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Chapter 4 Loans and Advances Title- Elements of banking and insurance, Author-jyotsna sethi and nishwan Bhatia, Publications-

PHI Learning and private limited Pg no.68-70 The primary function of a bank is that of a broker and a dealer in societys money. Banks mobilize a large fraction of the liquid savings of the nation and allocate them successfully and productively to those who need it, such as, industry, agriculture and households. The major portion of banks funds is employed by way of loans and advances from wherein banks earn interest, discounts and conversion fees. Title- Introduction to Banking, Author- Vijayaragavan Iyengar, Publication- Excel Books, pg no 382Efficient management of loans and advances portfolio has assumed greater significance as it is the largest asset of the bank having direct impact on its profitability. In the wake of the continued tightening of norms of income recognition, asset classification and provisioning, increased competition and emergence of new types of risks in the financial sector, it has become imperative that the credit functions are strengthened; RBI has also been emphasizing banks to evolve suitable guidelines for effective management and control of credit risk. With a view to ensuring a healthy loan portfolio, nationalized (public sector) bank have taken various steps to bring their policies and procedures in line with changing scenario which also aim at effective management and dispersal of credit risk, strengthening of pre-sanction appraisal and post sanction monitoring systems. Simultaneously steps are being initiated by the banks to strengthen their organizational set-up by opening specialized branches to meet the credit requirements of specific types of borrowers, imparting intensive credit management training to staff and deployment of the trained staff at branches / offices having potential for credit growth. Banks have laid down detailed guidelines to be followed while considering credit proposals, some of the important ones. All loans facilities are to be considered by the sanctioning authority after obtaining loan application(s) from the borrower(s) and complication of Confidential Report(s) on him/them and the guarantor(s). The borrowers should have the desired background, experience/expertise to run their business successfully. The project for which the finance is granted should be technically feasible and economically / commercially viable i.e. it should be able to generate enough surpluses so as to service the debts within a reasonable period of time. The cost of the project and means of financing the same should be properly assessed and tied up. Both under financing and over financing can have an adverse impact on the successful implementation of the project.

Borrowers should be financially sound, enjoy good market reputation and must have their stake in the business i.e., they should possess adequate liquid resources to contribute to the margin requirements. Loans should be sanctioned by the competent sanctioning authority as per the delegated loaning powers and should be disbursed only after execution of all the required documents. Projects financed must be closely monitored during implementation stage to avoid time and cost overruns and thereafter till the adjustment of the banks loan. Banks extend loan facilities by way of fund-based facilities and/or non fund based facilities. The fundbased facilities are usually allowed by way of term loans, cash credit, bills discounted/ purchased, demand loans, overdrafts, etc. Further, the banks also provide non fund-based facilities by way of issuance of inland and foreign letters of credit, issuance of guarantees, deferred payments guarantees, bills acceptance facility under IDBI Rediscounting Scheme etc. The usual types of facilities sanctioned by banks to the borrowers, are also other aspects like project appraisal, post-sanction follow up, management of NPAs, documentation, limitation etc. are discussed individually. While granting loans and advances banks follow the principles of lending. These are principles of sound lending, principle of liquidity, principle of safety and security, principle of profitability, principle of purpose, principle of diversification of risks and principle of social responsibility

PRINCIPLES OF SOUND LENDING Title- Elements of banking and insurance, Author-jyotsna sethi and nishwan Bhatia, Publications- PHI Learning and private limited Pg no.68-70 The business of lending carries certain inherent risks and banks can afford to take only calculated risks as they deal in other peoples money. Another important facet of bank operations is the need to have ready cash as a bank is under an obligation to return the customers money whenever it is demanded. Hence, the nature of bank functions is such that it requires a very prudent and diligent handling of bank funds. It is advisable that the following general principles of sound lending should be followed by a banker at a time of granting advances. PRINCIPLE OF LIQUIDITY As already observed banks accept customers money a substantial part of which is repayable on demand. Liquidity implies the ability to produce cash on demand and the banker must be able to meet these liabilities whenever they are demanded. While it is true that all businesses have to devote considerable attention to liquidity management, but for a banker it can affect its credit and for a banker, credit is the very foundation of his business. So a banker must ensure that money he invests or lends should be repaid in the stipulated period, so that his obligation to pay his

depositors is not affected. Liquidity also implies shiftability without loss. If the security accepted is readily shiftable, e.g., discounting of first class bills which can be rediscounted with the RBI in case of need, then the banker can obtain funds easily. On the other hand, if security is in the form of land, then such security can be converted into cash only after an interval. PRINCIPLE OF SAFETY AND SECURITY Bankers loan funds which are entrusted to him. Safety of funds means that the borrower repays the loan along with interest as per the agreement. To ensure safety and security, the banker must take into account (i) the capacity of the borrower to pay and (ii) willingness of the borrower to repay. Capacity depends upon the financial strength of the borrower, his tangible assets and success of his business. Willingness depends upon the honesty, integrity and reputation of the borrower. In other words, both the tangible worth of the security offered as well as the creditworthiness of the borrower should be carefully analyzed before granting an advance. PRINCIPLE OF PROFITABILITY Banks are essentially commercial ventures and as such they have to ensure that their lending operations are sufficiently profitable to cover their cost of funds, cost of interest and risk cost and leave sufficient income to allow for full prudential provisioning, allocation to capital and reserves for expansion, growth and for maintaining its competitive viability. Though banks are subjected to numerous regulations like priority sector lending yet they cannot afford to sacrifice profitability for social objectives. They have to attempt a fine balance between the two. PRINCIPLE OF PURPOSE At the time of granting an advance the banker must enquire about the purpose of the loan. If it is for speculative or unproductive purposes, it may prove to be a burden on cash generation and repayment capacity of the borrower. On the other hand, it can be reasonably anticipated that loans meant for productive purposes help generate incremental income that results in prompt repayment of the loan. PRINCIPLE OF DIVERSIFICATION OF RISKS The old maxim do not keep all the eggs in one basket is very apt as far as the bankers portfolio of loans and advances is concerned. A prudent banker should always try and spread risk by granting loans to borrowers from different trades, industries, sectors and regions, so that risks arising from change in government policies, natural calamities or technological breakthroughs and so forth do not put his position in jeopardy. PRINCIPLE OF SOCIAL RESPONSIBILITY At the time of elevation of a loan project, bankers should not put an overdue emphasis on the size of the borrower and the security that he is offering. The technical competency of the borrower and the economic viability of his project should also be considered. The priority sector guidelines have also to be followed by the bankers, if they want to contribute in the process of

economic development by helping more and more entrepreneurs to run successful ventures. The principle of social responsibility does not, however, mean that adequate attention should not be paid to other principles. In conclusion, it is pertinent to mention that none of the principles should be considered in isolation. While evaluating a loan proposal, a judicious balance of the cardinal principles of sound lending are called for. This has become more imperative after 1991. Before liberalization, banking business did not face much competition. As it was in a few hands, the policy environment was characterized by close regulation and control and profitability was not the dominant criteria on which the banks were supposed to function. But now the commercial principles of viability, efficiency, prudence and profitability are receiving as much attention as social banking.

Diagram

CASH ISSUANCE OF OVERDRAFT DISCOUNTIN DEFERED LOANS CREDIT BILLS NON-FEE BANK FEE CREDIT AND GUARANTEES ACCEPTANCE INLAND GBASED PAYMENT OFS BILLS BASED GURANTEES FOREIGN LC ,ETC. SERVICES SERVICES

Loans and Advances from pdf chaptr 4.1 Lending of funds to traders, businessmen and industrial enterprises is one of the important activities of nationalized banks. The major part of the deposits received by banks is lent out, and a large part of their income is earned from interest on such lending. There is a considerable difference between the rate of interest which the nationalized bank grants on deposits, and the rate they charge on loans and advances. It is this difference which constitutes the main source of bank earnings. Operation and expansion of business and commercial activities depend a great deal on the availability of loans/advances from commercial banks. In this lesson, you will learn about the procedure of getting loans and advance, cash credits, overdrafts, etc from the nationalized banks. Meaning of Loans and Advances The term loan refers to the amount borrowed by one person from another. The amount is in the nature of loan and refers to the sum paid to the borrower. Thus from the view point of borrower, it is borrowing and from the view point of bank, it is lending. Loan may be regarded as credit granted where the money is disbursed and its recovery is made on a later date. It is a debt for the borrower. While granting loans, credit is given for a definite purpose and for a predetermined period. Interest is charged on the loan at agreed rate and intervals of payment. Advance on the other hand, is a credit facility granted by the bank. Banks grant advances largely for short-term purposes, such as purchase of goods traded in and meeting other short-term trading liabilities. There is a sense of debt in loan, whereas an advance is a facility being availed of by the borrower. However, like loans, advances are also to be repaid. Thus a credit facility- repayable in installments over a period is termed as loan while a credit facility repayable within one year may be known as advances. However, in the present lesson these two terms are used interchangeably. Utility of Loans and Advances Loans and advances granted by commercial banks are highly beneficial to individuals, firms, companies and industrial concerns. The growth and diversification of business activities are effected to a large extent through bank financing. Loans and advances granted by banks help in meeting short-term and long term financial needs of business enterprises. We can discuss the role played by banks in the business world by way of loans and advances as follows:(a) Loans and advances can be arranged from banks in keeping with the flexibility in business operations. Traders may borrow money for day to day financial needs availing of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as loan may be repaid within a short period to suit the convenience of the borrower. Thus business may be run efficiently with borrowed funds from banks for financing its working capital requirements. (b) Loans and advances are utilized for making payment of current liabilities, wage and salaries of employees, and also the tax liability of business.

