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Chapter 2

Introduction to Loans and advances

Meaning of Loans and Advances


Utility of Loans and Advances
Lending of Money
Long-term and Short-term Loans

Types of Home Loans

Chapter 2
Introduction to Loans and advances
Meaning of Loans and Advances
The term loan refers to the amount borrowed by one person from another. The
amount is in the nature of loan and refers to the sum paid to the borrower. Thus
from the view point of borrower, it is borrowing and from the view point of
bank, it is lending. Loan may be regarded as credit granted where the money
is disbursed and its recovery is made on a later date. It is a debt for the
borrower. While granting loans, credit is given for a definite purpose and for a
predetermined period. Interest is charged on the loan at agreed rate and
intervals of payment. Advance on the other hand, is a credit facility granted
by the bank. Banks grant advances largely for short-term purposes, such as
purchase of goods traded in and meeting other short-term trading liabilities.
There is a sense of debt in loan, whereas an advance is a facility being availed
of by the borrower. However, like loans, advances are also to be repaid. Thus a
credit facility- repayable in instalments over a period is termed as loan while a
credit facility repayable within one year may be known as advances. However,
in the present lesson these two terms are used interchangeably.
Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial to
individuals, firms, companies and industrial concerns. The growth and
diversification of business activities are effected to a large extent through bank
financing. Loans and advances granted by banks help in meeting short-term and
long term financial needs of business enterprises. We can discuss the role

played by banks in the business world by way of loans and advances as


follows:(a) Loans and advances can be arranged from banks in keeping with the
flexibility in business operations. Traders, may borrow money for day to day
financial needs availing of the facility of cash credit, bank overdraft and
discounting of bills. The amount raised as loan may be repaid within a short
period to suit the convenience of the borrower. Thus business may be run
efficiently with borrowed funds from banks for financing its working capital
requirements.
(b) Loans and advances are utilized for making payment of current liabilities,
wage and salaries of employees, and also the tax liability of business.
(c) Loans and advances from banks are found to be economical for traders and
businessmen, because banks charge a reasonable rate of interest on such
loans/advances. For loans from money lenders, the rate of interest charged is
very high. The interest charged by commercial banks is regulated by the
Reserve Bank of India.
(d) Banks generally do not interfere with the use, management and control of
the borrowed money. But it takes care to ensure that the money lent is used
only for business purposes.
(e) Bank loans and advances are found to be convenient as far as its repayment
is concerned. This facilitates planning for future and timely repayment of loans.
Otherwise business activities would have come to a halt.
(f) Loans and advances by banks generally carry element of secrecy with it.
Banks are duty-bound to maintain secrecy of their transactions with the
customers. This enhances peoples faith in the banking system.

Lending of Money
Commercial banks lend money in four different ways: (a) direct loans, (b) cash
credit, (c) overdraft, and (d) discounting of bills. These are briefly discussed
below:
(I) Loans: Loan is the amount borrowed from bank. The nature of borrowing is
that the money is disbursed and recovery is made in installments. While lending
money by way of loan, credit is given for a definite purpose and for a predetermined period. Depending upon the purpose and period of loan, each bank
has its own procedure for granting loan. However the bank is at liberty to grant
the loan requested or refuse it depending upon its own cash position and
lending policy. There are two types of loan available from banks : (a) Demand
loan, and (b) Term loan
(a) A Demand Loan is a loan which is repayable on demand by the bank. In
other words, it is repayable at short-notice. The entire amount of demand loan
is disbursed at one time and the borrower has to pay interest on it. The
borrower can repay the loan either in lumpsum (one time) or as agreed with the
bank. For example, if it is so agreed the amount of loan may be repaid in
suitable instalments. Such loans are normally granted by banks against security.
The security may include materials or goods in stock, shares of companies or
any other asset. Demand loans are raised normally for working capital
purposes, like purchase of raw materials, making payment of short-term
liabilities.
(b) Term Loans : Medium and long term loans are called term loans. Term
loans are granted for more than a year and repayment of such loans is spread
over a longer period. The repayment is generally made in suitable instalments
of a fixed amount. Term loan is required for the purpose of starting a new

