)

Signatiure Signatiure

DECLARATION

I, Ms Poonam R Wala , hereby declare that this project
work entitled “Home Loan” is my original work.

I further declare that this report is based on the
information collected by me and has not been submitted
to any other university or academic body.

Date: 30 sep 2016 Poonam R Wala

ACKNOWLEDGEMENT

It is matter of outmost pleasure to express my deep sense of gratitude
and thanks to my guide ARUN THANVI and our
co ordinatior DR. SATINDRER KAUR GUJRAL , the college teacher
and my family for the guidance and the timely suggestions and the
information provided by them for this project
.

I also wish to express my heartiest thanks to all people who have
contributed to the making of this project. I also heartily thank who have
supported. Provided their valuable guidance and healped for the
accomplishment of the project.

Above all , I wish to thanks the “UNIVERSITY OF MUMBAI” for
giving me the opportunity to work on this project which was done with
great consideration and outmost seriousness

Index
INTRODUCTION

RATIONALE OF THE STUDY

HYPOTHESIS

RESEARCH METHODOLOGY

EXPECTED CONTRIBUTION

EXPECTED CONTRIBUTION

TYPES OF LOANS

INTRODUCTION TO HOME LOAN

CHARACTERISTICS OF HOME LOAN

TYPES OF HOME LOANS

BENEFITS OF HOME LOANS TO BORROWERS

TAX BENEFITS

STEPS IN PLANNING FOR A HOME LOAN
 PURPOSE
 SELECTION OF A PARTICULAR HOME LOAN
 FINDING OUT COST OF THE HOUSE
 FOLLOW UP WITH BANK’S PROCEEDS

FAIR PRACTICES CODE TO BE FOLLOWED BY BANKERS
WHILE GIVING HOME LOANS

PROCEDURE OF HOME LOAN & PARAMETERS IN
RELATION TO HOME LOANS

BIBLIOGRAPHY

WEBSITES

INTRODUCTION

Home is where the heart is - owning a home is a lifelong dream for most of the
people. Home is more or less a lifetime investment and hence home loans are an
integral part of every person who dreams and wants to have a living space of his
own. Buying a home is probably the biggest purchase most of us will ever make in
our lifetimes. Owning our own home is a watershed event in our life. You are the
master (or mistress) of your own space, your little corner in the universe. But the
process of finding your little nest is a stressful one. A once in a lifetime investment
needs a loan and that is how a home loan comes into the scheme of things in your
life.
Almost all public and private sector banks are offering home loans at attractive rates
for purchasing their dream home. Home loan usually cover a variety of types. All
Banks have come out with home loan products studded with features and value

additions that make the schemes not only attractive but also serve as a substantial
source to the borrowers for owning their dream home.
RATIONALE OF THE STUDY

The rationale of the study can be considered as follows:

 It helps to improve research ability.
 The study enables to enhance the knowledge base regarding home loans and
its various other aspects.
 It enables to think logically and practically.
 The study helps in development of skills of getting primary data.
 It leads to overall knowledge development

HYPOTHESIS

The hypothesis being put forth for this study about home loans is that the awareness
of home loans is 100% but after the survey the conclusion can be put that there are
still many people who do not know about home loans. Banks are coming up with
new innovative home loans schemes for increasing their customer base.

RESEARCH METHODOLOGY

The research methodology is data collection through

 Primary Sources
 Secondary Sources

Primary Sources: Survey by distributing questionnaire to the people taking sample
size of 100. Interviews conducted with bankers.
Secondary Sources: Data collection through books, magazines, websites, journals,
etc.

EXPECTED CONTRIBUTION
Expectations from the study are that it may contribute to the real scenario of home
loans demand and accordingly the banks can go for new innovative schemes. It will
also specify some recommendations and based on that banks can make suitable
arrangements in a particular sector. It will also make people aware about the various
home loan schemes and its various procedures and formalities.

INTRODUCTION
Banking system in the world has emerged many centuries ago and in India it rooted
its seed with the existence of the General Bank of India in the year 1786. In earlier
days banks were the Financial Institutions dealing in day to day services i.e.
accepting deposits and lending money. But now it has spread its wings to various
others sectors like it first started lending to big business entities and has also entered
into the retail banking sector i.e. it started lending for purchasing car, for education,
marriage and most importantly for purchasing a house.

To own a house is every man’s desire. But more than that, shelter is a basic human
need next only to food and clothing in importance. Yet every year more and more
people continue to be added to the category of homeless. Though a basic need of all
a significant section of the society is severely handicapped in getting shelter at

affordable cost. This need for housing finance for individuals was only fulfilled with
the advent of National Housing Bank (NHB), Housing and Urban Development
Corporation (HUDCO), Housing Development Finance Corporation, etc and most
particularly with the entry of commercial banks in the housing finance sector.

In Tune with the conservative traditions in lending, commercial banks played a very
limited role in providing housing finance till the early seventies. However, now as
per Reserve Bank guidelines, housing finance is part of priority sector lending
schemes for banks. There has been progressive increase in housing finance disbursed
by commercial banks since 1979.

The housing finance industry is getting increasingly commoditised. Competition
within the sector is ensuring that players offer consumers flexibility and features to
choose from. Features such as adjustable rate plans, lower processing fees/monthly
rest/interest rates/EMI/margin money, no pre- payment penalty have become
common across the industry. There is a growing trend among Banks and FIs to
include the cost of registration, stamp duty, society charges and other associated
costs while sanctioning loans to differentiate and make the home loans products
more attractive. This has resulted in further lowering the threshold limit for buying a
house.
TYPES OF LOANS

Loan refers to a sum of money borrowed at a particular interest rate. More generally,
it refers to anything given on condition of its return or repayment of its equivalent. A
loan may be acknowledged by a bond, a promissory note, or a mere oral promise to
repay. Banks grants 3 types of loans which are as follows:
Commercial loans or Industrial loans, Consumer loans and Mortgage loans

1) Commercial loans: Commercial loans are mainly provided to the business and
industrial firms. These can be divided into:

 Short term loans: Short term loans are mainly given for a period up to 1 year
and usually granted to the business and industrial firms to meet the working
capital requirements. For e.g.: Cash credit, Bank overdraft etc. (loans to finance
the purchase of material or labour)

 Long term loans: Long term loans are granted for a period above 5 years and
are granted to meet capital expenditure. For e.g. project finance, Education loan
etc. (loans to purchase machinery and equipments). Most commercial bank
offers a variable interest rate on these loans, which means that the interest rate
can change over the course of loan. Sanction of loan depends upon the credit and
loan history of the borrower, the borrower ability to make scheduled loan
payment, the amount of capital the borrower has invested in the business, the
condition of the economy and the value of the collateral the borrower pledges to
give the bank if the loan payments are not made.

2) Consumer Loans: One of the important areas of bank financing in recent years
is towards purchase of consumer durables like TV sets, Washing Machines etc.
Banks also provide liberal car finance. These days banks are competing with one
another to lend money for these purposes as default of payment is not high in
these areas as the borrowers are usually salaried persons as default of payment is
not high in these areas as the borrowers are usually salaried persons having
regular income. Further, bank’s interest rate is also higher. For e.g. Housing
Loan, Medical Loan, Car Loan, Education Loan.

There are two types of consumer loans:

 Closed ended credit: Closed ended loan are for fixed period of time, fixed
amount of loan, but not for a fixed purpose. The items purchased by the
consumer serve as collateral for the loan.

 Open ended credit: Open ended loan are for variable amount of money and it
does not require the borrower to specify the purpose of the loan. For e.g. Credit
cards. Most open ended loans carry fixed interest rate and it requires no
collateral but interest or other penalties or fees may be charged. Open end credit
interest rates usually exceed close end rate because open end loans are not
backed by collateral.

3) Mortgage loans:
These are usually long term loans and the interest rates charged can be either a
variable or a fixed rate for the term of the loan which often ranges from 15- 30 years.
These loans are used to purchase land or building such as household and factories
which serves as the collateral for the loan.

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

1. Clean Loans: Advances for which are given on the personal security of the
debtor, for which no tangible or collateral security is taken; this type of given
either when the amount of the advance is very small, or when the borrower is
known to the banker and banker has complete confidence in him.

2. Secured Loans: Loans which are covered by tangible or collateral security.
Bank provides such loan against different types of securities which a banker may
accept for such advances.

INTRODUCTION TO HOME LOAN
The sun at home warms better than sun elsewhere.
True isn’t it, where else do you find that comfort that makes you feel so special
everyday. Undoubtedly owning a house is the most important phase in ones life. Not

long ago, turning this dream into a reality was a daunting task for the common man
with property rates going north all the time. But now, thanks to the proliferation of
home loans and housing finance companies, one can aspire to own a roof over one's
head. Many think it is an expensive affair and beyond reach. Well, that’s not always
true. It takes a little planning and awareness to get to that home you want to call your
own.
Buying a home for the first time can be daunting to any person but in today’s time
various banks are lending a helping hand to the people to purchase their dream
house. Thus people look forward towards choosing a home loan. The primary
concern of a housing finance company is to determine the loan amount that the
borrower is comfortably able to repay. The most popular method of financing a
home purchase is with a mortgage. This is a loan that is secured over the home.
There are a number of different mortgage suppliers and people will have to shop
around in order to get the best deal.
Home Loan is one of the fastest growing retail and mass banking area. It forms an
important part of the country’s priority in 5 year plans. Almost all public and private
sector banks are offering home loans at attractive rates for purchasing their dream
home. Home loan usually cover a variety of types. All Banks have come out with
home loan products studded with features and value additions that make the schemes
not only attractive but also serve as a substantial source to the borrowers for owning
their dream home.

Banks as financial service providers aims at providing financial support from the
banking system to the needy for purchasing a home to the resident Indians as well as
non-resident Indians. The main emphasis is that every needy person is provided with
an opportunity to pursue home loan with the financial support from the banking
system with affordable terms and conditions.

CHARACTERISTICS OF HOME L OAN
 Home Loans are the consumer loans.
 Home loans are long term loans provided by various banks.
 These are large amount loans which provide financial support to the people who
want to purchase their dream home.
 Home loans are secured loans.
 The borrowers get to own their dream home and pay for it in easy and affordable
installments.
 Banks and Financial Institutions offers home loans at cost-effective rates.
 Tax concessions make home loans more attractive than other loan products.
 The borrowers can get tax deduction on repayment of the principal amount of a
loan taken to buy or construct a house.
 The interest paid on a loan is deductible from 'income from property', even if it
has not been paid during the year.
 Interest paid on a new loan taken to repay the original housing loan is also
allowed as deduction.

TYPES OF HOME LOANS
Lending institutions like banks offer different types of home loans for a wide gamut
of housing activities. Some of the popular home loans are:

Home Purchase Loans: There are the basic home loans for the purchase of a new
home.

Home Improvement Loans: These loans are given for implementing repair works
and renovations in a home that has already been purchased by the borrower.

Home Construction Loans: These loans are available for the construction of a new
home.

Home Extension Loans: These are given for expanding or extending an existing
home. For example addition of an extra room, etc.

Land Purchase Loans: These loans are available for purchase of land for both
home construction or investment purposes.

Bridge Loans: Bridge Loans are designed for people who wish to sell the existing
home and purchase another. The bridge loan helps finance the new home, until a
buyer is found for the old home.

Balance Transfer: Balance Transfer loans help the borrower to pay off an existing
home loan and avail the option of a loan with a lower rate of interest.

Refinance Loans: These loans helps to pay off the debt the borrower have incurred
from private sources such as relatives and friends, for the purchase of your present
home.

