MODULE 2 LOANS AND ADVANCES – I:

Loan
o A loan is an amount lent by the lender to the
borrower for a definite purpose for a
particular time period.
o So a loan is one kind of debt provided by a
bank to fulfil the long term requirement of a
borrower.
o A lender charges a fixed rate of interest
applicable to the loan amount borrowed.
o A loan credit on the basis of borrower's
income, credit history, financial transactions
etc.
o A loan may be a granted against any type of
security like collateral security, mortgage
asset, pledge etc. and it is called a secured
loan, while nothing is put as security it is
called unsecured loan.
o An interest is generally paid on a monthly
basis.
o A loan is generally repaid in equal monthly
instalments or the repayment of full amount
 when the expiry of loan ends along with
interest payable on the loan. It depends upon
the borrower which option to choose to repay
a loan.

Advances
o An advance is a credit facility provided to
the big corporations to fulfil their daily needs
like salary and wages, admin expenses,
material expenses etc.
o A businesses use this credit facility to run a
day to day operations smoothly.
o Advances are for the short term like for one
year.
o Banks or financial institutions charge a low-
interest rate and that is why it is cheaper and
convenient for businesses to use it.
Difference between loan and advances

Basic Loan Advances

When a fund
is borrowed
When a fund
by an entity
is provided by
or business
the bank to a
corporation or
business
an individual
corporation or
from another
an entity for a
entity,
Meaning specific
repayable
purpose to be
after a
repayable
specific
after a short
period
duration is
carrying
known as
interest rate is
advances.
known as
loans.

Nature A loan by Advances are

 nature is a by nature a
debt. credit facility.

Advances are
Loans are
Time for short term,
generally for
duration maximum for
a long term.
one year only.

Advances are
A loan is may
facilitated
be secured
only against
Collateral against
primary
security collateral
security or ant
security on
type of
not.
guarantee.

Legal There are There is low

formalities legal legal
formalities formalities as
while compared to
granting a the loan.
 loan.

Short term
Auto loan,
loan,
Personal loan,
Overdraft
Example Education
facility, Cash
loan, Home
credit, Bill
loan etc.
purchased etc.
Types of Borrowers
 Individual
 Partnership Firm
 Hindu Undivided Family : Joint Hindu
Family is governed basically by two schools of
thought. They are Dayabhag and Mitakshara
schools
 Companies
 Statutory Corporations
 Trusts and Cooperative Societies
 Accounts of Visually Challenged (Blind)
Persons
 A visually challenged person is competent to
the contract like any other person.
 Signature or thumb impression of the blind
person should be attested by an independent
witness to the effect that all terms and
conditions were properly explained to the blind
person in his presence.
 Cash deposit and withdrawal by blind
person should be handled by the officer of the
bank.
 RBI has advised banks to ensure that all the
banking facilities such as cheque book facility
including third party cheques, ATM facility,
Net banking facility, locker facility, retail
loans, credit cards etc. are invariably offered to
the visually challenged without any
discrimination.

Accounts of Illiterate Persons

 An illiterate person is competent to contract
like any other person.
 Cheque book is not issued to illiterate
depositor for cash payments.
 Cheque book can be issued formaking
statutory payments, post dated cheques for
repayment of instalments of loan. In such
cases, the cheques will be crossed account
payee and thumb impression of the illiterate
depositor will be verified on such cheques at
the time of issue of cheque book by competent
authority of the bank.

Joint accounts
 Either or Survivor (E or S): It means anyone
can operate the account till both are alive. After
the death of either of them, the bank can pay
the balance to the survivor without any
formality.
 To be operated jointly: Account will be
operated by both jointly till both are alive and,
if one of the two expires; the bank would pay
the final balance to the survivor, along with all
the legal heirs of the deceased.
 Jointly or by Survivors: Account can be
operated by both / all the person jointly during
their lifetime and, in the event of death of any
one, the balance is payable to the surviving
persons jointly
 Former or Survivor: in such accounts, till the
first named person is alive, the second named
person has no right to withdraw/operate the
account. After the death of the first named
person, the payment will be made to second
named person.

Partnership Firms
 Partnership is governed by Indian
Partnership Act 1932.
 Partnership is created by agreement.
 Partnership is created to run a business for
profit.
 Minimum number of partners is 2 and
maximum can be 10 for banking business and
20 for other business.
 Who can become a partner: An individual,
partnership firm, limited company.
 Who cannot become a partner: Minor,
insolvent, insane cannot become partner
because they are not competent to contract.
 Though a minor cannot become partner, he
can be admitted for sharing the benefits.
 As per Supreme Court Judgement, HUF
cannot become partner as HUF cannot be liable
for action of others.
 Trust cannot become partner because
partnership is established for business.
 A partnership firm is registered with
registrar of firms.
 Registration of a partnership firm is
optional. It is not necessary that the firm be
registered. But an unregistered firm cannot file
suit against others for recovery of its debt
whereas others can file suit against the firm.
 Liability of a partner: Every partner is liable,
jointly with all other partners and also
personally, for all acts of the firm while he is a
partner. His liability is unlimited.
 Operational Authority: In Partnership
accounts operation authority is given by all
partners.
 Any change in the operational authority is
also with the consent of all partners.
 Partner cannot delegate authority.
 Every partner including a sleeping partner
has authority to stop payment of a cheque
issued by another partner of the firm but
revocation can be done only as per operational
authority.
 Death of a partner: On the death of a partner,
the partnership is dissolved.
 The cheques signed by the deceased, insane
or insolvent partner will be paid after obtaining
consent of surviving partners.
 If the account is in credit, operations are
allowed for winding up of the firm.
 It the account is in debit, operations in the
account should be stopped to retain liability of
the deceased /insolvent partner or his/her estate
and to avoid operations of the Clayton’s rule.
 Limited Companies
 A limited company is an artificial person
with perpetual succession incorporated under
the Companies Act.
 Company is a legal person, created through
process of incorporation for which Registrar of
Companies issues Certificate of
 Incorporation.
 Shareholders are owners of the Company
and directors are agents of the company to
manage company.
 A limited company may be private limited
or public limited.
 Members in a private limited company:
minimum 2; maximum excluding employees
can be 50.
 Members in a public limited company:
minimum 7 and there is no ceiling on
maximum number.
 Number of Directors: A private limited
company should have minimum 2 directors
whereas a public limited company should have
minimum 3 directors. No limit on maximum
 number of directors. In a public limited
company, if directors are more than 12,
permission from central govt required.
 Public company: When minimum 51%
shares with government.
 Documents for opening the account:
Memorandum of Association, Articles of
Association, Certificate of Corporation,
Certificate of Commencement of Business
(only for public limited companies) and Board
Resolution. No introduction is required as
Certificate of Incorporation is enough
introduction. However, KYC norms to be
applied on all persons authorized to operate
 the account.
 Memorandum of Association: It contains
name of the Company, its authorised capital,
registered office and liability of shareholders,
objects of the company etc.
 Ultra Vires: Anything done by the directors
beyond the objects stated in the memorandum
of association is called ultravires
 The directors can not delegate their authority
to any other person.
 In case a director dies, the cheques signed
by him presented for payment can be paid if
these are dated prior to his death.
 If a director stops authority of other director
it is of no use. Bank will allow operations as
per Board Resolution.
 Common Seal of the Company is to be
affixed on documents as per Articles of
Association or Board Resolution.
 Cheque favouring company should not be
credited to the personal account of the director.
Such cheques should not be paid in cash. These
should be credited to the account of company
only.


