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Appraisal & Financing of Asset Products of HDFC

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A REPORT ON CENTURION BANK OF PUNJAB(NOW HDFC ) PROJECT TITLE:APPRAISAL AND FINANCING OF ASSET PRODUCTS OF HDFC SUBMITTED BY : PREETHA MUKHERJEE (E.I.I.LM.) PRODUCT NAME -HOME LOAN AND MORTGAGE EXTERNAL GUIDE- MR.DIPANJAN ROY(HDFC) INTERNAL GUIDE -MR.SMARAJIT SENGUPTA(E.I.I.L.M) 1
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Page 1: Appraisal & Financing of Asset Products of HDFC

A REPORT ON CENTURION BANK OF

PUNJAB(NOW HDFC )

PROJECT TITLE:APPRAISAL AND FINANCING OF ASSET PRODUCTS OF HDFC

SUBMITTED BY:PREETHA MUKHERJEE

(E.I.I.LM.)

PRODUCT NAME-HOME LOAN AND MORTGAGE

EXTERNAL GUIDE-MR.DIPANJAN ROY(HDFC)

INTERNAL GUIDE-MR.SMARAJIT SENGUPTA(E.I.I.L.M)

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ACKNOWLEDGEMENTLearning is an active process, as such I am delighted in making the venture by way of preparing the project work on’ An appraisal and financing of asset products’ of Centurion Bank Of Punjab subsequently taken over by the HDFC Bank. I have always endeavoured to disseminate the subject matter of my project in as much as clear, lucid and comprehensible language with objective analysis. During that course of journey I am indebted to quite a few personalities to whom I express my sincere gratitude because without their lending support to me this project work could not have seen the daylight. In this respect first , I wish to express my sincere gratitude to Mr. Dipanjan Roy(Branch Head) who has kindly consented to allow me to work under his guidance for my summer project in the bank. He, also being the external guide contributed substantially to the contents and structure of my project. I would also like to thank Mr.Bishan Das(Relationship Manager)for extending his support particularly in the aspect of imparting the knowledge of the specific banking product that comprises my project work. Expressing my gratitude would be incomplete without mentioning the names of Aditi Mukharji, Subhrangshu Biswas and Joydip Roy but for their active support. Apart from the names mentioned above the other employees, as well have made this journey of two months an experience to remember.

I am equally indebted to Mr.Smarajit Sengupt ,my internal guide,whose innovative thoughts, effective guidance and warm gesture paved the way for making the project a reality.

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CONTENTS:

INTRODUCTION

OBJECTIVE

METHODOLOGY

MERGER STORY

FINANCIAL ANALYSIS OF MERGER

APPRAISAL AND FINANCING OF HOME LOAN AND MORTGAGE

OVERVIEW TYPES OF HOME LOAN GENERAL FEATURES OF HOME LOAN ABOUT HDFC LTD HOME LOAN FEATURES OF HDFC DOCUMENTS REQUIRED PROCEDURE OF HOME LOAN DISBURSAL

BY HDFC SECURITY FOR HOME LOAN(MORTGAGE) ELIGIBILITY CALCULATION COMPARISONS RECOMMENDATIONS

CONCLUSION

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INTRODUCTION

Generally, the income and deductions of a banking entity are computed in the same way as those of other corporations. They are also subject to the same federal income tax rates that apply to other corporations. The term "bank" in recent years has become increasingly blurred, but is usually applied to any establishment engaged in the various functions associated with a bank. These functions include the receiving, collecting, lending, and servicing of money.

Banking Industry has revolutionized the transaction and financial services system worldwide. Through the development in technology banking services has been availed to the customers at all times, even after the normal banking hours, on a 24x7 basis. Banking Industry services is nothing but the access of most of the banking related services (such as verification of account details, going with the transactions, etc.). Now-a-days, almost all the banks all over the world, especially the multinational ones, provide their customers with Online Banking facility.

By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Currently banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.

In this space the focus is mainly on a particular bank that is Centurion Bank of Punjab(CBOP) that has been taken over by HDFC and the discussion centres around products mainly home loan and mortgage. First the merger is discussed as to how CBOP has been merged with HDFC and then the financing and appraising of home loan and mortgage.

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OBJECTIVES: To find out reasons for merger.

To find out parameters for disbursing loans to customers.

To find out extent of loans disbursed by HDFC and other processing charges in comparison to other banks.(Especially in case of home loan & mortgage).

METHODOLOGY:

Primary data collected from the direct interaction with branch manager, relationship manager.

Secondary data collected from internal source.

Observation from News Paper, Business Journal.

And observations from Internet

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MERGERRather than waiting for changes to happen through slow organic growth, it is far better to do it through mergers and acquisitions. Hence the attraction of mergers in the banking space over and above the usual advantage of economies of scale. For HDFC, the buyout makes eminent sense.

The merger is the culmination of a search, done independent of each other, by HDFC Bank and CBoP, to find a partner who could help them capture and ride the growth in the financial services industry more optimally. More particularly, HDFCBank, the second-largest private sector bank in the country, had been scouting for a merger opportunity that would add scale to its operations, facilitate its expansion to every nook and corner of the country, and bring on board an experienced management team that would add to its management bandwidth. CBoP provides the perfect fit in terms of culture, strategy and approach to business.

The top brass of the two banks have also developed a good chemistry. The HDFC Bank-CBoP merger brings both advantages and downsides to the post-merger HDFC Bank. The advantages can be analysed as the reasons for these banks to merge: They are:

One of the critical barometers is the bank's capital adequacy ratio. Capital adequacy ratio measures the amount of a bank's capital expressed as a percentage of its credit exposure. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. The Basel rules recognize that different types of equity are more important than others. To recognize this, different adjustments are made:

1. Tier I Capital: Actual contributed equity plus retained earnings. 2. Tier II Capital: Preferred shares plus 50% of subordinated debt.

CBOP’s total capital as a percentage of its risk weighted assets was 11.5% of which the Tier I capital adequacy ratio was 10.0% and the Tier II capital adequacy ratio was 1.5%. HDFC Bank's good capitalisation levels also reflect in its high Tier I capital adequacy ratio and overall capacity adequacy ratio, each as a proportion of risk-weighted assets, at 8.55 per cent and 11.41 per cent respectively.

With capital requirements for banks set to get more stringent next year onward as per the Reserve Bank of India's Basel II norms, consolidation in the banking industry may become more common.

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Basel II implementation could see banks' operational costs shooting up and a consequent rise in charges levied from customers. Thus, bigger banks with a better scale of economies would be able to provide services at a lower cost and prevent customer attrition. Basel II mandates stricter capital requirements based on the banks' own measures of risk that require comprehensive data collection and analysis, which will be expensive to implement. Further, the norm will require significant changes in internal systems and processes, which are expensive as well.

Larger banks make stronger banks. Size and scale do matter in the banking space and this deal has not come as a surprise. Stricter capital adequacy norms with Basel II implementation could force more banks, especially several of them down south, to merge with bigger entities. Thus, consolidation in the banking sector should go on for a while.With capital requirements for banks set to get more stringent next year onward as per the Reserve Bank of India's Basel II norms, consolidation in the banking industry may become more common.