Home Conversion Loans: These loans are for those people who have financed the
present home with a home loan and wishes to purchase/move to another home for
which some extra finances are required. In Home Conversion Loan, the existing loan
is transferred to new home including the extra amount required, eliminating need for
pre-payment of the previous loan.

Stamp Duty Loans: These loans are sanctioned to pay the stamp duty amount that
needs to be paid on the purchase of property.

Loans to NRIs: These loans are given to the NRI’s to build/buy a home in India.
EMI is payable till the loan is paid back in full. It consists of a portion of the interest
as well as the principal.

BENEFITS OF HOME LOANS TO BORROWERS

Food, clothing, shelter -- these are the basic needs of every individual. But to most,
owning a home is just a dream. The real estate boom and steadily rising capital
values are now making it next to impossible for most people to fund their own
homes. Banks and financial institutions are offering aggressively competitive rates
on home loans, making it possible for more people to own the home of their dreams.
Many builders have tie-ups with banks or financial institutions so that prospective
buyers are assured of housing loans without any hassles. Taking a home loan serves
two purposes. One, of course, is that the borrower gets to buy his/her own home and
pay for it in easy installments. The other is that the borrowers get several benefits
under the Income Tax Act.

TAX BENEFITS

1) For Resident Indians
There are certain tax benefits for the resident Indians based on the principal and
interest component of a loan under the Income Tax Act, 1961. It may help one get
tax benefit up to Rs. 50,490 p.a. (approx) if interest repayment of Rs. 1, 50,000 p.a.
is paid. In addition to this, one also is eligible for getting tax benefits under section
80C on repayment of Rs. 1, 00,000 p.a. that further reduces the tax liability by
Rs.33.660 p.a.
These deductions are available to assesses, who have taken a loan to either buy or
build a house, under Section 24(b). However, interest on borrowed capital is
deductible up to Rs. 150,000 if the following conditions are fulfilled:

 Capital is borrowed for acquiring or constructing a property on or after April 1,
1999.
 The acquisition and construction should be completed within 3 years from the
end of the financial year in which capital was borrowed.
 The person, extending the loan, certifies that such interest is payable in respect
of the amount advanced for acquisition or construction of the house.
 A loan for refinance of the principle amount outstanding under an earlier loan
taken for such acquisition or construction.
If the conditions stated above are not fulfilled, then the interest on borrowed capital
is deductible up to Rs 30,000 though the following conditions have to be satisfied:
 Capital is borrowed before April 1, 1999 for purchase, construction,
reconstruction repairs or renewal of a house property.
 Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs
or renewals of a house property.
 If the capital is borrowed on or after April 1, 1999, but construction is not
completed within 3 years from the end of the year, in which capital is borrowed.
In addition to the above, principal repayment of the loan/capital borrowed is eligible
for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-
07.
Terms and conditions for availing Tax benefits on Home Loans
1. Tax deductions can be claimed on housing loan interest payments, subject to an
upper limit of Rs 150,000 for a financial year.
2. An additional loan for extension/improvement to the same house and the
individual's deductions on the existing loan are less than Rs 150,000; he can
claim further benefits from the additional loan taken, subject to the upper limit of
Rs 150,000 for a financial year.

3. Tax benefits under Section 24 and deduction under section 80C of the Income
Tax Act can be claimed only when the payment is made. If an individual fails to
make EMI payments, he cannot claim tax benefits for the same.
4. According to the Income Tax Act, tax rebates can only be claimed by the loan
applicant.
5. The interest on home loans taken for repairs, renewals or reconstruction, also
qualifies for the deduction of Rs 150,000.
6. A husband and wife, both of whom are tax-payers with independent income
sources, get tax deduction benefits, with respect to the same housing loan; to the
extent of the amount of loan taken in their own respective name.
7. If an individual buys a house and sells it within the same year or after 3 years,
and if any profit is made, then a capital gains tax liability arises on the same for
which the individual is liable to pay short-term capital gains tax since the sale
took place in the same year. But in case, if the sale had taken place after 3 years,
then a long-term capital gains tax liability would have arisen.
8. On being proved that the home loan is simply an arrangement between the loan-
seeker and the builder or with a third party for the purpose of claiming tax
benefits, then tax benefits will not be allowed and benefits, previously claimed,
will be clubbed to the income and taxed accordingly.
Tax benefits on interest on housing loans are allowable only for the original loan and
according to Section 24 (1), tax benefits can also be availed for a second loan taken
to repay the first loan but not for subsequent loans. This means that if the borrower
have already availed of one loan to refinance the original loan and want to now avail
a third loan to refinance the second loan, tax rebate on interest payments will not be
permissible.

2) For Non- Resident Indians

NRIs cannot claim tax benefits on home loans in India as they have to pay tax in the
nation where they work and earn. Moreover, the borrowers need to file tax returns to
become eligible for home loans. However, if they pay tax in India for income earned
in India, they can claim tax rebate for the home loan.

STEPS IN PLANNING FOR A HOME LOAN

A) PURPOSE
The first step in planning for a home loan is to find out the purpose for which one is
planning to take the loan. Depending on the borrowers requirements, home loans can
be taken for a variety of purposes such as to purchase a new home, to implement
repair works and renovations in a home that has already been purchased by the
borrower, to construct a new home, for expanding or extending an existing home, to
purchase land for both home construction or investment purposes, etc. Hence finding
out the purpose of the loan is the first and foremost step in planning for a home loan.

B) SELECTION OF A PARTICULAR HOME LOAN

The selection of a particular home loan depends on the affordability position of the
borrower. What kind of home one can afford is, more often than not, a function of
how much/the maximum one can borrow?
How much one can afford/ the maximum one can borrow: Banks follow a
thumb rule while deciding the maximum a person can borrow: the monthly
repayment on the loan should not be more than 40 per cent of the net monthly
income. This ratio is called the Income to Installment ratio or IIR. Some lenders
may even be more conservative. One could expect to be allowed to borrow an even
lower figure if they consider an IIR of as low as 30 per cent of the net monthly
income. They finance a certain portion of the property value, typically 75-85 per
cent. The rest is the borrowers’ contribution, usually called the down payment or the
margin, and has to come out of his (borrower’s) own resources.
Down payment: Another important determinant of the value of the house one can
afford is how much the borrower has saved up. Since banks only finance between
75 and 85 per cent of the property value, effectively the down payment can
determine the value of the home that one can go for. Of course, this is subject to the
limit on how much one can repay every month, as determined by the IIR.
C) FINDING OUT COST OF THE HOUSE
Buying a home involves many financial considerations. Some home buying
expenses are one-time costs and others are ongoing commitments. In addition, there
are other costs that the borrowers should take into consideration in calculating the
cost of the house. Below is a checklist of additional expenses that the borrowers
need to keep in mind when purchasing a home.
Home buying costs
The Down Payment: A minimum down payment of 15% is required for a Normal
Housing loan. The government offers Tax incentives for homebuyers.

The Payment: A Home Loan Security is security for a loan on the property the
borrower own. It is repaid in regular monthly payments which are combined
payments. This means that the payment includes the principal (amount borrowed)
plus the interest (the charge for borrowing money).
Checklist of Additional Expenses: Additional expenses need to be incurred after
one has moved in.
Maintenance costs: These costs are incurred to cover the costs of anticipated or
unexpected repairs or replacement of such things as the painting or household
appliances.
Renovation and repairs costs: These costs are incurred in cases where the need
arises to repair the house. A home inspection may indicate that the home needs
major structural repairs.
Property taxes: Property taxes are always a certainty and needs to be taken into
account when one plans to purchase a home.
Property insurance: It is imperative for the borrowers to take insurance of the
house they plan to purchase. Additional expenses go into insuring the house like
premium expenses, legal expenses, etc.
Service charges: This includes the service charges levied by the banks and
financial institutions for processing the loan application.
Lawyer (notary) fees: Even a straightforward home purchase requires a lawyer to
review the Offer to Purchase, search the title, draw up mortgage documents and tend
to the closing details. Lawyers fees for a Housing loan and purchase range widely
depending on the complexity of the deal but will probably be at least Rs.500.

Moving costs: This refers to the expenses incurred when one moves from one home
to another for example expenses incurred for hiring a truck..
Other Costs: This is a list of possible extra costs involved in buying a home. Some
of them are one-time costs and others, such as maintenance fees and property
insurance, will be ongoing monthly expenses.
D) SELECTION OF THE MOST SUITABLE BANK

Choosing the most suitable bank is a crucial stage in the home loan process. It is
imperative to choose the financer with utmost care and proper consideration of its
past track record since the customer is entering in a long-term relationship with the
bank when he takes a home loan.

After finding out the cost of the house, one must compare banks on the basis of cost
to see which loan is the cheapest. Besides cost factors, though, there are some other
factors that one need to consider. Evaluation of the lenders can be done on the basis
of the following factors:
Rate of interest: This is where it all begins. Although the rate of interest offered by
most banks is more or less the same on paper, some degree of bargaining in most
cases, leads to a lowering of rates by as much as 0.25 to 0.50 percentage points and
more so if the borrowers profile happens to match the requirements of the bank. The
lowering of interest rate has a significant impact over the long term although the
difference is not so noticeable over the near term. Care needs to be taken to ensure
that the difference is not being offset elsewhere by the bank under the guise of other
`charges'.
Total financing cost: This measure quantifies what the loan really costs. It not only
incorporates interest cost but also combines the other costs such as processing fees
and other administrative charges collected by lenders upfront. Looking for a bank

not just with the lowest interest rate but the lowest total financing cost can help one
in opting for the best deals.
National presence: The bank should be present across the country or at least have
branches in all major metros and towns. This assumes importance if the current job
of an individual is of a transferable nature (e.g. bank jobs, defence personnel) or if
he needs to make long and frequent outstation visits (e.g. consultants, businessmen).
The individual shouldn't be put through the hassle of couriering his cheques to the
resident branch every time or contacting the resident branch each time he has a
difficulty or a query. So it helps if the bank is well networked across the country.
Prepayment/Foreclosure benefits: For many individuals, this plays a significant
role in their decision to go in for a particular bank. For example, many salaried
individuals know for a fact that their salaries would be revised every year. This
means that they can pay a higher EMI going forward. Some of these individuals also
know that they would be getting a bonus, which they can utilise to pay off their
home loan (either fully or partly). Some banks do not charge individuals for making
a prepayment/foreclosing his account. Obviously such bank should get preference
over other banks that do levy a prepayment charge.
Calculation of the exact home loan amount: Here the banks differ in their
calculation of the loan amount to be disbursed. Some banks calculate the amount to
be disbursed on the basis of, say, the gross salary while some banks calculate it on
the net salary. This might make a difference to individuals as the loan amount and
the EMI will vary across banks. One needs to look into this and get a comparative
analysis done across banks to understand which bank offers the best deal to the
borrower.
Extent of funding: Some banks fund only 60 to 75 per cent of the property value,
while others fund higher amounts. If the amount of down payment one have saved
up is not enough, this factor may tilt one lender's loan in ones’ favour.

