Home Loans

A Comparative Study on Housing Loans
VIJAYA DEGREE COLLEGE Page 1

CHAPTER 1
INTRODUCTION
BACKGROUND OF THE STUDY

The Housing Finance Industry has become a sunrise industry, thanks to the
falling interest rates, drastic fall in borrowers in other traditional fields and
exponential increase of borrowers in this field. Major players in the finance sector
have entered this field and today it has become affordable for a common man to
avail of housing finance for building his dream house.

It is all the more important to assess the requirements for availing finance
and the various parameters used by the players in the field for lending.

In order to get a housing loan, the customer has to go through a Credit
Appraisal process. Each Housing Finance Institution has its own norms and
standards to evaluate the credit worthiness of a customer. The eligibility of the loan
that the person can avail of depends on the credit worthiness as appraised by the
Housing Finance Institution.

This is one of the most critical stages in the whole loan process. A slight
error by the Housing Finance Institution can increase its risk exposure.
Accordingly, Housing Finance Institutions employ various stringent financial and
non-financial tools and techniques to evaluate the credit worthiness of potential
borrowers. During this whole process, the repayment capacity of the customer is
established, mainly based on some factors such as income, age, qualifications,
experience, employment, nature of business (if self employed), security of tenure,



taxation history, assets owned, alternative / additional sources of income, other
loan obligations, investments and other liabilities.
The Housing Finance Institutions lay down certain norms within which the
customer needs to fit to be eligible for a loan amount. Based on these parameters,
the maximum loan eligibility is worked out.
SBI is one of the major players in the field and are catering to the needs of
borrowers for housing finance throughout the country.
Hence this study is being undertaken to analyze the way SBI operates in
lending housing finance and the various parameters for lending. Also a
comparative study is being undertaken of other major players in the field with SBI.
This study is aimed to project the more important parameters on which the players
in the field give housing finance and also suggests scope for improvement, if any.



HOUSING FINANCE: INTRODUCTION

The need for housing did not receive much attention initially, resulting in a wide
gap between availability and demand for houses. This was also compounded by the
fact that until the early seventies, finance for housing was almost unheard of in our
country. At that time housing in the West was well organized, having undergone a
lot of trials and tribulations. Policy makers in India recognized the importance of
housing and initiated steps to create institutions in the public sector to construct
and finance housing. Primary co-operative housing societies funded by state level
apex co-operative societies were formed with LIC of India funding them. This
period also witnessed the emergence of two major institutions - HUDCO in the
public sector and SBI in the private sector to finance housing activities.

ESTABLISHMENT OF NHB:
Considering the acute shortage of housing the world over, the United
Nations declared 1987 as the International Year of Shelter for the Homeless, as a
result of which a number of housing finance institutions were set up. A few of
these companies were sponsored by Nationalized Banks, while others by private
initiative. To ensure a healthy growth & development in the housing sector and to
narrow down the margin between the housing demand and the availability of
houses the need for a regulatory body was felt. And so in 1988, the National
Housing Bank was set up by an Act of Parliament. Wholly owned by RBI, the key
focus areas of NHB was to regulate and supervise Housing Finance Companies,
provide financial assistance to them, formulate schemes for resource mobilization
and extend credit for housing.



A number of years have passed since then and today there are over 29 housing
finance companies in the market approved by NHB, which are as follows:
Andhra Bank Housing Finance
BOB Housing Finance
CanFin Homes
Cent Bank Homes Finance
Corpbank Homes
Dewan Housing Finance Corporation
GIC Housing Finance
GRUH Finance
GLFL Housing Finance
Global Housing Finance Corporation
Happy Home Profin Limited
Housing Development and Finance Corporation (HDFC)
Housing and Urban Development Corporation (HUDCO)
Home Trust Housing Finance
Ind Bank Housing
LIC Housing Finance Limited
Livewell Home Finance Limited
Orissa Rural Housing and Development Corporation
Parashwanath Housing Finance Corporation
PNB Housing Finance
Peerless Abasan Finance
SBI Home Finance
Saya Housing Finance
Vyasa Bank Housing Finance
Vijaya Home Loans.


The Above Housing Finance Institutions Can Be Classified Into Three
Categories:

Public Sector Finance - which include HUDCO, LIC Housing Finance
Limited, General Insurance Corporation Housing Finance Limited, PNB
Housing Finance, and SBI Home Finance.

Banks - Almost all the banks throughout India provide housing finance,
except a few small branches. The major banks that provide loans for
housing are Bank of Baroda, Bank of India, Bank of Maharashtra, Bank of
Punjab, Canara Bank, Cooperative Banks, Citi Bank NA, Corporation Bank,
Dena Niwas, HSBC, ICICI Home Finance, IDBI Bank, Induslnd Bank,
Lakshmi Vilas Bank, Punjab National Bank, SBI (State Bank of India),
UCO Bank, and many others. Amongst these ICICI and SBI are the leaders.

Private Sector Finance - Housing Development and Finance Corporation
(HDFC) -established in 1978, today it has become synonymous with
housing finance, Dewan Housing Finance Corporation, Global Housing
Finance Corporation Limited, Maharashi Housing Development Finance
Corporation, Weizmann Homes and others.



HOUSING FINANCE INDUSTRY - AN OVERVIEW

Housing Finance has a vast, untapped and potential market today. Significantly,
there has been no dearth of demand for housing and consequently for finances for
the same have been abundant. A boost to the housing finance industry can push up
the Indian economy scenario in a large scale. Housing has a tremendous tendency
to create income and demand for resources, tools and services. As per the ninth
plan, the shortage of housing in 2002 is estimated to be 41 million units, needing
an investment of Rs 1,51,000 crore. With the RBI attaching the priority tag to
housing, almost all nationalized banks have jumped into the fray, offering
attractive terms for housing. Market dynamics play a pivotal role in determining
the lending rates. The entry of banks into the housing finance sector has posed a
serious threat to already existent players in the field .The housing sector is
witnessing a clash between major players. Foremost amongst this is the ICICI and
SBI imbroglio. Such severe competition has benefited the customers in the form of
cheaper interest rates and better service. Tax sops provided by the Government of
India is a significant step towards upholding the future prospects of this industry.
The demand is a result of genuine individual needs for housing. Thus the industry
is on solid ground and has interesting prospects ahead.



BRIEF INSIGHT INTO HOUSING LOANS:
Housing loans refer to credit or finance taken for buying, constructing or
modifying a property or land.

TYPES OF HOUSING LOANS:
Loans Can Be Taken From Housing Finance Institutions For The Following
Reasons

Home loan: Loan taken for purchase of property under construction,
property ready for occupation, resale of property or for self-construction.

Land loan: Loan from Housing Finance Institutions taken for purchase of a
plot of land to construct a residential house. Though most insist that the land
be purchased from a development authority or housing society, some
Housing Finance Institutions also permit purchase of land from a developer.

Home extension loan: Loan taken to extend the built up area of an existing
property.

Home improvement loan: Loan taken for repairs and maintenance of a
property Note: NRIs (Non Resident Indians) can avail loans for the above
purposes etc.



Eligibility Criteria For Housing Loans:
Resident and non-resident Indians can apply for housing loans. To enhance
the loan eligibility, Housing Finance Institutions allow the option of stating a co-
applicant for clubbing of incomes. All the co-owners to the property need to be co-
applicants to the loan necessarily.
Housing Finance Institutions have specific terms and conditions on who can be
listed as co-applicants.

Documentation Required For Housing Loans:

I. Credit Documentation:

Documents that verify your personal and employment status.

A) General Requirements:
Application form duly filled in.
Processing fee (which may be fixed or a percentage of the loan amount
requested).
Photographs of the applicant and co-applicant.

B) Proof of Age: Any of the following can be submitted:
Passport
Voter's ID card
PAN card
Ration card
Employer's Identity card


School leaving certificate
Birth certificate

C) Proof of Residence: Any of the following can be submitted:
Ration card
Passport
PAN card
Rent agreement, if you are staying currently on rent
Bank Pass book
Allotment letter from your company if you are residing in company
quarters.
Proof of name change (if applicable)

D) Proof of Income:
a) For a Salaried Individual -
Employment form issued by employer OR Appointment letter
Copies of Pay-Slips for Last 3 months OR
Latest form 16 issued by employer
Salary certificate
Last 3 years Income Tax Returns duly filed and certified by the Income Tax
authorities
Retainership agreement, if appointed as a consultant
In case you are employed with a private limited company:
Profile of employer on employer's letterhead (to be signed by a senior
person in the organization) comprising
Name of promoters / Directors
Background of promoters / Directors


Nature of business activity of your employer
Number of employees
List of branches / factories

List of suppliers
List of clients / customers
Turnover
Annual reports for the last three years.
Proof of employment:
Identity card issued by your employer
Visiting card

b) For the Self-Employed or Business Class -
Last three years Balance Sheets and Profit & loss accounts duly attested by
a Chartered Accountant
A brief note on the nature of business, year of establishment, present
bankers, form of organization and the capacity in which the applicant is
engaged.
Statement of total income and income tax assessment orders and returns for
the last few years.
Copy of Partnership deed if it is a partnership firm or copy of Memorandum
of
Association and Articles of Association, if it is a company.

c) Other Requirements:
Net worth statement of applicant/co-applicant
Copies of LIC Policy, if any


Particulars of family member in the prescribed format; Name, Age,
Relationship, Occupation, Income
Particulars of Guarantor/s in prescribed format with proof of income of
guarantor/s.

II. Legal Documentation:
Documents with respect to the property for which the loan is being taken.
Original agreement with the builder/developer
Tripartite agreement from builder/developer
A certificate by the legal advisor of the builder to the effect that the builder
has a good reputation and it is free from encumbrance and other charges
A certificate from builder's Chartered Accountant certifying that the builder
has not mortgaged the property anywhere else
Copies of receipts of payments made to builder/developer
Certified copies of all documents pertaining to the property along with up to
date no-encumbrance certificate
Certified true copy of approved plan
Post dated Cheques for the EMIs
Relevant documents in case additional or alternate security
Acceptance copy of the letter issued by the Housing Finance Institution.

