Description
The report explaining housing finance process in India in detail.
Narsee Monjee Institute of Management & Higher Studies
Housing Finance Process in India
Submitted to: Faculty: Prof. Sanjay Chaturvedi
Real Estate Finance
Submission by: Anoop Nair Roshan Varghese Swati Jairath Anand Kulkarni (033) (048) (221) (224)
Group I, VIth Trimester, Second Year MBA (F/T), NMIMS.
1
Acknowledgements
We wish to thank Mr. Chandrakumar, Sr. Manager, Central Bank of India; Mrs. Lekha, Manager, Dena Bank; and Mr. George Rajah, Manager - Transaction Banking, Citibank for their support and sharing of knowledge to give us insights into the lending process in housing finance of their respective banks and sharing information privy to them.
2
Table of Contents
Introduction............................................................................................................ 4 Processes followed .................................................................................................. 4
Requirement analysis ...................................................................................................... 5 Documents to submitted ................................................................................................. 5 Age, address and identification proof......................................................................... 5 Proof of income and employment details.................................................................... 5 Processing Fee ................................................................................................................ 5 Field Investigation .......................................................................................................... 5 Credit appraisal and loan sanction .................................................................................. 6 Offer letter....................................................................................................................... 6 Acceptance copy ............................................................................................................. 6 Legalities: Property and papers....................................................................................... 6 Legal check ..................................................................................................................... 7 Technical / Valuation check............................................................................................ 7 Site visit .......................................................................................................................... 7 Registration: Sealing the deal ......................................................................................... 8 Signing the Home Loan Agreement ............................................................................... 8 Processing of the loan ..................................................................................................... 8 Disbursement .................................................................................................................. 8 Equitable mortgage ......................................................................................................... 9 Interest Rates................................................................................................................... 9
Summary................................................................................................................. 9 Annexure – 1......................................................................................................... 10 Annexure – 2......................................................................................................... 10 References ............................................................................................................. 11
3
Introduction:
The housing finance market in India has recorded robust growth in the last 5 years. Interest rates on housing loans have fallen from a peak of 17% in 1996 to 7.5% in 2004 making owning a home more affordable. This combined with increasing loan tenures, increasing loan-to-value ratio and a rise in the installment-to-income ratio are precipitating high growth rates in the housing finance market. Housing loans up to 15 lakhs being a priority sector lending for banks, 40% of all advances should be towards these priority sectors like housing, agriculture etc.
Processes followed:
In this scenario of rising credit off take in the home advances sector this project looks at the processes involved in the processing of housing loans which banks perform. The stages involved from applying to disbursement of housing loan is summarised as below. Step 1: Requirement analysis Step 2: Application form Step 3: Bank’s Field Investigation Step 4: Credit appraisal by the Bank and loan sanction Step 5: Offer Letter Step 6: Submission of legal documents & legal check Step 7: Technical / Valuation check Step 8: Valuation Step 9: Registration of the Property Documents Step 10: Signing of Agreements and submitting post dated cheques Step 11: Disbursement In a bank the home advances department comprises of a Branch manager, clerk and an agricultural field officer
4