Flexibility of repayment plans. Some banks offers flexibility in terms of
repayment. They could have either have 'Step-up' plans in which the EMI is stepped
up as the tenure increases (suitable for young borrowers just starting their careers) or
repayment plans that allow the borrower to load payments upfront (suitable for
borrowers who are close to retirement). Also, some banks allow borrowers to fix the
monthly payment themselves, especially when they take a loan far lower than what
they are eligible for and where repayments are very comfortable. In such a case, the
borrower himself can fix the loan tenure. If the profile fits one of these cases, one
can consider a bank who allows such flexibility.
Property characteristics: Some banks are wary about financing flats that are old
(more than 30 years). So it is important to check whether the bank will finance such
a property. Also, very few banks lend against properties that are sold by holders of
power of attorney on a property, rather than owners.
Collateral: Housing loans are already backed by collateral - the house being
financed. In addition to this, some banks ask for collateral such as life insurance
policies and fixed deposits. Since there are banks who will not ask for such collateral
and it is not particularly necessary to cough up extra collateral, especially if the
credit is good, one can look for a bank that does not ask for such collateral.
Service: Some banks offer some extra services that make the loan process a whole
lot easier. They come to the applicant’s home and get the application form filled by
him; they drop the disbursed check to the home or office of the borrower. When
there is a tie-up with the employer of the borrower, the process becomes a whole lot
easier.
Other factors: Other factors like documentation, processing fees, document storage
facilities and several other factors can be considered. It is also important to consider
the time taken to process the loan as well as special deals that a particular bank may

have with a real-estate developer. For example, individuals do not like it if the
documentation is an irksome process or if the processing fees are exorbitant.
E) FOLLOW UP WITH BANK’S PROCEEDS
After the application is submitted along with all supporting documents, the loan
officer conducts a formal interview where he assesses the creditworthiness of the
applicant and his repayment capability, based on the information provided in the
form and the applicant’s explanations during the interview.
The lender then conducts a credit evaluation of the applicant, which also factors in
the property valuation report from an independent valuer appointed by the lender
himself. If the loan officer has some queries, more documents and more explanations
may be needed. Based on the finding of the credit evaluation, a loan amount is
determined and sanctioned. A sanction letter is then sent to the applicant who
generally contains a disbursal plan.
FAIR PRACTICES CODE TO BE FOLLOWED BY
BANKERS WHILE GIVING HOME LOANS
With a view to setting out fair lending practices in a transparent manner, the RBI has
advised Banks and Financial Institutions (FIs) to adopt the following as Lenders’
Fair Practices Code.
The Fair Practices code applies to the following areas:
A) Applications for loans and their processing
1) Standard schedule of fee/ charges relating to the loan application depending on
the segment to which the accounts belong should be made available to all the
prospective borrowers in a transparent manner, along with the loan application,

irrespective of the loan amount. Likewise, amount of fee refundable in the event of
non-acceptance of the application, prepayment options and any other matter which
affects the interest of the borrower should also be made known to the borrower at the
time of application.
2) Receipt of completed application should be duly acknowledged.
3) The acknowledgement should also include the approximate date by which the
applicant should call on the Bank for preliminary discussions, if deemed necessary.
4) All loan applications will be disposed of within a stipulated period from the date
of receipt of duly completed loan applications i.e. with all the requisite
information/papers.
5) In case of rejection of loan application, irrespective of category of loans or
threshold limits, the same should be conveyed in writing along with the main
reason(s), which led to rejection of the loan application. The time frame for
conveying the reason/s of rejection should be as per the Schedules.
B) Loan appraisal and terms/conditions
1) In accordance with Bank’s prescribed risk based assessment procedures, each
loan application should be assessed and suitable margin/securities should be
stipulated based on such risk assessment and Bank’s extant guidelines, however
without compromising on due diligence.
2) The sanction of credit limit along with the terms and conditions thereof is to be
conveyed to the loan applicant in writing and applicant’s acceptance of such terms
and conditions should be obtained in writing. Such terms and conditions as have
been mutually agreed upon between the bank and borrower prior to the sanction will
only be stipulated.

3) Copy of loan documents, along with a copy of all relevant enclosures should be
made available to the loan applicant on specific request. Standard sanction letter
would include instances of approval, disallowance, etc. The bank is under no legal
obligation to consider increase/additional limits/facilities without proper
review/assessment.
4) In case of lending under consortium arrangement, the participating banks would
decide the timeframe to complete appraisal of the proposal and communication of
the decision. The Bank will abide by the decision of the consortium.
C) Disbursement of loans including changes in terms and conditions
1) Disbursement of loans sanctioned is to be made immediately on total compliance
of terms and conditions including execution of loan documents governing such
sanction.
2) Any change in terms and conditions, including interest rate and service charges,
should be informed individually to the borrowers in case of account specific changes
and in case of others by Public Notice/display on Notice Board at the branches/on
the Bank’s website/through Print and or other Media from time to time.
3) Changes in interest rates and service charges should be effected prospectively.
4) Consequent upon such changes any supplemental deeds, documents or writings
are required to be executed, the same shall also be advised. Further, availability of
facility will be subject to execution of such deeds, documents or writings.
D) Post disbursement supervision
1) Post disbursement supervision by Banks/ FIs, particularly in respect of loans upto
Rs. 2 lacs, should be constructive with a view to taking care of any genuine
difficulties that the borrower may face.

2) Before taking a decision to recall/accelerate payment or performance under the
agreement or seeking additional securities the Lenders should give reasonable notice
to the borrower.
3) All securities pertaining to the loan should be released by Banks/ FIs on receipt of
full and final payment of the loans subject to any legitimate right or lien and set off
for any other claim that the Bank/ Financial Institution may have against the
borrowers. If such right is to be exercised, borrowers should be given due and proper
notice with requisite details.
E) Other general guidelines
1) The Banks/ FIs should refrain from interference in the affairs of the borrower
except for what is provided in the terms and conditions of loan sanction documents
(unless new information, not earlier disclosed by the borrower, has come to the
notice of the Bank as lender). However this does not imply that Bank’s right of
recovery and enforcement of security under Law as well as appointment of nominee
directors, where required, is affected by this commitment.
2) While lending Banks/ FIs should not discriminate on the grounds of gender, caste
or religion in its lending policy and activity.
3) In the case of recovery, Banks/ FIs should resort to the usual measures as per laid
down guidelines and extant provisions and should operate within the legal
framework.
4) For the purpose of recovering loans, Banks/ FIs should have a Model Policy on
Code for Collection of Dues and Repossession of Security. They should not resort to
undue harassment viz. persistently bothering the borrowers at odd hours, use of
muscle power, etc.

5) In case of request for transfer of borrowal accounts, either from the borrower or
from a Bank/FI, the Bank’s consent or otherwise should be conveyed within a
stipulated period from the date of receipt of request.
6) The Branch Officials should immediately take up the matter for redressal in case
of any complaint/grievance from the applicant/borrowers.
7) In case of complaints received, the branch should take into consideration the
matter with full details within a stipulated period from date of receipt and take all
necessary steps to redress and resolve the grievance/dispute within a proper time
frame.

PROCEDURE OF HOME LOAN

Home loan procedure caters to processes right from the time the customer walks into
the bank with a request for home loan till the time the loan is finally repaid by the
customer. The three major phases in the home loan procedure are the information
acquisition, credit appraisal and sanction, and disbursement. Tracking the
performance of the process is an underlying phase that runs across the application
processing cycle and is critical for monitoring and profitability for the Bank/
Financial Institution.
The procedure for availing a home loan can be explained with the help of the
following flow chart:

A. Submission of application form: The application is submitted along with
photographs, credit documents and a cheque for processing, documentation and
administration fees by the customer. The credit documents comprise documents to
establish income, age, residence, employment, investments, etc. During this stage,
the bank/financial institution checks the repayment capacity of the customer. The
repayment capacity is determined by taking into consideration factors such as
income, age, qualifications, number of dependants, spouse's income, assets,
liabilities, stability and continuity of occupation and savings history.
Submission of application form
Personal Discussion with customer
Field Investigation by the bank/FI
Credit Appraisal and loan sanction
Issue of offer letter to the customer
Submission of property / legal documents
Legal check on the property by the bank
Technical check on the property by the bank
Disbursement
Repayment
Interest tax certificate
Prepayment by the customer

B. Personal Discussion with customer: Some banks/FIs require the customer be
present at the time of the credit appraisal. Some banks/FIs may insist on a personal
interview with the customer and perform a reference check on the references
provided by the customer on the application form. For the personal discussion the
customer needs to take with him all documents pertaining to the information
provided by him on the application form.

C. Field Investigation by the bank/FI: The bank/FI validates information
provided by the customer on the application form. This stage revolves around two
key aspects. Critically appraising the credit worthiness of the customer and
analyzing the risk in lending. It is necessary to capture all the information required
to cater to these aspects. It is important to verify that the information supplied by the
customer is correct and authentic. Banks achieve this mostly through external
agencies. Also the validity and authenticity of information can be done through
conducting checks on the residential address of the customer, the place of
employment of the customer, and credentials of the employer, verification of
documentary proofs of income, age and other information. To minimize the risk, it is
necessary to check that the customer is not a fraud or black listed within the bank or
other institutions.
D. Credit Appraisal and loan sanction: The next phase in the home loan process is
the credit appraisal and loan sanction. After checking the customer's repayment
capacity, the bank/FI sets norms that define the customer's eligibility for a loan
amount. The loan then gets sanctioned along with certain terms and conditions.
When evaluating the measurable aspects of home loan requests, an analyst addresses
the following issues: the character of the borrower, the use of loan proceeds, the
amount needed, and the primary and secondary sources of repayment. Therefore, the
bank has to base its decisions more on qualitative parameters rather than quantitative

aspects. Credit analysis therefore is distinct for each type of home loan scheme.
Credit analysis is the most popular methods of evaluating home loans.
D. Issue of offer letter to the customer: The bank/FI sends an offer letter to
the customer with the loan sanction details which mention:
 Loan amount
 Rate of interest and whether it is fixed / variable rate of interest. If variable,
period after which the rate of interest would be reset - annual / monthly reducing
balance
 Loan duration
 Mode of loan repayment
 Scheme of the loan, if a special scheme has been offered to the customer
 General terms and conditions of the loan
 Special conditions, if any, which the customer needs to adhere to prior to
disbursement
 Submission of the acceptance copy of the offer letter and a cheque for
administrative fees by the customer
F. Submission of property / legal documents by the customer to the bank/FI:
After the selection of the property, the customer is required to submit the original
documents pertaining to the property being purchased or mortgaged (if the property
purchased is different from the property mortgaged). The bank/FI keeps the property
documents as security for the loan amount given to the customer till the time the
loan is fully repaid.
G. Legal check on the property by the bank: The bank/FI sends all the documents
to their empanelled lawyer for a thorough scrutiny. On receiving the lawyer's report
that the documents are clear, the bank/FI decides to disburse the loan to the
customer. If the documents sent to the lawyer are not enough to arrive at a judgment,
the bank/FI requests the customer to furnish additional documents.