Hindu Undivided Family (HUF) : HUF is

neither a legal person nor a natural person. It is
not created by agreement_ It is not incorporated
under any Act. It is from a common ancestor
and membership is by birth or adoption.
 The eldest member of family is the Karta
and others are co parceners. Daughter can also
be Kerta.
 Seniormost member continues to be Karta
even when he/she lives outside India.
 Operational authority to operate the account
is with Karta
 Karts can appoint any other coparcener or
third party to conduct business of HUF and/or
operate the account.
 Co parcener can not stop payment of the
cheque unless he is authorized to operate the
account.
 Karta is personally liable.
 The liability of a co parcener is limited up to
his share in the firm. He is not liable
personally.
 HUF cannot be partner as per Supreme
Court Judgement.
Trusts :
 Trusts can be of two types – private trusts
where beneficiaries are certain specified
 individuals or groups and public trusts where
beneficiary is public at large.
 Private trusts are governed by Indian Trust
Act, 1882, public trusts are governed by Public
Trusts Act of the concerned state.
 The document creating a trust is called ‘trust
deed’. Public Trusts are registered with the
Charity Commissioner.
 The operation and other aspects of the bank
account are to be conducted as per the Trust
Deed. If trust deed is silent about operational
authority, all trustees have to operate the
account jointly.
 Stop- payment will be as per operational
authority. Revocation of stop payment as per
operational authority.
 Trustees can’t delegate their powers to an
outsider even by mutual consent.
 Loan to a trust Loan can be allowed
provided it is permitted by Trust Deed and it is
for the purposes of Trust.
 On the death of a trustee, the trust property
is passed on to the next trustee while in the
 event of death of sole trustee or last surviving
trustee, the court can appoint a trustee.
 Death or insolvency of a trustee does not
affect the trust property and the bank can pay
cheques issued by the deceased trustee prior to
his death.

Clubs and Societies

 For opening account of Clubs and Societies
bank will require Certificate of Registration,
Bye laws of the Society, and resolution of
Managing Committee or Executive Committee.
 Operational Authority will be as per
resolution of Managing Committee.
 Change in Operational authority as per
resolution of Managing Committee.
 Stop payment and revocation of stop
payment as per Operational Authority.
 Cheque signed by the secretary or treasurer
or president of society and presented after his
death can be paid if otherwise in order.
A secured loan requires you to provide the
lender with an asset that will be used as a
collateral for the loan. Whereas and unsecured
loan doesn't require you to provide an asset as
collateral in order to attain a loan. ... Secured
loans usually have a lower rate of interest when
compared to an unsecured loan.
In the secured loan category, you have to
mortgage any asset to avail a loan against it.
The loan is offered against the mortgaged
property. You can also refer to this type as
mortgage loans.

Define Pledge, Hypothecation and

Mortgage.

(1) Pledge is used when the lender (pledgee)

takes actual possession of assets (i.e.
certificates, goods ). Such securities or goods
are movable securities. In this case the pledgee
retains the possession of the goods until the
pledgor (i.e. borrower) repays the entire debt
amount. In case there is default by the
borrower, the pledgee has a right to sell the
goods in his possession and adjust its proceeds
towards the amount due (i.e. principal and
interest amount). Some examples of pledge are
Gold /Jewellery Loans, Advance against
goods,/stock, Advances against National
Saving Certificates etc.

(2) Hypothecation is used for creating charge

against the security of movable assets, but here
the possession of the security remains with the
borrower itself. Thus, in case of default by the
borrower, the lender (i.e. to whom the goods /
security has been hypothecated) will have to
first take possession of the security and then sell
the same. The best example of this type of
arrangement are Car Loans. In this case Car /
Vehicle remains with the borrower but the same
is hypothecated to the bank / financer. In case
the borrower, defaults, banks take possession of
the vehicle after giving notice and then sell the
same and credit the proceeds to the loan
account. Other examples of these hypothecation
are loans against stock and debtors.
[Sometimes, borrowers cheat the banker by
partly selling goods hypothecated to bank and
not keeping the desired amount of stock of
goods. In such cases, if bank feels that
borrower is trying to cheat, then it can convert
hypothecation to pledge i.e. it takes over
possession of the goods and keeps the same
under lock and key of the bank].

(3) Mortgage : is used for creating charge

against immovable property which includes
land, buildings or anything that is attached to
the earth or permanently fastened to anything
attached to the earth (However, it does not
include growing crops or grass as they can be
easily detached from the earth). The best
example when mortage is created is when
 someone takes a Housing Loan / Home Loan.
In this case house is mortgaged in favour of the
bank / financer but remains in possession of the
borrower, which he uses for himself or even
may give on rent.

Difference Between Pledge, Hypothecation

and Mortgage at a Glance:
Pledge Hypothecation Mortgage
Type of
Security
Movable Movable Immovable
Usually
Possession Remains
Remains withRemains
of thewith lender
security (pledgee) Borrower with
Borrower
Gold Loan,
Advance
against Car/Vehicle
Examples ofNSCs, Adv
Loans,Adv.again Housing
Loan whereagainst
used goods (alsost stock andLoans
given underdebtors
hypothecatio
n)
Pledge, Hypothecation and Mortgage Under
Indian Law

Pledge : Section 172 of the Indian Contract Act

defines pledge as "The bailment of goods as a
security for the payment of a debt or
performance of a promise" The bailor in this
case is called a Pawnor and the bailee is called
Pawnee

To create a valid pledge in the eyes of Law, the

three important points needs to be noted: (a)
Delivery of Possession: As in bailment, in
pledge too delivery of possession is required.
For example, in Revenue Authority vs
Sundarsanam Pictures, AIR 1968, it was held
NOT to be pledge because the film producer
borrowed a sum of money from a financier and
agreed to deliver the final prints of the film
when ready. Thus, there was no delivery of the
goods at the time of agreement; (b) Delivery is
in return of a loan or promise to perform
something. Therefore, if your friend gives you
his Motor-cycle to go to college, it is not pledge
but can be called simple bailment; (c) It should
be in pursuance of a contract : The delivery
must be done under a contract (oral or written).
However, it is not necessary that delivery and
loan take place at the same time. Delivery can
be made even after the loan is received.

Hypothecation: was not defined under Indian

Law for long time and was used more on the
basis of practice. However, now under the
Secruitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest
Act, hypothecation is defined as "a charge in or
upon any movable property, existing or future,
created by a borrower in favour of a secured
creditor without delivery of possession of the
movable property to such creditor, as a security
for financial assistance, and includes floating
charge and crystallization into fixed charge on
movable property". .

Mortgage : is defined in Section 58 of the

"Transfer of Property Act 1882". It is the
transfer of an interest in specific immovable
property for the purpose of securing payment of
money advanced by way of loan.

What is an Assignment?

There is another term (i.e. Assignment) which is

sometimes confused with above terms. An
assignment constitutes an action taken with a
contract. Assignment occurs when the owner of
a contract, known as the assignor, gives a
contract to another party, known as the
assignee. The assignee assumes all
responsibilities and benefits of the contract.
When it comes to loans, assignment can relate
to life insurance policies and mortgage contract
from one party to another. Mortgages and
other contracts sometimes contain provisions
limiting or stipulating conditions for
assignment.

One example of assignment is 'transfer by the

holder of a life insurance policy (the assignor)
of the benefits or proceeds of the policy to a
lender (the assignee), as a collateral for a
loan'. In such case in the event of the death of
the assignor, the assignee is paid first and the
balance (if any) is paid to the policy's
beneficiary. However, insurance policies
other than life insurance may not be used for
this purpose.

