1 Retail Banking- Retail Banking- Practical Aspects Practical Aspects of of Loaning Loaning R.R.Pujari
Aug 17, 2015
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Retail Banking-Retail Banking-Practical Aspects Practical Aspects
ofofLoaningLoaning
R.R.Pujari
Feb-04 2 Retail banking/RRPujari
Banking - segmentationBanking - segmentation
1. Major market segments Wholesale banking
Retail banking
2. Customer segmentation Commercial and Institutional clients
SIB, SME clients
Agricultural clients
Personal banking clients
Feb-04 3 Retail banking/RRPujari
Retail Banking - definedRetail Banking - defined
Commercial banks' dealings with individual customers and small businesses
Those activities and services that a bank provides for individual customers such as savings accounts, personal loans, cheque cashing, etc.
Also known as branch banking
Feb-04 4 Retail banking/RRPujari
Wholesale banking Wholesale banking
Banking functions provided to the business or industrial economy (wholesale market).
These services include commercial lending, factoring, securities underwriting, and export financing, among others.
Feb-04 5 Retail banking/RRPujari
Retail BankingRetail Banking
1. Retail Deposits Checking accounts
Current Accounts Savings Bank Accounts
Term Deposits – fixed / floating basis Fixed term Flexible
2. Retail Loans
3. Retail services Cards, Remittances, Lockers, Collections & other products
Feb-04 6 Retail banking/RRPujari
Retail LoansRetail Loans
Businesses Fund based
Term Loans Working Capital Loans General purpose loans
Non-fund based Letters of Credits Bank Guarantees
Personal Segment Loans
Feb-04 7 Retail banking/RRPujari
Personal Segment LoansPersonal Segment Loans
1. Purpose Oriented Housing Loans Car Loans, Motor cycle loans Education Loans
2. Personal Loans Secured Unsecured
Feb-04 8 Retail banking/RRPujari
Housing Loans
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Feb-04 9 Retail banking/RRPujari
Housing Loans Housing Loans Demand 20 mio units in rural and urban areas with an estimated investment
of over Rs.175,000 cr. (10th Plan) 25 lac units p.a. are built (Rs.10,000cr) – 30%CAGR - needed 65 lac
units
Regulatory Fiats 3% of incremental deposit over previous FY to go to housing Loans up to Rs.10 lacs to be treated as priority sector
Exemptions – Staff loans, NRI loans, take over loans etc. Lower risk weight of 50% as against 100% on other loans NHB to launch MORTGAGE CREDIT GUARANTEE SCHEME Reforms in Urban Land Ceiling, Rent Control Act etc.
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Feb-04 10 Retail banking/RRPujari
Housing LoansHousing Loans
Strong Incentives to home buyers
Interest on housing loan is tax deductible – up to Rs. 150,000 if self occupied & entire interest if let out on rent
Repayment of principle up to Rs.20,000 is tax deductible u/s 88
Loss on house to be considered for computing TDS from salaries
Higher deduction for repairs – 30%
Losses can be carried forward under “Income from property”
No wealth tax if let out for a min 300 days in a year
Exemption u/s 5(vi)-WT for one house or part thereof or a plot not exceeding 500 sq yards1
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Feb-04 11 Retail banking/RRPujari
Housing Loans - NormsHousing Loans - Norms
1. The Client – Age, profession, income, prior connection
2. The Asset – New, old, house or flat, valuation basis
3. The amount - cost of property, furnishing, registration, etc.
4. The period – start up, tenor
5. The margin – owner’s stake
6. Interest basis & rate – fixed/float, individual/group, tied
7. Repayment & prepayment – period, penalties, default clauses
8. Security – primary, collateral, additional comforts
9. Documentation – stamping, mortgage, agreements1.
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Feb-04 12 Retail banking/RRPujari
Housing Loans – Eligibility Housing Loans – Eligibility creteriacreteria
Age – min 21 years … max? Up to superannuation Internal stipulation basis – no loan if age is >55 yrs
Profession Employees
PSUs / MNCs, large PS – steady income, secure employment
Small enterprises, etc., Professionals
Lawyers, CAs, Politicians, etc? Self employed /business men1
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Feb-04 13 Retail banking/RRPujari
…… …… Eligibility Criteria …Eligibility Criteria …contdcontd
Income Basis
Salary Certificate IT return Bank statement
Net income or Gross income Other charges on the income Spouse income? Future rentals on the property?
