Regulatory prescriptions

• The Basel Committee on Banking Supervision defines retail exposure

as one that fulfills the criteria of orientation, granularity and low
value of individual exposure
• The RBI provides a working definition : Retail or household credit
comprises mainly of housing loans, advances to individuals against
fixed deposits, educational loans and loans for purchase of consumer
durables
• According to present RBI instructions, the exposures included in the
regulatory retail portfolio of banks are assigned a risk weight of 75%. To
achieve the lower risk weight, the loans to a borrower must be within
specific limits. Under extant guidelines, maximum aggregate exposure to a
single retail borrower cannot exceed Rs 5 crore. “In order to reduce the
cost of credit for this segment the limit is now increased to Rs.7.50 crores”

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Housing Loans
• Housing finance has always been a priority of the central government. Banks
have an important role to play in providing credit to the housing sector.
• RBI had introduced a scheme of Housing Finance Allocation and banks were
required to achieve the prescribed target of ‘Housing Finance’ announced
annually.
• The banks could either grant loans ( direct finance ), or investment in bonds
of NHB/HUDCO (indirect finance) or in combination.
• Banks fund for acquisition of sites, for construction of dwelling units on the
sites owned or purchase of site and construction of dwelling units thereafter.
Banks also lend for purchase of ready build house. Banks fund for repair,
renovation, addition and alteration of existing house.
Types of funding
• Banks fund for purchase of new flat under construction or existing
flat.
• Banks fund for slum clearance boards mainly for construction of
houses for those slum dwellers.
• Banks may grant term loans to housing finance institutions taking into
account debt-equity ratio, track record, recovery performance and
other relevant factors including the other applicable regulatory
guidelines for onward lending to this sector
• Banks may extend term loans to state level housing boards and other
public agencies again for onward lending to this sector
Types of funding
• Banks may extend funds to the builders for construction of housing
complexes. Such credit may be extended to builders of repute,
employing professionally qualified personnel. It should be ensured,
through close monitoring, that no part of such funds is used for any
speculation in land.
• The house for which the loan is given will be taken as Prime/ Primary
security. Banks can fund under pari -passu charge if another
institution has already lent on the same prime security, in this case
the dwelling house.
Prime/ Collaterals
• One of the major functions of a bank is to provide credit to the
customers for various purposes such as home, vehicle etc and a
bank’s strength and solvency depends on the quality of its loans and
advances. Securities serve as mitigants of risk. It provides a protection
to the lender in case of loan default as the lender could proceed
against the security if the borrower fails to repay the loan.

• They are called risk mitigants

Prime/ Collaterals

• When an asset acquired by the borrower under a loan is offered to the lender as security
for the financed amount then that asset is called Primary (Prime) Security. In simple terms,
it is the thing that is being financed.
Example: A person takes a housing loan of Rs 50 lakh from the bank and purchases a
residential loan. That flat will be mortgaged to the bank as primary security.
• If the bank or financial institution feels that the primary security is not enough to cover the
risk associated with the loan it asks for an additional security along with primary security
which is called Collateral Security. It guarantees a borrower’s performance on a debt
obligation. It can also be issued by a third party or an intermediary.
Example: A person takes a loan of Rs 2 crore for the purchase of machinery. So to secure
itself in the case of default by the borrower the bank asks for mortgaging residential flat
which will be termed as collateral security.
Creation of a charge on the Security

