Banks/HFC use credit appraisal for loan applications

Whenever the customer applies for a housing loan he has to complete the credit appraisal process. Each bank / Housing Finance Company (HFC) has its own criteria and standards to assess the credit worthiness of the customer to be eligible for loan application.

Various stern financial and non-financial tools and techniques are used by the Banks / HFCs to assess the credit worthiness of the customer. In this whole process, the repayment capacity of the customer is established, mainly based on Income, Age, Qualifications, Experience, Employer, Nature of business (if self-employed), Security of tenure, Taxation history, Assets owned, Alternative /additional sources of income, Other loan obligations, Investments, Other present and future liabilities.

The maximum loan eligibility is worked out according to these parameters. The final loan amount sanctioned by the bank is accordance to the LTV norms, IIR norms and the FOIR norms as laid down by the Bank /HFC.

LTV / LCR: LTV stands for the Loan to Value ratio. LCR stands for the Loan to Cost ratio.
By using these norms Banks / HFCs calculates the ratio of the loan amount that a person is eligible for on the total cost of the property.

However, there is an upper limit on the maximum loan amount that a person is eligible for, for the purpose of housing irrespective of the loan eligibility. The maximum amount of loan eligible is attached to the cost / value of the property. The loan eligibility as per the other parameters might be higher but the loan amount cannot exceed the cost / value of the property. (The ratio varies between 70 to 90 percent of the registered value of the property)

FOIR: This stands for Fixed Obligation to Income Ratio. In FOIR calculation, the Bank / HFC takes into account the installments of all other loans previously availed of by the customer, including the home loan applied for. In other words, this ratio includes all the fixed obligations that the customer is supposed to pay regularly on a monthly basis. The Fixed Obligations however, do not include statutory deductions from the salary like Provident Fund, Professional Tax and deductions for investment like Voluntary Provident Fund, Insurance Premiums, Recurring deposits etc.

For example: Income -Rs 50,000 p.m.
Car loan installment: Rs 8,000 pm
Fridge loan installment: Rs 2,000 pm
Proposed housing loan installment: Rs 15,000 pm

Accordingly, the FOIR is 50 percent i.e. Rs 25,000. (All loan installments divided by the monthly income). The bank / HFC may have a standard of 30 percent of FOIR. In this case, the total installments the person can pay as per the bank's FOIR standard would be Rs 15,000 per month. As the borrower is already paying Rs 10,000 pm for car and fridge, he has Rs 5,000 left and the loan would be calculated taking Rs 5,000 per month as the housing loan repayment capacity of the customer. Accordingly the housing loan amount will get reduced.

IIR: This stands for Installment to Income Ratio. This is used to calculate the loan eligibility of the customer. It is generally expressed as a percentage. This percentage denotes the portion of the customer's monthly installment on the Home Loan taken. As a rule of thumb, the banks use 33.33 % to 40 % ratio.

For Example: IIR is 40%
Gross Income is Rs. 60,000/- per month

As per the IIR ratio, the customer is eligible for a loan where the installment does not exceed Rs. 24,000/-per month (40% multiplied by Gross Monthly Income)

Icra reports high tendency of default in commercial vehicle loans

A survey was conducted by Icra a rating agency in which it found higher tendency for default in the commercial vehicle loans that were extended recently, than old advances.

The large number of borrowers are being brought into the line in a segment that is growing fast (buoyant) and there is certain lowering of credit criterion.

Kalpesh Gada, head of structured finance products at the affiliate of global rating agency Moody’s, said these factors are likely to increase the defaults among recent commercial vehicle loans.

While the rate of interest for new CV loans (which are governed at fixed rate) is higher, it does not play much part in delinquency. He added the time period for loan repayment CV loans is 3-4 years as a result, hike in rate does not impact heavily the payment capability.

An updated report was released by Icra on the performance till September 2007 of the various asset-backed securitization (ABS) transactions rated by it.

