PROJECT ON

“A Study on the Effectiveness of the Credit Appraisal System for Home Loans at
Corporation Bank, Electronic City Branch, Bangalore”

Submitted to Bangalore University

In partial fulfillment of requirement for the award of

“Master of Business Administration”

Submitted by

Mr. SUNILGOUDA. A

(Reg No: 09201044)

Under the guidance of

Prof. SUNITA. TRIPATHI

CMR Institute of Management Studies (Autonomous)

C.A. #2, 3rd C cross, 6th ‘A’ Main, HRBR layout

2nd Block, Kalyana Nagar

Bengaluru-560 043

2009-2011
INDIAN BANKING

The Reserve Bank of India is the central bank of the country. Central banks are a
relatively recent innovation and most central banks, as we know them today, were established
around the early twentieth century.

The Reserve Bank of India was set up on the basis of the recommendations of the Hilton
Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory
basis of the functioning of the Bank, which commenced operations on April 1, 1935.

The Bank began its operations by taking over from the Government the functions so far
being performed by the Controller of Currency and from the Imperial Bank of India, the
management of Government accounts and public debt. The existing currency offices at Calcutta,
Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the
Issue Department. Offices of the Banking Department were established in Calcutta, Bombay,
Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the
Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma
and later up to April, 1947.

After the partition of India, the Reserve Bank served as the central bank of Pakistan up to
June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was
originally set up as a shareholder's bank, was nationalized in 1949.

An interesting feature of the Reserve Bank of India was that at its very inception, the
Bank was seen as playing a special role in the context of development, especially Agriculture.
When India commenced its plan endeavors, the development role of the Bank came into focus,
especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and
practice of using finance to catalyze development. The Bank was also instrumental in
institutional development and helped set up institutions like the Deposit Insurance and Credit
Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of
India, the National Bank of Agriculture and Rural Development, the Discount and Finance
House of India etc. to build the financial infrastructure of the country with liberalization, the
Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank
Supervision and Regulation, and Overseeing the Payments System and onto developing the
financial markets.

COMMERCIAL BANK

Amongst the banking institutions in the organized sector, the commercial banks are the
oldest institutions having a wide network of branches, commanding utmost public confidence
and having the lion shares in the total banking operations. Initially they were established as
corporate bodies with share holdings by private individuals, but subsequently there has been a
drift towards central ownership and control.

Up to late sixties commercial banks were mainly engaged in financing organized trade,
commerce and industry, but since then they are actively participating in financing agriculture,
small business and small borrowers also.

PROGRESS OF COMMERCIAL BANKING IN INDIA

Banking in India on western lines had started from the beginning of 19th century. The
first joint stock was established at Calcutta by the name of Hindustan and was under European
management. But this bank failed at that time, the bank of Bengal (1806), bank of Bombay
(1840) and bank of madras (1843) were started with the financial participation of the
government. These banks were called as the presidency banks and were given the right of note
issue in their respective regions. The first purely Indian joint stock bank was the Oudh
commercial bank which came into existence in 1889. The swadeshi movement of 1905 gave
great stipules to the starting of the Indian Banks. The Indian banking system had gone through a
series of crisis and consequent bank failures. Its growth was quite slow during the first half of
this century. But after independence, the Indian banking system recorded rapid progress. This
was due to planned economic growth, increase in money supply, growth of banking habit,
control and guidance by the Reserve Bank and the nationalization of top banks etc. The
nationalization of 10 top Banks in July 1969 gave banking a sense of direction and purpose. In
1980, there was another nationalization of six smaller banks.
FUNCTIONS OF COMMERCIAL BANKS

The business of a commercial Bank is primarily to hold deposits and make loans and
investments with the object of securing profit for its shareholders.

It performs the following functions:

• Receiving deposits from the Public

• Making loans and advances
• Use of the cheque system
• Transfer of funds

Other functions:

1. Issuing and operating credit cards (Visa, Master) etc.

2. Keep the valuable articles of customers in safe custody.

3. Making and receiving payments on behalf of its depositors.

What is Credit Appraisal?

It is the process by which the lender appraises the creditworthiness of the prospective borrower.
This normally involves appraising the borrower’s payment history and establishing the quality
and sustainability of his income. In short it is a check on someone's financial situation to see if it
is safe to lend them money.

INTRODUCTION ABOUT HOME LOANS

Home is a shelter to person where he rests and feels comfortable. Many banks provide home
loans, whether commercial banks or financial institutions to the people who want to have their
own home, and among the banks Corporation Bank is also a major player in lending home
loans. Many banks provide home loans at low interest rate to attract consumers towards them. In
view of acute housing shortage in the country and the social – economic role of commercial
banks in the present times, the RBI advised banks to encourage the flow of credit for housing
finance.

Home is one of the things that everyone one wants to own. Home is a shelter to person
where he rests and feels comfortable. Many banks provide home loans whether commercial
banks or financial institutions to the people who want to have a home.

Corporation bank Home Loan, India have been serving the people for around three
decades and providing various housing loan according to their varied needs at attractive &
reasonable interest rates. Owing to their wide network of financing, Corporation Bank Housing
Loans provides services at your doorstep and helps you find a home as per your requirements.

Many banks are providing home loans at cheapest rate to attract consumers towards them.
The more customer friendly attitude of these banks, currently offer to consumers cheapest loan
over homes.

In view of acute housing shortage in the country, and keeping in mind the social –
economic role of commercial banks in the present times, the RBI advised banks to encourage the
flow of credit for housing finance.

CORPORATION BANK also provides with Home Improvement Loan for internal and
external repairs and other structural improvements like painting, waterproofing, plumbing and
electric works, tiling and flooring, grills and aluminum windows. CORPORATION BANK
finances up to 85% of the cost of renovation (100% for existing customers).

Current status is that CORPORATION BANK reduced home loan rates by 50 basis
points for all its existing floating rate customers.
 1.2 ADVANTAGES OF HOME LOANS:-

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

(i) Attractive interest rates:-

The various banks offer attractive interest rates to boost and help their customers. Many
banks provide loans on fixed or floating rates to facilitate consumers as per their needs.