Note: These documents are only indicative in nature. The documents will vary
depending on the nature and purpose of the loan.

Stages In The Disbursal Of A Housing Loan:


Submission of application form along with photographs, credit
documents and a checks or processing fees by the customer. During this
stage, the Housing Finance Institution Checks the repayment capacity of the
customer.

A. Personal Discussion With Customer:
Some Housing Finance Institutions require the customer to be present
at the time of the credit appraisal. For the personal discussion the customer
needs to take with him all documents pertaining to the information provided
by him on the application form.

B. Field Investigation By The Housing Finance Institution:
The Housing Finance Institution validates information provided by
the customer on the application form.

C. Credit Appraisal And Loan Sanction:
After checking the customer's repayment capacity, the Housing
Finance Institution sets norms that define the customer's eligibility for a loan
amount. The loan then gets sanctioned along with certain terms and
conditions.

D. Issue Of Offer Letter To The Customer:
The Housing Finance Institution sends an offer letter to the
customer with the loan sanction details, which mention:

Loan amount


Rate of interest and whether it is fixed / variable rate of interest. If variable,
period after which the rate of interest would be reset - annual / monthly
reducing balance
Loan duration
Mode of loan repayment
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
Submission of the acceptance copy of the offer letter and a cheque for
administrative fees by the customer

E. Submission Of Property / Legal Documents By The Customer:
After the selection of the property, the customer is required to
submit the original documents pertaining to the property being purchased or
mortgaged (if the property purchased is different from the property
mortgaged). The Housing Finance Institution keeps the property documents
as security for the loan amount given to the customer till the time the loan is
fully repaid.

F. Legal Check On The Property By The Housing Finance Institution:
It sends all the documents to their empanelled lawyer for a thorough
scrutiny. On receiving the lawyer's report that the documents are clear, the
Housing Finance Institution decides to disburse the loan to the customer. If
the documents sent to the lawyer are not enough to arrive at a judgment, the


Housing Finance Institution requests the customer to furnish additional
documents.

G. Technical Check On The Property:
Prior to disbursement, Housing Finance Institution conducts a site
visit to the customer's property to verify the following:

In Case of Under Construction Property:
i. Quality of construction
ii. Stage of construction: Whether it is the same as mentioned in the payment
notice given to the customer by the builder
iii. Progress of work
iv. Layout of flats and area of property is within permission granted by the
governing authority
v. Requisite certificates have been received by the builder to start construction
at the site.
In Case Of Ready Construction/ Resale:
vi. Age of the structure vii. Quality of construction
viii. Whether the structure will last the tenure of the loan ix. External
maintenance of the property
x. Internal maintenance of the property
xi. Surrounding area (development)
xii. Required certificates from the governing authority have been received by
the builder for handing over possession of the
xiii. There is no existing lien or mortgage on the property.

H. Disbursement:


After verifying that the property is legally and technically clear, the
Housing Finance Institution disburses the loan amount on the basis of the
stage of construction of the property. The customer needs to pay the margin
money from his own contribution prior to the disbursement.

I. Repayment:
The repayment of the loan by the customer starts only after the full
disbursement of the loan amount has been made by the Housing Finance
Institution. The loan is always repaid by way of EMIs. The mode of
repayment, however, differs from case to case. In case of a loan repayment
done through Deduction Against Salary (DAS), Post Dated Cheques
(PDCs), Standing Instructions (SI) and cash / Demand Draft (accepted only
by some Housing Finance Institutions). The customer can deposit the
amount of his EMI every month at the Housing Finance Institution's office.

J. Interest Tax Certificate:
This certificate is given by the HFI to the customer to avail of tax
benefits that accrue through a Home Loan. The customer can submit this to
his employer or Chartered Accountant to account it while calculating the
customer's tax liability.

K. Prepayment By The Customer:
The customer can either partly or fully prepay his loan at any given
point of time. The loan could be partly or fully disbursed when the customer
wishes to prepay his loan. Most HFIs, however, have a limit on the number
of times that a person can prepay his loan. There is, normally, also a
minimum amount that a customer has to prepay each time he wishes to do
so. Whenever a customer makes a prepayment, the customer has an option


of reducing his EMI by keeping his tenure constant or to reduce his tenure
by keeping the EMI constant.

CREDIT APPRAISAL
Is the process by which a lender appraises the credit worthiness of the
prospective borrower. This normally involves appraising the borrower's payment
history and establishing the quality and sustainability of his income. The lender
satisfies him self of the good intentions of the borrower, usually through an
interview.

TOOLS USED IN CREDIT APPRAISAL

(A) IIR: - IIR stands for the Installment to Income Ratio = Installment /
Income. It is used to calculate the loan eligibility of the borrower. It denotes the
portion of the customer's installment on the home loan taken.

(B) LCR: - LCR stands for the Loan to Cost Ratio. By cost we mean the
agreement value of the property. It is calculated as follows: -Loan to Cost Ratio =
Loan / Total Cost The loan to cost ratio depends on the organizational norms. Few
years back no company financed 100% of the cost of construction, but now days it
ranges from 70% to 90%, sometimes even 100%.



APPRAISAL OF SELF EMPLOYED BORROWERS

A Self-Employed Borrower Is A Person Who Has His Own Business Or
Who Is A Professional. He / She Can Be Either a:
Proprietor of a firm.
Partner in a partnership firm.
Director of a private limited company.
Self-employed Professional.

Appraisal of A Self-Employed Case: -There are three aspects involved in
appraisal of a self-employed borrower
Analysis of the financial statement.
Practical understanding of the business of the borrower and its implications.
Aspects that are common to both classes of borrowers - salaried and self
employed.

Analysis Of Financial Statements: -The financial statements of an applicant
comprise of the following:
Balance Sheet for the past 3 years.
Profit and Loss a/c for the 3 years.

A detailed study of each of the above documents is required to be done so as
to enable us to make sensible analysis.

Profitability Profits of a firm are the indicative of the health of the
business. The Net Profit Margin and the Gross Profit Margin should be
calculated. The profit Margin in a trading firm would be around 5-10%. It
would be higher inn case of a manufacturing concern.


Expenses Ascertain the actual expenses from the conversation with the
borrower

Turnover The assessment depends to a great extent on the level of
business activity of the individual. Assessing the sales details and their
schedule does this. Small businessmen usually have large cash sales, which
are not reflected in the papers.

Cost of Goods Sold The concerned officer should try to estimate what
the actual cost of particular item would be. Then may compare it with the
selling price to arrive at the profit figure.

Non-Cash Expenditure Non-cash expenditure like depreciation etc.
should be added back to the net profit where it is in excess of norms. Non-
recurring expenses should also be added back to the profit.

Consistency In Operation One should view the trend during the past 3
years very carefully and be wary of wide fluctuations. If there are
fluctuations the reasons behind the same should be1 found out. A newly
established business would show a rising trend. However one may find it
difficult to evaluate the future trend on the basis of the past records. An in-
depth analysis is required here.

Assets - The balance sheet gives us an idea about the assets held by the
firm. In case of proprietary concern, these would essentially his personal
assets and may be asked for as collateral security as per our requirements.


The type of asset profile would depend the nature of business. It should be
compared with other similar businesses.

Liabilities - On the liability side the company should watch out for the
contribution towards the capital and the borrowings. The proportion should
be confidence inspiring. If the borrower has availed any long term loans the
company may ask him how he proposes to pay it off, what purpose the
money was used etc.

Practical Aspects of Appraisal of A Self-Employed Borrower: -
It is generally the experience of the Housing Finance Institutions that the
books of accounts do not necessarily project the true picture of the business
of a borrower. This is especially true of a small time trader who structures
his books of accounts specially for the purpose of availing the loan. It is
necessary to keep certain points in mind that would be applicable to all
borrowers.

Scrutinize the Income Tax Returns and ensure that they are regular. This is
necessary because many instances of borrowers filing returns for the
purpose of availing a loan are found. If the returns are all filed on one day,
then it is not possible to judge the regularity of the business.

Check the computation of income of the borrower. A CA should certify this
computation. The various heads under which income is earned should be
identified. Interest income and Dividend income are not regular income, as
they will cease once the portfolio is liquidated. The other sources that the


borrower may show income from is agriculture i.e.50/o of this income may
be considered if adequate proof for the past 3 years is available.

The bank statements should be verified fully. This would give an idea of the
scale of operations. The various entries should be checked very carefully -
One should be on the look out for any entries of cheques returned. This is so
that the company may catch the borrowers with a tendency to dishonor
cheques before sanction itself and decision can be taken accordingly.

The credit facility enjoyed by the borrower should be taken note of. This
shows the confidence reposed on him by the banker.

The Credit Confidential Report is a very important document and the
comments of the banker should be incorporated in the interview sheet before
disbursement. Disbursement should not be made unless the CC Report is
received.

SALARIED BORROWERS:
Computation of Eligibility of the Borrower

Net Adjusted Salary: -
The loan of a borrower is determined on the basis of his Net Adjusted
Salary. The Net Adjusted Salary has to be calculated, as one cannot compute the
eligibility blindly on the basis of the amount carried home. Some of the deductions
would have to be adjusted. A detailed note on how the Net Adjusted Salary is
arrived at is given below: -While calculating the NAS, we should ignore statutory
deductions, as the outflow will have to be borne under any circumstance. In case of
non-statutory deductions, the following points should be considered.


Society Loan, Consumer Loan, Vehicle Loan. Provident Fund Loan: -
The amount of loan taken and the total number of installments should be
verified. Out of these the number of installments already paid and installments due
should be determined. If the number of installments do not exceed 9, then the
amount of installment should be added back to the net salary to calculate the NAS.

Festival Advance: -
It is a short-term borrowing and should be added back.

Voluntary Contribution to PF: -
In addition to statutory contribution to PF, sometimes people contribute
additional amount towards PF for saving purposes etc. This is pure voluntary and
can be discontinued whenever required. This should be added back to the net salary
to calculate the NAS.