H. Technical check on the property by the bank/financial institution: Prior to
disbursement, the bank/FI conduct a site visit to the customer's property to verify the
following:
In case of under construction property:
 Quality of construction
 Stage of construction: Whether it is the same as mentioned in the payment notice
given to the customer by the builder
 Progress of work
 Layout of flats and area of property is within permission granted by the
governing authority
 Requisite certificates have been received by the builder to start construction at
the site

In case of ready construction/ resale:
 Age of the structure
 Quality of construction
 Whether the structure will last the tenure of the loan
 External maintenance of the property
 Internal maintenance of the property
 Surrounding area (development)
 Required certificates from the governing authority have been received by the
builder for handing over possession of the flat
 There is no existing lien or mortgage on the property
I. Disbursement: After verifying that the property is legally and technically clear,
the bank/FI disburses the loan amount on the basis of the stage of construction of the

property. The customer needs to pay the margin money from his own contribution
prior to the disbursement.
J. Repayment: The repayment of the loan by the customer starts only after the full
disbursement of the loan amount has been made by the bank/FI. The loan is always
repaid by way of EMIs. The mode of repayment, however, differs from case to case.
In case of a loan repayment done through Deduction Against Salary (DAS), Post
Dated Cheques (PDCs), Standing Instructions (SI) and cash / Demand Draft
(accepted only by some banks/FIs). The customer can deposit the amount of his EMI
every month at the bank/FI’s office.
K. Interest tax certificate: This certificate is given by the bank/FI to the customer
to avail of tax benefits that accrue through a home loan. The customer can submit
this to his employer or Chartered Accountant to account it while calculating the
customer's tax liability.
L. Prepayment by the customer: The customer can either partly or fully prepay his
loan at any given point of time. The loan could be partly or fully disbursed when the
customer wishes to prepay his loan. Most banks/FIs, however, have a limit on the
number of times that a person can prepay his loan. There is, normally, also a
minimum amount that a customer has to prepay each time he wishes to do so.
Whenever a customer makes a prepayment, the customer has an option of reducing
his EMI by keeping his tenure constant or to reduce his tenure by keeping the EMI
constant.

PARAMETERS IN RELATION TO HOME LOANS
Home loans are an important means of social mobility. Under home loans, the
eligibility criteria, documentation, interest rates, quantum of loan, margin
requirement, security, repayment etc and such other important parameters are put
into consideration by banks and financial institutions while giving loans to the
borrowers. The parameters put down by banks and financial institutions vary from
institution to institution. However, the overall guidelines followed by them are given
as below:

 ELIGIBILITY CRITERIA
1) For Resident Indians
Home loan eligibility for Resident Indians depends upon the repayment capacity of
the loan applicant. The maximum loan that can be sanctioned varies with the banks
and other housing finance companies (HFC) and generally, the maximum loan
amount granted is 80 to 85% of the cost of the home.
Home loan eligibility corresponding to repayment option is based on the following
factors. Even though, the eligibility criteria may vary according to the HFCs
regulations:
Age (Minimum) 21 Years
Age (Maximum)
58(salaried), 60(Public limited/Government
Employees), 65 (self employed)
Qualification Graduation
Income Stable source of income and saving history
Dependents Number of dependents, assets, liabilities
Other income sources Spouse's income

As home loan rates increase, the loan eligibility for a borrower becomes stiffer. In
such a scenario, some home loan borrowers might have to re-evaluate their options
(in terms of loan amount) on account of the new eligibility criteria. Home loan
eligibility can be enhanced by:
i) Increasing the Home loan tenure: One of the basic process of enhancing the
home loan eligibility is by opting for a higher tenure. This is so because the EMI,
which an individual has to pay, starts to decline as the tenure increases while the
interest rate as well as the principal amount remains the same. What changes though,
is the net interest outgo, which rises with a rise in tenure. And since the individual is
paying a lower EMI now, his 'ability to pay' and therefore his loan eligibility
automatically increase.
ii) Repaying other outstanding loans: There might be adverse effect on home loan
eligibility for individuals with outstanding loans like car loans or personal loans.
Industry standards suggest that existing loans with over 12 unpaid installments are
taken into account while computing the home loan borrower's eligibility. In such a
scenario, individuals have the option of prepaying in part/full their existing loans.
This will ensure that their eligibility for the home loan purpose is unaffected.
iii) Clubbing of incomes: Home loan eligibility can also be enhanced by clubbing
incomes of spouse, children (son or daughter) staying with the applicant and having
regular income and even earning parents (father or mother) living with the applicant.
The eligibility in such cases will be calculated on the clubbed income of both the
applicants enhancing the individual's eligibility to the extent of the co-applicant's
income.
iv) Step-Up loan: Individuals can also enhance their loan eligibility by opting for
step-up loans. A step-up loan is a loan wherein an individual pays a lower EMI
during the initial years and the same is enhanced during the rest of the loan tenure.
HFCs usually consider the lower EMI of the initial years to calculate his loan

eligibility while the initial lower EMI helps increase the individual's 'capacity to
borrow'.
v) Perks: Salaried individuals must ensure that variable sources of income like
performance-linked pay among others are taken into consideration while computing
their income. This in turn will imply that the loan amounts they are eligible for stand
enhanced as well.
However, potential investors and borrowers must work out solutions best suited for
their profile after speaking to their home loan consultant and only then consider
acting on the options discussed. Because, increasing loan eligibility can have an
impact on other aspects of their financial planning.

2) For Non- Resident Indians
The eligibility criteria of NRIs differ from Resident Indians based on a few
parameters. The parameters include:
Age: The loan applicant has to be 21 years of age.
Qualification: The NRI loan seeker has to be a graduate.
Income: The loan applicant has to have a minimum monthly income of $ 2,000
(although, this criterion may differ across HFCs).The eligibility is also determined
by the stability and continuity of your employment or business.
Payment options: The NRI also has to route his EMI (Equated Monthly
Installments) cheques through his NRE/ NRO account. He cannot make payments
from another source say, his savings account in India.

Number of dependants: The eligibility of the applicant is also determined by the
number of dependents, assets and liabilities.
An NRI applicant is eligible to get a home loan ranging from a minimum of Rs 5
lakhs to a maximum of Rs 1 crore, based on the repayment capacity and the cost of
the property, which although is variable by the priorities of the home loan provider.
Also Home Loan Tenure for NRIs is different from Resident Indians. An applicant
will be eligible for a maximum of 85% of the cost of the property or the cost of
construction as applicable and 75% of the cost of land in case of purchase of land,
based on the repayment capacity of the borrower.
However, a NRI can enhance his loan eligibility by applying for home loans with a
co-applicant who has a separate source of income. Also, the rate of interest for home
loans to NRIs is higher than those offered to Resident Indians. The difference is to
the income. Also, the rate of interest for home loans to NRIs is higher than those
offered to Resident Indians. The difference is to the extent of 0.25%-0.50%. Some
HFCs also have an internally earmarked 'negative criterion' for NRI home loans. As
such, the NRIs who hail from locations that are marked as being 'negative' in the
books of HFCs, find it difficult to get a home loan.

 QUANTUM OF LOAN

The quantum of loan is assessed based on the net monthly/ net annual income with a
direct bearing on age factor of the borrower. A person of age in the range of 21 to 45
years is eligible for a maximum amount of 60 times of his Net Monthly Income
(NMI)/ five times of Net Annual Income. In case the age is above 45 years the
quantum will be restricted to 48 times of NMI/ four times of Net Annual Income.
Many banks have put a ceiling on the maximum amount of home loan at Rs.50

lakhs. In order to assess the quantum of finance income of spouse or close relative
can also be reckoned, provided that person becomes a co applicant.

 DOCUMENTATION

“Loan Documentation” refers to the documents needed to legally enforce the loan
agreement and properly analyze the borrower’s financial capacity. Documentation is
an essential component from the point of view of the safety of an advance. The
ability to control arises from the documentation of provisions, which confirm
understanding on the basis of which a credit facility has been sanctioned. Documents
should be properly drafted, stamped and executed with necessary legal formalities, if
any. An effective loan approval process establishes minimum requirements for the
information and analysis upon which a credit decision is based.
There are certain sets of documents that need to be submitted at the time of
application for a home loan. The document sets will vary according to the individual
status - either resident or non resident in India, as also the type of loan that the
borrower may want to avail of.
Resident Indians Non – Resident Indians
 Income documents
 Property documents
 Personal documents
 Income documents
 Property documents
 Personal documents

1) For Resident Indians
Documentation refers to the specific documents to be submitted by Resident Indians
as they apply for home loan. These documents are very much necessary for the
banks to avoid any dispute and uncertainty. The documents to be provided by the
resident Indians include income proof, property documents and personal
identification documents, etc. which of course varies based on the borrowers
financial status and the type of loan he want to avail. And of course every resident
Indian should follow some eligibility criteria before applying for Home Loans in
India.
However, there are some standard documents made mandatory for a loan applicant
to produce such as the loan applicant's profile, earning life of the applicant and
present financial status proof etc.
 The Applicant's Profile refers to the bio-data of the applicant, mentioning his
address, age, family background and detail information.
 The Earning Life of the Applicants' proof clarifies the capability of the loan
payment.
 The Present Financial status gives the present capability of handling the own
contribution and other expenditures. This includes the mortgage to be deposited
against the loan amount.
1) Income documents
 If you are employed
 Verification of Employment form
 Latest salary slip/salary certificate showing all deductions for at least the past 6
months
 Form 16 from your employer for the past 3 years.

 If your job is transferable, permanent address where correspondence relating to
the application can be mailed.
 If you have been in your present employment / business or profession for less
than a year, mention details of occupation for previous 5 years, giving position
held reasons for change and period of the same.

 If you are self employed
 Balance sheet and profit and loss account of the business/profession along with
copies of individual income tax returns for the past 3 years as certified by a
chartered accountant.
 A note giving information on the nature of the business/profession, year of
establishment, present bankers, form of organisation, clients, suppliers etc.
 Your net worth as an applicant/co-applicant.

2) Property documents
 Purchase of a flat or apartment from a builder/promoter
 Title deeds of the builder/land owner for a period of at least 13 years.
 Development agreement between the builder and land owner if applicable.
 Power of Attorney executed in favour of the builder, if applicable.
 An encumbrance certificate for the past 13 years.
 The khata certificate. (Basic document indicating ownership of property as
entered in the register of the government authorities.)
 Up-to-date tax paid receipts of the property.

 A sanctioned plan and license.
 An agreement for sale and a construction agreement with the borrower.
 In case purchase of house from second owner
 Title deeds of land owner for a period of at least 13 years.
 Encumberance certificate for the past 13 years.
 Khata certificate (Basic document indicating ownership of property as entered in
the register of the government authorities).
 Up to date tax paid receipts of the property.
 Sanctioned plan and license.
 Agreement for sale in favour of the applicant/applicants.
 Valuation report from qualified valuers.

 In case of repairs / renovation / extension of house/ flat
 Title deeds of land owner for a period of at least 13 years
 Encumberance certificate for the past 13 years.
 Khata certificate (Basic document indicating ownership of property as entered in
the register of the government authorities).
 Up to date tax paid receipts of the property.
 Sanctioned plan and license for the extension.
 Agreement for sale in favour of the applicant/applicants.
 Estimates of costs from a qualified engineer.
3) Personal documents
 1 passport size photograph,
 1 copy of your passport/PAN card/Driving License//School Leaving
Certificate/Birth Certificate/LIC Policy/Bankers sign verification,

 1 copy of last month's telephone bill/electricity bill/ ration card (first and last
page)/Title deed of property/rental agreement/driving license)
2) For Non- Resident Indians
The documentation required to be submitted by the NRIs are different from the
Resident Indians as they are required to submit additional documents, like copy of
the passport and a copy of the works contract, etc. And of course NRIs have to
follow certain eligibility criteria in order to get Home Loans in India.
Another vital document required while processing an NRI home loan is the power of
attorney (POA). The POA is important because, since the borrower is not based in
India; the bank would need a 'representative' 'in lieu of' the NRI to deal with and if
needed. Although not obligatory, the POA is usually drawn on the NRI's
parents/wife/children.
1) Income documents for NRIs
 Employment contract (if the contract is in any language other than English, the
same has to be translated into English and attested by the employer/Indian
Embassy.
 Certified copy of the latest salary slips for the past 6 months
 Identity card issued from the current employer
 Continuous discharge certificate, if applicable
 Latest work permit
 Visa stamped on passport
 NRE bank account passbook sheets
 Overseas bank account statement for the past 6 months
 Bio data covering educational qualifications, age job experience, nature of
profession/business with necessary proof
 Power of attorney in favour of local representative in India, if required

 Guarantor forms along with net worth proof/income proof. Number of
guarantors as per the norms of the company. The guarantors should be related to
the applicant/applicants.
2) Property documents for NRI’s
 Purchase of a flat or apartment from a builder/promoter
 Title deeds of the builder/land owner for a period of at least 13 years.
 Development agreement between the builder and land owner if applicable.
 Power of Attorney executed in favour of the builder, if applicable.
 An encumbrance certificate for the past 13 years.
 The khata certificate. (Basic document indicating ownership of property as
entered in the register of the government authorities.)
 Up-to-date tax paid receipts of the property.
 A sanctioned plan and license.
 An agreement for sale and a construction agreement with the borrower.
 In case purchase of house from second owner
 Title deeds of land owner for a period of at least 13 years
 Encumberance certificate for the past 13 years.
 Khata certificate (Basic document indicating ownership of property as entered in
the register of the government authorities).
 Up to date tax paid receipts of the property.
 Sanctioned plan and license.
 Agreement for sale in favour of the applicant/applicants.
 Valuation report from qualified valuers.
 In case of repairs / renovation / extension of house/ flat
 Title deeds of land owner for a period of at least 13 years.