• Charge creates an obstruction on the title of a property when there is

a charge on the asset, the asset cannot be sold or transferred.
• The charge is created on the borrower’s asset by the lender
• If the asset is movable it is an hypothecation/ pledge but if the asset
is immovable then the charge is called a mortgage.
 Pledge, Hypothecation & Mortgage
• Pledge, hypothecation and mortgage are three methods used by lenders to
create a charge on the asset.
• Pledge – pledge is used when the lender takes actual possession of the
property. Say for example – You pledge your gold with the bank for a gold
loan. The bank takes the possession of gold and gives you money. So pledge is
used only in the case of movable assets. And the pledgee (lender) 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. Another example could be – Pledge of shares. So the key is to
remember that Pledge means Gold loan – movable asset – banker/lender
takes possession.
Pledge, Hypothecation & Mortgage
• Hypothecation – Hypothecation is creating charge against the security of movable assets,
but here the possession of the security remains with the borrower itself. Say an example to
remember is – When you take a car loan, the car is hypothecated to the bank/lender. Here
it is a movable asset and the borrower has the possession of the asset. 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. So
the key is to remember that Hypothecation means Car loan – movable asset – borrower
retains the possession. (Here the RC book of the car would have the name of the
Bank/lender)
• Mortgage – Mortgage is used for creating charge against immovable property which
includes land, buildings etc (anything that is permanently attached to earth). So the key is
to remember that Mortgage means Housing loan – immovable asset – borrower retains
the physical possession. (Here the original title deed of the property would be in the safe
custody of the lender)
Loan to Value (LTV) Ratio.
• Banks do not lend 100% of the value of the asset. The maintain a
margin. The percentage of margin required varies from customer to
customer and from bank to bank depending on the credit worthiness of
the borrower.
• However in the case of housing loans, RBI has stipulated a minimum
loan to value ratio for the following loan slabs.
Up to Rs 30 lakhs – 90% - margin should be a minimum 10%
Above Rs 30 lakhs but less than Rs 75 lakhs – 80%- margin should be a
minimum 20%
Above Rs 75 lakhs – 75%- margin should be a minimum 25%
All individual housing loans, according to the statement of
developmental and regulatory measures, shall attract a risk weight of
35%, if their loan-to-value ratio is at 80% or lower. In case of home
loans, where the LTV ratio is higher than 80% but less than or equal to
90%, the risk weights will be higher at 50%.

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• If the cost of a dwelling unit is less than Rs 10 lakhs, banks may
include stamp duty, registration charges and documentation changes
for the purpose of LTV.
• Loan disbursal should be in stages and after confirming progress of
the construction.
• While appraising loan proposals involving real estate, banks should
ensure that the borrowers have obtained prior permission from
government / local governments / other statutory authorities for the
project, wherever required.
Other Terms and Conditions
• No guarantor/s only co-applicant either wife or one of the parents or
blood relative. If both spouses are IT assessees, income of both could
be clubbed to arrive at quantum.
• Housing loan released in stages ( generally 4 to 5 ) in the case of
construction of a house and as per schedule recorded in the sale
agreement if it is a flat under construction.
• Margin should be brought proportionately during every release. If it is
for the purchase of a ready built house or flat, margin should be kept
upfront in the savings bank account of the borrower.
Other Terms and Conditions
• Repayment is up to 30 years or up to the age of retirement whichever
is earlier. For non salaried class up to the age of 65 years.
• No prepayment penalty if the loan is paid out of own sources. If it is
paid out of loan raised from other institutions, prepayment penalty is
applicable.
Housing loan assessment
Example 1 :
Indira, a government employee, wishes to purchase a house property
at a cost of Rs.30.00 lakhs. The market value of house property is Rs.
41.14 lakhs. Her income for the last two years based on returns filed by
her was Rs. 609523 and Rs. 452674 respectively. She approaches
Canara Bank for a housing loan.
You have been assigned the task of assessing the loan. Please proceed
assuming that the bank has prescribed a margin of 20% for such loans
and 5times average salary is considered as per the scheme
Assessment based on cost

Purchase cost of house property : 30.00 lakhs

Market value of house property : 41.14 lakhs
Lower of the two : 30.00 lakhs
Eligible amount ( 80%) : 24.00 lakhs
Assessment based on Income
Income as per ITR for year 1 : Rs. 609523.00
TOTAL Income of Year 1 : Rs. 609523.00

Income as per ITR for year 2 : Rs.452674.00

TOTAL Income of Year 2 : Rs.452674.00
Total Income of YEAR 1 & 2 :Rs.1062197.00
Average Income of last 2 Years :Rs. 531098.50
5 times of Average Income :Rs. 2655492.50