Lien is the right to retain property belonging to

another until a debt due from the owner of the
property to the possessor of the property is paid.
... A banker's lien is a general lien enjoyed by
the banker over any borrowing customer's
property that comes into his hands in the
ordinary course of business as banker.
A lien is the right of a creditor in possession of
goods, securities or any other assets belonging
to the debtor to retain them until the debt is
repaid, provided that there is no contract express
or implied, to the contrary. It is a right to retain
possession of specific goods or securities or
other movables of which the ownership vests in
some other person and the possession can be
retained till the owner discharges the debt or
obligation to the possessor.

It is a legal claim by one person on the property

of another as security for payment of a debt.

A legal claim or attachment against property as

security (right) for payment of an obligation.

In Halsbury's Laws of England ,it is stated:

"Lien is, in its primary sense ,a right in one man
to retain that which is in his possession
belonging to another until certain demands of
the person in possession are satisfied. In its
primary sense, it is given by law and not by
contract."

What is set-off?
The right of set off is also known as the right of
combination of accounts .A bank has a right to
set off a debt owing to a customer against a debt
due from him.

"A legal set-off is where there are mutual debts

between the plaintiff and defendant, or if either
party sue or be sued as executor or administrator
one debt may be set against the other "(S.13
Insolvent Debtors Relied Act 1728)
From a commercial standpoint, a right of set-off
is a form of security (right) for a lender. It is an
attractive security because its realization does
not involve the sale of an asset to a third party.

A set-off must be in the form of a cross claim

for a liquidated amount and it can be pleaded
only in respect of a liquidated claim. Both the
claim and the set-off must be mutual debts, due
from and to the same parties, under the same
right A claim by a person in a representative
capacity cannot be set off against a personal
claim. Even a claim against the estate of a
deceased customer cannot be set off against a
debt, which was due to the customer from his
banker, during the former's lifetime, whether the
accounts are with one or more offices of the
banker, it does not materially affect the position
in any way.
A banker's right of set off cannot be exercised
after the money in his hands has been validly
assigned or in any case after he has been
notified of the fact of an assignment. (Official
Liquidator ,Hanuman Bank Ltd. v. K.P.T. Nadar
and Others 26 Comp.Cas .81) Judgments
indicating certain essentials to the exercising of
the right of set off.

Credit card pros and cons

PROS CONS

You can make a large You can easily dig

purchase now and pay it yourself into debt if
off in smaller amounts you’re not careful
over time. about your spending.
PROS CONS

Carrying credit cards is The ease of using

more convenient (and credit cards can cause
safer) than carrying a wad you to overspend.
of cash, and credit cards
are more widely accepted
than personal checks.

With responsible use, you Missing payments or

can build your credit, maxing out a card can
which will be important sink your credit score
later on. quickly.

Many credit cards give Interest can make

you rewards, essentially even a small debt
giving you back 1% or become large over
more of the money you time.
spend.
 Interest payments and fees
Credit card companies make money in three
ways:
 Transaction fees charged to the merchant
every time you use your credit card.
 Interest payments when you don’t pay off
your debt in full.
 Fees, like late payment or annual fees.
Choosing a credit card
When you’re deciding which credit card to get,
ask yourself this question: Will I be paying
interest on my debts?
 If you pay your credit card balance in full
and on time each month: You won’t be
charged interest. In that case, it’s worth it to get
a credit card that earns rewards, assuming you
have the credit scores to qualify for one. (In
general, the better your credit scores, the better
the cards you’re eligible for.) Rewards cards
 give you points, cash or airline miles every time
you use them. The most generous rewards rates,
the best perks and the lowest interest rates are
available to those with excellent credit.
Nerd Tip:
Rewards-earning credit cards typically have
higher interest rates than other cards — high
enough to wipe out the value of the rewards you
earn if you’re carrying a balance month to
month.
 If you do carry a balance (in other words,
you don’t pay off your debt every
month): You’ll want to minimize your interest
payments, so you should pick a credit card that
has a low interest rate.
Your credit card is issued by a bank, such as
Bank of America®, Chase or Wells Fargo. The
bank determines your interest rate, fees and
rewards, so it’s important to find a bank that
offers a card you like. Transactions are
processed on a payment network, like Visa,
Mastercard or American Express. This network
 determines where the card is accepted.
Some card perks — like rental car insurance
or cell phone protection — may come courtesy
of the payment network rather than the issuing
bank.
Interest payments and fees
Credit card companies make money in three
ways:
 Transaction fees charged to the merchant
every time you use your credit card.
 Interest payments when you don’t pay off
your debt in full.
 Fees, like late payment or annual fees.
You don’t have to worry about that first
one. Transaction fees are levied on merchants,
not you. Instead, concern yourself with interest
payments and fees.
Credit cards charge a number of fees, from an
annual fee to cash advance fees to late payment
fees. Most cards won’t have an annual fee
unless they offer big rewards or are designed for
people with less-than-good credit, but make sure
to make at least the minimum monthly payment
on time, or you may be slapped with a late fee
and a higher interest rate — and you might even
see your credit score suffer.
If you have a rewards credit card, remember: If
you carry a balance, the interest on that balance
will eat up any rewards you earn. If you think
there’s a chance you won’t pay off your balance
every month, steer clear of rewards cards.