(ii) Help in owning a home:-

The home availed by a person with the help of banks, because they provide technical and
financial assistance to customers for owning their dream home.

(iii) No requirement of guarantor:-

The commercial banks now a day, liberlise their laws regarding home loans. Some of
banks don’t even require the guarantor to grant loan to their consumers. They also make
consumers free by reliving him to find a guarantor to complete the proceedings of availing loan.

(iv) Door-Step Services:-

These door to step services are provided from enquiry stage to the final Credit appraisal
takes place such services are beneficial for customers in present busy life. Banks like ICICI bank
and standard chartered bank provide door to step services to customers to borrow loan.

(v) Loan period:-

There are many banks which provide maximum loan tenures upto 15-20 years based on the
loan amount and the creatibility of customers. This relieves the customers to repay loan amount
till a long period.
 (vi)For accidental death insurance :-

Some banks provide free accidental death insurance with housing loan which is also
beneficial for the customers.

These benefits or advantages of home loans are responsible for making than so popular
among customer that a person who don’t have their home and want to buy, they do it with home
loan. Home loans help such persons in making their dream home.

OVERVIEW OF THE INDUSTRY:

1.3 CREDIT APPRAISAL OF HOME LOANS :-

Every bank has its own procedure to disburse the loan amount among customers. After
choosing your right home, the next step is Credit appraisal of home loans. The loan amount is
disbursed after identifying and selecting the property or home that are purchased and submit the
requisite legal documents. In the Credit appraisal of home loans a clear title and full verification
to ensure that a person has full rights on his house. The 230A clearance of seller and /or 371
clearances from the appropriate authority of income tax is also needed.

(I) Eligibility criteria:-

However, if one is a resident or non-resident individual who is planning to buy a house in

India, one can apply for a home loan. If a person has decided to buy a property in the near future,
he/she can apply for a loan before even selecting the property. Once the maximum amount to put
into the property has been decided, the Housing Finance Institutions or Banks will let the
customer know that how much he/she is eligible for and this helps to plan out the budget.

(ii) Conditions regarding co-applicants: -

All Housing Finance Institutions lay down conditions on who can be co-applicants. all
co-owners to the property. Need to be co-applicants to the loan necessarily. These institutions
do not permit minors to join in as either co-owner or as co-applicants because a minor is not
eligible to enter into a contact as per law. They do not permit even friends or relatives who are
 not blood relatives to take a property jointly. However, Income of co-applicants can be clubbed
together to get higher loan eligibility. Given below is a Table that throw light on acceptable
relationship of a co-applicant for clubbing of income.

Income Clubbing of Co-applicants:- It is as follows:-

Combination Income Clubbing: -

 Husband-Wife: - Income of husband-wife can be clubbed.

 Parent - son: - It can be clubbed if only son is there but not if any male sibling exists.
 Brother-Brother: - If they are currently staying together and intend to stay together in the
new property, then only, their income-can be clubbed for above purposes.
 Brother-Sister: - No clubbing-is possible.
 Sister-Sister : - No clubbing is possible.
 Parent-Minor- Child: - No clubbing is possible in this case also.

(iii) General Terms and Conditions: - The following are the terms and conditions applicable to
the basic home loan product only. These are likely to change on the basis of the variations of the
home loan product. Typically, in general home loans, the following conditions are applicable :-

1) The loan to value ratio (LTV) cannot exceed a particular percentage. This differs from
product to product and from one Housing Finance Institutional Bank (HFI/B) to another. The
components of the value of the Property calculated here are covered under cost of property.
2) The maximum tenure of the bank is nominally fixed by HFI/Bs. However, HFls/Bs do
provide for different tenures with different terms and conditions.

3) The installment that one pay is normally restricted to about-50-per cent of the monthly-gross
income of the candidate.

4) The total monthly outflow towards all the loans that have been availed of, including the
current loan is normally restricted to 50% of the gross monthly income.
5) One will be eligible for a loan amount which is the lowest as per one's eligibility. This is
calculated as per the LTV norms, the HR, norms and the FOIR norms as mentioned above.

6) Most HFls/Bs consider the profile before they judge the repayment capacity. The judgement is
based on age, qualifications, number of dependents, employment details, employer credentials,
work experience, previous track record of repayment of any loans that have been availed of,
occupation, the industry to which the candidate's business relates to, if he/she is self-employed,
then the turnover in the last 3-4 years etc.

7) Some HFIs/Bs insists on guarantees from other individuals for the repayment of the loan. In
such cases, the customers has to arrange for the personal guarantee before the Credit appraisal of
the loan takes place.

8) The property should be technically clear before the HFIs/Bs disburses the loans amount.
Most of institutions and banks have a teams of technical experts who visit the site to get a
technical report before the Credit appraisal of loan. This is also beneficial to the customer as they
check for the technical quality and compliance with local laws.

9) The property should be legally clear before one can avail of a Credit appraisal of the loan
amount. Housing-Finance Institutions /Banks (HFIs/Bs) take legal clearance from their lawyers
before the Credit appraisal of amount. This proves to be beneficial to the customers as a legal
expert checks his/her documentation to ensure that he/she get a proper title to the property.

10) The Credit appraisal of the loan is as per the progress of construction of the property unless
it is a ready property in which case the Credit appraisal will be by one single cheque. PEMI or
simple interest on the loan amount disbursed to the customer in case of a part Credit appraisal
will be payable by the customer on the Credit appraisal.

11) The Credit appraisal in most cases will be favoring the builder or the seller or the society or
the development authority as the case may be. The Credit appraisal will come in the customer's
favour under special circumstances only.
12) The repayment of loan can be made either through deduction against salary, post-dated
cheques, standing instructions or Auto debit instructions to bank.

13) The principle is amortized either on annual reducing or monthly reducing basis as the case
may be.

The above terms and conditions are generally true for most Housing finance
Institutions/Banks with respect to the general Home Loans. However, the specific terms and
conditions vary with respect to special Housing Finance Institutions or Banks.