(c) Loans and advances from banks are found to be economical for traders and businessmen, because banks charge a reasonable rate of interest on such loans/advances. For loans from money lenders, the rate of interest charged is very high. The interest charged by commercial banks is regulated by the Reserve Bank of India. (d) Banks generally do not interfere with the use, management and control of the borrowed money. But it takes care to ensure that the money lent is used only for business purposes. (e) Bank loans and advances are found to be convenient as far as its repayment is concerned. This facilitates planning for future and timely repayment of loans. Otherwise business activities would have come to a halt. (f) Loans and advances by banks generally carry element of secrecy with it. Banks are dutybound to maintain secrecy of their transactions with the customers. This enhances peoples faith in the banking system. Borrowing Rate and Lending Rate People make their funds available to the banks by depositing their savings in various types of accounts. In other words, bank funds mainly consist of deposits from the public, though banks may also borrow money from other institutions and the Reserve Bank of India. Banks thus mobilizes funds through its deposits. On public deposits the banks pay interest and the rates of interest vary according to the type of deposit. The borrowing rate refers to the rate of interest paid by a bank on its deposits. The rates which the banks allow depend upon the nature of deposit account and the period for which the deposit is made with the bank. No interest is generally paid on current account deposits. The rate is relatively lower on savings account deposits. Higher rates ranging from 6% to 12% per annum are paid on Fixed deposit accounts according to the period of deposit. Banks also borrow from other institutions as well as from the Reserve Bank of India. When the Reserve Bank of India lends money to commercial banks, the rate of interest it charges for lending is known as Bank Rate. The rate at which commercial banks make funds available to people is known as Lending-rate. The lending rates also vary depending upon the nature of loans and advances. The rates also vary according to the purpose in view. For example if the loan is sanctioned for the purpose of activities for the development of backward areas, the rate of interest is relatively lower as against loans and advances for commercial/business purposes. Similarly for smaller amounts of loan the rate of interest is higher as compared to larger amounts. Again lending rates for consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators, etc. are relatively higher than for commercial borrowings. However, the Reserve Bank of India from time to time announces changes in the interest-rate structure to regulate the lending of funds by banks. Different rates of interest are prescribed for various categories of advances, such as advances to agriculture, small scale industries, road transport, etc. Graded rates of interest are prescribed for backward areas. Lower rate is normally charged from agencies selling food-grains at fixed price through Govt. approved outlets. Lastly, lower rate of interest is charged for loans granted to persons belonging to weaker sections of the society.

OVERDRAFTS Introduction to Banking, Author- Vijayaragavan Iyengar, PublicationExcel Books, pg no 383 All overdrafts accounts are treated as current accounts. Normally, overdrafts are allowed against the banks own deposits, government securities, approved shares and/or debentures of companies, life insurance policies, government supply bills, cash incentive and duty drawbacks, personal security, etc. The excess amount drawn by him is deemed as an advance taken from the bank. Interest on the exact amount overdrawn by the account holder is charged for the period of actual utilization. Overdraft facility is granted by a bank on an application made by the borrower. He is also required to sign a promissory note. Therefore, the customer is allowed the amount, up to the sanctioned limit of overdraft as and when he needs it. He is permitted to repay the loan as per his convenience and ability to do so. Overdrafts accounts are kept in the ordinary current account head of the bank branches. Temporary clean overdrafts in current accounts are maintained in the ordinary current account ledgers, today in an electronic form. from pdf chaptr 4.1 The interest rate on overdraft is higher than is charged on loan. The following are some of the benefits of cash credits and overdraft. (i) Cash credit and overdraft allow flexibility of borrowing, which depends upon the need of the borrower. (ii) There is no necessity of providing security and documentation again and again for borrowing funds . (iii) This mode of borrowing is simple and elastic and meets the short term financial needs of the business.

LOANS

DEMAND LOANS /SHORT TERM LOANS Introduction to Banking, AuthorVijayaragavan Iyengar, Publication- Excel Books, pg no 383 A demand loan account is an advance for a fixed amount and no debits to the account are made subsequent to the initial advance except for interest, insurance premium and other sundry

charges. As an amount credited to a demand loan account has the effect of permanently reducing the original advance, any further drawings permitted in the account will not be secured by the demand promissory note taken to cover the original loan. A fresh loan account must, therefore, is opened for ever new advance granted and a new demand promissory note taken as security. Demand loan would be a loan, which is repayable on demand in one shot i.e. bullet repayment. For example, if it is so agreed the amount of loan may be repaid in suitable installments. Such loans are normally granted by banks against security. Normally, demand loans are allowed against the banks own deposits, government securities, approved shares and/or debentures of companies, life insurance policies, pledge of gold/silver ornaments, and mortgage of immovable property. A separate account for each demand loan is kept in the appropriate. A separate account for each demand loan is kept in the appropriate demand loan ledger of the banks. Demand loans are raised normally for working capital purposes, like purchase of raw materials, making payment of short-term liabilities. Such goods and securities are pledged or hypothecated with the banker. RBI has exercised compulsion on banks since 1995 to grant 80% of the bank credit permissible to borrowers with credit of Rs 10 crore or more in the form of short term loans which may be for various maturities. Reserve Bank has also permitted the banks to roll over such loans i.e. to renew the loan for another period at the expiry of the period of the first loan. TERM LOANS Such loans are generally called Medium and Long term Loans and are granted by banks with All India Financial Institutions like Industrial Development Bank of India, Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India Ltd. Term loans are sanctioned for acquisition of fixed assets like land, building, plant/machinery, office equipment, furniture-fixture, etc. for purchase of transport vehicles and other vehicles, for purchase of agricultural equipment, machinery and other movable assets e.g. tractors, pump sets, cattle etc. under various schemes of agricultural advances introduced from time to time. It is required for the purpose of starting a new business activity, renovation, modernization, expansion/extension of existing units, purchase of land for setting up of a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and the like. In October 1997 Reserve Bank of India permitted the banks to announce separate prime lending rate for term loans of 3 years and above. In April 1999 Reserve Bank of India also permitted the banks to offer fixed rate loans for project financing. Reserve Bank of India has encouraged the banks to lend for project finance as well. In September, 1997 ceiling on the quantum of the term loans granted by banks individually or in consortia/syndicate for a single project was abolished. Banks now have the discretion to sanction term loans to all projects within the overall ceiling of the prudential exposure norms prescribed by Reserve Bank. The period of term loans will also be decided by banks themselves. Though term loans are meant for granting the project cost but as project cost but as project cost includes margin for working capital, a part of term loans essentially goes to meet the needs of working capital. The term loan would be a loan, which is not a demand loan and is repayable in terms i.e. in installments irrespective of period or the security cover.

Term loans are normally granted for periods varying from 3 to 7 years and in exceptional cases beyond 7 years. Term loans for infrastructure projects are allowed even with longer repayment period. The exact period for which a particular loan is sanctioned depends on the circumstances of the case. BRIDGE LOANS Title- Elements of banking and insurance, Author-jyotsna sethi and nishwan Bhatia, Publications- PHI Learning and private limited Pg no.74 Bridge loans are essentially short term loans that are granted pending disbursement of sanctioned term loans. Bridge loans are in fact short term loans which are granted to industrial undertaking to enable them to meet their urgent and critical needs during the period when formalities for availing of the term loans sanctioned are being fulfilled. They are repaid out of the amount of such loans or from the funds raised in the capital market if these loans are granted by financial institutions. Such loans are granted under the following circumstances: When a term loan has been sanctioned by banks and/ or financial institutions, but its actual disbursement will take time as necessary formalities are yet to be completed. When the company is taking necessary steps to raise the funds from the capital market by issue of equities/ debt instruments.

