Chapter – 3

Home Loan

3.1 Introduction
3.2 Basic Process of Home Loan in India
3.3 EMI (Equated Monthly Installments)
3.4 Calculation of Interest Rate
3.5 Interest Rates of Home Loan, Processing Fees and Pre -
Payment Charges
3.6 Stamp Duty and Registration Charges across various States
and Cities
3.7 Home Insurance
3.8 Tax Benefits
3.9 National Housing Bank (NHB) Residex
3.10 RBI Directive for Home Loans
3.11 Profile of Bank of Baroda
3.12 Profile of The Surat People’s Co-Operative Bank Ltd.

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 Chapter – 3

Home Loan
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3.1 Introduction
Home is an integral part of an individual, who since his / her birth and childhood,
dreams to have living space of his / her own. Once in a lifetime investment requires loan to
accomplish it and that is how the home loan comes into scheme of things. Buying a home
is dream for everyone. Owing to the rising price of properties, it has almost become
impossible for an average earning person to buy a home on a lump sum payment. Therefore,
the concept of home loan has come in existence. There are plethora of housing finance
companies and equal number of banks that offer home loans. The task of selecting one
company and one offer for home loan amidst the thousands available options have become
a very complex task owing to the burgeoning housing finance market in the country. Apart
from this, there are intricate business jargons and technicalities that make this task more
difficult. In this study, I propose to give the basic information of home loan technicalities,
so that when a person applies for the home loan, he / she can understand the basics and help
themselves remain away from the duping elements in the market.

3.1.1 Importance of Home Loan

• The need for home loans arises not because property prices are heading
upwards all the time but because home loans make great sense from a long-
term savings perspective. Not only are home loans a handy tool for the
common man to own a roof over his head but they also help save money in
the long run.
• With skyrocketing real estate prices, people are increasingly opting for
housing loans to acquire their dream home. Interest rates are coming
down all the time and the banks and the housing finance companies are
literally falling over each other to lure the prospective home-seekers.
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 • Notwithstanding the tax breaks and generous lending rates, a lot of people
still cannot arrange resources for the down-payment, which comes out to be
at least 15 per cent of the property value. Taking cognizance of the situation,
Banks are coming up with home loan products called ‘zero down payment
loans’ wherein 100 per cent funding is provided for select properties. These
lucrative offers are other major reasons for why people are opting for loans.
• Even if one can afford to buy a home with one's own money, home loans
should be availed because they act as good savings instrument. According
to industry estimates, the long term average return in investing in a home is
about 20% p.a. while the average cost of borrowing funds in the market
today is about 7% p.a. (considering all tax breaks).
• For salaried employees, housing loans are the best way to avail of tax
benefits. Many people simply go for the home loans in order to avail these
benefits. Interest payments up to ` 1.5 lakh on housing loans are deductible
from the taxable income and there is a further deduction of taxable income
maximum up to ` 1 lakh against repayment of principal portion per annum.
In case a person stays in a rented house, the cost of the loan will be nearly
zero per cent since he will be saving a decent amount on rent.
All the banks offer many types of loan and advances to the customers like retail loan, term
loan, working capital finance, overdraft, export import finance and project finance. Since
this study is based on home loan and home loan is part of retail loan various types of retail
loan are explained in 3.1.2.

3.1.2 Types of Retail Loans

Bank offers a wide range of retail loans to meet customer diverse needs. Whether
the need is for a new house, child's education, purchase of a new car or home appliances,
banks’ unique and need specific loans enable customer to convert customer dreams to
realities.
Table 3.1 Types of Retail Loans
1. Home Loan 2. Home Loans to NRIs / PIOs

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 3. Interest Subsidy Scheme for 4. Loan Against Future Rent Receivables
Housing the Urban Poor (ISHUP)

5. Mortgage Loan 6. Education Loan

7. Car Loan 8. Two Wheeler Loan

9. Loan to Professionals 10. Traders Loan

11. Personal Loan 12. Loan for financing Individuals for

subscription to Public Issues / IPO

13. Reverse Mortgage Loan

(1) Home Loan

Home Loan is available for Purchase of new / old dwelling unit, Construction of
house, Purchase of plot of land for construction of a house. Customers repaying a loan
already taken from other Housing Finance Company / Bank. Repayment period up to 25
years (floating rate option). Also for Repairs / Renovations / Improvement / Extension of
Home and for Furniture, Fittings & Fixtures.

(2) Home Loans to NRIs / PIOs

Banks have also designed housing loan facility for NRI / PIO. Customer opt for
Flexi Rate plan to hedge the interest rate risk by breaking the loan into two separate
accounts, Free property insurance and personal accident insurance. Borrower does not pay
pre payment / foreclosure charges for part as well as full prepayment (when repaid from
own sources by the borrower).

(3) Interest Subsidy Scheme For Housing The Urban Poor (ISHUP)
“Affordable Housing for all” is an important policy agenda of Government of
India and accordingly the Ministry of Housing and Urban Poverty Alleviation (MH &
UPA) has designed an Interest Subsidy Scheme as an additional instrument for addressing
the housing needs of Economic Weaker Section (EWS) and Low Income Group (LIG)

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segment in urban areas. The scheme envisages the provision of interest subsidy to EWS
and LIG segments to enable them to buy or construct houses.

(4) Loan Against Future Rent Receivables

Loan against future rent receivables has been developed considering the growth
potential in the real estate in various metros and urban areas, where many commercial
properties / shopping malls are being developed and the owners approach banks for loans
against securitization of future rent receivables from such properties. Loan covers the target
groups, viz. owners of immoveable properties and the minimum and maximum loan limits
are based on actual rent income received during the particular year.

(5) Mortgage Loan

Bank gives loan to the customer an innovative combination of a loan and over draft
facility with flexible repayment options against the security of customer is immovable
property. Benefits of this loan are ideal use of idle property - generate additional income
from idle property, customer withdraw money as per their need and save on interest cost,
deposit surplus money / regular income / salary and save interest, flexibility to withdraw
money deposited earlier. Banks also provide either as overdraft or demand loan as per the
customer’s need.

(6) Education Loan

Education is the most important investment one makes in life. Higher studies and
specialization in certain fields call for additional financial support from time to time.
Whether customers are planning for their child for school education (nursery to standard
XII) pursuing a graduate or post-graduate degree, the bank gives Education Loans, to fulfill
customers’ ambitions and goals.

(7) Car Loan

In today's fast paced world, a vehicle is a necessity. Yet other expenses and plans
in life take priority and the dream of owning a car takes a back seat. Whether as a
comfortable and dependable means of transport or as a status symbol in society, it is
believed that customer deserve ownership of a vehicle. Benefits of this loan are - available
up to ` 15 Lakhs for any car make/model (Inclusive of Gas-Kit), Loans can be availed for
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new and second-hand vehicles (Not more than 3 years old). Repayment period of loan is as
long as 7 years.

(8) Two Wheeler Loan

For those individuals who prefer to travel more conservatively or to get to their
destinations faster, a two-wheeler is as much a boon as it is to a car owner. With newer
models coming out each year, the options available to the customer are both attractive as
well as convenient. All resident Indians, salaried people, professionals, self-employed,
businessmen and farmers can apply for this loan.

(9) Loan to Professional

Banks give loan to professional persons like doctor, engineer, CA. This loan is
designed specially to cater to the financial needs of the professional. The loan can be
availed as a demand / term loan or overdraft as per customer’s preference. The loan is
available for Purchase of office equipments viz. computers, fax, air-conditioners and
furniture, etc. Also, loan is available for Expansion / renovation / modernization of existing
premises.

(10) Traders Loan

Traders Loan facility enables individuals, proprietorships, bodies such as
partnership firms and co-operative societies to avail of working capital or undertake
development of shop by way of loan / overdraft. Dealers in gold / silver jewellary are get
benefit of this loan. The loan is provided against the security of tangible collateral
Securities in the form of mortgage of land (not agricultural land) and building. Also
National Savings Certificates, Government Bonds, Bank's Term Deposits, Assignment of
Life Insurance Policies, standing in the name of the borrower/proprietor/partner/director.

(11) Personal Loan

There is wedding in the family. May be its high time for the person to surprise the
spouse with a priceless gift. The people simply need to pamper his family with an extended
vacation. These are the times when a person may need a helping hand. Bank offers personal
loan to meet the personal requirements. Bank helps customer to take care of all kinds of
expenses at a short notice. The Loan may be availed to meet expenses related to marriage,
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travel, honeymoon, holiday and medical expenditure or for any other personal use. It is also
available to Pensioners / Defense Pensioners. Loan is also available for Earnest Money
Deposits for buyers of home / flat / plot.

(12) Loan for financing Individuals for subscription to Public Issues / IPO
Loan for financing Individuals for subscription to Public Issues / IPO for the person
to take smart investment decisions and avail of the benefits. Customer can avail loan up to
` 10 Lakhs for subscribing to new issues. Loan is offered at affordable / competitive interest
rate. Customer can invest to pay within maximum period of 90 days. Banks give option to
continue the loan thereafter by availing loan against the allotted shares.

(13) Reverse Mortgage Loan

Reverse mortgage loan aims at making financial assistance available to senior
citizens. Customer should be Senior Citizen of India, above 60 years of age. Married
couples will be eligible as joint borrowers provided one of them is above 60 years of age
and age of spouse is not below 55 years at the time of application. Customer should be the
owner of a residential property (house or flat) located in India in his/her own name.
Residential property should be used as permanent primary residence (fully self occupied
property). The Commercial property will not be taken as a security under the product.

3.1.2 Types of Home Loan

Various kinds of home loans are available in India. They are described below:-

1. Home Purchase Loan

These are the basic home loans for the purchase of a new home. These loans
are given for purchase of a new or already built flat/bungalow/row-house.

2. Home Improvement Loan

These loans are given for implementing repair works and renovations in a
home that has already been purchased by the customer. It may be requested for
external works like structural repairs, waterproofing or internal works like tiling
and flooring, plumbing, electrical work, painting, etc.

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3. Home Construction Loan
These loans are available for the construction of a new home. The
documents required by the banks or bank for granting customer a home construction
loans are slightly different from the home purchase loans. Depending upon the fact
that when customer bought the land, the lending party would or would not include
the land cost as a component, to value the total cost of the property.

4. Home Extension Loan

Home Extension Loans are given for expanding or extending an existing
home. For example addition of an extra room, etc. For this kind of loan, customer
needs to have requisite approvals from the relevant municipal corporation.

5. Land Purchase Loan

Land Purchase Loans are available for purchase of land for both home
construction or investment purposes. Therefore, customer can be granted this loan
even if customer is not planning to construct any building on it in the near future.
However, customer has to complete construction within tenure of three years on the
same land.

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

7. Balance Transfer
Balance Transfer loans help customer to pay off an existing home loan and
avail the option of a loan with a lower rate of interest. Customer can transfer the
balance of the existing home loan to either the same banks or any another banks.

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

9. NRI Home Loan

This is a special home loan scheme for the Non-Resident Indians (NRI) who
wish to build or buy a home or land property in India. They are offered attractive
housing finance plans with suitable reimbursement options by many banks in the
country.