 Encumberance certificate for the past 13 years.
 Khata certificate (Basic document indicating ownership of property as entered in
the register of the government authorities).
 Up to date tax paid receipts of the property.
 Sanctioned plan and license for the extension.
 Agreement for sale in favour of the applicant/applicants.
 Estimates of costs from a qualified engineer
3) Personal documents for NRI’s
 1 passport size photograph,
 1 copy of your passport/PAN card/Driving License//School Leaving
Certificate/Birth Certificate/LIC Policy/Bankers sign verification,
 1 copy of last month's telephone bill/electricity bill/ ration card (first and last
page)/Title deed of property/rental agreement/driving license)
 FEES & CHARGES
The interest rates and EMIs are not the only cost factor that the banks and financial
institutions take into account while giving Home Loans. The certain other fees and
charges that the banks levy on the borrowers can be as follows:
1) Processing Charge: It's a fee payable to the lender on applying for a loan. It is
either a fixed amount not linked to the loan or may also be a percentage of the loan
amount. The loan amount received by the borrower can be less than the processing
fee.
2) Interest Tax: This is the tax payable on the interest paid on a home loan and not
the principal. This tax is some times included in the interest rate of the loan, or may
be charged separately as interest tax.

3) Documentation Fees: Banks collect fees for documentation, administration,
consultant charge, valuation fees and legal fees from the customers as part of the
application processing.
4) Commitment Fees: Some institutions levy a commitment fee in case the loan is
not availed of within a stipulated period of time after it is processed and sanctioned.
5) Prepayment Penalties: When a loan is paid back before the end of the agreed
duration a penalty is charged by some banks/companies, which is usually between
1% and 2% of the amount being pre paid.
6) Registration of mortgage deed
 AGE CONSIDERATION FOR HOME LOANS
The minimum age requirement for availing any type of Housing Loan is 18 years,
and the maximum is 60 years. The maximum age can be relaxed in deserving cases
up to 65 to 70 years.
 PENALTY FOR PRE-PAYMENT
When a loan is paid back before the end of the agreed duration a penalty is charged
by some banks/companies, which is usually between 1% and 2% of the amount
being pre paid.
 EMI (EQUATED MONTHLY INSTALMENT)
This is the installment amount the borrower has to make towards repayment of his
loan. The EMI comprises of both the principal and interest. Banks/FIs charge an
Equated Monthly Installment from the borrower that is calculated on the basis of
loan amount and the interest rate charged for the same. Repayment by way of EMI
generally commences from the month following the month in which one takes

disbursement. It can be calculated either on the basis of annual reducing rest,
monthly rest or daily rest. In an annual rest the EMIs (equated monthly
installments) are calculated on an annual basis. The interest is calculated on the
outstanding principal at the beginning of every year. Once the interest is calculated
at the rate charged to the customer for the entire year it is deducted from the EMIs
received during the year. The balance EMI is taken as principal repaid during the
year and this is deducted from the opening balance of principal of the current year to
arrive at the opening balance of principal for the next year. Under this method,
typically the component of interest in the EMI is higher for the first few years and
later on the component of principal increases and the interest keeps reducing year
after year. In other words, the interest in the EMI will keep reducing year after year
and the principal component in the EMI keeps increasing. This is commonly known
as Annual Reducing Balance of the principal amount lent. In this case EMI becomes
1/12th the Equated annual installment. In the monthly rest, principal repayments are
credited at the end of every month and interest is calculated on the outstanding
principal at the end of every month. In the daily reducing principal repayments are
credited at the end of the day an installment is paid.
The EMI for the loan will begin after the loan has been disbursed in full. Till such
time the borrower has to pay the interest for the loan. The amount of interest payable
every month is called pre-EMI.
In short the following four factors go into the determination of EMI.
 The principal amount - This is the actual loan amount taken. Obviously the
larger the amount, the greater the EMI.
 The rate of interest - Another obvious one, the higher the interest rate, the
higher the EMI.
 The tenure - The longer one take the loan for, the lesser the EMI. The faster one
want to repay it, the higher the EMI.

 How the interest rate is calculated - It could be calculated either on a daily
reducing or monthly reducing or on an annual reducing basis.
 INTEREST RATES FOR HOME LOANS & THEIR
CALCULATION
Interest rates charged by housing finance companies vary depending upon your
individual status - either resident or non resident in India, the loan amount, scheme
type, and are sometimes even based on the tenure of the loan.
The way banks / FIs charge interest to arrive at the value of EMI can be broadly
classified into ‘Flat rate system’ and ‘Reducing balance rate system’. In the flat rate
system, the rate of interest on the loan amount is calculated over the entire duration
of the loan and the principal plus the interest is divided over the number of
installments and the value arrived is the EMI. But in case of 'Reducing Balance
system’, the interest is charged on the outstanding balance of the loan, which goes
on reducing.
The reducing balance can be further classified into monthly reducing, quarterly
reducing and annual reducing methods based on the number of times the principal is
reduced/credited in a year. Suppose the principal is reduced 12 times a year, it is
termed as monthly reducing balance method, if the principal is reduced 4 time a
year, it termed as quarterly reducing balance method and if the principal is reduced 1
time a year, it known as annual reducing balance method. Annual reducing balance
method is very common with Indian banks and monthly reducing balance method is
popular among the foreign banks and nationalized banks, engaged in the activity of
housing finance.

Resident Indians Non-Resident Indians
 Buying a new house  Buying a new house

 Buying an existing house
 House improvement
 Buying an existing house
 House improvement

1) Interest rates for Resident Indians

 Buying a new house from a builder/promoter
Banks and FIs offer resident Indians loans upto Rs 10,000,000 for upto 30 years for
buying a new flat from a builder. The flat may be under construction at the time of
application.
The table below offers a comparison of loan ranges and corresponding interest rates
applicable under this scheme.
Company Loan amount (Rs.) Floating rate (%) Fixed rate (%)
HDFC (Monthly) For all loan amounts 11.25 13.25
HSBC For all loan amounts
12.00 13.50
ICICI For all loan amounts 13.75 14.00
SBI For all loan amounts
11.25 12.75

 Buying a house from a second owner
Banks and FIs offer resident Indians loans upto Rs 10,000,000 for upto 30 years
under this scheme.
The table below offers a comparison of loan ranges and corresponding interest rates
applicable under this scheme.

Company Loan amount (Rs.) Floating rate (%) Fixed rate (%)
HDFC (Monthly) For all loan amounts 11.25 13.25
HSBC For all loan amounts
12.00 13.50
ICICI For all loan amounts 13.75 14.00
SBI For all loan amounts
11.25 12.75

 Home Improvement
Banks and financial institutions offer non resident Indians loans upto Rs 1,000,000
for periods ranging from 1 to 10 years under this scheme.
Home improvement schemes allow the borrower to finance internal and external
repairs and other structural improvements in your home. Some of the home
improvements one can finance under this scheme are:
 External repairs
 Waterproofing and roofing
 Internal and external painting
 Plumbing and electrical works
 Tiling and flooring
 Grills and aluminium windows
The table below offers a comparison of loan ranges and corresponding interest rates
applicable under this scheme.

Company Loan amount (Rs.) Floating rate (%) Fixed rate (%)
HDFC (Monthly) For all loan amounts 11.25 13.25
HSBC For all loan amounts
12.00 13.50

ICICI For all loan amounts 13.75 14.00
SBI For all loan amounts
11.25 12.75

2) Interest Rates for Non-Resident Indians

 Buying a new house from a builder/promoter
Banks/ FIs offer non resident Indians loans upto Rs 10,000,000 for upto 10 years for
buying a new flat from a builder. The flat may be under construction at the time of
application.
The table below offers a comparison of loan ranges and corresponding interest rates
applicable under this scheme.
Company Loan amount (Rs.) Floating rate (%) Fixed rate (%)
HDFC (Monthly) For all loan amounts 11.25 13.25
HSBC For all loan amounts
12.00 13.50
ICICI For all loan amounts 13.75 14.00
SBI For all loan amounts
11.25 12.75

 Buying a house from a second owner
Bankls/ FIs offer non resident Indians loans upto Rs 10,000,000 for upto 10 years
under this scheme.
The table below offers a comparison of loan ranges and corresponding interest rates
applicable under this scheme.

Company Loan amount (Rs.) Floating rate (%) Fixed rate (%)
HDFC (Monthly) For all loan amounts 11.25 13.25
HSBC For all loan amounts
12.00 13.50
ICICI For all loan amounts 13.75 14.00
SBI For all loan amounts
11.25 12.75

 Home Improvement
Banks and FIs offer non resident Indians loans upto Rs 1,000,000 for periods
ranging from 1 to 10 years under this scheme.
Home improvement schemes allow the borrower to finance internal and external
repairs and other structural improvements in the home. Some of the home
improvements one can finance under this scheme are:
 External repairs
 Waterproofing and roofing
 Internal and external painting
 Plumbing and electrical works
 tiling and flooring
 Grills and aluminium windows
The table below offers a comparison of loan ranges and corresponding interest rates
applicable under this scheme.

Company Loan amount (Rs.) Floating rate (%) Fixed rate (%)
HDFC (Monthly) For all loan amounts 11.25 13.25
HSBC For all loan amounts
12.00 13.50

ICICI For all loan amounts 13.75 14.00
SBI For all loan amounts
11.25 12.75

 MARGIN AMOUNT FOR HOME LOANS
The difference in the total cost of the property and the loan amount sanctioned is the
margin amount. This money has to be invested by the borrower of the property prior
to the release of the loan amount in case of construction of a house. In case it is for
purchase of a ready house, the loan amount is released on the day of registration of
the property and the margin money has to be invested by the borrower prior to the
release. In case of purchase of flats also, the release will be made only on investment
of the margin money by the borrower. A margin amount is the amount that the
applicant pays through his/her pocket. As far as home loans are concerned a bank
usually pays 85% of the total cost of the house to be purchased by the borrower.
The margin is usually the amount not covered by the bank for the payment of the
essential and necessary fees for the purchase of the house. In most of the cases, the
margin amount of 25% of the purchase consideration has to be borne by the
borrower in the case of purchase of old houses/approved plots and 15% of the
project cost in the case of loans for construction/purchase of new house/flat.
 SECURITY FOR HOME LOANS
In most cases, the property to be purchased itself becomes the security and is
mortgaged to the lending institution till the entire loan is repaid. Interim security
may be additionally required, if the property is under construction Some companies
may also require additional securities which are called collateral securities like the
assignment of life insurance policies, pledge of shares, NSCs, units of mutual funds,
bank deposits or other investments.