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Feb-04 14 Retail banking/RRPujari
…… …… Eligibility Criteria …Eligibility Criteria …contdcontd
New Loans Prior Connection
Income and spending patterns Conduct of the accounts – avg balance, retn of cheques, etc Comfort level
Customer with others Opinion report Statement of accounts Background check
Take over Loans Only well conducted and good ones Verify possession of property Pay direct to the lending bank
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Feb-04 15 Retail banking/RRPujari
Amount – Loan quantumAmount – Loan quantum
Basis Property value minus stipulated margin (stake of the client) Purchase cost of Land as per Sale deed + stamp duty, etc Actual /estimated cost of construction duly vetted by a valuator Cost of additional amenities Cost of furnishing, white goods, etc. up to say, 5% to 10%
Eligible Amount Net annual income (own &spouse’s) – as per IT return/salary
certificate
Net of minimum amount needed for own use? Net of other deductions and taxes chargeable to the income?
Computed as a certain number of times of net income Adjusted for age factor – remaining years up to superannuation?
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Feb-04 16 Retail banking/RRPujari
Tenor of the LoanTenor of the Loan
Depends on Remaining age up to normal superannuation Quantum of loan sought over optimum EMI Optimum EMI not to be over affordable income surplus Additional collateral comfort available
Joint loans with a younger person LIC or SBI Life policy linked to the loan Additional near cash collateral Group guarantees
Minimum period is 5 years Maximum period is 20 years1
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Feb-04 17 Retail banking/RRPujari
Margin (owner’s stake)Margin (owner’s stake)
General Norm 15% of the project – land & constn., amenities, registration &
stamp duty, etc. 20% for repair / renovation/extension
Group borrowers Tied lending to employees of institutions with check off
facility Additional collateral in the form of
Life cover Over collateralization – market value Vs purchase price
Loyalty consideration
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Feb-04 18 Retail banking/RRPujari
Interest Interest Fixed Rate of Interest
Remains constant through out the life of the loan Can be made adjustable under certain circumstances
Floating Rate of Interest Indexed to PLR of the lending bank No neutral reference rate available/used in India On diminishing balances adjusted – ‘creative masking’
On daily basis At monthly or longer intervals
Normal ranges Up to 5 years 5 to 10 years Over 10 years
Finer interest for group borrowers, institutional tie ups, special categories
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Feb-04 19 Retail banking/RRPujari
Repayment / prepaymentRepayment / prepayment
Generally in equated monthly instalments comprising principle and interest
Stepped up/stepped down – flexible repayment programme tailored to meet specific requirements
EMI size is adjusted when interest rate changes – in respect of Floating Rating Loans
Prepayment penalty is about 1%. Default in repayment may trigger
Penalty provision Termination of the loan
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Feb-04 20 Retail banking/RRPujari
SecuritySecurity
Primary – assets created out of the loan Equitable mortgage of house/flat where clear title & all
documents are available cheaper, simpler but not foolproof
Registered mortgage where deemed necessary, where documents are not full
Costly, cumbersome but safer
Hypothecation of movable assets
Collateral Life cover in sync with outstanding loan amount Third party security/guarantee in some cases
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Feb-04 21 Retail banking/RRPujari
DocumentationDocumentation
Pre-Sale Deed stage Loan application Due diligence - applicant, property title and value Sanction Letter Stamped Loan Agreement capturing all terms and
conditions Agreement to sell Agreement to create mortgage
Post Sale Deed stage Mortgage of the property1
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Feb-04 22 Retail banking/RRPujari
Process FlowProcess Flow In-principle sanction
The client The project Back ground check on the builder Eligibility criteria
Due diligence Legal title Market value certificate Cost estimates - vetting
Documentation Salary Check off / Post dated cheques Standing Instructions on the account Creating charge on the securities
Disbursement – subject to compliance with conditions-precedent
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Feb-04 23 Retail banking/RRPujari
Post-Sanction DrillPost-Sanction Drill Inspect the property and make enquiries to ascertain facts Have the property insured with the bank’s interest noted therein Inspect before each stage-wise disbursement Conduct search in the registrar office to confirm title Keep on record full map of the place and detail drawing of the
flat/house Let the fact of the loan known to the employer and the neighbours
- utmost discretion is called for Make a social call on the family – let the family know about the
loan and the terms Obtain Encumbrance certificate at periodical intervals
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Feb-04 24 Retail banking/RRPujari
Other IssuesOther Issues Processing Fee up to 1% Interest rebate for good behaviour Cross selling
Credit/debit card Banking accounts for the family Lockers Other types of loans – education, auto loans, etc Life insurance policies Other financial products Leverage the good will to get company accounts etc.