3.1.3 Banks, Housing Finance Companies and Co-operative Banks provide

Home Loans in India
All the nationalized banks, private sector banks, foreign banks and housing finance
companies provide home loan in India. The detailed information of these banks and
companies is given in Annexure (1). Even a number of co-operative banks provide the
home loan in India. It is not possible to mention the names of all the co-operative banks in
India because their Act and Registrar are different in different states. The list of Co-
operative banks which are functioning in Surat and provide home loan is given in Annexure
(2).

3.2 Basic Process of Availing Home Loan in India

After deciding for availing home loan one should go through the process of home
loan which is applicable to customers as well as banks.

3.2.1 Determination of Loan amounts

Loan eligibility is based on two separate calculations:
1. The amount of Loan repayment that a customer can afford to make every
month.
2. A specified percentage of the cost of the property.

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 The amount of the loan sanctioned will be the lower of the two figures arrived at
after making this two calculation.
It is possible that while the customer’s income (and hence, customer’s ability to
repay) could make customer eligible for a higher loan, the bank will almost always cap the
sanctioned loan amount at 80 to 90 per cent of the property cost.

[i] Repayment Ability - The Most Important Determination

Customer’s ability to repay is based on income and expenditure pattern. For
instants, if a customer’s monthly income is ` 10,000 and his monthly expenses is ` 8,000
the customer can certainly pay ` 2,000 towards any potential home loan he can take. This
amount can now be used as the installment amount and the customer’s eligibility can be
reverse – calculated. The larger customer’s repayment capability, the higher will be
customer’s loan eligibility.
amount determined by the banks as available for loan repayments
. ℎ=
ℎ . ℎ

[ii] Determination of Income

Banks need to be sure about income stability of customer. Which is why, they may
not consider the following categories of income while calculating loan eligibility:
• Performance bonus, medical reimbursements or leave travel allowance, as these are
not certain, any case annual perks are not available every month to help in monthly
repayments. Some banks, however, are willing to consider these amounts either
partially or fully as ‘income’.
• Overtime may be of temporary nature. Again, if the overtime is shown as being
received consistently for a long period of time, some banks may consider at least a
part of this as ‘income’.
• Interest income since the underlying investments on which these incomes are
earned may be liquidated to pay for customer contribution required towards the cost
of the house. But if a customer can convince some bank that the interest income

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 will remain even after customer have bought the house, the bank may be persuaded
to include the interest income while calculating loan eligibility.
• Conveyance or entertainment / other allowances paid in cash through vouchers,
unless customer regularly deposits the cash reimbursement in his/her salary
account. Banks will hesitate to consider it for a loan since they have no document
to verify whether such an allowance is indeed paid.
• Earnings from non-verifiable sources such as tuition / tailoring are not considered
as ‘income’ by the banks unless business of this kind is carried on in a verifiable
manner.
• Agricultural income, since this is non-taxable and non-stable as well, most banks
do not give this any weightage or give significantly lower weightage.
• Rental income is being consistently received and shown in the income tax (IT)
returns and copies of the rental agreements are available, banks may consider part
or whole of this as ‘income’.
If a customer is a salaried employee, some banks apply the normative percentage
on the gross salary, while some apply it on customer’s net salary. Having said that, most
banks go by gross salary as the net salary varies from month to month (deduction of festival
advances, medical reimbursements given, or grant of leave travel allowance that month).
These banks allow a smaller percentage of customer income as available for payment of
loan installment; while those applying it on net salary allow a higher percentage of the
salary.
In case of customer is self-employed, the difference in eligibility norms can be
glaring. Some banks strictly consider only returned income, that too an average of last two
or three years of income, to smoothen out any sharp increases in reported incomes. Some
banks will add full/half of the depreciation to calculate the base income.
Recognizing this, quite a few banks have evolved eligibility norms that work around
these issues. Let us call these banks ‘self- employed-friendly banks’. Some of the things
they might have for calculating eligibility norms that are self-employed friendly are:
• Considering customer’s ‘actual income’ as multiple of customer’s ‘disclosed
income’.
• Estimating customer’s ‘actual income as a percentage of ‘gross receipts’ and
ignoring customer’s ‘disclosed income’.
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 • Clubbing the income of entities controlled by customer such as private limited
companies or partnership firms in which customer have substantial stakes or are a
partner by making such entities joint borrowers to the loan.
Some banks do not consider that part of income which forms customer’s yearly
investment which is allowed as deduction under section 80C. This amount is not considered
as income. However some banks have considered this as income if investment is liened by
bank authority.
Most foreign banks are ‘self-employed friendly’ on the above lines. Most banks do
empower local level officials with discretionary powers to enhance loan eligibilities based
on their subjective assessment of customer’s true income.

[iii] Clubbing of Incomes of Relatives

Eligibility is also calculated by clubbing the customer’s income with that of his
relatives. All banks allow clubbing of the spouse’s income to work out the loan eligibility.
In such cases, they insist on making the spouse a joint borrower (or coborrower). The basic
premise behind using pooled incomes for calculating eligibility is that both parties will
actually combine their income and pay off all expenses (including the home loan
installment). However, banks are selective in extending this concept of pooling of incomes
to other relations. Some banks allow parents, children and brothers to be joint borrowers.

[iv] Cost of the Property

The bank naturally wants customer to put in a contribution towards the cost of the
house so that customer has a stake in its continued maintenance. This also ensures that if
the value of the house goes down in future, the bank’s outstanding loan amount is lower
than the market value of the property. The amount the customer is expected to put in is
called ‘margin money’ or ‘down payment’. Generally bank gives loan amount of 85% to
90% of the agreement value of the property. Even if a customer’s income is enough to
justify a higher loan, the bank will give a maximum loan based on its margin requirements.

 Age of the Building

The down payment can also vary depending on the age of the property. If the
property is older, the down payment requirement may be higher. Most banks have a cap on
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the maximum age of the building at the end of the loan tenure. This would normally be
fifty years. So if a customer is buying a property on resale and the current age of the
building is thirty-eight years, the probability of getting a tenure higher than twelve years is
very low despite the fact that the customer may otherwise be eligible for a twenty-year
loan. This reduction of tenure would reduce the loan eligibility.

 Unaccounted Component
In some real estate transactions a portion of the cost is not accounted for in any of
the documents related to the purchase. Thankfully, this practice is on the decline especially
where the property is bought from reputed builders. No bank takes this unaccounted amount
in calculating the cost of the property while determining the loan amount eligibility.

 Resale Value
The resale value of a property is taken into consideration before the bank lends
money to buy a property. It ensures that in the unlikely event of a default, should the bank
need to dispose the property to recover its dues, the bank is well covered to the extent of
the home loan provided. This is more of a problem in case of resale properties and lesser
one in case of properties purchased from reputed builders.

 Independent Valuation of the Property

Every bank has practised that bank will not give a loan (or give the loan at a higher
rate) when the property is being bought from a relative. Also, the bank insists on an
independent valuation of the property and the maximum loan amounts are based on this
valuation rather than on the agreement value.

Elements to Determine Cost of the House (a) Readymade Properties

• Agreement value for buying the property.
• Value of amenities provided along with the flat and payment made
separately under an amenities agreement. In most cases, the amenities
agreement is an attempt to segregate the cost of the amenities to avoid
paying the high stamp duty on real estate in India. Most banks restrict the
value of the amenities to around 20 per cent of the total agreement value of

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 the flat. However, if the amenities agreement is also stamped and registered
most banks will consider 100 per cent of such costs.
• Stamp duty and registration charges to be paid on the agreement.
• Initial capital expenses, such as civil work, are to be met with.
• Some banks will also include transfer charges payable to a cooperative
society, deposits required by electricity companies, and separate payments
for club houses.
• Banks would also consider any cost incurred towards purchase of a parking
space.
• Cost of furnishing: In case of specific tie-up with a builder, a bank may
include the cost of ready furnishings provided along with the flat.
Typically bank will not provide loan for some of the elements of cost such
as stamp duty or registration cost. But some banks consider cost such as
stamp duty or registration cost include in cost of property.

(b) Self-Constructed Properties

Cost of the land, taken as the cost to customer or current market value, whichever
is lower. Some banks will not take the cost of the land into account if customers have
bought it more than a year ago. Cost of construction as estimated by customer’s architect
and vetted by the bank, fees paid for obtaining legal and statutory approvals, stamp duty
and registration charges payable on agreement.

3.2.2 Application Form

Filling up the application form is the first step towards the home loan. The look of
an application form may differ from bank to bank, but nearly 80 per cent of the information
they need is similar. Most of this pertains to customer’s personal and professional
information, details of customer financial assets and liabilities and the details of the
property (if finalized) including the estimated cost and the means of financing the same.
While submitting the application form, each bank would ask for documents to
establish customer income. This will need to be backed up by proofs such as copies of last
three years’ income tax returns (alongwith copies of computation of income / annual
accounts, if any), Form 16 / Form 16A, last three months’ salary slips and copies of the last
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six months’ statements of all customer active bank accounts in which customer salary /
business income details are reflected.
Alongwith the application form and the credit documents, banks will charge
processing fee. This fee varies from bank to bank, but is usually around 1 to 2 per cent of
the total loan amount.
Most banks have flexible fee structures, and it is advisable that customer negotiate
hard to find out the bank’s minimum fees though it is unlikely that a bank will agree to
provide a loan without any upfront fee at all. Some banks have zero upfront-fee loans but
that advantage may be negated as their other charges such as ‘legal charges’ and stamp
duty’ are normally higher. The bank statements are scrutinized for:

Level of Activity
In case of self-employed persons, this gives information about the extent of their
business activities.

Average Bank Balance

A customer relation is to be established with the bank after scrutinizing average
bank balance maintained in a savings bank account speaks volumes about the spending and
saving habits of any individual.

Cheque Returns
A small charge debited by customer bank in the statement indicates that a cheque
issued by customer was returned by customer bank. Many such returns can have a negative
impact on customer loan sanction.

Cheque Bounces
Cheque deposited by customer are returned by the issuer’s bank they will be visible
in customer bank statement and banks have specific norms as to how many such returns
are acceptable in a period of one year.

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Regular Periodic Payments
The existence of periodic payments to other finance companies/banks indicates an
existing liability and customer will need to provide full details to the lender.

Customer Age
Proof of customer age, such as, license / passport / ration card / PAN card / Election
Identity Card will need to be submitted.

Identification Proof
Same as above but with customer photograph. Sometimes the same document, if it
contains a photograph, the current residential address and the correct age can be the proof
for all three things.

Customer Employment Details

If Customer Company is not well known, then a short summary about the nature of
the company, its business lines, its main customers, its competitors, number of offices,
number of employees, its turnover and profits may be needed. Usually the company profile
that is available on the standard website of the company is enough.

Customer Investments
This helps the bank to estimate customer ability to pay for the down payment as well
as customer savings habit.

3.2.3 Personal Discussion

Some banks insist on meeting customer after receiving the application form, and
before the loan sanction, together more details about customer that may not be mentioned
in the application form.
If the bank calls customer for personal discussion (this is normally to reassure them
of customer repayment capacity) make sure customer carry all the original documents
pertaining to the information provided on the application form. Banks process loans only
after they are convinced favorably about customer.