Total Limit Eligible as per Income [2] :Rs.26,55,492.50

Maximum Limit as per Scheme [3] say :Rs.75,00,000.00
Limit applied (1) :Rs.24,00,000.00
MPBF [LEAST OF 1,2,3] :Rs.24,00,000.00
Assessment based on repayment capacity
Income as per ITR (FY 2015-16) : Rs. 609523.00
Interest of Existing liabilities if any : 0.00
Total Annual Income eligible for Deductions : Rs. 609523.00
Annual Loan Commitment of Existing loan/s : 0.00
Grand Total Income Eligible for Deductions : Rs.609523.00
60.00 % of which is : Rs.365713.80
Annual Loan Commitment of Proposed loan (say) : Rs.282708.00
Annual Loan Commitment of Existing loan/s : 0.00
Total Annual Loan Commitment is : Rs.282708.00
% of Annual total loan Commitment to Total Annual Income : 46.38 %
Vehicle Loans
• Vehicle loan is the next popular loan product offered by banks. Due to
the increase in income levels the need for vehicles has gone up
several folds.
• Banks liberal lending is another reason for boom in vehicles in our
country. This has attracted vehicle manufacturers from all over the
globe who have set businesses in India.
Salient features
The purpose, amount, eligibility criteria, margin, repayment terms etc
will vary from bank to bank as per their scheme. The below examples
are indicative

Eligibility: any individual in confirmed service or doing business or

independent practise or in agriculture
Purpose: for purchase of new two or four wheelers and also to buy used
cars (up to 5 year old model).
Amount: up to 80% of invoice value. In the case of used cars, 60% of value
certified by approved valuator or negotiated price whichever is lower
Salient features
Margin: 20% for new two and four wheelers
40% for 5 year old vehicles
Security : Hypothecation of the vehicles purchased out of loan.
Disbursement : directly to the automobile dealer in the case of new
vehicles and to the seller of old vehicles.
Moratorium: no moratorium ( holiday period )is allowed
Salient features
Repayment :to be repaid between 60 to 84 monthly equated
instalments (bank specific).
Rate of interest: Generally one year MCLR+ spread (bank specific)
Guarantor : waived by many banks. A few banks insist on a
creditworthy guarantor depends on the quantum of loan.
Bank Lien : bank lien to be noted in the B register in the Regional
Transport Office and also bank clause should be recorded in the third
party or comprehensive vehicle policy.
Assessment of Vehicle Loan
Example:
Dixit , a government employee desires to purchase a brand new car.
The invoice value of the vehicle is Rs.17,28,000, (all inclusive). He
wants to avail a vehicle loan. He is asking for a repayment schedule of
60 months. He produces his IT returns for last three years. The annual
gross salary is 12,00,000. You are an assessing officer. Please discuss the
steps you would follow. What will be the terms and conditions.
• Invoice value = Rs. 17,28,000
• 80% thereof = Rs. 13,82,400 …. 1
• Average annual salary = Rs. 12,00,000
• 10mths salary = Rs. 10,00,000 …. 2
• Maximum loan amount Rs. 10,00,000

• Repayment terms Rs. 60 months

• EMI is say Rs. 23354
• Annual payment Rs. 280248
• Example 3

Now assume that it is Mr Dixit who is applying for the two loans
How would you approach ?
• Annual repayment should be max. 60% of average salary

• The loans can be given if annual average salary is above 938260

Example 4:
Mr and Mrs. Sridhar approach the bank for a housing loan. They inform
that they intend to purchase a residential flat under construction. The
cost of the flat is Rs. 80 lakhs. They would also want to purchase a
second hand car for Rs. 1 lakh.
• The Bank has a housing loan scheme, according to which the margin
requirement is 10% and the rate of interest is 9%. The repayment
period is a max of 20 years.
• The Bank has a vehicle loan scheme and the margin requirement is
25% for second hand cars and the rate of interest is 11%. The
repayment period is a max of 36 months.
• The couple has submitted the ITR for last three years

• Calculate the eligible amount of the loan

• You are loan officer. Please proceed
• First proceed assessing individual loans as per the scheme.
Housing Loan : Cost is 80 lakhs.
Market value say Rs. 100 lakhs
Lower of the two Rs. 80 lakhs
Amount after margin of 10% Rs. 72 lakhs
Average annual income * 5 years = Rs. 43,26,167
Max loan amount that can be sanctioned is Rs. 43,25,000 say for 20 years
Vehicle loan
( second hand vehicle ) : cost is 100000
Assume market value is the same
Margin is 25%
Loan amount is 75,000 (max) for 3 years
• Proceed to calculate EMIs
Assume that the annual EMI is 456000 for the housing loan and Rs.
28620 for the vehicle loan
• Next check for the eligibility based on income criteria
• The total repayment cannot go beyond 60% of the annual income

• In this case it is 484620, so the hurdle is cleared.