When we compare between the cumulative loss ratio and the loss-cum-delinquency ratio, the rise in delinquency level has been much higher than the rise in the crystallized losses. Given that the newer pools (originated in 2005 and 2006) have sizeable balance tenure, the extent of ultimate losses in the pool would be driven by recovery from delinquent accounts.

Analysis done on certain matured pools indicates that delinquency levels on average peak at around 22 months post origination. The sizable recovery has been observed even from the 180+ day bucket in the case of CVs.

Among the matured pools, the losses and overdue at the end of the pools life were around 2 per cent in the case of car/multi-utility vehicle pools and around 1.8 per cent in the case of CV loan pools.

The report present a summary of the performance of 118 ICRA-rated ABS pools (pools that were active between December 2005 and September 2007) till September 2007.

The key performance points out that ICRA looks at are the aging profile of a securitized pool, collection efficiency ratios, and the rate of foreclosure of contracts.

In addition to these pool performance-related issues, ICRA also takes in consideration factors such as maintenance of credit quality of the Originator and performance of the overall portfolio of the Originator during its surveillance of the rated pools.

An essential factor of the regular monitoring of ratings assigned for ABS issues is evaluation of the adequacy of the available credit enhancement.

ICRA has rated 150 Asset Backed Securitization (ABS) transactions till date, with the rated amounts totaling around Rs 38,800 crore.

Amongst the receivables the assets such as classes of cars, commercial vehicles (CVs), construction equipment (CE), three-wheelers, two-wheelers, consumer durables and personal loans are covered.

Tips on how to make out of today’s market

There has been a major change in the real estate sector in India. It has aligned itself with global standards in some places. The developer community is becoming more professional, ensuring better quality and timely delivery. Moreover there has been a healthy growth in the residential sector, the commercial and retail sectors.

After all these changes and growth there is still a huge demand-supply gap in the housing sector. Therefore, the real estate market that has shown a rapid growth in the past is expected to maintain the momentum in the future.

Even the mindset of the Indian customer, has changed as far as taking a loan is concerned. Few years ago the consumer was cautious or even had a negative outlook on loans, today, the consumer has a far more positive and open outlook on taking a loan. He feels that taking a loan put into effect on him a sense of greater financial discipline, as he is bound to use a part of his salary to pay the Equated Monthly Installments (EMI), rather than spending on things on an ad-hoc basis. Now people prefer to take loan than other options such as borrowing from friends and relatives, because in his mind, taking a loan is about being self-reliant, and this gives him a greater sense of self-respect.

In home-loan sector the competition has grown and healthy. Many of the big players are offering similar basic offers. The customer is much more informed about the options available to him. Particularly in this scenario, in addition to competitive rates and best service, it is the value-added services and customized features that are likely to differentiate the leaders.

The biggest challenge for banks and Housing Finance Companies (HFCs) is to provide more sophisticated and customized products to suit customer needs, unlike a vanilla structure offered earlier. Consumer research also shows that customers are seeking more than just a loan — they want convenience in the entire process of acquiring a home as well as the finance for it.

The HFCs hope that the positive growth trend in the home-loans sector will continue. With smart thinking and a few handy tips, customers will be able to make their dream homes a reality. Enlisted below are a few interesting tips to help customers make the most out of today’s market conditions.

Select your home smartly

A buyer also need guidance for getting a good option. At times buyers do not realize that he can get a better home within the same budget because he is not aware of all options on houses available in the city, which fit his requirements. There are some banks offers these professional services.

Consider a longer tenure loan

Try to go for longer repayment tenure so that the EMI amount gets reduced - for instance, opting for a 20-year loan compared to a 15-year loan will make you eligible for a higher loan amount.

Say, if you have a monthly gross income of Rs 50,000 and the floating rate of interest applicable is 12.00% then the maximum loan amount you are eligible for will be: For a tenure of 10 years eligibility is of Rs 19.17 lakhs, for 15 years eligibility is of Rs 22.91 lakhs and for a 20-year-tenure the eligibility is of Rs 24.98 lakhs. Thus, longer tenures translate into higher loan eligibility.

Co-applicant eligibility

Taking a loan jointly with your spouse will help you increase the loan amount so that both the incomes are clubbed to determine the gross repayment capacity.