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3.2.4 Bank’s Field Investigation
Every bank validates customer information, including customer existing residential
address, customer’s place of employment, CIBIL report, employer credentials (if
customer’s work for a small organization) and residence and office telephone numbers.
This is normally done by sending representatives to customer workplace or residence.
These representatives are usually employees of small firms to which the bank has
outsourced this activity. The ability of these personnel is uneven and the interaction with
them may not always be smooth. Banks also do a quick check on the references customers
have provided in the application form.

3.2.5 Credit Appraisal and Loan Sanction

The bank establishes customer repayment capacity based on customer’s income,
age, qualification, experience, employer and nature of business (if self-employed). Based
on these parameters, customer maximum loan eligibility is worked out and the final loan
amount communicated to customer, then issues a sanction letter. This letter may either an
unconditional letter, or may have certain terms and conditions mentioned. Customer has to
fulfill these conditions before the loan is disbursed.

3.2.6 Offer Letter

Once the loan is sanctioned, an offer letter is sent mentioning details like loan
amount, rate of interest, whether fixed or variable rate of interest is linked to a reference
rate, tenure of the loan, mode of repayment, if the loan is under some special scheme, the
details would be mentioned, general terms and conditions of the loan and special
conditions, if any.

Acceptance Copy of the Offer Letter

If customer accepts the offer letter the bank will ask customer to sign a duplicate
letter for the same bank’s records.

3.2.7 Submission of Legal Documents

Once customer selects property, the bank requires customer to hand over the entire
set of’ original documents pertaining to customer property so that it can keep them as
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security for the loan amount given to customer. These documents would remain in the
bank’s custody until the loan is fully repaid.

Legal Check
Every bank conducts a legal check on customer documents (including draft sale
documents that customer will be entering into with customer seller) to validate their
authenticity. These documents normally include:
• The title documents of customer seller which prove the seller’s title including the
chain of title documents if he is not the first owner.
• NOCs from the legal owners such as Cooperative Housing Societies, statutory
development authorities, or the leaser of the land in the case of leasehold land.
NOCs are not required where the property is situated on freehold land and the entire
land is being transferred along with the structure.
The banks send these documents to a lawyer on their panel (either In-house or
outsourced) for a thorough scrutiny. Some banks will charge a special fee to cover these
cost while some banks will ask customer to pay these directly to the concerned lawyer
though for most banks the upfront fee covers these fees as well. The lawyer’s report either
gives a go-ahead if the documents are clear, or it may ask for a further set of documents. In
the latter case, customer are expected to handover the additional documents to the bank for
a clear title.

Since property documentation in India is non-standard and non-transparent, it helps

if customer buy property from a reputed builder since the builder would know the process
inside out, and keep all the documents ready. In fact, the maximum customer service issue
arises at this stage because of a lack of standardization. Also, as per the laws of several
states, there are heavy transfer charges on sale of property and / or very heavy stamp duties.
This has given rise to sale of property by showing lower consideration than agreed for, with
the balance being paid either on an amenities agreement or in cash. Moreover, the concept
of sale by executing ‘Irrevocable Power of Attorney’ has gained ground especially in the
National Capital Region. All this could restrict the choice of customer lenders and may
therefore increase the cost of the loan which customer might want to keep in mind while
finalizing these kinds of properties.
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3.2.8 Valuation of Property
Valuation has become a key parameter in determining the loan amount that can be
sanctioned by the bank. The valuation process is quite subjective and dependent on the
quality and ability of the person sent by the bank for valuation. In many cases, the valuer
determines the value of the property at an amount that is lower than the documented cost
of the property and this would result in the loan amount being decreased since the bank
funds a certain percentage of the cost or valuation of the property whichever is lower. Now
a day, valuation of property is determined according to “Jantri Value”. Valuer could not
exceed the value of property if valuer had proper evidence for higher value.

3.2.9 Registration of Property Documents

After the legal and technical / valuation check, the draft documents as cleared by
the lawyer need to be finalized and signed and the stamping and registration of the
documents need to be done. Also if any No Objection Certificates (NOCs) are pending
these need be obtained in the format approved by the bank’s lawyer.

3.2.10 Disbursement
The best part is when customer actually received the cheque. This happens once the
bank has ensured that the property is legally and technically clear and after customer has
handed over all the original documents pertaining to the transfer of ownership of property
in customer favour, having executed the necessary loan agreements with the bank. But at
this stage, customer should also provide documents to prove that customer have paid
customer personal contribution towards the property, since banks normally fund only up to
85-90 per cent of the total cost of the house.
In case customer are expecting money from other sources to fund customer own
contribution, customer need to provide sufficient evidence for the same. It is only after
submitting this proof that the bank will release part disbursement of the loan.
The cheque will be in the name of the reseller (for resale flats), builder, society or
the development authority. It is only in exceptional circumstances, that is, if customer

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provides documents to support that customer have made an excess payment from customer
own account that the cheque will be handed over to customer directly by the bank.
Usually, loans are disbursed on the basis of the stage of construction of the property.
This would mean that the disbursement could either be full and final (in the case of resale
or ready possession properties) or part disbursement (in the case of underconstruction
properties). Each option would have different disbursement processes. Customer should
keep photocopies of all documents / agreements / letters submitted to the bank to avoid any
misunderstandings later.
Apart from home loan process, the following flow charts shows home acquisition
process and booking process which are important for a home loan buyer.

3.2.11 Flow Chart of Home Acquisition Process

Figure 3.1 Flow Chart of Home Acquisition Process

93
3.2.12 Flow Chart of the Booking Process
Figure 3.2 Booking Process
94
 Prospective Customer identifies a property
to purchase

Filling of application with a Public Agency

Negotiates the Rates (with the builder/seller)
And takes details of additional charges in the transaction

Cross checks the rates and charges through other/alternate source

(Dealers/other property owners etc.)

Finalize the payment option

(Hire purchase or down payment)
And options of taking loan for purchase

In case of loan option being exercised negotiates

With Housing n Finance Institution and decides on terms and conditions
such as amount of loan, period of loan,
Rate of interest etc. and submits documents for processing
of loan for in-principal approval

Completes the booking formalities like: application form filing, submission

of requisite documents and pays the booking amount

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3.3 EMI (Equated Monthly Installments)
When customer takes a loan, he has not only to pay back the amount of money he
has borrowed, but also the cost of borrowing, which is the interest rate on the loan. The
cost of the loan will vary depending upon the number of years. Customer’s are borrowing
for, usually, a longer-term loan which will be more expensive, than a shorter loan, because
simply put, the lending institution has taken a risk, over a longer period of time. An EMI's
amount is dependent on the principal amount borrowed and the interest that is levied. The
number of EMIs on the other hand, will be dependent on the tenure of the loan. The longer
the loan period, the more number of EMIs customer needs to pay. The EMI usually remains
constant throughout the period of the loan. However, what of this is used to pay off interest
and what part to pay off the principal varies. In the beginning of the loan repayment period,
the interest component of an EMI is higher and the principal amount is lower. Later on, as
the years go by, the principal amount becomes higher and the interest becomes lower.

3.3.1 Calculation of EMI

An EMI can be calculated on a daily reducing, monthly reducing, quarterly
reducing, and half yearly or yearly reducing basis. The EMI will be lowest, if it is
calculated on a daily reducing basis.
Daily Reducing Basis: Even better than a monthly reducing calculation is a daily
reducing method, which some banks apply.
Monthly Reducing Balance: Now, let us take a real life example of an EMI calculated on
a monthly basis. Keeping the loan amount at ` 1 Lakh the period as 15 years and the rate of
interest as 12%, the bank will change the principal outstanding every month. After the
customers pay their EMI for the month, the new reduced amount will be calculated only
for the next month.
Similarly, in a quarterly, half yearly or annual reducing balance the interest is levied
according to principal outstanding at the end of these periods. Progressively, the EMI works
out to be more, with the highest being in an annual reducing basis.

Computation of EMI is calculated with the help of the following formula:

EMI = L×r×(1 + r)n/((1 + r)n - 1)

96
 Where, L - Loan Amount r - Rate of
Interest in Decimals
n - Period of loan (in years).

3.4 Calculation of Interest Rate

Interest rates continue to be calculated in different ways. The methods that are no
longer widely used are flat rate and annual reducing basis.

(a) Flat rate

Flat interest is calculated every year on the original principal amount without taking into
account the repayments that have occurred. The only reason a lender will quote a flat rate
of interest is to hide the actual interest rate, which is likely to be obnoxiously high. Unless
desperate, customer must not sign any contract where the interest rate is calculated on a
flat basis. There is a widespread misconception that the ‘effective interest rate’ is a certain
multiple of the ‘flat rate’. This is absolutely incorrect.
There is no magic formula that converts a ‘flat rate’ into an ‘effective interest rate’.

(b) Annual reducing basis

Here an Equated Annual Installment (EAI) is calculated which is then divided by
twelve to find out the monthly EMI. The EAI is calculated assuming that it is payable at
the end of the year even though, in practice, the installments are paid every month. Thus
the actual cost is higher than the stated cost.
No large bank currently uses this method of interest calculation for new loans.
However, some banks continue to use this kind of interest rate calculation for their shorter
duration loans, such as, home improvement loans and loans against property. The same rule
applies to these kinds of loans as in the case of loans with flat rates, though to a much lesser
degree. This kind of interest calculation is used to mask the higher interest rate being
charged.

97
(c) Monthly reducing / Daily reducing basis
This is the most commonly used form of calculating interest rates. There is very
little difference between the two methods as in most cases the installments are, in any case,
paid on a monthly basis. However, where the interest is calculated on a monthly reducing
basis and customer pay the installment a few days early, the credit is given only on the due
date and not on the date of payment whereas, in cases where the interest is calculated on a
daily basis, the credit is given on the date of payment. This does result in some savings
though it may not be very significant unless customer plan to pay all customer installments
well before time.

(d) Fixed Rate and Variable Rate

There are two basic kinds of interest rates: (i) fixed interest rate and (ii) variable
interest rate also called adjustable rate loan or floating rate.

Fixed Interest Rate

As the name suggests, the interest rate in these loans remains constant throughout
the tenure of the loan. These loans are normally priced higher than variable rate loans for a
similar tenure.
As a variation, some banks offer a resettable fixed rate loan under which the rate
remains fixed for a particular period (say three years) and is then reset every three years.
The interest rate on such resettable fixed rate loan is normally lower than extended tenure
fixed rate loans.

Variable Interest Rate

Some banks also call these adjustable rate home loans. Here the interest rate is
linked to a benchmark rate. Some banks use their prime lending rates as the benchmark rate
while some banks have specific benchmark rates that they use for home loan purposes.
Typically, the interest rate applicable to customer loan tends to be a certain percentage
below this benchmark rate. (This is the current trend. Nothing stops the bank from having
a low benchmark rate and quoting the applicable interest rate as a certain percentage above
the benchmark rate. In fact this is the trend worldwide.)