 GUARANTOR FOR HOME LOANS
Guarantors are essential for sanctioning of loans. Usually, a guarantor is required so
that if the applicant fails or becomes incapable of repaying, the guarantor will be
responsible for clearing the debt. Generally most banks do not insist on a guarantor
when giving home loans but some might insist for 1 or 2 guarantors in certain cases.
A guarantor is equally liable to pay up the loan in case the borrower misses out on
repayments. By seeking a guarantor, the lender tries to enforce a moral check that
prevents the borrower from defaulting.

If the borrower is a salaried individual with a good employment record and laudable
debt repayment history, banks are assured of his/her financial stability and
credibility. In case one runs a small business with low profits, the banks are taking a
risk. To safeguard their interests in such circumstances, banks seek a guarantor who
is legally bound to make repayments in case of default. The bank seeks a guarantor
in case the loan applicant does not live in the same city in which he is purchasing the
property. If the nature of his job is such that he will be constantly transferred or
could go abroad, the banks need a guarantor.
The same is the case for self-employed individuals who lack required professional
qualifications. Absence of a co-applicant for a loan sometimes calls for a guarantor.
In most other cases, there is no personal guarantor required as home is an investment
to which people have emotional bonding. And they are sure to go to any extent to
keep it. Any friend or family member can be a guarantor and can guarantee the loan.
A guarantor has to fulfill the criteria relating to age and income of a normal
customer. The minimum income criteria vary from one housing finance company to
another. This is to ensure that since he is equally liable to pay the loan in case of
default, he has to be financially sound too like the loan applicant himself.

 DISBURSEMENT
When the entire essential work of selecting the land/ home is done and after all the
legal documentation (such as handing over of the original agreement for sale /
lodging receipt to the lender), etc is completed, the borrower starts getting the
disbursement of the loan. On an average it takes around fifteen days for processing
of one's application if the documents are in order. It takes another week for the
bank/FI to check out the property papers and make the disbursement. The bank /FI
also ask for a proof stating that the borrowers own contribution of the cost of the
property has been paid upfront to the seller/vendor / builder / developer of the
property. In case of property under construction, the disbursement of the loan is
made in installments according to the stage of construction.

 REPAYMENT OPTIONS
1) For Resident Indians
Every bank/ FI have customized repayment options to suit every individual's
requirement and also repaying capacity with some tax benefits. They have thereby
come up with more flexible and Multiple Repayment Option. A few among them
are:
Step-up Repayment Facility: The objective of step-up repayment is to provide the
borrower with a repayment schedule, which is linked to expected growth in income.

It not only helps a customer get a larger amount of loan as compared to the loan
under the normal housing loan; but the customer can avail of a higher amount of
loan and pay lower EMIs in the initial years, which is subsequently accelerated
proportionately with the assumed increase in his income.
Flexible Loan Installments Plan: This repayment option offers a customized
solution to suit the needs of customers whose repayment capacity is likely to alter
during the term of the loan. In cases when a borrower is nearing retirement, the loan
is structured in such a way that the EMI is higher during the initial years and
subsequently decreases in the latter part proportionate to the reduced income of the
customer. This option helps such customers combine the incomes and take a long
term home loan where in the installment reduces upon retirement of the borrower.
Tranche Based EMI: Customers purchasing an under construction property, need
to pay interest (on the loan amount drawn based on level of construction) till the
property is ready. Tranche Based EMI is a special facility offered by some banks to
help customer save this interest. Customers can fix the installments they wish to pay
till the property is ready. The minimum amount payable is the interest on the loan
amount drawn. Anything over and above the interest paid by the customer goes
towards principal repayment. The customer benefits by starting EMI and hence
repays the loan faster.
Accelerated Repayment Scheme: Accelerated Repayment Scheme offers the
borrower a great opportunity to repay the loan faster by increasing the EMI.
Whenever the borrower get an increment, increase in the disposable income or have
lump sum funds for loan prepayment, he can benefit by:
 Increase in EMI means faster loan repayment
 Saving of interest because of faster loan repayment

 Or invest lump sum funds rather than use it for loan prepayment. The return
from the investments also gives the borrower the comfort of paying the increased
EMI.
Balloon Payment: Balloon Payment is an augmentation tool offered by the
banks/FIs, which helps in increasing the loan eligibility of the customer without
increasing the EMI by assigning securities like National Savings Certificate (NSC),
LIC policies etc. The present value of the maturity amount of assigned securities is
combined with the loan amount to arrive at the enhanced loan eligibility. Under this
facility, the EMI is calculated on the net loan amount (i.e. total loan less the present
value of the maturity value of the securities).
2) For Non- Resident Indians
The repayment option for Non-Resident Indians (NRIs) is done in EMIs, and
includes interest and principal amount calculated on monthly rests. The borrower
can pay EMIs by issuing post-dated cheques from the Non Resident External
(NRE)/Non-Resident Ordinary (NRO) or Non Resident (Special) Rupee Account
(NRSR) in India; or any other account approved by the Reserve Bank of India
(RBI).
In the case of part-disbursement of the loan, the monthly interest is payable only on
the disbursed amount. EMI is payable every month, by the end of the month from
the date of each disbursement up to the date of commencement of EMI. Pre-EMI is
calculated at the same rate at which EMI is calculated.
Step-Up Repayment Facility: By the step-up repayment option, a borrower can
apply for a higher range loan based on the prospects of growth in income for years to
come. In this repayment option the loanee has to pay less EMI in the initial years
which increase as the income grows with the coming years.

Flexible Loan Installments Plan: In this mode of repayment, the borrower has
flexible loan installment facility where a borrower nearing retirement age can opt for
paying higher EMI in the initial years and gradually move to paying lower
installments after reaching retirement age.
Tranche Based EMI: Tranche Based EMI is a special facility offered to the
customers so as to save their interest, in cases when customers purchasing an under
construction property need to pay interest (on the loan amount drawn based on level
of construction) till the property is ready. In such cases, customers can fix the
installments they wish to pay till the property is ready. The minimum amount
payable is the interest on the loan amount drawn. Anything over and above the
interest paid by the customer goes towards principal repayment. The customer
benefits by starting EMI and hence repays the loan faster.
Accelerated Repayment Scheme: Accelerated Repayment Scheme for NRIs offers
a great opportunity to repay the loan faster by increasing the EMI. Whenever the
NRI get an increment, increase in the disposable income or have lump sum funds for
loan prepayment, the loanee can benefit by:
 Increase in EMI, which means faster loan repayment
 Saving of interest because of faster loan repayment and can invest lump sum
funds rather than use it for loan prepayment.
A NRI loanee can opt for repayment ahead of schedule, by remittances in abroad
through normal banking channels, the NRO / NRSR in India. However, by
regulations in many states in India, the Agreement of Sale between the builder and
purchaser is required to be registered by law. It is therefore advisable to record the
agreement for registration within four months of the date of the Agreement at the
office of the Sub Registrar appointed by the State Government, under the Indian
Registration Act, 1908.

 REPAYMENT TENURE

1) For Resident Indians
Home loan tenures fixed by RBI are available up to a term of 15 years. Some
financial institutions have home loan tenures in the range extending up to 20, 25 and
30 years if the applicant fulfills certain criteria. However, one cannot opt for a term
that extends beyond attaining retirement age or 60 years of age (whichever is
earlier).
Home loan Tenure:
Type of Property Salaried Self-Employed
Residential 15 years 10 years
Plot of Land 10 years 10 years
Against Existing Plot of Land 15 years 10 years
2) For Non- Resident Indians
The home loan tenure for Non-resident Indians differs from the Resident Indians on
a few points, which may of course vary from one bank to another. For most banks
the home loan tenure exceeds maximum from 25 to 30 years. However, for NRIs the
maximum tenure is from 7 years up to 15 years, the number of years fixed by RBI.
However, one cannot opt for a term that extends beyond attaining retirement age or
60 years of age (whichever is earlier).

HOME LOAN WITH INSURANCE COVER
There are many individuals who worry about the adverse impact of the home loans if
something happened to them. This is where a home loan insurance product comes to
the rescue. Many banks and financial institutions insist on getting the home insured
to safeguard their interest. The borrower needs to ensure that the property is duly
and properly insured for fire and other appropriate hazards, as required by the bank
and financial institution during the period of the loan and will have to produce
evidence each year and/or whenever required by the lenders. The bank/financial
institution will be the beneficiary of the insurance policy. There are various kinds of

insurance covers available for a homeowner. The various options may be insurance
against fire, against other disasters, etc.
Home loan insurance plans, also known as mortgage redemption plans are policies
that cover the home loan liability. Though there are some minor variants, most plans
offer a sum assured that reduces as the outstanding home loan comes down every
year. In such plans, it is not the home but the loan that is covered should something
happen to the borrower. For instance, if a person have taken a home loan of Rs 40
lakh and covered this through a home loan insurance. If after a year, the outstanding
loan comes down to Rs 39 lakh, then the sum assured also comes down to Rs 39
lakh. In short the sum assured is adjusted against the home loan liability.

This insurance is much like the term plan or pure risk cover plan that is available
from various insurance companies. There are exceptions like ICICI Bank (through
their tie-ups with ICICI Lombard) home insurance loan where the sum insured
remains constant. And in the event of death of the life assured, the outstanding home
loan is cleared off and the rest is paid to the family. Some characteristics of such
plans include:

 Low premiums, high cover
 No maturity amount on survival of the term
 Choice of one time premium or regular premiums

However, the cover in term plans available in India are level term plans where the
cover remains the same whereas in the case of home loan covers, the amount keeps
falling as the home loan liability decreases. Also it is important to know that while
most term plans can be bought till the age of 55, home loan insurance plans can be
bought till the age of 60. However, the medical underwriting is stringent and it is
only after adequate tests that these policies are issued at the higher age band. If one
opts for a joint application then the premium is double. And if any of the joint

applicants die, the loan is paid off by the insurance company. The premiums are
calculated based on the medical underwriting, based on the age and medical record.
The conditions are:

Age of the life insured: The premium increases with age. Medical tests increase
with age and are mandatory above 40 years. Below this age, a simple declaration is
good enough though this depends on each insurance company.

Medical record: If the borrower of the loan is in a good health, the premiums will
be regular but if the insurance company's prognosis about the life assured is at higher
risk, then the premiums will be higher. A past family history of early death or
critical illness will also increase the premiums.

Loan tenure: The premium will increase with the duration of the loan. A cover of
Rs 50 lakh for five years and a cover of Rs 50 lakh for 20 years will attract different
premiums, with the latter being more expensive.

Since this is a life insurance plan issued by an insurance company, the premiums
paid towards life insurance schemes are eligible for deductions under Section 80C.
However, if the premium is clubbed within the equated monthly installment of the
home loan, then the borrower will not get the Section 80C benefit. Most banks have
tie-ups with insurance companies for the issuance of such policies. There is always
the question that whether it is better to take a term plan and insure the life that is
going to repay the home loan or go for home loan insurance. A factor that tilts the
argument in favour of term plans is the cost, which is much less and remains
constant as well.

However, a majority of the people should get thorough needs analysis done and not
just cover their home liability but other liabilities as well, dependent goals (financial
needs of children) and dependent income goals (monthly needs of family if the

borrower were to die) as well. After this, taking a term plan for the requisite cover
needed is considered. For those who cannot undergo this exercise, opting for the
home loan insurance cover may prove helpful.

