CHAPTER 1 1.1EXECUTIVE SUMMARY Banking is essentially a business deals with money & credit.

The primary function of banking is to accept deposit and to lend money. Bank accept deposit though four account i.e. saving A/c, current A/c, recurring A/c & fixed deposit A/c and lends though corporate lending & retail lending. Retail lending means loan & advances given to individual person. Housing finance is a retail lending. Housing is one of three basic human needs viz Roti, Kapada, Makan. Housing development has been slow. Because housing is a large investment, it requires long term finance. The different housing loan products offered are as follows Home Loans, Home Improvement Loans, Home Extension Loans, etc. At present there are 320 housing finance companies of which few are registered under NHB which accounts for 98% of the countrys total housing disbursement. The housing sector has certainly seen a lot of changes in recent times. Housing Finance has been targeting all segments in the society namely salaried, selfemployed professionals and self employed non-professionals. The documents vary from one HFI to another based on your employer, qualifications, experience, etc. The general requirements are as follows: Income Documents, Proof of Employment, Proof of Age, Proof of Residence, and Proof of Investments.

1.2 OBJECTIVES OF THE STUDY The objectives of the Study are as follows: To get knowledge about Indian Housing finance such as operation perform by banks, Different type of bank product, Services. To understand current scenario of the Indian Housing Finance.

1.3 RESEARCH METHODOLOGY We have done exploratory research on HOUSING FINANCE and for that we had used secondary data. We had collected secondary data from various published material like books and from internet web site. From these various information and data we had done qualitative and quantitative analysis to find out the impact of various forces and effect of macro environmental factor.

CHAPTER 2 2.1 INTRODUCTION TO HOUSING FINANCE Shelter is basic human need. Secure ownership of a house can raise the welfare of the housing that lives in it and inter alia enhances productivity, efficiency and creativity. But housing development has been slow. Because housing is a large investment, it requires long term finance. Other factors hindering housing development are inflation, interest rate controls, instability of financial markets and the inadequate legal system. Housing in India has been one of the important economic activities which serves to fulfill many of the plan objectives; providing shelter to the needy, raising the quality of life; particularly of the poor, creating an environment conducive for better health and sanitation, creating additional employment and achieving urban, rural and inter-personal equity in terms of standard of living. Further, housing could lead to the generation of additional savings at all levels. Shelter, like food and clothing, is one of the most important inputs which has a profound impact on the socio-economic and physicpsychological development of human beings. Housing is important to development in both economic and welfare terms. It is not only consumption good but also a productive investment. Housing is one of three basic human needs viz Roti, Kapada, Makan. Ever since the origin of life, mankind has been striving to arrange for these basic requirements & continues to do so even today.
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The definitive dream of an individual, a house that appeared distant a few years, is easily achievable today. Housing loan in traditional sense means finance for buying / modifying a property. The different housing loan products offered are as follows Home Loans, Home Improvement Loans, Home Extension Loans, Loans to professionals for office or clinic, Home Equity Loans (Loan against Property), Loan against Rent receivables, Short Term Bridging Loan. Loans on Adjustable Rate, Fixed Rate with money market condition and Fixed Rate without money market Conditions. 2.2 HOUSING FINANCE POLICY: The federal government has taken several measures in its annual budget to encourage housing finance industry. The direct tax rebate on housing loans for individual taxpayers has provided the single-biggest push for generating more demand for housing mortgages. In addition, National Housing and Habitat Policy announced in 1998 has redefined the priorities for the housing industry and delineated the focus areas for housing finance industry. 2.3 EVOLUTION OF HOUSING FINANCE The implementation of housing finance policies pre-supposes efficient institutional arrangements. Although there were a large number of agencies providing direct finance to individuals for house construction, there was no
4