Life Insurance Premium: -
Life Insurance Premiums are essentially towards saving for future. They
should therefore be added back to the net salary to calculate the NAS.

House Building Advance: -
Sometimes, borrowers have already availed housing loan from their
employer. In such a situation the Appraisal officer should exercise the utmost
caution in deciding whether the person should be considered for the loan or not.
One should try to find out if the person is making the habit of availing loans. The


amount of loan outstanding should also not be huge. If the number of outstanding
installments is less than 10, the same can be added to the net salary to compute the
NAS.

Salary Advance: -
Salary advance is not effectively a deduction at all and should be added back
to the net salary to compute the NAS.

Treatment Of Over-Time: -
This income which may not always be earned at the same rate and the
amount may fluctuate. Therefore while computing the NAS, average overtime for
the past 6 months is calculated. 50% of this average should be added back to
calculate the NAS.

Treatment of Incentives: -
Sometimes borrowers also get performance incentives. This is especially in
case of Sales and Marketing Personnel. For this average incentive for the last 6
months is taken into consideration and 50% is added back to the net income. This
procedure is followed only if it is established that the payment is regular and the
amount is consistent. Quarterly or yearly incentives should be ignored.

The Net Adjusted Salary will be computed as follows:
GROSS SALARY - DEDUCTIONS = NET SALARY.

NET SALARY
Less
Overtime
Incentives


Arrears
Medical / LTA claimed (if any)
Add
Voluntary contribution to PF
LIC Premium
Festival Advance
Other loans of short term duration that is less than 9 months
Average incentives
Recurring deposit and other saving scheme contribution
= NET AD JUSTED SALARY

EMI
An EMI refers to an equated monthly installment. It is a fixed amount,
which the borrower pays every month towards the loan. It comprises of both,
principal repayment and interest payment.

Pre-EMI Interest
In the case of part disbursement of the loan, monthly interest is payable only
on the disbursed amount. This interest is called pre-EMI interest (PEMI) and is
payable monthly till the final disbursement is made, after which the EMIs would
commence.

Monthly Reducing Balance
An Equated Monthly Installment (EMI) has 2 components, interest and
principal. When the interest is calculated on monthly rests, the principal on which


the interest is charged goes down every month. This results in a significant saving
for the customer over the tenure of the loan.

Annual Reducing Balance:
An Equated Monthly Installment (EMI) has 2 components, interest and
principal. When the interest is calculated on annual rests, the principal reduces only
at the end of the year. Therefore, the borrower continues to pay interest on a
portion of the principal that he/ she has already actually paid back to the lending
company.

ANALYSIS OF THE HOUSING FINANCE INDUSTRY

1.1 Importance of Housing Finance Industry:
Housing is a priority sector and is the cornerstone for economic growth.
This is on account of chain of backward and forward linkages with other sectors of
the economy, fueling the growth of over 250 ancillary industries such as steel,
cement, timber, building materials etc; Re. 1 increase in expenditure on housing
sector increases GDP by Re. 0.78 due to multiplier effect. It certainly has the
potential to kick-start the economy.

1.2 Factors Responsible For High Demand For Housing:

Population Growth: As per 2001 census Indian Population has already
crossed the billion marks. So for such a large population, there has to be a
high demand for housing.


Changing Culture: Over the past few years, Indian economy has witnessed
a move towards nuclear family system instead of joint family system. As a
result demand for own houses as well as rental houses have been rising.

Per Capita Income: If the rise in per capita income is more than rise in
price level, economy will witness increased purchasing power. According to
researchers, we have witnessed the same situation. So this increase in
purchasing power along with reduction in interest rates and fiscal incentives
offered by the government result in higher demand for housing.

Falling Returns in Other Avenues for Investment: Investment in housing
is the safest form of investment. During last few years, returns in capital
markets are coming down. In years to come, even Public Provident Funds or
National Savings Schemes are unlikely to be as attractive as they are today.
With the reduction in incentives for most of the alternative instruments,
increased opportunities exist for channelizing individual savings into
investment in housing. Besides this, rising rents in metros are making
investment in residential and commercial property more attractive.

Urbanization in Indian Economy: Urban India comprises of almost 30.5%
of country's population, but contributes to more than 60% to the nation's
GDP. Employment in urban India recorded a growth of 38% as against 16%
in rural


India. In urban areas, presence of big nationals and international corporates
has resulted in increased employment opportunities. As a consequence of
which Indian people are moving towards cities. This rising level of
urbanization translates into increased demand for own and rental housing.

Affordability: Nowadays, housing has become affordable. Interest rate on
housing loans has declined from average 17-18% in 1994 to 8-10.5% now,
thereby making loans cheaper. Apart from this government has been laying
emphasis on the sector by maintaining the incentives offered to investment
in housing and real estate. In India the ratio of average property prices to
annual incomes significantly improved from 20:1, twenty years ago to 4-5:1
today.

Whereas on supply side the housing shortage still continues: The current
housing supply to demand ratio is 1:3.

1.3 Reasons For Exponential Growth In Housing Finance Industry:
Aided by the growth in demand in the Indian housing sector, the housing
finance sector has been witnessing an exponential growth in the last few years. The
primary reason for the rapid growth of the housing finance industry has been the
consistent decline in interest rates over the last five years, realistic property prices,
innovative products and tax incentives provided by successive government
budgets. In fact, last year's growth rate in this industry has been around 28 - 30 %.
The housing finance sector is, therefore, expected to witness robust growth rates
even in the future.

1.4 Housing Finance Has Been A Stellar Industry In Terms Of Growth And
Performance For The Real Estate Sector In India.


Loan disbursals have grown by 35 per cent per annum over the past five
years. For instance, in the case of SBI, which is the market leader, the individual
loan approvals and disbursements have increased between 30 to 50% every year
over the last five years. The market size too has grown tremendously, egged on by
the rising salary levels of India's burgeoning middle class. Besides, property prices
have come down drastically since they peaked in 1995-96 and become far more
affordable today; driven by a balanced supply-demand scenario.

1.5 Historically, The Housing Finance Sector Has Always Remained Well
Insulated From Any Decline In The Growth Of The Economy.
Typically, an economic downturn has a much greater impact on
businessmen and people at the top end earning high incomes on the one side and
poor people on the other. The middle-income group, especially the salaried

employees are usually the last to get impacted in a slowdown. As the market for
home loans comprises predominantly of the latter group, the impact of an
economic slowdown on the housing finance sector is seldom very strong.

1.6 In Fact, Growth Is Likely To Touch 50 Per Cent In The Next Few Years,
As The Trend Of Lowering Interest Rates And Further Budgetary Sops Is
Only Bound To Continue.
One major healthy outcome of this increase in market size for housing
loans has been the increase in competition among the Housing Finance Companies
and banks for a slice of this segment. Even SBI, which used to corner over 80 per
cent of the home loan market just a few years ago, has now 40 - 50% presence.

1.7 In India, The Demand For Housing Will Always Persist due to the huge
population and the corresponding shortage of dwelling units (19.4 million units).


But this too has changed drastically over the past few years. Residential houses
have become more affordable today. Where houses would cost about 20 years of
the average annual salary earlier, now they cost around 8-15 years salary.

1.8 Housing Finance Companies Are Currently Offering The Lowest Ever
Interest Rates.
Gone are the days when rates around 19-20 per cent were considered a
good deal for home loans. Single-digit interest rates are now the norm with banks
like Vijaya Bank offering an interest rate as low as 7.5 per cent in July 2004. And
considering the tax benefits offered on the interest payments, the effective interest
rates are around 6.25 per cent.

1.9 With The Small Savings Interest Rates Lowered In The 2004 Budget, This
Rate Is Likely To Come Down Further.

In view of this trend of declining interest rates, most customers are choosing the
floating rate option to the fixed rate. In effect, housing loans have become much
cheaper and affordable. Indian families are now buying their first homes at a much
younger age and also purchasing more than one home in their lifetime. Another
positive impact of easily available home loans is that the amount of unaccounted
money in real estate transactions has also come down drastically.



1.10. An Interesting Factor Has Been The Presence Of Banks In The Housing
Finance Sector, since 1999.
In fact, banks have garnered close to 35 per cent of the market share.
Income tax incentives have also played a major role in stimulating housing
demand, which is why this sector has remained strong despite the decline in the
overall economy. Interest payment to the tune of Rs 1,50,000 per annum is exempt
from income tax, which covers about 95 per cent of all home loans in the country.
Even though the housing finance industry is on solid ground and has excellent
prospects, it has become overcrowded with lots of players of all sizes. The entry of
banks into this sector has only served to intensify the competition. Only companies
that have a strong brand image, large distribution network and a customer friendly
service stand to benefit in the future.

1.11 Luckily For Housing Finance Companies And Banks, The Default Rates
For Such Loans Are Presently Around 1.5 Percent, Which Is Low By
International Levels.

Intense competition has enabled the domino effect to occur among Housing
Finance Companies and banks, each institution following the other in lowering the
interest rates.



CHAPTER 2
RESEARCH DESIGN

INTRODUCTION
Research Design is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically. In it we
study the various steps that are generally adopted by a researcher in studying his /
her research problem along with the logic behind them. It is necessary for the
researcher to know not only the research methods / techniques but also the


methodology. Research methodology has many dimensions and research methods
do constitute a part of the research methodology. The scope of research
methodology is wider than that of research methods.

TYPE OF RESEARCH
The research carried out in this study is descriptive in nature. This is so
because

The home loan segment has been analyzed in detail with focus on SBI,
which is the market leader in the industry.

The elements/factors affecting the Credit Appraisal for home loans have
been identified, their impact on loan eligibility studied.

The other lending market players like ICICI, SBI, LICHFL and Vijaya
Bank have been also analyzed with respect to the second point (mentioned
above).

Comparison has been made with the help of typical case study problems
between SBI and other Housing Finance Institutions.

