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The Role Of Financial Institutions In Providing Housing

Loan To Middle Income Groups.

Dissertation submitted in partial fulfilment of the requirements for the

Award of degree of

MASTER OF BUSINESS ADMINISTRATION

OF

BANGALORE UNIVERSITY

By

Agnelamit B Borges

(Reg. No.12CQCMA008)

Under the Guidance of

Mr Harish

Lecturer, DSCMIT MBA BU

DayanandaSagar College of Arts, Science &Commerce

ShavigeMalleshwara Hills, KumaraswamyLayout , Bangalore - 560078CERTIFICATE OF THE FACULTY GUIDE

This is to certify that the dissertation report titled The Role Of Financial

Institutions In Providing Housing Loan To Middle Income Groups. submitted in partial fulfilment of the requirement for the award of the degree of Master of Business Administration to Bangalore University is a record of original work carried out by Agnelamit B Borges (Reg. no. 12CQCMA008) under my supervision and guidance and that no part of this report has been submitted for the award of any other degree/diploma/certificate.

Place: BangaloreMr Harish

Date:Lecturer,DSCMIT

MBA BUINSTITUTE CERTIFICATE

This is to certify that the dissertation titled The Role Of Financial Institutions In

Providing Housing Loan To Middle Income Groups., submitted in partial fulfilment of the requirement for the award of degree of Master of Business Administration to Bangalore University, is a record of original work carried out by

Agnelamit B Borges (Reg. no. 12CQCMA008) under the guidance of Mr.Harish during the academic year 2012-2014. This has not been submitted to any other university or institution for the award of any degree/ diploma/ certificate.

Dr. Dinakar GDr N Suresh

Professor & HODDirector

(DSCMIT)

Place: Bangalore

Date:Student Declaration

I do hereby declare that the dissertation Report titled The Role Of Financial

Institutions In Providing Housing Loan To Middle Income Groups. is an original work done by me, submitted in partial fulfilment of the requirement for the award of the degree of Master of Business Administration to Bangalore University, under the guidance of Mr Harish. This has not been submitted for the award of any other degree/ diploma/ certificate.

Place: BangaloreAgnelamit B BorgesDate:Reg.No. 12CQCMA008ACKNOWLEDGEMENT

I express my sincere thanks and deep sense of gratitude to Dr. N

SURESHthe director (MBA BU) of DAYANANDA SAGAR

COLLEGE OF ARTS, SCIENCE & COMMERCE, BANGALORE, and Dr. DINAKARAN, Head of the Department (MBA BU) of

DSCMIT for granting me permission to do this project and extending all his help and support.

With deep respect I express my sincere gratitude towards my project guide MR HARISH for his valuable comments and guidance throughout my project.

I express my heartfelt thanks to all the faculties of the Department of Management Studies, DAYANANDA SAGAR COLLEGE OF ARTS, SCIENCES & COMMERCE, BANGALORE, for their instant help and guidance throughout my project.

I also express my sincere gratitude towards my parents and friends who supported and encouraged me for the successful completion of the project.

AGNELAMIT B BORGESTABLE OF CONTENTS

Chapters

ContentsPage No

INTRODUCTION1-10

1.1Background of the study

1.2Present scenario of the market

1

1.3Future trend of the market

1.4 Highlights and Comments

1.5Bangalore market scenario

1.6 Need and importance of the study

LITERATURE REVIEW & RESEARCH11-15

DESIGN

2.1Introduction To Housing Finance

2.2 Statement Of The Problem

2.3Objectives Of The Study

2

2.4Research Methodology

2.5Type Of Research

2.6Sample Technique

2.7Sample Size

2.8Collection Of Data

2.9 Limitations Of The Study

INDUSTRY PROFILE16-41

3.1Housing Finance

33.2Housing Finance Institutions

3.3 Development Of Modern Banking

3.4Structure Of Banking System In India

DATA ANALYSIS AND INTERPRETATION42-65

4

4.1Hypothesis

4.2Analysis and Interpretation

5FINDINGS, RECOMMENDATIONS &66-69

CONCLUSION

BIBLIOGRAPHY70

ANNEXURES71-75

LIST OF TABLES & GRAPHS

TABLETITLEPAGE NO

NO

01Age wise classification of respondents39-40

02Occupation of the respondents40-41

03Income level of the respondents42

04Monthly savings of the respondents43-44

05Residential status of the respondents44

06Purpose for which home loan is to be applied45

07Ranks for the decision attributes46-47

08Ranking of the Housing Finance Institutions47-48

09Ranking of key attributes in selection of HFIs49-50

10Purpose for which home loan was opted50-51

11Loan amount borrowed by current applicants52

12Tenure of the loan amount53-54

13Type of interest rate opted54-55

14Satisfaction level of current applicants55-56

15(a)Ranking of attributes by satisfied current applicants56-57

15(b)Ranking of attributes by dissatisfied current57-58

applicants

16Suggestions by the current applicants59-60

17Willingness To Shift From Current To Fluctuating60-61

Rate Of Interest BY Current Applicants

18Most Preferred Institution By Potential Applicants61-62

Role of Financial Institution Providing Housing Loan to Middle Income Groups

Chapter-1

INTRODUCTION

A home is a place of residence or refuge and comfort. Purchasing and moving into a dream house would generally rank among the top three things on the wish list of most people. After all its what been proved by Maslows Law of Hierarchy as well. Middle income groups cant buy their dream home at once paying huge amount of money that is the reason they go for home loan to the financial institutions. But nowadays it is difficult to choose proper financial institutions due to competencies between so many players in the market. So that financial institutions play a important role to middle income groups.

The industry comprises of nearly 383 housing finance companies although disbursements from only the leading 26 institutions are eligible for re-finance from National Housing Bank, which is the regulatory body for these companies. These Housing Finance Companies (HFCs) constitute nearly 95 % of the total disbursement by the industry.

In today's political scenario, India has positioned itself as one of the best place

for realty investments. The reason behind this development is India's flexible policies and open system with social and political safety regulators and a conducive environment that provides comfort, long-term stability and security to the foreign investors for personal as well as business investments.

The positive outlook of Indian government is the key factor behind the rise of the Indian real estate sector, the second largest employer after agriculture in India. This budding sector is today witnessing development in all area such as - residential, retail and commercial in metros of India such as Mumbai, Delhi, Kolkata, Bangalore and Chennai. Easier access to bank loans and higher earnings are some of the pivotal reasons behind the sudden jump in the real estate sector.

Dayananda Sagar College of Arts Science and CommercePage 1Role of Financial Institution Providing Housing Loan to Middle Income Groups

As access to bank loans are becoming easier, many potential buyers wish to learn about best financial institution and real deal for home purchase.

Even the property prices are augmenting fast, especially Chennai real estate, Hyderabad real estate and Bangalore real estate are on the very high phase. The market boom is spread across the country and hence more and more Indians are not interested in investing for India real estate. The economy rate as well has managed to grow faster than 8% each year because of increasing real estate market trend.

1.1 Background of the study

The Indian housing finance industry

Since the 1970s, the Indian government had given special emphasis to the housing industry and made providing housing one of its main objectives. However, due to the scarcity of finance, owning a house remained a distant dream for the average Indian; even a

lifetime'searnings and investments were not enough to fund the purchase of a house.

As a result, even by 2001, the country faced a shortage of 19.40 million dwelling units. The housing finance industry emerged as the answer to the problem of housing by providing finance to individuals planning to own a house.

Till then, banks had offered personal loans for properties. But these loans were restricted to bank and government (public sector) employees. Private sector employees had to undergo a lot of hardship to obtain housing loans.

To take care of this problem and to boost investment in housing industry, thegovernm ent established the Housing Development Finance Corporation LTD (HDFC) in1977.