Bridge loans are provided by banks or by the financial institutions which have granted term loans. Reserve Bank of India has allowed the banks to grant such loans within the ceiling of 5% of incremental deposits of the previous year prescribed for individual Banks investment in Shares/ Convertible debentures. It may be granted for a maximum period of one year. COMPOSITE LOAN Title- Elements of banking and insurance, Author-jyotsna sethi and nishwan Bhatia, Publications- PHI Learning and private limited Pg no.74 If a loan is taken for buying capital assets as well as for meeting working capital requirements, it is called a composite loan. Usually such loans are availed by small entrepreneurs, artisans and farmers. Under the composite loan scheme, both term loans and Working Capital are provided through a single window. The limit for composite loans has recently (in Feb 2000) been increased from Rs. 5 lakhs to Rs. 10 lakhs for small borrowers. PERSONAL LOANhttp://www.onlineduniya.com/loans-india/ These loans are granted by banks to individuals specially the salary earners and others with regular income, to purchase consumer durables goods like refrigerators, T.Vs, Cars etc. personal loans are also granted for purchase/construction of houses. Generally the amount of loan is fixed as a multiple of the borrowers income and a repayment schedule is prepared as per his capacity to save. In view of the overflow of loans that are available in the market these days, different types of loans in India that are available through private banks, government banks and other financial institutions in India.

The Indian banks grants loans for education, home, personal loans and business loans are available. Each one loans given also are in accordance with Reserve Bank of India (RBI) guidelines. Indian Bank loans or Loans in India can be divided into the following categories. CASH CREDIT ADVANCES Cash credit account is a drawing account against credit granted by the bank and is operated in exactly the same way as a current account on which an overdraft has been sanctioned. The various types of securities against which cash credits are allowed are pledge/hypothecation of goods or produce, pledge of documents of title to goods, mortgage of immovable property, book debts, trust securities, etc. In cash credits accounts the borrower is allowed to draw an account within the prescribed limit, as and when required. DISCOUNTING OF BILLS Apart from sanctioning loans and advances, discounting of bills of exchange by bank is another way of making funds available to the customers. Bills of exchange are negotiable instruments which enable debtors to discharge their obligations to the creditors. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade. When the seller of goods has to realize his dues from the buyer at a distant place immediately or after the lapse of the agreed period of time, the bill of exchange facilitates this task with the help of the banking institution. Banks invest a good percentage of their funds in discounting bills of exchange. These bills may be payable on demand or after a stated period. In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so discounted is retained by the bank till its due date and is presented to the drawer on the date of maturity. In case the bill is dishonored on due date the amount due on bill together with interest and other charges is debited by the bank to the customers account. Procedure of granting Cash Credit, Overdraft and Discounting Bills The procedure of applying for and sanction of loans and advances differs from bank to bank. However, the steps which are generally to be taken in all cases are as follow: (I) Filling up of loan application form Each bank has separate loan application forms for different categories of borrowers. When you want to borrow money from a bank, you will have to fill up a loan application form available with the bank free of cost. The loan application form contains different columns to be filled in by the applicant. It includes all information required about the borrower, purpose of loan, nature of facility (cash-credit, overdraft etc) required, period of repayment, nature of security offered, and the financial status of the borrower. A running business limit may be required to furnish additional information in respect of: Assets and Liabilities Profit and Loss for the last 2 to 3 years. The names and addresses of three persons (Which may include borrowers, suppliers, customers and bankers) for reference purposes.

(ii) Submission of form along with relevant documents The loan application form duly filled in should be submitted to the bank along with the relevant documents. (iii) Sanctioning of loan The bank scrutinizes the documents submitted and determines the credit worthiness of the applicant. If it is found to be feasible, the loan is sanctioned. If the loan is for Rs 5000 or less, normally the Branch Manager himself can take the decision and sanction the loan. In case the amount of loan is more than Rs 5000, the application is considered at regional, zonal or head office level, depending on the amount of loan. (iv) Executing the Agreement When the loan is sanctioned by the bank and the borrower is informed about it, he will have to execute an agreement with the bank regarding terms and condition for the amount of loan raised. (v) Arrangement of Security for Loan The borrower will now arrange for security against the loan. These securities may be immovable properties, shares, debentures, fixed deposit receipts, and other documents, like, Kisan Vikas Patra, National Savings Certificate, as per agreement. When the borrower completes all the formalities, he is allowed to get the amount of loan/advance/ over draft as sanctioned by the bank. In case of discounting of bills, the bank credits the amount of bill to the customers account before the realization of the bill and thus, makes available the fund. In case, the bill is dishonored on due date, the amount due on the bill together with interest and other charges are payable by the party whose bill is discounted.
Loans in India by Category

Home Loans India Auto Loans India Car Loans India Business Loans India Education Loans India Personal Loans India Loan Against Property Loan Against Auto Loan Against Shares Loan Against Jewelry Loan Against Policies Wedding Loans

HOME LOANS (Title- banking product and services, publications- taxman publications IIBF edition 2nd pg 69-81)

TYPES OF HOME LOANS There are a variety of Home loans available:


a) Home purchase loan- this is the basic home loan for the purchase of a new home. b) Existing Home Improvement Loan- These loans are given for implementing repair c) d) e)

f) g)

h) i)

j) k)

works and renovations in a home that has already been purchased by the borrower. Home Construction Loan- This is a loan given for the construction of a new home. Home Extension loan- This is given for expanding or extending an existing home such as adding a room or a floor etc. Home Conversion Loan This is given to those who have financed the present home with a loan and wish to purchase another home for which extra funds are required. The Home Conversion Loan allows the borrower to transfer the existing loan to the new home loan, which includes the extra amount required, thus doing away with the need to pre-pay the previous loan. Land Purchase loan- This is provided to purchase land either for construction of a home or for investment purpose. Bridge Loans These loans are given to persons who are looking to sell their existing home and purchase another. The bridge loan helps finance the purchase of the new home until the old one is sold. Balance transfer loan This is a loan which allows the borrower to repay an existing loan and avail of another loan at lower rate of interest. Refinance loan This loan is given in order to repay debts incurred from unorganized sources such as relatives, friends etc. which may have been taken to purchase the home. Stamp Duty Loan This loan is sanctioned to pay the stamp duty amount necessary to be paid on the purchase of a home. Loans to NRIs These are similar to loans given to domestic borrowers but are specifically ear-marked as loans to NRIs as the repayment is usually from foreign currency sour The primary concern of a Housing Finance Company is to determine the loan amount that the borrower is comfortably able to repay. The repayment capacity is determined by taking into considerations factors such as income, age, qualifications, number of dependents, spouses income, assets, liabilities, stability and continuity of occupation and saving history. DOCUMENTATION REQUIREMENTS PRE-APPROVAL At the time of application for a home loan, the Housing Finance Company would ask for the following common documents:

ELIGIBILITY TERMS FOR HOME LOANS

1) In case the borrower is a salaried employee; proof of income i.e. salary certificate/slips and TDS certificate (Form 16) of the borrower and coapplicant, if any. 2) In case the borrower is self-employed; details of business track record and a copy of the audited financial statements of the last 2 years of the borrower an co-applicant, if any. 3) Copy of bank account statements for the last 6months. 4) Copy of the latest credit card statement. 5) Passport size photograph. 6) Signature verification from the borrowers banker. 7) Proof of residence. Upon receipt of all the documents along with the duly completed application form, the Housing Finance Company reviews the details and communicates its decision regarding approval of the loan application. DOCCUMENTS REQUIREMENTS-POST APPROVAL/DISBURSAL STAGE After the loan application has been approved and the time the borrower requires the funds for payment, the following documents are required to be furnished: 1) 2) 3) 4) 5) Allotment letter Photocopies of title deeds Agreement to sell Non-encumbrance certificate Approved plans and clearance certificates along with estimates if the property is selfconstructed.

REPAYMENT PERIOD Repayment period options range generally from 5 to 15 years. A few Housing Finance Companies also offer a 20 year repayment period, usually at a higher rate of interest. NRIs can avail of a housing loan for a maximum period of 7 years. Repayment is usually taken in Equated Monthly Installments (EMI) by way of post-dated cheques. This fixed sum of money that is repaid to the Housing Finance Company every month comprises of both interest and principal repayment. COLLATERAL SECURITIES Housing Finance Companies usually take securities as collateral in addition to the mortgage of the property being purchased. These collateral securities could be guarantees from one or two persons (guarantors), assignment of Life Insurance policies, shares, units of Unit Trust of India, bank deposits and other securities. These securities are taken so as to ensure that the loan is repaid in the event that the borrowers normal sources of income are no longer available. Security for the loan is a first mortgage to be financed, normally by way of deposit of title deeds. Liquidation of the mortgaged property is usually the last resort of the Housing Finance Company for repayment of the loan.