Requirement analysis When the borrower approaches the bank, the bank does an assessment of the requirements, namely the purpose of the loan and the amount of loan .The purpose in most cases may vary from purchasing a flat, constructing a house or even renovation or even buying a piece of land. The amount sanctioned depends on the purpose and is defined as thus Loan Amount • Up to Rs.100 lakhs for the purchase of a house. • Up to Rs.5 lakhs for renovation/ up gradation. After the requirements are assessed the customer is asked to fill an application form Filling up the application form is the first step towards the home loan cheque and to a great extend includes basically personal and professional information, details of the borrowers financial assets and liabilities and the details of the property (if finalized) including the estimated cost and the means of financing the same. Documents to submitted Age, address and identification proof: Copy of borrower’s school leaving certificate/Driving license/Passport/ration card/PAN card/Election Commission’s card/etc. Proof of income and employment details: These will need to be backed up by proof such as copies of last three years’ Income Tax returns (along with copies of Computation of Income/Annual accounts, if any), Form 16/Form 16A, last three months salary slips, copies of the last 6 months’ statements of all borrower’s active Bank accounts in which borrower’s salary/business income details are reflected, etc. Salaried employees: Latest salary slip with all deductions Self-employed persons: Certified computation of income for past two years Certified Profit and Loss Account and Balance Sheet Processing Fee: Along with the application form and the credit documents, Banks ask for a processing fee. This fee varies from Bank to Bank, but is usually around 0.25% to 0.50% of the total loan amount. Field Investigation: Checking the credentials The bank checks all borrower’s information including borrower’s existing residential address, borrower’s place of employment, employer credentials (if the borrower works for a small organisation), residence and work telephone numbers. Representatives are sent to the borrower’s workplace or residence to verify the details. 5
Credit appraisal and loan sanction The bank establishes the repayment capacity based on borrower’s income, age, qualifications, experience, employer, nature of business (if self employed), etc, and based on these, works out borrower’s maximum loan eligibility, and the final loan amount is communicated to borrower. The Bank then issues a sanction letter. This letter may either be an unconditional letter, or may have certain terms and conditions mentioned, which the borrower has to fulfill before the loan disbursal. Offer letter: Once the loan is sanctioned, an offer letter is sent mentioning the following details: 1.Loan amount 2.Rate of Interest 3.Whether fixed or variable rate of interest linked to a reference rate 4.Tenure of the loan 5.Mode of repayment 6.If the loan is under some special scheme, then the details of the scheme 7.General terms and conditions of the loan 8.Special conditions, if any Acceptance copy If the borrower agrees with what is mentioned in the offer letter, he will have to sign a duplicate letter of the same for the Bank’s records. Earlier, Banks used to charge 'Administrative Fees' along with the Offer Letter. Legalities: Property and papers Now the focus of the banks activities shifts from the borrower to the property the borrower intends to buy. Once the borrower selects his property, he needs to hand over the entire set of original documents pertaining to the property to the bank so that it can keep them as security for the loan amount given to the borrower. These normally include: 1. The title documents of the seller which prove the seller's title including the chain of title documents if he is not the first owner 2. NOCs from the legal owners such as Cooperative housing Societies, statutory development authorities, the lessor of the land –in the case of leasehold land, etc. NOCs are not required where the property is situated on freehold land and the entire land is being transferred along with the structure. 3. Location sketch 4. Encumbrance certificate that certifies that there are no binding legal issues on the land / property for a particular period of years.
6
Legal check Every Bank conducts a legal check on the borrower’s documents to validate their authenticity. The documents are sent to a lawyer in their panel (either in-house or outsourced) for a thorough scrutiny. The lawyer’s report either gives a go-ahead if documents are clear, or it may ask for a further set of documents. The report given by the lawyer is called Legal scrutiny report and instrumental in the final approval of the loan. Technical / Valuation check: Banks are extremely careful about the property they plan to finance. They send an expert to visit the premises the borrower intend to purchase. This expert could either be a Bank employee or he could belong to a firm of architects or civil engineers. Site visit: The site visits to borrower’s property are to verify the following: In case of under construction property: 1. Stage of construction is the same as that mentioned in the payment notice given to the borrower by the builder. 2. Quality of construction 3. Satisfactory progress of work. 4. Layout of flats and area of property is within permissions granted by the governing authority. 5. The builder has the requisite certificates to start construction at the site. 6. Valuation of the property in relation to other deals in the surrounding areas. In case of ready / resale construction: 1. External / internal maintenance of the property. 2. The age of the building. 3. Will the building last the loan tenure? This has a direct bearing on the borrower’s loan eligibility since the loan tenure will be restricted to the maximum age of the property as decided by the Bank’s engineer and this will impact the borrower’s loan eligibility. 4. Quality of construction. 5. Surrounding area (development). 6. Whether the builder has received the requisite certificates for handing over possession of the flat. 7. There is no existing lien or mortgage on the property. 8. Valuation of the property in relation to other deals in the surrounding areas. Valuation has become a key parameter in determining the loan amount that can be sanctioned by the Bank. The valuation process is quite subjective and dependent on the quality and ability of the person sent by the Bank for valuation.