The objective of HDFC was identified as promoting home ownership by providing long-term finance to households for their housing needs.


During the 1980s and 1990s, increased urbanization and the migration of the rural population to the cities resulted in heavy demand for housing. This created a great need for housing finance.

The National Housing Bank (NHB) was also established on 9th July 1988 the NationalHousing Bank Act, 1987 to function as principal agency to promote Hous ing FinanceInstitutions and to provide financial and other support to such institutions.

The National Housing Bank Act empowers National housing bank or NBH to:

Direct and regulate the functioning of housing finance institutions for fair practices

Provide loans, advances or any other financial assistance to Banks and housing finance institutions for slum improvement.

Supervise mobilization of resources and extension of credit for housing.

Till the late-1990s, the marketing efforts of Indian HFCs were rather limited because the industry was largely a seller's market. Even the market leader, HDFC, had not undertaken any major marketing initiatives.

The entry of commercial banks and other private sector companies, however, changed the dynamics of the industry, and for the first time, all the players emphasized on marketing. Many of the HFCs targeted the middle class, which had begun availing of housing loans largely due to the declining interest rates.

Analysts pointed out that housing loan companies needed a strong brand image to build a strong relationship with these customers. It was felt that if interest rates increased in the future, this brand image would help

companies gain/retain their market shares. Direct marketing emerged as a very effective tool for attracting customers in this industry.

In the early 21st century, the housing industry in India was one of the few sectors that were growing at a healthy rate of 28-30% in spite of the economic slowdown. A host of reasons were responsible for this growth, including favorable government policies, increased corporate activity, and above all, an increasing customer-base.


During 2000-2002, the government had announced many industry-friendly policies; in addition, during the same period, real estate prices had also gone down across the country. The industry's strong growth had a direct impact on many other related industries, such as the cement, engineering, paint and steel industries. One industry that experienced hectic activity during the period was the housing finance industry. In fact, some industry observers claimed that the ease with which housing finance could be obtained resulted in the increased activity in the housing industry. Not only were customers given tax concessions on housing loan repayments, companies were also given tax rebates on profits earned.

As a result, many banks and financial institutions had entered the market withattractiv e financing rates and consumer-friendly schemes. So that the new home purchase loan has become much easily available and is much cheaper than what was available earlier.

Banks were everywhere and the schemes were implemented even in villages and smaller towns. The housing loans are popular there too, however, the activity of building flats is little slow. It would not be wrong to say that there has been a boom in the home loan market and with this boom; there is also a boom in the number of home loan mortgage brokers in India.

The main reason for this boom in home loan market is the change in government policies. It is governments motivation that the home loan interest rates in

India have fallen considerably. Lot many banks are offering home loans and this is available at low EMIs (Equated monthly Installments).

Again, there were different types of home loans available. The interest rate available is also of two different types. One is the fixed rate loan and the other is the floating rate loan. In the fixed rate loan, whatever interest is fixed on the start of loan is carried on for the complete period. However, in the other one, the interest rate is not fixed and as the interest rate goes up or low the effect is directly transferred to the person who is taking the loan.


As shared earlier, taking a loan is not a difficult task. However, before taking a loan, one must realize that the relationship with the bank will be for a longer period usually 15 to20 years so one must ensure faith and integrity in bank. Apart from low rate of interest, the bank should also provide some value added services. The other thing is to look into is the property that is to be brought. Making sure that the builder has all sanctions and facility to build a good building is very important.

1.2 Present scenario of the market

The housing finance sector is set to see higher growth in the next few years, with an increase in the demand and supply of housing projects.

According to estimates, the total housing credit outstanding in India as of June 30, 2013, was over Rs 7.99 lakh crore, against Rs 7.59 lakh crore on March 31, 2013. That is an annualized growth rate of 21 per cent, against 18 per cent in 2012-13.

Although, there was a slight decline in net interest margins and stability on the non-performing-loan front, overall, declining net interest margins and increasing credit provisions could lead to a 20-30 basis point reduction in profitability for housing finance companies. However, profits could still be reasonable.

Indias ratio of housing loans to GDP is seven per cent, among the lowest in the world. Most purchases of homes are still made out of savings.

The shortfall of dwelling units has been growing and is now estimated at over 25 million units. Bridging this gap, entails the creation of the quantum of housing that currently exists in Mumbai, Delhi, Kolkata and Chennai together.

Decline in rates of interest to 8%-9% from 12% over the past one year; this amounts to a 15%-25% reduction in the equated monthly installment (EMI) per lakh of loan

Increase in supply of affordable homes and price correction in the residential real estate market.

Increase in economic activity

Large inventory of unleveraged homes (which could be pledged by borrowers to raise loans)


Increase in income of government employees following implementation of the

Sixth Pay Commissions recommendations.

However, it is also likely that a further correction or even stagnation in real estate prices may lead to borrowers deferring home purchase decisions on the expectations of another round of correction.

1.3 Future trend of the market

Housing finance companies are expected to grow 24 per cent, while banks are pegged to grow 14 per cent. Experts say this trend is expected to continue over the next five years.

Consequently, these finance companies, including LIC Housing Finance and Housing Development Finance Corporation (HDFC), have been gaining share over banks over the last few years. According to a leading credit rating agency, disbursals of home loans are projected to grow by 19 per cent in the next financial year.

Future projections predict that the population of India would reach 1,350 million by the year 2020. Keeping in mind the additional new housing requirements as a result of the above, an additional 70 million new households would get added up to the existing housing requirements. This would amount to an additional 3.5 million housing units required during the next 10-year period. In other words, due to the population increase alone, an additional3.5 million houses per year would be required. Hence, we need to gear up to contribute substantially to the housing stock through streamlined efforts of public, private, co-operative, community and self-help sectors, in order to see the dream of "Shelter for All" turn a reality by the end of the current decade.


1.4 Highlights and Comments

o Highlights:

Significantly, there has been no dearth of demand for housing and consequently for finances for the same have been abundant.

Market dynamics play a pivotal role in determining the lending rates.Consideri ng the same, the housing finance industry has been in a slump in recent times.

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 HDFC imbroglio.

Housing finance policies provided by the Government of India is a significant step towards upholding the future prospects of this industry.

o Comments

There always has been huge demand of housing and it will remain same in the future.

Indian housing sector has been developing successfully even though its going through the impact of global crisis as any other developed and developing countries. Few years ago housing loan interest rate was declining rapidly due to competencies of many financial institutions in India. The declining interest rest has resulted badly to value of real state due to increase in prices. And Government of India needed to handle this problem through its policies. GOI has introduced feasible loan condition through public bank sectors but it is not enough to supply all the demand. So there is still a huge demand from the customers for the housing financial institutions. And interest rates are still remained attractive.

1.5 Bangalore market scenario

Home loans in Bangalore are almost synonymous to any property purchase in Bangalore. This is the result of the level the property prices have reached following a booming commercial and industrial segments. In other words, purchasing a home for dwelling is simply not affordable for many. Renting a house or getting financial assistance to buy a house could be the possible housing solutions in the current


scenario. Thus home equity loans are a popular real estate service in Bangalore. Even the real estate mortgage gets high returns since the property value is so high.

The instigation of housing finance services has helped many in getting their dream home in Bangalore that was way beyond their immediate reach. The housing loans are available as homeloans for buying preconstructed realty or developing or renovatinge xisting property and also as finance against home assets or real estate assets.

With home loans, we can purchase a residential plot or a house in the forms of flats or apartments. If our home does not have enough space to suffice our requirement and you want to add an extra floor to it, you can get financial assistance for that. Home loans for renovation or remodeling by many leading banks are just for that. With rate of interest going down consistently, home loans in Bangalore offer us a good option to bring the idea of our dream home into reality.