For example, if you have a gross monthly income of Rs 25,000 then your maximum eligibility for a 20-year loan at 12.00% floating rate of interest will be Rs 12.49 lakh.

In case your spouse also has a gross monthly income of Rs 25,000 and he/she is considered as a co-applicant, then your maximum loan eligibility will become Rs 24.98 lakhs.

Select a product with lower total interest outflow.

Some products help you repay your loan amount much faster with a lower interest outflow as compared to a normal home loan.

Reduce the burden of your other loans to enhance loan eligibility

In case you are currently availing high-interest loans for other purposes, you can reduce the burden by taking a “Loan Against Property” (LAP) at attractive rates of interest and repaying the high-cost loans. This loan will help you in reducing the interest burden and also lower the installments, as LAP loans are offered for higher tenures. LAP loans can be availed for upto Rs 3 crore against your existing property — residential or commercial. The loan can be used for multiple purposes like repaying high cost loans, funding your business plans, sponsoring your child’s education or for your child’s marriage. Even on transferring your loans to LAP, your EMI would come down leading to a higher disposable income available for taking a fresh home loan. Hence your eligibility automatically increases.

In case you’re gross monthly income is Rs 50,000 and you are servicing a high interest loan at an EMI of Rs 25,000, your home loan eligibility will be Rs 14.74 lakh. In case the existing high cost loans are closed and a loan against property is taken wherein the EMI becomes Rs 20,000 (indicative), then on your balance income of Rs 30,000 your home loan eligibility will become Rs 17.68 lakh, approximately.

SBI informs loans rate not likely to decline

Speaking to the media person on the sidelines of a seminar organized by the Confederation of Indian Industry (CII), T S Bhattacharyya, the managing director of State Bank of India said, that the interest rates for the short- to medium-term lending were not likely to come down for the time being. He also added that raising funds through deposits from non-resident Indians were drying up due to the appreciation of the rupee against the dollar.

Bhattacharyya said, “The resources for the long-term lending are growing very slowly and in addition to this, the cost of funds is also on the rise, so there is no likelihood of interest rate easing out for the short- and medium-term loans as of now.”

He said, “The lack of resources for long-term lending is acting as a constraint against the lending rates.” He informed that the banks have to earn enough money from the corporate and industrial sectors to cover up for the subsidized rates and the regulatory compliances. “The cost expectation is linked with the decision of the regulator along with the ability of the banks to reduce cost,” Bhattacharyya said.

Bhattacharyya also maintained the demand for credit in the industrial infrastructure sector has increased particularly for steel and power plant units.

However, the chairman showed a concern regarding the sustainability of small-sized steel plants.

“The prices that they are getting today would not be there every time and hence an organized approach is needed for their survival for they would suffer individually in the long run,” he said.

Centre issues notification of interest free loans for sugar millers

Finally sugar millers hue and cries have reached the ears of the centre.The centre has issued a notice to provide financial assistance to sugar mills to improve their liquidity position. This official notification has come after full six months of comprehensive relief package which was first mooted by food minister Sharad Pawar.


The gazette notification on the Scheme for Extending Financial Assistance to Sugar Undertakings, 2007 — issued on December 7 — is intended to enable all sugar units operational in the past two years to clear their statutory minimum price (SMP)-related arrears on cane price to farmers for 2006-07 and for 2007-08.

Food ministry has been demanding for interest free loans for sugar units from a long time significantly, the notification has authorized this demand of food minister. This means full financial support at 12%, although the finance ministry has so far been persistently blocking the suggestion, arguing instead for only 5% financial support. That would have confirmed loans for sugar factories at 7%. Full subvention will cost the exchequer over Rs 1,300 crore, whereas 5% subvention would have cost only Rs 565 crore. Mills are to repay the loans in 24 monthly installments after a cessation of 2 years.