SAMPLING TECHNIQUE
The technique adopted is Non Probability Judgment Sampling for the
selection of Housing Finance Institutions for comparison with SBI and Non
Probability Selective Sampling for choosing the case studies for analyzing the
factors affecting Credit Appraisal / loan eligibility of the borrower.



Here Judgment Sampling has been adopted with respect to selection
of other Housing Finance Institutions since the Housing Finance Institutions
so chosen typically represent over 95% of the market share along with SBI.
Vijay Bank has been chosen especially as it offers the lowest interest rates in
the industry. Selective Sampling has been adopted with respect to choosing
case studies since there is a need adopted with respect to choosing case

studies since there is a need to identify the differential approach adopted by
the various Housing Finance Institutions so chosen in determining the loan
eligibility of its customers / borrowers. The case studies have been chosen
carefully so that they typically represent the majority of the actual type of
customers in the home loan industry.

SAMPLE SIZE
In addition to SBI, Four other Housing Finance Institutions have been
chosen for sampling namely State Bank of India, ICICI, LIC Housing Finance
Limited and Vijaya Bank. Five case studies have been considered to evaluate
the differential approach adopted by the various Housing Finance Institutions
with respect to Credit Appraisal / Loan Eligibility.

SAMPLE DESCRIPTION
Housing Finance Institutions - In addition to SBI, four other Housing
Finance Institutions have been chosen for sampling namely State Bank of
India, ICICI, LIC Housing Finance Limited and Vijaya Bank. The four
institutions along with SBI represent over 95% of the market for housing
finance. Vijaya Bank has been chosen for the study, as they are first to offer
the lowest ever interest rates in the industry.


STATEMENT OF THE PROBLEM
The aim of the project is to analyze the important factors of the Credit
Appraisal process adopted by the major Housing Finance Institutions with
particular reference to SBI and on comparison of the Credit Appraisal process
of the various players in the field, suggest scope for improvement if any, in the
Credit Appraisal system of SBI.

OBJECTIVES OF THE STUDY
To analyze the Housing Finance Industry
To analyze SBI as a player in the Housing Finance Industry as compared to
other major players.

To make an in-depth study of the Credit Appraisal System of SBI.
To analyze the individual elements and to identify the major elements of
Credit Appraisal, which have a bearing on the sanction of the credit amount,
that is loan eligibility for SBI with other major players in the same industry.
To identify areas of improvement for SBI, if any, by comparing with other
major players.

SCOPE OF THE STUDY
This study is carried out for SBI, which is the market leader in the Housing
Finance Industry. The Purpose of the study is to study the Credit Appraisal
System of SBI along with other major players in the industry in order to analyze
the factors affecting the Credit Appraisal and determining the effectiveness of
SBIs Credit Appraisal System.



TOOLS OF DATA COLLECTION
Data has been collected by personal interviewing the officials of the
Housing Finance Institutions with respect to factors affecting Credit Appraisal,
other important factors, tools used by Housing Finance Institutions for
determining the loan eligibility in general and with respect to the five case
study problems with the help of open ended Interview Schedule.

METHOD OF ANALYSIS
An analytical research is carried out first to gain insight and proper
understanding of the housing finance and its different parameters. The method
used is Interview Schedule for all the five Housing Finance Institutions. The
format of the Interview Schedule for SBI and the format of the Interview
Schedule for the other four is given in the Supplementary Pages, at the end of
the report. Several graphs and tables were prepared for a better analyzation of
service provided by different Housing Finance Industry.

LIMITATION OF THE STUDY
For practical purposes the study is limited to Bangalore City and to the
following players in the Industry for analyzing the Credit Appraisal System.

SBI (State Bank Of India)


LIC Housing Finance Limited
ICICI
Vijaya Bank
HDFC

Data has been collected and tabulated from SBI and other institutions
wherever made available. A lot of data was confidential in nature.

The study has been undertaken only for the credit appraisal of Home
Loans.

Floating Rate of Interest, which is currently preferred by most of the
borrowers, was considered for analysis in this study.

The five case studies chosen on the basis of data made available from SBI
have been analyzed and inputs obtained from all five Housing Finance
Institutions in the third and fourth week of July 2004.

The case studies considered for the analysis of borrowers do not have any
other fixed obligations and hence FOIR (Fixed Obligation to Income Ratio)
tool has not been considered for the study.



CHAPTER 3
BANK PROFILE
The roots of the State Bank of India rest in the first decade of 19th century,
when the Bank of Calcutta, later renamed the Bank of Bengal, was
established on 2 June 1806. The Bank of Bengal was one of three Presidency
banks, the other two being the Bank of Bombay (incorporated on 15 April
1840) and the Bank of Madras (incorporated on 1 July 1843). All three
Presidency banks were incorporated as joint stock companies and were the
result of the royal charters. These three banks received the exclusive right to
issue paper currency in 1861 with the Paper Currency Act, a right they
retained until the formation of the Reserve Bank of India. The Presidency
banks amalgamated on 27 January 1921, and the reorganized banking entity
took as its name: Imperial Bank of India. The Imperial Bank of India
remained a joint stock company


Pursuant to the provisions of the State Bank of India Act (1955), the Reserve
Bank of India, which is India's central bank, acquired a controlling interest in
the Imperial Bank of India. On 30 April 1955, the Imperial Bank of India
became the State Bank of India. The government of India recently acquired
the Reserve Bank of India's stake in SBI so as to remove any conflict of
interest because the RBI is the country's banking regulatory authority.
In 1959, the government passed the State Bank of India (Subsidiary Banks)
Act, enabling the State Bank of India to take over eight former state-
associated banks as its subsidiaries. On 13 September 2008, the State Bank of
Saurashtra, one of its associate banks, merged with the State Bank of India.
SBI has acquired local banks in rescues. For instance, in 1985, it acquired the
Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as
its affiliate, the State Bank of Travancore, already had an extensive network
in Kerala.

Associate Banks

Main Branch of SBI in Mumbai.
SBI has six associate banks; all use the same logo of a blue circle and all the
associates use the "State Bank of" name, followed by the regional
headquarters' name;
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of India


State Bank of Patiala
State Bank of Travancore
State Bank of Indore
Earlier SBI had only seven associate banks that constituted the State Bank
Group. Originally, the then seven banks that became the associate banks
belonged to princely state until the government nationalised them between
October 1959 and May 1960. In tune with the first Five Year Plan,
emphasising the development of rural India, the government integrated these
banks into the State Bank of India system to expand its rural outreach. There
has been a proposal to merge all the associate banks into SBI to create a
"mega bank" and streamline operations.
The first step towards unification occurred on 13 August 2008 when State
Bank of Shaurastra merged with SBI, reducing the number of state banks
from seven to six. Then on 19 June 2009 the SBI board approved the merger
of its subsidiary, State Bank of Indore with itself. SBI holds 98.3% in State

Bank of Indore. (Individuals who held the shares prior to its takeover by the
government hold the balance of 1.77%.).
The acquisition of State Bank of Indore added 470 branches to SBI's existing
network of 12,448 and over 21,000 ATMs. Also, following the acquisition,
SBI's total assets will inch very close to the Rs 10-lakh crore mark. Total
assets of SBI and the State Bank of Indore stood at Rs 998,119 crore as on
March 2009. The process of merging of State Bank of Indore was completed
by April 2010, and the SBI Indore Branches started functioning as SBI
branches on 26 August 2010.

Logo:



Slogans :

"Pure banking nothing else"

Vision :
To be amongst most trusted power utility company of the country by
providing environment friendly power on most cost effective basis, ensuring
prosperity for its stakeholders and growth with human face.

Mission :

>To ensure most cost effective power for sustained growth of India.

>To provide clean and green power for secured future of countrymen.

>To retain leadership position of the organisation in Hydro Power
generation, while working with dedication and innovation in every project
we undertake.

>To maintain continuous pursuit for cost effectiveness, enhanced
productivity for ensuring financial health of the organization, to take care of
stakeholders aspirations continuously.


>To be a technology driven, transparent organization, ensuring dignity and
respect for its team members.

>To inculcate value system all cross the organization for ensuring
trustworthy relationship with its constitutent associates & stakeholders.

>To continuously upgrade & update knowledge & skill set of its human
resources.

>To be socially responsible through community development by leveraging
resources and knowledge base.

>To achieve excellence in every activity we undertake.

The functions of the State Bank of India.

The Imperial Bank of India was nationalized in 1957 and after
nationalization it was renamed as the State Bank of India. The functions of
the commercial banks may be broadly classified into two categories called:
Primary functions
Subsidiary functions

The primary functions of the State Bank of India are as follows:
Like other banks, it grants loans and deals in bills of exchange and hundies.
If functions as a Govt. Bank where Reserve Bank of India does not exist.
it undertake treasury functions on behalf of the government.
The subsidiary functions of the State Bank of India are as follows:
It helps in issuing bank drafts at the time of transferring of funds.
It helps in investing in securities.
It purchases bills upto 15 months and issues foreign bills of exchange.
It performs other banking functions of a commercial Bank.