Understanding the costs

APR (Annual percentage rate) for purchases
This is the interest rate that will be charged on
anything you didn’t pay off the month before.
It’s charged on a daily basis — meaning that if
your APR is 15%, you don’t get charged 15%
once a year, but rather 0.0027% a day. Some
cards give you an introductory 0% interest
period of six months or longer, to get you in the
habit of using the card. Taking advantage of
these offers allows you to make a big purchase
and pay it off over time interest-free.
APR for balance transfers
If you have credit card debt, you can shift it
over to a new card, in what’s known as
a balance transfer. Some cards will let you move
your debt and not pay interest on that balance
for a period of time (often six to 12 months or
longer), but others will charge you the
same APR as regular purchases.
Most — but not all — cards also charge a one-
time balance transfer fee equal to a percentage
of the balance you’re moving. More on that fee
below.
APR for cash advances
If you take out a cash advance (that is, you use
your card to withdraw cash from an ATM or get
money from a bank teller), you’ll be charged
this interest rate on the amount you borrow.
Unlike regular purchases, where you have a
grace period to pay off your debt, you start
accumulating interest on cash advances the day
you take them.
Penalty APR
If you miss a payment, you may have to pay this
higher interest rate for up to six months.
‘How to avoid paying interest’
This section tells you your grace period, or how
long you have after your credit card statement
date to pay off your debt without accruing
interest.
Minimum interest charge
If you owe any interest, it will be at least this
amount. So if you carry a balance of $1 and
your interest rate is 12.99%, you’d normally be
charged $0.01, but the credit card company will
bump it up to, say, $0.50 anyway.
 Annual fee
Exactly what it sounds like. It’s a fee you pay
the credit card company to carry its product.
Most cards don’t have an annual fee, but they’re
common on cards that offer high rewards rates.
Cards for people with average or bad credit are
more likely to have a fee, as well.
Transaction fees
 Balance transfer fee: If you move debt
from one card to another, you’ll usually be
charged this fee by the card you moved it to.
Fees typically range from 3% to 5% of the
amount transferred. A few cards don’t charge a
transfer fee.
 Cash advance fee: If you take out a cash
advance, you’ll pay this fee on top of the
interest that begins accumulating immediately.
 Foreign transaction fee: If you use your
credit card overseas, you’ll be charged this fee
on every purchase made in a foreign
country. Foreign transaction fees are typically
about 3% of the purchase. Most cards aimed at
 travelers don’t charge this fee, and some issuers
(notably Capital One and Discover) don’t
charge it on any of their cards.
Penalty fees
 Late payment: If you don’t pay at least the
minimum amount due by the due date on your
credit card statement, you’ll have to pay this fee.
If you’re more than 30 days late, it could affect
your credit scores.
 Over-the-limit fee: If you go over your
credit limit, the issuer could still approve the
transaction but charge you this fee. However,
you have to opt in to over-limit coverage before
it can do so. Because of that, over-limit fees are
rare.
 Returned payment: If you try to pay your
credit card bill and it doesn’t work for some
reason (like the check bounces or the transfer
from your bank is declined), you’ll have to pay
this fee.
Rewards program details
If you have a rewards credit card, this portion
will spell out exactly how you earn and redeem
your rewards. Read this section
carefully. Many credit card rewards programs
are fantastic, giving you cash back or points you
can redeem for things like free travel. But others
aren’t all they make out to be — paying
minuscule rates or giving you rewards only for
crummy merchandise you don’t want or gift
cards you’ll never use.
If you’re just starting out
To qualify for the best credit cards, you need
good to excellent credit. As a result, high
rewards rates and low APRs are often out of
reach for young people just starting out, whether
they’re in the workforce or still in school. If
you’re new to credit, you’ll need to work on
building your credit first. Here are some options
for doing that:
1. Get a secured credit card
A secured card requires a cash deposit, usually
equal to your credit line. The deposit protects
the card issuer in case you don’t pay your bill.
Since the deposit reduces the risk to the issuer,
credit card companies are more willing to give
these cards to people with bad credit or no
credit. However, when you apply, you’ll still
need to show that you have income.
2. Get a student credit card
Student cards are specifically designed for
young people who have a thin credit file. A
warning: Simply being a college student is not
enough to qualify for a student card. If you’re
under 21, you’ll need to show on your
application that you have independent income.
Once you’re 21, you can report any income you
have access to, including your partner’s or an
allowance from parents.
3. Become an authorized user
An authorized user piggybacks on someone
else’s credit card account. You get a card with
your name on it that you can use for purchases.
You’re not legally on the hook for making the
payments, though; the primary cardholder is
responsible. Many issuers report authorized user
activity to the credit bureaus, which can help
your score.
4. Find a co-signer
A co-signer is someone who promises to pay
your debts if you don’t pay them. Usually it’s a
parent or friend. Some issuers allow co-signers,
some do not.
HOME LOAN
A sum of money borrowed from a financial
institution or bank to purchase a house. Home
loans consist of an adjustable or fixed interest
rate and payment terms.
Home Loans help to fulfill all housing finance
related needs. But to do so, they need certain
documents to be sure of the borrower. Also,
home loans are secured loans. As such, the
lenders need to have the property documents
before they approve the loan. Different lenders
have their own specific requirements, criteria
and documents required.
Here is a complete list of the documents
required for a home loan.
Checklist of Documents Required for Home
Loan
Here is a checklist of the documents required to
apply for a home loan.
1. Passport Size Photographs
2. Identity Proof: Passport / Driving
License / Voter ID / PAN Card / Aadhaar
Card.
3. Address Proof: Driving License /
Registered Rent Agreement / Electricity Bill
(up to 3 months old) / Passport.
4. Employment Appointment Letter:
5. Required if the current employment is
less than 1-year old.

6. Financial Documents:
Last 3 months salary slip.

6 month bank statement.

2 year Form 16.

7. Property Documents: Sale deed,
Khata, transfer of ownership.
8. Advance Processing Cheque: A
cancelled cheque for validation of bank
account.
9. Financial Documents:
a. For Salaried Individual: 3 month salary
slip, Form 16 and bank statement
b. For Self-Employed Individual: IT
returns for last 2 years along with
 computation of income tax for past 2 years
certified by a Chartered accountant
c. For Self-Employed Non-
Professionals: IT returns for last 3 years
along with computation of income tax for
past 2 years certified by a Chartered
accountant
10. Complete Home Loan Application form
duly filled.
List of Common Documents Required for a
Home Loan
 Complete Home Loan Application
Form with one passport size photograph.
 Photo Identity Proof: Passport / Driving
License / Voter ID / PAN
 Residence Address Proof: License /
Registered Rent Agreement / Utility Bill
 Residence Ownership Proof: Sale deed or
rental agreement
 Income Proof: salary slip, bank statement
and Form 16
 Job Continuity Proof: Appointment letter
at employment and validation letter from
HR
 Bank Statement: Past 6 months’ document
 Property Documents: Sale deed, Katha,
transfer of ownership.
 Advance Processing Cheque: A cancelled
cheque for validation of bank account.

 Financial Documents:
a. For Salaried Individual: 3 month salary
slip, Form 16 and bank statement
b. For Self-Employed Individual: IT
returns for last 2 years along with
computation of income tax for past 2 years
certified by a Chartered accountant
 c. For Self-Employed Non-
Professionals: IT returns for last 3 years
along with computation of income tax for
past 2 years certified by a Chartered
accountant
Documents Required for Salaried Individual
 Loan Form: Bank loan application form to
be filled with passport size photographs
affixed
 Address Proof: Leave and License /
Registered Rent Agreement / Utility Bill
(up to 3 months old), Passport
 Identity Proof: Passport / Driving License /
Voter ID / PAN
 Income Proof: 3 month pay slips, 2 years
Form 16, Copy of Income Tax PAN
 Bank Statement: 6 months bank statement
that shows salary from the employer and
any EMI paid for outstanding debt.
Documents Required for Self Employed–
Professionals
  Identity Proof: Passport / Driving License /
Voter ID / PAN.
 Address Proof: License / Registered Rent
Agreement / Utility Bill.
 Office Address Proof: Property
Documents, Utility Bill.
 Office Ownership Proof: Property
Documents, Utility Bill, Maintenance Bill.
 Business Existence Proof: 3 years old
Saral Copy, the Company Registration
license, Shop Establishment Act.
 Income Proof: Latest 3 years Income Tax
Returns including Computation of Income,
Profit & Loss Account, Audit Report,
Balance Sheet, etc.
 Bank Statement: Past 1 year bank
statement.
 1 passport size color photograph.
Documents Required for Home Loan Balance
Transfer
There are many reasons why people transfer
their home loan from one financial institute to
another. Most prominent reason is lower
interest rate which saves cost of borrowing.
You must identify the objective of transferring
the loan before actually doing it. The process of
home loan balance transfer is not much
different than applying for the home loan. That
is the reason why documentation part is very
important for transferring the home loan from
one financial institute to another. The process
not just includes the documentation but also the
validation of documents. The documents are r
validated by the bank or NBFC that you apply
to. One has to accept that the reliability of a
person for repayment is decided from the
documents that the person has to offer. The
documents of the applicant will describe if he /
she will able to repay the loan amount or not.
The prerequisite key documents for home loan
transfers are the following:
 Passport-size photographs
 Filled application form for loan transfer (of
the bank / NBFC)
 Latest three months' Salary Slips indicating
break up of Gross salary that is the Basic
Pay, House rent and Net Salary after
deductions, if any.
 Six months' bank statement, reflecting
salary credits updated within 15 days before
the loan application.
 Identity Proof (Any One): Pan Card,
Passport / Driving License / Voter's ID
card / employee identity card (as identity
proof and signature proof in case of
government employees).
 Proof of address: utility bill / voters ID /
Aadhar card.
 Proof of Age (Any One): 10th or 12th
Marks Cards / birth certificate / PAN Card /
Voters ID Card.
 If you are a self-employed professional or
businessperson, then instead of Points (3.)
 and (4.), you need to provide documents
proving the existence of your business (for
businesspersons) and academic
qualifications (for professionals) ; and
financial statements for both.
 Bank statements from wherein the home
loan EMIs were deducted amounting to last
12 months of the account.
 The Loan statement copy and complete set
of documents relating to the property that is
currently in possession of the present home
loan lender.