well established finance system till mid-80s, in as much as it had not been integrated with the main financial system of the country. The NHB was established in July 1988 under the National Housing Bank Act 1987 as an apex bank, on the lines of IDBI and as a wholly owned subsidiary of RBI. It is the principal agency to promote housing finance institutions at the regional and local levels and to provide financial and other support to such institutions connected with the housing and human settlement The system has also been characterized by the emergence of several specialized financial institutions, which are considerably strengthened the organization of housing finance system in the country. At present there are 320 housing finance companies of which few are registered under NHB which accounts for 98% of the countrys total housing disbursement. The second pillar of the initial stage was the cooperative movement catering largely to the private sector. Households were encouraged to form cooperative societies, invest initial capital for land purchase and then were financed by the level apex cooperative housing finance companies, which in turn were financed by the LIC, which set aside a particular quantum of their investible resources for this purpose. The third pillar was the housing building advance made to employees of the public sector cooperation and financial institutions as well as to civil servants. Capital formation in housing for the rest of the private sector is left almost entire to the market forces. It is estimated that about Rs. 7000 crores has been the total formal sectors finance for housing which are netting out internal sectoral flows, workout out to roughly half the gross figure i.e. Rs 3500 crores.
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Housing finance as a financial intermediate process commenced only in 1978, with the establishment of Housing Development Finance Corporation (HDFC) as a specialized leader to households and corporate entities specifically for housing purpose. State housing boards like MHADA were introduced further for promotion of housing industry. The robust growth in the demand for housing finance in the recent years has been remarkable. Lower interest rates, tax incentives home ownership, massive competition by providers of housing finance has helped consumers considerably. The primary market for housing finance has now matured. We need to move on to the next stage very quickly.

CHAPTER 3 3.1 GUIDELINE OF RBI FOR HOUSING FINANCE IN INDIA

A) DIRECT HOUSING FINANCE:Direct Housing Finance refers to the finance provided to individuals or groups of individuals including co-operative societies . Banks are free to evolve their own guidelines with the approval of their Boards on aspects such as security, margin, age of dwelling units, repayment schedule, etc. B) Other Guidelines:The following types of bank finance may be included under Direct Housing Finance:
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i.

Bank finance extended to a person who already owns a house in town / village where he resides, for buying / constructing a second house in the occupation. same or other town / village for the purpose of self

ii.

Bank finance extended for purchase of a house by a borrower who proposes to let it out on rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.

iii. iv.

Bank finance extended to a person who proposes to buy an old house where he is presently residing as a tenant. Bank finance granted only for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks themselves.

v.

Supplementary finance. a) Banks may consider requests for additional finance within the overall ceiling for carrying out alterations / additions/ repairs to the house / flat already financed by them. b) In the case of individuals who might have raised funds for

construction / acquisition of accommodation from other sources & need supplementary finance, banks obtaining pari passu or second as they may deem appropriate. may extend such finance after mortgage charge over the property

mortgaged in of favour other lenders and / or against such other security,

3.2 OVERVIEW OF HOUSING LOANS IN INDIA

The housing sector has certainly seen a lot of changes in recent times. The drop in interest rates, stable real estate prices, and the attractive tax savings provided by the government have together resulted in a high rate of growth, which is expected to continue. Moreover, the mindset of the Indian customer, as far as taking a loan is concerned, has undergone a change. Unlike the cautious or even negative outlook on loans a few years ago, the customer today has a far more positive and open outlook on taking a loan. He feels that taking a loan enforces on him a sense of greater financial discipline, as he is bound to use a part of his salary to pay the emi, rather than spending on things on an adhoc basis. He also prefers it to other options such as borrowing from friends and relatives, because in his mind, taking a loan is about being self-reliant, and this gives him a greater sense of self-respect.

3.3 CHALLENGES IN HOUSING FINANCE

This sector today has become extremely competitive. Most players have similar basic offers. The customer is much more informed about the options available to him. Given this scenario, in addition to competitive rates and best service, it is the value-added services and customized features that are likely to differentiate the leaders.

The biggest challenge to banks and HFCs is in offering more sophisticated and tailor- made products to suit customer needs, unlike a vanilla structure offered earlier. For instance, ICICI Bank offers a personal accident insurance cover free-of-cost to the customer. Consumer research also indicates that customers are seeking more than just a loan; they seek convenience in the entire process of acquiring a home as well as the finance for it. The other big challenge is to spread out geographically while ensuring consistency in processes and service standards. This is very important if we have to tap the true potential of the market. Where does India stand in this domain? The property market in India has also undergone transformation, and in some ways aligned itself with global standards. The builder community has become more profess-ional, ensuring better quality and timely delivery. There is increased emphasis on quality and cost control. Documentation methods of project details are more rigorous and more meaningful. Reduction in interest rates has enhanced the borrowing power of customers. A relatively younger set of customers is also entering the market. Therefore, buyers are now more end-users rather than investors, which has resulted in increased awareness about legal documentation and approvals. CHAPTER 4 4.1 HOUSING LOAN UNDER PRIORITY SECTOR