Basel II implementation could see banks' operational costs shooting up and a consequent rise in charges levied from customers. Thus, bigger banks with a better scale of economies would be able to provide services at a lower cost and prevent customer attrition. Basel II mandates stricter capital requirements based on the banks' own measures of risk that require comprehensive data collection and analysis, which will be expensive to implement. Further, the norm will require significant changes in internal systems and processes, which are expensive as well.

The merger will further improve the franchise and customer proposition offered. HDFC gets 394 branches and licences for 350 more when RBI is being very stingy on doling out branch licences i.e. gains geographical spread, especially in Punjab and Kerala. CBoP’s branch network will also facilitate the expansion plans of HDFC Bank subsidiaries HDFC Securities and HDB Finance, a non-banking finance company, in newer areas. The marriage offers a strong platform for accelerated growth

It will create a bank with a Rs 1,50,000-crore balance sheet.

HDFC Bank gets the top class management of Centurion Bank of Punjab.

Strong two-wheeler, commercial vehicle and construction equipment portfolio. About 40 per cent of CBoP's total retail assets comprise home loans, car loans and personal loans.

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Small and medium enterprises (SME) client base of 2,500 and advances of over Rs 1,500 crore.

However the disadvantages cannot be ignored. They are summarized as follows:-

Share of low-cost deposits to decline marginally as CBoP has a much lower portfolio of such deposits than HDFC Bank.

CBoP has relatively high net NPAs of 1.31 per cent. This will affect HDFC Bank's asset quality.

Employee integration to be a big issue as CBoP has a large workforce.

Technology integration to take time and also cost a packet as the two banks operate on different latforms.

It's an all-stock deal, but HDFC Bank promoter HDFC will have to pump in close to Rs 4,000 crore to maintain its stake at a little over 23 per cent.

The merger will definitely lower the quality of HDFC Bank’s assets. It currently has a net NPA level of 0.43 per cent, compared to the corresponding CBoP figure of 1.31 per cent. So, even after accounting for the latter?s smaller loan portfolio, there will be some increase in the net NPA level of the postmerger HDFC Bank. Then, NPAs typically surface 2-3 years into the tenure of loans. Whether or not there are any booby traps lurking in CBoP?s retail loan portfolio will be known only in future.

On the business front, the retail sector, which has powered the impressive performance of the banking sector in the recent past, is experiencing a slowdown and banks are already feeling the pinch. And, if the US slowdown turns into a full-blown recession, it will be difficult for India to escape its impact. Under such circumstances, servicing a large balance sheet will become difficult. So, while rival ICICI Bank spreading its wings internationally, HDFC Bank top brass will get caught in managing the integration for at least a year.

But banking sector analysts say both merging banks have experience at integrating other banks into themselves?HDFC Bank acquired Times Bank while Centurion Bank

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successfully merged Lord Krishna Bank and Bank of Punjab with itself. This experience, and the track record of the top management of the combined bank, analysts add, mean the pluses outnumber the minuses by a wide margin. Lots of investors will be keeping their fingers crossed.To answer the question as to why a merger is necessary at this stage HDFC Bank MD Aditya Puri said, ”CBOP has 50% of the branch network , which HDFC Bank has. It also has a robust SME and agri-financing franchise. There will be no management integration issues as this will be a fair,professional and clean merger. We will not be looking at downsizing the staff,who would join us from CBOP. The merged entity would have a base which would be large enough to accommodate everyone”. Mr.Puri further added: ”We will look at other banks for inorganic growth opportunities, once we digest this deal. Given the growth in our distribution network, we will gain market share across all products, credit cards,personal loans and auto loans. The merger will help us gain greater market share that too,at a faster pace.”

Centurion Bank of Punjab shareholders will get one HDFC Bank share for every 29 shares they hold according to the swap ratio approved by the boards of the respective banks.

Pre –merger conditions

CBoP infrastructure and capabilities were underutilised. Although it had 400 branches which is more than 50% of the 700-odd branches that HDFC had, its balance sheet was only 25% of HDFC.

CBoP was paying a higher cost of deposits which, when they come up for maturity, is being renewed at the same cost as HDFC Bank. CBoP had good people, who were sitting there as a cost after the bank had stopped some of the business like small-ticket personal loans and two-wheelers. All its vendors now have to give HDFC pricing, allowing cost-savings. CBoP was the fastest-growing private sector bank and it was achieving this with an arm and a leg tied behind its back. It had hardly any products to offer. But it had an excellent sales force. What the bank needed was a little more direction, little more investment and products. All of which have been put in place.

The cost to revenue ratio of CBOP was 73% while that of HDFC was 49.9%. Combined it could go marginally up to 53%-55%. Comparing the CASA ratio HDFC were at 45%-50% while CBOP being at 24%-25%. Combined it could come down to 43%-45% presently and 45%-50% within 6-9 months. The same goes for delinquencies. Net NPA before the year-end will be the same as it was with HDFC Bank.

In terms of interest earned and interest spared HDFC bank (11.10% and 4.30%) is ahead of CBoP (12.60% and 3.30%) in interest spread while the latter has a better yield. This is interesting as the HDFC may open it to new markets improving the existing margins on larger funds.

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The proportion of savings and current account deposits in these two banks present an interesting picture. The CASA is high at 50.9% at HDFC Bank leading to lower cost of funds, whereas CBoP has high cost deposits as its CASA is below 25%.

The capital adequacy of CBoP is 11.50% while the HDFC bank has capital adequacy of 13.8%.

Both CBoP (57%) and HDFC (30%) had shown good growth in the other income for the quarter ended Dec 07.

Post –merger conditions

The post-merger conditions can be analysed as : HDFC Bank has gained high yielding SME portfolios, 450 branches, good quality assets which are yielding at 9.30%, fairly good business with capital adequacy taken care of and above all trained manpower to leverage on its strengths in newer geographical areas.

The combined entity will have 1148 branches spread over the country, northern region having more number of branches and 2,358 automated teller machines (ATMs) will make it the largest by branches in the private sector.

 Additional Branch network will help HDFC to distribute its financial products such as mutual fund schemes and insurance.

CBoP has home loans while the HDFC bank prefers to keep away from home loans reserving the space for the parent HDFC. CBoP home loan portfolios will be sold and that will explain partly the buoyancy in HDFC shares as the latter stands to gain in such an n arrangement. It has to find monies for the additional share subscription and home loan take over.

But, with CBoP, HDFC Bank has, in fact, gobbled up four banks in all: Times Bank, Centurion Bank, Bank of Punjab and Lord Krishna Bank. Puri, therefore, has made it good, and has managed to close the gap with others, but just a wee bit. CBoP has not fully absorbed the Lord Krishna Bank’s operations. This is an additional area of concern to HDFC while consolidating the operations. While the Centurion bank staff is expected to resemble HDFC bank in terms of methods, the latter has a job to do to mould the staff of Bank of Punjab and Lord Krishna Bank, which was recently taken over by Centurion Bank.  We can expect a fait amount of employee shake out as HDFC bank prepares to implement new work culture.

