INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE

FINANCE AND ADMINISTRATION – SEMESTER IV

CREDIT MANAGEMENT AND RETAIL BANKING

HOUSING FINANCE TO INDIVIDUALS

PURPOSE: -
(a) To purchase or construct a new house / flat
(b) To extend, repair, renovate or alter an existing house/flat
(c) To purchase an existing (old) house/flat, with permission from senior authority.

ELIGIBILITY:-
i) Individual (s) over 18 years of age with steady source of income, including persons
engaged in agriculture and allied activities.
ii) In the case of spouse/son/daughter-in-law, if the property is held jointly,
spouse/son/daughter-in-law will be co-borrower and if the property is held in single
name, the spouse/son/ daughter-in-law will stand as guarantor.

LOAN AMOUNT:-

The actual loan amount is to be determined on the basis of repayment capacity taking into account
income, age, margin, assets & liabilities.
Various Banks adopt different methods like..
60 times the net monthly income of the applicant in case of salaried persons or
5 times net annual income in case of others (i.e income as per latest income tax return filed
less loan repayments and tax payable)

Up to a period generating EMI <=50 % of loan amount

(b) Regular income from all sources (including expected rentals etc.) can be considered subject to
satisfaction about the proof of income
While computing maximum eligible loan amount, expected rent accruals from the proposed
house/flat being let out may be reckoned, subject maximum amount equivalent to the Net Monthly
Income (NMI)/Net Annual Income (NAI) of the borrower and spouse, for computing the eligible
loan amount.
(c) Where land alone is being purchase borrower has to give an undertaking to construct a house
thereon within 24 months.

MARGIN :-

Normally 15% to 20% of the total project cost including cost of land, additional amenities,
registration amt, stamp duty etc.

SECURITY:-

Looking to the legal expenses involved, normally equitable mortgage by deposit of title deeds
should be obtained. The documents of landed property /flat/house, etc. should be examined by the
Bank’s advocate and a search report obtained to the effect that a valid equitable mortgage can be
created.
TITLE OF THE MORTGAGOR : IMPORTANT ASPECTS

1. The title of the mortgagor (borrower) who is mortgaging the property to the bank has got to
be examined and it has to be ensured that the mortgagor has a clear and marketable title
free from encumbrance. The certificate/ title report of the advocate should clearly specify
the same.
2. The link documents i.e. the title deeds of seller of property in original should be obtained
and provided to the advocate for verification of title of mortgagor and kept on branch record
along with mortgage papers.
3. However, in case of 1st sale of flats by a builder, a copy of the builder’s title deed be
provided to the advocate for verification of title. It should also be ensured that the original
title deeds of land are in the possession of builders.
4. The branch staff should invariably make physical inspection of the property to be
mortgaged and local enquiries to be made to ascertain its valuation as also clear
marketable title etc.
 
REPAYMENT:-

i) The maximum repayment period allowed is 20 years by way of Equated Monthly Instalments
(EMI ) (including a moratorium of 18 months from the disbursement of first installment of the loan
or completion of construction , which may be earlier ).

ii) The due date of the loan will not normally be beyond the age of retirement in case of employee.
However, bank at its discretion fix repayment up to 70 years of age in case they are satisfied of
the repayment during the extended period.

iii) In case of professional & businessmen it will be up to a maximum of 70 years.

vi) In case of salaried persons, a check-off facility is preferable. Where check-off facility is not
available, the post-dated cheques should be obtained.

PREPAYMENT PENALTY

1- 2% penalty on the amount prepaid in excess of normal EMI was charged by various banks.
RBI has now advised that if this repayment is from genuine sources of income, prepayment
penalty should not be charged.

PROCESSING FEE :-

Various banks charge some processing fee which may be say 0.50% of loan amount with some
maximum ceiling like Rs. 10000/-

TAKEOVER OF HOUSING LOANS: -

RBI has prescribed that takeover of housing loan should be done after due diligence and
precautions like :-
i) Possession of the house/flat has been taken.
ii) Repayment of the existing loan has already commenced.
iii) Installments have been paid as per terms of sanction, and
iv) The owner has valid documents evidencing his title to the house/flat.
 INSPECTION:-

Pre-spot inspection should be carried out at the time of release of loan and at all major stages of
construction till completion of house. Banks are normally doing inspections after construction is
over only when installments are in arrears.

INTEREST: -
Bank sanction loans both on Fixed rate and Floating rates. Banks are free to quote rate of interest
and are not regulated by RBI.

TYPE OF LOAN

Normally TERM LOAN for a period of 10 to 20 years.

Few banks are sanctioning loans in form of Overdraft limits, with reducing drawing power as per
EMI.

INSURANCE

The house/flat purchased/constructed with Bank’s finance should be insured against the risk of
fire/riots/earthquakes/lightning/floods etc. in the joint names of the borrower and the Bank

DISBURSEMENT :-

To safeguard the Bank’s interest and to prevent misuse of funds, disbursement should be made
only in phases & should be co-related to the actual progress in the construction e.g. at stages like
completion of plinth, lintel, roof etc. Banks generally insist upon a certificate from
engineer/architect of the borrower regarding stage of completion of the project. Disbursement
should be made only after the branch is satisfied about the proper use of funds. Inspection of the
site should also to be carried out during the course of construction.

PRECAUTIONS:
Pre and Post Sanction Measures to be taken in Housing Loans

i. KYC norms should be strictly adhered to.

ii. Instructions regarding purpose, eligible class of borrowers and income eligibility should be
strictly adhered to.
iii. Copy of Form 16/Income Tax Returns / I.T. Challans should be obtained and verified from the
original for the prescribed minimum period as per extant instructions. In case of doubt, the
services of Chartered Accountants may be engaged to verify the genuineness of I. T. Returns,
challans, etc.
iv. An intelligent scrutiny of the lawyer's report and valuation report should be made instead of
solely relying on them for processing the loan proposals.
v. It should be ensured that the site plans and approvals are current and valid.
vi. Meaningful pre-sanction survey should be conducted.
vii. Inspection Register should be properly maintained and details of pre sanction and post-
sanction inspections and comments of the Field Officers therein i.e. progress of work etc
should be recorded.
viii. Opinion report should be compiled in respect of Borrowers/ Guarantors based on their current
personal assets and liabilities statements.
ix. Disbursement of loans should strictly correspond to actual progress of work and after post
sanction inspection in this regard.
x. Banker's cheque constituting loan proceeds should be dispatched directly to the seller/ builder
with the standard forwarding letter by registered AD/ Speed Post and should not be handed
over to the borrower/ his representative/ builder's representative etc.
 xi. Stamped receipt should be obtained from the builder in respect of disbursements of housing
loans and kept on record.
xii. Periodical inspection of the assets must be carried out. In some cases property has been sold
through duplicate / fake title deeds without clearing the existing loan even though the legal title
is with the Bank.
xiii. The custody of PDC Cheques and procedure for taking action under Section 138 of Negotiable
Instrument Act 1881should be done to ensure recovery of loan
xiv. Banks should not entertain house loan proposals through intermediaries.

Prepared by :
Arvind Paranjape, M.Sc., CAIIB
paranjape.arvind@yahoo.com
9425067026