The following housing finance limits will be considered as Priority Sector Advances:
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A] Direct Finance:i. Loans up to Rs. 15 lakh in rural, semi-urban, urban and metropolitan areas for construction of houses by individuals, with the approval of their Boards. ii. Loans up to Rs.1 lakh in rural and semi urban areas and Rs. 2 lakhs in urban areas for repairs to damaged houses by individuals. B) Indirect Finance:i. Assistance given to any governmental agency for construction of houses, or for slum clearance & rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit. ii. Assistance given to a non-governmental agency approved by the National Housing Bank for the purpose of refinance for reconstruction of houses or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit. C) Investments in Bonds Investments already made by banks up to March 31, 2005 in the special bonds issued by specified institutions, including inter alia, NHB and HUDCO shall not be eligible for classification under priority sector lending with effect from April 1, 2006. 4.2 PLAYERS IN HOUSING FINANCE MARKET

The Indian housing finance sector is crowded with players of all sizes and nature: government organisation, insurance companies,
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commercial

banks,

housing

finance

companies

and

co-operative

organisation. The governments support to housing had traditionally been centralized & directed through the state Housing Boards & Development Authorities. In 1970, the central government set up the Housing & Urban Development Corporation (HUDCO) to finance housing & urban infrastructure activities. In 1977, Housing Development Finance Corporation (HDFC) was the first housing finance company in the private sector to be set up in India. In 1988, the National Housing Bank (NHB) was established as a 100% subsidiary of the Reserve Bank of India to promote housing finance through a refinance mechanism to banks, housing finance companies (HFCs) & other institutions & also to function as the supervisory & regulatory body for housing finance companies. Major players in the Industry are HDFC, LIC Housing Finance, SBI Home Finance, and ICICI Home Loan.

CHAPTER 5 5.1 NATIONAL HOUSING BANK

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The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. The NHB has a twin role in the industry refinancing and regulation. As an apex refinance institution, the principal focus of NHBs programs is to generate large-scale involvement of primary lending institutions in various categories to serve as outlets for assistance to the housing sector. Its responsibility as a regulator assumes importance as the housing finance system integrates with the dept and capital markets. In May 2000, the Indian parliament passed an amendment to the national housing bank act. The amendment increases finance of housing banks by adopting asset The Act, inter alia, empowers NHB to: Issue directions to housing finance institutions to ensure their growth on sound lines Make loans and advances and render any other form of financial assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement Formulate schemes for the purpose of mobilization of resources and extension of credit for housing NHB ensures a sound & healthy housing finance system in India through effective regulation & supervision of housing finance institutions. As a financial institution, NHB is known for its commitment, innovation & quality of service offering a broad spectrum of financial products to address
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the needs of the housing sector with motivated employees working in a congenial & participative work environment. I. Business Activity NHB, as the Apex level financial institution for the housing sector in the country, performs the following roles: (A) Promotion & Development: NHB operates as a multifunctional Development Finance Institution (DFI) for the housing sector. The Bank's policies are directed towards promotion and development of housing finance institutions. NHB has framed guidelines for HFCs with a view to promoting their development on sound and healthy lines. NHB has a dedicated Training Division which organizes regular training programmes in areas relating to housing and housing finance for development of management capabilities of officials working in the sector. (B) Regulation and Supervision: NHB exercises regulatory and supervisory authority over the HFCs in the matter of acceptance of deposits by them pursuant to the powers vested in it under the Act. As per the amendments to certain provisions of the Act, which came into effect from June 12, 2000, NHB is vested with powers to grant Certificate of Registration to companies for commencing /carrying on the business of a housing finance institution. Besides, NHB regulates the deposit acceptance activities in accordance with the Housing Finance Companies (NHB) Directions, 2001, amended from time to time, in the matter of ceiling on borrowings (including public deposits, rate of interest, period, liquid assets, etc).
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(C) Financing: NHB raises resources for the housing sector towards increasing new housing stock and provides refinance to a large set of retail lending institutions. These include scheduled commercial banks, scheduled state cooperative banks, scheduled urban cooperative banks, specialized housing finance institutions, apex co-operative housing finance societies and agriculture and rural development banks. NHB is also operating a special window for extending financial assistance to the people affected by natural calamities viz. earthquake, cyclone etc. Refinance is provided by NHB under various schemes (D) Rural Housing: NHB launched the "Swarna Jayanti Rural Housing Finance Scheme" to mark the golden jubilee of India's Independence. The Scheme seeks to provide country.. II. Financial Services NHB supports housing finance sector by extending refinance to different primary lenders in respect of: Eligible housing loans extended by them to individual beneficiaries. improved access to housing loans to borrowers for construction/acquisition/ up-gradation of a house in rural areas of the