Purpose Documents
Proof of both identity 1. Valid Passport
and residence (any 1)
2. Voter ID Card
3. Aadhaar Card
4. Valid Driving
Licence
Proof of income 1. Last 3 months' Salary
Slips
2. Last 6 months' Bank
Statements, showing
salary credits
3. Latest Form-16 and
IT returns
Other documents 1. Employment
Contract / Appointment
Letter in case current
employment is less than
1 year old
2. Last 6 months' Bank
Statements showing
repayment of any
ongoing loans
 3. Passport size
photograph of all the
applicants / co-
applicants to be affixed
on the Application
Form and signed across
4. Cheque for
processing fee favoring
‘The New bank’
Documents for a 1. A letter on the letter
Balance Transfer head of the existing
Loan lender stating the list of
property documents
held by them
2. Latest outstanding
balance letter from your
existing financial
institution on their
letter head
3. Photocopy of the
property documents
(including Own
Contribution Proof)
Ability to reimburse the credit takes factors, for
example, age, capabilities, pay, and life
partner's salary, number of dependents,
resources, reserve funds history, liabilities,
dependability and persistence in occupation in
thought. The candidate is called as the
individual and the co-candidates can be
candidate's mate, guardians, or even real
youngsters. The co-candidate requires not be
co-proprietor of house, but rather co-proprietor
of property should be the co-candidate. In
Floating-rate of intrigue credits any adjustment
in the base rate will be directly affecting
financing cost of the Home Loan.
Additional SalariedSelf Employed
Documents for Loan
Takeover / Transfer
Loan statement (loan Yes Yes
track) and list of
property documents
(LOD) in possession of
existing lender
Last 12 months' Yes Yes
statement of bank
account from which
loan EMI is paid
Application Form SalariedSelf Employed
and KYC
Application Form with Yes Yes
photo and signed by
Primary Borrower and
Co-borrower(s)
Identity Proof of Yes Yes
Primary Borrower and
Co-borrower(s)
Residential AddressYes Yes
proof of Primary
Borrower and Co-
borrower(s)
Age Proof of Primary Yes Yes
Borrower and Co-
borrower(s)
Office address – Yes
ownership / lease / rent
agreement / utility bill
Income Proof SalariedSelf Employed
Last 3 years’ Form 16, Yes
last 6 months salary
slip, last 6 months’
bank account statement
showing salary credit
Last 3 years ITR (self Yes
and business), profit
and loss account,
balance sheets certified
/ audited by a CA. Last
12 months bank
account statement (self
and business)
Certificate and Proof Yes
of Business Existence
Business Profile Yes
Documents Required For Under Construction
Home Loan
 Age proof along with address proof.
 Income proof.
 Bank statements.
 Identity proof.
 Educational Qualification proof i.e. mark
sheets or certificates.
 Filled application form.

Documents required for senior citizens/

pensioners :
 1 passport size color photograph
 Photo Identity Proof: Passport / Driving
License / Voter ID / PAN
  Residence Address Proof: License /
Registered Rent Agreement / Utility Bill
 Age Proof: Pan Card or Passport
 Income Proof: Pension Returns Or Bank
Statement
Banks & financial institutions ask for numerous
documents because of following reasons:
1. To know the nationality & age of the
applicant. Age is important as home loan is
long term loan & the person should be at the
age of repayment till the loan is over.
2. Financial documents clearly state all the
records that you have. For example, if the
current loan’s EMI was not paid on time it
will be traceable from bank statement.
3. Credit score is easily verifiable from the
list of documents that you are supposed to
submit for loan transfer. If your credit score
is not as per the requirement of bank of
NBFC they will reject the application
 4. Monthly income can be determined
easily from the employment & business
documents. It is very important for bank /
financial institute to make sure that you are
eligible for the loan & you will able to
repay t on time.
PERSONAL LOAN
A personal loan is a type of unsecured loan and
helps you meet your current financial needs.
You don't usually need to pledge any security or
collateral while availing a personal loan and
your lender provides you with the flexibility to
use the funds as per your need.
A personal loan is a fixed amount of money
borrowed at a fix rate and repaid over a fixed
amount of time. You can get a personal
loan from a bank, credit union or online lender.
Personal loans can either be secured or
unsecured. A secured personal loan requires
some type of collateral

What is a personal loan?

Simply put, it is an unsecured loan taken by

individuals from a bank or a non-banking
financial company (NBFC) to meet their
personal needs. It is provided on the basis of key
criteria such as income level, credit and
employment history, repayment capacity, etc.

Unlike a home or a car loan, a personal loan is

not secured against any asset. As it is unsecured
and the borrower does not put up collateral like
gold or property to avail it, the lender, in case of
a default, cannot auction anything you own. The
interest rates on personal loans are higher than
those on home, car or gold loans because of the
greater perceived risk when sanctioning them.

However, like any other loan, defaulting on a

personal loan is not good as it would reflect in
your credit report and cause problems when you
apply for credit cards or other loans in future.

For what purposes can it be used?

It can be used for any personal financial need

and the bank will not monitor its use. It can be
utilised for renovating your home, marriage-
related expenses, a family vacation, your child's
education, purchasing latest electronic gadgets
or home appliances, meeting unexpected
medical expenses or any other emergencies.
Personal loans are also useful when it comes to
investing in business, fixing your car, down
payment of new house...etc.

Eligibility criteria

Although it varies from bank to bank, the

general criteria include your age, occupation,
income, capacity to repay the loan and place of
residence.

To avail of a personal loan, you must have a

regular income source, whether you are a
salaried individual, self-employed business
person or a professional. An individual's
eligibility is also affected by the company he is
employed with, his credit history, etc.

Maximum loan duration

It can be 1 to 5 years or 12 to 60 months.
Shorter or longer tenures may be allowed on a
case by case basis, but it is rare.

Disbursal of loan amount

Typically, it gets disbursed within 7 working

days of the loan application to the lender. Once
approved, you may either receive an account
payee cheque/draft equal to the loan amount or
get the money deposited automatically into your
savings account electronically.

How much can one borrow?

It usually depends on your income and varies

based on whether you are salaried or self-
employed. Usually, the banks restrict the loan
amount such that your EMI isn't more than 40-
50% of your monthly income.

Any existing loans that are being serviced by the

applicant are also considered when calculating
the personal loan amount. For the self
employed, the loan value is determined on the
basis of the profit earned as per the most recent
acknowledged profit/Loss statement, while
taking into account any additional liabilities
(such as current loans for business, etc.) that he
might have.

Is there a minimum loan amount?

Yes, though the exact amount varies from one
institution to another. Most lenders have set
their minimum personal loan principal amount
at Rs 30,000.
From which bank/financial institution should
one borrow?

It is good to compare the offers of various banks

before you settle on one. Some key factors to
consider when deciding on a loan provider
include interest rates, loan tenure, processing
fees, etc.

How do banks decide on the maximum loan

amount?
Although the loan sanctioning criteria may
differ from one bank to another, some key
factors determining the maximum loan amount
that can be sanctioned to you include your credit
score, current income level as well as liabilities.
A high credit score (closer to 900) means you
have serviced your previous loans and/or credit
card dues properly, leading the lenders to feel
that you are a safe borrower, leading to a higher
loan amount being sanctioned.

Your current income level and liabilities

(outstanding credit card dues, unpaid loans,
current EMIs, etc.) have a direct bearing on your
repayment capacity.
Therefore, if you are in a lower income bracket
or have a large amount of unpaid credit card
bills or outstanding loan EMI, you will be
sanctioned a lower personal loan amount than
those with a higher income or fewer financial
liabilities.