The erstwhile Garden City and Pensioners Paradise and todays Silicon Valley of India due to its supremacy as the Information Technology hub has made Bangalore a hotspot real estate destination.

Now officially renamed as Bengaluru, the city is a metropolitan with a population of over 10million making it the third most populous city and fifth largest metropolitan area. Information technology undoubtedly has been the forerunner in setting the stage for development,

Growing pockets of Bangalore

On analysis of the growth pattern of Bangalore, we witness a push for developments

North of Bangalore

The demand for high-end residential units remains high in the North Bangalore region. Residential real estate activity in North Bangalore has gained traction post the commencement of the Bangalore International Airport. The projects located around Hebbal, Bellary Road and surrounding areas are in the luxury segment. North Bangalore is assured to be the next economic centre of Bangalore.


Proximity to the International Airport and planned social and the physical infrastructure in the North have boosted development in the area. Embassy Lake Terraces, RMZ Latitude, Karle Zenith, Equinox, Embassy Boulevard are some of the high-end projects in the North Bangalore

. South of Bangalore

The demand for high-end residential developments is low in the South. The housing requirement in this area increased after Electronic City established itself as an IT Hub in this micro-market. However, it did not attract premium residential developments due to poor urban and social infrastructure. Electronic city is located in the outskirts of Bangalore in an area of 332acres and is home for the IT behemoths including Hewlett Packard, Infosys, and Siemens and Wipro. Sarjapur road is another promising area in the south of the city. Jaynagar, J.P Nagar, BTM layout are the areas adjoining to Electronic city developed primarily as residential areas.

East of Bangalore

It has grown till Whitefield, rapidly developing as a commercial area. Though the connectivity to this part is not au courant, initiatives of government are underway in form of metro rail and improved road connectivity. Kormangala, Indiranagar and Hosur road are the prime areas. Prices in the East have remained stable with priceranging between Rs 2500-7700 per square feet for residential and Rs 3000-

8000 for commercial.

West of Bangalore

It has predominantly been the residential focus with prime areas being Malleshwaram, Rajaji nagar and Chord Road. Being a residential area the prices have comparatively been stable hovering between Rs 2000-6500 per square feet for residential and Rs 3000-6000 per square feet for commercial.

All leading banks and finance companies have their branches in Bangalore wherethey provide home loans experts who guide you about the formalities and eligib ility procedure of each bank and the housing finance product most suitable to your


requirements. Many cheap home loans products are available in the market that makes these housing finance services more affordable for the masses.

1.6 Need and importance of the study

A positive real estate scenario in Bangalore city exists today because of connectivity and convenience offered by infrastructure developments. This gave rise to new residentialoptions at various parts of Bangalore city created a ideal situation to go for purchase/construction of house. Since, middle income group constitute major portion of Bangalores population, its important to identify the factors effecting the decision making to go for a housing loan by this group. Here comes the need to give snap shot picture of current scenario of housing finance industry. This will benefit the loan applicants in their decision making to go for a loan and selection of a service provider. The study centered on to find out the key decision attributes which affects decision making on home loans by middle income groups in Bangalore city. The study also reminds the role played by financial institutions and offers suggestions for improvement. And it is important to know for me about Indian housing sector, its features and difference from Mongolian mortgage, housing market.


Chapter-2

LITERATURE REVIEW & RESEARCH DESIGN

Home has been the centre and instrument for mankind's moral and material progress ever since the advent of civilisation. Since home life affects the very foundation of an individual's life, the house becomes an integral part of it. The first step in house construction is collecting money to own a house. These days one need not have ready cash to start house construction. There are many financing institutions which give a helping hand in fulfilling one's dream of owning a house. This is a topic on which many studies have not been done in our country. The available literature is reviewed under the following heads. Importance of housing, problems, shortages, cost effectiveness, environment awareness and various sources of housing finance, urban sat on approach, Marxian views, effects of decentralization, and the developmental efforts for the future housing sector. Man spends 1/3rd of his lifetime in sleeping. In a modern society a house not only satisfies the need for shelter to man but also security and pleasure in the society. To have this, one should have the capacity to purchase or hire or to build their dream home. Since a large part of the population of middle income groups have the capacity to own a house but lack to gather huge amount at once. Here comes the role of financial institutions to fund this type of construction. In the present scenario of falling interest rates, the study on role of Financial Institutions in providing housing loans for middle class income group has become a subject matter of paramount importance.


IMPORTANCE OF HOUSING:

According to Krishnamachari (1980) as stated in preamble of the National Housing Policy, "shelter is a basic human need and as an intrinsic part of human settlement, is closely linked with the process of overall socioeconomic development. Though a house is essentially a place of dwelling, it also fulfils many important social needs of the household. Besides providing shelter, it creates employment, generates voluntary saving and creates a conducive condition needed for achieving crucial goals "'

In the opinion of Naik (1981) "housing is an essential element of life for most human beings. The modern concept of housing does not limit the idea of housing merely to the provision of shelter." Housing constitutes a physical matrix in which human interaction occurs. The house that people live in, touch upon every facet of their lives and the society as a whole" as cited by Paul S. (1 983)-3

According to Satyanarayana (1987), housing is an element of material culture, is one such devices to overcome threats against physical elements or security to lives and serves as an important purpose by making the provision of shelter. It provides a place for the operation of many human activities Irrespective of place and time man is using a place of accommodation which is called a house. It helps people to interact within the family and with the outside world.4

As cited in Encyclopedia Britani B, the world housing has a general meaning covering conditions and statistics applying to all the dwellings of the community. It is used to refer to the problem created by deficiency in number or defects in conditions of the dwellings.

Kearl (1979), The mortgage market is important for housing precisely because it makes the asset divisible and therefore allows a household to more closely adjust its asset portfolio as desired. This speaks volumes about the significance of housing finance for an individual home buyer as for the economy.

Charles (1977) expects demand for housing to be sensitive to economic variables. Income therefore plays a major role in demand for housing and


thereby for housing finance. The role of income is incorporated in terms of

monthly repayment burden that a potential borrower can

Gelfand (1966, 1970) suggests that lenders can choose borrowers with stable incomes in the case when credit terms are too liberal

Lindsay (1971)The relationship between housing finance and income is manifested in the fact that it enables households to spend more that what their current income permits

Clauretie and Herzog (1990) found that loan losses for lenders reduced when regressed on rising property prices and rising interest rates. The reason is that an increase in the current market rate of interest reduces the incentive for borrowers to default on the mortgage carrying lower rate

RESEARCH DSIGN

2.1 INTRODUCTION TO HOUSING FINANCE:

To give a boost to the housing scenario in India and to narrow down the margin between the housing demand and the availability of houses, The National Housing Bank was set up in the year 1988. This was done by keeping in mind that a home seeker though has a desire for a house but lacks the resources for construction or buying it. To give an enhancement to private housing finance institutions the National Housing Bank came into the picture. It is a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions. While it is important to keep in mind that the National housing Bank itself does not give loans or finance individuals or a party as such. It is only a corporate body to promote, establish, support or aid the housing finance institutions.

2.2 STATEMENT OF THE PROBLEM:

Man spends 1/3rd of his lifetime in sleeping. In a modern society a house not only satisfies the need for shelter to man but also security and pleasure in the society.


To have this, one should have the capacity to purchase or hire or to build their dream home. Since a large part of the population of middle income groups have the capacity to own a house but lack to gather huge amount at once. Here comes the role of financial institutions to fund this type of construction. In the present scenario of falling interest rates, the study on role of Financial Institutions in providing housing loans for middle class income group has become a subject matter of paramount importance.

2.3 OBJECTIVES OF THE STUDY:

The study was conducted in order to achieve the following objectives:

To identify those factors which influence the decisions to apply for home loan and in selection of housing financial institution by prospective middle-income

group customers for home loan. To assess the satisfaction level of current home loan customers.