(iv) Charges applicable to home loans :-

The different kinds of charges applicable to home loans are discussed below:

a) Processing fees :-

First of all, comes the process fee. This is a charge that is levied by most HFls/Bs. This has
to be paid at the time of submission of the application form. It's normally charged as a percentage
of the loan amount sanctioned. Some HFls also charge a flat fee based on the loan amount
instead of a percentage. When a lower amount is sanctioned the excess fees paid at the time of
submission of the application is adjusted with the charges, which one make to the HFI/B
subsequently. Most HFls/Bs refund the processing fee if the loan application is rejected.

b) Administrative fees :-

This charge is again, normally, a percentage of the loan amount sanctioned. It is collected by
the HFI/B for the maintenance of customer's records, issuing interest certificates, legal charges,
technical charges, etc. though the tenure of the loan. It is payable by the customer when he/she
accepts the offer letter given by the HFI/B. This payment has to be made before the availment of
the Credit appraisal. The mode of collection of these fees varies from one HFI/B to another.

c) Rate of interest :-
 This is the rate of interest applicable on the loan amount through the tenure of the loan. It is
charged on the principal monthly reducing method. Most HFIs/Bs give an option to select either
a fixed rate of interest or a variable rate of interest.

d) Legal Charges:-

Some HFIs/Bs mainly Public Sector Banks levy legal charges that they incur on getting the
property documents vetted by their panel of lawyers.

e) Technical Charges:-

These charges are also levied by certain Housing Finance Institutions/Banks (HFIs/Bs) to
meet their expenses on the technical site visits to the customer's property. This ensures quality of
construction and construction within the norms as stipulated by the respective approval authority.

f) Stamp duty and registration charges:-

HFIs that go in for a registered mortgage pass these charges on to the customer. These are
rather heavy in certain states depending on the laws laid down by the state where one buy a
property.

g) Personal Guarantee from Charges :-

Since the personal guarantee provided by the customer need to be stamped, these charges
are also recovered from the customer. They are charged to him by HFIs who demand for
Guarantees.

h) Cheque Bounce Charges :-

In case the cheques through which one make a payment to HFls get dishonored, some
minimum charges are levied by the HFI. The same are recovered from the customer.

(i) Delayed payment charges :-

 HFls/Bs charge delayed payment charges from the customer if he/she delays the payment of
installments beyond the due date.

(j) Additional charges :-

These are levied as a percentage on the delayed payment charges by most HFls. They are
levied if one fail to pay the dues within the stipulated time after a delay has taken place.

(k) Incidental charge :-

This is payable in case the HFI/B sends a representative from their organization to collect
their outstanding dues. It is normally charged at a flat rate per visit. These charges are levied by
most HFls/Bs.

l) Prepayment Charges :-

This is a penalty charged by HFls/Bs from when one makes either a part prepayment or a
full repayment of the loan. This charge is levied only on lump sum payments and not on the
EMls that one pays. This charge is levied on the amount prepaid by one and not on the entire
outstanding principal. These charges are gradually being discount. So, these are the charges
levied by most Housing Finance Institutions and Banks while granting home loan to the
customers. Now, the decision on the repayment capacity shall be talked about as follows.

(v) Judgement regarding repayment capacity on the basis of income :-

To understand how the income of a customer is considered to arrive at his repayment

capacity, it is first necessary to classify customers into salaried and self employed individuals.

a) The income of the salaried individual is considered in the following manner:-

Gross monthly income as it appears on the salary slip

Less:- Any non regular variable income appearing on the salary slip (including overtime, etc.)
Add : - 50 per cent of the average variable income of the last six months.

Add: - Any fixed cash/voucher payments for which proof can be submitted.

Add: - 50 per cent of the average variable cash/voucher payments with proof like traveling
reimbursement etc.

Add :- HRA receivable if not being received already in the salary slip.

The above income calculated for the calculation of eligibility using IIR and FOIR norms. For
calculation of FOIR, the installments of all the loans that one has availed of currently for which
repayment is being made is taken into account as well. The lower of the two eligibilities is
considered as the maximum repayment capacity.

b) To consider income of Self-employed individuals we further classify them into Professionals

and non-professionals .

• Professionals:- Comprising doctors, chartered accountants, lawyers, architects, etc. For

calculation of eligibility of professional's income is computed by most HFIs using the
gross professional receipts instead of the Net profit as in the case of self-employed non-
professionals.
• Non-Professionals: - The income of non-professionals is normally calculated by HFIs in
the following manner: -

Average of the net profits of last 2 years as it appears in the profit and loss account (Returns
need to be filed for the same. They should be filed regularly before the due date is over).

Less: - Any income, which is unusual and non-recurring in nature like sale of some asset, etc
which affects profits substantially,

Add: - Any expense that is unusual and non-recurring in nature like repairs and maintenance that
has not been capitalized and effect profit adversely.
Add: - 50 per cent of the average depreciation of the last two years. The above income is
calculated for the calculation of eligibility using IIR and FOIR norms.

For calculation of FOIR the installments of all the loans that one has availed of currently for
which repayment is being made is taken into account and the eligibility is worked out. The lower
of the two eligibilities is considered as the maximum repayment capacity.

(vi) Credit documentation:-

Given below is the exhaustive list of credit documents- that need to be submitted for a
general home loan product. The documents vary from one HFI/B to another based on one's
employer, qualifications experience etc. the general requirements are as follows: -

(a) Income Documents : -

For salaried slips for the last three months appointments letter-salary certificate-
retainership agreement, if appointed as a consultant-Form 16 issued by the employer in
customer's name income document for self employee - last three years profit and loss account
statement duly attested by Chartered Accountants. Last three years Balance Sheets duly attested
by Chartered Accountant, last three years Income Tax Returns with computation chart duly filed
and certified by the Income Tax authorities.

b) Proof of employment : -

Identify card issued by the employer- Visiting card.

(c) Employer's details (In case of private limited companies) : -

Profile of employer on employers letterhead (to be signed by a senior person in the

organization) comprising

• Name of promoter/directors

• Background of promoters/directors
 • Nature of business activity of your employer

• Number of employees

• List of branches/factories

• List of suppliers

• List of clients/customers

• Turnover of employer

• Annual reports of the employer for the last two to three years.

