Consequences of non repayment of home loans

There are certain benefits to home loans but there also certain problems related with it. There are certain basic things that a person must keep in mind while buying a home on loan. And amongst them is the question as to what happens if one is not able to pay back. This is how the procedure follows.

If a person who bought his home on loan and is unable to pay the equated monthly installments (EMI) , then after a few months the bank has to right to sell the property in order to recover back the debt.

If a person is not able to pay the EMI the borrower will receive legal notice from the bank, Informing the lender that the loan amount will be recovered by the bidding of the property. Even then if the borrower is not able to pay back the installments the he receives a final notice after 60 days.;

However to avoid such a situation the borrower is left with some options. Either he can repay the pending 50% of the installment amount and challenge the bank by filing an appeal to Debts Recovery Appellate Tribunal (DRAT). Then the property can not be sold until the case remains sub-judice.

Or if the borrower already know that whatever he does he will not be able to pay the installments then the can sell the property on his own with in best possible rate and pay the debt of the bank. The choice of option can vary from person to person.

But as it is said loss for someone is an opportunity for the other. Here’s some exciting prospect for the buyers. Before the auction, the bank circulates advertisements in the local daily. So if he thinks the property is of any use to you you can participate in the auction and there are always chances that you can get possession over the property with lower price then it actually costs.

Following RBI measure some banks to go slow on teaser home loans

In its second quarter monetary policy review the Reserve Bank of India increased the provisioning for teaser loans to 2% from 0.4% in order to discourage the teaser home loans. The apex bank has capped all home loans at 80% of the value of a property.

Some banks have thus decided to go slow on teaser loans – home loans bearing an introductory lower interest rate for a stipulated period of time. However country’s largest lender State Bank of India (SBI) has stood its ground, several other banks.

Punjab National Bank, second largest public sector lender has decided not to push its special scheme which will be available until December 31 under which it is offering home loans at 8.5% for the first three years, an anonymous senior bank official informed. While floating home loan rates will normally range between 9 per cent and 10.25 per cent, depending on the amount borrowed and tenor.

He told, after RBI’s directive PNB will have to set aside an additional Rs 12 crore to meet provisioning. By the end of September quarter, bank housing loan portfolio stood at Rs 10,160 crore, of which teaser loans accounted for around Rs 700 crore.

Keki Mistry, vice-chairman & chief executive officer at HDFC said, "Teaser rate loans are a concern. Lenders use the initial lower interest rate while considering the eligibility of a borrower." Bank teaser loan scheme will expire at the end of the month, then it will decide whether to continue to offer the teaser rates.

However, since last December, the largest mortgage lender had extended the teaser loan scheme four times. In the first year bank has set rate at 8.5% and in the second year the rate is 9.25%, consequently in the following years a borrower has to pay floating interest rates.

Earlier RBI has expressed concern over teaser home loan scheme as the borrower risk increases if floating rates suddenly shoot up. However apex bank’s latest directive is applicable only to banks.

In fact SBI was the first one to launch teaser rate scheme two years ago, at that time very few people took loan and the cost of funds was low. Bank chairman OP Bhatt said the scheme helped revive demand. Bhatt said, without lowering a borrower’s eligibility criteria, teaser rate scheme helped in acquiring new customers and grow business. At present in SBI's loans segment home loans make up 13 per cent.

R R Nair, managing director & chief executive at LIC Housing Finance said, "We will wait for the initial response from (housing finance regulator) NHB. We have no plan to continue with our festive home loan offer, which gives loans at 9.25 per cent for the first five years." The scheme is available till November 15.

On the other hand Dena Bank Executive Director A K Dutt said his bank teaser scheme, did not receive a good response.

The bank has no plan to market its scheme aggressively.

The ratings, research and advisory firm Crisil said RBI’s latest measure will help to "ensure that the credit quality in this segment, which traditionally has low non-performing assets, remains robust".

It said, together with the 25-basis point increase in benchmark rates by RBI, the measures will increase home loan rates, which will result in "a moderation in demand for, and disbursement of, loans in the near future''.

Following RBI move, NHB is also planning to introduce provisioning norms on teaser loans and cap the loan-to-value (LTV) for housing finance companies to avoid arbitrage opportunities. R V Verma, chairman, NHB said, "So far, housing finance companies are not required to make any provision on standard teaser loans. We will come up with guidelines to ensure there is no arbitrage in the system."