SME loans are prone to defaults at the signs of economic contraction as these businesses are highly leveraged. At present CBoP has reported net non performing asset of 1.60% of its assets compared 0.40% reported by HDFC Bank. This is expected

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to strain the capital funds as and when the deceleration of the economy or IT slow down affect personal loans.

Post-merger, HDFC Bank will have an asset size of Rs 1,09,718 crore. In the pecking order, it will be seventh. The State Bank of India is the pack-leader at Rs 5,66,565 crore followed by ICICI Bank (Rs 3,44,658 crore).

It also gains from substantial cross-selling opportunities in the short-term. However, it will not vend home loans given the conflict of interest with parent HDFC and may even sell down CBoP’s home-loan book to it. A point of concern is the fact that the retail portfolio of the merged entity will have more by way of unsecured and two-wheeler loans. This business has come under pressure in recent times.

We try to provide how both the banks stack up in terms of figures:(as on Dec31,07,figures in Rs.crores)

HDFC CBOP

Net Profit 1,119 118

Advances 71,386 15,083

Deposits 99,386 20,710

Total Assets 1,31,439 25,403

Net Interest Margin 4.3 3.6

Branches 754 394

ATMs 1,906 452

Thus the highlights of the merger being:

• On Feb 25, 2008, HDFC Bank approved the acquisition of Centurion Bankof Punjab (CBoP)

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• CBoP shareholders will get 1 share of HDFC Bank for every 29 shares heldby them.

• RBI approved the merger and the amalgamation; effective date May 23,2008.

• HDFC group, the promoters of HDFC Bank, would infuse further capital tokeep their shareholding level intact after the merger.

• A capital dilution of around 25% would take place consequent to themerger and preferential allotment to promoters (HDFC group).

A table comparing the estimates(E) of HDFC Bank with and without the merger ispresented below.

HDFC Bank-with and without merger

Details Without merger

2008-09E 2009-10E

With Merger & promoter money infusion

2008-09E 2009-10ECASA 54% 55% 49% 50%NIM 4.75% 4.80% 4.75% 4.79%

EPS(Rs.) 62 81 58 76CAR 12.8% 12.5% 14.1% 13.1%ROE 17.0% 18.7% 15.9% 15.5%ROA 1.48% 1.59% 1.42% 1.53%

Source: Company Releases, Religare Institutional Equity Research

Estimates on the financials of the merged entity as presented in the above table. shows that the merger is earnings dilutive in the near term i.e. at least until FY10. Even though the margins of the bank might not be hit, the ROE and ROA should dip duringFY09 and FY10. CBoP has not announced its FY08 (and Q4) financials yet and as per the latest Dec 2007 Q3 reports, the bank’s balance sheet size was Rs 254 bn with a CAR of 11.5%.Of its total advances, 60% were made to the retail segment ofwhich mortgage and personal loans comprised more than 50%. The quality ofthese loans and the provisioning required to be made for these loans are theother key areas unclear from HDFC Bank’s standpoint, in terms of the merger. The last 4 quarters information were used as basis of the combined estimates.

FINANCIAL ANALYSISThe analysis is highlighted with the help of bar-diagrams. These data has been represented from the following table.

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years 2005-06 2006-07 2007-08profit before

tax 125351 163875 228063profit

after tax 87078 114145 159018deposit 5579682 6829794 10076860loans 3506126 4694478 6342690EPS 27.92 36.29 46.22tier1

capital ratio 8.55% 8.58% 10.30%total

capital ratio 11.41% 13.08% 13.60%

dividend per

share 5.5 7 8.5BV per

share at 31st

march 169.24 201.42 324.42MV per share at

31st march 774.25 954.15 1331.25

It is represented in the following bar-diagrams.

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This figure show the difference between profit before tax and profit after tax of HDFC bank’s in last three years by which we can find net adjusted profit. From 2005-06 to 2006-07 the increase increase in profit before tax is 30.73% and that from 2006-07 to 2007-08 is 39.16%. While the rise in profit after tax from 2005-06 to 2006-07 is 31.08% and from 2006-07 to 2007-08 is 39.31%. As we can see that PBT & PAT have increased for last two consecutive years, it clearly shows HDFC Bank has been doing exceptionally well.

Through the overall transaction which occurred in last three years we can find out that there is a healthy relationship between the deposit taken and loan given, which is very essential for a bank’s proper functioning and earn to a good profit. Here we see the % increase in deposits from 2005-06 to 2006-07 is 22.40% whereas from 2006-07 to 2007-08 it is 47.54%. Again in case of loans the increment from 2005-06 to 2006-07 has been 33.89% and that from 2006-07 to 2007-07 is 33.89%. Here also we can see that HDFC Bank has maintained an uniform growth from 2005-06 to 2007-08.

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The % increase in EPS from 2005-06 to 2006-07 and 2006-07 to 2007-08 has been 29.97% and 27.36%. While tier1 capital has increased from 0.03% to 1.72% in 2005-06 to 2006-07 and 2006-07 to 2007-08 respectively. While for total capital ratio it is 1.67% to 0.52%.Hence in this case we find that the increment has been a little less than the previous year. Now the dividend per share has shown a % growth of 27.27% from 2005-06 to 21.42% which is also a little lower than the rate of the its preceding year.

This figure shows the growth of book value & market value of per share in last three years. The % increase in book value per share from 2005-06 to 2006-07 is about 19% and that of market value is 23.23% while that from 2006-07 to 2007-08 of book value is 61.06% and that of market value is 39.52%. It can be clearly seen that market value of per share has increased considerably in comparison to the book value, so we can say that the value of the share of HDFC have increased by a long way in the last three years. The % increase in book value per share from 2005-06 to 2006-07 is about 19% and that of market value is 23.23% while that from

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2006-07 to 2007-08 of book value is 61.06% and that of market. It clearly reflects a promising future for HDFC Bank.

HOME LOAN AND MORTGAGE

Against the milieu of rapid urbanisation and a changing socio-economic scenario, the demand for housing has grown explosively. The importance of the housing sector in the economy can be illustrated by a few key statistics. According to the National Building Organisation (NBO), the total demand for housing is estimated at 2 million units per year and the total housing shortfall is estimated to be 19.4 million units, of which 12.76 million units is from rural areas and 6.64 million units from urban areas. The housing industry is the second largest employment generator in the country. It is estimated that the budgeted 2 million units would lead to the creation of an additional 10 million man-years of direct employment and another 15 million man-years of indirect employment.

Home loans in India implies ownership of a house on payment of monthly installments with an interest rate, in fixed or floating rate. Factors like the salary of the client, the desired loan term and other related parameters of the customers profile determine the home loans in India. The home loan rates in India varies with the nature of the loan, with the choice of fixed rate loan or a floating rate loan.

There are many nationalized banks as well as housing companies who offer finance at affordable interest rates. Some of the leading sources of Home Loans in India are:

Citibank Dewan Housing Finance GIC Housing Fin. HDFC Hudco HSBC ICICI IDBI Kotak Bank LIC Housing Finance Ltd. PNB Home Loans SBI Home Loans Standard Chartered Bank

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Tata Housing Finance

TYPES OF HOME LOAN

. Not only are home loans a handy tool for the common man to own a roof over his head but they also help save money in longrun. There are different types of home loans tailored to meet your needs.