(d) Proof of age (Anyone of the following) : -

Passport- Voter's ID card-PAN card-Ration card-Employer's identity card-School leaving

certificate-Birth certificate.

(e) Proof of residence (Anyone of the following) : -

Ration card-Passport- PAN card-Rent agreement, if the customer is staying currently on

rent- Bank Pass book-Allotment letter from the company if he/she is residing in company
quarters.

(f) Proof of name change (If applicable) : -

A copy of the official gazette –A copy of a newspaper advertisement publicizing the

name change-Marriage certificates.

(g) Proof if investment (If required) :-

Bank statement for the last six months of all operating and salary accounts - Bank
statements for the last six months of all current accounts, if self-employed-any other photocopies
of investments held, if required by the HFC.
(vii) Legal documentation :-

Legal Documentation the typical legal documents that need to be submitted to the HFC
arc discussed here. Given below is a list of legal property documents that need to be submitted to
the HFC for mortgage of the property. The name and the list of documents vary from state to
state and also depend on the type of property being financed. A broad outline of the documents
required is given below.

a) Acceptance copy of the offer letter issued by the HFC/B

b) Title documents of the property that include -sale agreement duly

Registered-Own contribution receipts - Allotment letter-Registration receipt-Land documents

indicating ownership, if applicable- Possession letter-Lease agreement, if applicable (Property
bought from a development authority) - Mortgage deed if the HFC opts for a registered
mortgage.

c) No Objection Certificate from the developer, society or development authority as applicable.

d) Personal Guarantees, if applicable.

e) In case of alternator additional security, documents for the same depending upon the security
details.

f) Post dated cheques for the EMls.

The above documents are only indicative in nature and do not cover the entire list. It may, also
be noted that in a resale case, the previous chain of agreement also need to be taken.

(viii) The tax benefits that are applicable to housing loans for individuals :-
Currently Tax Benefits to individuals are available only for the Home Loans and Home
Extension Loans products. The benefits available are covered under these sections.

Property Insurance :-

Is it compulsory to insure the property? Some HFls insist on a mortgage redemption life
insurance policy. In this case the customer gets a benefit of an interest rate reduction. Though the
HFI may not insist, it is better to go in for property insurance to safeguard the asset against any
sort of damage or loss. The customer can select the tenure for the property insurance. The
insurance premium is changed up front. Most insurance companies provide for huge discounts on
the rate of premium for larger tenures. The premium charged currently is seventy-seven for every
lakh of property for a year. So a customer has to fulfill various conditions to be eligible for
availing home loan from a Housing Finance Institution/Bank After fulfilling these conditions, a
customer can avail loan at low interest rate i.e. fixed rate floating rate. A decision on whether one
should go in for a fixed-rate loan or a floating-rate loan now is a function of two factors i.e.
One's perception of where interest rates in the economy are headed and one' capacity to ride the
interest rate changes. A floating-rate loan let one take advantage of further falls in interest rates
but one stand to lose if interest rate, rise again. However this decision is based on the perception
of the consumer.
 Chapter 2

RESEARCH METHODOLOGY:-

Research methodology is a way to systematically show the research problem. It may be

understood as a science of studying how research is done scientifically. It is necessary for the
researcher to know not only the research methods but also the methodology.

This Section includes the methodology which includes. The research design, objectives of study,
scope of study along with research methodology and limitations of study etc.

• To analyze the Housing Finance Industry.

• To make an in-depth study of the credit appraisal system at Corporation Bank.
• To analyze the individual elements and to identify the major elements of credit appraisal,
which have a bearing on the sanction of the credit amount

3.1- RESEARCH DESIGN:-

This project is based on exploratory study as well descriptive study. It was an exploratory
study when the customer satisfaction level was studied to suggest new methods to improve the
services of Corporation Bank LTD in providing home loans and it was descriptive study when
detailed study was made for comparison of disbursement of home loans by commercial banks.

3.2 – SOURCES OF DATA :-

To fulfill the information need of the study. The data is collected from primary as well as
secondary sources-

A - PRIMARY SOURCE:-
 The primary source of data collection was made on basis of interaction with the bank
manager and hence no questionnaire was made.

B – SECONDARY SOURCE:-

It was collected from internal sources. The secondary data was collected on the basis of
organizational file, official records, news papers, magazines, management books, preserved
information in the company’s database and website of the company.

TOOLS OF ANALYSIS:-

Data has been presented with the help of bar graph, pie charts, line graphs etc.

PLAN OF ANALYSIS:-

Tables were used for the analysis of the collected data. The data is also neatly presented with
the help of statistical tools such as graphs and pie charts. Percentages and averages have also
been used to represent data clearly and effectively.

PROBLEM STATEMENT

To analyze the housing finance industry in India and the credit appraisal process parameters
taken into account in the process.

• The aim of the project is to analyze the important factors of the credit appraisal process
adopted at Corporation Bank and to suggest improvements if any, in the credit appraisal
system.

OBJECTIVES OF THE STUDY

• To analyze the Housing Finance Industry.

• To make an in-depth study of the credit appraisal system at Corporation Bank.
 • To analyze the individual elements and to identify the major elements of credit appraisal,
which have a bearing on the sanction of the credit amount

SCOPE

• The study is also confined to the internal functional and operational aspects of the
Credit Appraisal System.
• The data and the information will be collected from the record books maintained by the
branch and from the oral communication with the branch manager.

LIMITATIONS

Some of the limitations of the project that can be encountered during the study are:

• The study is restricted to Corporation Bank Electronic city Branch only.

• Due to scarcity of time, only important factors will be analyzed and discussed.
 CHAPTER 3

THE HISTORY OF INDIAN HOME LOANS:-

Home loans in India have made people Buy Property in India in spite of the
skyrocketing prices. Today, we find considerable Real Estate Investment in India, either in the
field of Residential Property in India or Commercial Properties in India. Home Loans in India
are disbursed by many Banks as Loan Banking is on of the most important function of the
Financial Services in India. Property Dealers and Real Estate Consultants in India usually
recommend that we undertake appropriate Home Loan or Mortgage Loan counseling so that we
can Buy Apartment in India at an affordable Mortgage Rate.Purchasing the home of your dreams
is not an easy task. Especially when you plan to buy a home on loan. Home loan means that you
buy a house on installments. In simpler terms when you want to own a home and can’t afford to
pay the amount in lump sum, you can pay it in monthly installments with an interest rate.

