Retail banking in India

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Retail Banking-Retail Banking-Practical Aspects Practical Aspects

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R.R.Pujari

Feb-04 2 Retail banking/RRPujari

Banking - segmentationBanking - segmentation

1. Major market segments Wholesale banking

Retail banking

2. Customer segmentation Commercial and Institutional clients

SIB, SME clients

Agricultural clients

Personal banking clients


Retail Banking - definedRetail Banking - defined

Commercial banks' dealings with individual customers and small businesses

Those activities and services that a bank provides for individual customers such as savings accounts, personal loans, cheque cashing, etc.

Also known as branch banking


Wholesale banking Wholesale banking

Banking functions provided to the business or industrial economy (wholesale market).

These services include commercial lending, factoring, securities underwriting, and export financing, among others.


Retail BankingRetail Banking

1. Retail Deposits Checking accounts

Current Accounts Savings Bank Accounts

Term Deposits – fixed / floating basis Fixed term Flexible

2. Retail Loans

3. Retail services Cards, Remittances, Lockers, Collections & other products


Retail LoansRetail Loans

Businesses Fund based

Term Loans Working Capital Loans General purpose loans

Non-fund based Letters of Credits Bank Guarantees

Personal Segment Loans


Personal Segment LoansPersonal Segment Loans

1. Purpose Oriented Housing Loans Car Loans, Motor cycle loans Education Loans

2. Personal Loans Secured Unsecured


Housing Loans

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Housing Loans Housing Loans Demand 20 mio units in rural and urban areas with an estimated investment

of over Rs.175,000 cr. (10th Plan) 25 lac units p.a. are built (Rs.10,000cr) – 30%CAGR - needed 65 lac

units

Regulatory Fiats 3% of incremental deposit over previous FY to go to housing Loans up to Rs.10 lacs to be treated as priority sector

Exemptions – Staff loans, NRI loans, take over loans etc. Lower risk weight of 50% as against 100% on other loans NHB to launch MORTGAGE CREDIT GUARANTEE SCHEME Reforms in Urban Land Ceiling, Rent Control Act etc.

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Housing LoansHousing Loans

Strong Incentives to home buyers

Interest on housing loan is tax deductible – up to Rs. 150,000 if self occupied & entire interest if let out on rent

Repayment of principle up to Rs.20,000 is tax deductible u/s 88

Loss on house to be considered for computing TDS from salaries

Higher deduction for repairs – 30%

Losses can be carried forward under “Income from property”

No wealth tax if let out for a min 300 days in a year

Exemption u/s 5(vi)-WT for one house or part thereof or a plot not exceeding 500 sq yards1

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Housing Loans - NormsHousing Loans - Norms

1. The Client – Age, profession, income, prior connection

2. The Asset – New, old, house or flat, valuation basis

3. The amount - cost of property, furnishing, registration, etc.

4. The period – start up, tenor

5. The margin – owner’s stake

6. Interest basis & rate – fixed/float, individual/group, tied

7. Repayment & prepayment – period, penalties, default clauses

8. Security – primary, collateral, additional comforts

9. Documentation – stamping, mortgage, agreements1.

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Housing Loans – Eligibility Housing Loans – Eligibility creteriacreteria

Age – min 21 years … max? Up to superannuation Internal stipulation basis – no loan if age is >55 yrs

Profession Employees

PSUs / MNCs, large PS – steady income, secure employment

Small enterprises, etc., Professionals

Lawyers, CAs, Politicians, etc? Self employed /business men1

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…… …… Eligibility Criteria …Eligibility Criteria …contdcontd

Income Basis

Salary Certificate IT return Bank statement

Net income or Gross income Other charges on the income Spouse income? Future rentals on the property?

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…… …… Eligibility Criteria …Eligibility Criteria …contdcontd

New Loans Prior Connection

Income and spending patterns Conduct of the accounts – avg balance, retn of cheques, etc Comfort level

Customer with others Opinion report Statement of accounts Background check

Take over Loans Only well conducted and good ones Verify possession of property Pay direct to the lending bank

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Amount – Loan quantumAmount – Loan quantum

Basis Property value minus stipulated margin (stake of the client) Purchase cost of Land as per Sale deed + stamp duty, etc Actual /estimated cost of construction duly vetted by a valuator Cost of additional amenities Cost of furnishing, white goods, etc. up to say, 5% to 10%

Eligible Amount Net annual income (own &spouse’s) – as per IT return/salary

certificate

Net of minimum amount needed for own use? Net of other deductions and taxes chargeable to the income?

Computed as a certain number of times of net income Adjusted for age factor – remaining years up to superannuation?