To study the role played by financial institutions in providing housing loans.

To study the effect of falling interest rates on home loan seekers.

RESEARCH METHODOLOGY:

Any type of research should deal with the methods employed and the tools applied to fulfill the objectives of the study.

2.5 TYPE OF REASERCH:

A descriptive study has been undertaken for this study to know about the functionality of housing loan industry, major players, norms and procedure, interest rates patterns, cost of loan to the customers.

2.6 SAMPLE TECHNIQUE:

The respondents with respect to current and potential applicants had been picked on the basis of random convenience sampling.


2.7 SAMPLE SIZE:

The sample size of this study was 50 for current customers and 50 for potential customers. These samples would be selected from Bangalore.

2.8 SAMPLE DESCRIPTION:

The sample size obtained for the study would be between the age group of 25years to 60 years whose monthly income ranges between Rs10,000/- to Rs.40,000/-and would be chosen from different parts of the city.

COLLECTION OF DATA:

Primary source of data

Primary source of data from potential customers is obtained from meeting them personally and got the questionnaire filled. It is a firsthand data.

The primary collection of data from current customers is done through sending questionnaire through friends, relatives and also by personal meeting with the respondents.

Secondary source of data

Secondary source of data is obtained from internet and websites, various publications, news papers, magazines, books etc

LIMITATIONS OF THE STUDY:

The study would be subjected to the following limitation:

The study conducted is restricted to the available information from the sources.

It would take into consideration the confidentiality of certain facts and figures.

During the course of study time constraint would be a limitation.


Chapter-3

INDUSTRY PROFILE:

3.1 Housing finance

Housing Finance is considered both by way direct and indirect finance.

Direct finance:

Loans give to individuals or group of individuals such as co-operative Housing Societies or Educational, Health, Social Cultural or other institutions/centers which are part of a housing project and which are necessary for the development or settlement of townships or to shopping complexes, markets and any other centers catering to the day to day needs of the residents of the housing colonies and forming part of a housing project or to construction meant for improving the conditions in slum areas for which credit is to be extended directly to the slum dwellers against the guarantee of government or indirectly through stated governments are classified under direct finance.

Indirect Finance:

Loans granted t public housing agencies like HUDCO, StatedHousing Boards, State L evel Agencies, HDFC, Housing Finance Institutions, Housing Boards and other Agencies are classified under Indirect Finance. Also, financing for Land acquisitions and to Private Builders is classified under Indirect Finance.

Nature of housing loans:

1) Longer tenure of loans, ranging from minimum 5 years to 20/25 years. Higher outlay of funds and longer duration of the housing loans make it different form that of other retail loans. Therefore, the risk horizon also differs for the housing vis--vis retail loans.


Rather low cost of operations in terms of deployment of manpower for processing and follow up, etc., as compared to other loans of the same size within the retail or any other segments.

Safe advances as these are invariably backed by tangible security the form of mortgage of house/flat

.4) Tendency to default on housing loans low as house is considered as the big ticket deal of an individuals life.

5)Housing finance provides a higher and rather consistentrisk adjusted returnto banks.

6)Cut throat competition prevails among Banks, HousingFinance Companiesand NBFCs

Types of home loans

Today, home loans have been restructured to suit your constantly changing needs starting with a basic loan to buy a home, to loans required for construction or for repairing your existing home. Featured below are a few other kinds of loans available.

Out Right Purchase Loans

As the name indicates, we can avail these loans for the outright purchase of our homes.

Construction Loans

We can avail these loans for the construction of your home.

Home Extension Loan

We could avail of this loan if we want to build a floor or expand it but only after we obtain the requisite approvals from the municipal and town authorities.

Home Improvement Loans

External work like structural repairs or waterproofing and internal work like tiling, plumbing, electrical work painting, flooring, etc., remains to be done even after weve bought the house. This is when a home improvement loan comes in handy.

Home Conversion Loan

Simply put, this loan enables us to transfer our current loan (which we took to buy our house) to the new house, thereby providing us with additional finances for the


incremental cost of the new house. Which means, we can move to our new house without having to pre- pay our existing loan?

Land Purchase Loan

If weve opted to invest in land instead of buying a flat in town, we could apply for a land purchase loan. We could later apply for a construction loan separately to build our dream home on the land.

Stamp Duty Loan

This is extended against the stamp duty amount payable on our purchase of a house. This particular loan could be worth considering, especially in cities like Delhi, Mumbai and Bangalore where Real Estate prices are on the high side and the stamp duty payable is substantial.

NRI Loans

Loans today are available not only to resident Indians but also to NRIs if they wish to buy or construct a house in India. But for an NRI the documentation required is different. He/ She would have to submit his/her work permit ( where applicable), stamped visa on the passport, employment contract, latest salary slip and overseas bank statement of the past few months, Repayment of the loan could be done through the normal banking channels using either a Non-Resident (external)or a Non-Resident (ordinary) account

Bridge Loans

In short, bridge loans are short-term finance loans that cover the period till we sell off your old house. To elaborate slightly, supposing we plan to buy a new house (which weve already found) and want to sell the one were currently living in but are unable to find a buyer, a bridge loan proves useful. Repayment of a bridge loan can be done through a lump sum or in installments.

Refinance Loan

This simply means that a housing finance company gives us a home loan to repay our earlier debt. But the condition is that the earlier debt shouldnt be over six months.

A refinance loan therefore works out cheaper when your present house has entailed a borrowing for mother sources such as friends, provident funds, etc.

Balance Transfer (swap)


A balance transfer loan is really useful when interest rates fall even as were still repaying our home loan. And if weve opted for fixed-interest rate repayment terms, well be paying a higher rate of interest. What we could do is get our existing loan refinanced (usually by another finance company). The new lender will repay our existing loan and give us a new loan at the current, lower rate of interest. We might have to face a pre-payment penalty on our old loan, but it will be worth it if the new EMI (based on the new, lower interest rate) ensures sufficient savings.

Sanctioning criteria for Housing Loans

Age

It influences the amount and eligibility for a loan by the way of being a major and the period remaining for retirement.

Savings

How much of ones savings can one put for the house? The more one can put into the down payment, the less he needs to borrow. Yes, given the low interest rates and attractive tax breaks, it perhaps makes more sense to take higher loans now than never before. But remember: there isnt a one-size-fits-all option here; the down payment-loan ratio will largely be determined by ones specific financial situation.

For instance, the young couple in our example wont have a substantial corpus of savings but will be looking to make the most of their tax breaks by taking the largest possible loan. With their incomes likely to increase over time, they can easily service their loan on the other hand single mother with her childs education to worry about, or man with dual responsibilities will want to limit their loan repayment liability with higher down payments.

Income

Obviously a major determinant of, how much loan one can get and how much quickly one can repay it. Each EMI consists of a principal component and an interest component. As a thumb rule, the maximum possible EMI is usually put at 35-40% of your gross monthly income. Most lenders allow the borrowers to club one co-applicants income with their own to increase ones loan eligibility.


As a young couple looking at a growing income curve, one can afford to take a large loan or even a step-up land where the EMIs keep increasing with rising repayment capacity. On the other hand, declining future income will deter the man on the verge of retirement from taking a large loan. He may find it prudent to in for step-down plan. That lets him scale down his EMIs in his post-retirement years or he may opt to return the loan partially or fully with his super-annotation benefits.

Debts

If one has commitments like repayment of a car loan, it will limit the finances one can raise for a house. Then the loan will be lesser than what one could have taken had been debt-free. Basically, it is about ones disposable income. The lender is interested in knowing what resources are available to the borrower to service the loan.

Interest rate

The choice of lender may also be determined by how the interest is calculated. Under certain calculation methods, the interest outgo is more.