7
Registration: Sealing the deal After the legal and technical / valuation check the draft documents as cleared by the lawyer need to be finalized and signed and the stamping and registration of the documents needs to be done. Also if any NOCs are pending these need to be obtained in the format approved by the Bank’s lawyer. Signing the Home Loan Agreement: Inking the pact All the borrowers need to sign the Home loan agreement. The borrower also needs to submit post dated cheques as agreed mode of repayment. The original property documents have to be handed over to the Bank at this stage. Some Banks also create a document recording the handing over of the property documents to them as security for the due repayment of the Home loan. This document is also called a memorandum of entry and attracts significant stamp duty dependent on the amount of the loan in some states. The stamp duty payable on such a memorandum is naturally recovered from the borrower. Not all Banks create this memorandum and hence the stamp duty may or may not be payable dependent on the practice of the specific Bank. However even where no such memorandum of entry is created the concerned state government may, in the future, demand a stamp duty on the loan transaction, which naturally is recoverable from the borrower as per the home loan agreement signed by the borrower. Processing of the loan: In this step the bank asks the borrower to submit the following documents that provides information regarding the loan amount requires .They are 1. Blueprint of the plan with approval by the local body, corporation / municipality. 2. The estimates of the costs certified by an engineer. After these documents are scrutinized the disbursement of the loan is done Disbursement: Usually, loans are disbursed on the basis of the stage of construction of the property. So, in case of resale or ready possession properties, the disbursement is full and final. However, in case of under construction properties, the payment is made in parts, also known as part disbursement. After the Bank has ensured that the property is legally and technically clear, all the original documents pertaining to transfer of ownership of property in the borrower’s favour have been submitted, and all the necessary loan agreements have been executed, the bank makes a disbursement of the loan subject to a maximum of 85% the loan amount, and the rest 15% is the margin money that the borrower has to put up upfront.
8
The cheque will be in the name of the reseller (for resale flats), builder, society or the development authority. It is only in exceptional circumstances, that is, if borrower provide documents to support that he/she has made an excess payment from their account that the cheque will be handed over to the borrower directly by the Bank. As per RBI guidelines it is imperative that the bank disburses loans to the customer within 15days of submission of documents. Equitable mortgage: Before disbursement an equitable mortgage is created. This is done with the borrower agreeing in principle with the intention to create a mortgage. Asks the borrower to send an inland letter to the bank expressing interest to create a mortgage along with the submission of the documents .Along with the equitable mortgage other legal documents to execute adequately stamped. Interest Rates: Banks have their interest rates chalked out for their borrowers. In few instances the banks make exceptions like in the case of Citibank which has a concept of ‘relationship pricing’, wherein a long time associated customer is given a better rate than a normal customer. This is usually based on the duration of association and the balances that the individual retains/ manages in the bank. The discounting could be either elimination of the processing fee or a 0.5% reduction in the rate of interest. The prior association check is basically an elimination procedure to flush out potential borrowers who could turn into defaulters.
Summary
Most of the steps and processes are similar across banks (public and private) and NBFC’s. Most banks today access data made available by CIBIL (Credit Information Bureau (India) Limited.). CIBIL holds the database with credit information of all the borrowers across any bank in the country. CIBIL had been set up in association with Dun & Bradstreet and Trans Union and as per the directive of the RBI (2003) expects all the banks to provide credit information of borrowers. This helps banks in validating the credit history of the borrower and either accept/ eliminate the borrower request or redesign the program for the individual.
9
Annexure – 1
SBI Housing Loan Form.pdf
SBI Housing Finance Form (provided along with this document in the folder)
Annexure – 2
Dena Bank Rate of Interest.xls
Dena Niwas Housing Finance Scheme {Interest Rate Calculation} (provided along with this document in the folder)
10
References
www.denabank.comhttp://www.rediff.com/money/2003/sep/24spec.htmhttp://www.iloveindia.com/real-estate/home-loans/home-loan-process.htmlhttp://www.bostonapartments.com/loans/india-home-loan.htmlhttp://www.iloveindia.com/real-estate/home-loans/choosing-finance-company.htmlhttp://www.madrasi.info/home-loans.htmlhttp://www.indianground.com/home_loans/homeloans_faq_indian.aspxhttp://www.apnaloan.com/index.php?option=com_content&task=view&id=114&Itemid= 2
11
doc_825189274.pdf
The report explaining housing finance process in India in detail.