business activity, renovation, modernization, expansion/ extension of existing


units, purchase of plant and machinery, purchase of land for setting up of a
factory, construction of factory building or purchase of other immovable assets.
These loans are generally secured against the mortgage of land, plant and
machinery, building and the like.
(II) Cash credit: Cash credit is a flexible system of lending under which the
borrower has the option to withdraw the funds as and when required and to the
extent of his needs. Under this arrangement the banker specifies a limit of loan
for the customer (known as cash credit limit) up to which the customer is
allowed to draw. The cash credit limit is based on the borrowers need and as
agreed with the bank.
Against the limit of cash credit, the borrower is permitted to withdraw as and
when he needs money subject to the limit sanctioned.
It is normally sanctioned for a period of one year and secured by the security of
some tangible assets or personal guarantee. If the account is running
satisfactorily, the limit of cash credit may be renewed by the bank at the end of
year. The interest is calculated and charged to the customers account.
Cash credit, is one of the types of bank lending against security by way of
pledge or /hypothetication of goods. Pledge means bailment of goods as
security for payment of debt. Its primary purpose is to put the goods pledged in
the possession of the lender. It ensures recovery of loan in case of failure of the
borrower to repay the borrowed amount. In Hypothetication, goods remain in
the possession of the borrower, who binds himself under the agreement to give

possession of goods to the banker whenever the banker requires him to do so.
So hypothetication is a device to create a charge over the asset under
circumstances in which transfer of possession is either inconvenient or
impracticable.
(III) Overdraft: Overdraft facility is more or less similar to cash credit
facility. Overdraft facility is the result of an agreement with the bank by which
a current account holder is allowed to draw over and above the credit balance in
his/her account. It is a short-period facility. This facility is made available to
current account holders who operate their account through cheques. The
customer is permitted to withdraw the amount of overdraft allowed as and when
he/she needs it and to repay it through deposits in the account as and when it is
convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of a written
request by the customer. Sometimes the bank also insists on either a promissory
note from the borrower or personal security of the borrower to ensure safety of
amount withdrawn by the customer. The interest rate on overdraft is higher than
is charged on loan. The following are some of the benefits of cash credits and
overdraft :(i)

Cash credit and overdraft allow flexibility of borrowing, which

(ii)

depends upon the need of the borrower.


There is no necessity of providing security and documentation again

(iii)

and again for borrowing funds.


This mode of borrowing is simple and elastic and meets the short term
financial needs of the business.

(IV) Discounting of Bills: Apart from sanctioning loans and advances,


discounting of bills of exchange by bank is another way of making funds
available to the customers. Bills of exchange are negotiable instruments which
enable debtors to discharge their obligations to the creditors. Such Bills of
exchange arise out of commercial transactions both in inland trade and foreign
trade. When the seller of goods has to realise his dues from the buyer at a
distant place immediately or after the lapse of the agreed period of time, the bill
of exchange facilitates this task with the help of the banking institution.
Banks invest a good percentage of their funds in discounting bills of exchange.
These bills may be payable on demand or after a stated period.
In discounting a bill, the bank pays the amount to the customer in advance, i.e.
before the due date. For this purpose, the bank charges discount on the bill at a
specified rate. The bill so discounted , is retained by the bank till its due date
and is presented to the drawee on the date of maturity. In case the bill is
dishonoured on due date the amount due on bill together with interest and other
charges is debited by the bank to the customers account.
Long-term and Short-term Loans
Commercial banks grant loans for different periods-long, short and medium
term for different purposes.
(1) Short-term loans:
Short term loans are granted by banks to meet the working capital needs of
business. The working capital needs refer to financial needs for such purposes
as, purchase of raw materials, payment of wages, electricity bill, taxes etc. Such

loans are granted by banks to its borrowers to be repaid within a short period of
time not exceeding 15 months.
Short term loans are normally granted against the security of tangible assets
like goods in stock, shares, debentures, etc. The rate of interest charged on
short term loans ranges from 12% to 18% p.a.
(2) Term Loans:
Medium and long term loans are generally known as term loans. These loans
are granted for more than 15 months. In case of medium term loan, the period
ranges from 15 months to less than 5 years. Medium term loans are generally
granted for heavy repairs, expansion of existing units, modernization /
renovation etc. Such loans are sanctioned against the security of immovable
assets. The normal rate of interest ranges between 12% to 18% depending upon
the period, purpose, nature and amount of the loan. Though banks may grant
long term loans, they avoid granting loan for more than 5 years.