Product and Services


Personal Banking

SBI Term Deposits
SBI Loan for Pensioners
SBI Recurring Deposits
Loan against Mortgage Of Property
SBI Housing Loan
Loan against Shares & Debentures
SBI Car Loan
Rent-Plus Scheme
SBI Educational Loan
Medi-Plus Scheme
SBI Personal Loan
Rates of Interest

Other services

ATM Services
RTGS/NEFT
Internet banking
Sbi Vishwa Yatra Foreign Travel Card
E-pay
E-rail
Safe deposit locker
RBIEFT

Magnetic ink character recognition (MICR)
Broking services

Current Board of Directors

Pratip Chaudhuri (Chairman)
Hemant G. Contractor (Managing Director)
Diwakar Gupta (Managing Director)
A Krishna Kumar (Managing Director)
Dileep C Choksi (Director)
S. Venkatachalam (Director)



Sundaram (Director)
Parthasarathy Iyengar (Director)
D. Nadaf (Officer Employee Director)
Rashpal Malhotra (Director)
D. K. Mittal (Director)
Subir V. Gokarn (Director)

Branches of SBI

State Bank of India has 172 foreign , SBI has about 25,000 ATMs (25,000th
ATM was inaugurated by the then Chairman of State Bank Shri O.P. Bhatt
on 31 March 2011, the day of his retirement); and SBI group(including
associate banks) has about 45,000 ATMs. SBI has 21,500 branches,
including branches that belong to its associate banks.
SBI includes 99345 offices in India. India's number one ADB is in Bellary i e
State bank of India Bellary ADB

Transformation of SBI

State Bank of India (SBI) has embarked on a transformation path to scale up
its profile.
The countrys largest bank now plan to cater to the affluent strata and also
gain structural capabilities for a complete wholesale banking division.
Currently, only 3 per cent of its individual customers are from the mass
affluent segment, and it is also unable to provide sophisticated solutions to
corporates.
The bank's strategy for winning market share includes getting back Indian
middle-class consumers, "own" rural India, set-up a profitable wholesale
banking division, a global treasury, chart out "smart" global expansion and
enter new business areas that had bypassed the bank.
The bank is firming up plans to enter new business areas of financial
planning and advisory services, custodial services, merchant acquisition,
mobile banking, payments solutions, general insurance, pension funds this


year.
The bank has created posts of 439 relationship managers in personal banking
and will recruit 1000 RMs by October and cull out wealth managers from
them.

International presence

State Bank of India in Israel
The bank had 157 overseas offices spread over 32 countries. It has branches
of the parent in Colombo ,Dhaka , Frankfurt, Hong Kong, Tehran , ,
Johannesburg, London, Los Angeles, Male in the Maldivies , Muscat, Dubai,
New York, Osaka, Sydney, and Tokyo. It has Offshore banking units in
the Bahamas, Bahrain, and Singapore, and representative offices in
Bhutan and Cape town. It also has an ADB in

Boston, USA.
SBI operates several foreign subsidiaries or affiliates. In 1990, it established
an offshore bank: State Bank of India (Mauritius).
In 1982, the bank established a subsidiary, State Bank of India (California),
which now has ten branches nine branches in the state of California and
one in Washington, D.C. The 10th branch was opened in Fremont, California
on 28 March 2011. The other eight branches in California are located in Los
Angeles, Artesia, San Jose, Canoga Park, Fresno, San Diego, Tustin and
Bakersfield.


The Canadian subsidiary, State Bank of India (Canada) also dates to 1982. It
has seven branches, four in the Toronto area and three in British Community
In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the
Indo-Nigerian Merchant Bank and received permission in 2002 to commence
retail banking. It now has five branches in Nigeria.
In Nepal, SBI owns 55% of Nepal SBI Bank, which has branches throughout
the country. In Moscow, SBI owns 60% of Commercial Bank of India,
with Canara Bank owning the rest. In Indonesia, it owns 76% of PT Bank
Indo Monex.
The State Bank of India already has a branch in Shanghai and plans to open
one in Tianjin

CHAPTER 4
ANALYSIS OF DATA & INTERPRETATION

AN IN DEPTH STUDY OF THE CREDIT APPRAISAL SYSTEM OF
SBI

Credit Appraisal is one of the most critical stages in a loan process.
Credit appraisal is a very important tool to determine the credit worthiness


and the loan eligibility of the borrower. It helps the organization i.e. lender to
reduce the risk exposure and thereby helps to keep the default rate as
minimum as possible.

Therefore the twin objectives of a good effective credit appraisal system is:

a) To determine optimum loan eligibility in order to meet the
requirements of borrowers
b) To minimize the risk exposure.

LOAN PROCESS AT SBI
The entire lone process at SBI can be under stood by the following flow chart

FLOW OF APPLICATION
Receipt of application
(With processing fees and supporting documents)

Loan Appraisal Meeting
(Credit evaluation / Appraisal & Checklist of Pending Documents

Focus of
the study


Sanction of loan
(Issue of acceptance of offer)

Technical Inspection Submission of Pending Documents
(Site visit & recommendation of (Submission of guarantor forms and
Disbursement based on stage of legal appraisal)
Construction on site)

Disbursement of Loan
(In part / in full and payment of Pre-EMI)

Repayment of Loan
(Payment of EMIs)

FALLING RATE OF INTEREST:

With the entry of so many players in the market, the margins in the housing
finance segment are taking a beating. The average interest rate was around 13.5%
in 2001. The rate has come down to as low as 7.5% (by Vijaya Bank) and it
doesn't seem to have reach the bottom yet. Moreover, some finance companies are
also waiving off the processing fees and some other fees that they used to charge
earlier and thereby putting more pressure on the spreads.


Table No.l
Table Showing Falling Rate Of Interest In The Housing Finance Industry
YEAR

INTEREST (%)
2008

13.5
2009

12
2010

11
2011

7.5

Graph No. 1
Graph Showing Falling Rate Of Interest In The Housing Finance Industry

13.5
12
11
7.5
0
2
4
6
8
10
12
14
16
2008 2009 2010 2011

Year

I
n
t
e
r
e
s
t

MARKET SHARE OF HOUSING FINANCE INSTITUTIONS (HFI).

Table No. 2
Table Showing Market Share Of Major Players In The Housing Finance Industry
HFI

2009-10 (in%)

2010-11(in%)
SBI

52

49

HDFC

14

20

LIC

14

14



ICICI

6

12

OTHERS

14

5

Graph No.2
Graph Showing Market Share Of Major Players In The Housing Finance Industry

52
14 14
6
14
49
20
14
12
5
0
10
20
30
40
50
60
SBI HDFC
I
LIC ICICI OTHERS
2009-10 (in%) 2010-11(in%)

Interpretation: From the above table and graph it can be seen that competition in
the Housing Finance Industry has drastically increased from 2010-2011 (short
span of two years only) thereby posing a big threat to the market share of SBI
which has declined from 52% to 49%, whereas the market share of SBI and ICICI
has increased.

HOME LOAN DISBURSALS FOR THE YEAR 2010-11

Table No. 3
Table Showing Home Loan Disbursals Of The Five Housing Finance Institutions
Chosen For The Study For The Year 2010-11.


HFI

Disbursals
(In Crores)

In %

Rank

ICICI

8660

35.5

I
SBI

7616.56

31

II

HDFC

3950

17

III

LICHFL

2941.42

12

IV

Vijaya Bank

481.834

2

V
OTHERS

737.55

2.5

-

Graph No.3
Graph Showing Home Loan Disbursals Of The Five Housing Finance Institutions
Chosen For The Study For The Year 2010-11.



8660
7616.56
3950
2941.42
481.83
737.55
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
H
o
m
e

L
o
a
n

D
i
s
b
u
r
s
a
l
s

I
C
I
C
I

S
B
I

H
D
F
C

L
I
C
H
F
L

V
i
j
a
y
a

B
a
n
k

O
T
H
E
R
S

Housing Finance Institutions
ICICI HDFC SBI LICHFL Vijaya Bank OTHERS

Interpretation: From the above table and graph it can be seen that ICICI has the
highest disbursals for the year 2008-2009 and SBI is second to ICICI. HDFC is
third in the category. There is considerable competition in the housing finance
segment, and though SBI's market share may have fallen, its share in the profits of
the sector has not fallen much. However the gap between availability and demand
for housing is so huge that there is enough opportunity for the next decade. With
better and higher value added services the corporation will be able to fight the
competition.

(Table No.4)
Table Showing Comparison Of Loan Eligibility, EMI And Processing & Other
Charges Of The Housing Finance Institutions For Case Study 1

Particulars

SBI

Other Major Housing Finance Institutions

HDFC

ICICI

LICHFL

VIJAYA
BANK



Interest rate
(Floating) p.a.
9% 9.25% 9.25% 10.25% 9%
EMI per lack Rs. 1014 Rs. 1029 Rs. 1029 Rs. 1090 Rs. 1014
Monthly
Instalement
Rs. 3448 Rs. 5557 Rs. 4940 Rs. 4524 Rs. 5962
Loan
Eligibility
340000 540000 480000 415000 588000
Processing &
Other Charges
Rs. 3400 Rs. 1350 Rs. 2400 Rs.6275 Rs. 588
Net Loan
Available
336600 538650 477600 408725 587412

Graph No. 4
Graph Showing Comparison Of Loan Eligibility And Processing & Other


0
100000
200000
300000
400000
500000
600000
700000
HDFC SBI ICICI LICHFL VIJAYA
BANK
HOUSING FINANCE INSTUITIONS
L
O
A
N

A
M
O
U
N
T

E
L
I
G
I
B
L
E

&

N
E
T

L
O
A
N

A
M
O
U
N
T

A
V
A
I
L
E
D

(
R
S
)

Loan Eligibility Net loan availed

Interpretation: On analyzing the five banks, the government employee with
monthly gross salary of Rs.9, 800 seeking Rs. 10,00,000 loan gets the best deal
from Vijaya Bank, where he gets Rs.5, 88,000 @ 9% per annum with an EMI of
Rs.1, 014 per lack.
The next best options would be SBI and ICICI in that order offering Rs.5,
40,000 @ 9.25% p.a. and 4,80,000 @ 9.25% p.a. respectively.
The least attractive options would be those of either LICHFL or SBI where
even though SBI @ 9% has a lower interest rate, the loan amount is very low @
Rs.3, 40,000. LICHFL with a higher interest rate @ 10.25 % offers a loan amount
more than SBI by Rs.75, 000.
It is significant to note that SBI considers the borrower to be in a position to
pay monthly an amount of about Rs.3,450 which is the most conservative amongst
all Housing Finance Institutions. Vijaya Bank on the other hand is financing the
maximum amount.

(Table No. 5)


Table Showing Comparison Of Loan Eligibility, EMI And Processing & Other

Particulars

SBI


HDFC

ICICI

LICHFL

Vijaya Bank

Interest Rate
(Floating) p.a.