Narsee Monjee Institute of Management & Higher Studies
Housing Finance Process in India
Submitted to: Faculty: Prof. Sanjay Chaturvedi
Real Estate Finance
Submission by: Anoop Nair Roshan Varghese Swati Jairath Anand Kulkarni (033) (048) (221) (224)
Group I, VIth Trimester, Second Year MBA (F/T), NMIMS.
1
Acknowledgements
We wish to thank Mr. Chandrakumar, Sr. Manager, Central Bank of India; Mrs. Lekha, Manager, Dena Bank; and Mr. George Rajah, Manager - Transaction Banking, Citibank for their support and sharing of knowledge to give us insights into the lending process in housing finance of their respective banks and sharing information privy to them.
2
Table of Contents
Introduction............................................................................................................ 4 Processes followed .................................................................................................. 4
Requirement analysis ...................................................................................................... 5 Documents to submitted ................................................................................................. 5 Age, address and identification proof......................................................................... 5 Proof of income and employment details.................................................................... 5 Processing Fee ................................................................................................................ 5 Field Investigation .......................................................................................................... 5 Credit appraisal and loan sanction .................................................................................. 6 Offer letter....................................................................................................................... 6 Acceptance copy ............................................................................................................. 6 Legalities: Property and papers....................................................................................... 6 Legal check ..................................................................................................................... 7 Technical / Valuation check............................................................................................ 7 Site visit .......................................................................................................................... 7 Registration: Sealing the deal ......................................................................................... 8 Signing the Home Loan Agreement ............................................................................... 8 Processing of the loan ..................................................................................................... 8 Disbursement .................................................................................................................. 8 Equitable mortgage ......................................................................................................... 9 Interest Rates................................................................................................................... 9
Summary................................................................................................................. 9 Annexure – 1......................................................................................................... 10 Annexure – 2......................................................................................................... 10 References ............................................................................................................. 11
3
Introduction:
The housing finance market in India has recorded robust growth in the last 5 years. Interest rates on housing loans have fallen from a peak of 17% in 1996 to 7.5% in 2004 making owning a home more affordable. This combined with increasing loan tenures, increasing loan-to-value ratio and a rise in the installment-to-income ratio are precipitating high growth rates in the housing finance market. Housing loans up to 15 lakhs being a priority sector lending for banks, 40% of all advances should be towards these priority sectors like housing, agriculture etc.
Processes followed:
In this scenario of rising credit off take in the home advances sector this project looks at the processes involved in the processing of housing loans which banks perform. The stages involved from applying to disbursement of housing loan is summarised as below. Step 1: Requirement analysis Step 2: Application form Step 3: Bank’s Field Investigation Step 4: Credit appraisal by the Bank and loan sanction Step 5: Offer Letter Step 6: Submission of legal documents & legal check Step 7: Technical / Valuation check Step 8: Valuation Step 9: Registration of the Property Documents Step 10: Signing of Agreements and submitting post dated cheques Step 11: Disbursement In a bank the home advances department comprises of a Branch manager, clerk and an agricultural field officer
4