Should I always go for the lowest possible

EMI when choosing a loan provider?
Low EMI offers can typically result from a long
repayment term, a low interest rate, or a
combination of the two factors. Thus,
sometimes, you may end up paying more
interest to your lender if you choose low EMIs.
So use online tools like the personal loan EMI
calculator to find out your interest payout over
the loan tenure and your repayment capacity
before taking a call.
Rates
Being unsecured loans, personal loans have a
higher interest rate than those on secured 'home
and car' loans. At present, many leading banks
and NBFCs offer such loans at interest rates of
as low as 11.49%. However, the rate applicable
to a borrower is contingent on key factors,
including credit score, income level, loan
amount and tenure, previous relationship
(savings account, loans or credit cards) with the
lender, etc.
Extra charge payable

Yes. In addition to the interest payable on the

principal amount, there is a non-refundable
charge on applying for a personal loan. The
lender charges processing fees, usually 1-2% of
the loan principal, to take care of any paperwork
that needs to be processed as part of the
application process. The lender may waive this
charge if you have a long-term association with
him.

Fixed or floating interest rates

For a fixed rate personal loan, the EMIs remain

fixed. Floating rate means the EMIs keep
decreasing as it follows the reducing balance
method of calculating interest payout on a
personal loan. As per the new Marginal Cost of
Funds based Lending Rate (MCLR) rules,
floating rates may be changed either on a half-
yearly or annual basis.

Difference between reducing and flat interest

rate
As the name implies, in the former, the
borrower pays interest only on the outstanding
loan balance, i.e., the balance that remains
outstanding after getting reduced by the
principal repayment. In flat interest rate
scenario, the borrower pays interest on the entire
loan balance throughout the loan term. Thus, the
interest payable does not decrease even as the
borrower makes periodic EMI payments.
Can I apply jointly with my spouse?
Yes, you can apply for a personal loan either
yourself (singly) or together with a co-applicant
(jointly), who needs to be a family member like
your spouse or parents. Having a co-borrower
means your loan application will be processed
in a higher income bracket, making you eligible
for a larger loan amount. However, keep in
mind that if you or the co-applicant has a poor
credit history, the chances of success of your
loan application may be low.

CONSUMER LOAN
A consumer loan is when a person borrows
money from a lender, either unsecured or
secured. There are several types of consumer
loans and some of the most popular ones
include mortgages, refinances, home equity
lines of credit, credit cards, auto loans,
student loans, and personal loans.
What is a Consumer Loan?

A consumer loan is a loan given to consumers to

finance specific types of expenditures. In other
words, a consumer loan is any type of loan
made to a consumer by a creditor. The loan can
be secured (backed by the assets of the
borrower) or unsecured (not backed by the
assets of the borrower).
Types of Consumer Loans
 Mortgages: Used by consumers to finance

the purchase of a house

 Credit cards: Used by consumers to finance

everyday purchases
 Auto loans: Used by consumers to finance
the purchase of a vehicle
 Student loans: Used by consumers to
finance education
 Personal loans: Used by consumers for
personal purposes
For qualified borrowers, consumer loans serve a
multitude of purposes and are essential in
helping them finance their life.

Secured vs. Unsecured Consumer Loans

Secured consumer loans are loans that are
backed by collateral (assets that are used to
cover the loan in the event that the borrower
defaults). Secured loans generally grant the
borrower greater amounts of financing, a longer
repayment period, and a lower charged interest
rate. As the loan is backed by assets, the risk
faced by the lender is reduced. For example, in
the event that the borrower defaults, the lender
would be able to take possession of
collateralized assets and liquidate them to repay
the outstanding amount.
Unsecured consumer loans are loans that are
not backed by collateral. Unsecured loans
generally grant the borrower a limited amount
of financing, a shorter repayment period, and a
higher charged interest rate. As the loan is not
backed by assets, the lender faces increased risk.
For example, in the case of borrower default, the
lender may not be able to recover the
outstanding loan amount.
Categories of Loans
1. Open-end loan
An open-end consumer loan, also known as
revolving credit, is a loan in that the borrower
can use for any type of purchases but must pay
back a minimum amount of the loan, plus
interest, before a specified date. Open-end loans
are generally unsecured. If a consumer is unable
to pay off the loan in full before the specified
date, interest is charged.
A credit card is an example of an open-end
consumer loan. The consumer is able to make
purchases on a credit card but must pay the
outstanding amount when it becomes due. If the
consumer fails to settle the outstanding amount
on the credit card, he/she would be charged
interest until the amount is paid off.
2. Closed-end loan
A closed-end consumer loan, also known as
installment credit, is used to finance specific
purchases. In closed-end loans, the consumer
makes equal monthly payments over a period of
time. Such loans are generally secured. If a
consumer is unable to pay the installment
amounts, the lender can seize the assets that
were used as collateral.
SOCIAL BANKING
MICROFINANCE
Microfinance is a banking service provided to
unemployed or low-income individuals or
groups who otherwise would have no other
access to financial services. It allows people to
take on reasonable small business loans safely,
and in a manner that is consistent with ethical
lending practices.
Microfinance—also called microcredit—is a
way to provide small business owners and
entrepreneur’s access to capital. ...
Essentially, microfinance is providing loans,
credit, access to savings accounts—even
insurance policies and money transfers––to the
small business owner and entrepreneur.
Various types of institutions
offer microfinance: credit unions, commercial
banks, NGOs (Non-governmental
Organizations), cooperatives, and sectors of
government banks.
Benefits of Microfinance in Developing
Countries