The policies that one may consider other than a home insurance are
as follows:

1) Fire policy for a householder
Suitability
A householder can cover his movable and immovable properties against fire and
allied perils. Apart from persons owning a house, people staying in a Rented/Leased
house can take this policy, if they are responsible for its safety by any covenant. An
individual can also insure household contents not belonging to him, but held in trust
or belonging to relatives permanently staying with him.
Salient Features
The Fire Policy can be taken to cover any property within the country. The policy
offers cover on loss and/or damage on account of:
 Accidental fires
 Lightning
 Explosion & implosion 'due' to pressure vessels (used for domestic purposes)
 By rioting mob, striking workers, malicious acts by third parties and damage by
terrorists
 Impact damage by rail/road vehicles, carts & animals
 By aircraft or any arial devices or articles dropped there from
 Landslide & rockslide
 Storm, cyclone, flood & inundation and similar vagaries of nature
 Bursting and over flowing of water tanks and pipes etc.
 Missile Testing

 Leakage from sprinklers
 Bush Fire
Benefits
 Claims are payable at the market value of the property damaged at the time of
loss.
 If the individual value if assets is not furnished then the value of each property is
considered as not more than 5% of the total sum insured.
 Long term policy may be taken.
2) All risk Insurance
Suitability
This policy is suitable for people owning things, which are prone to accidental loss
or damages.
Salient Features
It covers valuables like jewelry, work of art and similar artifacts of sentimental
values. The scope of the cover is limited to loss or damage due to fire, riot & strike,
terrorist act, burglary, larceny or theft and accidental loss or damages.
Benefits
The policy pays for any loss to the property insured against by insured perils. The
amount of claim payable is limited to the sum insured or the market value at the time
of loss, whichever is lower.
3) Burglary Insurance

Suitability
This policy is more suitable for people who have movable property like clothes,
appliances etc. prone to burglary, theft and larceny.
Salient Features
This insurance policy covers burglary, theft and larceny.
Benefits
This policy pays for any loss of property due to burglary, theft or larceny occurring
during the policy period. The amount of claim payable is limited to the sum insured
or the market value at the time of loss, whichever is lower. This policy also covers
damage to the premises like walls, windows etc.

4) Householder’s Package Policy
Suitability
This is a single package policy offered at economical rates of premium through
which all of the householder's needs are addressed.
Salient Features
The package includes the following policies:
 Fire Insurance
 Burglary
 All Risks Insurance
 Plate Glass Insurance

 Break down of Domestic Appliances (Electrical and mechanical failures)
 Television including VCR & VCP and music systems
 Pedal cycle Insurance
 Personal baggage insurance
 Personal accident
 Public liability
 Employers Liability
Benefits
This being a package policy, only one proposal form is to be completed instead of
separate proposal forms for individual policies. As regards fire risks, while covers
like explosion/implosion (other domestic gas cylinders or pressure cookers) and
impact of rail/road vehicles are withdrawn as inconsequential, special risks like
damage due to bursting and overflowing of water tanks, apparatus, or pipes are
included in the policy.

RECOMMENDATIONS FOR BANKERS

The entire housing finance sector thrives on a simple logic that the house is the
single largest investment made by a common man in his entire lifetime. There is an
emotional and sentimental attachment towards his house property wherein lots of
personal money is involved. Hence, the risk is very low to a lender since it would be
a great loss to the borrower if he looses the possession of the house. This safest
mode of business has spurred many new entrants to join the fray. According to the
details given by the National Housing Board (NHB) pertaining to the housing loan

disbursements of banks and housing finance companies as on June 29, 2006, the
housing finance sector has shown an exponential growth as compared to the other
areas of credit.

The housing finance sector even if it is showing an exponential growth is not devoid
of risks. The problem of bad loans has always been a matter of concern for the entire
industry. Since the competition among the players in the housing finance sector is
too high, all the housing finance companies maintain the interest rates in unison
except for public sector banks which operate on relatively low rates of interest as
they concentrate more on retail business. Despite the low risk attached to this sector
and legal support to the lenders, problem loans are creeping into the system
overwhelmingly. In order to avoid the problem of bad loans the banks and financial
institutions may undertake the following remedial measures for mitigation of risks:

1) PROPER SCRUTINY IN SANCTIONS AND
DISBURSEMENTS
Home loans are made available by banks and financial institutions to both Indian
and Non Resident Indian customers at floating and fixed rates of interest and also
with attractive EMI options. The loans are offered for construction of or buying a
new house, home repairs and renovations, purchase of plots, against mortgage of
property, etc. Hence the banks and financial institutions should conduct a proper
scrutiny while sanctioning and disbursements of loans.

2) PROPER STUDY OF FINANCIAL STATEMENTS
Many a times the banks and financial institutions in order to cope with and to
outsmart the competitors, they go to the extent of luring the customers of their
competitors by providing attractve schemes. Some companies even go to the extent
of sanctioning the home loan without identifying the property and improper title
deeds which is the prerequisite for eligibility. Waiving the processing fee, providing

free accident insurance and property insurance, waiving penalties, etc,. are some of
the factors causing reduction in the profit margin. Hence proper study of financial
statements and analysis should be undertaken in order to increase the profitability.

3) END USE OF THE MONEY LENT
Banks and other housing finance companies have high rate of interests for non-
residential use of the loan. A study of the NPAs of these banks/FIs shows that
individuals who avail themselves of loans for residential properties, divert them for
commercial or any other purposes. Any fluctuations in the business operations or
mindset of the borrowers lead to non-payment of interest. At times, it is very
difficult for the lender to recover the loan amount if the borrower has left the
country. Hence, it is very important for banks and financial institutions to verify that
the loan given is utilized for the purpose for which it is sanctioned.

4) MARKETABILITY OF THE MORTGAGED ASSETS
Improper valuation and scrutiny of the documents tend to lead the financier to invest
more than 100% of the value of the property. In case, the loan is not serviced, he
may not realize the claim amount. When the borrower constantly defaults in
servicing the loan, the lender has five types of rights. Possession, lease, manage,
reconstruct or sell. In practice the possessed assets are in such a condition that they
can be neither sold nor managed nor given for lease. To market them the lender of
the loan has to incur further expenses adding to his risk of getting back his further
investment.

5) CONSTANT MONITORING
Once the loan is sanctioned, the job of the lender is not over. He has to exercise
vigilance and monitor the payments of installments by the borrowers. It is advisable
to make periodical review of the borrower’s financial position to ensure his
capabilities of prompt payment of installments. A close monitoring has to be done

by the lender about the performance of various industrial units, changes in the socio-
economic conditions in his areas of operations, which will have a bearing on the
repayment capacity if the individuals.

6) TAKE OVER OF BAD LOANS
Most of the institutions play safe by handing over their doubtful and risky loans to
the other institutions. These are taken over just to add a feather to their asset
portfolio in the balance sheet. As far as possible, taking over of loans should be done
only after a thorough study of the case and the reasons of handing over the loan.
Verification of repayment track and reasons for takeover are very important.

7) FAIR ASSESSMENT OF PROPERTY
While scrutinizing the valuations, it is very important for the lender to go by his own
assessment instead of being carried over by real estate boom. The banks and
financial institutions should keep in mind the resale value of the asset rather than the
market value. Most of the cases suffer form the drawback of poor collateral.
Condition of the underlying asset also must be taken care of. Care should be taken to
see that the asset is sold very soon after seizing it. Or else, the resale value may
come down. Therefore, finding out the buyers to dispose of the asset is a challenging
task for the banks and financial institutions.

8) INCREASING EMPLOYEE MORALE
The banks and financial institutions should protect the employee morale by
providing performance-based incentives as there is a tendency in any finance
department to become corrupt. The sanctioning official must be made directly
responsible for the bad loans to a certain extent.

TABULATED COMPARISON BETWEEN HOME LOAN
SCHEMES PROVIDED BY SBI BANK & ICICI BANK
1) ELIGIBILITY
Scheme Min Age
(years)
Max Age
(years)
Min
Income
(Rs/mth)
Max
Income
(Rs/mth)
SBI Optima Additional Home
Loans/SBI Housing Loan -RI/SBI
Freedom Home Loans(NRI)
21 45 1 _
ICICI Home Loans (for Resident
Indians)
21 65 1 _
ICICI Home Loans (for NRIs) 21 65 _ _

2) FEES
Scheme Processing Fees (%) Administrative Fees (%)
SBI Freedom Home Loans(NRI)/SBI Housing 0.50 _

Loan-RI/SBI Optima Additional Home Loans
ICICI Home Loans (for NRIs) _ _
ICICI Home Loans (for Resident Indians) 0.50 5.00

3) INTEREST
Scheme From
(years)
To
(years)
From
(Rs)

To (Rs)

Interest
Rate (%)
SBI Optima Additional Home
Loans
1

5

_ 500,00,000 9.50

SBI Optima Additional Home
Loans
6 10 _ 500,00,000 9.75
SBI Housing Loan-RI/ SBI
Freedom Home Loans
1 5 _ 500,00,000 9.50
SBI Housing Loan-RI 6 10 _ 500,00,000 9.75
SBI Freedom Home Loans
(NRI)
6 10 _ 500,00,000 9.25
SBI Maxgain Home Loan- RI 1 5 500,000 0 8.75
SBI Flexi Home Loan-RI 0 5 500,000 0 8.75
ICICI Home Loans (for RI) _ 20 2,00,000 _ 11.00
ICICI Home Loans (for RI) _ 20 2,00,000 _ 9.50
ICICI Home Loans (for NRIs) _ _ 5,00,000

100,00,000 11.00

4) MAXIMUM LIMIT
Scheme Min Max Amt Max Limit Min Max

Amt
(Rs)
(Rs)

Term
(years)

Term
(years)
SBI Freedom
Home Loans
(NRI)
_ 5,00,00,000

_ _ 20
SBI Housing
Loan-RI

_ 5,00,00,000 The maximum amount=60 NMI/ 5
times NAI, subject to aggregate
repayment obligations not
exceeding 57.50% of NMI/ NAI
for those less than 45 years of age.
If the borrower is above 45 years
of age it is 48 times NMI or 4
times NAI.
0 5
SBI Optima
Additional
Home Loans

_ 5,00,00,000

The eligibility is 18 times NMI
(for salaried borrowers)/ 1 times
NAI (for others) or (i) 25% of the
original project cost of house/flat
(ii) 85% of the cost of repairs etc.
or (iii) gap between 85% of the
current market price of flat/house
and actual outstanding loan dues,
whichever is lower (EMI/NMI
ratio of all loans should not exceed
60%)
_ _
ICICI Home
Loans (for
Resident
Indians)
2,00,000

_ Maximum of 85% of the cost of
the property

_ 20
ICICI Home
Loans (for
NRIs)
5,00,000

1,00,00,000

Maximum of 85% of the cost of
the property
_ 15
5) UNIQUE FEATURES

Scheme Unique Features
SBI Freedom
Home Loans(NRI)

This product is for those individuals who are on the lookout for a source of
finance for a property they want to invest in without mortgaging the same. All
they have to do is pledge any financial security that they have and will get a
Home Loan for their dream home.
SBI Housing Loan-
RI

This loan is for Purchase/Construction of new House/ Flat, Purchase of an
existing House/ Flat, purchase of a plot of land for construction of House,
Extension/ repair/ renovation/ alteration of an existing House/ Flat, takeover of
an existing loan from other Banks/ FIs. Free personal accident insurance cover.
Optional Group Insurance from SBI Life at concessional premium.
SBI Optima
Additional Home
Loans
This loan is aimed at enabling the customer meet expenditure towards major
repair, renovation, addition to their house/flat, purchase of furniture, fixtures
and consumer durables.
ICICI Home Loans
(for Resident
Indians)
Door-step service from enquiry stage till final disbursement. Free personal
accidental insurance, Special 100% funding for select properties. The
borrowers can transfer the existing high-interest rate loan.
ICICI Home Loans
(for NRIs)
The borrowers can take loans for purchase, construction, extension or
renovation of a new house or flat.