Personal Loans
Banks grant personal loans for any legal purpose.

Eligibility: : all individuals both salaried and non salaried class. Salaried
class from Government, reputed corporate, reputed institutions
preferred. Non salaried class only against computation of income
declared to IT.
Quantum: 10 months gross salary or 3 years average annual gross
income declared in the IT returns filed (bank specific).
Salient features
Security : clean loan. No security is insisted
Surety: one or two credit worthy surety/ies acceptable to the bank.
Disbursement : directly credited to the savings bank account of the
borrower.
Repayment : to be repaid in 36 to 60 equated monthly instalments
( bank specific).
Interest : 1 year MCLR+spread (bank specific)
Education Loan
Education being another priority in our country, banks have education
loan as a product.
Eligibility: meritorious students pursuing diploma, under graduation,
masters or professional courses in India or Abroad.
students pursuing vocational training courses approved by
state or central government.
Quantum : studies in India – up to Rs 10 lakhs
Foreign studies -up to Rs 20 lakhs
Salient features
Security : a)Up to Rs 4 lakhs – no security
b) Above Rs 4 lakhs less than Rs7.50 lakhs - a third party
credit worthy guarantor
c) Above Rs 7.50 lakhs tangible assets equal to the value of
the loan
Co Borrower: one of the parents or both the parents having income
should be co-borrower/s to the loan.
Salient features
Disbursement: loan instalments to be released directly to the
educational institution every academic year as mentioned in the
prospectus.
Moratorium : one year after completion of the course or 6 months
after getting employment.
Salient features
Repayment : to be cleared with in 10 years from the date of first
disbursement including course period and moratorium period.
Interest rate : 1 year MCLR+spread (bank specific)

• Banks can sanction higher quantum of loan depending on the course

fee and other fee mentioned in the prospectus depending on the
merits of the case.
Gold Loan
Banks also lend against pledge of gold
Eligibility : any individual major who owns gold jewellery.
Purpose : to meet any contingency
Quantum: 80% of the market value of gold contents in the jewellery
subject to carat value.
Security : any 18 or 24 carat gold jewellery.
Salient features
Guarantee : exempted. If any specific jewellery sentimental to the
other spouse, is to be pledged, loan should be arranged in joint
names.
Repayment : to be repaid in lump sum or in instalments with in 1 to 2
years (bank specific)
Charge : the jewellery has to be pledged to the bank
 Other loan products
Home loan improvement:
Eligibility: : individual/s both salaried, non salaried class, agriculturists,
members of cooperative societies who own flats.
Purpose : for repair, renovation, alteration and up gradation of existing
house.
Amount : maximum of Rs 10 lakhs
Margin: 20 to 40 percent
Security : registered equitable mortgage of land and house.
Disbursement : to be released in 4 to 5 instalment depends on the
progress of construction.
Moratorium : maximum 3 months
Repayment : to be cleared in 15 years
Assessment : present income of which 60% is eligible for fixation of
EMI. All deductions including EMI of existing housing loan should be
taken before arriving at the eligible quantum .
Reverse Mortgage Loans
Objective : to provide additional source of income to senior citizens to
meet contingencies.
Purpose: to meet any type of expenditure including repair, renovation,
alteration of the existing house.
Borrowers : single or jointly with the spouse in the case of living
spouse.
Salient features
• Age: above 60 years
• Eligibility: : Should be the owner of the self acquired property with
permanent resident status.
• Residual life of the property : should be at least 20 years and 25
years if the age of the spouse is less than 60 years .
• Security: registered equitable mortgage of existing house/flat
Salient features
• Tenor of payment : Till the death of the borrower and the spouse or
voluntary sale or renting out of the dwelling house or repayment
through other source of income.
• Disbursement : to be released in monthly/quarterly instalments. Not
exceeding Rs 50000 per release per month or not exceeding Rs 15
lakhs in lump sum.
Salient features

• Interest rate: 11% pa fixed ( bank specific)

• Insurance : to be insured for the value given by the approved
evaluator.
• Charge : registered equitable mortgage
• Tax Liability : periodical releases from the loan are not taxable as they
are not considered as income