Under the scheme, NPA units will be covered only if the state governments agree to give guarantee for their loans. The government has appointed State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank and Indian Bank as the nodal agencies for payment of interest to commercial banks. Nabard has been appointed the nodal agency for cooperative banks and RRBs. Arrears are currently as high as 17.4% of the total sugarcane supply this year, against only 2.9% last year.

Wherever necessary, term loan agreement and extension of personal guarantee agreement by the promoters will be applied. Under the scheme, the borrower will also have to provide an undertaking that the loan shall be exclusively used for the payment of cane price arrears of 2006-07 and 2007-08 sugar seasons.

The notification has fixed loan to sugar factories as equivalent to the hypothetical central excise duty payable on total production of sugar during 2006-07 and 2007-08 sugar seasons. It stated, “The central excise duty shall be net of sugar cess. In case a company has availed Cenvat, the sugar undertaking may avail the loan against such Cenvat amount also”

“Full interest subvention shall be provided to all scheduled commercial banks, regional rural banks and cooperative banks for the total duration of the loan, i.e., four years, including the 2-year moratorium. The interest subvention will be limited to 12% per annum, of which 5% will be met out of general Budget provisions of the central government and the remaining 7% from the Sugar Development Fund,” the notification said.

The factories must have accounts to get interest rate subsidy. It will be given only if the ‘account is regular’, that is, if the repayment of installment of principal is made after the expiry of cessation. Factories who do not have regular accounts will not be eligible for the interest subsidy until the accounts are made regular. Under the scheme, the interest will be debited by the banks on the facility to a sugar mill’s account and on receipt of the subsidy; the interest would be credited to the mill’s account.

The industry had demanded for deferred payment of excise duty for two years after that period. But this demand has not been accepted, mainly as the finance ministry has been dead against sugar mills — whether in the public, private or cooperative sector — getting easy loans under the financial assistance of the Centre which is extending farm sector subsidies. It had also clearly mentioned that NPA mills will be allowed to avail of the scheme only if the state governments stood guarantee.

Companies will have to pay for the unused amount of the sanctioned loan

Banks are formulating new terms and conditions of sanction for lending to companies

Many companies take loan from the bank but do not utilize the whole amount of the loan for which they have taken. So Banks plan to charge a levy on unutilized portion of credit.

According to new terms and conditions companies from now on will have to pay a price for unused term loans sanctioned by banks.



Currently companies avail of the sanctioned loan in phases depending on their needs. The companies having strong financial position often do not draw the entire loans sanctioned. However, the unused amounts are included in calculating a banks total admittance to a company.



Banks are working towards put in new clauses in their loan agreements which would allow them to levy a charge on companies for not utilizing the entire loan amount sanctioned to them.



On the other hand, if a company is not willing to pay a charge, banks will keep the right to revoke the unutilized portion of the sanctioned loans. This clause will be included in the new terms of sanction for lending to companies.



From this year, banks will be required to keep aside capital for unused portion of loans under the new capital adequacy guidelines. So far, only amount of loans drawn attracted capital adequacy norms.





A senior official of a Mumbai-based public sector bank said, “We are taking some steps to ensure we are unnecessarily not paying a charge. There will be a provision in the sanction letter or in the loan agreement with the corporate that if the limits are not drawn as per the drawl schedule, the limits will be considered cancelled.”



For companies that want banks to keep with their committed credit limits, banks would levy a charge on the undrawn portion of the loan. Banks are likely to levy a commitment charge of 50-100 basis points on the undrawn loan amount, which would translate into a Rs 5,000-Rs 10,000 charge for every Rs 1 lakh of undrawn loan. One basis point is one-hundredth of a percentage point.



Already banks is levying a commitment charge on companies for drawing less than 70-80 per cent of cash credit facilities committed to them. These working capital loans are renewed every year. Now, bank will impose a commitment charge on term loans also, which are drawn over 3-5 years.



The commitment charge will be used to cover the cost of capital which banks would have to allocate for the undrawn loan amounts, under the revised capital adequacy framework, popularly known as Basel-II. If a company draws only Rs 400 crore of the sanctioned Rs 500 crore loan, the lender would have to give capital for 20 per cent of the undrawn amount (or Rs 20 crore) if the residual term of the sanctioned credit is up to one year.