INTEREST RATE CALCULATION In India, the interest on Home loans is usually calculated either on Monthly Reducing or Yearly Reducing Balance. 1) Monthly Reducing Balance: The principal on which the interest is paid reduces every month as the EMI is paid. 2) Annual Reducing Balance: The principal is reduced at the end of the year. This method of calculating interest is more expensive as the borrower continues to pay interest on a certain portion of the principal, which has already been paid back to the Housing Finance Company by way of the EMI. The effective interest rate is approximately 0.7 % higher than the Monthly Reducing Balance method FIXED AND FLOATING/ADJUST RATE OF INTEREST Most Housing Finance Companies offer both options of Fixed and Adjustable Rate of interest. In the Fixed Rate of interest, the rate of interest remains unchanged throughout the period of the loan. Thus the benefit of interest rate fall is not incorporated in the borrowers plan. Conversely, the borrower stands to gain in a rising interest rate scenario. The Floating Rate of interest is one that fluctuates as per the market lending rate and therefore reflects the trends in the interest rate scenario. FEES AND CHARGES Home Loans are usually accomplished by some or all of the following charges: (1) Processing Charge is a fee payable to the lender on applying for a loan. It could be a fixed fee or a percentage of the loan amount applied for and sanctioned. These charges are usually to cover administrative expenses incurred by the Housing Finance Company in processing a loan application. (2) Prepayment Penalties are sometimes charged when a loan is repaid before the end of the agreed duration of the loan. This usually ranges between 0.5% and 1% of the amount being repaid. (3) Commitment Fees are sometimes charged when a loan is not availed of within a stipulated period of the loan application being processed and sanctioned. (4) Miscellaneous Charges could include documentation or consultation charges. TAX BENEFITS Tax benefits are available under:
(1) Exemptions under section 80 of IT Act for repayment of principal upto Rs. 1, 00,000

along with other investments.


(2) Deduction under Section 24 of IT Act for interest payment on Housing Loans upto Rs.

1, 50,000 (in respect of self occupied house property acquired or constructed with capital borrowed on or after 1.4.99, and acquisition or construction is completed within 3

years from the end of the financial year in which the capital was borrowed). Tax benefits will differ in case the property has been leased out. CAR/AUTO LOANS Car loan or Auto loans could be of the following nature:
a) New Car Loan- This is the most opted for as it provides a simple loan for purchasing a

new car. b) Used Car Loan- This is a loan facility offered on second-hand car purchases. This involves valuation of the car being purchased by certified valuers of used car. c) Auto Refinance- This is loan facility given on an existing car owned by the borrower provided that the car is not hypothecated to any financier. ELIGIBILITY TERMS FOR CAR LOANS Typically most financiers have similar eligibility criteria for car loans. The age of the borrower should be between 21-58 years. Annual income should be above Rs.60,000. Additional information is taken with the loan application form. The size of the loan amount sanctioned depends on the cost of the vehicle, the type of car (standard or premium) and the percentage financing that is offered. A new car can get upto 90% financing. Used cars get lower financing. Depending on the model and its resale value, the financing amount on used cars like the Maruti 800 could go up. DOCUMENTATION REQUIREMENTS PRE APPROVAL (1) In case the borrower is a salaried employee; proof of income i.e. salary certificate/slips and TDS certificate (form 16) of the borrower and co-applicant, if any. (2) In case the borrower is self-employed; details of business track record and a copy of the audited financial statements of the last 2 years of the borrower and co-applicant, if any. (3) Copy of bank account statement for the last 6 months. (4) Copy of the latest credit card statement. (5) Passport size photograph. (6) Signature verification from the borrowers banker. (7) Proof of residence Upon receipt of all the documents along with the duly completed application form, the Car Finance Company/Bank reviews the details and communicates its decision regarding approval of the loan application. DOCUMENTATION REQUIREMENTS- POST APPROVAL/DISBURSAL Apart from the loan documentation the borrower is required to submit photocopies of the following: (1) Registration Certificate (RC book) (2) Insurance policy (3) Road transport tax papers

The RC book is usually endorsed as hypothecated to the financier until full repayment of the loan amount, when the hypothecation is cancelled. After the last payment is made the bank issues a NOC and form 35 to cancel the hypothecation on the car. This is submitted to the RTO for updating the RC book. The insurance company would also require an NOC to make the necessary changes in the insurance policy. REPARMENT PERIOD Usually car financing is available from 1-5 years. Some financiers offer longer tenure loans upto 7 years. The tenure is usually dependent on the brand of the car being purchased. A super premium car such as Mercedes would be restricted to tenure of 3 years only. As tenure increases the EMI reduces but the total interest outflow is higher. Some financiers allow a facility for back loading of the EMI wherein the EMI payments are lower initially and increase as the borrowers income increases. COLLATERAL SECURITIES. Typically there is no requirement for any additional collateral to be provided. The RC book is endorsed for hypothecation to the financier which by itself is adequate security for the financier. INTEREST RATE CALCULATION The interest is usually charged on a float rate or on a reducing balance basis which could be daily, monthly, quarterly or annually. The Rack Rate is the rate that the financier offers upfront. These are usually negotiable based on simple negotiating skills or on a credit profile which satisfies most of the financiers requirements immediately. Some banks offer a deduction based on Relationship Pricing criteria i.e. if the borrower has any other relationships with the bank by way of deposits, credit cards or other loans with a good track record of repayment. FEES AND CHARGES There are fees and charges in addition to interest rate. Processing fees, advance EMIs if applicable, stamp charges, registration charges and insurance have to be paid prior to the transaction being completed. Most financiers do not cover insurance and registration. The price of the car is taken to be the exshowroom price, which does not include Insurance and registration charges. TAX BENEFIT Salaried employees can not avail of tax benefits on the loan taken on purchase of a car. However, self employed persons can avail of tax benefits on depreciation as well as on the interest paid on the amount borrowed for the purchase of the vehicle.

BILL FINANCE Advances against Inland Bills are sanctioned in the form of limits for purchase of bills (Bills Purchase Limit) or discount of bills (bills discounting limit) or bills sent for collection advance against bills sent for collection (ABC Limited), to borrowers for their genuine trade transactions. Bills are either payable on demand or after usance period. Demand Bills which are payable on demand or at sight are purchased from the parties who are sanctioned Bills Purchase limits and Usance Bills which are payable on maturity after a certain

period of time as per terms of contract are discounted for parties who are sanctioned Bills Discounting limits. PACKING CREDIT Packing credit is an advance given to an exporter who holds a Code Number assigned to him by the Directorate General of Foreign Trade (DGFT), for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgment of export of export orders or Letter of Credit with the bank has been waived. Packing credit advance are generally allowed separately for each Letter of Credit/ Firm order to comply with the guidelines issued by corporate divisions of the concerned banks/Reserve Bank of India. INLAND LETTER OF CREDIT Letter of credit (LC) is used by the bank at the request of its customer in favour of a third party informing him that the Bank undertakes to accept the bills drawn on its customers up to the amount stated in the LC subject to the fulfillment of the conditions stipulated therein. Therefore, when the bank issues LC, it assumes responsibility to pay its beneficiary on production of bills drawn in accordance with the terms and conditions of the LC. GUARANTEES Guarantee is a contract to execute the promise, or discharge the liability of a third person in case of his default. In the ordinary course of business, the bank often issues guarantees on behalf of its customers in favour of third parties. When the bank issues such a guarantee, it assumes a responsibility to pay the beneficiary, in the event of a default made by the customer. DOCCUMENTATION No advance is expected to be disbursed by the banks until documents are properly executed strictly in accordance with the prescribed guidelines of the respective banks. Proper documentation in a loan account is very essential from the bankers point of view. The prime consideration kept in mind by the banks while executing the documents is that these are enforceable in a court of law in case the bank decides to initiate legal action to recover its dues. A bank generally takes some assets as security for advances made by it. The purpose is to realize the assets so taken in case the borrower defaults in making payments of the dues. This is possible only when documents are complete in all respects (i.e. correctly drafted, stamped and properly executed) so that the bank can prove its rights over the property/ies in court of law. LOAN AGAINST NRE & FCNR DEPOSITS In case of loan/overdraft against security of a deposit under Non-Resident (External) Account and Foreign Currency (Non-Resident) Account Scheme, branch managers ensure that these advances are strictly in terms of instructions issued by Exchange Control Department of RBI

from time to time contained in the Exchange Control Manual/Circulars issued by international Banking Divisions. Since the account holder of NRE Saving Deposits can withdraw saving deposits at any time, banks do not mark any type of lien, direct or indirect, against these deposits. LOANS AGAINST LIFE POLICIES Overdrafts and demand loans are granted against the life insurance policies issued by private sector insurance companies approved by Insurance Regulatory Development Authority (IRDA) in addition to Life Policies issued by LIC of India. Before allowing an advance against the security of life insurance policy, it should be ensured that: (i) There are no burdens on the other relative policy. (ii) The age of the assured stands admitted in the books of the company/Corporation and (iii)Premia is paid up to date. The limit is fixed after ascertaining the surrender value of the policy. Life Insurance Policy affected by a married man for the benefit of his wife and/or children under Section 6 of the Married Womens Property Act, is not accepted as security. ASSIGNMENT OF POLICIES
a) A policy accepted as security is assigned in favour of the bank by the assured through the

prescribed form of the banks.