Home Purchase Loans : These are the basic forms of home loans used for purchasing of a new home.

Home Improvement Loans : These loans are given for implementing repair works, healing and renovations in a home that has already been purchased.

Home Construction Loans : These loans are available for the construction of a new home.

Home Extension Loans : These loans are given for expanding or extending an existing home. For eg: addition of an extra room etc.

Home Conversion Loans : These loans are available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need of pre-payment of the previous loan.

Land Purchase Loans : These loans are available for purchasing land for both construction and investment purposes.

Bridge Loans : Bridge loans are designed for people who wish to sell the existing home and purchase another one. The bridge loans help finance the new home, until a buyer is found for the home.

FEATURES OF HOME LOAN

Home loan is not a one-time decision; the market needs to be reviewed periodically before availing them. Today there are unlimited numbers of banks in the country wanting to give out Home loans. Given this scenario, it may seem easy getting a loan. But it’s not completely agreeable.Buyers tend to make mistakes while entering into deals, which may not be beneficial for them, so it’s better to compare all the variables before signing a loan agreement by different banks. However the loan agreement should be finalized only after reading the terms and conditions carefully.

: Home loan is a secured loan wherein collateral are required. � Loan tenure:: The maximum loan tenure is 20 years.So if a customer is planning to avail a home loan, the following considerations must be taken into account:Firstly, it,s wise for the customer to take his own time and evaluate his expenses and do

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a market survey about the property buying process. Buying a house, which is way beyond his range, could affect him financially; banks help in financing customer’s dream home via home loans.Eligibility: Banks determine customer’s eligibility based on his repayment capacity and discuss about the loan amount up front. The eligibility for acquiring a home loan is augmented by clubbing income of customer’s father/spouse/mother/son, by clearing his outstanding debts, by stretching his loan tenur., Salaried individuals can increase their eligibility by showing their performance linked income or bonus earned.Secondly, the customer must make his own analysis and check the impact of his repayment of home loan on his monthly expenditure, as a thumb rule, its recommended to make sure the EMI of his home loan do not exceed more than 40% of his gross monthly income.Interest rates best suited :An important factor that goes into customer’s EMI calculations is the interest rates, which may vary from bank to bank. So a complete and detailed analysis of the various options like the interest rates i.e. fixed and floating rate of interest should be made.Thirdly, if two banks give the customer the same amount of loan but at different interest rates do the customer must decide what’s best for him..Fixed interest loans charge an interest, which remains the same through out the tenure of the loan. This means that the consumer is immune to market risk or the possible upward movement in the interest rates.Hence, fixed rate is a good option when the interest rates are expected to move up in the future.As for floating rate loan, a consumer is exposed to market risk and his gain or loss depends on the interest rate condition prevailing in the market. Floating rate is beneficial if the interest rate falls in the future. A floating rate is considered non-transparent and is also known as 'adjustable rate'.Fourthly, if the customer decides to opt for a fixed rate loan, he can still switch to a floating rate loan in the future and vice versa as and when rates go in his favour and if he decides to switch, he should take into account the cost of doing so and the interest rate benefits of switching. For a given interest rate, loan with a daily or monthly reducing balance is better than an annual reducing balance loan. Interest rates vary depending on the tenure of the loan, the amount of the loan and the consumer’s personal profile. Insurance cover (an added cost) Also, many banks may insist on getting the customer’s home insured to safeguard their interest. There are various kinds of insurance covers available for the customers. Apart from getting the mandatory ones, he should try to get insurance as per his circumstances. He also has a choice of getting insured from another company without any objection from his particular bank.Other costs The interest rates and EMIs are not the only cost factor. A 1% administration fee and a 1% processing fee on a Rs.10 lac loan, would amount to Rs.20,000.Processing fees, administration fees, valuation fee, legal fee, is to be paid when anyone applies for a loan and other fees paid at closing. Many of these fees are negotiable. The customer should ask for zero processing fees and zero-penalty for pre-payment option. If this were not available, then lowest cost would be better.

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the customer must make sure he works out as to how much these other costs add up to. So even though the interest rate may be lower, it usually adds up to being expensive. If the EMIs may come out a lot more than what he can afford on a monthly basis; it’s better to redo with changes in the tenure and loan amount (if possible).Documents required: Most importantly, all deals and offers agreed upon are supported by relevant papers. Self employed and salaried require different documents to support the deal.

Penalties: Once the customer has received the loan he must do his best to pay it back as quickly as possible. But this early payment might invite a pre-payment clause.Banks make their money off the interest they charge and the sooner the customer pay back his loan the less money he will have to pay in interest. When it comes to Home loans, penalties are binding, like if he chose to pay up his entire money before the tenure, a Pre-payment penalty is charged. So he should know about such penalties beforehand to avoid future misunderstanding between him and the bank.

HDFC Ltd.

Now we try to focus on the various aspects of HDFC in providing home loans.

HDFC was incorporated in 1977 with the primary objective of meeting a social need - that of promoting home ownership by providing long-term finance to households for their housing needs. HDFC was promoted with an initial share capital of Rs. 100 million. The primary objective of HDFC is to enhance residential housing stock in the country through the provision of housing finance in a systematic and professional manner, and to promote home ownership. Another objective is to increase the flow of resources to the housing sector by integrating the housing finance sector with the overall domestic financial markets..

HDFC's main goals are to a) develop close relationships with individual households, b) maintain its position as the premier housing finance institution in the country, c) transform ideas into viable and creative solutions, d) provide consistently high returns to shareholders, and e) to grow through diversification by leveraging off the existing client base.

HDFC, having pioneered and helped develop market-oriented housing finance in India, has continued to expand its services to a broader spectrum of clients by offering specialised training courses.HDFC’s Centre for Housing Finance (CHF) provides technical assistance to national governments and housing finance institutions in developing countries in the South Asian and African regions, especially in the field of institutional development for effective shelter finance delivery.

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The second major area of activity of the CHF is managerial training for housing finance institutions. Besides effective housing finance operations, some established housing finance institutions also seek training for systems development and improvement.

The cut-throat competition in the housing finance market has ensured that lending institutions come up with a wide array of products to woo the potential customers. In such a scenario, prospective buyers need to adopt a prudent approach and evaluate the options available in the market before choosing a particular home loan.

First and foremost, the affordability factor has to be taken into account. As the investment in a home does not yield any monthly income, the ability to repay the loan depends entirely on salary or regular income from a stable business. Most finance companies finance upto a maximum of 85% of the cost of the house and monthly repayments are usually less than 35-50% of the customer's gross monthly salary.

Choosing the lending institution is another vital step. It is imperative to choose the financer with utmost care and proper consideration of its past track record. Apart from the housing finance companies, most of the major nationalized banks have forayed into the home loan segment.

Another important consideration in choosing home loans is the tax bracket as housing loans are one of the best ways to avail tax benefits. The tax breaks are directly related to the level of interest and principal repayments made each year, with an over all upper limit. One may not qualify for the full tax break if one's loan is relatively small.