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Tenor of the LoanTenor of the Loan

Depends on Remaining age up to normal superannuation Quantum of loan sought over optimum EMI Optimum EMI not to be over affordable income surplus Additional collateral comfort available

Joint loans with a younger person LIC or SBI Life policy linked to the loan Additional near cash collateral Group guarantees

Minimum period is 5 years Maximum period is 20 years1

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Margin (owner’s stake)Margin (owner’s stake)

General Norm 15% of the project – land & constn., amenities, registration &

stamp duty, etc. 20% for repair / renovation/extension

Group borrowers Tied lending to employees of institutions with check off

facility Additional collateral in the form of

Life cover Over collateralization – market value Vs purchase price

Loyalty consideration

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Interest Interest Fixed Rate of Interest

Remains constant through out the life of the loan Can be made adjustable under certain circumstances

Floating Rate of Interest Indexed to PLR of the lending bank No neutral reference rate available/used in India On diminishing balances adjusted – ‘creative masking’

On daily basis At monthly or longer intervals

Normal ranges Up to 5 years 5 to 10 years Over 10 years

Finer interest for group borrowers, institutional tie ups, special categories

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Repayment / prepaymentRepayment / prepayment

Generally in equated monthly instalments comprising principle and interest

Stepped up/stepped down – flexible repayment programme tailored to meet specific requirements

EMI size is adjusted when interest rate changes – in respect of Floating Rating Loans

Prepayment penalty is about 1%. Default in repayment may trigger

Penalty provision Termination of the loan

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SecuritySecurity

Primary – assets created out of the loan Equitable mortgage of house/flat where clear title & all

documents are available cheaper, simpler but not foolproof

Registered mortgage where deemed necessary, where documents are not full

Costly, cumbersome but safer

Hypothecation of movable assets

Collateral Life cover in sync with outstanding loan amount Third party security/guarantee in some cases

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DocumentationDocumentation

Pre-Sale Deed stage Loan application Due diligence - applicant, property title and value Sanction Letter Stamped Loan Agreement capturing all terms and

conditions Agreement to sell Agreement to create mortgage

Post Sale Deed stage Mortgage of the property1

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Process FlowProcess Flow In-principle sanction

The client The project Back ground check on the builder Eligibility criteria

Due diligence Legal title Market value certificate Cost estimates - vetting

Documentation Salary Check off / Post dated cheques Standing Instructions on the account Creating charge on the securities

Disbursement – subject to compliance with conditions-precedent

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Post-Sanction DrillPost-Sanction Drill Inspect the property and make enquiries to ascertain facts Have the property insured with the bank’s interest noted therein Inspect before each stage-wise disbursement Conduct search in the registrar office to confirm title Keep on record full map of the place and detail drawing of the

flat/house Let the fact of the loan known to the employer and the neighbours

- utmost discretion is called for Make a social call on the family – let the family know about the

loan and the terms Obtain Encumbrance certificate at periodical intervals

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Other IssuesOther Issues Processing Fee up to 1% Interest rebate for good behaviour Cross selling

Credit/debit card Banking accounts for the family Lockers Other types of loans – education, auto loans, etc Life insurance policies Other financial products Leverage the good will to get company accounts etc.

Disbursement to direct to the builder/supplier1.

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Auto Loans

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Vehicle Loans – Terms at a Vehicle Loans – Terms at a glanceglance

New Vehicles – direct loaning vis a vis institutional tie ups

Old Vehicles – valuation, ownership verification?

Eligibility - Persons with regular income - Employees of PSUs, PSs, MNCs and HNIs or Self employed persons

Amount of Loan – Lower of

Cost +Regn – margin (15%)

A multiple of Net monthly income or a maximum

Comprehensive Insurance – Bank’s interest to be noted

Security – Hypothecation of the vehicle (endorsed on RC book) + Life policy

Interest – Fixed – Pricing technique -system of subvention, etc.

Repayment – EMI – Post dated cheques

Post-sanction search with RTO to establish ownership

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Auto Loans - Auto Loans - documentationdocumentation

Application-cum-appraisal with two photos Proof of income – IT return/Salary certificate Arrangement Letter Hypothecation Agreement Guarantee Agreement ( in case of no check-off or salary

account with the bank) Authority letter from the employer Undertaking from the borrower Blank signed HPTR form

Disbursement to be made direct to the dealer with instructions1.