b) When it is specifically stated in a policy that nomination has been made under Section 39

of the India Insurance Act, any subsequent assignment of the policy has the effect of cancelling such nomination. In such cases, therefore the assignment in the banks favour is to be made by the assured alone. On adjustment of loan account the policy is reassigned in favour of the assured by the authorized official of the bank in the prescribed form. Reassignment is to be made at the earliest so that the assured or his nominee/heirs are able to secure the benefits there under. ADVANCES AGAINST GOVERNMENT SECURITIES All government promissory notes tendered as security for advances must invariably be sent to the appropriate Public Debt Office for examination in order to ascertain that: (i) The endorsement are in order; (ii) The Notes are not stopped or confiscated, that none of them is a duplicate; and

(iii)No alterations have been made in the principal amounts Stock certificates are not good security for advances unless they are transferred into the banks name. The form of transfer having been completed by the holders and the bank, the certificates are forwarded to the appropriate Public Debt Office for new securities to be issued in the name of the bank. Alternatively, intending borrowers are asked to convert their inscribed stock into endorsable government paper. Post office certificates and some of the Unit Certificates of Unit Trust of India also constitute approved securities and branch managers are empowered to make advances against such certificates to the extent of their loaning powers. Incumbents should, however, ensure that before the advance is made, the pledged certificates are transferred as security in the banks name in terms of the rules governing such securities. ADVANCES AGAINST COMPANY SHARES/DEBENTURES & PSU BONDS Banks are expected to follow the statutory provisions regarding grant of advances contained in Sections 19(2) and(3) and 20(1)(a) of the Banking Regulation Act 1949, which are briefly reproduced below: Section 19 (2) and (3) A bank cannot hold shares in any company, whether as pledge, mortgage or absolute owner of an amount exceeding 30% of the paid up share capital of the company or 30% of the own paid up share capital and reserves, whichever is less. Further a bank cannot hold shares, whether as pledge, mortgage or absolute owner, in any company in the management of which any managing director or manager of the bank is in any manner concerned or interested. Section 20 (1) (a) A bank cannot grant any loans or advances on the security of its own shares. ADVANCE AGAINST DEBENTURES The debentures of the companies, whose shares can be financed against, can also be financed by maintaining the prescribed margin. ADVANCE AGAINST PSU BONDS Bonds issued by various public sector undertakings may also be financed against by maintaining the prescribed margin and by following all other terms and conditions as are applicable in case of advance against shares and debentures, as PSU bonds are akin to the debentures of the companies. ADVANCE AGAINST JEWELLERY/ORNAMENTS Advances by way of overdrafts and demand loans may be granted to borrowers against the security of gold/silver jewelry and ornaments which may be for productive purposes such as agricultural/allied and other activities as well as for non-productive purposes ( i.e.)for meeting medical, educational, marriage expenses and other unforeseen liabilities etc.)

Security is to be tested by an approved shroff. The Shroff should record and weigh different items of security separately, determine the pure gold and silver content nd record the above particulars and also the market value of the gold along with a certificate in token of having verified the genuineness and value of security and correctness of weights recorded. The shroffs are those approved by the government. However, where either the government approved shroffs are not available banks have put in place a system whereby they approve competent local shroffs for the purposes. ADVANCES AGAINST GOVERNMENT SUPPLY BILLS Advance against Government Supply Bill is a clean advance and therefore attention is paid by the bankers as to the means of the borrower, his financial positions, business integrity beyond doubt, his credit in the market, his experience of the business and banks past experience with the party, as also availability of adequate security. TWO-WHEELER AND CONSUMER DURABLE LOANS Two wheeler loans are given for purchase of mopeds, scooters and motor-cycles. Consumer durable loans cover purchase of durables such as refrigerators, washing machines, Air-Conditioners, Microwave Ovens, Colour Televisions, Music Systems, Camcorders and DVD Players. ELIGIBILITY TERMS FOR TWO-WHEELER AND CONSUMER DURABLE LOANS Broadly, the eligibility criteria are: (1) Between 21 years and 60 years (2) Minimum Gross Monthly Income of Rs 4,500 for salaried employees (3) Minimum annual income of about Rs. 45,000 for self-employed individuals The loan amounts sanctioned range from Rs. 7,500 to Rs. 90,000 for Two-wheeler loans. Consumer durable loans are usually of a smaller amount and vary as per the nature of the durable being purchased. Most of the financiers require a down payment to be made by the borrower towards the purchase of the two wheeler or consumer durable. DOCUMENTATION REQUIREMENTS (1) In case the borrower is a salaried employee; proof of income i.e. salary certificate/slips and TDS certificate (form 16) of the borrower and co-applicant, if any. However, the stringency of this requirement is waived in most cases. (2) In case the borrower is self-employed; details of business track record and a copy of the audited financial statements of the last two years of the borrower and coapplicant, if any. These documents are not mandatory. (3) Signature verification from the borrowers banker/proof of identity. (4) Proof of residence.

Upon receipt of all the documents along with the duly completed application form, the Finance Company/Bank reviews the details and communicates its decision regarding approval of the loan application. Post-dated cheques are collected from the borrower as part of the documentation requirement. REPAYMENT PERIOD Repayment of two-wheeler loans are usually over 6 to 36 months, whilst those of consumer durable loans are between 12 to 36 months. COLLATERAL SECURITIES Usually no collateral security is required in two wheeler and consumer durable loans. INTEREST RATE CALCULATION Interest is charged at a flat rate and range between 7.5% and 15.25% for two-wheeler loans. The rates on consumer durable loans are varied depending on the seasonality of the product being sold. FEES AND CHARGES Most two-wheeler financiers charge a flat processing fee of 2% or Rs.500 whichever is higher. The additional charges on consumer durable financing are similar to that of the two-wheeler charges, the difference being that there are slabs of loan amounts approximately of upto Rs. 10,000, between Rs. 10,000 and Rs. 20,000 and above Rs. 20,000 and fees are based on these amounts. TAX BENEFITS Salaried employees cannot avail of tax benefits on the loan taken for purchasing a two-wheeler. However, self employed persons can avail of tax benefits on depreciation as well as on the interest paid on the amount borrowed for the purchase of the vehicle or durable if it is for professional purposes. PERSONAL/UNSECURED LOAN Generally, banks give a loan against some security, so that it can fall back on it in case of a default. However, sometimes loans are given against personal security without any tangible security. Examples are salary loan, loan to pensioners, loan to professional, etc. Most of the banks give loans to the salaried class as the source of income is regular. Personal Loan is an all purpose loan for which the end-use can be to meet any personal requirements of the borrower.

ELIGIBILITY TERMS FOR TWO-WHEELER AND CONSUMER DURABLE LOANS

Broadly the eligibility criteria are: (1) Between 21 years and 60 years (2) Minimum Gross Monthly Income of Rs. 4,500 for salaried employees (3) Minimum annual income of about Rs. 45,000 for self-employed individuals The loan amounts sanctioned range from Rs. 7,500 to Rs. 90,000 for Two-wheeler loans. Consumer durable loans are usually of a smaller amounts and vary as per the nature of the durable being purchased. Most of the financiers require a down payment to be made by the borrower towards the purchase of the two-wheeler or consumer durable. DOCUMENTATION REQUIREMENTS
(1) In case the borrower is the salaried employee; proof of income i.e. salary

certificate/slips and TDS certificate (form 16) of the borrower and co-applicant, if any. However, the stringency of this requirement is waived in most cases. (2) In case the borrower is self-employed; details of business track record and a copy of the audited financial statements of the last 2 years of the borrower and co-applicant, if any. These documents are not mandatory. (3) Signature verification from the borrowers banker/ proof of Identity (4) Proof of residence Upon receipt of all the documents along with the duly completed application form, the Finance Company/ Bank reviews the details and communicates its decision regarding approval of the loan application. Post-dated cheques are collected from the borrower as part of the documentation required. REPAYMENT PERIOD Repayments of two wheeler loans are usually over 6 to 36 months, while those of consumer durable loans are between 12 to 36 months. COLLATERAL SECURITIES Usually no collateral security is required in two-wheeler and consumer durable loans.