Types of Home Loans


The Home Loans that are available in the market have different criteria to avail.
They also have number of segments that are categorized according to varied
demand of the market different home loans for different requirements. The
following is the list of different types of Home Loans you can avail from the
market:
Home Purchase Loans
Home Construction Loans
Home Improvement Loans
Home Extension Loans
Home Conversion Loans
Land Purchase Loans
Stamp Duty Loans
Bridge Loans
Balance Transfer Loans
Refinance Loans
Loans to NRIs
Home Purchase Loans:
Home Purchase Loans are the basic home loan you can opt for purchasing new
home. This type of Home Loan is offered by all kinds of Banks and HFCs.
Home Construction Loans:
Home Construction Loans are especially meant for the construction of a new
home. Formality of availing this loan has a little different from the normal Housing

Loan. The plot on which the construction is being erected is purchased within a
period of one year, the cost of the plot is then also included as the component for
the valuation of total cost of the property. But in case the date of purchase exceeds
one year to the date of application the above condition is not applicable.
Home Extension Loans:
Home Extension Loans is offered for meeting the operating cost of alteration to an
existing building. Extension here means addition of an extra room etc.
Home Conversion Loans:
Home Conversion Loans are offered to those who want finance for the purchase of
another home by converting the already existing home and on which loan is
already sanctioned. Through this loan, the existing loan is transferred to the new
home including the extra amount required and there is no need for pre-payment of
the previous loan.
Land Purchase Loans:
Land Purchase Loans can be availed for purchasing land for both home
construction as well as investment purposes.
NRI Home Loans:
NRI Home Loans are meant for Non-Resident Indians who wish to build or buy a
home or property in India.
State Bank of Mysore offers loans for construction or purchase of a new house
or flat. It also offers loans for repairs / renovation / extension of existing house.
One can also avail of plot loans as well as loans for resale property. It also

offers loans against second charge. Loans are offered at fixed and floating
interest rates to Indian residents and NRIs.
Under Personal Segment, You can avail a loan for
Construction or Purchase of a new house or flat
Repairs / Renovation / Extension of existing house
For purchase of plot for construction of house within two years
For purchase of built houses not more than 15 years old
Housing loan against II charge
For Purchase of Furnishings / Consumer durables as part of the project
cost
Quantum of Loan amount
Upto Rs. 2.00 lacs
Above Rs. 2 lacs to Rs. 5 Lacs
Above Rs. 5 lacs

:
:
:

40% EMI
50% EMI
55% EMI

Rate of Interest
Float Interest Rate 9.25
Float EMI 18317.0
Tenure 20
Charge for Changing Fixed to Floating: Rs 1000
Security
Equitable mortgage of house property.
Interest
Penal interest of 1% in case of default of three or more consecutive
installments.
Processing charges

0.50% with a maximum of Rs. 10000.


Insurance
The house property has to be insured covering all risks. Group insurance is
available to cover the life of the borrower on payment of one time upfront
premium.

Disbursement
- Direct to the sellers in case of purchase.
- For Construction / Repairs / Renovations in a phased manner

Repayment
Repayable in monthly installments. Repayment period ranging from 5 to 25
years, including a moratorium period ranging from 6 to18 months from the date
of the first disbursement.

Attractive features of State Bank of Mysores Housing Finance scheme


Loans from State Bank of Mysore are cheaper than housing finance
agencies / companies.
Nominal processing charges.
No administration charges.
No commitment charges.
Interest charged on reducing balances.
Facility available at all branches in India.
Exemption from wealth tax for one house under Wealth Tax Act.