98
 The benchmark rate of a bank called Retail Prime Lending Rate (RPLR) by the
bank) or BPLR (Base Prime Lending Rate) is 10.25% per annum. The bank may currently
quote the interest rate for a twenty-year home loan at 2% below its RPLR. Therefore, the
rate applicable for customer loan currently becomes 8.25% per annum (which is 2% less
than 10.25%).
The applicable interest rate for customer loan will henceforth be governed by the
movement in the RPLR. If RPLR goes up, the applicable interest rate on customer loan will
go up and similarly, the applicable interest rate will go down if the RPLR goes down.

(e) Prime Lending Rate / BPLR

The Prime Lending Rate (PLR) is the rate a bank will charge its best (prime)
customers. Therefore, by definition, banks should not lend below their PLR. In India the
concept of PLR is a bit of a misnomer since banks lend a significant portion of their funds
to blue chip corporate at rates much lower than their PLRs. Hence, the declared PLRs for
most banks only serve as pegs or benchmarks for deriving the rates for the other customers.
This is the reason that banks charging rates lower than their PLR for home loans as well.
Most variable rate home loans are currently priced at a certain percentage below the
declared PLR of the bank.

3.5 Interest Rates of Home Loan, Processing Fees and Pre-Payment

Charges
Generally banks are independent to determine their home loan interest rate depending upon
banks’ BPLR (Base Prime Lending Rate) or Base Rate. But, on an average housing loan
interest rate for nationalized banks varied to 8% to 10% and for private banks, foreign
banks and co-operative banks varied to 9% to 12%.
As concerned with processing fees it is totally depend on credit policy of each bank. Some
banks (nationalized banks) declare waiver of processing charges to attract the customers
during the festival season. Generally, private banks levied processing charges 2% to 3%
depending upon credit policy of banks. However, co-operative banks generally levied 0.5%
processing charges.

99
As far as concerned with pre-payment charges, no pre-payment charges is to be levied by
the nationalized banks and co-operative banks. But, private banks have practiced to levy
pre-payment charges depending upon credit policy of the banks.
The detail information regarding interest rate, processing fees and pre-payment
charges of different banks given in annexure (3).

3.6 Stamp Duty and Registration Charges across various States and
Cities
In purchasing home, stamp-duty play vital role. Because of stamp duty, cost of house
increase from 5% to 8% as stamp duty applicable to the state in Gujarat, stamp duty is
charge as per Bombay Stamp Act as applicable to Gujarat.
As compared to other states, stamp charges and registration charges are less in Gujarat
state. Also in Gujarat incentive given by state government to women so that there are no
registration fees paid if property has been registered only in the name of women.
The detail information given in annexure (4).

3.7 Home Insurance

After sanctioning home loan one needs to insure it against future risks and perils.
Besides natural calamities such as cyclones and earthquakes, man-made disasters, too, pose
significant threats to residential properties. Here comes the use of home insurance policy.
In the present time, a number of insurance companies and banks are coming up with
attractive home insurance policies, which provide cover for the property in case of all the
aforementioned hazards.
Tragedies due to gas cylinder explosion, fire due to electric short circuit or disasters
like burglary are also covered by majority of home insurance polices available in the
market. It shall be noted that a home insurance does not cover the market value of the home.
The price of the home includes the cost of the land and the cost of constructing the building
structure on this land and the land cannot be insured. The insurance cover is only for the
cost of constructing the building. The sum insured is calculated by multiplying customer
home area by the construction rate per sq.ft.

100
Things Included In Home Insurance Policies
• Building structure
• Contents inside the home

Insurance Covers for a Building Structure

The Fire and Special Perils covers damages to the structure of home due to the
following reasons
• Fire • Bursting And/or Overflowing Of Water

• Storm, Tempest, Flood Inundation Tanks, Apparatus And Pipes

• Riot, Strike Malicious Damage • Missile Testing Operation
• Lightning • Leakage From Automatic Sprinkler
• Explosion Implosion Installations
• Aircraft Damage • Bush Fire
• Damage Due To Impact By Vehicles • Earthquake Cover
• Subsidence, Landslides And Rockslides • Terrorism Cover

Insurance Cover for Contents inside the Home

• This cover is only for damages or loss of the contents inside the home -electronic
and electrical goods, furniture and fixtures, clothing, jewelry and any other contents
inside the home.
• The covers that can be taken for the contents include fire and special perils cover,
earthquake cover, burglary, loss / damage to contents due to burglary or an
attempted burglary loss of jewelry, gold ornaments, silver articles and precious
stones kept under lock and key.

3.8 Tax Benefits

In the present study, I wanted to reveal that the Government of India has announced
following tax benefit in direct tax and indirect tax.

3.8.1 Income Tax / Direct Tax

There are certain tax benefits for the resident Indians based on the principal and
interest component of a loan under the Income Tax Act, 1961. It may help one get tax

101
benefit up to ` 46,350 p.a. (approx). If interest repayment of ` 1,50,000 p.a. is paid. In
addition to this, also is one eligible for getting tax benefits under section 80C on
repayment of ` 1,00,000 p.a. that further reduces the tax liability by ` 30,900 p.a.
These deductions are available to assesses, who have taken a loan to either buy or
build a house, under Section 24(b). However, interest on borrowed capital is deductible up
to ` 1,50,000 if the following conditions are fulfilled:
• Capital is borrowed for acquiring or constructing a property on or after April 1,
1999.
• The acquisition and construction should be completed within 3 years from the end
of the financial year in which capital was borrowed.
• The person, extending the loan, certifies that such interest is payable in respect of
the amount advanced for acquisition or construction of the house
• A loan for refinance of the principal amount outstanding under an earlier loan taken
for such acquisition or construction.
If the conditions stated above are not fulfilled, then the interest on borrowed
capital is deductible up to ` 30,000 though the following conditions have to be satisfied:
• Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction
repairs or renewal of a house property.
• Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or
renewals of a house property.
• If the capital is borrowed on or after April 1, 1999, but construction is not completed
within 3 years from the end of the year, in which capital is borrowed.
In addition to the above, principal repayment of the loan / capital borrowed is
eligible for a deduction of up to ` 1,00,000 under Section 80C from assessment year 2006-
07.

Terms and conditions for availing Tax benefits on Home Loans

1. Tax deductions can be claimed on housing loan interest payments, subject to an
upper limit of ` 1,50,000 for a financial year.
2. An additional loan for extension / improvement to the same house and the
individual's deductions on the existing loan are less than ` 1,50,000 he can claim

102
 further benefits from the additional loan taken, subject to the upper limit of `
1,50,000 for a financial year.
3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax
Act can be claimed on accrual basis and payment basis respectively. If an
individual fails to make EMI payments, he cannot claim tax benefits U/s 80C.
4. According to the Income Tax Act, tax rebates can only be claimed by the loan
applicant.
5. The interest on home loans taken for repairs, renewals or reconstruction, also
qualifies for the deduction of ` 1,50,000.
6. Both the spouses who are tax-payers with independent income sources, get tax
deduction benefits, with respect to the same housing loan, to the extent of the
amount of loan taken in their own respective name.
7. If an individual buys a house and sells it within the same year or after 3 years, and
if any profit is made, then a capital gains tax liability arises on the same for which
the individual is liable to pay short-term capital gains tax since the sale took place
in the same year. But in case, if the sale had taken place after 3 years, then a
longterm capital gains tax liability would have arisen.
8. On being proved that the home loan is simply an arrangement between the
loanseeker and the builder or with a third party for the purpose of claiming tax
benefits, then tax benefits will not be allowed and benefits, previously claimed, will
be clubbed to the income and taxed accordingly.
9. Tax benefits on interest on housing loans are allowable only for the original loan
and according to Section 24(1), tax benefits can also be availed for a second loan
taken to repay the first loan but not for subsequent loans. This means that if you
have already availed of one loan to refinance the original loan and now want to
avail a third loan to refinance the second loan, tax rebate on interest payments will
not be permissible.

Deduction Available to Person on Transfer of House Property U/s 80 C

Any stamp duty, registration fees and other expenses for the purpose of transfer of
such house property is allowable as deduction U/s 80C of one’s income. To this extent one
can claim benefit whether or not home loan principle portion is paid to bank or not.
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Set off Loss U/s 71B
Negative income in case of income from house property (which is always there for
self occupied property and possible in some cases of let out property) such as set off amount
of loss under section 71B of the Income Tax Act, 1961 is allowed to be adjusted against
positive income under other heads and contributes to savings in tax, at the applicable rate.

Deduction Available to Developer and Building Housing Projects in Income Tax Act
Profit from Developing and Building Housing Projects [Section 80-IB(10)]

1. Deduction Allowable
Deduction would be allowed to an undertaking developing and building housing
projects in respect of profits derived from such housing projects.

2. Approval Needed
Any such housing project shall be approved by a local authority on or before
31/3/2008 and as may be prescribed by the law.

3. Amount of Deduction
Amount of deduction would be equal to 100 per cent of the profits derived during
the previous year from the development and building of housing projects.

4. Commencement and Completion of Project

It is provided that the undertaking has commenced or commences development and
construction of the housing project on or after the 1-10-1998 and completes such
construction within the specified time. Specified time for completion of project is as
prescribed by the law.

5. Date of Approval in Case of Multiple Approvals

It is provided that in a case where the approval in respect of the housing project is
obtained more than once, such housing project shall be deemed to have been approved on
the date on which the building plan of such housing project is first approved by the local
authority.

104
 Then the starting point for completion of project will be counted from 31/3/2005
and the project is to be completed within four years there from.

6. Date of Completion
It is provided that the date of completion of construction of the housing project shall
be taken to be the date on which the completion certificate in respect of such housing
project is issued by the local authority.

7. Size of Plot of Land

It is provided that the project is on the size of a plot of land which has a minimum
area of one acre.