The interest rates of home loans are expected to go down even further according to
analysts who foresee a cut down in the rates by the RBI in the wake of the decision taken by US
Federal Reserve to cut its rates by a significant margin.

There are number of companies offer cheap home loans at a low interest rate. You can avail
loan against existing house for renovation or expansion etc. There are many nationalized banks
that offer finance for affordable housing. India Housing has put together a comprehensive data to
provide you with the cheapest Home Loans available in the market. We have listed all the
important housing finance institutes and some of the top home finance banks providing lowest
interest rates.

In the last few years, housing loan scenario in India has changed drastically. It has taken a
front seat and people are looking forward to owning their own houses. It is no more a dream that
required lifetime saving and a difficult decision to make. Today the new home purchase loan is
much easily available and is much cheaper than what was available earlier. Banks are now
everywhere and the schemes are implemented even in villages and smaller towns. The housing
loans are popular there too, however, the activity of building flats is little slow. It would not be
wrong to say that there has been a boom in the home loan market and with this boom; there is
also a boom in the Number of home loans mortgage brokers in India.

The main reason for this boom in home loan market is the change in government policies. It
is our government’s motivation that the home loan interest rates in India have fallen
considerably. Lot many banks are offering home loans and this is available at low EMIs
(Equated monthly Installments). High EMIs are now a thing of past. Today lending rate is in the
range of 7.5 to 15 %.

Again, there are different types of home loans available today. The interest rate available is
also of two different types. One is the fixed rate loan and the other is the floating rate loan. In the
fixed rate loan, whatever interest is fixed on the start of loan is carried on for the complete
period. However, in the other one, the interest rate is not fixed and as the interest rate goes up or
low the effect is directly transferred to the person who is taking the loan. In the last few years the
floating interest rate has been a favorite among most of the people taking home loans.

There is also a trend to opt for home construction loan. This loan is available to those
who want to design their homes according to their requirement and taste. In other words, this
loan is meant for those who themselves want to construct their new home.

As shared earlier, taking a loan is not a difficult task. However, before taking a loan, one
must realize that the relationship with the bank will be for a longer period usually 15 to 20 years
so one must ensure faith and integrity in bank. Apart from low rate of interest, the bank should
also provide some value added services. The other thing is to look into is the property that is to
be brought. Making sure that the builder has all sanctions and facility to build a good building is
very important.

Taking home loans these days has become simpler. With the RBI regularly bring down
interest rates; taking home loans have become extremely easy. Housing loans which were 16.5%
to 18% a few years ago fell by 11.5% to 13%. With interest rates going down, people
increasingly number apply to take these loans. Some of the leading banks offering home loans in
India, including Corporation Bank, ICICI Bank, IDBI Bank, HDFC Bank , Bank of Baroda,
SBI, Standard Chartered Bank and Axis Bank .
 Company Profile

Corporation Bank started about 104 years ago in the year 1906, with an initial capital of just
Rs.5000. It has recorded Rs. 1, 55, 936 Crore mark in business and even far more, with over
3500 service outlets across the nation. It was nationalized in the year 1980 and has adapted itself
well to the financial reforms. It offers a host of services inclusive of home loans to cater to its
wide client base.

Corporation Bank loans can be availed for construction of house/flat, purchase of ready built
house/ flat; for repairs/renovation/extension/improvement of existing house/flat or for take-over
of housing loans from other Banks/Institutions.

Analysis

Loan to Value Ratio –

Property Value Loan available subject to credit discretion

Above Rs. 1 Cr. And below Rs. 2 Cr. 75%

Above Rs. 2 Cr. And below Rs. 3 Cr. 70%
Above Rs. 3 Cr. 65%

Few banks are more lenient when it comes to loan to value ratio.

Tenure –

Maximum tenor under fixed rate loans is restricted to 20 years for salaried class and 15 years for
other category of borrowers. Housing loans under fixed rate of interest is offered upto 20 years
only. The rate of interest will be reset at the discretion of the Bank once in 5 years. Under
floating interest rates, the maximum tenor can be extended upto 25 years.
Interest Rate –

Fixed Rate:

Loan Tenor Up to Rs.30 lakh Above Rs.30 lakhAbove Rs.50 lakh

& up to Rs.50 lakh
Up to 5 years 11.00% 11.50 % 11.50%
Above 5 & upto 15 years 11.00% 11.50 % 11.50%
Above 15 years & up to 20 11.00% 11.50 % 11.50 %
years
Above 20 & upto 25 years 11.00% 11.50 % 11.50 %

Floating Rate:

Loan Tenor Up to Rs.30 lakh Above Rs.30 lakhAbove Rs.50 lakh

& upto Rs.50 lakh
Up to 5 years 8.75 % 9.50% 10.00%
Above 5 & upto 15 years 9.50 % 10.00% 10.50%
Above 15 years & upto 20 9.75 % 10.50% 10.75%
years
Above 20 & upto 25 years 10.25 % 10.75% 11.00%

Prepayment Charges – On prepayment of the loan, 0.5% on loan amount is charged under the
floating rate option whereas, 1% on loan amount is charged under the fixed rate option. This is
among the lowest charges in the industry.

Processing Charges -

Up to Rs.5 lakh 0.50% of loan subject to min Rs.1000/- & max. Rs.2500/-
Above Rs.5 lakh & 0.50% of loan subject to min Rs. 2500/- & max.Rs.7500/-
upto Rs.15 lakh
Above Rs.15 lakh & 0.50% of loan subject to min Rs.7,500/-& max.Rs.10,000/-
upto Rs.20 lakh
Above Rs.20 lakh 0.50% of loan subject to min Rs.10,000/- & max.Rs.50,000/

The above mentioned processing fee bracket gives tough competition to IDBI Bank’s offering
charged @ 0.5% or Rs. 11, 000.