Interest rate is undoubtedly one of the most important parameters to factor into one's calculations. In fixed interest rates, the rate of interest remains unchanged for the entire duration of the loan while in floating rates, interest rates change every time the interest rate in the financial system change.

HOME LOAN FEATURES OF HDFCNow we consider the various features of home loans provided by HDFC.

Maximum loan 85% of the cost of the property (including the cost of the land) and based on the repayment capacity of the customer.

Maximum Term 20 years subject to applicant’s retirement age.

Applicant and Co- Applicant to the loanHome Loans can be applied for either individually or jointly.

Proposed owners of the property , will have to be co-applicants. However, the co-applicants need not be coowners.

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Adjustable Rate Home Loan Loan under Adjustable Rate is linked to HDFC's Retail Prime Lending Rate (RPLR). The rate on the loan will be revised every three months from the date of first disbursement, if there is a change in RPLR, the interest rate on the loan may change. However, the EMI on the home loan disbursed will not change. If the interest rate increases, the interest component in an EMI will increase and the principal component will reduce resulting in an extension of term of the loan, and vice versa when the interest rate decreases.

DOCUMENTS REQUIRED FOR HOME LOAN

We go through the following table to have an idea of the documents required by the applicants for sanctioning of home loans that is needed by HDFC.

Salaried Customers Self Employed Professionals Self Employed Businessman

Application form with photograph

Application form with photograph

Application form with photograph

Identity and Residence Proof Identity and Residence Proof Identity and Residence Proof

Latest Salary-slipEducation Qualifications Certificate and Proof of

business existence

Education Qualifications Certificate and Proof of

business existence

Form 16 Last 3 years Income Tax returns (self and business) Business profile

Last 6 months bank statements

Last 3 years Profit /Loss and Balance Sheet

Last 3 years Income Tax returns (self and business)

Last 3 years Profit /Loss and Balance Sheet

Processing fee cheque

Last 6 months bank statements Last 6 months bank statements (self and business)

Processing fee cheque Processing fee cheque

PROCEDURE OF DISBURSAL OF HOME LOAN BY HDFC

Next is the procedure of how the home loan is disbursed from HDFC.

Step 1 Application:Complete and submit the Application Form to HDFC. The Application Form contained in the Information Booklet is available for purchase from HDFC for Rf50/-.

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Clarification and assistance in completing the forms would be provided by HDFC where required. The information required would include:

(i) Ownership documents and collateral, (ii) Costing of proposed investment,(iii) Proposed construction methods and arrangements, (iv) Permits and drawings,(v) Sources and amount of income of the applicant,(vi) Credit history of the applicant, (vii) Availability of down payment, and (viii) Other relevant information depending on the proposal

Step 2 Preliminary Review:Application will be reviewed by a Credit Officer, and applicant will be requested to visit HDFC for a face-to-face interview (a telephone interview would be arranged if this is not possible). Applicant would be requested to bring along missing documents within 14 days of time. During the interview, the proposal would be reviewed with the applicant to provide a close fit of the investment to the applicant’s financial position. Applicant would be advised if documentation is still incomplete and requested to provide these within 14 days.

Step 3 Loan Processing: When all the required information is received and documentation is completed, the Credit Officer assigned to the project would evaluate the loan, and compile the Project Report to the Credit Committee. At this stage HDFC would undertake site visit and take photos and make assessment of the property. Fees required is 1% of the loan amount applied plus applicable service taxes and cess. No Charges for replacement of cheques, Income Tax Certificates and Accelerated Repayment Option.

Step 4 Loan Approval: The Credit Committee reviews the Project Report produced by the Credit Officer including supporting documents and other facts of the case, and approve (or does not approve) the loan. The Internal Auditor would then review the documentation to ensure proper procedures were followed by the Credit Committee in its decision making.

Successful applicants would then receive an Offer Letter requesting to accept the loan offer in writing (offer) delete within 14 working days.

Unsuccessful applications would be advised in writing as to why the loan is not approved at this stage, and what needs to be rectified to be successful.

Step 5 Acceptance of Loan Offer:Once the company received Letter of Acceptance from the applicant, the project would be handed over to the Legal Department.

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The Legal Department would then communicate with the applicant to finalise loan and mortgage agreements and request to submit original title deed of the property, revenue stamp and Funds Draw Down Schedule in line with the approved Work Plan. The Loan Agreement would then be signed in the Civil Court, registered in the Civil Court, and mortgage of the property completed by the Male’ Municipality.

Step 6 Release of Funding:Once the Loan Agreement is signed and mortgage of the property is completed, the HDFC funding would be released in installments as per with the approved Funds Draw Down Schedule.

Step 7 Appeal:Loans not approved initially will still remain open and the applicants are encouraged to continue the discussion with HDFC to explore and meet the required conditions for eligibility.

HDFC encourages applicants to appeal against any of its decisions directly to the Appeals Committee of the Board of Directors.

Applicants may also request for meetings with either the CEO or the Chairman to discuss and / or clarify any matters regarding loan applications and proposed projects. These appointments would be provided with 24 hours of the request.

We discuss about the repayment options and security now.

The various kinds of repayment options offered by HDFC are:

Step Up Repayment Facility

Helps young executives take a much bigger loan today based on an increase in their future income, this helps executives buy a bigger home today!

Flexible Loan installments Plan

Often customers, parents and their children, wish to purchase properties together. The parent is nearing retirement and their children have just started working. This option helps such customers combine the incomes and take a long term home loan where in the installment reduces upon retirement of the earning parent.

Tranche Based EMI

Customers purchasing an under construction property need to pay interest ( on the loan amount drawn based on level of construction) till the property is ready. To help customer save this interest, HDFC have introduced a special facility of Tranche Based EMI. Customers can fix the installments they wish to pay till the time the property is ready for possession. The minimum amount payable is the interest on the loan amount drawn. Anything over and above the interest paid by the customer goes towards

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Principal repayment. The customer benefits by starting EMI and hence repays the loan faster.

o Accelerated Repayment Scheme offers customers a great opportunity to repay the loan faster by increasing the EMI. Whenever he gets an increment, increase in his disposable income or have lumpsum funds for loan prepayment, he can benefit by increase in EMI which means faster loan repayment and saving of interest because of faster loan repayment.

The security for the loan is a first mortgage of the property to be financed, normally by way of deposit of title deeds and/or such other collateral security as may be necessary.Interim security may be additionally required, if the property is under construction. Collateral or interim security could be assignment to HDFC of life insurance policies, the surrender value of which is at least equal to the loan amount, guarantees from sound and solvent guarantors, pledge of shares and such other investments that are acceptable to HDFC.It is to be ensured that the title to the property is clear, marketable and free from encumbrance. To elaborate, there should not be any existing mortgage, loan or litigation, which is likely to affect the title to the property adversely. This brings us to the concept of mortgage.

SECURITY FOR HOME LOAN(MORTGAGE)

India Mortgage industry until recently was an unorganized sector. But today organized mortgage sector is witnessing steady growth. It is estimated to be US $ 18 billion industry. Huge real estate requirements and its subsequent development has fueled its growth. The predominant market leaders in organized 'India Mortgage' sector are housing finance companies like LIC Housing Finance, HDFC, ICICI Home Finance etc. Although, size of organized sector account only for 25% of the total housing investment in India .