INTEREST RATE CALCULATION Interest is charged at a flat rate and range between 7.5% and 15.25% for two-wheeler loans. The rates on consumer durable loans are varied depending on the seasonality of the product being sold. FEES AND CHARGES Most two-wheeler financiers charge a flat processing fee of 2% or Rs.500 whichever is higher. The additional charges on consumer durable financing are similar to that of the two-wheeler charges, the difference being that there are slabs of loan amount approximately of upto

Rs.10,000, between Rs. 10,000 and Rs. 20,000 and above Rs.20,000 and fees are based on these amounts. TAX BENEFITS Salaried employees cannot avail of tax benefits on the loan taken for purchasing a two-wheeler. However, self employed persons can avail of tax benefits on depreciation as well as on the interest paid on the amount borrowed for the purchase of the vehicle or durable if it is for professional purposes. PERSONAL/UNSECURED LOAN A Personal Loan is an all-purpose loan for which the end-use can be to meet any personal requirements of the borrower. ELIGIBILITY TERMS FOR PERSONAL/UNSECURED LOANS Typically, the take home salary has to be over Rs. 8,000. The borrower should be above 21 years of age and less than 58 years old. Loan eligibility is determined primarily by the borrowers capacity to repay i.e. his current earnings are the primary determinant. The bank usually tries to ensure that the EMI does not exceed 30-40% of the net take-home salary. The borrowers place of residence and work-place and employment track record are given higher priority than in secured loans. The maximum amount of loan sanctioned is usually in the range of about 11 times the net takehome salary, which is arrived at after deducting other normal household expenses and outflow such as any EMI on other loan etc. and regular outflows. Most banks lends between Rs.1 5, 000 to Rs. 10,000 lakhs towards Personal Loans. DOCUMENTATION REQUIREMENTS- PRE APPROVAL
(1) In case the borrower is a salaried employee; proof of income i.e. salary certificate/slips

and TDS certificate (form 16) of the borrower and co-applicant, if any. (2) In case the borrower is self- employed; details of business track record and a copy of the audited financial statements of the last 2 years of the borrower and co-applicant, if any. (3) Copy of bank account statements for the last 6 months. (4) Copy of the latest credit card statement. (5) Passport size photograph. (6) Signature verification from the borrowers banker. (7) Proof of residence. Upon receipt of all the documents along with the duly completed application form, the bank reviews the details and communicates its decision regarding approval of the loan application. DOCUMENTATION REQUIREMENTS-POST APPROVAL/DISBURAL Post approval, the bank collects post-dated cheques for the full tenure of the loan prior to disbursal along with the collateral securities, if any. REPAYMENT PERIOD

Personal loans are usually short tenure loans upto a maximum of 3 years. In rare cases some banks offer a 5 year repayment option. There is usually a 6 month lock-in period in either case. COLLATERAL SECURITIES Unsecured loans are by definition unsecured. They are designed for people who dont want to undergo the hassles of providing security or hypothecation and are willing to pay the higher price of such loans. No collateral or guarantee is usually taken by the bank. However, in case of software professionals, some banks ask for a guarantor or a co-applicant. INTEREST RATE CALCULATION Interest rates currently vary between 15 to 30%. Longer tenure loans are usually priced higher and also loans to persons with a higher risk profile. FEES AND CHARGES The usual fees and charges include:
(1) Processing fees, which could be about 1-3% of the loan amount being sanctioned. (2) Foreclosure or prepayment penalty ranges between 2-3% of the amount being repaid.

(3) Some banks also charge a commitment fee of approximately 1% of the loan is not availed of within stipulated time duration. TAX BENEFITS Tax benefits on Personal Loans are not available to salaried employees. However, self-employed persons may avail of tax benefits on the interest amount paid if the loan is for professional purposes. EDUCATIONAL LOANS Educational loans usually cover a variety of courses. It pays for the cost of tuitions fees, hostel fees, mess fees and examination fees. The cost of books, equipment and other instruments required by the student are also covered. Some financiers cover the cost of airfare if the studies are being undertaken overseas. ELIGIBILITY TERMS FOR EDUCATIONAL LOANS The terms for eligibility for an Educational Loan vary from bank to bank. The primary requirement is that the student should have got admission to the course for which he is seeking the loan. Most banks also specify an age criterion such as 16-26 years etc. The past academic track record of the student would also be considered. The maximum loan amount varies by individual banks as well as the institution that the student would pursue his/her academics. It could be upto a maximum of Rs. 7.5 lakhs for studies in India and upto Rs. 15 lakhs for studies abroad. The repayment capacity of the student and in several cases, the parents and/or guardians is of utmost concern to the bank. Usually no margin money is required for loan upto Rs. 4 lakhs. For loans above Rs. 4 lakhs, most banks require a margin amount of 5 % for studies in India and 15% for studies abroad, to be borne by the applicant. The parents income would also be considered by most banks. DOCUMENTATION REQUIREMENTS-PRE APPROVAL

The documentation requirements would depend on the specific requirements as per the policy of the bank giving the loan. However, a confirmation of admission by the educational institution is necessary. Other documents would include: (1) (2) (3) (4) Copy of bank account statements for the last 6 months. Passport size photograph. Signature verification from the borrowers banker. Proof of residence (5) In case either of the borrowers parents is a salaried employee; proof of income i.e. salary certificate/slips and TDS certificate (form 16) of the borrower and coapplicant, if any. (6) In case either of the borrowers parents is a salaried employee; details of business track record and a copy of the audited financial statements of the last 2 years of the borrower co-applicant, if any. (7) Documents with respect of past academic track record of the student. (8) Airline booking details, in case of foreign university education. DOCUMENTATION REQUIREMENTS-POST APPROVAL/DISBURAL Disbursement of the educational loan is made directly to the institution to which the student is admitted. Hostel and mess fees are also paid likewise. Air fare is directly paid to the airlines. The student is given certain amounts to make book or instrument/equipment purchases on a monthly or quarterly basis. Receipts for each payment are forwarded to the bank. When the loan amount exceeds Rs. 1 lakh, banks usually require a Life Insurance Policy equal to or more than the loan amount. This is the security that the bank takes to recover the outstanding amount. This is the security that the banks take to recover the outstanding amount in case the student is unable to repay the loan amount. REPAYMENT PERIOD A holiday period is usually given for educational loan repayment before he/she starts paying back the loan in EMIs. The holiday period ranges from 6 months to a year. However, if the student starts working immediately on completing the course, he does not enjoy a holiday period. Repayment starts six months after completion of the course or on commencement of a job, whichever is earlier. COLLATERAL SECURITIES Some banks do not require collateral security to be furnished if the amount being borrowed is less than Rs. 25,000. For amounts greater than the NSCs, bonds, mortgage etc. are taken as collateral. Some banks require the applicant to take a Life Insurance Policy at the time of disbursal of the loan. INTEREST RATE CALCULATION Interest on educational loans is charged on a simple basis during study period or upto commencement of repayment (interest rates are as per RBI guidelines).

FEES AND CHARGES Fees and charges include: (1) Processing fees (2) Documentation cost (3) Pre-payment penalty (4) Penal interest for overdue amount and overdue period. TAX BENEFITS Under section 80E of the IT Act from the assessment year 2006-07, a deduction will be allowed in respect of interest on loan taken for educational purposes. This deduction is allowed for a maximum period of 8 years or till the interest is paid whichever is earlier. [No deduction in respect of repayment of loan is available from assessment year 2006-07] The deduction above shall be allowed in computing the total income in respect of the initial assessment year and seven years immediately succeeding the initial assessment year or until the interest is paid in full, whichever is earlier. Up to assessment year 2005-06, the amount deductible was installment of principal as well as interest subject to maximum of Rs. 40,000. OVERDRAFT/DEMAND LOANS AGAINST BANK DEPOSTS Overdrafts and demand loans may be granted to customers against deposits lying at the credit of the borrowers and/or third parties in the books of the branch making such advance or any branch of the bank, subject to the observance of the precautions mentioned below Before an advance is allowed against fixed deposits/ recurring deposits as security, a letter of pledge/lien signed by the depositor and fixed deposit receipt/recurring deposit pass book duly discharged with revenue stamp of Re.1 by the depositor should be obtained. The following are considered advances against the borrowers own deposits: (i) Advance made to a partnership firm against a deposit in the name of one of the partners. (ii) Advance made to a partnership firm against a deposit standing in the name of the partner of the firm jointly with another person who is not a partner in the firm and who may or may not be related to him or her. (iii)Advance made to a proprietary concern against a deposit in the name of its proprietor. (iv)Advanced made to proprietorship concern against a deposit standing in the name of the proprietor along with another person who may or may not be related to the proprietor. (v) Advance made to a guardian against a deposit in the name of his ward (where the guardian, being competent to borrow on behalf of the ward, does so). (vi)Advance made to a depositor against a deposit standing in his name singly or jointly with other depositors. (vii)Advance made to a trust against a deposit standing in the name of a trustee or beneficiary of a trustee and the trust is enjoying credit facility. (i) Advance made to a co-parcner of Hindu Undivided Family (HUF) concern against the deposits standing in the name of HUF concern may be treated as advances against