9%

9.25%

9.25%

10.25%

9. %

EMI Per lack

Rs.1, 014

Rs. 1,029

Rs. 1,029

Rs. 1,090

Rs.1014
Monthly
Installment

Rs.8, 011

Rs.9, 878

Rs.9, 878

Rs.8, 284

Rs.9, 734

Loan Eligibility 7,90,000 9,60,000 9,70,000 7,60,000 9,60,000

Processing &
Other Charges

Rs.7, 900

Rs.2, 400

Rs.4, 850

Rs. 11,450

Rs.960

Net Loan
availec

Rs.7, 82,100

Rs.9, 57,600

Rs.9, 655150

Rs.7, 48,550

Rs.9, 59,040

Graph No.5


0
200000
400000
600000
800000
1000000
1200000
BANK
L
O
A
N

A
M
O
U
N
T

E
L
I
G
I
B
L
E

&

N
E
T

L
O
A
N

A
M
O
U
N
T

A
V
I
A
L
E
D

(
R
S
.
)

Loan Eligibility net loan availed

Interpretation: On analyzing the five banks, the Doctor with monthly gross
income of Rs.20, 000 net income (Rs. 16,000) seeking Rs. 12,00,000 loan gets the
best deal from Vijaya Bank, where he get Rs.9, 60,000 @ 9% per annum with an
EMI of Rs.1, 014 per lack. Even though ICICI offers Rs.9, 70,000 that is Rs.
10,000 more than Vijaya Bank, the interest rate for ICICI is more by 0.25% than
Vijaya Bank.
The next best options would be ICICI followed by SBI where loan
eligibility is Rs.9, 70,000 and Rs.9, 60,000 respectively at an interest rate of 9.25%
per annum.
HDFC is the fourth option where even though rate of interest is only 9%,
loan eligibility is only Rs.7, 90,000.

The least attractive option would be that of LICHFL, where the loan eligibility is
only Rs.7, 60,000 @ 10.25% per annum which is the highest interest rate amongst
the Housing Finance Institutions.


(Table No. 6)
Table Showing Comparison Of Loan Eligibility And Processing & Other

Particulars

SBI


HDFC

ICICI

LICHFL

Vijaya Bank

Interest Rate
(Floating) p. a.

8.75%

8.75%

8.75%

9.5%

8.5%

EMI Per lack

Rs. 1,254

Rs. 1,253

Rs.1253

Rs. 1,294

Rs. 1,240
Monthly
Installment

Rs. 15,800

Rs. 15,976

Rs. 15,976

Rs. 13,458

Rs. 14,880


Processing &
Other Charges

Rs. 12,600

Rs.3, 187.50

Rs.5, 000

Rs. 15,650

Rs. 1,200

Net Loan
availec

12,47,400

12,71,812.50

12,70,000

10,24,350

l1,98,800



Graph No.6

0
200000
400000
600000
800000
1000000
1200000
1400000
BANK
HOUSING FINANCE INSTITUTIONS
L
O
A
N

A
M
O
U
N
T

E
L
I
G
I
B
L
E

N
E
T

L
O
A
N

A
M
O
U
N
T

A
V
A
I
L
E
D

(
R
S
.
)


Interpretation: On analyzing the five banks, the Director with monthly gross
salary of Rs.35, 000 net salary (Rs.27, 000) seeking Rs. 13,00,000 loan gets the
best deal of Rs. 12,75,000 @ 8.75% per annum with an EMI of Rs. 1,253 per lac
from HDFC & ICICI in that order.
The next best option would be SBI where loan eligibility is Rs. 12,60,000 at
interest rate of 8.75% per annum and EMI @ Rs. 1,254 per lack.
Vijaya Bank is the fourth option where loan eligibility is Rs. 12,00,000 @
8.5% per annum and EMI @ Rs. 1,240 per lack.



The least attractive option would be that of LICHFL, where the loan eligibility is
Rs. 10,40,000 @ 9.5% per annum.

(Table No.7)
Table showing Comparison of Loan Eligibility, EMI and Processing & other
Charges of the Housing Finance Institutions for Case Study 4

Particulars

SBI


HDFC

ICICI

LICHFL

Vijaya Bank

Interest Rate
(Floating) p.a.

9%

9.25%

9.25%

10.25%

9%

EMI Per lack

Rs. 1,014

Rs. 1,029

Rs. 1,029

Rs. 1,090

Rs.1, 014
Monthly
Installment

Rs.15, 514

Rs. 15,744

Rs.15, 744

Rs. 16,350

Rs. 14,602

Loan Eligibility l 5,30,000 l 5,30,000 15,30,000 15,00,000 14,40,000

Processing &
Other Charges

Rs. 15,300

Rs.3, 825

Rs.5, 000

Rs. 15,000

Rs. 1,440

Net Loan
availec

15,14,700

15,26, 175

15,25,000

14,85,000

14,38,560



Graph No. 7
Graph showing Comparison of Loan Eligibility and Processing & other

1380000
1400000
1420000
1440000
1460000
1480000
1500000
1520000
1540000
BANK
Loan Eligibility Net loan availed

Interpretation: On analyzing the five banks, the Software Engineer with monthly
gross salary of Rs.40, 000 net salary (Rs.32, 000) seeking Rs. 18,00,000 loan gets
the best deal from SBI, where he gets Rs. 15,30,000 @ 9% per annum with an EMI
of Rs. 1,014 per lack.
The next best options would be HDFC & ICIC1 in that order, where loan
eligibility in both cases is Rs. 15,30,000 at an interest rate of 9.25% per annum and
EMI @ Rs. 1,029 per lack.
The least preferred options are Vijaya Bank which offers loan amount of Rs.
14,40,000 @ 9% per annum and LICHFL which offers loan amount of Rs.15,
00,000 @ 10.25%.
.


(Table No.8)

Table showing Comparison of Loan Eligibility, EMI and Processing & other

Particulars

SBI


HDFC

ICICI

LICHFL

Vijaya Bank

Interest Rate
(Floating) p.a.

9%

8.75%

8.75%

9.5%

8.5%

EMI Per lack

Rs.1, 014

Rs. 1,253

Rs. 1,253

Rs. 1,294

Rs. 1,240
Monthly
Installment

Rs.7, 461

Rs.7, 455

Rs.7, 455

Rs.6, 729

Rs.6, 944


Processing &
Other Charges

Rs.5, 950

Rs. 1,487.50

Rs.2, 975

Rs.7, 850

Rs.560

Net loan
availec

5,89,050

5,93,5 12.50

5,92,025

5,12,150

5,59,440



Graph No.8
Graph showing Comparison of Loan Eligibility and Processing & other

460000
480000
500000
520000
540000
560000
580000
600000
620000
BANK
L
O
A
N

A
M
O
U
N
T

E
L
I
G
I
B
L
E

&

N
E
T

L
O
A
N

A
M
O
U
N
T

A
V
A
I
L
E
D

(
R
S
)


Interpretation: On analyzing the five banks, the Accounts Manager with monthly
gross salary of Rs. 16,500 net salary (Rs. 13,500) seeking Rs.7, 00,000 loan gets
the best deal from HDFC & ICICI in that order, where he gets Rs.5, 95,000 @
8.75% per annum with an EMI of Rs. 1,014 per lack.
The next best option would be that of SBI which offers Rs.5, 95,000 (same
as that of SBI / ICICI) but at a higher rate of interest of 9% p.a.
Even though Vijaya Bank offers the lowest rate of interest @ 8.5%, since
amount required is Rs.7, 00,000 the applicant would normally prefer to go to those
housing finance institutions which gives a higher loan amount. In this case it would
be SBI /HDFC/ ICICI which offers Rs.5, 95,000. Therefore Vijaya Bank is ranked
behind them at No.4. Here the applicant is already 40 years old with monthly gross
salary of Rs. 16,500 (Net Salary Rs. 13,500) and as such difference in loan amount
by Rs.35, 000 is quite substantial.


The least attractive option would be that of LICHFL where loan eligibility is Rs.5,
20,000 @ 9.5% per annum.

Empirical Tools Used By SBI (Lender) To Determine Loan Eligibility Of
The Borrower In The Credit Appraisal Process.

1. Installment to Income Ratio (IIR) = Installment / Income.
This is used to calculate the loan eligibility of a customer. It is generally
expressed as a percentage. This percentage denotes the portion of the customer's
monthly installment on the home loan taken. The IIR followed by SBI varies
between 30-55% depending on the repayment capacity of the borrower.

2. Loan to Cost Ratio (LCR) = Loan / Total Cost.
This is used to calculate the loan amount that a person is eligible for on ihc
total cost of the property. There is an upper limit on the maximum loan amount that
a person is eligible for irrespective of the loan eligibility.

The maximum amount of loan eligible is pegged to the cost / value of the
property. The loan eligibility as per other parameters maybe higher, but the loan
amount can't exceed the cost / value of the property.

The ratio followed by SBI for Housing Loans is 85%. However SBI has tie-
ups with certain corporates like WIPRO, Infosys, etc. The employees of such
corporates can avail of housing loans upto 90%. The LCR for purchase of site is
70%.

3. Fixed Obligation to Income Ratio (FOIR) = Fixed obligation / Income.


Here the Housing Finance Institution takes into consideration the
installments of all other loans previously availed of by the customer, including
home loan applied for. In other words, this ratio includes all the fixed obligations

that a customer is supposed to pay regularly on a monthly basis. The fixed
obligations however do not include statutory deductions from the salary such as
Provident Fund, Professional Tax & Deductions for Investments such as Voluntary
PF, Insurance Premium, and Recurring Deposits etc.

The above three Ratios can be illustrated with the help of the following example.
Income = Rs. 10,000 per month
Cost of Property = Rs.5, 00,000
Loan Requirement = Rs.3, 50,000
Other Loan Installments (Obligations) = Rs.500 per month

(Assumption - EMI is taken to be Rs. 1,000 per lacks)

l. IIR = 3,50,000 x 1, 000 x 100 = 35%
10,000

2. LCR = 3,50,000 x 100 = 70%
5,00,000

3. FOIR = 3,500 + 500 x 100 = 40%
10,000



Elements Of Credit Appraisal Process Based On Borrower's Inputs.
The following are the factors considered by SBI for Credit appraisal of
Borrowers that will help to determine loan eligibility.