Requirement analysis When the borrower approaches the bank, the bank does an assessment of the requirements, namely the purpose of the loan and the amount of loan .The purpose in most cases may vary from purchasing a flat, constructing a house or even renovation or even buying a piece of land. The amount sanctioned depends on the purpose and is defined as thus Loan Amount • Up to Rs.100 lakhs for the purchase of a house. • Up to Rs.5 lakhs for renovation/ up gradation. After the requirements are assessed the customer is asked to fill an application form Filling up the application form is the first step towards the home loan cheque and to a great extend includes basically personal and professional information, details of the borrowers financial assets and liabilities and the details of the property (if finalized) including the estimated cost and the means of financing the same. Documents to submitted Age, address and identification proof: Copy of borrower’s school leaving certificate/Driving license/Passport/ration card/PAN card/Election Commission’s card/etc. Proof of income and employment details: These will need to be backed up by proof such as copies of last three years’ Income Tax returns (along with copies of Computation of Income/Annual accounts, if any), Form 16/Form 16A, last three months salary slips, copies of the last 6 months’ statements of all borrower’s active Bank accounts in which borrower’s salary/business income details are reflected, etc. Salaried employees: Latest salary slip with all deductions Self-employed persons: Certified computation of income for past two years Certified Profit and Loss Account and Balance Sheet Processing Fee: Along with the application form and the credit documents, Banks ask for a processing fee. This fee varies from Bank to Bank, but is usually around 0.25% to 0.50% of the total loan amount. Field Investigation: Checking the credentials The bank checks all borrower’s information including borrower’s existing residential address, borrower’s place of employment, employer credentials (if the borrower works for a small organisation), residence and work telephone numbers. Representatives are sent to the borrower’s workplace or residence to verify the details. 5
Credit appraisal and loan sanction The bank establishes the repayment capacity based on borrower’s income, age, qualifications, experience, employer, nature of business (if self employed), etc, and based on these, works out borrower’s maximum loan eligibility, and the final loan amount is communicated to borrower. The Bank then issues a sanction letter. This letter may either be an unconditional letter, or may have certain terms and conditions mentioned, which the borrower has to fulfill before the loan disbursal. Offer letter: Once the loan is sanctioned, an offer letter is sent mentioning the following details: 1.Loan amount 2.Rate of Interest 3.Whether fixed or variable rate of interest linked to a reference rate 4.Tenure of the loan 5.Mode of repayment 6.If the loan is under some special scheme, then the details of the scheme 7.General terms and conditions of the loan 8.Special conditions, if any Acceptance copy If the borrower agrees with what is mentioned in the offer letter, he will have to sign a duplicate letter of the same for the Bank’s records. Earlier, Banks used to charge 'Administrative Fees' along with the Offer Letter. Legalities: Property and papers Now the focus of the banks activities shifts from the borrower to the property the borrower intends to buy. Once the borrower selects his property, he needs to hand over the entire set of original documents pertaining to the property to the bank so that it can keep them as security for the loan amount given to the borrower. These normally include: 1. The title documents of the seller which prove the seller's title including the chain of title documents if he is not the first owner 2. NOCs from the legal owners such as Cooperative housing Societies, statutory development authorities, the lessor of the land –in the case of leasehold land, etc. NOCs are not required where the property is situated on freehold land and the entire land is being transferred along with the structure. 3. Location sketch 4. Encumbrance certificate that certifies that there are no binding legal issues on the land / property for a particular period of years.
6
Legal check Every Bank conducts a legal check on the borrower’s documents to validate their authenticity. The documents are sent to a lawyer in their panel (either in-house or outsourced) for a thorough scrutiny. The lawyer’s report either gives a go-ahead if documents are clear, or it may ask for a further set of documents. The report given by the lawyer is called Legal scrutiny report and instrumental in the final approval of the loan. Technical / Valuation check: Banks are extremely careful about the property they plan to finance. They send an expert to visit the premises the borrower intend to purchase. This expert could either be a Bank employee or he could belong to a firm of architects or civil engineers. Site visit: The site visits to borrower’s property are to verify the following: In case of under construction property: 1. Stage of construction is the same as that mentioned in the payment notice given to the borrower by the builder. 2. Quality of construction 3. Satisfactory progress of work. 4. Layout of flats and area of property is within permissions granted by the governing authority. 5. The builder has the requisite certificates to start construction at the site. 6. Valuation of the property in relation to other deals in the surrounding areas. In case of ready / resale construction: 1. External / internal maintenance of the property. 2. The age of the building. 3. Will the building last the loan tenure? This has a direct bearing on the borrower’s loan eligibility since the loan tenure will be restricted to the maximum age of the property as decided by the Bank’s engineer and this will impact the borrower’s loan eligibility. 4. Quality of construction. 5. Surrounding area (development). 6. Whether the builder has received the requisite certificates for handing over possession of the flat. 7. There is no existing lien or mortgage on the property. 8. Valuation of the property in relation to other deals in the surrounding areas. Valuation has become a key parameter in determining the loan amount that can be sanctioned by the Bank. The valuation process is quite subjective and dependent on the quality and ability of the person sent by the Bank for valuation.