A part of each EMI one pays goes towards reducing the principal amount. How much this portion is- on which the interest rate is based- depends on how the interest is calculated by the lender. It may be calculated on a yearly, monthly, or daily reducing basis. The daily reducing balance method is the most cost-effective. As a thumb rule, given an interest rate, the more frequently the interest is computed, the better for the borrower.

Tenure

One can opt for long loan tenures when he is sure he can still repay even after 15 or 25 years. One must also be reasonably certain that unexpected and substantial monetary obligations wont crop up, as in the case of the young widow or the man with a growing family and aged parents. If he is close to retirement, he must be looking at a declining repayment capacity- it makes sense to go for shorter tenures or smaller loans.

But even for the young couple, a 30 year loan can prove counter-productive. Unlike in the US, where interest rates are lower for long-term loans, in India the rates are same for all tenure. This results in a sharp increase in interest obligation for 30-year loans without a corresponding increase in loan amounts.


Procedure for Availing Housing Loan

The appraisal officer attends to the queries of a prospective borrower. Various details e.g., eligibility criteria are discussed during this meeting.

Customer collects the application form, which is generally available at the reception counter.

Applicant pays the processing fees, which is about 1% of the loan amount. The fees are non-refundable. Generally they are asked to pay the fees only if the chances of the loan getting sanctioned are really good as per the Officer's analysis.

The date of the personal interview is fixed up as per mutual convenience. The appraisal officer conducts the interview.

The Appraisal Officer prepares the file and discusses the case with the Branch Manager. The Branch Manager should substantiate recommendations of the Appraisal Officer. The file is then recommended for sanctioning by the competent authority.

The competent authority concerned sanctions the loan proposal. In case there are some queries, the same have to answer by the Appraisal Officer to the satisfaction of the sanctioning authority.

If approved, applicant collects the Loan Offer letter. They fill Property Details formand Acceptance Note and sign the same. This signifies your acceptance of the proposal. Then, they are required to collect the disbursement within a month of the acceptance of the offer letter failing which a Commitment Charge of generally 1% on the loan is levied

The Legal and Technical fee is generally 1% of the loan sanctioned is paid by the borrower. The file is then transferred to the Legal department. You submit the legal documents to the Legal Officer. The Loan Agreement and the other documents are signed. The Legal Officer then prepares the Legal Report after studying the legal documents in depth.

The Technical Officer visits the property and submits the Technical Report. TheTechnical officer as per the stage of completion recommends the amount f or disbursement.


The Disbursement Memo is prepared and is signed by the Appraisal, Legal and Technical Officers, and countersigned by the Branch Manager.

The accounts department prepares the cheque which is then sent to the authorizedsignatories. The Disbursement Memo is attached with important do cuments likeinterview sheet, Legal Report, Technical Report, PEMI Status Report applicable etc.

The PEMI cheque of the amount disbursed is collected before releasing the disbursement amount cheque. PEMI is the interest charged on the amount already disbursed by the company.

Consequent to the final disbursement the EMI starts, which amortizes the interest and adjust the principal for the tenure allotted.

The documents mortgaged are released on closure of loan.

List of Documents In Case Of Salaried Borrowers

The following documents are required to be submitted by the borrower at the time

of submitting his application: -

Loan Application form duly filled and signed by the borrower and co-borrower (where applicable).

Latest salary slips in original.

Employment certificate on the letterhead of the borrower's employer.

Xerox copy of the first and last page of the ration card.

Xerox copy of the first and balance page of Bank Pass Book.

Xerox copies of Rent Receipt and Electricity Bill, if applicable.

Xerox copy of the LIC policy along with a copy of the latest premium receipt.

Xerox Copies of various investments of the borrower.

Proof of educational qualification

Proof of age.

Previous experiences certificate wherever applicable.

Xerox copy of the agreement of the property if the property is already selected and agreement is entered into.


Xerox copies of the own contribution receipts, wherever applicable.

In case of borrowers whose salary is taxable, the companies generally call for the 3years form 16 for tax deducted at source by the employer

Factors to be considered before taking individual loan

Here are some of the factors one should consider before making decisions on home loans.

Rate of interest

This is one of the most important factors. Simply put, this is the rate at which we borrow money to buy the house.

Its not always a fixed rate. Though interest rates vary from lender to lender, they usually range from 8% to 10%, depending on the amount of loan.

The rate for small loans (below Rs.5 lakhs) is lower than that for Rs.10 lakhs and above. The interest rate on home loans is much lower compared to that of a personal loan, like a car loan.

Interest rates offered are of two types:

1) The floating interest rate loan:

Here, the interest rate payable is linked to the market rate like the bank lending rate. As the bank rate varies, the interest rate payable will also rise or fall. Since theres an element of risk due to the interest rate fluctuations, the floating interest rates offered are slightly lower than the fixed interest rates.

2) The fixed interest rate loan:

The interest rate is constant over the loan tenure.

Tenure of the loan

This is the period of time for which we are taking the loan. Usually it ranges

from 5years to 15 years. Typically, the tenure of the loan dose not extends beyond the age of retirement or when we turn 65- whichever comes first.

Equated Monthly Installment (EMI)


EMI means the amount of money returned back by the borrower to the money lending institution every month, till the end of the loan tenure. It is the spread of loan amount payable in the form of small parts each month.

Reducing balance factor

This is the method of reducing the principal amount repaid from the outstanding loan amount. Every time you make a payment, the interest you pay is on the part of the original principal sum that remains un-prepaid till then. You could calculate the reducing balance in three ways:Daily reducing balance

Monthly reducing balance

Annual reducing balance

In the daily reducing balance method, the principal is reduced every day as if you were making repayment of the principal on a daily basis.

In the other two cases, the reduction in the principal outstanding is made at the end of every month and every year respectively. So, the EMI in the monthly reducing balance method will be lower than in the annual reducing balance method given the same rate of interest.

Service from the lender.

Today, many companies offer a wide range of personalized services. Sometimes a loan is sanctioned even before a property is identified. The speed of approval and processing, however, varies across HFIs. A few institutions offer you not only financial advice but also consultation services on property. Some incentives offered to the customer range form free credit cards, free ATM cards, and free accident insurance to discounted consumer loans. Some companies even send a representative to your home to discuss and deliver the loan and also pick up the EMI cheques.

Additional charges

This includes processing and administrative charges and is expressed as a percentage of the loan amount. And currently rages from 0.25% to 0.50% of the loan amount.

Processing charges

This is a certain charge payable on the loan we have applied for and not on the amount of loan eventually sanctioned. This charge varies and is typically fixed,


irrespective of the loan amount or maybe a certain percentage of the loan applied for. Paid up front, this amount effectively reduces the loan availed of by you.

For instance, a 1% Processing charge onRs.10 lakhs loan means you are effectively getting a amount of Rs.9, 90,000 /- (Rs.10 lakhs minus the Rs.10, 000/- processing charges). You still have to pay the interest on Rs.10 lakhs. Therefore, a lower processing charge would prove more beneficial to you.

Commitment fees

There could be a delay in availing of the sanctioned loan as you may not have found the right house or the builder couldnt deliver the property on time. In such case, aco mmitment fee, depending on the lenders policy, may be levied on the loan amount set aside for you.

Hidden Charges

Documentation charges, consultation fee of an advocate to get the title clearance for the property, etc., could be a few of the hidden charges payable. But this should be considered as part of the total charges levied by the lender.

Interest tax

This is a tax on the interest paid on the loan. The interest rate announced may not include the interest tax. HFIs normally include the interest tax while banks charge it as 2%additional interest tax- ( charged only on the interest paid and not on the principal- i.e. on a loan carrying an interest rate of 15, the additional interest payable will be 2% of 15% -i.e.0.3%)

Pre-payment

Returning part of the loan before it is actually due for repayment, as per their payment schedule, means a pre-payment.