However, housing finance companies have to keep a 100 per cent risk weight on LTV of above 75 per cent. Other than teaser loans, for other loans NHB is required to make a provision for 0.4% of the asset.

NHB says: “There is no real rush on the part of HFCs to raise rates”

After the hike in key rates by the Reserve Bank of India (RBI) the banks are raising their lending rates. The banks have raised their BPLR which will have impact on home, car and personal loans.

But National Housing Bank (NHB), regulator for HFCs, has said that they will not follow the banks in raising home loan rates immediately.

RV Verma, executive director of NHB, told Financial Chronicle, “There is no real rush on the part of HFCs to raise rates. It will depend on their cost of funds.”

Verma said HFCs will wait and watch banks action on base rate before thinking of raising lending rates. He said, “Over 50 per cent of HFC funding comes from banks. If banks raise their base rates when they conduct their next round of review, the cost of funds of HFCs will be impacted. That will have a bearing on the decision of most HFCs.”

According to rating agency ICRA report, at the end of December 2009, around 59% of HFCs loans were taken by commercial banks.

Verma says, bank may have to raise their base rates in the next review as they are raising their deposit rates, due to which their cost of funds will be affected.

Most of the commercial banks including the State Bank of India, ICICI Bank, Punjab National Bank, Union Bank and IDBI Bank — have hiked their prime lending rates. The EMIs of borrowers whose loans are linked to floating rates are adjusted accordingly as the rates are linked to PLR.

From July 1, banks have switched to base rate system in which they cannot lend below this rate to the new borrowers. The existing borrowers have option to switch to the new rate system without paying any charges or can continue to the earlier benchmark prime lending rate (the rate at which they give loans to their best rated borrowers).

RR Nair, director and chief executive officer of LIC Housing Finance, said the rates for existing borrowers might be reviewed at the beginning of the next quarter. Nair told Financial Chronicle, “We do not adopt the policy of changing interest rates depending on market movement. For our existing customers, we review our rates once at the beginning of each quarter.”

He told, his company normally reviews its rates for fresh loans every month taking in consideration market developments. Nair added, “We have to take a view on rates on new loans.”

The HDFC official said his company will review lending rates depending on the cost of funds and experience. He said, “It (reviewing lending rates) is a continuous process. We take into account the cost of funds before taking a view (on rate revision).”

As per ICRA recent report, 30% share of the home loan market are held by HFCs, and the rest of the shares are held by the commercial banks. The report stated as on December 31, 2009, the total mortgage debt outstanding amounted to nearly Rs 413,700 crore, out of which 71% is of commercial banks and the rest is of HFCs.

RBI ask banks to provide 1% interest subsidy to home loan borrowers

Finance Minister Pranab Mukherjee in Budget 2009-10, had announced to provide interest subvention of 1% on housing loans of up to Rs 10 lakh for one year for houses having cost less than Rs 20 lakh. This scheme was announced with a view to push up the housing sector. Initially scheme was for a period of one year up to September 30, 2010, later it was extended till March 31, 2011.

The Reserve Bank of India has instructed banks to introduce a suitable mechanism to provide the benefit of the 1% interest subsidy to the home loan borrowers, announced by the government to buy a house of up to Rs 20 lakh.

RBI said in a notification said, “Banks are advised to put in place a suitable mechanism to ensure that the eligible borrowers avail of the benefit of interest subvention for one housing unit only.” Notification further said banks after sanctioning and disbursing eligible loans under the scheme can claim the disbursement of subsidy from the RBI on a monthly basis.

For this scheme government has made a provision of Rs 1,000 crore for 2009-10 and Rs 700 crore for the current financial year.

Some significant home loan clauses

Increase in income of the people has boosted the loan segment of the banks especially the home loan segment as owning a house is becoming the first priority of the people. But most of us don’t have the knowledge of significant clauses of the home loan. Here we have tried to take few clauses about which we must have knowledge.

Interest rate movement:

Banks have included a clause of revising interest rates in the home loan agreements this has enable banks to even revise the fixed interest rate on loans. In floating interest rate bank already have power to change the interest rates. This can be done unilaterally, at the discretion of the bank.