borrowers own deposits only after obtaining a factual confirmation by acceptable evidence, i.e. declaration by all co-parcener including karta of the HUF as to how that deposit is treated for tax purpose etc.. And that whether the deposit is really belonging to the HUF, as the liability of co-parcener in HUF concern is limited to the extent of his share in the family estate. In other cases, deposits of individual co-parcner may be treated as the deposit of third party for the purpose of allowing advances their against to HUF concern. ADVANCES AGAINST DEPOSTS MADE BY A BANK Loans or advances against deposits made by a bank viz banking institution or co-operative banks other than a Land Development Bank may be treated as loan or advance granted against deposit to any other customer and the following rules may be observed. Generally, such a loan or advance is discouraged. ADVANCES AGAINST DEPOSITS IN THE NAME OF MINORS Advance against deposits in the name of minor are allowed to natural guardian or guardian appointed by the court, by way of demand loan and /or overdraft by taking an undertaking from the guardian to the effect that the advance is required for the benefit of the minor and that he/she shall indemnify the bank against any claim or loss in consequence of having allowed to the said advances. ADVANCES AGAINST DEPOSTS TO BLIND PERSONS Advance is allowed to blind persons against their term deposits subject to the following guidelines in addition to the normal procedure followed in such type of advances:
(i) Advances against term deposits standing in the name of blind persons; singly or

jointly with others, is permitted after getting the term deposits discharged, if he is illiterate. He should discharged term deposits in the presence of an authorized official not below the rank of an officer and witnessed by two responsible persons known to the bank and attested by the officer concerned. (ii) In case he is illiterate, his thumb impression is taken in the presence of Incumbent-Incharge as well as to independent witnesses. (iii)In case where an illiterate depositor can only sign in a regional language, but cannot write such language, the loan document executed by him, is supplemeted by a certificate signed by the Incumbent-In-Charge of the lending office as well as two independent witnesses. Terms and conditions of the loan, amount of loan, etc is read and explained to the blind person in the presence of two witnesses. The signature of the witnesses for having done this is obtained on the Account Opening Form. (iv)Cash payment is made to a blind person in the presences of two witnesses. The amount of loan is received by the blind person is confirmed to the blind person orally. LOANS TO TRADERS

Certain small traders may find difficulty in making regular transactions from Cash Credit Account. Therefore, Working Capital limits are granted by way of Working Capital Term Loan (WCTL) repayable in three to five years depending upon repayment capacity of a borrower. DEFERRED PAYMENT GUARANTEES (DPGs) Like term loans, deferred payment guarantees are also given for acquisition of fixed assets. Term loans involves payment in cash where as in the deferred payment guarantee, the bank commits to pay the bebeficiary in case of default made by its customer (purchaser). Therefore, the issuance of deferred payment guarantees should be treated at par with the grant of term loans and the proposal for the two should be examined in the same manner. REFINANCE BY IDBI/SIDBI Term loans are also refinanced by IDBI/SIDBI provided that they meet the prescribed eligibility condition. TAKEOVERS OF LOANS ACCOUNTS FROM FIs /BANKS Takeovers of loan accounts by the branches of the banks are done after approval from the competent authority of the banks vis--vis the guidelines put in place for the purpose. CASH CREDIT ADVANCES Cash Credit is a facility granted against hypothecation and pledge of goods or produce, book debts, bills, trust receipt etc. In cash credit accounts a borrower is allowed to draw on account within the prescribed limit/drawing power, as and when required. Also, when the advance is secured by the pledge or hypothecation of goods, the security may be deposited/withdrawn by the borrower from time to time to suit his business requirement. CONSIDERATIONS BEFORE MAKING OR RECOMMENDING ADVANCES Before granting any advance under their own delegated powers or while forwarding proposal for sanction to a higher authority, managers must satisfy themselves or provides such of the following information as may be necessary to take a prudent credit decision and give their own definite recommendations: (1) The means of the applicant and guarantors should be verified by independent enquiries and if possible by examination of their books. (2) The details of the assets of the applicants, with specific reference to his liquid assets viz. cash, book debts, stocks etc. (3) The details of the liabilities of the applicant- whether short term or long term. (4) The extent of the margin available with the applicant, which is indicated by the excess of the liquid assets over the current liabilities. (5) The experience of the applicant in the business or the line of activity in which he proposes to utilize the money to be borrowed from the bank. (6) The purpose for which the advance is required and the probable date of repayment. The advance should be for productive purpose and not for speculative purpose. (7) The profitability projection/ repayment schedule submitted by the applicant should be critically analyzed so as to ensure that the projections are not optimistic.

(8) The details of the primary and collateral security offered to secure the loan need to be ascertaining. (9) That amount of the advance is need-based and is in relation to the applicants means. The same should also bear a reasonable relationship to the amount of the self-owned capital provided by him. MODES OF CREATING CHARGES In case of secured loan, a charge is created on the asset in favour of the bank. In other word, the banker obtains a legal right to get payment of the loan amount out of the security charged. The borrower still remains the owner of the asset, but the banker gets the right of realizing his dues out of the sale proceeds of the assets. Thus, bankers interest is safeguard. According to the nature of security, charges can be of the following types. TYPES OF CHARGE AND NATURE OF SECURITY TYPE OF CHARGE Lien Pledge Hypothecation Assignment Mortgage Set-off NATUE OF SECURITY Goods and securities Movable properties Movable properties Book debts Immovable property Set-off against Debtor and Creditor

Charges can also be categorized according to their nature such as fixed or floating charge. A fixed charge is created on assets whose identity does not change, e.g., land and buildings. In the case of floating charge, the identity of the asset keeps fluctuating, e.g., stocks. The legal provisions regarding modes of creating charge over tangible assets and the rights and obligations of various parties are explained under. LIEN Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt due from him is repaid. The creditor gets only the right to retain the goods and not the right to sell. Lien can be either particular or general. The right of a particular lien can be exercised by a person who has spent his time, money or labour on the goods, e.g., a car mechanic, a tailor, etc. It can be exercised against only those goods for which charges have to be paid. Features: The right of general lien right of a banker is a blanket right and is applicable in respect of all amounts which are due from the debtor such as security handed over to the

banker for a machinery loan after its repayment can also be used by the banker in respect of any other advance outstanding in his name, e.g., against an overdraft taken by the borrower. Even though his right is conferred upon the banker by the Indian Contract Act, yet it is advisable to take a letter from entrusted to the banker as security and he may exercise his right of lien against it. The bankers right of lien is tantamount to an implied pledge. Unlike as in the case of a particular lien the creditor can only retain the goods till the amount due is paid, the banker has the right to sell the goods in case of default of the customer. Sometimes even a negative lien can be entered. Under this arrangement, the borrower has to (i) give a declaration that the assets given as security are free from any charge or encumbrance, (ii) that no charge will be created on them nor will the borrower dispose of those assets without the consent of the banker. The bankers interests are only partially safe by securitizing a negative lien as he cannot realize his dues from these assets. PLEDGE Pledge is the most popular method of creating over the movable assets. Indian Contract Act, 1872, defines pledge as bailment of goods as security for payment of a debt or performance of a promise. When a borrower secures a loan through a pledge, he is called a pledger, and the bank is called the pledgee. Indian Contract Act defines bailment as, delivery of goods from one person to another for some purpose upon the contract that the goods be returned back when the purpose is accomplished or otherwise disposed of according to the instructions of the bailer. Thus when the borrower pledges his goods with the banker, he delivers the goods to the banker to be retained by him as security for the amount of the loan. Delivery of goods may be either (i) physical delivery (ii) constructive or symbolic delivery. The later does not involve physical delivery of the goods. The handing over of the keys of the godown storing the goods, or even handing over the documents of the title to goods like warehouse receipts duly endorsed in favour of the banker amounts to constructive delivery. Features The goods can be pledged by the owner, a joint owner with the consent of other joint owners, a mercantile agent or in some cases by an unpaid seller. The banker can retain the goods for the payment of the debt, for any interest that has accrued on it as well as any expenses incurred by him for keeping the goods safe and secure. Goods can be retained for any subsequent advances also, but not for any existing debt which is not covered by the pledge. In case of non-payment, the banker has the right to sell the goods and recover the amount of loan along with the interest and expenses, if any. In case of default by the pledger, the banker has the right either to