Foreclosure

S foreclosure is when you repay the entire outstanding loan at any point of the time before the end of the loan tenure.

Pre-payment or Foreclosure penalty

In both cases you are charged a penalty called pre-payment penalty. This ranges from 1% to 2% of the amount being pre-paid. But it varies across HFIs. There are a few HFIs which do not charge either of the penalties.RBI advised that banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,


Some points to remember on loan transfer:

Interest rates may look upwards again, so if you wish to avail a loan transfer do so now, by locking an old loan into a new, lower rate loan.

Be aware that the old institution will not allow you to walk away easily.

A loan transfer makes sense when the loan amount outstanding is still large.

Institutions are always on the lookout for a good loan. Try and convince your own finance company to provide the benefit of a lower interest rate regime. They will respond.

Check out what is the pre-payment penalty for an old loan. Some institutions have waived it off.

Check out the tax benefits relating to a loan transfer. The tax benefits may or may not accrue to you if you go in for a loan transfer, as there is currently no income tax ruling on this.

Try and get the new organization to directly buy the loan from the old one, by paying a certain premium. Do not try and chase documents yourself. To go for best home loan the applicant should check following points:

Is the interest computation on daily rest, monthly rest or annual rest basis.

Quantum of processing fee

Are there add-

on benefits like free personal accident insurance, waiving of processingfee,etc.

3.2 Housing finance institutions

To give a boost to the housing scenario in India and to narrow downthe

margin between the housing demand and the availability of houses, The National

Housing Bank was set up in the year 1988. This was done by keeping in mind that a home seeker though does have a desire for a house but lacks the resources for construction or buying it. To give an enhancement to private housing finance institutions the National Housing Bank came into the picture. It is a principal agency

to promote housing finance institutions both at local and regional levels and to

provide financial and other support to such institutions. While it is important to keep in mind that the National housing Bank itself does not give loans or finance


individuals or a party as such. It is only a corporate body to promote, establish, support or aid the housing finance institutions. The housing finance institutions can be segregated into three categories:

Public Sector Finance

Banks

Private sector Finance

Public Sector Banks

o HUDCO (Housing and Urban Development Corporation Limited)

HUDCO is an influential Government of India Enterprise. With the main aim of funding state governments for infrastructure development. HUDCO intends to surface as the lone Organization of its kind for dealing with the needs of shelter and infrastructure development in the human settlements.

Since HUDCO entered into the individual housing finance sector, the complete state of affairs has changed. 44.33% of housing loan of HUDCO has been allocated for Economically Weaker Section (EWS) and Low Income Group (LIG) which carries a concessional rate of interest of 8.5%(floating) to 9.75%(floating), over 93% of the dwelling units sanctioned by HUDCO benefit these sections of society.

o LICHFL (Life Insurance Corporation Housing Finance Limited)

L.I.C Housing Finance Ltd. is one of the leading and oldest home funding organizations, which offers one of the finest services in the trade. It has branches all over India. It offers variety of loans like housing finance for new purchases, re-constructions, renovations, NRI housing finance etc. Some of the schemes that L.I.C.H.F.L offers are, the Griha Shobha, which is for NRIs, Griha Sudhar, where one can apply for a loan for renovations and repairs in existing houses. Green Channel

Facility is meant for professionals like practicing doctors, CAs, software professionals etc. Of late L.I.C.H.F.L introduced a new scheme Apna Chikitsalaya,


which is especially for medical practitioners for renovating, purchasing or extending their clinic, hospital, laboratory, etc. Then it also has the scheme of Sampurna Griha

(A) & (B) for resident Indians.

o GICHFL (General Insurance Corporation Housing Finance

Limited)

GIC Housing Finance Ltd., a company from the house of General Insurance Company has also emerged as a strong housing finance institution in the recent years.

o PNBHFL (Punjab National Housing Bank Housing Finance

Limited)

A subsidiary of the Punjab National Bank, PNBHFL offers the Apna Ghar Yojana for construction or buying a house. It also offers the Ghar Sudhar Yojana for renovation or repair of house or flat. It has home loan facilities for NRIs and Line of Credit Facilities for companies to give loans to their employees for construction or renovation.

o SBIHF (State Bank of India Housing Finance)

SBIHF offers loan for construction and renovation of houses at the lowest interest rates, which range from 8% p.a. to 10% p.a.

o OTHERS:

The other major players in the public sector are: Corporation bank Homes,

Canara Bank Home Finance Limited (can fin homes), HDFC etc...

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, IndusInd 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. ICICI gives the maximum period of 30 years for the repayment of loans. It offers loans ranging from a minimum of Rs. 1 lac to Rs. 1crore.

o Canara bank

As a premier commercial bank in India, Canara Bank has a distinct track record in the service of the nation for over 100 years. Today, Canara Bank has a strong pan India presence with3002 branches and over 2000 ATMs, catering to all segments of an ever growing clientele base of over 36 million. They are recognized as a leading financial conglomerate in India, with as many as nine subsidiaries/sponsored institutions/joint ventures in India and abroad. As they step into the second century, they aspire to

emerge as a Global Bank with Best Practices. o HSBC bank

HSBC's origins in India date back to 1853, when the Mercantile Bank of India was established in Mumbai. The Bank has since, steadily grown in reach and service

offerings,keeping pace with the evolving banking and financial needs of its customers

.In India, the Bank offers a comprehensive suite of world-class products and services to its corporate and commercial banking clients as also to a fast growing personal banking customer base.

o ICICI home finance

The Bank has a network of 1,694 branches and about 4,883 ATMs in India and presence in 18 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery

channelsandthroughitsspecializedsubsidiariesandaffiliatesinthe areas of investment banking,life and nonlife insurance, venture capital and asset

management. ICICI Bank Home Loans, offer unbeatable benefits to ensure that we get the best deal without any hassles. As one of the leading home loan provider, ICICI Bank understands how special building a new home is for us and their Home Loan help us lay the foundation for our dream home. ICICI offers us the most convenient home loan plans to suit our needs. With so many attractive features in every type of home loan they offer some of their key benefits are:


Guidance throughout the process

Home Loan tenure up to 20 years

Simplified documentation

Doorstep delivery of home loan papers

Free Personal Accident Insurance (Terms & Conditions)

o IDBI bank

Presenting IDBI Bank's ultra flexible home loan we have been looking for. They realize what owning our home means to us and our family.

We can avail of the Home Loans for constructing a home, purchasing a ready built house/flat, residential plot and even for re-financing existing loans we may have availed from other banks or housing finance companies.

o Punjab national bank

With over 38 million satisfied customers and 4668 offices, PNB has continued to retain its leadership position among the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking.

PNB reaches out to us with fast, friendly and most convenient home loans for: Construction or purchase of house/flat. Carrying out repairs/renovations/ additions/ alterations to existing house/flat.

Special Feature to cover the loan outstanding, life Insurance cover is also available on payment of one time premium which can also be financed by the Bank

PRIVATE SECTOR FINANCE

o HDFC (Housing Development Finance Corporation)

With the objective of augmentation of housing through the stipulation of housing finance HDFC was established in 1978 with the support of the Industrial Credit and Investment Corporation of India, the International Finance Corporation


(IFC) in Washington and the Aga Khan Fund. Today HDFC and Housing finance are synonymous. It has become one of the largest home loan providers in India.

The maximum loan HDFC offers is Rs.250, 000 or 85 per cent of the cost of the property. The repayment of the loan is on a monthly basis in equated monthly installments over a period of between 5 and 15 years.

o DHFCL (Dewan Housing Finance Corporation Limited)

Dewan Housing Finance Corporation Ltd. is one of the finest preferences in private housing finance sector. Since 1984 in the market, today it has 22 branches all over the country. Union Bank of India has obtained an equity involvement in DHFCL's capital composition. It is interesting to note that DHFCL's shares are listed on Mumbai, Delhi and Ahmadabad Stock Exchanges.