Prepayment charge:

When bank sanction loan it also specify the repayment tenure of the loan. If a customer plans to repay loan before the due date some of the banks have incorporated foreclosure charges. In this the condition may range from taking prior permission of the bank, to a lock-in period during which the loan cannot be prepaid. Some banks levy prepayment penalty in case of the loan is repaid before the completion of tenure. But some banks don’t charge prepayment penalty if the loan is repaid out of one’s own funds.

Switchover charge:

As per RBI norms the home loan borrower can switchover to another bank if he finds that other bank is offering low interest rate in comparison to its existing lender. But in this case the banks have switchover charges. The existing bank will take fee from the borrower for switching over to other bank.

Disbursement date:

All the banks differ on the timing of disbursement of the loan. Some banks consider the date of the cheque as the disbursement date. Some of them consider the date of payment advice as the date of disbursement. According to some of the banks the date on which actually the funds were transferred is the date of disbursement. The difference in these dates has a significant affect on the interest element.

Job status of borrower:

Some banks have added a clause that when the job status of the borrower changes, the borrower must inform the lender about this.

Default penalty:

In case the borrower default in payment or delays EMI payment or the loan EMI cheque gets dishonor for this banks have default penalty clause.

Lakshmi Vilas Bank venturing into housing finance biz

Lakshmi Vilas Bank, a private sector lender is planning to venture into housing finance business by floating a subsidiary housing finance company.

To float equity shares of up to 40 per cent of the present issued capital, bank will be taking approval from the shareholders’. The bank is also looking for a qualified institutional placement, a global depository receipts or an American depository receipt issue, or a follow-on public offer.

Lakshmi Vilas Bank Managing Director & CEO K S R Anjaneyulu said, “The housing finance space offers immense scope. We need focused and concerted efforts in this business so as to reap the benefits from this huge potential market. That is why the bank’s board has decided to float a new subsidiary to undertake the housing finance business.”

Besides this, bank is also planning to issue equity stock options of up to 5 million to its eligible employees and directors under the stock option scheme.

As on March 31, as per Basal-II norms bank capital adequacy ratio stood at 14.82 per cent.

Anjaneyulu said the bank need more capital to meet its expansion plans. He added, “That is why after raising funds through a rights issue in December 2009, the bank plans to raise further share capital in the current financial year.”

According to records, as on March 31, banks’ share capital amounted to Rs 97.51 crore. During 2009-10 there was a growth of 23.28 per cent from Rs 7,631 crore to Rs 9,075 crore in its total deposits however its net advances accounted to Rs 6,277 crore, registering a growth of 19.88 per cent from the previous year advances of Rs 5,236 crore.

HSBC bank to pay compensation of Rs 1 lakh to an NRI couple

HSBC Bank is to pay Rs1 lakh as compensation to an NRI couple for failing to disburse a sanctioned home loan. The national consumer dispute redressal commission (NCDRC) while dismissing the bank’s revision plea directed the bank to pay the compensation to the couple.

The commission upheld the decision of the Chandigarh state consumer dispute redressal commission in favor of Sridhar Gajula and Manjeet Kaur.

The Gajulas had booked a flat worth Rs32 lakh in Chandigarh’s Florenz Tower, promoted by Omaxe Builders. For this the couple took loan of Rs28 lakh from ICICI bank. They had to repay the loan in 120 installments, which worked out to Rs32,511 per month.

But, later Omaxe Builders increased the cost of the flat to Rs39 lakh. That time HSBC offered the couple a deal that it would give a loan of Rs 40 lakh if the couple transferred the loan.

The in spite of all promises bank failed to disburse the loan even though the couple had paid also paid Rs76,790 as foreclosure charges.

NCDRC also maintained the state consumer forum’s order directing the bank to refund the foreclosure charges and Rs98,000, which the couple had to pay to the builder, over and above the Rs1 lakh compensation.

RBI asks banks to offer choice to old home loan borrowers under base rate

All the banks will be switching to base rate system from July 1, 2010, and RBI has already made it clear that the existing home loan customers should also be offered an alternative either to continue with their old home loan rates or move to new rates decided by the base rate system. It is believed with the introduction of base rate system old home loan borrowers might also get a chance to negotiate for a lower interest rate as banks will be re-fixing their lending rates once the base rate sets in.