Mortgage rates in India industry is consistently registering 20-50 % growth from the year 2000 onwards. Low income groups communities are still ignorant and skeptical of about it, the bottlenecks are –

Affordability

Accessibility

To help it grow and fulfill its huge requirements India Mortgage industry needs indirect government participation, as a guardian and facilitator. Private funds and even FDI should be encouraged to see 'India Mortgage' industry grow further. Overall revamping of land laws, rental laws, fast mutation and registration process along with setting up of credit rating organization and mortgage insurance will only help India in

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realizing its housing dreams. This will accelerate organized growth of 'India Mortgage' market and at the same time will help reach all sections of Indian society.

The mortgage industry, also known as the housing finance industry is one of the most promising sectors of India of the past decade. Before viewing India Mortgage Rates , it would be worthwhile to have a brief introduction to the word “ mortgage ”.

Mortgage is a conditional conveyance of property as security for repayment of loan. Such a property is put up as a collateral security which is liable to confiscation in the event of failure of repayment of the loan and the mortgage rate associated with it.

Hence, Mortgage Rate is a rate of

Indian Mortgage Rates can be classified into two types:

Fixed Mortgage Rate Flexible Mortgage Rate

Fixed Mortgage Rate - in this case the rate of interest remains fixed throughout the loan term. The mortgage rates do not vary according to market conditions. In other words, the rate of interest is pre-fixed during the process of borrowing and it generally varies between 12.5% and 25 %.

Flexible Mortgage Rate - is one in which the interest rate varies according to market movements. This type of interest rate is called 'adjusting' or 'floating' rates. The risk factor is high in this type of interest rates.

Some of the well-known mortgage-financing companies offering various types of mortgage in India are as follows -

LIC Housing Finance HDFC ICICI Home Finance SBI Housing Finance UCO Bank State Bank of India State Bank of Mysore Allahabad Bank United Bank of India United Commercial Bank of India Bank of Baroda Kotak Mahindra Bank

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Citi Bank HSBC Standard Chartered Bank

The mortgage industry of India could break open from its age old image of being housing mortgage facilitator only. Today, the types of mortgage that are being accepted as collateral are varied and not confined to residential property only.

When a borrower is going for a First Time Buyer Mortgages, he has to first search for a house that is within his budget. Then he has to apply for the home loan and once it has been approved, he can buy his dream house. In the First Time Buyer Mortgages, the lender usually advances 3.25 times the amount of salary of the single earning member. In case the couple is earning, the lender advances 2.25 times of the salary of the couple. Some lenders even advance in First Time Buyer Mortgages around 5 times the amount of salary.

Mortgage financing is the process of utilizing property or conveying the personal as well as real property of the mortgagor on condition, as a security for the repayment of a loan. Mortgage financing in most of the countries is restricted generally to securing loans against land or house.

Parties involved in mortgage financing:Mortgage financing involves mainly 2 parties – the first party is the mortgage lender and second party is the mortgagor or the mortgage applicant. The mortgage lender is the person who provides the mortgage loan against the collateral of the mortgagor. The mortgage lender is legally allowed to confiscate the collateral in case the mortgagor is not able to pay off the loan within the stipulated period. The mortgagor is the loan applicant who is responsible for the repayment of the mortgage loan secured against his personal property. In case of default in the repayment of the mortgage loan by the mortgagor, the mortgagor has to suffer from the process of foreclosure carried on by the mortgagee. Foreclosure is the procedure wherein the mortgage lender sells the property of the mortgagor to recover the loan amount. Foreclosures can be of various kinds like the foreclosure by judicial sale, foreclosure by power of sale, strict foreclosure etc.

Repayment Procedure in mortgage financing: The procedure of mortgage financing facilitates the mortgagors on account of the long tenure of the mortgage loans and the large number of repayment options provided by the mortgage lenders. The long tenure of the mortgage loans helps the mortgagor to repay the loans in the form of small payments at regular intervals over a substantial period of time. The large repayment options include the generally followed repayment option of the repayment of both the interest and the capital amount at regular intervals during the loan period. The exact opposite repayment option of the above repayment option involves the repayment of the capital and the interest at the end of the loan period. There are other 2 popular repayment options also available for the mortgagors.

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The first popular option includes the repayment of the interest at regular intervals, but the payment of the capital is done at the end of the tenure. The second popular option involves the partial payment of the capital amount during the loan tenure but regular payments of the interest. The calculation of interest in case of mortgage financing is done with the aid of 2 interest calculation procedures-the fixed rate interest calculation procedure and the adjustable rate interest calculation procedure.

Classifications of mortgage financing:Mortgage financing can be classified into various types as home mortgage financing, Second Mortgage Financing, Commercial Mortgage Financing etc. Home mortgage financing is the most significant method of financing individual ownership of residential properties prevalent in most of the countries around the world. The home mortgage financing is usually stretched over a long period of time. Regular payments towards the capital amount in case of a mortgage loan can be compared to the annuities in case of insurances or retirement plans. The mortgage lenders essentially use home mortgage financing to gain income from interests and usually resort to the accumulation of funds with the issue of bonds or acceptance of public deposits. Commercial mortgage financing involves securing of loans against any property used for commercial purpose. Second mortgage financing is the procedure of taking another mortgage loan against the already mortgaged property.

Key Constituents of Mortgage Loan Financing:The term mortgage loan financing denotes a loan which is granted against the property of the borrower and this property is considered as the collateral for the loan. The key constituents of mortgage loan financing comprise of the rate of interest, a specific sum of money that the borrower has to pay the lender at regular intervals for the loan, the tenure of the loan, the regular payments made towards the principal amount of the loan and the repayment procedure.

Mortgage Loan Financing Process:Mortgage loan financing is presently done either through the fixed rate mortgage process or through the variable or adjustable rate mortgage process. In the fixed rate mortgage process, the mortgage lender lends money at an agreed rate of interest which remains same for the entire tenure of the loan. In the variable rate mortgage process, the mortgage lender lends money ab initio at a fixed rate of interest for an agreed period of time and then modifies the rate of interest, in accordance with the market indexes.

Default Procedure in Mortgage Loan Financing:In case the borrower is not able to pay off his debt by the aid of any of the above repayment procedures then the mortgage lender is allowed the choice to appropriate

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the mortgage amount by selling the property which was kept as security for the repayment of the loan.

Kinds of Mortgage Loan Financing:Varied market requirements has led to the formulation as well as implementation of a large number of mortgage loan financing schemes worldwide. Some of the prominent mortgage loan financing schemes include:

Assumed Mortgage Commercial Loan Reverse Mortgage Budget Loan Seasoned Mortgage Equity Loan Jumbo Mortgages Participation Mortgage Bridge Loan Non-Conforming Mortgage

The Indian mortgage loan financing sector has been facilitated by the entry of the renowned banks like the State Bank of India, Citibank, HDFC, HSBC, ICICI etc. in mortgage loan financing.

Home Mortgage Financing, better defined as home mortgage loans, help in the procurement of a house, in which the said house in considered as a security against the loan amount. Home Mortgage Financing usually stretch over a substantial period of time.