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 For project loans extended by them to various implementing agencies Lending directly in respect of projects undertaken by public housing agencies for housing construction & development of housing related infrastructure. Guaranteeing the repayment of principal & payment of interest on bonds issued by Housing Finance Companies. Acting as Special Purpose Vehicle for securitizing the housing loan receivables. Refinance Operations Project Finance Guarantee (A) Refinance Operations A number of Primary Lending Institutions (PLIs) are currently active in the housing finance sector in India. The institutions provide finance to individual borrowers, builders, corporate houses etc. for purchase/construction of houses and for repair / up gradation of existing house. With the objective of providing long-term funds to these institutions, NHB extends refinance in respect of the loans extended by them. The following categories of institutions are eligible to take refinance from NHB: Housing Finance Company Scheduled Banks Regional Rural Bank
15

 State level apex co-operative Housing Finance Societies State co-operative Agriculture & Rural Development Bank (B) Project Finance: The National Housing Bank provides financial assistance for project lending to a range of borrowers both in the public and private sector. The eligible agencies for project lending are:

III. (A) Eligible Borrowers (a) Public Agencies: Agencies incorporated under the enactments of the Central or State legislatures or under the Companies Act, 1956 such as: State Housing Boards/Improvement Trusts State Slum Clearance Boards/Authorities Development Authorities Municipal Corporations/Councils New Town Development Agencies Local Authorities for Housing & Urban Development

(b) Private Sector Agencies: Reputed Developers / Builders having similar experience of minimum 5 years for projects above Rs. 50.00 crores. The cost
16

ceiling is not applicable in respect of slum re-development projects Microfinance Institutions / Self Help Groups / NGOs / Societies registered under the Societies Act, 1860.

III. (B) Eligible Purposes: The Bank offers financial assistance for various types of projects right from township development, land acquisition and development, slum redevelopment projects etc. The same are enumerated below under three main heads namely special projects, general projects and short term facility:

(a)Special Projects: Slum redevelopment projects Housing for EWS/LIG etc (b)General Projects: Township cum housing development projects Construction of houses on individual plots or group housing Land acquisition for the purpose of township and housing development Land development for housing including provision of facilities like roads, water supply, storm water drains, sewerage system etc. (c)Short Term Facility:

17

 Short term finance facility up to a maximum period of 2 years to public agencies engaged in housing projects. III. (C) Security The project finance shall be secured through one or more of the following depending on the Agency/project: Mortgage/charge over immovable property acceptable to NHB Charge over receivables Bank Guarantee Government Guarantee Hypothecation of property III. (D) Customer Service NHB provides excellent customer service by quick disposal of project proposals and individual attention. It will also provide requisite financial and technical expertise and guidance in project formulation, if so required by the borrowers. IV. Guarantee NHB will provide top ended guarantee relating to the repayment of principal and interest which will provide necessary credit enhancement and will enable HFCs to acquire higher credit rating leading to competitive pricing of these instruments. The Scheme envisages provision of guarantee by NHB to the investors regarding repayment of principal and interest during the top end (say last two years) irrespective of the repayment schedule fixed by the HFC and the guarantee shall not exceed 67% of the total amount to be raised and the interest thereof. IV. (a) Security
18

The HFCs desirous of availing the guarantee will have to create a floating charge on the assets equivalent to 125% of the principal amount in favor of NHB. In case the HFC offers any other security in addition to a floating charge for its existing borrowing or is in a position to provide further security, the same shall also be asked for. In case of the HFCs, where personal or corporate guarantee has been obtained, the same shall be extended to cover the guarantee for the bonds/debentures. IV. (b) Guarantee Fee For extending the guarantee, the HFCs shall be charged 75 basis points per year of the amount to be floated as guarantee commission and this shall be payable upfront. IV. (c) Returns The HFC shall furnish such returns/information as may be laid down from time to time for the purpose of availing refinance.