7
Registration: Sealing the deal After the legal and technical / valuation check the draft documents as cleared by the lawyer need to be finalized and signed and the stamping and registration of the documents needs to be done. Also if any NOCs are pending these need to be obtained in the format approved by the Bank’s lawyer. Signing the Home Loan Agreement: Inking the pact All the borrowers need to sign the Home loan agreement. The borrower also needs to submit post dated cheques as agreed mode of repayment. The original property documents have to be handed over to the Bank at this stage. Some Banks also create a document recording the handing over of the property documents to them as security for the due repayment of the Home loan. This document is also called a memorandum of entry and attracts significant stamp duty dependent on the amount of the loan in some states. The stamp duty payable on such a memorandum is naturally recovered from the borrower. Not all Banks create this memorandum and hence the stamp duty may or may not be payable dependent on the practice of the specific Bank. However even where no such memorandum of entry is created the concerned state government may, in the future, demand a stamp duty on the loan transaction, which naturally is recoverable from the borrower as per the home loan agreement signed by the borrower. Processing of the loan: In this step the bank asks the borrower to submit the following documents that provides information regarding the loan amount requires .They are 1. Blueprint of the plan with approval by the local body, corporation / municipality. 2. The estimates of the costs certified by an engineer. After these documents are scrutinized the disbursement of the loan is done Disbursement: Usually, loans are disbursed on the basis of the stage of construction of the property. So, in case of resale or ready possession properties, the disbursement is full and final. However, in case of under construction properties, the payment is made in parts, also known as part disbursement. After the Bank has ensured that the property is legally and technically clear, all the original documents pertaining to transfer of ownership of property in the borrower’s favour have been submitted, and all the necessary loan agreements have been executed, the bank makes a disbursement of the loan subject to a maximum of 85% the loan amount, and the rest 15% is the margin money that the borrower has to put up upfront.
8
The cheque will be in the name of the reseller (for resale flats), builder, society or the development authority. It is only in exceptional circumstances, that is, if borrower provide documents to support that he/she has made an excess payment from their account that the cheque will be handed over to the borrower directly by the Bank. As per RBI guidelines it is imperative that the bank disburses loans to the customer within 15days of submission of documents. Equitable mortgage: Before disbursement an equitable mortgage is created. This is done with the borrower agreeing in principle with the intention to create a mortgage. Asks the borrower to send an inland letter to the bank expressing interest to create a mortgage along with the submission of the documents .Along with the equitable mortgage other legal documents to execute adequately stamped. Interest Rates: Banks have their interest rates chalked out for their borrowers. In few instances the banks make exceptions like in the case of Citibank which has a concept of ‘relationship pricing’, wherein a long time associated customer is given a better rate than a normal customer. This is usually based on the duration of association and the balances that the individual retains/ manages in the bank. The discounting could be either elimination of the processing fee or a 0.5% reduction in the rate of interest. The prior association check is basically an elimination procedure to flush out potential borrowers who could turn into defaulters.
Summary
Most of the steps and processes are similar across banks (public and private) and NBFC’s. Most banks today access data made available by CIBIL (Credit Information Bureau (India) Limited.). CIBIL holds the database with credit information of all the borrowers across any bank in the country. CIBIL had been set up in association with Dun & Bradstreet and Trans Union and as per the directive of the RBI (2003) expects all the banks to provide credit information of borrowers. This helps banks in validating the credit history of the borrower and either accept/ eliminate the borrower request or redesign the program for the individual.
9
Annexure – 1
SBI Housing Loan Form.pdf
SBI Housing Finance Form (provided along with this document in the folder)
Annexure – 2
Dena Bank Rate of Interest.xls
Dena Niwas Housing Finance Scheme {Interest Rate Calculation} (provided along with this document in the folder)
10
References
www.denabank.comhttp://www.rediff.com/money/2003/sep/24spec.htmhttp://www.iloveindia.com/real-estate/home-loans/home-loan-process.htmlhttp://www.bostonapartments.com/loans/india-home-loan.htmlhttp://www.iloveindia.com/real-estate/home-loans/choosing-finance-company.htmlhttp://www.madrasi.info/home-loans.htmlhttp://www.indianground.com/home_loans/homeloans_faq_indian.aspxhttp://www.apnaloan.com/index.php?option=com_content&task=view&id=114&Itemid= 2
11
doc_825189274.pdf