Key Constituents of Home Mortgage Financing:Home Mortgage Financing revolves around certain constituents and the most significant constituent is the house that has initiated the need for home mortgage financing. The choice of the proper institution to avail the loan is the second important constituent. The next constituent are the terms and conditions set up for the mortgage procedure. Terms and conditions involve the principal loan amount, required for the purchase of the house and the rate of interest is calculated on the principle amount.

Home Mortgage Financing is carried on with the help of two systems, that include: Fixed Rate Mortgage Adjustable Rate mortgage

Fixed rate mortgage provide the assurance of a fixed rate of interest maintained throughout the loan period. Fixed rate mortgage also guarantees an exact loan repayment amount at particular intervals. While the variable or adjustable rate mortgage maintains a specific interest rate maintained for a particular time span. The

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interest rate after the completion of that particular time span is altered with the altered market indices.

Repayment Procedure of Home Mortgage Financing:

The procedure of repayment of home mortgage loans has been simplified by providing the borrower with a number of choices for repayment. The most common among the repayment plans is the capital and interest repayment procedure which lies in contrast to the special repayment plan i.e. no capital or interest repayment procedure. Another variation to the said repayment plans is the interest only repayment plan, that does not require the repayment of the capital amount. Provisions have been made where the payment of the total interest amount is required and but the partial payment of capital amount can be done.

The income groups for mortgage can be classified into:- Salaried Business- class

The following documents are required: For proprietorship firms

o Last 3 years P/L balance sheeto If turnover is greater than Rs.40,000 audited balance sheet is

needed.o Last 3 years trade license

For private firms

o Memorandum

o Articles

o Form 32

o Form 18

o Pan card of company

o Pan card of directors

o Address proof

o Photograph

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For salaried persons

o Minimum salary should be 1 lac

o Form 16

o Income tax return for last 2 years

o Salary account bank statement for last 2 years

o Minimum work experience should be 3 years

ELIGIBILITY CALCULATION FOR HOME LOAN

Now comes the eligibility calculation for disbursing home loans. At HDFC a system of fixed obligation income ratio(FOIR) is maintained. The table for which is given below:

INCOME(p.m.)

LESS THAN Rs.10,000

BETWEEN Rs.10,000-20,000BETWEEN Rs.21,000-30,000GREATER THAN Rs.30,000

FIXED OBLIGATION INCOME RATIO(FOIR)35%

38%

40%

45%-50%

Let us consider an example as to how this chart is really going to work for customers who intend to take loans.

Let income of a customer be=Rs.40,000p.m.Let his car loan instalment be Rs.4,000p.m,instalment for t.v.loan Rs.1,000pm & proposed housing loan instalment of Rs.12,000p.m.

According to the FOIR chart the ratio is 50%of monthly income. However the let us consider the standard FOIR is 40% of monthly income.

The proposed solution:

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So the total amount of instalment,the person can pay,as per the standard would be Rs.16,000p.m.

As he is already paying Rs.5,000 for car and t.v. he has Rs.11,000 left.

The home loan will be calculated taking Rs.11,000 p.m. as the repayment capacity of the applicant not the proposed Rs.12,000

The security for home loan is is a first mortgage of the property to be financed, normally by way of deposit of title deeds and/or such other collateral security as may be necessary. Interim security may be required, if the property is under construction.

COMPARISON OF HDFC WITH SBI AND ICICIThe comparisons of HDFC in respect of home loan providing criteria is shown below where 2 more banks are taken for comparisons. SBI and ICICI.

ELIGIBILTY REQUIRED(SALARIEDSHDFC SBI ICICI

AGE 25-58 21-58 21-65

MIN INCOME - 1,00,000 -

LOAN AMT 2LAC-1CR 2LAC-2CR 2LAC-1CR

TENURE 5-20YRS - 5-20YRS

LOAN TO VALUE RATIO

85%OF AGREEMENT VALUE

- 85%OF AGREEMENT VALUE

ELIGIBILTY(SELF-EMPLOYED)HDFC SBI ICICI

AGE 21-65 21-65 21-65

MIN INCOME - -

LOAN AMT 2LACS-2CR   2LACS-2CR

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TENURE 5-20YRS   5-20YRS

LOAN TO VALUE RATIO

85%OF AGREEMENT VALUE

85%OF AGREEMENT VALUE

85%OF AGREEMENT VALUE

INTEREST RATES & PROCESSING FEES  HDFC SBI ICICI

FIXED 13.25% 12.75% 14.75%

FLOATING 10.25% 11% 13.5%

PROCESSING FEES

0.50% 0.25% 0.50%

The question which naturally arises next is why should people actually go for home loans from HDFC. There are reasons that can be offered to support the cause. The primary ones are listed as follows:-

Leading private sector lender in home loans space, HDFC reduced interest rate on floating loans by 0.50 per cent but left the fixed rate untouched at 13.25 per cent. Accordingly, the revised rate stands at 10.50 per cent and will be applicable to loan disbursements on or before 31 October, an HDFC spokesperson said here today.

However, there is no revision in the fixed home loan rate which remains unchanged at 13.25 per cent. Commenting on this step, HDFC executive director Ms Renu Sud Karnad, said, "Our lending rates are a function of our cost of funds and we have seen a reduction in our cost of funds."

"Historically, we have maintained a pre-determined spread and have always believed in passing the benefits to the customers. This special offer is an extension of the same philosophy."

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The country's largest housing finance company, HDFC announced a special interest rate of 10.50% for customers availing home loans at floating rate of interest.

The offer will be applicable to all loans disbursed on or before October 31. This is 75 basis points lower than HDFC's regular rates and 50 basis points lower than the rates charged under the monsoon scheme launched last quarter.

BPTP, one of the fastest growing players in real estate industry today signed an MOU with HDFC HOME LOANS. HDFC would be extending home loans on exclusive terms to investors in the Group Housing project at Sector 75, BPTP Parklands, the new age integrated township at Faridabad.

The unique feature of the loan is that it would be disbursed on a special interest rate with 24 months interest-free period. HDFC would grant loan to the extent of 90% of the apartment cost to the purchaser. The first Equal Monthly Installment (EMI) would be payable only after two years from the date of disbursement of the loan. The project is also likely to be completed in the next two years and as such, the buyer would be ready to move in before the commencement of loan repayment schedule. This facility would be made available to prospective buyers from 22nd to 24th September '07.

HDFC Bank Ltd., India's third- biggest financial services company by market value, said fiscal first quarter profit rose 34 percent as it gave more loans to individuals and companies and as fees increased.

Net income rose to 3.21 billion rupees ($79 million) in the three months ended June 30, compared with 2.39 billion rupees a year earlier, the bank said in an e-mailed statement. That's higher than the 3.13 billion rupees median estimate of five analysts surveyed by Bloomberg.

Demand for loans from individuals to buy consumer durables and from companies seeking to expand in an economy that grew an average 8.6 percent in the past four years has boosted earnings at Indian banks. More than half HDFC Bank's loans go to individuals who are increasing borrowing as incomes rise

Other than these some other important features being:-

Home Loan - Home loans for individuals to purchase (fresh / resale) or construct houses. Application can be made individually or jointly. HDFC finances up to 85%

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maximum of the cost of the property (Agreement value + Stamp duty + Registration charges).