Disbursement to direct to the builder/supplier1.
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Feb-04 25 Retail banking/RRPujari
Auto Loans
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Feb-04 26 Retail banking/RRPujari
Vehicle Loans – Terms at a Vehicle Loans – Terms at a glanceglance
New Vehicles – direct loaning vis a vis institutional tie ups
Old Vehicles – valuation, ownership verification?
Eligibility - Persons with regular income - Employees of PSUs, PSs, MNCs and HNIs or Self employed persons
Amount of Loan – Lower of
Cost +Regn – margin (15%)
A multiple of Net monthly income or a maximum
Comprehensive Insurance – Bank’s interest to be noted
Security – Hypothecation of the vehicle (endorsed on RC book) + Life policy
Interest – Fixed – Pricing technique -system of subvention, etc.
Repayment – EMI – Post dated cheques
Post-sanction search with RTO to establish ownership
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Feb-04 27 Retail banking/RRPujari
Auto Loans - Auto Loans - documentationdocumentation
Application-cum-appraisal with two photos Proof of income – IT return/Salary certificate Arrangement Letter Hypothecation Agreement Guarantee Agreement ( in case of no check-off or salary
account with the bank) Authority letter from the employer Undertaking from the borrower Blank signed HPTR form
Disbursement to be made direct to the dealer with instructions1.
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Feb-04 28 Retail banking/RRPujari
Education Loans
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Feb-04 29 Retail banking/RRPujari
Educational Loans - Educational Loans - DomesticDomestic
Eligible courses School/plus2, College, PhD, Engineering/Medical, IT courses
Loan Amount – Need based subject to repaying capacity- Max Rs.7.5 lacs – given in the joint names of student and /or guardian
Coverage – All expenses supported by bills Margin – up to Rs. 4 lacs – nil margin; Above Rs. 4alcs – 5% Interest –
up to Rs. 4 lacs – PLR Above Rs. 4alcs – PLR +1%
Repayment – Course period + earlier of 1 yr or 6 m from job Security – LIC policy + collateral if loan is > Rs.4 lacs Processing Fee - None
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Feb-04 30 Retail banking/RRPujari
Educational Loans - AbroadEducational Loans - Abroad Eligible courses - Job oriented courses offered by reputed institutions
Loan Amount – Need based subject to repaying capacity- Max Rs.15 lacs – given in the joint names of the student (if major) and/or guardian
Coverage – All expenses supported by bills Margin –
up to Rs. 4 lacs – nil margin Above Rs. 4alcs – 15%
Interest – up to Rs. 4 lacs – PLR Above Rs. 4alcs – PLR +1%
Repayment – Course period + earlier of 1 yr or 6 m from job Security – LIC cover +Collateral to be taken if loan is >Rs.4 lacs Processing Fee - None
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Feb-04 31 Retail banking/RRPujari
Educational Loan Educational Loan DocumentsDocuments
Application-cum-appraisal form Proof of admission Marks sheet Statement of account & proof of residence Two photos IT assessment order/return or salary certificate Guarantee Agreement , Deed of Ratification to be executed on attaining majority Arrangement Letter
Tuition and hostel fee direct to the institute with instructionsTuition and hostel fee direct to the institute with instructions1.