Microfinance is the practice of extending a

small loan or other form of credit, savings,
checking, or insurance products to individuals
who do not have access to this type of capital.
This allows individuals who are living in
poverty to work on becoming financially
independent so they can work their way into
better living conditions.
Since a majority of the world is forced to
survive on the equivalent of just $2 per day,
microfinance becomes a solution that can help
more people be able to improve their living
conditions. These are the benefits of
microfinance in developing countries and why
everyone should consider getting involved in
this form of lending.
1. It allows people to better provide for their
families.
Microfinance allows for an added level of
resiliency in the developing world. Even when
households are able to work their way out of
poverty, it often takes just one adverse event to
send them right back into it. It’s often a health
care issue that causes a return to poverty. By
allowing entrepreneurs to become more resilient
through their own efforts at their own business,
it gives them the opportunity to make it through
times of economic difficulty.
Most of the households that take advantage of
the microfinance offer that are available in
developing countries live in what would be
considered “abject poverty.” This is defined as
living on $1.25 per day or less – though some
definitions extend this amount to $2 per day or
more. About 80% of that amount goes to the
purchase or creation of food resources.
By offering microfinance products that can be
repaid with that remaining 20%, more
households have the opportunity to expand their
current opportunities so that more income
accumulation may occur.
2. It gives people access to credit.
By extending microfinance opportunities,
people have access to small amounts of credit,
which can then stop poverty at a rapid pace.
3. It serves those who are often overlooked in
society.
In many developing nations, the primary
recipient of microloans tends to be women. Up
to 95% of some loan products are extended by
microfinance institutions are given to women.
Those with disabilities, those who are
unemployed, and even those who simply beg to
meet their basic needs are also recipients of
microfinance products that can help them take
control of their own lives.
Women are key figures in leadership roles in
business, even in the developed world. Catalyst
has reported that companies with female board
directors are able to obtain returns that are up to
66% better in returns on invested capital and
42% better in terms of sales returns than
companies with male board members only.
Women also develop others more frequently
when it comes to entrepreneurial roles. This
comes from coaching, feedback, or investments.
Even in the developed world, women helping
women is an economic force that poverty can’t
stop.
4. It offers a better overall loan repayment
rate than traditional banking products.
When people are empowered, they are more
likely to avoid defaulting on a loan. Women are
also statistically more likely to repay a loan than
men are which is another reason why women
are targeted in the microfinance world. There’s
also the fact that for many who receive a
microloan, it is their only real chance to get
themselves out of poverty, so they’re not going
to mess things up.
Zenger Folk man published a survey regarding
ratings of high integrity and honesty in
leadership roles that was separated by gender.
The mean percentile of women displaying these
traits was 55%, while for men, it was just 48%.
In business, the bottom line is this: integrity
matters. Microfinance institutions have
recognized this and approached women because
of this.
5. It provides families with an opportunity to
provide an education to their children.
Children who are living in poverty are more
likely to have missed school days or to not even
be enrolled in school at all. This is because the
majority of families who live in poverty are
working in the agricultural sector. The families
need the children to be working and productive
so their financial needs can be met. By receiving
micro financing products, there is less of a
threat of going without funding, and that means
more opportunities for children to stay in
school.
This is especially important for families with
girls. When girls receive just 8 years of a formal
education, they are four times less likely to
become married young. They are less likely to
have a teen pregnancy. In return, this makes
girls more likely to finish schooling and then
either obtain a fair-paying job or go onto a
further educational opportunity.
6. It creates the possibility of future
investments.
The problem with poverty is that it is a cycle
that perpetuates itself. When there is a lack of
money, there is a lack of food. When there is a
lack of clean water, there is a lack of sanitary
living conditions. When people are suffering
from malnutrition, they are less likely to work.
A lack of sanitation creates the potential of
illness that prevents working days.
Microfinance changes this by making more
money available. When basic needs are met,
families can then invest into better wells, better
sanitation, and afford the time it may take to
access the health care they need.
7. It is a sustainable process.
How much risk is there with a $100 loan? Some
investors might pay that for a decent dinner
somewhere. Yet $100 could be enough for an
entrepreneur in a developing country to pull
themselves out of poverty. This small level of
working capital is sustainable because it’s
essentially a forgettable amount.
If there is a default on that money, the interest
and high repayment rates of other microloans
will make up for it. Then repayments are
reinvested into communities so that the benefits
of microfinance can be continually enhanced.
Each repayment becomes the foundation of
another potential loan.
This is why many microfinance products have
relatively high interest rates. Some institutions
may charge the equivalent of a 20% APR, but
others have interest rates which exceed 800%.
Although interest is high, recipients are invested
into making these products work because
virtually all institutions put repayments back
into new loans that target the most vulnerable
households in the developing world.
8. It can create real jobs.
Microfinance is also able to let entrepreneurs in
developing countries be able to create new
employment opportunities for others. With more
people able to work and earn an income, the rest
of the local economy also benefits because there
are more revenues available to move through
local businesses and service providers.
9. It encourages people to save.
Microloans are an important component of
microfinance, but so is saving money. When
people have their basic needs met, the natural
inclination is for them to save the leftover
earnings for a future emergency. This creates
the potential for more investments and
ultimately even more income for those who are
in the developing world.
10. It reduces stress.
There is a valid argument to be made that some
microloans go to cover household expenses
instead of business needs. Some are using these
loans to pay bills or purchase food. It’s true. Yet
without this product available, there wouldn’t be
an ability to pay bills or purchase food. So even
though it may not always be used for business
purposes, it still serves a purpose by reducing
stress.
11. It allows people to feel like they matter.
The feeling of receiving a credit product for the
first time cannot be ignored. It’s a feeling like
you’ve made it. That you really are somebody
because you’ve been trusted with credit. This
feeling applies to everyone, even in the
developed world. When a person feels like they
matter, it changes who they are at a core level.
Instead of focusing on how they can just
survive, then begin to look for ways to thrive.
12. It offers significant economic gains even if
income levels remain the same.
The gains from participation in a microfinance
program including access to better nutrition,
higher levels of consumption, and consumption
smoothing. There is also an unmeasurable effect
which occurs when women are empowered to
do something in their society when they might
not normally be allowed to do so. As spending
occurs, these benefits also extend outward to
those who may not be participating in the
program so that the entire community benefits.

Typical microcredit products look like this (the

numbers are only hypothetical):

Product Purpose Terms Interest

rate

Income Income 50 weeks 12.5%

Generation generation, asset loan paid (flat) 24%
Loan (IGL) development weekly (effective)
Mid-Term Same as IGL, 50 weeks 12.5%
Loan available at loan paid (flat) 24%
(MTL) middle (week weekly (effective)
25) of IGL
Emergency All emergencies 20 weeks 0% Interest
Loan (EL) such as health, loan free
funerals,
hospitalization
Individual Income 1-2 years 11% (flat)
Loan (IL) generation, asset loan 23%
development repaid (effective)
monthly

In the microfinance sector there´s other services

expanding as well. The poor need, like all of us,
a secure place to save their money and access to
insurance for their homes, businesses and
health. Microfinance institutions are now
innovating new products to help meet these
needs, empowering the world’s poor to improve
their own lives. Products common used in the
microfinance sector today is:
 Micro savings – A possibility to save
money without any minimum balance. Allows
people to retain money for future use or for
unexepected costs. In SHGs the members save
small amounts of money, as little as a few
rupees a month in a group fund. Members may
borrow from the group fund for a variety of
purposes ranging from household emergencies
to school fees. As SHGs prove capable of
managing their funds well, they may borrow
from a local bank to invest in small business or
farm activities. Banks typically lend up to four
rupees for every rupee in the group fund;
 Micro insurance – Gives the entrepreneurs
the chance to focus more on their core business
which drastically reduces the risk affecting their
property, health or working possibilities. The is
different types of insurance services like life
insurance, property insurance, health insurance
and disability insurance. The spectrum of
services in this sphere is constantly expanded, as
schemes and terms of providing insurance
 services are determined by each company
individually;
 Micro leasing – For entrepreneurs or small
businesses who can´t afford buy at full cost they
can instead lease equipment, agricultural
machinery or vehicles. Often no limitations of
minimum cost of the leased object;
 Money transfer – A service for transferring
money, mainly overseas to family or friends.
Money transfers without opening current
accounts are performed by a number of
commercial banks through international money
transfer systems such as Western Union, Money
Gram, and Anelik. On the surface they may
seem like small money transfers, but when one
considers that such transactions take place
millions of times around the world each week,
the numbers start to become impressive.
According to the World Bank, the annual global
market for remittances – money transferred
home from migrant workers – is around 167
billion US dollars. The estimated total is closer
to 230 billion dollars if one counts unregulated
transactions. Remittances are also an important
source of income for many developing countries
including India, China and Mexico, all of which
receive over 20 billion dollars each year in
remittances from abroad.
Credit Delivery Methodologies used by
Microfinance Institutions

MFI’s use two basic methods in delivering

financial services to their clients.
These are:
(!) Group Method and
(2) Individual method
Group Method
This is one of the most common methodologies
for providing micro-finance. Group method
primarily involves a group of individuals, which
becomes the basic unit of operation for the
MFIs. As we have discussed earlier, MFIs have
to provide collateral free loans, group
methodologies help in creating social collateral
(peer pressure) that can effectively substitute
physical collateral. Group becomes a basic unit
with which MFIs deal. The advantage of group
methodology is that
• Groups are trained to own joint responsibility
for loans that are taken by individuals in the
group.
• Groups ensure repayments from all individuals
in that group and incase of a default
• Groups functions as the forum where the credit
discipline and other related issues are discussed.
• Group may have to jointly own the
responsibility of defaults and pay on behalf of
defaulting client.
• Group also help credit appraisal and provide
opinion on creditworthiness of each individual
in the group.