(a) File a civil suit against the pledger and retain the goods as additional

security; or (b) Sell the goods. In case of sale, banker must give due notice of sale to the borrower before making a sale. This right is not limited by the law of limitation. Bankers right of pledge prevails over any other dues including government dues except workers wages. Banker must take good care of goods and return them after the payment is made along with accretion, if any. HYPOTHECATION Hypothecation is an extended idea of pledge, where by the creditor permits the debtor to retain possession of goods, either on behalf of or in trust for himself. It is another method of creating a charge over the movable assets of the borrower. It is preferred in circumstances in which transfer of possession over such assets is either inconvenient or is impracticable. For e.g., if borrower wants to borrow on the security of raw material or goods in process, which are converted into finished products, transfer of possession is not possible/practicable because his business will be obstructed. Similarly a transporter needs the vehicle for working on the road and hence cannot give its possession to the banker for taking a loan. In such circumstances a charge is created by way of hypothecation. Under hypothecation, neither ownership nor possession over the asset is transferred to the creditor. Only an equitable charge is created in favour of the banker. The asset remains in the possession of the borrower who promises to give possession thereof to the banker, whenever the latter requires him to do so. The charge of hypothecation is thus converted into that of a pledge. The banker enjoys the rights and powers of a pledgee. The borrower uses the asset in any manner he likes, viz he may take out the stock, sell it and replenish it by a new one. Thus a charge is created on the movable assets of the borrower. The borrower is deemed to hold possession over the goods as an agent of the creditor. The bank cannot take possession of goods without the consent of the borrower, but after taking possession, the banker is free to exercise the right of a pledge, and sell the assets without intervention of the court. ASSIGNMENT Assignment of a contract means transfer of contractual rights and liabilities to a third party. The transferor or borrower is called the assignor, and the transferee or banker is called the assignee. The borrower can assign any of his rights, properties or debts to the banker as security for a loan. Generally the actionable claims are assigned by the borrower. An actionable claim is a claim to any debt, other than a debt secured by mortgage of immovable property, or by hypothecation or pledge of movable property, or to any interest in constructive, of the claimant which the civil court recognizes as affording ground of relief, whether such debt or beneficial interest be existent, accruing, conditional and contingent. Usually the borrower may assign the book debts, money due from government or semi-government organizations or life insurance policies. Although notice of assignment of debtor is not required under law (section 130 of Transfer of Property Act, 1881), nevertheless it is in the interest of the assignee to give notice to the debtor

because in the absence of the notice, the assignee is bound by any payments which the debtor might make to the assignor in ignorance of the assignment. For example, if the borrower assigns his life insurance policy in favour of his banker as security for a loan, the bank should give a notice to the Life Insurance Corporation (LIC), otherwise if any payment is made by the LIC to the borrower, the banker will not be able to claim it. Assignment may be legal or equitable. A legal assignment is effected through an instrument in writing signed by the assignor. The assignor too informs the debtor in writing about the assignment, the assignees name and address. The assignee also serves a notice on the debtor of the assignor and seeks conformation of assigned balance. If the above conditions are not fulfilled i.e. assignment is not done in writing or notice of assignment is not given to debtor, then such assignment is called equitable assignment. MORTGAGE When a customer secures an advance on the security of specific immovable property the charge created thereon is called a mortgage. A charge on immovable property like Land & Building is created by means of a mortgage. Transfer of Property Act 1882 defines mortgage as the transfer of an interest in specific immovable property for the purpose of securing the payment of money, advanced by way of loan, an existing or future debt or the performance of an engagement which gives rise to a pecuniary liability. The transferor is called the mortgagor and the transferee mortgagee. The owner transfers some of the rights of ownership to the mortgagee and retains the remaining with him. The object of transfer of interest in the property must be to secure a loan or to ensure the performance of an engagement which results in monetary obligation. It is not necessary that actual possession of the property be passed on to the mortgagee. The mortgagee, however, gets the right to recover the amount of the loan out of the sale proceeds of the mortgaged property. The mortgagor gets back the interest in the mortgaged property on repayment of the amount of the loan along with interest and other charges. Section 58 of the Transfer of Property Act specifies six type of mortgagers which are discussed below
(1) Simple mortgage: In case of simple mortgage, the mortgagor does not give

possession of property, but binds himself personally to pay the mortgage money. He agrees expressly or impliedly that in case he fails to make the payment according to the contract, then the mortgagee shall have right to cause the mortgage property to be sold and proceeds of sale to be applied, as far as may be necessary, in payment of the mortgage money. The mortgagee himself cannot sell the property, but has to seek intervention of the court.
(2) Mortgage by conditional sale: under this form of mortgage the mortgager ostensibly

(on the face of it ) sells the mortgaged property with any one of the following conditions: (a) On default of payment of mortgage money, the sale shall become absolute. (b) On payment being made on a certain date, the sale shall become void. (c) When the payment is made, the buyer shall transfer the property to the seller.

(1) Usufructuary mortgage: Unlike the simple mortgage which is non-possessory, in

case of usufructuary mortgage, the mortgagor delivers possession of the mortgaged property. The mortgagee is also entitled to receive rents and profits accruing from the property and appropriate the same in lieu of interest or in payment of mortgaged money or both. When the debt is so discharged or repaid, the mortgagor is entitled to recover possession of his property. There is no personal liability on the mortgagor.
(2) English mortgage: In case of English mortgage, there is transfer of ownership on the

condition that the mortgagee will re-transfer the same on the payment of mortgage money. Further, the mortgagor personally undertakes to repay the mortgaged money. In case of default, the mortgagee has the right to sell the property without seeking permission of the court in the special circumstances mentioned in section 69 of the Transfer of Property Act.
(3) Legal mortgages: In case of Legal Mortgage, the mortgagor transfers legal title to

the property in favour of the mortgagee by executing the Mortgaged Deed. When the mortgage money is repaid, the legal title to the mortgaged property is re-transferred to the mortgagor. Thus in this type of mortgage expenses are incurred in the form of stamp duty and registration charges.
(4) Equitable Mortgage: this mortgaged is affected by deposits of title deeds of the

property by the debtor in favour of the creditor to create a security there on. This type of mortgage is called an equitable mortgage in English Law. In India, it is restricted to the cities of Delhi, Mumbai, Kolkata and Chennai or any other town which the concerned state government may notify in the official gazette in this behalf. No registration is necessary and delivery can be either actual or constructive. There is a personal liability of the mortgagor to pay, and the mortgagee can sell the property with the sanction of the court if the mortgaged money is not repaid. The legal title of the property is not passed on to the mortgagee but the mortgagor undertakes through a Memorandum of Deposit to execute a legal mortgage in case he fails to pay the mortgaged money. In such situation the mortgagee is empowered to apply to the court to convert the equitable mortgage in to legal mortgage. SET-OFF (Title Principles & Practices of Banking, Author Macmillan, 2nd edition, Indian Institute of Banking and Finance) Set-off means total or partial merging of a claim of one person against another in a counter claim by the latter against the former. It is in effect, the combining of accounts of the debtor and creditor, to arrive at the net balance payable to one or the other. The right of set-off is a statutory right and can also arise out of an agreement between parties. Features

(a) Both debts must be for certain sums. A debt-accruing due cannot be set-off against

the debt already due. (b) The banker cannot set-off the credit balance in the account of guarantor till the liability of the guarantor is determined. (c) The credit balance in the current account cannot be set-off against a contingent liability of a bill discounted but not yet due. (d) A banker cannot set-off a debt due to him upon a loan account repayable on demand or at a specified date against a credit balance in the current account until the demand is made or due date arrives. (e) The parties must be mutually indebted in the same right. (f) The credit balance in the partners account can be set-off against the debit balance of a partnership account since the liability of the partners is joint and several. (g) Right of set-off is exercisable between two firms, which have separate names but are composed of same set-off partners. (h) The credit balance in the personal account of a sole proprietor can be set off against the debit balance of the sole proprietary concern and vice versa. (i) When the right set-off is available to the bank, lien right cannot apply. These two different rights cannot be exercised simultaneously at the same time. Automatic right of set-off arises in the following circumstances: (a) on the death, insanity or insolvency of the customer (b) on the insolvency of a partner of a firm or winding up of a company (c) on receipt of a garnishee order (d) on receipt of notice of assignment of a customers credit balance.