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Feb-04 32 Retail banking/RRPujari
Loans against DepositsLoans against Deposits
Borrower : All or any holders of Deposit
Loan Amount : Deposit + Accrued interest (–) margin
Margin : For loans up to Rs.10,000 – 10% ; others 20-25%
Interest : 2% above applicable TDR int.
Repayment : In affordable instalments – tenor co-extinguished with that of TDR.
Documents : DPN, discharged TDR, Lien Agreement
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Feb-04 33 Retail banking/RRPujari
Loan against NSCsLoan against NSCs
Borrower : All or any holders of the NSCs with satisfactorily conducted accounts
Loan Amount : 65% of the face value of NSCs
Margin : 35%
Interest : PLR + 1.50%
Repayment : In affordable instalments – in 2/3 years.
Documents : DPN, discharged Policy, Proof of identity/income, SV and noting of assignment from LIC
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Feb-04 34 Retail banking/RRPujari
Loans against Life policiesLoans against Life policiesWho can borrow? Policy holder with satisfactorily conducted accountsHow much ?
95% of the surrender value of the PolicyAt what interest ?
@ PLR What is the repayment condition?
Depends on repayment capacity – generally not more than 3 yrs. What are the documents to be obtained?
Application with two photos Proof of identity & income Confirmation from LIC/SBILife about Surrender Value and
noting of assignment in favour of the bank DP note/take delivery letter
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Feb-04 35 Retail banking/RRPujari
Against Kisan Vikas PatraAgainst Kisan Vikas Patra Who can borrow ?
Holders with satisfactorily conducted a/c How much ?
75% of the value of the investment At what interest ?
@ PLR on Demand Loan & 1% above PLR on Overdraft What is the repayment?
Depends on repayment capacity – generally not more than 3 yrs. What documents need to be obtained?
Application with two photos & Proof of identity and income DP Note/delivery letter Duly discharged patra Security delivery letter
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Feb-04 36 Retail banking/RRPujari
Against magnums/Mutual Against magnums/Mutual fundsfunds
Who can borrow ? Holders with satisfactorily conducted a/c
How much ? 50% of the market value or NAV
At what interest ? @ PLR +1.50%
What is the repayment? Depends on repayment capacity – generally not more than 3 yrs.
What documents need to be obtained? Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged security / copies of certificates Proof of marking of lien from the fund Security delivery letter
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Feb-04 37 Retail banking/RRPujari
Against UTI unitsAgainst UTI units Who can borrow ?
Holders with satisfactorily conducted a/c How much ?
60% of the Face Value or 75% of NAV At what interest ?
@ PLR + 2.00% What is the repayment?
Depends on repayment capacity – generally not more than 3 yrs. What documents need to be obtained?
Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged certificates Proof of marking of lien from the fund Security delivery letter
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Feb-04 38 Retail banking/RRPujari
Against RBI relief bondsAgainst RBI relief bonds Who can borrow ?
Holders with satisfactorily conducted a/c How much ?
85% - 90% of the market value At what interest ?
@ PLR +1.00% What is the repayment?
Depends on repayment capacity – generally not more than 3 yrs. What documents need to be obtained?
Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged patra Confirmation from the PDO about genuineness and
endorsements/registgration of bank’s name
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Feb-04 39 Retail banking/RRPujari
Against Gold OrnamentsAgainst Gold Ornaments1.
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Who can borrow ? Owners of the property with satisfactorily conducted a/c
How much ? 70% of the value advised by the head office at intervals
At what interest ? @ PLR + 3.50%
What is the repayment? Depends on repayment capacity – generally not more than 3 yrs.
What documents need to be obtained? Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged patra Gold ornaments and take delivery letter