-> Home Improvement Loan - HIL facilitates internal and external repairs and other structural improvements like painting, waterproofing, plumbing and electric works, tiling and flooring, grills and aluminium windows. HDFC finances up to 85% of the cost of renovation (100% for existing customers).

-> Home Extension Loan - HEL facilitates the extension of an existing dwelling unit. All the terms are the same as applicable to Home Loan.

-> Land Purchase Loan - Be it land for a dream house, or just an investment for the future, HDFC Land Purchase Loan is a convenient loan facility to purchase land. HDFC finances up to 70% of the cost of the land (Conditions Apply). Repayment of the loan can be done over a maximum period of 10 years.

Loan cover Term Assurance Plan - HDFC Standard Life Insurance Company Ltd. offers an insurance plan*, which is designed to ensure that life's uncertainties do not affect customer’s family's interests and the precious home. LCTAP provides a lump-sum payment on the unfortunate demise of the life assured. This pure risk plan is designed in a way that the cover decreases as customer repays his home loan making it a low cost premium insurance plan.

Automated Repayment of Home loan EMI - Customer can give HDFC standing instructions to repay his Home Loan EMIs directly from his HDFC Bank Savings Account, thus, saving him the trouble of procuring, signing and tracking post-dated cheques.

-> HDFC also offers In -house scrutiny of Property documents for customer’s complete peace of mind.

-> Customer privileges - If someone is an existing HDFC Home Loan customer, he can avail of other loans (such as Personal Loans, Car Loans, Two-wheeler Loans and Loan against securities) at lower interest rates.

HDFC Bank looking to start operations in rural areas

With most urban centres growing to saturation for a host of business activities, rural initiative is fast becoming the flavour among major players from every sector. After

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FMCG and telecom bigwigs, now the financial services firms are putting in place a detailed plan aimed at a strong rural presence. HDFC Bank is aiming to take the lead in finance segment which, on a pan India basis, accounts for about 70% of the country's one-billion-plus population.

One of the distinguishing features of HDFC Bank's rural foray is its decision to take the more demanding route of connecting with customers directly, rather than taking the easier direct sales agent route. "The bank prefers to connect to its customers directly," Ashok Khanna, EVP, HDFC Bank said.

Moreover HDFC trusted brand name synonymous with integrity, transparency and quality services. Supporting over 2.4 million families through home loan approvals of over Rs 70,000 Crores.

RECOMMENDATIONS

However the recommendations that could be given are summarized as follows:

Processing charges should be refunded. If an applicant for home loan is found to have become compelled for any reason not in a position to draw the loan the processing fees charged earlier for the purpose should be returned.

Reverse mortgage is a Home Loan product designed for the senior citizens by converting their fixed asset - their home or in banking terms their equity in any house property into an income channel without having to liquidify your equity in case of any requirement. It involves two parties, the borrower - the senior citizen and the lender - any bank or housing finance institution. The borrower pledge their home property to a lender. In return of the house property pledged, the borrower gets a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized by the borrower (senior citizen) as per needs and not for speculative purposes. The homeowner and now the borrower will not be required to repay the loan during his lifetime. On his death or leaving the house permanently, the loan along with the accumulated interest is repaid through the sale of the property pledged. In case the accumulated interest and loan amount is larger than the value of the mortgaged property, the mortgage loan is capped at the value of the home equity only and the lender is the party at loss. Any excess amount by the sale of the property is duly remitted to the borrower incase of permanent leaving of the house or his heirs in case of the death of the borrower. Adoption of such a scheme is another important step.

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HDFC is already identifying customers and their needs in respect of its proposal for reverse mortgage product.

HDFC should, along with the home loan cover the moving cost also which basically involves cost of furniture, durables etc. The secret to a successful move, with minimum stress, requires organization and taking things one step at a time. "TIME COSTS MONEY”. The less the mover has to handle, the better packed and prepared he will be. Hence the less expensive his moving bill will be.

Lastly a scorecard has been recommended.

UPTO 1 CR 1CR-2CR 2CR-4CR 4CR-6CR >6CR WT. ASSIGNED

NET WORTH 1 2 3 4 5 0.35PAST REPAYMENT RECORD

DEFAULTER

1

PART PAYMENT

2

PRE-PAYMENT

3

INSTALLMENT

4

TIMELY PAYMENT5

0.15

RENTAL NO0

YES1

0.20

VALUE OF COLLATERAL SECURITY

< 1 CR

1

1CR-2CR2

2CR-4CR3

4CR-6CR

4

>6CR

5

0.10

FREE FROM ENCUMBERANCES

NO

0

YES

1

0.05

IMPENDING LOANS(OTHER THAN HOME LOANS)

YES

0

NO

1

0.15

TOTAL

We take an example.

Let us consider 2 customers one has a net value of his asset as Rs.3cr and another Rs.6 cr.

Both customers’ past re-payment being on time.

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Let the value of collateral security of the 1st customer be Rs.1cr and the 2nd Rs.5 cr.

Both would receive rent from tenants.

Their house would be hassle-free.

Suppose the 1st one maintains some impending personal loans along with the home-loan to be taken and the 2nd one does not.

Let the standard weightage taken for a customer to get loan to be 3. We have taken a scale of 0-5.

Here comes the recommendation.

For networth the 1st scores 3*0.35=1.05 & the 2nd customer scores 5*0.35=1.75

For past repayment record both score 5*0.15=0.75

For collateral security the 1st one scores 2*0.10=0.2 and the 2nd one 4*0.10=0.4

For rental both score,1*0.20=0.2

For their house being hassle-free,1*0.05=0.05

For impending personal loan the 1st one scores 0*0.15=0 & the 2nd scores 1*0.5=0.5

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Thus the total of the 1st customer is=1.05+0.75+ 0.2+0.2+0.05+0=2.25 and that of the 2nd being=1.75+0.75+0.4+0.2+0.05+0.5=3.65.

Thus we can see that the 1st customer does not meet our standard weightage of getting loan(as his total comes to 2.25 which is less than the standard weightage of 3 that we have taken) while the 2nd customer is quite easily accesible in getting this loan according to the standard set by us(as his total comes to 3.65 much higher than our standard weightage of 3).

CONCLUSION

I want to conclude by saying my summer training was a great learning experience and I am really grateful for the exposure to the real world of the workplace atmosphere. I am glad that I was given the opportunity of participating in daily banking operations and helped in generating TDS certificate details and dispatching it to customer contacts, assisted in post merger data standardization project pertaining to a/c opening forms, signature scanning of around 1000 AOFs, renewal of overdraft facilities against FD. Lastly I have learnt extensively regarding HDFC’s procedure of appraising and financing about home loan and mortgage. Also the changing scenario of merger of Centurion Bank of Punjab into HDFC Bank showed a new dimension of the banking activities.

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REFERENCE

The following were of immense help in making this project. They are:

The Economic Times Business Today

Business World

www.hdfcbank.com

www.hdfc.com

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