8. Size of the Residential Unit

There is a requirement vis-à-vis the maximum size of the residential unit also. This
size has been linked to the city in which the housing project is situated. Maximum Size of
Residential Unit is about 1,500 Sq.ft. (Other City) for Delhi and Mumbai maximum size of
residential unit is about 1,000 Sq.ft.1

3.8.2 Indirect Tax Applicability

In Relation to Service Tax Matter
Construction of Residential Complex Services is taxable service with effect form
16.06.2005 vide notification no. 15/2005 dated 07.06.2005. From 16.06.2005, residential
house is costly as service tax is applicable. For the purpose of construction of complex
means:

(a) Construction of a new residential complex or a part thereof; or

(b) Completion and finishing services in relation to residential complex such as
glazing, plastering, painting, floor and wall tiling, wall covering and wall papering,
wood and metal joinery and carpentry, fencing and railing, construction of
swimming pools, acoustic application or fittings and other similar service; or

1
Singaniya, V.K. (2011). Master Guide to Income-Tax. New Delhi: Taxman Publication Pvt. Ltd.
ps.197-199.
105
 (c) Repair, alteration, renovation or restoration of, or similar services in relation to
residential complex.
The complex should comprise of building or buildings having more than 12
residential units. Thus, Government gives relaxation which has not more than 12 residential
units.
According to me, government has given illusory deduction U/s. 80C in Income Tax
Act, 1961, which is applicable to every tax payer and on the other side the Government is
declared taxable services of construction of residential complex service in Indirect taxation
in service tax. So benefit given in direct taxation U/s 80C will not help properly to housing
Industries.2

3.9 National Housing Bank (NHB) Residex

Internationally, construction of housing price index is a practice amongst the developed
countries. The launch of NHB Residex in India is arguably the maiden effort by a
developing country to capture the trend of price movements in residential property on such
a comprehensive scale. Though the residential property market in India is active, there is
no organized market which estimates the demand and supply forces and tracks the price
movements. The complexity of the markets for house property in terms of the price
discovery mechanism which is an outcome of combination of factors like locality, covered
area, community facilities, individual layouts etc, emerged as the major challenge in choice
of the appropriate methodology for development of a representative price index.
Keeping in view the prominence of housing and real estate as a major area for creation of
both physical and financial assets and its contribution in overall National wealth, a need
was felt for setting up of a mechanism, which could track the movement of prices in the
residential housing segment. Regular monitoring of the house prices can be useful inputs
for the different interest groups. Accordingly, National Housing Bank, at the behest of the
Ministry of Finance, undertook a pilot study to examine the feasibility of preparing such
an index at the National level. The pilot study covered 5 cities viz. Bangalore, Bhopal,
Delhi, Kolkatta and Mumbai. Besides, a Technical Advisory Group (TAG), with Adviser,

2
Gabbawala, Sunil (2011). Treatise on Service tax. New Delhi: Bharat Law House Pvt. Ltd. ps.
4.3854.388.
106
Ministry of Finance, as its Chairman and comprising of experts members form RBI, NSSO,
CSO, Labour Bureau, NHB and other market players, was constituted to deal with all the
issues relating to methodology, collection of data and also to guide the process of
construction of and appropriate index . Based on the results of the study and
recommendations of the TAG, NHB launched RESIDEX for tracking prices of residential
properties in India, in July 2007 by Shri P. Chidambram (the Hon’ble Finance Minister).
In order to guide and oversee the construction of NHB RESIDEX and extension of its
coverage, to include all the 63 cities under Jawaharlal Nehru National Urban Renewal
Mission (JNNURM); a Standing Committee of technical experts has been constituted under
the Chairmanship of CMD, NHB with representations from the Government of India,
(Ministry of Finance, NSSO, CSO, Labour Bureau), RBI, and other prominent market
players.
At present, index is being developed only for residential housing sector. However, at a
later stage, based on experience of constructing this index for a wider geographical spread,
the scope of the index could be expanded to develop separate indices for commercial
property and land, which could be combined to arrive at the real estate price index.

NHB RESIDEX: Salient Features

 Pilot study covered 5 cities viz. Delhi, Mumbai, Kolkata, Bangalore and Bhopal
representing the various regions of the country.
 Actual transactions prices considered for the study in order to arrive at an Index
which will reflect the market trends.
 2001 was taken as the base year for the study to be comparable with the WPI and
CPI. Year to year price movement during the period 2001-2005 has been captured
in the study, and subsequently updated for two more years i.e. up to 2007.
 NHB RESIDEX has been expanded to cover ten more cities, viz, Ahmedabad,
Faridabad, Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow, Pune and Surat.
 Further, with 2007 as base, NHB RESIDEX has been updated upto June, 2010 with
quarterly update (April - June, 2010).
 At the time of last updation and expansion of coverage of NHB RESIDEX to 10
more cities, the base year has been shifted from 2001 to 2007.

107
  NHB RESIDEX will be up dated on quarterly basis from now onwards. This is the
second quarterly update of NHB RESIDEX.
 In the first phase NHB RESIDEX will be expanded to cover 35 cities having million
plus population.
 The proposal is to expand NHB RESIDEX to 63 cities which are covered under the
Jawaharlal Nehru National Urban Renewal Mission to make it a truly national
index.
 Prices have been studied for various administrative zones / property tax zones
constituting each city.
 The index has been constructed using the weighted average methodology with Price
Relative Method (Modified Laspeyre’s approach).
 Primary data on housing prices is being collected from real estate agents by
commissioning the services of private consultancy / research organizations of
national repute; in addition data on housing prices are also being collected from the
housing finance companies and bank, which is based on housing loans
contracted by these institutions.3
It is envisaged to develop a residential property price index for select cities and
subsequently an all India composite index by suitably combining these city level indices to
capture the relative temporal change in the prices of houses at different levels. The data of
NHB Residex for Surat given in Annexure (5).

3.10 RBI Directive for Home Loans

The Reserve Bank of India (RBI) has in the latest directive asked the Indian banks
to be more "fair and transparent" while signing their agreements with the consumers. This
has come following complaints from various consumer sections regarding home loans.
It has emphasized on the fact that while giving a home loan, the banks should not
tie their loans with their own Prime Lending Rates (PLR) which often results in pro-bank
and against consumer interest.

3
www.nhb.org
Residex
108
 • Households should get credit counseling before signing any loan agreement. In
such case, banks should give credit counseling to customer before giving a loan.
Any non-governmental organization can also give independent credit counseling to
small borrowers.
• Consumers often complain of not receiving benefits of falling interest rates as banks
tie their floating rate loans with its PLR and even when rates fall, the banks kept
the PLR unchanged. But when interest rates are hiked, the banks increase the
benchmark rate, thus making customers pay a higher rate and consequently increase
the number of EMIs too. The RBI has asked the banks to mend rules for the same.
• Individual borrowers should ask for the exact tenure and EMI while taking a fixed
rate loan. The RBI has also resolved to look into all consumer complaints if it is
bought to the regulator's notice.
• The IRDA (insurance regulator) has powers to take action against banks if a
customer feels cheated while buying an insurance product. On its regulatory role,
the RBI is trying to maintain a balance between the extent of freedom granted to
the banks and the objectives of governance.
• RBI has made it mandatory for all banks - including private and foreign banks - to
offer a passbook to their customers with the address and telephone number of the
nearest branch.
• Customers have often been harassed by banks' call centers where there is no
accountability of the query made. The "do not call" registry has also been flouted
by banks as customers are bombarded with unnecessary product offerings. The RBI
has directed the Indian Banks' Association to come out with a single "do not call"
registry or when a customer adds his name to a single bank registry it should then
stop unsolicited calls from all banks.
• On rising credit card frauds and wrong statements given by the banks, the RBI has
asked the customers to approach the ombudsman to redress their problems. This
way the RBI feels would inculcate more consumer friendly practices among Indian
banks.4

4
“RBI Directive for Home Loan” www.nhb.org.
109
 As mentioned earlier, in my study I have selected two banks: one is a nationalized
bank (Bank of Baroda) and the second is a Co-operative bank (The Surat peoples
Cooperative Bank Limited). In the following paragraphs, profile of these banks are
provided:

3.11 Profile of Bank of Baroda

There are many nationalized banks in India which provides home loan. In housing sector
Bank of Baroda plays a vital role. Bank of Baroda is one of the lead banks among the all
nationalized banks and it is a lead bank for Surat District. So, I have selected Bank of
Baroda for my research study.

3.11.1 History
Sayajirao Gaekwad, under whose patronage the bank was incorporated on 20th July
1908 with a paid-up capital of ` 10 Lakhs (now US$ 20,800). The bank survived the
disastrous years between 1913 and 1917 – when as many as 87 banks failed – mainly due
to its financial integrity and an abiding responsibility it feels toward its client's hard earned
money. These principles have become the guiding mantra of the bank in the 102 years of
its existence and have helped steer the bank safely through various financial upheavals. In
1953 Bank of Baroda became one of the first Indian banks to open an office abroad, when
it set up a branch in Kenya followed by an office in London six years later.
It has since extended its footprint to 25 countries which it serves through 74 branch offices.
The bank was nationalized in July 1969. This set in motion a new phase in its growth.
While commerce continued to be its objective, the bank was now also called upon to help
in the development of rural markets. With its multi service agency model for urban micro-
credit, Bank of Baroda has, today, redefined social banking and has emerged as a leading
lender to this community. The mid-1980s marked the beginning of a shift to a buyers'
market. The bank responded by diversifying into areas of merchant banking, housing
finance, credit cards and mutual funds. Overseas operations were revamped and structural
changes intensified in various servicing various needs.5

5
Tripathi, Dwijendra (2008). A Century History of Bank of Baroda. New Delhi: Oxford Press.
ps.25-30.
110
Vision and Mission of Bank
It has been a long and eventful journey of almost a century across 26 countries.
Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda
Corporate Centre in Mumbai is a saga of vision, enterprise, financial prudence and
corporate governance.
It is a history scripted in corporate wisdom and social pride. It is a way of ordinary
bankers and their extraordinary contribution in the ascent of Bank of Baroda to the
formidable heights of corporate glory. It is a story that needs to be shared with all those
millions of people - customers, stakeholders, employees & the public at large - who in
ample measure, have contributed to the making of an institution. “To be a top ranking
National Bank of International Standards committed to augmenting stake holders' value
through concern, care and competence”.6

Branch Network of Bank

The Bank of Baroda has 3283 total branches in India and 84 branches in foreign countries.
In Gujarat there are 839 branches and in Surat there are 102 branches of Bank of Baroda.
The detailed information about the branch network in different areas of India is given in
annexure (6) and (7). I have collected this information from the annual report of the bank,
regional office of the bank and website of the bank.

3.11.2 Products and Services of Bank of Baroda

The bank have been provide following facilities to the customer

6
www.bob.com.
111
 Rural / Agri Banking Internet Banking
Wholesale Banking NRI Remittances
Small and Medium Enterprise (SME) Baroda e-Trading

Banking Interest Rates

Deposit Products
Wealth Management
Loan Products
Dematerialized of shares and securities
ATM / Debit Cards
services
Retail Banking
Product Enquiry

Bank of Baroda takes special care to look after the requirements of its shareholders.
Given below are the various benefits provided to the shareholders of the bank:-

• Change of address or of Lodgment of Shares

names • Duplicate Share Certificate
Shareholders • Duplicate Dividend Warrants
• Transmission of shares • Revalidation
• Transposition • Means of communication
• De-materializing Shares • Investor Grievance Committee
• Investors Services Department • Electronic Clearing Services or ECS
• Registrars & Share Transfer Agent • Stock Market Data
• Bonds related to Transfer

Personal Services of Bank • Credit Cards & Debit Cards

• Deposits • Services
• Gen-Next • Lockers
• Loans
Corporate Services of Bank
• Wholesale Banking Advances
• Deposits Services
• Loans

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International Services of Bank
• NRI Services FCNR (B) Loans
• FGN Currency Credits (Foreign Offshore Banking
Currency Credits) Finance in Export and Import
• ECB (External Communication Correspondent Banking Facility
Borrowings) International Treasury
Treasury service of Bank of Baroda includes Domestic operations and Forex operations.

Rural Facilities Provided by Bank Domestic Services

• Deposits Services
• Priority Sector Advances Lockers

Priority Sector Advances

• Small Scale Industries
• Small Business
• Retail Loans
• Schemes sponsored by the GOI
(Government of India)
• Baroda General Credit Card Scheme
(BGCC)

3.11.3 Bank of Baroda Home Loan Process

Bank of Baroda extends its hand to help the customers sail through and realize their
dream of owning a home. Most competitive rates have made by Bank of Baroda home loans
popular among the home buyers. In most of urban area / city Bank of Baroda has started
central processing cell - loan factory where file for home loan has been processes centrally
for the city. The main concepts for opening cpc centre are early process of sanctioning
home loan. Bank of Baroda has committed that the bank will process and sanction the
home loan within seven days. The detailed internal process of home loan given is as
follows.