If the loan is pre-closed from own resources for which proof is submitted by the
borrower to the satisfaction of the Branch Manager, pre-closure penalty shall
not be levied irrespective of the period for which the account has run. In other
cases, where such proof is not produced by the borrowers, 2% penalty on the
amount prepaid in excess of normal EMI dues should be levied in case of preclosure of Home loans within 3 years from the date of commencement of
repayment.
Housing Loan
Under Personal Segment, You can avail a loan for
Construction or Purchase of a new house or flat
Repairs / Renovation / Extension of existing house
For purchase of plot for construction of house within two years
For purchase of built houses not more than 15 years old
Housing loan against II charge
For Purchase of Furnishings / Consumer durables as part of the project
cost

Quantum of Loan amount


Loan amount for all categories
Net Annual Income

EMI / NMI

Upto Rs. 60000/Above Rs. 60000 to less than Rs.1,20,000/Above Rs. 1,20,000/- to less than Rs.2,00,000/Above Rs. 2,00,000 to less than Rs.5,00,000/-

Ratio
20%
25%
30%
50%

Above Rs. 5,00,000 to less than Rs.10,00,000/-

55%

Above Rs. 10 lacs

65%

Margin
Amount

Margin (%)

Upto Rs. 30 lakhs

20%

Above Rs. 30 laks to 75 lakhs

20%

Above Rs 75 lakhs to 1.00 Crore

25%

Above Rs 1.00 crore

40%

Margin for Purchase of New houses which are ready for possession (Applicable to
First sale only)
Amount

Margin (%)

Upto Rs. 75 lakhs

15%

Above Rs.75 laks to 1 cr

20%

Above Rs 1.00 crore

30%

Interest
Penal interest of 1% in case of default of three or more consecutive instalments.
Processing charges

Loan Amount

Processing Charges (w.e.f. 01.06.2011)

Upto Rs 25 Lacs

0.25% of loan amount, with a minimum of Rs


500/-

Above Rs 25 Lacs and upto Rs 75

Rs 10,000/-

Lacs
Above Rs 75.00 Lacs

Rs 20,000/-

Insurance
The house property has to be insured covering all risks. Group insurance is
available to cover the life of the borrower on payment of one time upfront
premium.

Disbursement
Direct to the sellers in case of purchase.
For Construction / Repairs / Renovations in a phased manner
Repayment
Repayable in monthly instalments. Repayment period ranging from 5 to 25 years,
including a moratorium period ranging from 6 to18 months from the date of the
first disbursement.
Schemes and Interest Rates are subject to changes from time to time.
Attractive features of State Bank of Mysores Housing Finance scheme
Loans from State Bank of Mysore are cheaper than housing finance agencies
/ companies.
Nominal processing charges.
No administration charges.
No commitment charges.
Interest charged on reducing balances.
Facility available at all branches in India.
Exemption from wealth tax for one house under Wealth Tax Act.
Pre-payment Penalty
No Pre-closure / Pre-payment penalty on all Home Loans.
Terms and Conditions subject to change.

Happy Home- Consumer Durable Loan Scheme


Happy Home Loan
Purpose
State Bank of Mysore is now at your doorsteps to provide you all good things in
life you have been craving for. You richly deserved them but couldnt buy them
perhaps for want of ready cash. Here is where State Bank of Mysore steps in to
solve your problems and make your home a Happy Home. Colour TV Sets,
VCRs, Refrigerators, Cars, Scooters, Mopeds, Washing Machines, Mixers /
Grinders, Coolers, Air conditioners, Furniture and what have you? All these
goodies brought to you within your reach under State Bank of Mysores Happy
Homes Scheme.

Highlights of the Scheme


Tailor-made for employees of Govt / Public Sector undertakings, Corporations,
Private Sector Companies, Police, Defence forces and reputed establishments
with a minimum of 5 years service. Professionals, Self-employed with a
minimum of 5 years standing.
Net monthly salary / income should be Rs.2000/75% of the cost of the articles.Maximum loan of Rs. 1.00 lac or eight times the
net monthly income / salary of the borrower whichever is lower.
Repayable in 36 to 60 months.