• Groups methodology also helps in controlling

cost
This ensures that even without taking any
physical collateral, the MFI is able to manage its
credit risk (loan related risk).
MFIs actually deliver the financial service at the
client’s location which could be a village in
rural areas or a colony/slum in urban area.
Having a group helps the MFIs in getting all
clients at one spot rather than visiting each
individual’s house. This helps the MFI in
increasing the efficiency of staff and controlling
the cost. Group methodology creates a forum
where individuals come and discuss, can
provide opinion, and exert social pressure.
The advantage of Group methodology can easily
be appreciated by the fact if a MFI employee
has to visit each individual house in isolation, it
would be very difficult. Also in the absence of a
group, if a client refuses to pay there is no
forum where such a case can be discussed or
there is no method through which the MFI can
exert pressure on the client.
Group methodology is also important because in
case of larger loan defaults a financial
institutions can take recourse o legal action but
in small loans legal recourse is not an
economically sound option. An MFI who may
have an outstanding or Rs 3,000 at default
cannot apply legal pressure as the cost of
recovery through that method can be higher than
the amount to be recovered itself.
Moreover, the clients that the MFIs are dealing
with are generally poor and may face genuine
problems at times. Rather than taking an
aggressive/legal approach, which such
vulnerable clients it is always better to have
more constructive and collective approach,
which is provided by the Groups.
Due to the various advantages, as indicated
above provided by groups, this methodology is
widely accepted and used in micro-finance
across the world.
Self-help Group and Joint Liability Groups
(Grameen model and its variants) are two
common credit delivery models in India.

Self –Help Groups (SHGs)

Self-help Group concept has its origin in India.
SHGs are now considered to be very important
bodies in rural development and are therefore
found in almost all parts of the country and their
number is still rapidly growing. SHGs are
formed by Non-Government Organisations as
well as Government agencies and are used as
channels for various development programmes.
A Self-Help Group is an association of
generally up to 20 members (not exceeding 20
members), preferably from the same socio-
economic background. SHGs are facilitated by
Government agencies or NGOs for members to
come together for discussing and solving their
common problems either financial or social
through mutual help. An SHG can be all-women
group, all-men group, or even a mixed Group.
However, it has been the experience that
women’s groups perform better in all the
important activities of SHGs. Mixed group is
not preferred in many of the places, due to the
presence of conflicting interests.
Some of the distinct features of SHGs are;
(i) Recognized by government: SHGs are well
recognized and accepted by government, SHGs
can open bank accounts in the name of SHG.
They can also receive government grants and
funds for development activities.
(ii) SHGs are social intermediaries: SHGs do
not restrict their functions only to financial
transactions. SHGs are often involved in many
social activities. There are example where SHGs
have taken up social issues and fought against
social evils like alcoholism, violence, against
women, dowry, getting into village politics and
being elected as Sarpanch.
(iii) Books of accounts: SHGs maintain their
own books of accounts. These are simple books
to keep records of their savings, loans income
and expenditures. Strong SHGs also make their
Balance sheets and Income statements.
(iv) Have office bearers: SHGs gave a structure
where there is a Group President, Secretary and
Treasure. They are elected by the group.
(v) SHGs are more autonomous as they decide
their own rules and regulations.
(vi) SHGs mobilize thrift and rotate it internally.
(i.e use resources optimally)
(vii) SHGs can hold bank account and can also
borrow from banks and other financial
institutions.
We see that SHGs are groups, which are more
autonomous. While they are involved in
financial transactions, their role is not just
restricted to it. SHGs are also involved in
various social issues.
As more SHGs are formed they have started
federating themselves into clusters and clusters
in turn as SHG Federations. The Federations are
able to channelise funds to the SHGs and also
help in improving the managing and financial
skills of SHGs.
Joint Liability Group – Grameen Model
Grameen model is based on the concept of joint
liability. It is the brainchild of Prof..
Muhammad Yunus, founder of Grameen Bank
in Bangladesh. Grameen model is the most
accepted and prevalent micro-finance delivery
model in the world today. Many MFIs have
accepted the model as it has high focus on
standardization and discipline
Grameen model, as mentioned, is a joint
liability group model. Here five-member groups
are formed and eight such groups form a Center.
Hence, in a full-capacity Center there are 40
members (8 x 5). However, over the years
people have experimented with Centers of
different sizes and now there are variations of 5-
8 groups within a Center. Center is the
operational unit for the MFI, which means that
MFI deals with a Center as a whole.
Meetings also take place only at the Central
level and individual groups do not meet. Group
meetings take place only in front of the Field
staff of the MFI. A Grameen model is focused
on financial transactions and other social issues
are generally not discussed. The Group and
Center are Joint liability Groups, which means
that all members are jointly responsible
(‘liable’) for the repayment. MFI recovers full
money from Center, if any member has
defaulted: the group members have to pool in
money to repay to the MFI. If Group members
are unable to do it, Center as whole has to
contribute and share the responsibility.
Some other features of Grammen Model are:
(i) The group meeting take place every week
(ii) Interest rate are charged on flat basis
(iii) MFI staff conducts the meeting
(iv) All transactions take place only in Center
meetings
Grameen model is focused on providing
financial services to the clients and hence there
is an emphasis on standardization and
discipline. The model suggests weekly meeting
for frequent interaction with the clients to
reduce credit risk. The meetings are conducted
for carrying out the financial transactions only.
The meetings are conducted systematically in a
short-time and other social issues are not
discussed. Flat interest is charged again for
making the system standardized. In flat rate
system installment size of repayment remains
small for all weeks and hence is convenient and
easier to explain. Also, it is easy to break the
loan installment into the principal and interest
component.
We see that the SHG and Grameen model have
originated with two different approaches. SHG
model has been developed with holistic view of
development and empowerment of society
where financial transactions are only one part of
it. While Grameen model is specifically focused
on providing financial services to the low-
income clients. A broad comparison of the two
models is presented in the Table 1.
Joint Liability Groups (JLG)
Grameen model is a particular form of joint
liability Group but in India there are other forms
of Joint liability Groups as well. MFIs,
particularly in urban areas, form JLGs of five-
members. These are group of individuals
coming together to borrow from the financial
institution. They share responsibility
(“liability”) and stand as guarantee for each
other. There is a Group Leader in such JLGs,
many MFIs prefer such group in urban business
areas. Such JLGs do not hold periodic meetings.
Typically members are shopkeepers from same
locality. These forms of JLGs are somewhere
between Group and Individual lending methods.
While lending in such JLGs is to individual
members small JLGs still provide some sort of
comfort to the MFIs. Also collection can be
done from a single point, generally from the
Group leader rather than going to each
individual. As in urban areas shopkeepers do not
have time to hold meeting, these JLGs do not
meet.
Individual Method
So far we have discussed the Group based
lending method. However MFIs are also
increasingly providing loans to individuals. In
Individual lending method, MFIs provide loans
to an individual based on his/her own personal
credit worthiness. Individual lending is more
prevalent with clients who generally need bigger
size loans and have the capacity to produce
guarantee and generate enough comfort to the
MFI. MFIs generally base their decision on
personal knowledge of the client, his/her
reputation among peers and society, client’s
income sources and business position. MFIs
also ask for individual guarantors or take post-
dated cheques from clients.
Individual guarantors come from friends or
relatives well known to the borrower and who
are ready to take liability of repaying the loan,
should the borrower fail to do so. If the loan is
significantly larger, then MFIs may also take
some collateral security.