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3.11.3.1 Purpose of Home Loan
• Construction of new dwelling unit and purchasing of new residential house / flat.
• Old dwelling unit (not more than 25 years old) for dwelling units which are older
than 20 years but not more than 25 years, branch to ascertain structural soundness
of the building by obtaining an approved engineer’s certificate, certifying the
structural soundness as well as residual life of the building which should be at least
5 years more than the repayment period.
• For dwelling units which are older than 25 years, Regional Head may authorize
such cases on selective basis, subject to, ascertaining structural soundness of the
building by obtaining an approved engineer’s certificate, certifying the structural
soundness as well as residual life of the building which should be at least five years
more than the repayment period of the loan.
• Purchase of plot of land, subject to the condition that a house will be constructed
thereon within 3 years or up to the period allowed by Development authority,
whichever is earlier, from the date of purchase of plot, without resorting to penal
interest. Please note that there is no exclusive scheme for purchase of plot under
home loan product and provision of plot is a part of home loan project. As such,
only a reasonable part of the total home loan eligibility should be sanctioned /
disbursed for purchase of plot, keeping margin for construction of house over the
plot. When the loan is considered for purchase of a plot to construct the house, the
branch should obtain a suitable undertaking from the borrower to this effect. Since
the compliance of the undertaking rests with the borrower, Branches are required
to incorporate suitable covenants in the loan documents at the time of sanction, to
enable them to recall the loan and / or charge higher rate of interest, ab initio, in the
event of non-compliance by the borrower with his undertaking. In this background,
for the benefit of the branches, we would like to clarify the issue as under:
In case the borrower fails to construct the house within a period of three years from the
ailment of the said finance:
- Branch to charge commercial rate of interest (PLR / BPLR plus maximum band
declared by the Bank) from the date of first disbursement.
- Branch to recall the loan and recover total loan with revised interest.

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 - Repayment of the loan already availed from any other Bank / Housing Finance
Company and / or other sources, provided documentary evidences are
produced.

3.11.3.2 Eligibility for applying home loan

• All individuals singly or jointly.
• Principal applicant must be employed minimum for last three years.
• Minimum age must be 21 years. However, the minimum age of co-borrower can
be 18 years. Age of the borrower plus repayment period should not be beyond
retirement age in case of salaried persons and 65 years in case of others.
• Person who already owns a house can also be considered for construction / buying
a second house / flat in the same village / town / city or other village / town for
the purpose of self-occupation.
• Normally Housing Loan is to be considered only for purchase / construction of
one house / flat. However, looking to the size of the family, income eligibility
and repayment capacity of the applicant, Housing Loan can be considered for
purchase of two flats / two houses also, provided both the flats / houses are
adjacent or in the same place (city / town / village) and acquired for self
occupation.
• Person who has been provided accommodation by his / her employer is also
eligible for loan, even though he / she is not in a position to occupy it in the near
future and proposes to let out on rental basis.
• Housing loan to HUF is not to be considered as it is not meant for the purpose of
family business of HUF and also there are certain legal complications.
• In the case of individuals who have taken loan for construction / acquisition of
house / flat from other bank / HFC and need supplementary finance, loan may be
considered to high class borrowers after obtaining pari passu or second charge
over the property mortgaged in favour of other bank / HFC and / or against such
other security as deemed appropriate.

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3.11.3.3 Income Criteria for Determining the Loan Amount
The maximum amount of loan should not exceed the following:

a) In Case of Salaried Persons:

Monthly Income Eligible Amount of Loan

Up to ` 20, 000 36 times of monthly gross income

More than ` 20, 000 and Up to ` 1,00,000 48 times of monthly gross income

More than ` 1,00,000 54 times of monthly gross income

a. In case of others viz. professionals / self-employed / business / persons etc., 5- times

of average annual income (last three years). (Depreciation allowed hitherto is not
to be considered for computing eligible loan amount). However, bank should
verified income tax return of applicant, co-applicant and guarantor from income tax
department and verified CIBIL score of every person for their credit history. After
verifying income tax return and CIBIL score, bank should further process for home
loan.
b. Wherever income of the family members is clubbed, they should be made
coborrowers.
c. Considering the average life expectancy of about 65 years, the pension income is
not to be included in the income for calculating the eligible loan amount.

3.11.3.4 Repaying Capacity

i. In Case of Salaried Persons: Monthly Income Total Deductions not to exceed
(Including proposed EMI)
Monthly Income Total Deductions not to exceed
(including proposed EMI)
Up to ` 20,000 40%

More than ` 20,000 and up to ` 50,000 50%

Above ` 50,000 and up to ` 1,00,000 60%

Above ` 1,00,000 60%

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ii. In Case of Others
Annual Income Total Deductions not to exceed (including proposed EMI)
Annual Income Total Deductions not to exceed
(including proposed EMI)
Up to ` 2.4 lakhs 50%

Above ` 2.4 lakhs & upto Rs12 Lakhs 60%

Above ` 12 lakhs 70%

However, higher repayment capacity may be considered by taking into account age,
income, qualification, number of dependents, assets, liabilities stability / continuity of
employment / business of the applicant and the co-applicant’s income.

3.11.3.5 Margin
Margin stipulation on purchase of plot / flat / readymade house (including
registration charges, cost of stamp etc.) and on cost of construction:

For Salaried Persons

Monthly Income Purpose Margin
Up to ` 20,000 Purchase of plot 20%

House/flat already constructed from own resources 25%

All other cases 20%

Above ` 20,000 Purchase of plot 20%

House/flat already constructed from own resources 20%

All other cases 15%

For Others
i. For purchase of plot - 20%
ii. For houses / flats already constructed from own resources and loan is taken
subsequently, 20% of the cost of construction / purchase price of house / flat.
iii. For all other cases 15%

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 iv. For the purpose of finance, least of the value assessed by Bank’s approved valuer
on a realistic basis at the current market value / cost of construction / agreement
value and other legal charges viz. stamp duty, registration charges, legal expenses
etc. should be considered.

3.11.3.6 Security for Home Loan

i. Mortgage of the property constructed / purchased.
ii. If mortgage is not feasible, branch can accept, at its discretion, security of adequate
value in the form of life insurance policies, Government Promissory Notes, shares
and debentures, gold ornaments or such other security as may be deemed adequate
including third party guarantee from individuals with the prior permission of
Regional Head.
iii. Even if it is possible to create equitable mortgage, but customer desires that the
equitable mortgage need not be insisted upon, in such a case branch may as a special
case, accept at its discretion, security of adequate value in the form of life insurance
policies, Government Promissory Notes, shares and debentures, gold ornaments or
such other security as may be deemed adequate with the prior permission of
Regional Head, along with stamped undertaking that the borrower shall not create
any charge on the said property to any third party and that he will create mortgage
of the dwelling units / housing property at a later date if desired by the bank, be
obtained from the borrower. Margin on above securities is to be maintained as per
extant guidelines applicable for financing against those securities.
iv. In cases where procedure for execution of sale deed / conveyance deed , forming a
co-operative society and issuance of share certificate takes a very long time and as
such there are practical difficulties in creating equitable mortgage at the time of
sanction of housing loan for flats developed by builders / developers following
procedure may be adopted : Create equitable mortgage by obtaining following
documents duly supported with the advocate’s search report and opinion on title of
the land as also on the agreement to sale.
- Original agreement to sale executed by builder in favour of borrower, duly
stamped and registered.
- Index – II Property Card
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 - Original Receipt in respect of registration of “Agreement to sell”.
- Copy of the map of the building duly approved by the appropriate authority.
- NOC from builder for creating mortgage and noting of Bank’s lien if the
building is under construction.
- Share Certificate, if society is formed, duly supported with NOC from the
society for creation of mortgage and noting of banks lien in society’s record.
- Possession letter in original.
As regard stamp duty, the same is to be paid as applicable on Memorandum of
Deposit of Title Deed.

3.11.3.7 Rate of Interest

Bank has both the options of interest rate, i.e. Fixed and Floating and borrower can
avail any of the option as per his choice, however, fixed rate option is subject to reset clause
after every 3 years. Floating interest rates are linked with BPLR and subject to stipulation
of minimum interest rate clause. The minimum interest rate would be the rate applicable as
on date of sanction.
- Fixed rate option is not available for loans up to ` 2 Lakhs.
- “Floating rate of interest will undergo change as and when Bank will revise floating
rate or BPLR” in the sanction letters issued to the borrowers who opt for floating
interest rate option.
- For the purpose of deciding rate of interest, tenure should be arrived at by adding
moratorium period to the number of EMIs.
- An option of Flexi interest rate providing therein part of the loan under fixed and
part of the loan under floating rate option.

3.11.3.8 Risk Rating

All home loan applications are subject to CRISIL Risk rating Total marks are 168
and the cutoff is set at 96. The details of the various ‘Rating Parameters and risk rating
model’ are given here. Bank of Baroda takes the decision regarding whether the loan is
sanctioned or not.

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‘Rating Parameters and risk rating model’

Table 3.2 Rating Parameters for Housing Loans

Sr. Variable Score Max Min

No.
1 Borrower Age (in Year) 5 0
(a) 0 – 8 0
(b) Above 18 – upto 25 1
(c) Above 25 – upto 40 4
(d) Above 40 – upto 50 5
(e) More than 50 0

2 Education Qualifications 5 0
(a) Doctorate/Post Graduate 5
(b) Graduate 3
(c) Diploma 2
(d) Higher Secondary 1
(e) Less than Higher Secondary 0

Sr. Variable Score Max Min

No.
3 Marital Status (a) 12 3
Married 12
(b) Single 3
4 Mobility of Individual - Location 10 0
(a) Has not changed location in past 3 years 10
(b) Changed location once in past 3 years 3
(c) Changed location more than once in past 3 years 0
5 Number of dependents 8 0
(a) Zero 8
(b) One 5
(c) Two 2
(d) More than two 0

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6 Number of join applicants 9 0
(a) 0 0
(b) 1 5
(c) 2 or more 9
7 Relationship with bank 14 -4
(a) All banking done through bank 14
(b) Good track record of banking with bank 12
(c) Short term relationship 3
(d) No existing relationship -4

8 Employer type 9 0
(a) Govt./Public sector 9
(b) MNC 9
(c) Listed private sector companies 9
(d) Professional 4
(e) Unlisted private companies 8
(f) Own business 2
(g) Self Employed 2
(h) Pensioner drawing pension through Bank of Baroda 0
(i) Pensioner drawing pension from others 0
(j) Others 0

Sr. Variable Score Max Min

No.
9 Designation 5 0
(a) Senior Management 5
(b) Middle Management or Self employed 3
(c) Junior/Clerical/Pensioners 0

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10 Stability of Income 12 -5
(a) Income has been steadily increasing over the last 3 12
years
(b) Income has been almost the same over the last 3 years 7
(c) Income has been unstable over the last 3 years
(d) Income has been steadily decreasing over the last 3 0
years -5

11 Proof of Income of borrower 3 0

(a) Income tax returns 3
(b) Salary slip 3
(c) Letterhead 1
(d) No proof 0
12 Marketability of property (Marketability will increase if 15 -8
significant developments are happening in nearby areas,
also it will depend on the condition of the property etc.)
(a) Very good 15
(b) Good 10
(c) Fair 5
(d) Poor -8
13 Housing loan purpose category 8 0
(a) Construction (New) 4
(b) Purchase (Old construction) 0
(c) Improvement 8
(d) Foreclosure (for borrowers who borrow in order to 8
repay a previous housing loan)
(e) Loan given under the rural housing scheme 2

Sr. Variable Score Max Min

No.