Published on August 5, 2010 · Filed under: Corporation Bank Home Loan;

Competitors

INTEREST RATES PROVIDED BY VARIOUS BANKS

Loan Period EMI / Lakh EMI / Lakh

Finance Institution Fixed Floating
(in years) (INR) (INR)

Up to 5 9.00 2076 8.00 2028

6 to 10 9.25 1230 8.25 1227
Bank of Baroda
11 to 15 9.50 1044 8.25 970
16 to 20 9.50 932 8.50 868

Up to 5 9.50 2100 8.75 2064

6 to 10 9.75 1300 9.25 1280
State Bank Of India
11 to 15 - - 9.25 1029
16 to 20 - - 9.75 949

Up to 5 11 2175 9.50 2101

6 to 10 11 1375 9.50 1294
HDFC
11 to 15 11 1137 9.50 1045
16 to 20 11 1033 9.50 933

ICICI Bank Up to 5 10.75 2162 9.50 2101

6 to 10 10.75 1364 9.50 1294
 11 to 15 10.75 721 9.50 1045
16 to 20 10.75 1016 9.50 933

Up to 5 10.50 2149 9.50 2100

6 to 10 11 1373 9.50 1294
LIC Housing Finance
11 to 15 11 1137 9.50 1044
16 to 20 11 1032 9.50 932

Up to 5 9.00 2076 10.50 2150

6 to 10 9.00 1267 10.50 1350
PNB Housing Finance
11 to 15 9.25 1030 10.50 1106
16 to 20 9.50 933 10.50 999

The above table illustrates the comparison between the interest rates from various Housing
Finance Companies and banks. It can be seen that if one wishes to go for floating loans, the bank
which gives the best deal as far as the interest rate is concerned.
Recent trends of home loan in India:-

In order to understand the recent trends we need to know or understand various factors.
These factors play vital role in Indian home loan market. These include interest rate on which
banks provide home loan, tax rebate on home loan and its impact. Apart from this to understand
the recent trend we need to compare the trends of home loan of different years. Here we have
compared the interest and other market trends of year 2009 with 2007-08. This kind of
comparison gives the result which helps us to understand the trends of market of any industry.
Apart from the impact of present and past economic ups and down also affect the trends. Today
the US slowdown is the major issue which has affected almost all the industry. So we have also
discussed this issue in terms to define trend of home loan market in India.

Impact of slowdown on home loan market in India:-

The fear of a recession looms over the United States. And as the clinch goes, whenever
the US sneezes, the world catches a cold. This is evident from the way the Indian markets
crashed taking a cue from a probable recession in the US and a global economic slowdown. U.S
slowdown has affected almost all sectors not only in US but to all over the world. Indian
economy has also been affected by this slowdown because India is a growing country and almost
in all sectors various multinational companies have major contribution. So the role of this
slowdown is a major issue to be discussed while talking about Home Loan Market in India.

Bankers who were earlier falling over each other to dole out home loans, even for soft
furnishings, have suddenly become choosy. Banks like SBI, ICICI Bank, UTI Bank, IDBI Bank
and leading mortgage firm Corporation are now apparently making a conscious attempt to curb
their aggression in the home loan market situation is like that if a customer who recently
approached a private sector bank for a home loan of about Rs 10 lakh for a tenure of 15 years
found, to his shock, that the eventual loan disbursement was just Rs 5 lakh. Most bankers aren't
willing to confirm any slowdown in their home loan portfolio. On record, they attribute the
marginal dip in home loan disbursements to the recent hike in interest rate.
 Privately, however, they have a different story to tell. "The slowdown in the home loan
market for select players like ICICI Bank was evident from January. ICICI Bank's average home
loan disbursement in a month is around Rs 2,500 crore in a month, which has come down to
almost Rs 2,000 crore in March," said a private sector banker. ICICI Bank officials denied any
slowdown in their home loan portfolio and they say that the recent dip in interest rates has had
some impact on disbursals. However, in absolute terms, it is still low. Even this slowdown the
deposit growth for the sector as a whole is around 17%, while credit is growing at almost 28%,
forcing banks to become selective. Institutions now charge a floating rate of 8 to 8.25 per cent on
home loans above Rs 20 lakh. Initial estimates by bankers suggest that the increase in rate for
home loans and other segments would be around 25-50 basis points (0.25% to 0.5%). Even as
the provisioning requirement has gone up around 60 basis points, the hike in interest rates may
be lower as the impact would be felt for the first year. It would also depend on how well
capitalized the banks are as the rise in provisioning and risk weightage would affect the return on
equity for banks. Weaker banks and banks with a large portfolio of these loans are likely to be
more affected and may hike rates first.

Home loan growth of disbursals were at 20 per cent in 2007-08 according to a study by
the credit rating agency CRISIL, a Standard & Poor’s company. This rate is lower than the 30
per cent annual increase seen in the past three years, but in absolute terms represents a
substantial expansion. The slower growth reflects the impact of rising property prices and
interest.

Types of home loans: -

Housing loans offered by banks are of different types:-

• Home Purchase Loans

• Home Construction Loans
• Home Improvement Loans
• Home Extension Loans
• Home Conversion Loans
• Land Purchase Loans
 • Stamp Duty Loans
• Bridge Loans
• Balance Transfer Loans
• Refinance Loans
• Loans to NRIs

Home purchase loans:-

This is the basic home loan for the purchase of a new home. If you want to buy a flat in
some society or some already built house, banks and HFCs sanction you home purchase loans for
this process.

Home construction loans:-

This loan is available for the construction of a new home on a said property. The
documents that are required in such a case are slightly different from the ones you submit for a
normal Housing Loan. If you have purchased this plot within a period of one year before you
started construction of your house, most HFCs will include the land cost as a component, to
value the total cost of the property. In cases where the period from the date of purchase of land to
the date of application has exceeded a year, the land cost will not be included in the total cost of
property while calculating eligibility.