Minimum loan amount Rs. 10000/-. Demand Loans upto Rs.25000/- payable in
36 months. Demand Loans above Rs. 25000/- repayable in 36 months Term
loans repayable in more than 36 months and upto 60 months.
Simple security needed.
Hypothecation of assets created (articles bought)
Third party guarantee acceptable to the bank if check off facility is not
available.
Insurance Cover
Vehicles bought to be insured for full value.
For articles above Rs.10000/- insurance will be for market value or atleast
110% of the loan amount whichever is higher.
A small one-time service fee of 1% of the loan amount.

Terms and Norms


Eligibility
If one is a resident or non-resident individual who is planning to buy a house in
India, one can apply for a home loan. If a person has decided to buy a property
in the near future, he/she can apply for a loan before even selecting the
property. Once the maximum amount to put into the property has been decided,
the Housing Finance Institutions or Banks will let the customer know that how
much he/she is eligible for and this helps to plan out the budget.
Conditions regarding co-applicants:
All Housing Finance Institutions lay down conditions on who can be coapplicants. All co-owners of the property need to be co-applicants to the loan
necessarily. These institutions do not permit minors to join in as either coowner or as co-applicants because a minor is not eligible to enter into a contact
as per law. They do not permit even friends or relatives who are not blood
relatives to take a property jointly. However, Income of co-applicants can be
clubbed together to get higher loan eligibility. Given below is a Table that
throws light on acceptable relationship of a co-applicant for clubbing of
income.
Minimum age: 18 years as on the date of sanction
Maximum age: limit for a Home Loan borrower is fixed at 70 years, i.e. the age
by which the loan should be fully repaid, subject to availability of sufficient,
regular and continuous source of income for servicing the loan repayment.
Eligibility Criteria & Documentation Self employed
required for Individuals: Salaried
Age
21years to 60years
Income
Rs.1,20,000 (p.a.)
Loan Amount Offered
5,00,000 - 1,00,00000

21years to 70years
Rs.2,00,000 (p.a.)
5,00,000 - 2,00,00000

Tenure
Current Experience
Documentation

5years-20years
5years-20years
2years
3years
1) Application form with 1) Application form with
photograph 2) Identity

photograph 2) Identity

& residence proof 3)

& residence proof 3)

Last 3 months salary

Education qualifications

slip 4) Form 16 5) Last

certificate & proof of

6 months bank salaried

business existence 4)

credit statements 6)

Business profile, 5) Last

Processing fee cheque

3 years profit/loss &


balance sheet 6) Last 6
months bank statements
7) Processing fee cheque

Documents
(1) ADVOCATE Check List: (Prepare separate set)
Copies of Mother deed/parent document link deeds, allotment letter, Khatha
certificate/endorsement, up to date encumbrance & tax paid receipts. (In
case of flats, if the project is already approved by SBI panel advocate then
this is not required).
Copies of Agreement for sale, Construction Agreement
ORIGINAL Sub Registrar certified copy of the Sale Deed(for takeover loans
ORIGINAL of updated encumbrance certificate.
Copy of Plan sanction.
Copies of latest Khata certificate,Khata extract etc.
Upto date Tax paid receipts (Form-16).

Copies of Sanction letter of other bank/institution & Letter of original


documents held in their custody ( applicable In case of takeover loans from
other banks/institutions)
(2) ENGINEER Check List:
(Kindly take the Engineer Telephone Nos from the bank to co-ordinate with
him for inspection of your property)
Photo copy of Sale Deed.
Plan Sanction Copy.
Interior Estimate, if any, for approval by Engineer.
(3) Builders/Sellers Check List
Allotment Letter & detail split up cost of the project.
In case of completed projects, a letter from the builder stating that the
property is ready for registration.
Letter from the builder/seller the property is not mortgaged to any bank/
financial institution. If mortgaged then an NOC from the concerned
bank/institution.
Advance Receipt / Paid Receipts from Builder/Seller, If any.
Due diligence on Builders and Seller KYC Norms : Proof of Identity
(PAN copy) & Residence proof (Telephone/electricity bill - both self
attested and originals verified & attested by the bank) along with the duly
filled in KYC form (form to collect from the bank)
(4) Other Bank/Institution Check List ( In case of Takeover Loans)

Sanction Letter of the other bank/institution.