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 14 Loan to value ratio 18 0
(a) Less than 0.5 18
(b) 0.5 – 0.7 12
(c) Above 0.7 – upto 0.9 7
(d) More than 0.9 0
15 Net worth to loan ratio 5 0
(a) 0 – 0.5 0
(b) Above 0.5 – upto 0.75 1
(c) Above 0.75 – upto 1.0 2
(d) Above 1.0 – upto 1.5 3
(e) Above 1.5 – upto 2.5 4
(f) More than 2.5 5
16 Net annual income of the borrower (in ` ) 10 -5
(a) Less than 1,00,000 -5
(b) 1,00,000 – 2,00,000 2
(c) Above 2,00,000 – upto 3,50,000 (d) Above 3,50,000 – 4
upto 6,00,000 6
(e) More than 6,00,000 10

17 Fixed obligations to income ratio 12 0

(a) 0 -0.3 12
(b) Above 0.3 – upto 0.5 8
(c) Above 0.5 – upto 0.7 4
(d) More than 0.7 0
18 Guarantor’s net worth to loan ratio 8 -4
(a) 0 – 0.5 -4
(b) Above 0.5 – upto 1 4
(c) More than 1 8
Sum 168 -23

3.11.3.9 Documentation
Following documents are to be obtained:

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 • Term loan agreement
• General form of Guarantee wherever third party guarantee is stipulated.
• Usual procedure for creation of equitable mortgage / registered mortgage of the
immovable property being financed.
• Document required to be obtained for recovery as per State Recovery Act. In order
to ensure that panel advocate incorporates all vital points in his report relating to
the property offered as security such as non-encumbrance, marketability and title
of the property, the branches are advised to send letters to Advocates as per model
draft while seeking his / her opinion. Reports which do not contain the information
on the points mentioned in the branch letter must not be accepted.

3.11.3.10 Repayment Period

• Maximum 25 years including moratorium period. Loan to be repaid in monthly
equated installments except in case of farmers where the loan is proposed to be
repaid in half yearly installments coinciding with harvesting/marketing of major
crops produced.
• Moratorium period maximum 18 months or one month after completion of house /
taking possession of flat / house whichever is earlier.
• Present age of the borrower plus repayment period should not be beyond retirement
age in case of salaried persons and beyond 65 years in case of others.
• The repayment period can be extended up to 65 years of the age in case of salaried
persons drawing pension subject to the condition that 40% of the pension is
sufficient to pay EMI. In case EMI exceeds 40% of the pension, the borrower to
deposit adequate amount in the loan account so as to reduce the outstanding amount
of loan to the extent it can be serviced by 40% of the pension.
• In exceptional cases, this term may be extended beyond above age limit if borrower
pledges FDRs / NSCs / Govt. Security etc. of adequate value to ensure continuity
of income for repayment of loan installment with interest if sanctioning authority
is satisfied about the same.

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3.11.3.11 Equated Monthly Installment (EMI) Plan
i. The recovery under EMI provides for repayment of dues uniformly throughout the
loan period. The following accounting procedure may be followed in this regard:
a . At the time of granting loan, EMI should be calculated as per chart
b The EMI should be in figures rounded off to next higher rupee.

ii. Accounting & interest application

a. The monthly recovery under EMI shall be credited in full to the loan
account.
b. At the time of monthly interest application, interest is to be calculated on
daily products basis and debited to the loan account. In effect, this would
result in application of interest on daily product basis at monthly rests.

iii. Change in Interest Rates (Under floating Rate Option)

a. As interest rates on Housing Loans are linked to Benchmark Prime Lending Rate
(BPLR) the ultimate rate would, therefore, undergo change as and when Bank will
revise floating rate or BPLR. Accordingly, whenever rate of interest is changed, the
EMI also would need to be modified.

iv. Recovery of interest for the pre-EMI period

a. Interest charged during the pre-EMI period is to be recovered as and when debited,
before commencement of recovery by EMI.
b. For any reason, if the borrower is not in a position to repay the interest as and when
charged in one lump sum, the same may be recovered within 2 months, by
charging overdue interest as and where applicable, as per rules / extant guidelines.

v. Issuance of Interest Certificate

For the purpose of income tax, branches may issue certificate to the borrower for
interest debited during the year to the Housing Loan account, being interest actually
accrued on loan account.

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3.11.3.12 Disbursement of Loan
i. In case of outright purchase of house / flat ready for possession – Disbursement be
made in one installment directly to the seller of the house / flat.
ii. In case of construction of house / flat – In 3 to 4 stages after physical verification,
depending on the progress of construction. Payment can be made either to the
builder directly or to the borrower subject to verification of bills/money
receipts/invoices etc or certificate issued by approved valuer / architect certifying
the progress of the work and the estimated expenditure having incurred there for,
as the case may be. During the course of construction at least once valuation report
from Bank’s approved/ Govt. valuer must be obtained.
iii. To safeguard banks’ interest and as a preventive vigilance measure branches should
adhere to the guidelines given hereunder:
- Upon receipt of quotation / agreement the branch should obtain in writing the
name of the Bank and Branch from the builder / vendor for the purpose of
issuing Banker Cheque / Demand Draft pertaining to the disbursement.
- To obtain request letter from borrower for making the payment to the builder.
- To issue Demand Draft / Bankers Cheques in favour of Bank / Branch, A/cNo.,
Name of Builders / Vendors / Suppliers alongwith a letter addressed to the
vendor.
- Not to hand over the Demand Draft / Bankers Cheque towards disbursement to
the borrower.

3.11.3.13 Unified Processing Charges

Only unified processing charges (which includes processing charges,
documentation charges, document verification charges and pre & one time post sanction
inspection charges) to be levied as detailed below:
Loans upto ` 20 lakhs 0.35% of loan amount.

Loans above ` 20 lakhs 0.40% of loan amount.

Maximum ` 15,000
In case of takeover of Home loan: 0.10% maximum ` 5,000.
(Unified Processing charges recovered, should be credited to ‘P/L Comm. Earned – Service
charge A/c’).

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3.11.3.14 Insurance of the House Property & Personal Accident Insurance of
the Borrower
The house mortgaged with the Bank is to be insured. As a value proposition the
premium is to be borne by the Bank. Bank have an arrangement of free insurance cover in
the name of “Baroda Home Loan Suraksha Bima Yojana” for house property mortgaged
with the Bank and also accidental death insurance cover with the National Insurance
Company limited, who are our partner of Bancassurance business.

Life Insurance cover to Home Loan Borrowers

Life insurance cover available to home loan borrowers under Group Mortgage
Redemption Assurance scheme of LIC of India called Baroda Jeevan Griha Suraksha and
home loans sanctioned / disbursed on or after 01.01.2010 will be covered under tie-up
arrangement with Kotak Life Insurance.

3.11.3.15 Inspection of House Property

i. Pre-sanction inspection is to be carried out
- To ascertain the correctness of various facts and data submitted by an applicant.
- To verify the credentials and antecedents of the applicant.
- To verify the house/flat proposed to be purchased / constructed with the bank
finance.
- To do careful analysis of information collected during pre sanction inspection
to arrive at a credit decision.
- In short the above activities form the due diligence process in appraising the
applications for loans.
- Detailed Pre-sanction inspection including visit to the place of residence, work
/ business place as well as property to be purchased, must be carried out
preferably without giving prior information to the applicant. Pre-sanction
inspection report should be prepared in the format prescribed and kept on
record.

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 - During Pre-sanction inspection, the branch official must cross verify the
information submitted by the applicant with respect to his identity, residence,
employment / business and property to be purchased.
No separate charge be levied as pre sanction is part of processing.

ii. Post –Sanction Activities

- To verify the end use of funds after each disbursement of the loan by physically
verifying the assets created out of bank finance,
- After completion of the house/dwelling unit, inspection be carried out at least
once in 3 years if the account is regular. If this condition is not fulfilled, regular
inspections are to be carried out as per administrative guidelines for inspection
of other advances accounts.
- For quick and immediate detection of misutilisation of bank's loan, if any and
to immediately take corrective steps.
- Inspection reports for each inspection are to be kept on record.
` 100/- plus service tax per inspection may be recovered for carrying out
postsanction inspection.

3.11.4 Conversion from Fixed Interest Rate to Fluctuating Interest Rate

Option
Requests from customers may be considered for allowing conversion from fixed
Interest rate to fluctuating interest rate option by Branch Manager with prospective effect
subject to the following:
- if the account is regular
- as one time offer from the Bank.
- upfront payment of charges on outstanding balance @ 0.5% for every year forth
residual period of the loan maximum 2% of the amount outstanding on the date of
allowing conversion.

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3.11.5 Change of Tenure
Borrowers may be permitted to reduce the tenure of the loans subject to the
following conditions:
i. This option can only be exercised by those borrowers who have availed home loans
under tenure-based rate of interest.
ii. Upfront payment of charges @ 0.20% p.a. on the outstanding amount of loan for
the residual period of the loan as per new repayment schedule i.e. after considering
reduction in the tenure (0.20% x Balance outstanding i.e. 10/- Lakhs x residual
period of loan i.e. 9 years). However, vice-versa i.e. change from lower tenure to
higher tenure is not possible.
iii. There should not be any overdue in the account.
iv. The new repayment schedule should be duly supported by repaying capacity of the
borrower.
v. A written request is to be obtained from the borrower.
vi. The decision of the Bank to be conveyed in writing to the borrower and also the
guarantor, if any, and their acknowledgement be obtained. This letter along with
the request letter of the borrower should be kept with the documents.
vii. New tenure for deciding revised rate of interest will be the period of loan already
lapsed plus the remaining period in which customer wants to repay the entire loan.
The new tenure in the above-cited example will be ten years (period already elapsed
i.e. 1 year plus residual period i.e. 9 years) and accordingly revised rate of interest
is to be levied from the date of Bank’s decision to reduce the tenure.

Bank of Baroda Home Loans Services

The home loans products and services by Bank of Baroda cover:
• Loans for purchase of a new house
• Loan for financing an old house
• Loans for purchasing a plot
• Repayment of loans from other housing finance companies

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 To help customer with any financial requirement for a ready-to-move-in property,
under construction property or any repayment issues. The loan sanctioned can be upto ` 100
lakhs with a flexible repayment period of 25 years.