1. Personal Parameters - Which basically represents the repayment capacity of
the borrowers which is determined by studying the factors such as:

Income: It is the most important factor that helps to determine repayment
capacity of the borrowers. Income of both Applicant & Co-Applicant is
taken.

For Employed Income would For Self-employed Income would
Include Include
Salary Business Income
Incentives Salary from the Firm
Allowances Interest
Commissions etc. Commissions etc.

Age
Qualification
Assets: In case of self-employed the balance sheet gives an idea about the
assets held by the firm. In case of proprietary concern, these would
essentially be his personal assets and may be asked for as collateral security


as per our requirements. The type of asset profile would depend on the
nature of business. It should be compared with other similar businesses. In
case of employed people assets would denote any personal assets held.

Liabilities: In case of self-employed the Bank or Housing Finance
Company should watch out for the contribution towards the capital and the
borrowings. The proportion should be confidence inspiring. If the borrower
has availed any long-term loans the company may ask him how he proposes
to pay it off. What purpose the money was used etc.

Number of dependents
Family background
Source of own contribution
Occupational History

2. Legal & Technical Parameters
Title deeds (property documents)
Agreement for sale.

Estimates
Approved Plans

3. Others
Personal Guarantors
Additional Guarantors who may be required during the interim period or if
the risk level is high or if the Quantum of loan is large etc.

Legal
Technical


IMPORTANT FACTORS AFFECTING CREDIT APPRAISAL AT SBI

On discussion with SBI it is analyzed that the following are the important
factors affecting credit appraisal. The factors are analyzed keeping in mind the twin
objectives of credit appraisal, i.e. determination of optimum loan eligibility and
minimizing risk exposure.

1. Income: Income is the most important factor that helps to determine the
repayment capacity of the borrower at SBI. Income is taken to be gross
income. The repayment capacity is determined by using IIR / FOIR. As
mentioned earlier income of both the applicant and co-applicant is taken.

Graph No. 4
Graph showing relationship between Income & Loan Eligibility

Rs.1 crore Upper Ceiling of Rs. 1 crore

0



Interpretation: Keeping all other factors the same, we can see that as the income
increases the loan eligibility also increases i.e. there is a direct relationship between
income and loan eligibility.

Graph No.5
Graph Showing Relationship Between Income & Risk

Interpretation: Keeping all other factors the same, we can see that as the income
increases the risk decreases i.e. there is an inverse relationship between income and
risk.

2. Nature of Employment: All borrowers can be categorized as:

a. Self-employed: Are those who could be Directors in Private Limited Company
Public Limited Company, Businessmen, Partners in a Partnership Firm, Sole
Proprietors or Petty Merchants.

b. Employed: Are those who get regular income (the salaried class). They could be
employees of MNC, Government Company, Private Limited Company, Public
Limited Company, Proprietary Concern OR Partnership Firm.
SBI has tie-ups with certain corporates whose employees have special terms with
respect to eligibility.


Graph No. 6
Graph Showing Relationship Between Nature Of Employment & Level Of
Risk
* Perception of Risk

Employed Self Employed /
(Salaried) employed Self-employed
Nature of Employment

Interpretation: From the above graph one can conclude that "employed people"
are perceived to have the least risk. In the employed category people working in
those companies which have corporate tie-up with SBI have lesser risk than people
working in other companies. They are also eligible for higher loan amount.
Self-employed borrowers are perceived to have greater risk than the salaried
employees.
Certain categories such as Politicians, Lawyers, Celebrities etc. who may be
employed or self-employed are perceived to have highest risk.

I
n

c
o
r
p
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r
a
t
e

T
i
e

U
p
s

I
n

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p
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c

(
H
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h

R
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c
a
t
e
g
o
r
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)



3. Age: The minimum age for applying for a loan at SBI is 21 years and
maximum age within which repayment should be made is 65 years.

Graph No. 7
Graph Showing Relationship Between Age & Risk

0 21 65
Age
Interpretation: Keeping all other factors the same, we can see that as the age
increases the risk level also increases.

Graph No. 8
Graph Showing Relationship Between Age & Loan Eligibility

0 21 65
Age

Interpretation: Keeping all other factors the same, we can see that as the age
increases the loan eligibility decreases.
R
I
S
K


4. Term of Loan: The term of loan at SBI is upto a maximum period of 20 years.

Graph No. 9
Graph Showing Relationship Between Term Of Loan & Risk

0 5 10 15 20
Term of Loan

Graph No.10
Graph Showing Relationship Between Term Of Loan & Loan Eligibility

0 5 10 15 20
Term of Loan
Interpretation: Keeping all other factors the same, we can see that as the term of
R
I
S
K


loan increases the risk level and loan eligibility increases.

Graph No. 11

Graph Showing Relationship Between Term Of Loan (Years) & Rate Of Interest

10.0 9.5%
9.5
9.0 8.75%
8.5
8.0

0 5 10 15 20
Term of Loan (Years)

Interpretation: From the above graph we can see that as the term of loan increases
the floating rate of interest also increases. There is a direct relationship between the
two. SBI is taken as an example to show the various interest rates for the different
periods. 0 - 5 years = 8.75%, 6 - 10 years = 9% and 11 - 20 years - 9.5%.

9%
%


5. Cost of Property:

Graph No. 12
Graph Showing Relationship Between Costs Of Property & Risk

0 1 crore
Cost of Property

Interpretation: Keeping all other factors the same, we can see that as the cost of
property increases the risk level also increases. Loan eligibility is considered on the
basis of lower of the following 2 factors.
a. Repayment capacity (as determined by IIR / FOIR)
b. 85% of cost of property (For site 70%).
(Higher LCR for corporate tie-ups for most Housing Finance Institutions
Ex: SBI, LCR -90%.)

R
I
S
K


6. Qualification:
Graph No. 13
Graph Showing Relationship Between Qualification & Risk

Qualification

Interpretation: Keeping all other factors the same, we can see that higher the
qualification lower is the level of risk. Higher the qualification greater are chances
of continuous employment and re-employment and hence lower chances of default
for the company.

R
I
S
K


COMPARISON OF CREDIT PARAMETERS OF MAJOR PLAYERS
VIS-A-VIS SBI

The Following Objective Has Been Analyzed Here -
'To identify the individual elements and to analyze the major elements of
Credit Appraisal, which have a bearing on the sanction of the credit amount i.e.,
loan eligibility for SBI with other major players in the Housing Finance Industry".

Detailed discussions were held with the help of structured interview
schedules in the following major Housing Finance Institutions in Bangalore - a)
LIC Housing Finance Limited, b) ICICI c) State Bank of India (SBI) d) Vijaya
Bank. The above was done in order to draw up a comparison of the impact of all
the factors affecting disbursements of Housing Loans in general and Credit
appraisal system in particular. Comparison charts are presented in this chapter so
that an analysis of all the factors in comparison to SBI is made possible.



Income (Table No. 4)

V
I
J
A
Y
A

B
A
N
K

N
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l

G
r
o
s
s

S
a
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S
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a
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d

6
0

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s
a
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y

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m
p
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3

y
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a
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r
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t
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s

*

6
0

3
6

L
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H
F
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N
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N
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S
a
l
a
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y

5
0
%

o
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I
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5

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4

t
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t
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n
s
.

S
B
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N
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f

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f
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s
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a
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F
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d

o
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n

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f
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p
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.

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=

3
0

5
5
%

I
n
c
o
m
e

C
r
i
t
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r
i
a

1
.

M
i
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R
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q
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t

2
.

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S
a
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3
.

A

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f
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-
p
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m
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t



Interpretation:
1. SBI has no minimum income criteria. The same holds good for all other
Housing Finance Institutions studied except in the case of HDFC where the net
salary should be at least Rs.3,000 to Rs.4,000 per month.
2. Income for computation is considered as gross salary for SBI and the same is
observed for ICICI & Vijaya Bank. LIC and SBI compute income on the basis
of net salary.
3. This factor helps to identify the repayment capacity of the borrower based on
monthly income. The loan amount sanctioned is worked out by considering the
lower of either the income factor or LCR.



NATURE OF EMPLOYMENT (Table No. 5)

V
I
J
A
Y
A

B
A
N
K

M
o
r
e

R
i
s
k

L
e
s
s

R
i
s
k

H
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g
h

R
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s
k

G
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v
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n

G
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n

G
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n

G
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v
e
n

S
a
f
e

S
a
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M
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d
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m

R
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s
k

S
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H
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g
h

R
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s
k

H
i
g
h

R
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s
k

L
I
C
H
F
L

M
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R
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s
k

L
e
s
s

R
i
s
k

H
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g
h

R
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s
k

G
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v
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n

N
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t

G
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n

G
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n

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f

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w
a
b
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-

g
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k

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G
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G
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S
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S
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S
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(
p
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f

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Interpretation:
1. All Housing Finance Institutions treat self-employed borrowers as more risky in
comparison to salaried / employed borrowers.
2. Most of the Housing Finance Institutions arc singular in categorizing lawyers,
politicians, certain policemen, celebrities and sports people (without regular
income) as high-risk categories.
3. SBI does not give home loans for free-lance, part time borrowers. On the
contrary LIC and ICICI give home loans for-those categories.

AGE
(Table No.6)

SBI


HDFC

ICICI

LICHFL

VIJAYA
BANK

Minimum
Age
(eligibility

21 Years

21 Years

21 Years

18 Years

21 Years

Maximum
Age

65 Years

65 Years

The loan
terminates
before or
when one
turns 65 or
before
retirement,
whichever is
earlier

Retirement
age or 70
whichever is
earlier

58 Years
(Usually)



Interpretation:
1. LICHFL provides opportunity for a person whose just 18 years old to apply for
a housing loan provided he has satisfied other criteria, whereas in all other
Housing Finance Institutions including SBI minimum age is 21 years.
2. Even the maximum age for exit is higher at 70 years in the case of LICHFL
provided the applicant is still employed / in business.