Home improvement loans:-

These loans are given for implementing repair works and renovations in a home that has
already been purchased, for external works like structural repairs, waterproofing or internal work
like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan
facility of a home improvement loan, after obtaining the requisite approvals from the relevant
building authority. the following are coming under the home improvement loans:

• External repairs
• Tiling and flooring
• Internal and external painting
 • Plumbing and electrical work
• Waterproofing and roofing
• Grills and aluminum windows
• Waterproofing on terrace
• Construction of underground/overhead water tank
• Paving of compound wall (with stone/tile/etc.)
• Bore well

Home extension loans:-

An extension loan is one which helps you to meet the expenses of any alteration to the
existing building like extension/ modification of an existing home; for example addition of an
extra room etc. One can avail of such a loan facility of a home extension loan, after obtaining the
requisite approvals from the relevant municipal corporation.

Home conversion loans:-

This is available for those who have financed the present home with a home loan and
wish to purchase and move to another home for which some extra funds are required. Through a
home conversion loan, the existing loan is transferred to the new home including the extra
amount required, eliminating the need for pre-payment of the previous loan.

Land purchase loans:-

This loan is available for purchase of land for both home construction or investment
purposes.

Stamp duty loans:-

This loan is sanctioned to pay the stamp duty amount that needs to be paid on the
purchase of property.

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 loans:-

Balance Transfer is the transfer of the balance of an existing home loan that you availed
at a higher rate of interest (ROI) to either the same HFC or another HFC at the current ROI a
lower rate of interest.

Refinance loans:-

Refinance loans are taken in case when a loan for your house from a HFI at a particular
ROI you have taken drops over the years and you stand to lose. In such cases you may opt to
swap your loan. This could be done from either the same HFI or another HFI at the current rates
of interest, which is lower.

NRI home loans:-

This is tailored for the requirements of Non-Resident Indians who wish to build or buy a
home or property in India. The HFCs offer attractive housing finance plans for NRI investors
with suitable repayment options.

On would be entitled for home loans in the range of Rs 5 lakh to a maximum of Rs 1 crore, based
on the repayment capacity, previous credit history and the cost of the property. The bank may
provide 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. The repayment capacity is calculated
taking into account factors such as:

• Age
• Income/Salary
• Qualifications
• Dependant/(s)
• Assets/Liabilities
 • Credit History
• Stability / continuity of your employment/business
• Income of co-applicant/(s)

Taking home loans these days has become simpler. With the RBI regularly bring down
interest rates; taking home loans have become extremely easy. Housing loans which were 16.5%
to 18% a few years ago fell by 11.5% to 13%. With interest rates going down, people
increasingly number apply to take these loans. Some of the leading banks offering home loans in
India, including Corporation Bank, ICICI Bank, IDBI Bank, HDFC Bank State Bank, Bank of
Baroda, Kotak Bank, SBI, Standard Chartered Bank and Axis Bank.
 Chapter 4

Data Analysis & Interpretation

Home Loan Procedure in Corporation Bank :-

Submission of Application Form: - After choosing a particular home loan, the customer
submits the application form to the housing finance company (HFC) along with other relevant
documents as required by the HFC. They comprise documents to establish income, age,
residence, employment, investments, etc. The customer also needs to hand over a cheque for
payment of an up front (non -refundable) processing fee of about 0.5-1% of the loan amount to
the HFC.

Validation of the Information: - In the next stage, HFCs validate the information provided by
the customer on the application form. They usually conduct checks on the residential address of
the customer, the place of employment of the customer, and credentials of the employer. Some
HFCs 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.

Issue of Sanction Letter :- After due appraisal of customer profile, a sanction letter is issued
which contains details such as loan amount, rate of interest, annual / monthly reducing balance,
tenor of the loan, mode of repayment and general terms and conditions of the loan. This is the
actually the approval of the money lending procedure by the company. However, the money is
sanctioned only after the documents and the property on behalf of which the loan is being
granted is thoroughly verified.

Submission of Documents: - Once the sanction letter is passed, the customer is required to leave
the entire set of original documents pertaining to the property being purchased with the HFC as
security for the loan amount sanctioned. These documents remain in the custody of the HFC till
the time the loan is fully repaid. Once the documents are handed over to the HFC, they send all
the documents for a thorough legal scrutiny.
Validation of Property: - Prior to disbursement, the HFC also conducts a site visit to the
customer's property to ensure that all construction norms have been adhered to properly. Once
the HFC is satisfied that the property is legally and technically clear, they disburse the loan
amount. The disbursement from the HFI is on the basis of the stage of construction of the
property.

Payment Procedure: - Once all the above mentioned process, the borrower is entitled to take
the money from the lender party. Until such time that the entire sanctioned amount is not drawn,
the customer is supposed to pay a simple interest on the Actual Amount drawn (without any
principal repayments). The EMI payments commences only after the entire sanctioned loan
amount is drawn.

Indian Market for Home loans is more than Rs.500,000 crore:-

Today, not only the metros are witnessing the housing crunch even the second tier cities like-
Jaipur, Bhubneshwar, Lucknow, Trivendrum etc. are falling into the dearth of living space and
wanting for more expansion.

India Report:

Indian credit report in comparison to the other Asian countries is shown in the statistics below,
which is among the lowest. It is Indian psyche that credit is termed bad, Indian are traditionally
not inclined to take credit this reflects in the figures below:-
GRAPH :- 4.1

Indian home loans Industry:-

Indian Home loans industry is growing at a fast pace 30% per annum, this can be seen in
the stats shown below with average ticket size (loan size) and Amount disbursed is rising every
year the opportunities have become more dominant for different organization in India. The
demand drivers are fast growing middle class population, rise in working women workforce,
bigger aspirations of youth, Tax saving, Transparency in the real estate market.
GRAPH:- 4.2

Still in comparison to other nations India has a long way to go, The figures shown below
shows that even the GDP/mortgage ratio is low which indicates that credit is not well sought as
figure below shows the average percentage of mortgage to GDP
GRAPH:-4.3

Comparison with other nations India fall behind in terms of Mortgage Penetration which directly
demonstrates the potential in Indian market for Housing mortgage finance companies
GRAPH:- 4.4

Real Estate is currently sought of as a great means of Investment, the prices of residents have
shot up very high which is clearly shown in the figure below, the major cities have witnesses lot
of development and price appreciation which demonstrates the growing demand more and more
people are migrating to cities for work / business. More and more jobs are created and price
index rise becomes inevitable.
Price Index: FIG-4.5

The above figure shows the rise in prices of space per sq feet in different major cities.