5.2 ROLE OF NHB IN HOUSING FINANCE

The NHB completed its sixteenth year of functioning as the apex institution to promote the housing finance system & other support to housing finance institutions in the country. The NHB has been undertaking measures for capacity building for the housing finance system and for improving the credit absorption capacity of the sector. The Bank continued to expand its financial assistance to the sector by introducing innovative products and liberalized schemes in tune with market demand. The thrust
19

for the development of the secondary mortgage market was renewed and the Banks efforts were continued to introduce mortgage credit guarantee in the country. The total assets of the Bank, which were about Rs.4,000 crore up to 2000-01 made an impressive growth during the last three years & crossed the Rs.13,000 crore mark. Financial performance of NHB during the last two years is given below

5.3 Housing Finance function in India

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CHAPTER 6
21

6.1 OPENING OF SPECIALISED HOUSING FINANCE BRANCHES In view of the priority accorded to the development of housing as also to achieve greater professionalism, there is a need for establishment of specialized branches at certain centre exclusively to cater to housing finance. It is the intention that a housing finance branch should be established in each district. But this can be brought about gradually based on the policies and perceptions for greater involvement of commercial banks in the housing sector. Since the housing finance is a new concept to banks, initially the opening of such specialized branches may be restricted to semi-urban/urban areas and the number of such branches to be allowed will depend on the size and spread of the bank. Requests for this kind of branch in rural area will also be considered where there is a clear need and assured viability. While formulating their proposals, banks may, therefore, keep in view the following aspects for consideration: The housing finance branch of a bank should be in any of the districts for which the bank has lead responsibility or, in the case of banks having very nominal lead responsibility, in districts where they have a large presence. Banks should avoid opening of such housing finance branches at metropolitan centers which are served by quite a few specialized housing finance companies like HDFC or housing finance subsidiaries of the commercial banks. The housing finance branches may be set up in areas where there is a concentration of branches of the same bank designated to handle housing finance business so that the expertise available in the specialized branch
22

could be used for servicing the other designated branches. While formulating their proposals, banks should, as far as possible, give preference to smaller urban and semi-urban centers where there is enough potential for opening of such branches. The proposals should cover all the states to ensure a wider geographical dispersion of housing finance branches. The applicant bank should also explore the feasibility of converting any of its loss-making branches at the centre into a proposed housing finance branch. Apart from this, banks could designate one of their branches in each district for the purpose of housing finance in addition to their normal banking functions. The availability of housing finance services at specialized branches should also be widely publicised. In the interest of effecting economy in expenditure, the proposed housing finance branches, as far as possible, may be accommodated in any of the existing premises of the bank at the centre. Banks may also indicate the existing construction activities, likely development in the business, their involvement in financing such projects/ construction work (whether in consortium or individual basis) at the centre. National Housing Bank will be prepared to take up the task of training the staff to be posted in the specialized housing finance branches so that they are equipped with the necessary skills for the work.

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CHAPTER 7

7.1 Housing and Urban Development Corporation (HUDCO) These institutions have been set up with the sole purpose of financing house construction/ purchasing activities. The Housing and Urban Development Corporation (HUDCO) is the public sector apex body which was setup in 1970. Its activities are to finance and undertake housing and urban development programmers all over the country , build new satellite towns, finance building material industries, undertake consultancy in the areas of housing and urban development, conduct research in low-cost housing etc. HUDCOs main aim, among other things is to serve the need o9f the poor strata of society.

7.2 Target segment of Housing Finance

Housing Finance has been targeting all segments in the society namely salaried, self-employed professionals and self employed nonprofessionals. Its aim is to address every need of a customer buying a home in the marketright from selection of property to availing of a land loan to availing of a home loan.

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CHAPTER 8 8.1 FUNCTIONING OF HOUSING MARKET Housing Market consists of innumerable sub markets such as inputs market for land, labour, materials, infrastructure, etc. Often the interaction of these market forces decided the unit price of a housing stock. Inputs such as land, labour, finance & developers (which may be Govt. agents, such as Housing Boards) to produce a qualitative, standard housing stock. The various aspects of the housing market operations are presented in diagram

25

Inpu t

Lan d

Infrastru cture

Finan ce Product ion

Labou r

Materi al

Builde rs

Develop ers Outpu t

Landlor ds

Housing Services bought by renters & home owners

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8.2 HOME LOANS-WHAT YOU PAY BACK?