Applying a risk weight of 100 per cent, as applicable to a BBB-rated corporate, the bank will have to provide an additional Rs 1.8 crore of capital. If the residual maturity of a loan is more than one year, then 50 per cent of the undrawn amount would have to be considered for calculating capital required to be allocated.



The executive director of another public sector bank informed all banks will have to do this. So far we were not compulsory charging. Now this could be in the sanctioned terms and conditions or in the approval note sent with the sanction letter.



Banks have in the past ceased from levying any commitment charge on top-rated companies despite having a provision in the loan agreement due to fear of losing the loan account to another bank. There will be a period of adjustment.



There would be better appreciation by large corporates of the banks’ situation. If there is a Rs 100 crore limit lying unutilized, I am earning zero on the loan account (as) I have to provide capital, said the official.



For the time being the new terms would be incorporated in the new loan agreements, for existing loans, banks are asking companies to reassess if they really need the sanctioned limits. For the existing contracts, banks will take them up with the clients for discussion and they will have to agree to one of these options.



A senior banker said if the companies do not agree, they can withdraw and go to another bank. The head of corporate credit of the Mumbai-based public sector bank said, “We are seeking legal advice as to what to do about the existing contracts?”

Small loans comes to rescue poor and lead them to the path of freedom

Julian D'Cruze three decades ago, moved off from his family's poor farming to big city on a mission to help his father.



The family's land in Doripara, a village covered by Toomilia parish, 30 kilometers northeast of Dhaka, was mortgaged and no longer under their control.

"My father had to mortgage our land to others to meet our family's needs," D'Cruze told UCA News Nov. 8. "This way he lost the land to grow rice for the family, and our situation became worse day by day."

It has been over the last two years D'Cruze, a Catholic, is one of 120 members of Christian Cooperative Credit Union Limited (CCCUL) had bought apartments in Dhaka with the help of loans he took from the credit union.

On Nov. 3 36th National Cooperatives Day was celebrated and about 2,500 people recently took out a rally in Dhaka to celebrate the work of such cooperatives as CCCUL. CCCUL had put up banners in Bangla that said, "Employment Creation is Our Goal - Self-dependent Society is Our Vision." And D'Cruze is an example who has benefited from this vision.



Speaking with UCA News in Dhaka, D'Cruze, now 49, recalls about the days he used to live in grass hut house along with family members and one day he left his family's grass hut in 1978 for a job in Dhaka. Completed a secondary-school education, he hoped not only to make a living but also help his father to pay off debts so that his family could regain their two acres of land.

With the help of cooperative lending today, he has been able to buy back the family land and is also having a good job, he is working for the international courier company DHL, and a family of his own.


D'Cruze told that he found a job when he arrived in Dhaka in 1978, and within three months he took a first loan of 1,000 taka (US$15) from the Dhaka-based CCCUL.

CCCUL is the largest Christian credit union in Bangladesh, according to Nirmal Rozario, its secretary. Founded in 1955, it now has more than 20,000 members.



After taking a loan first of all D'Cruze managed to pay off the debt on one of the four plots of his father's land.

"I was so happy to free the land that was under mortgage for the previous 14 years," D'Cruze said. "My father started cultivating this again and we got more crops for the family."

From the salary he was getting, he was able to repay the loan earlier than the expected date and took more loans, from CCCUL and from his Toomilia parish credit union. These loans helped him free the other three plots of land.

On acquiring back their land his family started producing rice for themselves and sold the excess for an income.

D'Cruze told the news that by taking loans from CCCUL and his parish credit union, he also built two brick-walled houses with corrugated-iron roofs for his family in the village, and was also able to financially support his younger brother and two sisters in their studies, got married and bought more land.



One year ago, D'Cruze took loans from CCCUL and a commercial leasing company and to buy an apartment in Dhaka. He said that if he had been able to obtain all the money from CCCUL, he would have avoided paying the commercial company's higher interest rate.