DHFCL offers a Double Protection Plan in the form of Free Accident Risk Cover +

Property Insurance to the extent of the loan liability to safeguard the interest of the borrower. It also has a Regressive Payment Scheme for applicants who are due for retirements within 5-10 years and apply jointly with the eligible younger co-applicants.

o GHFCL (Global Housing Finance Corporation Limited)

GHFCL, A syndicate of reputed builders was incorporated in June 1994, offers Individual Home Loan Scheme and Home Improvement Scheme. Oriental Bank of Commerce, one of the leading nationalized banks, also participates in the equity of the company.

o BHFL (Birla Home Finance Limited)

BHFL offers Easy Title for registration of the property or land purchased Easy Upgrade loans for renovation of the existing house, which has been purchased or constructed at least one year ago. The renovation can be in the form of flooring, tiling, plumbing, paint, polish, etc., Easy extend loans for extensions of an existing house, Easy Home loans for outright purchase of a ready built house, Easy Build loans for


construction of house on self-acquired or inherited vacant plot of land, and Easy Bridge Loans for purchase of a ready built house, when an individual already owns a property, which would be sold on getting possession of the new one.

o Maharishi Housing

Maharishi Housing Finance Corporation Ltd., a company from Maharishi Group started in 1997 also caters home loans. One of the key attractions of Maharishi Housing is its 35-year loan repayment scheme.

o Others

Other key housing finance providers in the private sector are Sundaram Home Finance, Home trust Housing, Gruh Finance, Weizmann Homes, GLFL housing, etc.

History of Banking Industry

Banking system occupies an important place in a nations economy. A Banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country. Banking was primarily the business of dealing in money and instruments of credit. Banks were traditionally differentiated from other financial institutions by their principal functions of accepting deposits- subject to withdrawal or transfer by check-and making loans.

General History

A simple form of banking was practiced by the ancient temples of Egypt, Babylonia, and Greece, which loaned at high rates of interest the gold and silver deposited for safekeeping. Private banking existed by 600 B.C. and was considerably developed by the Greeks, Romans, and Byzantines. The forerunners of modern banks were frequently chartered for a specific purpose, e.g., The Bank of Venice (1171) and the Bank of England (1694), in connection with Loans to the government. The bank of Amsterdam (1609) to receive deposits of gold and silver.


Indian Banking system

Banks in India were started on the British pattern in the beginning of the 19th Century. In those days, all the banks were joint stock banks and a large number of them were small and weak. At the time of the Second World War, about 1500 joint stock banks were operating in un-divided India, out of which over 1400 were not scheduled banks. Quite a few of them were managed by bad and dishonest management and naturally they were a number of banks failures. Hence the Government has to step to the Banking Companies Act, 1949 (which was subsequently renamed as banking regulation act) was enacted which led to gradual elimination of weak bank that were not in a position to fulfill the various requirements of the Act. In order to strengthen the weak units and revive public confidence in the banking system a new section 45 was inserted in the banking regulation act in September 1960, empowering the government of India to compulsorily amalgamate weak units with stronger ones on the recommendations of RBI. RBI was empowered in 1960, to force compulsory merger of weak banks with the stronger ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. In July 1969, Government Nationalized 14 banks having deposit of Rs. 50 crores and above. In 1980, Government acquired 6 more banks with deposits of more than Rs. 200 crores. Nationalization of banks was to make them play the role of catalytic agents for economic growth. The Narsimham committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices. The Amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks.

3.3 DEVELOPMENT OF MODERN BANKING:

For the history of modern banking in India, a reference to the English agency houses in the days of the east India Company would be necessary. These agency houses with almost no capital of their own and depending entirely on deposits were in fact trading firms carrying on banking as a part of their business. Such a combination of trading with banking had necessarily to be fatal. No wonder, therefore that almost all such agency houses vanished from the scene in the crisis of 1829-1832.In the first half of the 19th century, the east India company established 3 banks-the bank of Bengal in


1809, the bank of Bombay in 1840 and the bank of madras in 1843.the 3 banks are also known as presidency banks were independent units and functioned as well .it was however considered that it would be in the interest of these banks and the country that they should amalgamate. In 1920 was passed the imperial Bank of India was established in 1921.The Bank was authorized to hold government balances and manage and public debt. It was not, however given power to issue notes .the branches of the bank were to work as clearing houses .it was mainly a commercial bank competing with other banks .the Imperial Bank of India was nationalized in 1955, by the state bank of India act.

DEFINITION OF BANKING /BANKING COMPANY/

BANKER/BANK

Section 5(1) (c)of the Indian Banking Regulation act of 1949 defines the term

banking as accepting ,for the purpose of lending or investment of deposits of money from public ,repayable on demand or otherwise and withdraw able by cheque , t ,order or otherwise . . Kin lay defines a bank as an establishment which makes to individuals .such advance of money as may be required and safely made and to which individuals entrust money when not needed by them for use. G Crowther defines a bank as a dealer in debt, his own and other peoples. Dr H l Hart defines a banker as

one who in the ordinary course of his business, honors ceruse drawn upon him by persons from and for whom he receives money on current accounts.

RBI Banking

The reserve Bank of India is the Central banking institution in India. It is the sole authority for issuing Bank notes and the supervisory body for banking operations in India. It supervises and administers exchange control and banking regulations and administers the governments monetary policy. It is also responsible for granting licenses for new bank branches. 25 Foreign banks operate in India with full banking licenses. Several licenses for private banks have been approved. Despite fairly broad banking coverage nationwide, the financial system remains in accessible to the poorest people in India.


Government and RBI regulations:

All commercial banks face stiff restrictions on the use of both their assets and liabilities. 40% of the loans must direct to Priority Sectors and the high liquidity ratio and cash reserve requirements severely limit the availability of deposits for lending. The RBI requires that domestic Indian banks make 40% of their loans at concessional rates to priority sectors selected by the government. These sectors consist largely of agriculture, exporters and small businesses. Since July 1993, foreign banks have been required to make 32% of their loans to these priority sectors. Within the target of 32% two sub-targets for loans to the small-scale sector (minimum of 10%) and exports (minimum of 12%) have been fixed. Banking regulation act of

India, 1949 defines banking as Accepting, for the purpose of lending of deposits of money from the public repayable on demand or other wise and withdrawal by cheque, draft, Order or otherwise. Most of the activities a bank performs are derived from the above definition. In addition, banks are allowed to perform certain activities that are ancillary to this business of accepting deposits and lending. A banks relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity that is assuming increasing importance is transfer of money- both domestic and foreign- form one place to another. This activity is generally known as

remittance business in banking parlance.

The so-called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies. The law governing Banking

Activities in India is called Negotiable Instruments Act 1881. The Banking activities can be classified as:

Accepting Deposits from public/ others (Deposits)

Lending money to public (Loans).

Transferring money from one place to another (Remittance).

Acting as Trustees.

Acting as Intermediaries.

Keeping valuables in safe custody.

Collection Business.

Government Business.