There are some other factors besides interest, which can have a significant bearing on the overall cost of your loan. The following is what you pay back to the Housing Finance Company when you borrow. 1. EMI (Equated Monthly Installments):If you are taking a home loan, then HFCs will ask you to repay the loan amount in equal installments every month. This repayment which you make every month to the HFCs is termed as the EMI- Equated Monthly Installments. It comprises both interest and principal repayment. The size of the EMI depends on various factors- the quantum of the loan, the interest rate applicable and the term of the loan. In the initial years, a major portion of the EMI goes in the interest payment only. Pre-EMI Interest:Youve chosen a property thats yet under construction. So the HFCs make the disbursement in parts based on the progress of the construction of your property. Pending final disbursement, you may pay interest on the portion of the loan disbursed at the rate you have agreed upon with the HFC. This is known as the Pre-EMI interest. Pre- EMI interest is payable every month from the date of each disbursement up to the date of commencement of EMI. 2. Pre-Payment Charges:When a loan is paid back before the end of the agreed duration a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre paid. Most people take a 10-15 year loan.
27

Improving incomes over the years invariably results in prepayment of the loan in 5-7 years. 3. Other Cost:Normally, the hidden costs include the fees charged towards processing and administrative fees, the increase in the effective rate of interest due to the annual reducing balance method, pre payment charges, delayed payment charges, etc; if any. To administrative fees are charged to the customers. Some HFCs also charge legal fees and technical fees from the customers while others may include charges for stamp duty and registration of the mortgage deed, if they are going in for a registered mortgage.

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CHAPTER 9 9.1 GENERAL TERMS AND CONDITIONS OF A HOUSING LOAN The following are terms and conditions applicable to the basic Housing Loan product only. These are likely to vary with respect to the different types of housing loans. 1. The loan to value ratio cannot exceed a particular percentage. This differs from product to product and from one HFI to another. 2. The maximum tenure of the loan is normally fixed by HFIs. However, HFIs do provide for different tenors with different terms and conditions. 3. The installment that you pay is normally restricted to about 40% of your monthly gross income. Income Ratio (IIR) knows this as the Installment. 4. Your total monthly outflow towards all the loans that you have availed of including the current loan is normally restricted to 50% of your Gross Monthly Income. This is known as the Fixed Obligation to income Ratio 5. You will be eligible for a loan amount, which is the lowest as per your eligibility. 6. Most HFIs consider your profile before they judge your repayment capacity. You are judged on the basis of age, qualifications, number of dependants, employment details employer credentials, work experience,
29

previous track record of repayment of any loans that you have availed of, occupation, the industry to which your business relates to if you are selfemployed, your turnover in the last 3-4 years, etc. 7. Some HFIs insist on guarantees from other individuals for due repayment of your loan. In such cases you have to arrange for the personal guarantee before the disbursement of your loan takes place. 8. Most HFIs have a team of civil engineers visit the site to get a technical report on the quality of construction compliance with the local laws before they disburse the loan. 9 Most HFIs have a panel of lawyers who go through your property documents to ensure that the documents are clear and are not misrepresented. This is an added benefit that you get when you avail of a loan from HFIs. 10. The disbursement of your loan is as per the progress of construction of your property unless it is a ready property in which case the disbursement will be one single cheque. Pre-EMI or Simple Interest on the loan amount disbursed to you in case of a part disbursement will be payable by you on the disbursement. 11. You repay the loan either through Deduction against Salary, Post Dated Cheques, and standing instructions or by cash/DD. 12. The principal is amortized either on annual reducing or monthly reducing basis as the case may be. The above terms and conditions are generally true for most HFIs with respect to Housing Loans. However the specific terms and conditions vary with respect to specific HFIs.
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CHAPTER 10 10.1 TYPES OF HOUSING FINANCE 1] New Home Loans:A person who is applying for a home loan for the first time is treated as a 'new' consumer. In a highly competitive home finance market environment, there is no question of not getting a new home loan. 2] Construction Home Loan:A home loan may be given out to buy a ready-to-move-into home, like an apartment, or to a consumer who wishes to build his own property. A construction home loan is ideally suited to those who wish to build their own houses, rather than simply buy them. It might be slightly more difficult to acquire a construction home loan because the property consumer intend to build does not yet exist & the finance company may be apprehensive about its resale value and its market viability.