Most of the public and private sector banks are expected to re-price their retail loans at 1-2% points higher than the base rate to remain competitive.

According to the State Bank of India official, “The new customer may enjoy rates in the region of 9-10%, while existing customer will still be paying 1-2% below the existing prime lending rate which for some banks is as high as 13.75%”. As per the new system of lending, the banks are likely to keep the base rate low so as to keep hold on clients and also attract more clients in the competitive atmosphere.

The SBI official said, “In order to be competitive most banks will keep the base rates in the range of around 8-9%. Customers who are in the mid-term of the loan period and are paying interest in double digits will have an advantage”.

From Banks side, up till now, no clarification has been given whether they will be offering the benefit to the old customers. According to an official of a private bank, “It will depend on the customer profile as well. Generally banks tend to hold on their retail customers even if they have to pass on a 50 basis points (0.5%) rebate”.

Govt. to help home loan borrowers by making norms for prepayment of loans

The government has come forward to help home loan borrowers by making some norms so that home loan borrowers can easily prepay the loan. These norms will also make possible to shift to another scheme without having to pay a penalty.

The government is planning to make changes in the prepayment rules so that home loan borrower can easily shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan.

After receiving suggestions from loan borrowers, the Competition Commission of India (CCI) has asked the banks that why prepayment penalty should not be held as anti-competitive practice.

However one can prepay home loan when his financial condition improves but the timing of prepayment of loan should be chosen carefully. Before making prepayment borrower must check how much amount of loan he can prepay with out paying penalty. Although, most banks allow loan prepayment up to a certain point without any penalty, but borrower must check that the part-prepayments do not exceed this limit to avoid a prepayment penalty.

Banks have fixed their own prepayment limit. Generally, the prepayment charge levied is two percent of the principal outstanding at the time of foreclosure and amount paid in excess of the monthly installment in the last one year. In some cases, banks do not levy any charges if the prepayment is made after three years of availing the loan and if it is from own savings.

But the penalty clause is significantly included in the contract. In fact the charges are meant for those who want to pay off a loan or move to one offering better terms. Most banks waive the penalty if the repayment is made with the borrower’s own money. In case the borrower takes a loan from other bank to prepay the existing loan then banks levy charges. It acts as a restriction for borrowers who wish to switch the lender by way of refinancing the loan when the other bank offers a lower rate of interest.

Banks say, the penalty interest is mainly to cover the bank’s notional losses incurred in finding a new borrower, and to prevent a borrower from increasing the bank’s load by returning the money. The banks say that if they allow easy foreclosure without any penal charges it may lead to asset-liability mismatch.

The Reserve Bank of India will be discussing the issue with the Indian Banking Association (IBA), a body of all commercial banks, after which it will formulate new prepayment norms including fixing the maximum and the minimum amounts that a bank may charge.

However government requires that banks should give two-month window to new borrowers to shift to some other bank without a prepayment penalty if they have raised interest rates too quickly after disbursement. The finance ministry will be discussing this matter with the Reserve Bank of India to make these changes

Prepare checklist before finalizing bank for home loan

Generally,in order to buy a house we take home loan from banks and 70-80 percent we get from banks and rest is financed out of our own resources. Here we will discuss some factors which should be taken into consideration before taking a final decision from whom to borrow and how much to borrow.

First you should prepare a checklist covering specific areas which can be prepared while discussing with a prospective lender. This helps in making a comparison and take a final decision.

The points to be covered in checklist:

Purposes for taking the loan – to purchase plot, for construction or for both. Then how and when will the bank give the loan amount. Documents required for getting loan, Eligibility to be a co-applicant. How much time bank will take to disburse the loan amount?

Usually bank takes 7-10 working days to disburse loan amount. Then you must know when EMIs start, method of implementing interest rate change - reduction/increase in tenure or EMI Method of calculating interest rate. Guarantor requirement, phases of the loan disbursement, legal and verification fees payable by the borrower, rate of interest and effective rate of interest. The effective interest rate will help in making comparison.

Then there are commitment charges payables, if any processing charges payable by the borrower, procedure for switching over from floating to fixed rate or vice versa. The terms and conditions related to charges payable.