Loan account statement from the date of sanction till date.
Pre-closure letter inclusive of penalty from the other bank/institution.
Letter of original documents held in their custody.
Receipts for the total amount of the project issued by builder/seller to the
purchaser/bank/institution.

(5) PERSONAL DOCUMENTS


(From the Applicant / Co- applicant and Guarantor, if any)
SELF ATTESTED COPIES OF DOCUMENTS Sl.No.1 to 6:
1)

Proof

of

Identity

(passport/pan

card)

2)

Proof

of

Residence

(telephone/electricity bill/ company letter)


3) Salary Slip - last 3 months. (Attested by the employer) 4) Salary account
bank statement - last 6 months (bank attested) 5) Form 16 for the last two years.
6) Income Tax Saral copy for the last two years. 7) Photograph - 2 nos. 8)
Application Form
9) Company Profile details of company
(6) Check list by the Purpose
Confirmation of Income
If you are a salaried person, please provide two recent consecutive pay
slips or a copy of your employment contract or a letter from your
employer.
If you are self-employed, please provide copies of your last two Financial

Accounts as prepared by your accountant.


Appointment Letter
Salary Certificate
Retainer ship Agreement, if appointed as a consultant
FORM 16 issued by the employer in your name.
Last three years income tax returns duly filed and certified by the Income
Tax Authorities

Employment Proof
Identity card issued by your employer
Visiting card

Age Proof

Passport
Voter's ID card
PAN card
Ration card
Employer's Identity card
School leaving certificate
Birth certificate

Residence Proof

Ration card
Passport
PAN card
Rent agreement, if you are staying currently on rent
Bank Pass book
Allotment letter from your company if you are residing in company
quarters.

Name Change Proof (If Applicable) a. A copy of the official gazette


b. A copy of a newspaper advertisement publicizing the name change
c. Marriage certificate
Investment Proof (If Applicable)
Bank statement for the last six months of all operating and salary
accounts
Bank statements for the last six months of all current accounts, if selfemployed.
Any other photocopies of investments held, if required by the Bank

Property Title Proof


Original Sale agreement with Builder/Developer duly registered,
Registration receipt
Tripartite agreement from builder/developer
Land documents indicating ownership, e.g.- Photocopies of title deeds, if
applicable
A certificate by the legal advisor of the builder to the effect that the
builder has a good reputation and it is free from encumbrance and other
charges.
A certificate from builder's Chartered Accountant certifying that the

builder has not mortgaged the property anywhere else.


Certified true copy of approved plan.
Copies of receipts of payments made to builder/developer.
Allotment letter
Possession letter
Lease agreement, if applicable (Property bought from a development

authority)
Mortgage deed if the Bank opts for a registered mortgage.
No Objection Certificate from the developer, society or development authority
as applicable
Personal Guarantees, if applicable.
In case of alternate or additional security, documents for the same
depending upon the security details.
For self-construction: Approved plans and clearance certificates along
with estimates
Post dated cheques for the EMIs.
Confirmation of Rental Income Copy of the existing tenancy agreement, or a
rental appraisal, from a local real estate agent signed by branch manager, or
rental manager.

Deposit or Investments
Evidence of your deposit or investment funds, i.e. a bank statement or
term deposit receipt.
For low equity loans (5-19% deposit), copy of your savings account
statements over the last six months.
Sale and Purchase Agreement
If you are planning to buy a property, please provide a copy of the
successful sale and purchase agreement signed by both you and the
vendor.
If you are planning to sell or have already sold your existing property,
please provide a copy of that property's sales and purchase agreement.
PURPOSE
The bank offers home loans for purchase and/or construction of house property
as well as plot loans.
It offers loans for:

Purchase/ Construction of new House/ Flat


Purchase of an existing House/ Flat
Purchase of a plot of land for construction of House
Extension/ repair/ renovation/ alteration of an existing House/ Flat
Purchase of Furnishings and Consumer Durables as a part of the project
cost

Takeover of an existing loan from other Banks/ Housing Finance Companies