ANALYSIS

ICICI and SBI are the pioneers in the home loan sector in private and public sector
respectively in India. These banks offer home loans with attractive and unique
features for the benefits of their customers. As per the eligibility criteria ICICI bank
holds a better position as compared to SBI bank because it provides home loan to
maximum age limit of 65 years as compared to the maximum age limit of 45 years
offered by SBI bank. With respect to the fees SBI stands ahead of ICCI because it
has less processing fees and administrative charges. Interest rates offered by ICICI
are up to 11% whereas in case of SBI the loans are offered below 10%. SBI has an
upper hand over ICICI because the maximum limit is Rs. 5, 00, 00,000. By

analyzing the home loan schemes offered by both the banks SBI can be placed at a
better position as compared to ICICI because of the advantages stated above.

SURVEY

I had conducted a survey taking the sample size of 100 people including all groups
of people. I had done the survey at different places like Andheri station, Kandivli,
Bhayander, Ghatkopar, Lokhandwala, Borivali, Santacruz, Bandra, Dadar and other
places considering all income groups of people. The questionnaire of the survey in
enclosed in the annexure.
It was a very good experience while conducting this survey. It developed a sense of
confidence and augmented the data collection skills within me. It enabled me to
develop a skill of getting primary data from the common people and then analyzing
it and presenting it in a systemic manner. Most importantly it made me think
logically and practically and thereby improved my research ability. The information
collected is analyzed and represented below with all possible diagrams.

ANAYLSIS

AWARENESS OF HOME LOAN

95%
5%
Aware
Not aware

The survey indicates that nearly 95% of the people are aware about the Home loan
facilities offered by different banks. But there are still 5% of people who are not
much educated and are unaware about the different types of home loan facility. For
this banks should also target their lower income group while making the publicity of
their home loan products and their should also be a direct selling concept of
marketing their product and by this banks can increase their customer base by
providing loan to this particular section of people by making them aware of it.
Security and comfort in life is a top priority for everyone. So everyone should be
made aware of this facility and enable them to take advantage of it for which banks
and financial institutions should take care of.
DEMAND FOR HOME LOANS

The survey conducted by me shows that 70% of the people want to pursue home
loan facility in the future if required. This shows there is an increase in the demand
for home loans. The reason behind this could be the boom in the home loan sector in
India. The real estate boom has added new dimensions to the housing finance sector.
The new class of young buyers, whose affordability are high, is spending a little
more on paying Equated Monthly Installments (EMIs) rather than spending huge
amounts on the rents, thereby, owns a house. Hence the reasons for the growth of the
home loans market has been mainly fuelled by certain fiscal, social and regulatory
drivers such as:
 Changes in demographic profile including increase in the rate of household
formation due to structural shift from joint family system to nuclear family
70%
30%
Want to
Pursue
Don’t
want to
Pursue

 Ever increasing middle class, migration of population and increasing
urbanization resulting in acute shortage of housing units
 Increase in disposable income levels due to decrease in marginal tax rates and
increase in total income levels
 Tax benefits and other fiscal incentives announced in the Union Budgets thereby
encouraging the sector
 Increasing affordability of housing property purchase due to declining interest
rates and stable property prices
 Decline in the average house cost to annual income ratio to around 4-5 from 11-
14 during the last decade resulting in an affordable EMI as a percentage of
monthly income
 Aggressive lending by banks to the housing sector due to lower credit off take by
the corporate sector, attractive spread and lower non performing assets

PREFERENCE FOR TYPE OF HOME LOAN

According to the survey 42% of the people would prefer to take loan for home
purchase, 33% for purchasing land, 14% for home
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Home
purchase
Land
Purchase
Home
Extension
Others
No. of people
Type of loan preferred

extension/improvement/renovation, while only 11% for other type of loan. Due to
the hike in the property rates the demand for loan for home purchase is increasing
and the same is so for the purchase of land property. Due to affordability factor and
less amount of money required for home extension or improvement or renovation
people prefer less to opt for loan for these purposes.The other type of loans such as
Bridge Loans,
Balance Transfer, Refinance Loans, Home Conversion Loans, Stamp Duty Loans
and Loans to NRIs, are not much in demand.

PREFERENCE TO PRIVATE, PUBLIC SECTOR OR FOREIGN BANKS

As per the survey, 60% of the people preferred to go for public sector banks, 30%
for private sector banks while the remaining for foreign banks. In the booming home
loan segment, it is the public sector banks (PSBs) which are now having a clear-cut
advantage over their private and foreign counterparts. Some of the big PSBs,
including State Bank of India, Bank of Baroda and Canara Bank, are offering both
fixed and floating home loan products almost 75-100 basis points cheaper than
private and foreign banks.
After the recent rate hike by the Reserve Bank of India (RBI), the private sector and
foreign banks like ICICI Bank and Standard Chartered have also raised rates to
60%
30%
10%
Public Sector Banks
Private Sector Banks
Foreign Banks

manage the rising cost of funds. However, their public sector counterparts are yet to
join the bandwagon and are unlikely to react before the quarterly review of the RBI
Annual Policy.
As a result, public sector banks, now following the same marketing model like the
private sector and foreign banks, are now offering competitive rates in home loan
segments. To make life further tough for the private and foreign banks, PSBs have
beefed up their marketing campaign to sell home loan products. For example, BoB
has launched a pilot project in Mumbai, named Project Parivartan, in which BoB
officers are going door-to-door to sell home loans. This move is probably for the
first time that a public sector bank is going door-to-door to sell their products,
initiatives normally associated with private banks. Foreign Banks have recently
started concentrating on retailing sector particular in home loan sector in India so
there is still a lot of scope for them to catch the interest of the Indian borrowers. In
case of public sector banks the rise in home loan rate is not as steep as in the private
sector.

PREFERENCE FOR FIXED OR FLOATING INTEREST RATES
Going by the trend, it should surprise no one if interest rates on home loans rise as a
consequence of the rising interest rate scenario. This being the case, home loan
seekers considers opting for a fixed rate loan (i.e. fixed for 3-5 years). This protects
them from a potential interest rate hike in the near term. At the end of the said 3-5
year term, they have the option of considering either to continue with the 'fixed' rate
(if interest rates continue to rise) or migrate to a floating rate loan However, in case
an individual does not have the risk appetite to take the interest rate fluctuations in
his stride, he may consider selecting the 'truly' fixed rate loans. Such loans have a
fixed rate throughout the tenure of the loan. However, if interest rates were to
decline going forward, the truly fixed rate loan will not reflect the fall in interest

rates and the consumer will forfeit any chance of benefiting from a decline in
interest rates.
EFFECTS OF PROPERTY RATES HIKE ON HOME LOANS
The home loan sector has been drastically affected by the hike in the property rates.
The property prices have been rising and touching unprecedented heights. In fact so
much so, that property are again becoming out of reach of common man. Whether
the price rise is justified or is it just a manipulated bubble remains to be seen.
Reserve Bank of India, in its policy statements has time and again cautioned the
banks to be extra cautious before taking exposure. In fact RBI went to the extent of
increasing the risk weight age of the housing loans. Reserve Bank of India increased
the risk weight on real estate exposure and hiked the risk weight for lending to the
real estate sector. The RBI has cautioned the banks to be extra careful while going
all out to fund and finance the real estate sector. According to reports, the property
prices have come to their saturation and there is little scope for further increases.
The price hike has been quite fast and unrealistic. The growth in infrastructure has
not been able to keep pace with the increase in property prices. Hence property rates
hike have led to an increasing importance to home loans but bankers have to be extra
cautious on their part.

HOME LOAN PROCESS
According to the survey 25% of the people feel that home loan process is
convenient. Maximum number of people i.e. 75% says that the process is lengthy as
banks requires time for processing the loan application, verification of various
documents, appraising the credit and other formalities takes a longer time in
sanctioning of the loan.
CONCLUSION

In view of its backward and forward linkages with other sectors of the
economy, housing finance in developing countries is seen as a social good. In India,
growth of housing finance segment has accelerated in recent years. Several
supporting policy measures (like tax benefits) and the supervisory incentives
instituted had played a major role in this market.
The housing finance industry is getting increasingly commoditised.
Competition within the sector is ensuring that players offer consumers flexibility and
features to choose from. Features such as adjustable rate plans, lower processing
fees/monthly rest/interest rates/EMI/margin money, no pre- payment penalty have
become common across the industry. There is a growing trend among Banks and FIs
to include the cost of registration, stamp duty, society charges and other associated
costs while sanctioning loans to differentiate and make the home loans products
more attractive. This has resulted in further lowering the threshold limit for buying a
house. For differentiation of their home loan products, banks are also resorting to
offering of free add-ons such as life insurance, credit cards and consumer loans at
reduced rates for furnishing the house.
Some of the major players in the housing finance industry have started
organizing property fairs, wherein the projects of different construction companies
are brought together and bundled with a lower than normal interest rate loan product.
Such initiatives are expected to result in a more organized housing market and more
value for the customer. On the services front the banks/ FIs have begun addressing
concerns of borrowers through counseling and legal advisory services on matters
pertaining to property’s title, its technical evaluation, and its pricing etc. Banks/ FIs
have been upgrading their technology and investing in sophisticated systems for
sourcing, processing and managing information pertaining to home loan customers.
Housing credit has increased substantially over last few years, but from a very
low base. Thus, from miniscule amounts, the exposure of the banking sector to
housing loans has gone up. However, with growing competition in the housing

finance market, there has been a growing concern over its likely impact on the asset
quality. While no immediate financial stability concerns exist, there is a need to put
in place appropriate risk management systems, strengthen internal control
procedures and also improve regulatory oversight in this area. Banks also need to
monitor their exposure and the credit quality. In a fiercely competitive market, there
may be some temptation to slacken the loan scrutiny procedures and this need to be
severely checked.
ANNEXURE

I had visited ICICI Bank, Andheri (West) Branch on 28
th
August, 2007. There I
interviewed Miss. Shubhangi Gaekwad, Assistant Manager of the bank. It was a
very good experience interviewing her. Also she entertained me to the full extent
and rendered full support by providing me with the relevant information in regards
to the completion of this project.

BIBLIOGRAPHY

MAGAZINES

 Professional Banker (The ICFAI University Press Release, June 2007
Publication)

BOOKS FOR REFERENCE
 Merchant Banker by H. R. Suneja
OTHER SOURCES
 Interview with Miss. Shubhangi Gaekwad (Assistant Manager), ICICI Bank,
Andheri (West) Branch and Mrs. Mithila Jadhav (Chief Manager) SBI Bank,
Andheri (East) Branch.
 Brochures of ICICI Bank and SBI Bank.

WEBSITES

 www.economictimes.com
 www.indiainfoline.com
 www.icicibank.com
 www.surfindia.com
 www.hindustanlinks.com
 www.myiris.com
 www.moneycontrol.com
 www.bankofindia.com
 www.hdfc.com
 www.sbi.co.in
 www.bankof baroda.com
 www.sundaramfinance.com
 www.harmonyindia.org
 www.obc.com
 www. sify.com

Home Loan Project black book

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