In case of purchase of land and construction loan, you must check whether bank will sanction separate loans or a composite loan. Also monthly EMI amount, mode of payment of EMIs direct transfer from bank account, postdated cheques or debit from salary, offer of a free or concessional insurance policy for the loan, house or against personal accident Impact of part prepayment on EMI - reduction of EMI amount or reduced number of EMIs.

These factors will help in preparing preliminary checklist only there are many more factors. Thus, this will help you in comparing and negotiating with banks for a good deal.

Options to increase home loan eligibility

Normally 70 per cent and 80 per cent of the loan-to-value ratio is sanctioned to home loan borrower. This can be increased by providing collaterals in the form of life insurance policies, national saving certificates (NSC) and other investments.

Usually people avoid home insurance policy due to added costs but it is useful if unfortunately borrower expires. Here we will discuss about the investment options which can be used as collaterals with bank to increase the loan eligibility.

Life insurance: As many people do not buy home insurance policy therefore a life cover can be used as collateral. In case you do not have a life cover, then banks insist you have a term policy at least. S Govindan, general manager, Union Bank of India, said, “We encourage borrowers to take up a separate life cover for a home loan, as the life insurance policy is meant for dependents in an unforeseen situation.”

Bank uses this collateral to recover their loan amount unfortunately the borrower expire during the repayment period. In such case lender then either request the insurance company to remit the entire amount due to them. The lender, on its part, will adjust the loan outstanding and pay the balance to the borrower’s family or legal heir.

If all the debt has been cleared the policy papers are returned by the bank. The bank will write to the life insurance company to reassign or transfer the ownership back in the name of the borrower.

Shares: If shares are kept as collateral, the borrower has to transfer the ownership to the bank. K V S Manian, head (retail banking), Kotak Mahindra Bank, said, “Shares are in the demat form and therefore, need to be transferred in the name of the lender.”

In case during the repayment period borrow expires then the lender can recover the outstanding loan amount by selling the shares. The leftover amount is paid to the family.

The shares have additional benefit that is their value increases and makes it easier for the banks to recover the loan. A banker said, “In many cases, the borrower’s dependents also get some amount.”

Other investments: The long term investment instruments such as NSC, Indira Vikas Patra, Kisan Vikas Patra and Mutual Funds can also be kept as security. According to experts it is discouraged, “These are meant for dependents of the borrower in an unfortunate circumstance. By using it as a security, the purpose is defeated,” said Govindan.

Like shares these documents are also needed to be endorsed in the name of the bank, if taken as security for a loan. “Mutual funds are liened to the bank. But investments are considered only for high net worth clients who will not need to liquidate the investments,’ said Manian.

If, unfortunately borrower dies, a similar formula is used as before.

Property: In case you own more than one property then you can used it as collateral. In this case transactions are done in two ways:

1. The property documents are to be kept with the lender.

2. The property is registered in the name of the lender till the financial obligations are over.

“In most cases, the property is equitable,” said Manian. In case the borrower dies before the settlement of the loan, the lender can sell the property and recover the loan amount.

Fixed deposits (FDs): You can keep FD as collateral with the lender but the FD should be of the same bank from which you have taken home loan. In this case also if the borrower dies before the settlement of the loan the outstanding is recovered from this.

Public Provident Fund: The banks have stopped accepting PF. “PF is not an instrument, it is an account,” said Manian. Reason being, as per law, no authority is allowed to freeze your PPF account except if it is to set-off your income tax.

SBI further extended home loan teaser rates till June 30

The State Bank of India (SBI), country’s largest lender has further extended its home loan teaser rates by two months till June 30.

Earlier bank had extended the scheme till April 30, as the scheme is popular with the customers and also bank has surplus liquidity therefore it has decided to extend its special concessional home loan rate scheme, an anonymous SBI official told the press.

The official said, "This scheme is very popular with customers. As far as liquidity is good, we can continue with this scheme".

No changes have done in the rates for the first three years but the rate for fourth year onwards has been slightly reduced.

For the first year, the home loan interest rate is 8 % and for the second and third years the interest rate will be 9%.

Then from fourth year onwards, on home loans up to Rs 50 lakh bank will charge 9.25% interest rate while higher loans will carry 9.75 per cent interest rate.