Commercial Banks

Banking segment in India functions under the umbrella of Reserve Bank of India the regulatory, Central Bank. This segment broadly consists of:Commercial Banks

Co-operative Banks

Commercial Banks:

Amongst the banking institutions in the organized sector, the commercial banks are the oldest institutions having a wide network of branches, commanding utmost public confidence and having the lion shares in the total banking operations. Initially they were established as corporate bodies with share holdings by private individuals, but subsequently there has been a drift towards central ownership and control. Up to late sixties commercial banks were mainly engaged in financing organized trade, commerce and industry, but since they are actively participating in financing agriculture, small business and borrowers also. Progress of Commercial Banking in India banking in India on western lines had started from the beginning of 19th century. The first joint stock bank was established at Calcutta by the name Bank of Hindustan and was under European Management. But this bank failed at that time. Then later The Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843) were started with final participation of the Government. These banks were called as the Presidency Banks and were given the right of note issue in their respective regions. The first purely Indian Joint stock company was the Oudh Commercial Bank which came into existence in 1889; it was followed by the Punjab National Bank in 1894 and the Peoples Bank in 1901.

The Swadeshi Movement of 1905 gave great stipules to the starting of the Indian banks. The Indian Banking system had gone through a series of crisis and consequent bank failures. Its growth was quite slow during the first half of 19th century. But after independence, the Indian banking system recorded rapid progress; this was due to planned economic growth, increase in money supply, and growth of banking habit, control and guidance of Reserve Bank etc. The number of commercial banks declined


since 1950 due to the Reserve banks policy of Amalgamation of small banks with bigger banks, as a measure of strengthening the banking system. The Indian Economy has been fast developing under the impact of economic planning and the banking system was developing quite fast.

Functions of Commercial Banks:

The term Bank originally referred to an individual or organization which exchanged one currency to another (i.e., money- changer). But these days banks refer to an institution in which people keep their cash balances in the form of deposits. The main functions of commercial banks are as follows:

1. Receiving Deposits from the public:

An important function of commercial bank is to attract deposits from the public. The commercial banks not only protect them but also provide the depositors with the convenient method for transferring funds through the use of cheques.

2. Making Loans and Advances:

The next important function of commercial bank is to make loans and advances out of the money which comes to it from the public by way of deposits. Direct loans and advances are given to all types of persons particularly to businessman and investors against personal security, gold, silver and other movable and immovable assets. The most common way of lending is by Overdraft facilities, i.e., allowing the borrower to overdraw his current account and also through discounting bills of exchange.

A. Use of cheques system:

Apart from these two major functions a commercial bank performs a number of other useful functions of the community. For instance, it has developed the cheques system, under which the depositors are given the right to withdraw from their deposits any amount to their convenience by means of a cheques.


B. Transfer of funds:

Another function of commercial bank is to provide facilities for transfer of funds from one part of the country to another.

C. Other functions:

Other miscellaneous functions performed by commercial bank include the provision of safety holders to keep the value articles of the customers in safe custody, making and receiving payments on behalf of its depositors, issuing letters of credit and travelers cheques for its customers.

The Lending Operations of commercial Banks:

Lending of funds constitutes mainly to traders, business and industrial enterprises. The major portion of the bank funds are employed by the way of loans and advances, which is most profitable employment of its funds. The major part of the banks income is earned from the interest and discounts on the funds so lent. The business of lending, nevertheless is not without certain

Inherent risks largely depending upon the borrowed funds a banker cannot afford to make undue risk in lending. While lending his funds, a banker therefore, follows a very cautious policy and conducts his business on the basis of the well known principles of sound lending in order to minimize risks.

The commercial banking structure in India consists of:

Scheduled commercial banks

Unscheduled Banks


Scheduled Commercial banks

It constitute of those banks that have been included in the second schedule of Reserve Bank of India (RBI) act, 1934. RBI in turn includes only those banks in these schedule that satisfy the criteria laid down vide section 42 (60 of the act). Some co-operative banks are scheduled commercial banks albeit not all cooperative banks are. Being the parts of the second scheduled confers some benefits to the banks in term of access to accommodation by RBI during the terms of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligations towards the reserve regulations of RBI.

This sub sector can broadly be classified into:

Public sector

Private sector

Foreign banks

Unscheduled Banks

They are those joint stock banks, which are not included in the second schedule of the RBI act on account of the failure to comply with the minimum requirements for being scheduled.

In the first category the primary co-operative banks which are small sized units organized in the cooperative sector which operate both in urban and non urban centers

.they finance small borrowers in industrial and trade sectors, besides professionals and salaried classes .regulated by Reserve Bank of India, they are governed by the banking regulations act 1949 and banking laws (co operative societies) act 1965.


Co-operative Banks

It is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. Cooperative banking, as discussed here, includes retail banking carried out by credit unions, mutual savings banks, building societies and cooperatives, as well as commercial banking services provided by mutual organizations (such as cooperative federations) to cooperative businesses. Like credit unions, cooperative banks are owned by their customers and follow the cooperative principle of one person, one vote. Unlike credit unions, however, cooperative banks are often regulated under both banking and cooperative legislation. They provide services such as savings and loans to non-members as well as to members and some participate in the wholesale markets for bonds, money and even equities. Many cooperative banks are traded on public stock markets, with the result that they are partly owned by non-members. Member control is diluted by these outside stakes, so they may be regarded as semi-cooperative.

Cooperative banking systems are also usually more integrated than credit union systems. Local branches of cooperative banks select their own boards of directors and manage their own operations, but most strategic decisions require approval from a central office. Credit unions usually retain strategic decision-making at a local level, though they share back-office functions, such as access to the global payments system, by federating.

Some cooperative banks are criticized for diluting their cooperative principles. Principles 2-4 of the "Statement on the Co-operative Identity" can be interpreted to require that members must control both the governance systems and capital of their cooperatives. A cooperative bank that raises capital on public stock markets creates a second class of shareholders who compete with the members for control. In some circumstances, the members may lose control. This effectively means that the bank ceases to be a cooperative. Accepting deposits from non-members may also lead to a dilution of member control.


3.4 Structure of banking system in India:

Reserve Bank Of India


Chapter 4

DATA ANALYSIS AND INTERPRETATION

The data collected from the survey conducted at Bangalore city has been analyzed and interpreted in this section. The interpretation is based on the information collected through a structured questionnaire prepared for research...

The research was divided into a sample size of 100 into 2 parts of 50 each for present/existing applicants and potential/prospective applicants respectively. Research was maintained in similarity with respect to age, occupation, monthly income and savings in order to have better comparison between the two sample sizes. Following are the Tables and graphs which will be for the total of 100 respondents.

TABLE NO 4. 1 to represent age wise classification of respondents

AgeNo. of RespondentsPercentage

25-343232

35-442222

45-552222

55-602424

Total100100


Graph 4.1

No of Respondents

35

32

30

222224

25

20

15

10

5

0

25-3435-4445-5555-60

Age

No. of Respondents

Percentage

INTERPRETATION:

This study was focused on the age group between 25years to 60years. The graph-1 shows Out of 100 respondents 32% of respondents fall under the age group of 25-34years, 22% fall under the age group of 35-44years and 22% of them under the age group of 44-55years. Finally 24% of the respondents fall under the age group of 55-60 years respectively.

Table No 4.2 to represent the occupation of the respondent

OccupationNo. of RespondentsPercentage

Govt. Employee2626

Business Man2222

Professional (Except Govt.3030

Emp. And IT Professional)

IT Professional2222

Total100100


Graph 4.2

Govt.Employee

22%26%

Business Man

Professional (Except

Govt. Emp. And IT

30%22%

Professional)

IT Professional

INTERPRETATION:

The effect has been made to cover people of earning class having lower and higher income levels in middle income group (MIG). Table shows, 30% respondents were from professional group (other than government and IT professionals). Government employees totaled 26%. IT professionals were about 22% and Businessman was respectively represented as 22% respondents each in the study.


TABLE NO 4. 3 to represent monthly income level of the

respondents.

Monthly Income

No. of RespondentsPercentage(In Rs)

Below 150003232

15000-200003232

20000-350001616

35000 & Above2020

Total100100

Graph 4.3

Respondents35

30

25

20

15

10

of5

0

No

Monthly Income

No. of Respondents

Perc