31

This cannot be a long-term loan, however. A construction is not likely to extend beyond a year or two and you must be prepared to pay up the full amount at an early date. 3] Home Equity Loan:There was a time when the concept of home equity loans was unknown. Now, borrowing against the home equity is popular, especially in highly competitive markets where finance is available for just about any purpose. Home equity refers to the difference between the actual market value of their house and the amount of outstanding debt on that home loan you took. A lot of people use this difference to borrow further against the growing value of their home. There are low interest rates on an equity loan & it also has tax advantages in many countries. 4] Land Loan:A land loan is available to customers who wish to purchase a plot of land to construct a residential house. Most HFIs who offer this loan insist that the land is purchased from a development authority or from a society. Some HFIs also permit purchase of land from a developer. Loans are not available for purchase of agricultural land. Refinance of land purchased & purchase of land from an individual owner is normally not permitted by HFIs. Not all HFIs give this loan. The reasons being difficulty in documentation & security of the property (risk of encroachments). 5] Secured Home Loans:All home loans are secured. A secure home loan is one where the housing finance institution is 'secure' or doesn't face so much risk of losses
32

incurred through defaulters. The company or bank gives out home loans worth several lakhs and even crores of rupees, which is not the case with personal loans. Although the risk increases with the amount of loan given out, the risk is also reduced because of the purpose for which the loan is being advanced. A house is an investment & is likely to grow in value over time. In case of default, most companies will allow a grace period of ninety days. If the consumer fails to pay the installments or declares himself delinquent, the bank will simply sell off the house. In fact, the house borrower buy actually isn't their until he have paid up his loan in full, or at least ninety percent of the amount, including interest. The finance company offers him the loan, but borrowers never see the cash. The money goes straight to the concerned housing society or the construction company, & the finance company becomes the real owner of the house. 6] Bad Credit Home Loans:Bad credit home loans would usually refer to an applicant that the finance institution does not consider credit-worthy. Most banking or finance institutions refuse to disburse loans to those who are considered 'bad credit' but this may not always apply to home loans, simply because the property being bought is usually a safe investment & belongs to the company, in case of default. In case of bad credit, the finance company may not reject the loan application entirely. They may insist on a larger share of down-payment.

33

For instance, the company may finance only seventy percent of the total amount, instead of the customary eighty-five percent norm. 7] Interest Only Home loans:A home loan comes in various shapes and sizes. One of the possible options is an interest-only home loan. This refers to a home loan where borrowers are only paying back the interest on the loan as monthly installments, though this is mostly restricted to the first three years or so, when he may not be in a position to repay more than the interest. This means that borrowers repayment amount is the least possible. Another advantage is that the full amount he is paying up is tax deductible. 8] Home Loans for Non Resident Indians (NRIs):The NRI Home Loan is available to Non - Resident Indians from various HFIs for purchase of a house either under construction or on Resale or for self-construction of a property on a plot of land or to finance the purchase of a plot of land allotted by a society / development authority or To renovate / improve an existing property in India. Borrowers have to necessarily be a non - resident Indian holding a valid Indian passport. If borrower are of Indian origin but do not hold a valid Indian passport he / she do not qualify for a NRI Loan. There are basically two definitions of a Non - Resident Indian. One is as defined by the Income Tax Authorities and the second one by Reserve Bank of India (RBI). According to RBI, an Indian citizen who holds a valid Indian passport and who stays abroad for employment / carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a NRI. According to
34

Income Tax Act, an NRI is one, who is employed abroad for a period of not less than 182 days in the financial year immediately preceding the year in which he is assessed.

10.2 PROCEDURE FOR TAKING HOUSING LOAN The various stages involved in a home loan are listed below. The time frames mentioned are on an average and may reduce or increase depending on the peculiarities and the urgency of a case. 1. Submission of application form along with photograph, credit documents & a cheque for processing fees. :-

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Profile of employer on employers letterhead (to be signed by a senior person in the organization) comprising. Once the customer is clear on his queries on home loans, he submits the application form to the HFI. He either submits it directly to the HFI or to a Franchisee of the HFI. Along with the application form, the customer also needs to submit various other documents as required by the HFI. These documents help the HFI in establishing the repayment capacity of the customer. They comprise documents to establish income, age, residence, employment, investments, etc. The customer also needs to hand over a cheque for payment of processing fees to the HFI. 2. Personal Discussion with customer :Some HFIs insist the customer be present at the time of the credit absent appraisal. A practice undertaken to find out more details about the customer that are on the application form. Most HFIs list down the profile of customers whom they would like to meet for a personal discussion. The profile could be based on occupation, loan amounts, etc. For the personal discussion the customer needs to take with him all documents pertaining to the information provided by him on the application form. The HFI proceeds with the processing of the application form only if it is convinced favorably about the customer.