TERM OF LOAN
(Table No.7)

SBI


HDFC

ICICI

LICHFL

VIJAYA
BANK

Most Popular
Term Period

15 years

10 years

10 years (for
self-
employed
loan >than 5
lacks - only
10 years
term. <than 5
lacks - 15
years term).

15 years

15 years (for
employed) 5-
10 years (for
self-
employed)

Interpretation:
1. The term of loan generally ranges up to 20 years. The most popular term
period is 10 to 15 years.



COST OF PROPERTY
(Table No.8)

SBI


HDFC

ICICI

LICHFL

VIJAYA
BANK
Loan Amount

No lower
limit. Upper
limit - 1 crore

Lower limit-
Rs. 1,00,000

Lower limit -
1 lacks Upper
limit - 1
crore"

Grihaprakash
Scheme

No lower
limit. No
Upper limit

No Upper
limit

Lower limit -
Rs.25, 000
Upper limit -
Rs.l Crore
Grihalakshmi
Scheme

Lower limit -
Rs. 1 lakh
Upper limit -
Rs.l Crore

Extent of
Financing
(LCR)

85% of cost
of property
including
stamp duty +
registration
charges

85%

85%

85% of cost
of property
including
stamp duty +
registration
charges

80%



Interpretation:
1. Though no upper limit is specifically mentioned for SBI and Vijaya Bank, the
upper limits are exercised on the basis of income criteria.
2. Only SBI & LICHFL among all Housing Finance Institutions offers 85% of
Cost of Property including stamp duty -t- registration charges, This implies
higher loan amount from SBI & LICHFL
which is not the case with other Housing Finance Institutions. Only for Vijaya
Bank LCR = 80%

QUALIFICATION
(Table No.9)

SBI


HDFC

ICICI

LICHFL

VIJAYA
BANK

Important in
determining
the loan
eligibility

Very
Important

Not
Important

Not
Important

Not
Important

Not
Important

Interpretation:
1. Qualification docs not have any impact on loan eligibility for all other
Housing Finance Institutions. However SBI gives high importance to
qualification and has several flexible repayment packages like FLIP, SURF,
Balloon Payment etc. which would be of immense use for qualified /
professionals whose incomes have potential for high growth.



CHAPTER 5
FINDINGS AND CONCLUSION
FINDINGS:

1) Vijaya Bank offers the lowest rate of interest for housing loans in some
cases and offers on par with SBI in some cases. But for a term of Five years
its offers the industry's lowest rate of interest at 7.5%.

2) SBI, ICICI & Vijaya Bank are less conservative when compared to HDFC
on most occasions.

3) LICHFL offers the least preferred package of low loan eligibility, high rate
of interest and high processing + other charges.

4) SBI offers better deals for higher income groups when compared to lower /
middle income groups.

5) It is also found that IIR becomes the limiting factor for Housing Finance
Institutions, which are more conservative. Here the borrower gets a much
lower loan eligibility than what he is eligible for in other Housing Finance
Institutions.

6) When LCR becomes the limiting factor it is been that the borrower gets up
to 85% (80% in case of Vijaya Bank) of cost of property / loan required. In
exceptional cases, it is gathered from all Housing Finance Institutions that
they are willing to sanction up to 100% of loan required by the borrower.



7) In all cases it is seen that the processing + other charges is highest in
LICHFL followed by SBI which would reduce the attractiveness of the loan
options offered by these two institutions. Vijaya Bank offers the best deal
with respect to processing + other charges. Although HDFC & ICICI offers
the same amount in three out of five cases, SBI offers a better deal than
ICICI with respect to processing + other charges.

CONCLUSION:
The major of the study is on evaluating the tools used by the Housing
Finance Institutions with particular focus on SBI and their effectiveness in hedging
risk exposure while remaining competitive in the industry.

It is the evident that SBI needs to play a far more important role in
providing higher / on par loans with other the Housing Finance Institutions,
especially in the category of borrowers with lower incomes. This category will be
predominantly the salaried class where monthly incomes are assured and SBI needs
to fine tune its tools of Credit Appraisal considering the probability of having a low
default rate in this segment, also as per a (Financial Times, Bangalore, Saturday,
August 16, 2004). It is seen that the number of low-income families (defined as
those with an annual income of less than Rs. 22500) is projected to decline from
86.10 million families as of the financial year 1995 to 39.90 million families by the
financial year 2007 in India. Also the lower middle-income category would in fact
account for a lions share of the nations population in income terms having a
39 % contribution.



It can be inferred from the analysis that the two major threats to SBI in the Housing
Finance Industry are ICICI and HDFC, which are also major market players.

In all the case studies considered, these two Housing Finance Institutions offer
more / same loan amounts. Though in some cases the interest rates are marginally
higher (0.25%) with respect to ICICI and HDFC as compared to SBI, SBIs
charges of processing + administration are very high when compared to these two
Housing Finance Institutions.

Vijaya Bank is another Housing Finance Institution, which is fast catching
up in the Housing Finance Industry by giving the lowest interest rates (In fact Mr.
M.S. Kapur, Chairman & Managing Director, Vijaya Bank said that the rate of 7.50
% for a five year tenure loan acknowledges the credit worthiness of borrowers
who have not defaulted on their loans.) As a matter of tact it provides very
attractive options for the lower income group of borrowers. SBI offers the least
attractive loan amount to the every same segment.

LIC Housing Finance Limited at present offers low loan amounts, high
interest rates as well as high processing and administration charges as compared to
other Housing Finance Institutions.

The market threat for SBI is being / will be posed by ICICI, HDFC and
Vijaya Bank.



CHAPTER 6
SUGGESTIONS
1) Lower / Middle income group whose income are less than Rs. 15,000 per
month because of lower IIR at 35% get significantly lower quantum of loan
from SBI as compared to all other major Housing Finance Institutions.
Housing loan will be an essential requirement for this category of people.
SBI can assess the income sources and if they are found steady, can use a
higher IIR, which will help this group to get loans on par with major
competitors of SBI. Also if the default rate in this segment is low, SBI
should offer higher loan amounts which are more / on par with its
competitors.

2) The higher income categories on the contrary will not be solely dependent
on housing loans and may have other avenues of funding. Also in a country
like India where there is a clear-cut directive by the Government to provide
housing for all and where several initiatives are taken, it is all the more
imperative that a big player like SBI in the Housing Finance Industry sets
the trend.

3) Even Banks, which have a tradition of being very conservative, are offering
very competitive interest rates for housing loans. Vijaya Bank offers interest
rates, which are lower than SBI in some plans. For a five-year term loan
(which is the most favorite among Business class as could be seen when the
Housing Finance Institutions were interviewed) Vijaya Bank offers the
industry lowest interest rate of 7.5%.



4) Entry age level can be made at 18 years on par with LICHFL from present
age limit of 21 years. This will facilitate borrowers who are 18 years of age
and earning to avail housing loans.

SUGGESTIONS FOR FURTHER RESEARCH

While undertaking the study of this project, apart from the primary
information sources like the Housing Finance Institutions themselves, hardly
any other information source was available relevant to the study. While lot of
reports were available in the newspapers, magazines and the internet relating to
the Housing Loan/ Finance Industry, there was virtually no study found with
respect to Credit Appraisal system in the Housing Finance Institutions and in
particular SBI in order to elicit the data and information pertaining to the
objectives of the study.

It is suggested that on the basis of this study, the focus topics like default
rates in the industry, satisfaction of the borrower with respect to loan amount
sanctioned and the ways and means on which borrower mops up the balance
fianc required for the property and many more such relevant areas could be
undertaken for research purposed which would be immense benefit to this
sector, both for the borrowers and the Housing Finance Institutions.



Interview Schedule For SBI

1) What are the types of customers for whom SBI sanctions home loans?
2) How do you analyze the customers and their loan eligibility?
3) Which are the major factors affecting Credit Appraisal in SBI?
4) Which are the other important factors taken into consideration while
sanctioning home loans?
5) What are the tools used by SBI for arriving at the loan eligible for the
customers?
6) How does age of the borrower affect loan eligibility?
7) What are the terms and conditions regarding home loans and their
disbursals?
8) Is there any differential treatment accorded for purchase of flats / house vis-
-vis purchase of plot and construction of house?
9) Do any category of customers have special concessions?
10) Is there any other information affecting disbursal of home loans?



Interview Schedule For The Concerned Officials Of Other Housing
Finance Institutions
1) Which are the major factors affecting Credit Appraisal of home loans?
2) Which are the other important factors taken into consideration while
sanctioning home loans?
3) What are the terms and conditions regarding home loans and their
disbursals?
4) Which category of customers would you consider more risky and why?
5) Is there a minimum income requirement?
6) How much of the income of you consider for repayment?
7) Is the repayment calculation done on gross or net salary?
8) What is the minimum age for getting a home loan and what is the maximum
age within which the repayment should be done?
9) Does the term of loan affect eligibility?
10) Which is the most popular term of loan repayment?
11) Is their any differential treatment accorded for purchase of flats / house vis-
-vis purchases of plot and construction of house/ what is the extent of
financing tin the two cases?
12) Do any category of customer have special concessions?
13) Does qualifications play an important role in determining the eligibility of
the customer?
14) What is the USP (Unit Selling Point) in your Institution?
15) What are the processing fees charged? Are there any other charges?



Bibliography

1. The Internet:
www.indiainfoline.com
www.personalfn.com
www.SBI.com
www.icici.com
www.statebankofindia.com
www.vijayabank.com
www.lichousingfinance.com
Google, Yahoo and other Search Engines.

2. Newspapers:
The Times Of India Property Times
The Economic Times And The Financial Times

3. Annual Reports of SBI and Vijaya Bank

4. Printed Material, Brochures From All The Housing Finance
Institutions

5. The Week Magazine May 25
th
, 2010 Issue.

Home Loans

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A Comparative Study on Housing Loans

VIJAYA DEGREE COLLEGE Page 1

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