Housing shortage in India: - The below figure shows the ever-increasing demand for houses in
India and also mentioned here is the Rural and urban requirement. Banks are driving new
strategies to tap both the markets in a different way – Rural/Urban. There are categories with
Indian loan demand, which is shown in this figure.
FIG:- 4.6

Lock-in facility by banks :-

A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a

certain interest rate and a certain number of points for you, usually for a specified period of time,
while your loan application is processed. (Points are additional charges imposed by the lender
that are usually prepaid by the consumer at settlement but can sometimes be financed by adding
them to the mortgage amount. One point equals one percent of the loan amount.) Depending
upon the lender, you may be able to lock in the interest rate and number of points that you will
be charged when you file your application, during processing of the loan, when the loan is
approved, or later.

A lock-in that is given when you apply for a loan may be useful because it’s likely to take
your lender several weeks or longer to prepare, document, and evaluate your loan application.
During that time, the cost of mortgages may change. But if your interest rate and points are
locked in, you should be protected against increases while your application is processed. This
protection could affect whether you can afford the mortgage. However, a locked-in rate could
also prevent you from taking advantage of price decreases, unless your lender is willing to lock
in a lower rate that becomes available during this period.

It is important to recognize that a lock-in is not the same as a loan commitment, although
some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to
make you a loan in a specific amount at some future time. Generally, you will receive the
lender’s commitment only after your loan application has been approved. This commitment
usually will state the loan terms that have been approved (including loan amount), how long the
commitment is valid, and the lender’s conditions for making the loans such as receipt of a
satisfactory title insurance policy protecting the lender.

Oral or written lock-in agreement? :-

Some lenders have preprinted forms that set out the exact terms of the lock-in agreement.
Others may only make an oral lock-in promise on the telephone or at the time of application.
Oral agreements can be very difficult to prove in the event of a dispute. It is wise to obtain
written, rather than verbal, lock-in agreements to make sure that you fully understand how your
lender’s lock-ins and loan commitments work and to have a tangible record of your arrangements
with the lender. This record may be useful in the event of a dispute.

Charges of a lock-in:-

Lenders may charge you a fee for locking in the rate of interest and number of points for
your mortgage. Some lenders may charge you a fee up-front, and may not refund it if you
withdraw your application, if your credit is denied, or if you do not close the loan. Others might
charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or
a fraction of a percentage point added to the rate you lock in. The amount of the fee and how it is
charged will vary among lenders and may depend on the length of the lock-in period.
Types of lock-in:-

Locked-In Interest Rate--Locked-In Points :- Under this option, the lender lets you lock in
both the interest rate and points quoted to you. This option may be considered to be a true lock-in
because your mortgage terms should not increase above the interest rate and points that you’ve
agreed upon even if market conditions change.

Locked-in Interest Rate--Floating Points:- Under this option, the lender lets you lock in the
interest rate, while permitting or requiring the points to rise and fall (float) with changes in
market conditions. If market interest rates drop during the lock-in period, the points may also
fall. If they rise, the points may increase. Even if you float your points, your lender may allow
you to lock-in the points at some time before settlement at whatever level is then current. (For
instance, say you’ve locked in a 10½ percent interest rate, but not the 3 points that went with that
rate. A month later, the market interest rate remains the same, but the points the lender charges
for that rate have dropped to 2½. With your lender’s agreement, you could then lock in the
lower 2½. Points.) If you float your points and market interest rates increase by the time of
settlement, the lender may charge a greater number of points for a loan at the rate you’ve locked
in. In this case, the benefit you might have had by locking in your rate may be lost because you’ll
have to pay more in up-front costs.

Indian Economy is growing at a nice pace (8% p.a) which is also driving per capita income rise.
The demand of real estate has reached at a new peak according to ninth five year plan there is a
shortage of 42million houses .But in India the figures to GDP are smaller in comparison to the
other countries Contribution of housing to GDP is close to 8%.
 Chapter 5

FINDINGS

While taking loans major considered points:-

 Rate of interest provided.

 Services provided by banks.
 Time taken for providing loan.
 Sanctioning Loan Amount

Generally people prefer to take SBI Home Loan because SBI (State bank of India) is main
centralized and national bank but now a day’s major highlight is on Corporation Bank.
SBI provides loan at comparatively low interest rate than HDFCS, while Corporation
Bank offers a wide range of Home Loan products, designed to meet the requirements of
customers.

RECOMMENDATION

Low EMI is not only the factor influencing one’s choice of housing finance companies and
Income tax incentives are more important. Despite the above mentioned factors several bottle
necks still exists in the Industry, which have to be taken care of before any of the above can
bring about improvement in the prospects of the Industry.
CONCLUSION

The industry is witnessing a boom at present boosted by the generous budget sops and rock
bottom real estate prices. The demand is result of genuine individual needs for housing thus the
housing finance industry is on solid ground and has interesting prospects ahead.

As for the small players, they will have to take harsh decision to either exit the industry or merge
with bigger entities. Low EMI is not only the factor influencing one’s choice of housing finance
companies and Income tax incentives are more important. Despite the above mentioned factors
several bottle necks still exists in the Industry, which have to be taken care of before any of the
above can bring about improvement in the prospects of the Industry. From an overall view point
demand for housing is ever rising and the same would be reflected on the demand for the funds
hence the profitability of the Industry should commence on the positive track in the future.
BIBLIOGRAPHY

M Y KHAN, 2008, FINANCIAL SERVICE, Tata Mc Graw – Hill Publishing company Ltd
(Fourth Edition), New Delhi

1. M Y KHAN ,2006,The Indian Financial System, Tata Mc Graw – Hill Publishing

company Ltd, New Delhi
2. Vasant Desai, The Indian Finance System, Himalaya Publication house
3. B.B.Padhiari, P.Ch.Misra, 2004,Rural housing finance,Discovery Publishing House,(First
Edition),Delhi.

4. Know Your Banking-IV-HOME LOANS , Indian Institute Of Banking Finance (IIBF)

WEBSITE

1. www.rbi.org.in

2. www.corporationbank.com