3. Field Investigation by the HFI :Every HFI validates information provided by the customer on the application form. Normal kinds of checks conducted by the HFI are on the residential address of the customer, the place of employment of the customer, credentials of the employers. In case of small organizations a
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validation check on the telephone numbers of the customers residence & employer & a reference check on the references provided by the customer on the application form is also performed. 4. Credit Appraisal by the HFI :Under this stage, the customer's repayment capacity is established based on his income, age, qualifications, experience, employer, nature of business (if self employed), etc. Every HFI lays down certain norms within which the customer needs to fit in to be eligible for a loan amount. 5. Sanctioning of the loan :After the customer details have been appraised by the HFI, the loan gets sanctioned along with certain terms and conditions. 6. Handing over of offer letter to the customer The above-mentioned sanction details will then be sent to the customer in an offer letter. Typically, the offer letter contains details pertaining to the following: Loan amount, Rate of interest, Fixed / Variable rate of interest, If variable, period after which the rate of interest would be reset. Annual / Monthly Reducing balance, Tenor of the loan, Mode of repayment of the loan, Scheme of the loan, if a special scheme has been offered to the customer, General terms and conditions of the loan, Special conditions, if any, which the customer needs to, adhere to prior to disbursement. 7. Handing over of the acceptance copy of the offer letter & a cheque for administrative fees :-

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If the customer accepts the terms & conditions mentioned in the offer letter then he needs to sign the duplicate letter of the offer letter & hand it over to the HFI. A cheque towards Administrative Fees that are mentioned in the offer letter also needs to be given. 8. Submission of property / legal documents by the customer to the HFI :After the selection of the property, the customer needs to hand over the entire set of original documents pertaining to the property being purchased or mortgaged (if the property purchased is different from the property mortgaged) These should clearly indicate that the ownership rights on the property lie with the customer. This needs to be handed over to the HFI since it keeps the property as security for the loan amount given to you. These documents remain in the custody of the HFI till the time the time the loan is fully repaid. 9. Legal check on the property by the HFI :Once the documents are handed over to the HFI, the HFI sends all the documents to their empanelled lawyer for a thorough scrutiny. The lawyers report that comes back to the HFI stating if the documents are clear. In case the lawyer feels that the documents given to him are not enough to arrive at a judgment he may ask for some more documents. Accordingly the customer has to hand over the additional documents. Hence, if a HFI decides to disburse the loan to the customer, the customer can safely assume that the documents of the property he has purchased are clear & the transaction is a safe one.

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10.3 DOCUMENTS FOR TAKING HOME LOAN Given below is the exhaustive list of credit documents that need to be submitted for a general Home Loan Product. The documents vary from one HFI to another based on your employer, qualifications, experience, etc. The general requirements are as follows: 1. Income Documents:Salary slips for last 4 / 3 months Appointment Letter Salary certificate Form 16 issued by the employer Last 3 years Profit & Loss A/c statement duly attested by a C. A., if self employed. Last 3 years Income Tax Returns duly filed & certified by the Income Tax authorities. 2. Proof of Employment:Identity card issued by your employer. Visiting Card 3. Proof of Age:Passport Voters ID card
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PAN card Ration card Employers Identity card School leaving certificate Birth 4. Proof of Residence:Ration card Passport PAN card Rent agreement, if you are staying currently on rent 5. Proof of Investments:Bank statement for the last six months of all operating and salary accounts. Bank statements for the last six months of all current accounts, if selfemployed. Any other photocopies of investments held, if required by the HFI.

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CHAPTER 11 CONCLUSION

Housing finance appears to be extremely important in influencing effective demand for housing, although the terms and conditions on which the finance is offered have a critical impact on its effect. Housing finance being a specialized activity, it was felt desirable to concentrate the activities by selected banks rather than the indiscriminate involvement by all banks. As residential housing loans do not create direct additional income, recovery of loan may prove to be difficult even though loan may be adequately secured. There are many legal and other hurdles to be tackled before substantial involvement of banks. At the same time, banks cannot stand apart from housing finance particularly when many avenues of traditional lending being taken away from commercial banks in the wake of financial innovations.

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CHAPTER 12 BIBLIOGRAPHY Text Reference: Fundamentals Of Financial Services - written by Prasana Chandra

Global Financial Management- written by ANBARSU

Financial Management(a planning and control approach)written by Dr. M.K. Rastogi

Websites And Online Portals: Web Portal for Professional Financial Services www.lichfs.com

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