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Education Loans

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Educational Loans - Educational Loans - DomesticDomestic

Eligible courses School/plus2, College, PhD, Engineering/Medical, IT courses

Loan Amount – Need based subject to repaying capacity- Max Rs.7.5 lacs – given in the joint names of student and /or guardian

Coverage – All expenses supported by bills Margin – up to Rs. 4 lacs – nil margin; Above Rs. 4alcs – 5% Interest –

up to Rs. 4 lacs – PLR Above Rs. 4alcs – PLR +1%

Repayment – Course period + earlier of 1 yr or 6 m from job Security – LIC policy + collateral if loan is > Rs.4 lacs Processing Fee - None

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Educational Loans - AbroadEducational Loans - Abroad Eligible courses - Job oriented courses offered by reputed institutions

Loan Amount – Need based subject to repaying capacity- Max Rs.15 lacs – given in the joint names of the student (if major) and/or guardian

Coverage – All expenses supported by bills Margin –

up to Rs. 4 lacs – nil margin Above Rs. 4alcs – 15%

Interest – up to Rs. 4 lacs – PLR Above Rs. 4alcs – PLR +1%

Repayment – Course period + earlier of 1 yr or 6 m from job Security – LIC cover +Collateral to be taken if loan is >Rs.4 lacs Processing Fee - None

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Educational Loan Educational Loan DocumentsDocuments

Application-cum-appraisal form Proof of admission Marks sheet Statement of account & proof of residence Two photos IT assessment order/return or salary certificate Guarantee Agreement , Deed of Ratification to be executed on attaining majority Arrangement Letter

Tuition and hostel fee direct to the institute with instructionsTuition and hostel fee direct to the institute with instructions1.

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Loans against DepositsLoans against Deposits

Borrower : All or any holders of Deposit

Loan Amount : Deposit + Accrued interest (–) margin

Margin : For loans up to Rs.10,000 – 10% ; others 20-25%

Interest : 2% above applicable TDR int.

Repayment : In affordable instalments – tenor co-extinguished with that of TDR.

Documents : DPN, discharged TDR, Lien Agreement

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Loan against NSCsLoan against NSCs

Borrower : All or any holders of the NSCs with satisfactorily conducted accounts

Loan Amount : 65% of the face value of NSCs

Margin : 35%

Interest : PLR + 1.50%

Repayment : In affordable instalments – in 2/3 years.

Documents : DPN, discharged Policy, Proof of identity/income, SV and noting of assignment from LIC

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Loans against Life policiesLoans against Life policiesWho can borrow? Policy holder with satisfactorily conducted accountsHow much ?

95% of the surrender value of the PolicyAt what interest ?

@ PLR What is the repayment condition?

Depends on repayment capacity – generally not more than 3 yrs. What are the documents to be obtained?

Application with two photos Proof of identity & income Confirmation from LIC/SBILife about Surrender Value and

noting of assignment in favour of the bank DP note/take delivery letter

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Against Kisan Vikas PatraAgainst Kisan Vikas Patra Who can borrow ?

Holders with satisfactorily conducted a/c How much ?

75% of the value of the investment At what interest ?

@ PLR on Demand Loan & 1% above PLR on Overdraft What is the repayment?

Depends on repayment capacity – generally not more than 3 yrs. What documents need to be obtained?

Application with two photos & Proof of identity and income DP Note/delivery letter Duly discharged patra Security delivery letter

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Against magnums/Mutual Against magnums/Mutual fundsfunds

Who can borrow ? Holders with satisfactorily conducted a/c

How much ? 50% of the market value or NAV

At what interest ? @ PLR +1.50%

What is the repayment? Depends on repayment capacity – generally not more than 3 yrs.

What documents need to be obtained? Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged security / copies of certificates Proof of marking of lien from the fund Security delivery letter

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Against UTI unitsAgainst UTI units Who can borrow ?


60% of the Face Value or 75% of NAV At what interest ?

@ PLR + 2.00% What is the repayment?


Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged certificates Proof of marking of lien from the fund Security delivery letter

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Against RBI relief bondsAgainst RBI relief bonds Who can borrow ?


85% - 90% of the market value At what interest ?

@ PLR +1.00% What is the repayment?


Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged patra Confirmation from the PDO about genuineness and

endorsements/registgration of bank’s name

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Against Gold OrnamentsAgainst Gold Ornaments1.

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Who can borrow ? Owners of the property with satisfactorily conducted a/c

How much ? 70% of the value advised by the head office at intervals

At what interest ? @ PLR + 3.50%

What is the repayment? Depends on repayment capacity – generally not more than 3 yrs.

What documents need to be obtained? Application with two photos & Proof of identity and income DP Note/take delivery letter Duly discharged patra Gold ornaments and take delivery letter

Retail banking in India

Economy & Finance

Transcript of Retail banking in India