BOB Home Loan Advantage

Along with providing finance for dream home, Bank of Baroda also gives additional
benefits with each housing loan product to the customers like:
• Free Property Insurance and Personal Accident Insurance during the stipulated
tenure of loan.
• No processing charges for housing loans taken over from other Banks/Institutions.
• Free Credit Card - "PARAS" card (Complimentary for first year) to all new home
loan borrowers with loan limit of ` 2 lakhs and above
• Free Personal Accident Coverage up to ` 2 lakhs Under "PARAS" credit card
Advance up to 90% of the principal amount of home loan repaid for any
requirement ('AAA').
As per current IT provisions - Interest on loan upto ` 1.5 lakhs per annum is exempt from
income tax (Under section 24(b) of the Income Tax Act)

3.12 Profile of The Surat People’s Co-Operative Bank Ltd.

There are many co-operative banks functioning in Surat city. Among them The Surat
People’s Co-operative Bank is the largest co-operative bank in Surat city. So, I have
selected this bank for research study. I have collected the data from annual reports of the
bank, bank officers and website of the bank.

3.12.1 History
With the advent of the 20th century, Co-operative Movement started in India.
Late Rao Saheb Vrundavan Jadav a visionary dreamt of establishing Co-operative
Bank. This Dream turned into reality in the name of The Surat People’s Co-operative Bank
Ltd.
The Surat People’s Co-operative Bank Ltd. was established in 1922 in Surat. The
Bank was registered on 10th March, 1922 and started functioning from 21st April, 1922.

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The Bank was first registered as Urban Co-Operative Bank in India and became Scheduled
Bank on 1st September, 1988.7
The Bank has been servicing for last 89 years to the people of Surat. The bank is
having network of 24 branches, 22 in Surat and 1 branch at Vapi and 1 branch at Navsari.

Strengths
• The Bank is the "First Registered Urban Co-operative Bank" of India.
• All Branches Connected with Core Banking System.
• Among the first 13 Co-operative Banks in September 1988 to get the "Scheduled
Bank" Status.
• The Bank commenced "Total Branch Automation" in 1992-93.
• The Bank introduced "SMS Banking Facility" and "View Account Terminal"
(VAT) facility at all its branches for better customer service.
• Bank started its own "Training Centre" for providing training to its employees.
• The first bank to provide the "Depository Participant Services" in South Gujarat.
• The only co-operative bank of South Gujarat to have direct connectivity to RBI
server for RTGS / NEFT facility.
• The only bank to have direct connectivity with RBI server to have NECS facility.
• The only bank to give RTGS / NEFT facility on STP basis - straight through
processing.

3.12.2 Different Types of Loan and their Interest Rates

Surat People’s Bank provides the different types of loan to the customer. Following
table give the details of deferent types of loan and interest rate attach with loan amount.

Table 3.3 Different Types of Loan and their Interest Rates

(April 2011)
Loan Type Limitation Upto ` 1 Upto ` 5 Upto ` Above `
Lakh Lakhs 50 Lakhs 50 Lakhs

7
www.spb.com

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Housing Loan upto 66 months
10.50 10.50 10.50 10.50

Housing Loan Upto 10 yrs 11 11 11 11

Housing Loan 15 Yrs 11.50 11.50 11.50 11.50

Consumer Durables 14 14 14 14

Personal Loan Against 15 15 15 15

Property

Personal Loan Travel 13 13 13 13

Vehicle Loan 2 - 3 wheeler 13 13 13 13

Vehicle Loan 4 wheeler 13 13 13 13

Cash Credit CC 12.50 12.50 12.50 12.50

Mortgage / HP OD 14.50 14.50 14.50 14.50

Machinery Loan TUF 12.50 12.50 12.50 12

Bill Discounting Letter of Credit

12 12 12 12

Bill Discounting Simple 15 15 15 15

Cash Purchase Credit Sales 11 11 11 11

Self Employment 10.50 10.50 10.50 10.50

Loan / OD Against Govt.

11 11 11 11
Securities

Education Loan Boy 10.50 10.50 10.50 10.50

Education Loan Girl 13 13 13 13

Loan Against Shares 14.5 14.5 14.5 14.5

Project Finance 13.5 13.5 13.5 13.5

Source: SPB, Surat.

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3.12.3 Other Services Provided by the Surat People’s Co-Op Bank
Bank is also providing the other services to the customers as are follows:

• Safe Deposit Lockers Demand Draft & Pay Orders

• Depository Service Any Branch Banking
• ATM Service General Insurance
• SMS banking Services Foreign Exchange
• VAT (View Account Terminal)
Services

3.12.4 Home Loan Procedure in The Surat People’s Co-operative Bank Ltd.
Submission of Application Form
A customer submits the application form to bank alongwith other relevant
documents as required. They (Banks’ staff) comprise documents to establish income, age,
residence, employment, investments, etc. The customer also needs to hand over a photo
copy of property paper at the time of submission of application form.

Validation of the Information

In the next stage, bank validates the information provided by the customer on the
application form. They usually conduct checks on the residential address of the customer,
the place of employment of the customer, and credentials of the employer. Sometime, bank
may ask for credit report from the other banks if customer had taken loan in the past from
other bank. Bank may insist on a personal interview with the customer and perform a
reference check on the references provided by the customer on the application form.

Issue of Sanction Letter

After due appraisal of customer profile, bank calls the applicant for interview in
board of director meeting. In this meeting, if directors of the bank and the manager of bank
are satisfied then only a sanction letter is issued which contains details such as loan amount,
rate of interest, annual / monthly reducing balance, tenor of the loan, mode of repayment
and general terms and conditions of the loan. This, actually, is the approval of the money
lending procedure by the bank. However, the loan amount is disbursed only after the

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documents and the property on behalf of which the loan is being granted are thoroughly
verified.

Submission of Documents
Once the sanction letter is authorised, the customer is required to leave the entire
set of original documents pertaining to the property being purchased with the bank as
security for the loan amount sanctioned. These documents remain in the custody of the
bank till the time the loan is fully repaid. Once the documents are handed over to the bank,
they send all the documents for a thorough legal scrutiny. During this time, the applicant
has to pay for processing fees, insurance premium of property and banks shares.

Validation of Property
Prior to disbursement, the bank also conducts a site visit to the customer's property
to ensure that all construction norms have been adhered to properly. Once the bank is
satisfied that the property is legally and technically clear, they disburse the loan amount.
The disbursement from the bank is on the basis of the stage of construction of the property
if customer is constructed property.

Payment Procedure
Once all the above mentioned process, the borrower is entitled to take the money
from the lender party. Until such time that the entire sanctioned amount is not drawn, the
customer is supposed to pay a simple interest on the Actual Amount drawn. The EMI
payments commences only after the entire sanctioned loan amount is drawn.

3.12.5 Vasudhara Awas Yojna (Home Loan)

Vasudhara Awas Yojna (Home Loan) is for purchase / construction of flat /
bungalow / house. The bank’s home loan is available on competitive interest rate. This
home loan is available for 5 to 15 years. So, the customer may select his home loan period
and also can plan for easy installments.

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3.12.5.1 Purposes for which this Loan is given are
Purchase / Construction of property.
Extension / Renovation / Repairing of house or flat owned by the customer.
Take - over existing housing loan

3.12.5.2 The Main Features of this Scheme are as follows

• Long term housing loan (5 to 15 years)
• Margin 20%
• Easy Process
• Interest charged on actual reducing balance
• No hidden charges
• Nominal processing charges
• No prepayment penalty
• Interest charged on daily product bases.

3.12.5.3 Margins: 20% Margin for Home Loan

3.12.5.4 Interest Rates as Implemented on: 01/04/2011

Period Interest Rates (in %)

Up to 5 Years 10.5
Up to 10 Years 11.0
Up to 15 Years 11.5

3.12.5.5 Eligibility and Repayment

The customer must be at least 21 years of age when the loan is sanctioned.

Repayment
Repayment of loan in easy installments is spread up to 15 years. (Based on the age
and repaying capacity of the customer). The customer may pay more than stipulated
monthly installment at any date within a month, depending upon availability of funds with
the customer. This would enable the customer to pay off his/her loan faster and reduce his
/ her interest burden. No prepayment penalty is levied by bank.

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3.12.5.6 Takeover of Loan
If the customer has already taken a housing loan from any other bank and want to
avail of the benefit of the Bank’s low rates of interest, the bank can take over the loan
he/she has have availed from the other financial institution.

3.12.5.7 Documentation and Income Proof

Required Documents for Assets

For Purchase
- Allotment Letter, Other proof for purchase / construction

For Construction
- Approved Plan, Approval Letter, Construction Cost Estimate, Necessary proof
of assets.

Income proof
If the applicant has his / her own business then
- IT Returns of the last three years, Profit and Loss Ledger, Balance Sheet and
Property Ledger, Copy of Computation of income tax, Tax acknowledgement
and Assessment order. ( If the customer is eligible for income tax)

For Employee
- Last Pay-Slip / Salary Certificate / Copy of form no. 16.
- Copy of Salary Certificate of whole year.
- If Public Provident Fund is being deducted from the customer’s salary then a
copy of the same.

Proof of Business
- Registration of business certificate (Gumasta Dhara License) / or copy of Sales tax
number.

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 Residence Proof
- Copy of City Survey or Tax bill of customer existing house / Rent Receipt /
Ration Card / Driving License

Additional Information Required for “Guarantee”

- Details of L.I.C policy with receipt.
- N.S.C / K.V.P / Term Deposits of our Bank.

Information of Bank Account

- Bank statement of the last 6 months or passbook having the records of the last six
months.

One Guarantor
- Proof of the assets of the guarantor, Copy of city survey or Share certificate,
Copy of 7 / 12, Tax-bill and receipt -
Proof of Income.

The following other documents are needed for Title Investigation:-

a. Duly stamped Agreement for sale with builder / society in case of first sale.
b. Duly stamped Agreement for resale with the present owner including all previous
intervening Agreement.
c. Conveyance Deed in favor of the builder / society (in case of the builder, if there is
no conveyance, then the Agreement to sell land and the development Agreement).
d. Transfer form executed by the present owner in case of society.
e. Receipt of Registration fees (filing fees) issued by the Sub-Registrar of Assurances
in respect of Agreement for Sale / Re-Sale / Conveyance Deed.
i) N.O.C. from the builder for the proposed mortgage. OR
ii) N.O.C from the Society for the proposed mortgage.
f. Commencement Certificate / Development permission granted by the Competent
Authority (viz. Municipal Corporation / Gram Panchayat as the case may be of
the concerned area) for constructing the building.

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 g. Approved building plan (approved by the Competent authority), Municipal
Corporation / Council or Gram Panchayat as the case may be of the concerned area.
h. Occupation / Completion Certificate granted by the Competent authority (viz.
Municipal Corporation / Council or Gram Panchayat as the case may be, of the
concerned area) in respect of the building.
i. Title Report / certificate from the Solicitor / Advocate of the builders / sellers
regarding the said property.
j. Valuation report from approved valuer.
- Share Certificate in the name of (applicant) issued by the Co-operative
Housing Society (After the applicant becomes a member)
- Letter of Possession
- Original receipt of payment
- Any other document / certificates needed as per requirement
After discussing importance, types, basic process, calculation of EMI and interest
rate, home insurance, etc. the next chapter deals with the Data Analysis and
Interpretation.

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