At present, from the fourth year onwards the scheme is offering 10 per cent interest rate.

Under the teaser rate schemes banks offer concessional home loans to borrowers in the initial years, thereafter the interest rates increases to align with prevailing market rates.

The government and the RBI has shown concern over these schemes and said these may impact financial stability of lenders.

However the two other banks ICICI bank and HDFC Bank had also re-introduced their teaser rate schemes but on Friday the schemes of both the banks had expired and they have no plans of extending it.

Muthoot Group to foray in home loan segment, drops banking plans

Muthoot Pappachan Group, a Kerala based finance group is planning to enter the housing finance business in the country by setting up a separate subsidiary in the next fiscal. Earlier group was to apply for a banking license but it has dropped its plan.

In its subsidiary, Muthoot Housing Finance Limited, group is planning to invest around Rs 100 crore over the next two years. The subsidiary will be a wholly –owned subsidiary of Muthoot Fin Corp.

In the beginning the new entity will target the affordable housing segment and will be disbursing small-ticket loans up to six lakh

Initially 25 branches of Muthoot Housing Finance will be opened in the suburbs of major metros like Mumbai and Chennai, the Group’s Chairman and Managing Director, John Muthoot informed.

Muthoot told media over phone, "Setting up a housing finance company is part of the group's strategy to take our operations into the next level. This would also hugely benefit the lower income segment to secure a home loan without much hassle."

Muthoot told it dropped the plan of entering into banking because it wants to assist the group’s smooth entry into the home-finance segment and also to increase its non-banking finance operations. At present group’s annual turnover is Rs 20,000 crore and a customer base of over 10-lakh.

Muthoot said, "At first we thought of doing that (applying for banking license). But, later decided not to apply for the banking license as we felt that there is a lot of untapped potential in the NBFC business."

After the budget announcement the RBI will be considering giving banking licenses to corporates and NBFCs, Muthoot Group had expressed its intention to apply for the bank license like other players such as Reliance Capital and Bajaj Finserv amongst others.

Muthoot will be approaching the National Housing Bank for necessary approval to set up the new company. The group is hoping to start lending operations by the third quarter of next financial year.

"The idea is not to compete with large players in the segment but to tap the opportunity in the middle-class segment, which is yet to be explored fully. We are looking at customers, who have a monthly income in the range of Rs 6,000-Rs 12,000, with an average ticket-size of Rs 2.5 lakh-Rs 6-lakh ," Muthoot said.

At present larger players in home segment like HDFC and SBI are offering cheaper home loans (teaser), under which they are offering loans at a fixed rate as low as 8-8.25 per cent to woo small home buyers and entry of local players like Muthoot, is likely to intensify the prevailing competition in the small loan segment. Muthoot group started in 1939, is running two NBFCs, Muthoot FinCorp and Muthoot Capital Services Limited, is having a good hold in the southern cities of the country.

At present the group is offering services in brokerage, auto, gold and mortgage finance, Hospitality and infrastructure. Muthoot Fincorp is having over 360 branches and offers products and services like gold, and auto loans, money transfer and investment solutions.

MCSL is offering capital market solutions including leasing and hire purchase, vehicle Loans, bonds and deposits.

Axis bank launched special scheme offering home loans at 8.25 percent fixed rate

Two months before Axis bank had launched Power Plus Home Loans offering 8% interest on home loan for the first year and after offer period floating rates will be applicable, similarly as country's largest lender, State Bank has offered an interest rate of 8 percent on home loans. Now the bank has launched its special scheme under which it is offering home loans at 8.25 percent fixed rate for the first two years irrespective of loan amount.

The new scheme will be open till March 31, 2010. After two years the bank will charge floating rate of interest based on the mortgage reference rate.

According to bank statement on loans up to Rs 30 lakhs, rates will be MRR minus 3.5 percent, while for loans above Rs 30-lakh the bank will charge MRR minus 3 percent.

Axis Bank's president-Retail Banking, Manju Srivatsa said, "The bank decided to launch the scheme--Power Advantage Home Loan--based on extensive interactions with our customers and market feedback."

Srivastava stated, "We feel that this is the right time to launch the Power Advantage Home Loan scheme. This expands our home loan portfolio, enhances our product offerings and reiterates our commitment to help home buyers in their desire to have a home of their own."