He said he needed to buy an apartment in Dhaka because his daughter and son are attending college and high school here. By renting he would lose money, whereas "the apartment is an asset."

Anjoli, his wife, who is working as a nursing supervisor at hospital credits the credit union with playing "a vital role in bringing our family financial solvency." She sold her earnings to repay the loans.


D'Cruze told news he tried to get loans from local banks, but he was unable to fulfill the requirements of the banks. Through the credit unions, he was able to get guarantees from other members.

Jonas Dhaki, chairman of Cooperative Credit Union League of Bangladesh, told UCA News people that the people from lower and lower-middle classes are unlikely to get bank loans, since they cannot fulfill the necessary guarantees and requirements.



"To alleviate the poverty of the country, credit unions are an effective way to change poor people's situation," Dhaki declared.

The country's best-known credit union is Grameen Bank, founded in 1983 by Muhammad Yunis, winner of the 2006 Nobel Peace Prize.

Bad loans up by 55% of new private banks, public sector banks NPA goes down

According to the data available during 2006-07 the new generation private sector banks have slipped on the front of reducing non- performing assets (NPA). Though the banking sector have been working on in reducing non-performing assets (NPAs), or loans defaulted by borrowers. The Reserve Bank of India (RBI) has said gross NPAs of new private banks have shot up by 55 per cent to Rs 6,287 crore during the year as against Rs 4,052 crore in the previous year, reversing the declining trend in the last four years.

The public sector banks, which were famous in building up NPAs in the 1990s, have managed to bring down bad loans further — from Rs 41,358 crore during the year 2006 to Rs 38,968 crore in 2007. There has been 40 per cent decline from Rs 64,812 crore in 2004. The total NPAs of all commercial banks fell from Rs 51,097 crore to Rs 50,487 crore in 2007.

RBI in its Report on Trend and Progress of Banking in India said, “The asset quality of new private sector banks, though comfortable, showed some signs of weakening.” Same is the case with foreign banks operating in India, with their gross NPAs rising from Rs 1,928 crore in 2006 to Rs 2,263 crore in 2007.

Though, old generation private banks have managed to bring down their NPAs from Rs 3,759 crore to Rs 2,969 crore in 2007. According to the analyst, “Defaults in the retail segment seem to have added to the NPAs. One large private bank which was very active in retail lending contributed the maximum to NPAs.”

RBI said, during 2006-07 NPAs in the priority sector increased. It said, “This was mainly due to an increase in NPAs in the agriculture sector while NPAs in the small-scale sector declined. The NPAs in the public sector, too, increased during the year.”

Banks used SARFAESI Act and Debt Recovery Tribunals for recovery of bad loans and have been successful in the last four years in their plan. Besides, higher write-offs and sale of NPAs to asset reconstruction companies also aided banks in cutting NPAs. Though gross NPAs in absolute terms have declined, there has been increase in net NPAs, reflecting a higher write-back of excess provisioning than fresh provisioning made during the year.

In 2007 the ratio of gross NPAs to gross advances has improved considerably in the last six years — from 11.4 per cent in 2001 to 2.5 per cent. If we compare this with other countries the results are better. Argentina’s NPA-advances ratio improved from 13.1 per cent to 3.2 per cent, Korea from 3.4 to 0.8 per cent, Brazil from 5.6 per cent to four per cent, Japan from 8.4 per cent to 2.5 per cent, the UK from 2.6 per cent to 0.9 per cent and Australia from 0.6 per cent to 0.2 per cent.

Urban co-operative banks (UCBs) in India are still having high ratio of NPA-advances, at 17 per cent. Gross NPAs of UCBs fell marginally from Rs 13,506 crore in 2006 to Rs 13,363 crore in 2007.

Yes, there’s a housing loan slowdown

There has been slowdown in the housing loan segment this has been confirmed by the RBI. In 2006-07 the has been decline in the housing loans demand it has come down to 24.6 per cent at Rs 45,508 crore from 38.3 per cent at Rs 51,273 crore in the previous year, according to the central bank. The reasons behind the decline are the high interest rates and soaring real estate prices.