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BY:TANU MOTWANI

PGDM (FINANCE)-09DM149

BIRLA INSTITUTE OF MANAGEMENT TECHNOLOGY,

GREATER NOIDA

2009-2011

FACULTY GUIDE: DR. L.RAMANIINDUSTRY GUIDE: MR. RAJENDER GAUR

SUMMER INTERNSHIP REPORT

THE CREDIT PROCESS

Faculty Guide: Industry Guide:

Prof. Dr. L. Ramani Mr. Rajender Gaur

Birla Institute of Management Technology General Manager(Operations)

Greater Noida Vishwakriya Housing Finance Ltd,

New Delhi

BIRLA INSTITUTE OF MANAGEMENT TECHNOLOGY (BIMTECH)

GREATER NOIDA

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3

TITLE:

Aligning, reinforcing and enhancing existing credit processes, by developing metrics and measures, capturing data points in loan applications, appraisals and records (files, computer systems), with a view to analyzing and mitigating risk related to credit of loanees.

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Summer Project Certificate

This is to certify that Ms. Tanu Motwani, Roll No. 09DM149 a student of PGDM(Finance) has

worked on summer project titled” THE CREDIT PROCESS”, at Vishwakriya Housing Finance

Ltd., after trimester –III in partial fulfillment of the requirement for the programme. This is her

original work to the best of my knowledge.

Date:______________ Signature: ________________

(Faculty Guide: Dr. L. Ramani.)

BIMTECH SEAL

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ACKNOWLEDGEMENT

I am extremely grateful to Mr.Rohit Mishra, Chief Executive Officer, VHFL,for giving me the opportunity to work on this project, which helped me learn a lot and integrate my theoretical knowledge with the practical workings of a fast developing company.

I would also like to thank my project guide Mr.Rajender Gaur, General Manager, Operations Vishwakriya Housing Finance Private Ltd, New Delhi for guiding me through my Summer Internship project in spite of his busy schedule . His encouragement, time and effort are greatly appreciated.

I sincerely thank my faculty guide Prof. Dr. L. Ramani, Department of PGDM (Finance) at

Birla Institute of Management Technology, Greater Noida for supporting me during this project

and providing me all the inputs necessary to carry out this project.

And, I would like to thank all the respondents for sparing their precious time to offer their

valuable opinions and suggestions through the survey that was conducted by me in course of this

project.

Finally, my heartfelt thanks to all the people and staff at Vishwakriya Housing Finance Ltd,

respected faculty members at BIMTECH and all my beloved friends who have directly or

indirectly appreciated, criticized and supported my work and helped me to remain motivated for

the completion of this project.

(Tanu Motwani)

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CERTIFICATE FOR COMPLETION OF PROJECT

This is to certify that Ms. Tanu Motwani has successfully completed the project on “THE CREDIT PROCESS” at Vishwakriya Housing Finance Limited, Delhi as part of the requirement of the fulfillment of course curriculum for the award of the Post Graduate Diploma in Management (Finance) under my guidance.

Signature of Faculty Guide:

Prof. Dr. L. Ramani

Birla Institute of Management Technology

Greater Noida

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S. No. Particulars Page .no.

Cover page 1,2

Title of the project 3

Summer project Certificate 4

Acknowledgement 5

Certificate of completion(faculty guide) 6

Certificate of completion(industry guide) 6

Executive Summary 8

1

1.1

1.2

1.3

1.4

Introduction

What is Housing Finance

Industry Overview

Present Situation of Housing Finance Industry in India

Home Loan providers in India

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10

11-14

15-20

21-24

2

2.1

About Vishwakriya Housing Finance Ltd.

SWOT analysis of company

25-27

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3 The existing credit process of the company(VHFL) 29-32

4

4.1

The proposed process of the company(VHFL)

Benefits of the proposed process

33-85

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5 New proposed loan policies(VHFL) 87-116

6,7,8 Conclusion, Bibliography 117-121

7 Appendix (1- 8) 122-140

TABLE OF CONTENTS

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EXECUTIVE SUMMARY

Vishwakriya Housing Finance Ltd. (VHFL) is a public limited company incorporated in 2000 with the Registrar of Companies (Regn No.: 55-104956).

It is a Housing Finance Company (HFC) registered and regulated by the National Housing Bank (NHB), a wholly owned subsidiary of the Reserve Bank of India. VHFL was registered in 2002 by the NHB, and subsequently issued with permission to raise public deposits (Certificate of Registration No. 01.0059.04 dated 7 October 2004). VHFL is one of only about 20 HFCs issued with such permission as of date.

The Company operates two satellite offices for purpose of loan origination and client service in Palwal and Gurgaon, both within Delhi NCR. It is anticipated that this network of service centres, supported by the controlling branch in Delhi (South Extension, NDSE-II), will grow further in the following year as disbursals grow in the core market of Delhi NCR, as well as in Jaipur-Alwar (Rajasthan) and Bhubaneswar-Cuttack (Orissa).

The Company has recently taken up a new corporate office in Green Park, New Delhi.

This project covers two parts which starts with the existing credit process in order to get insight into the operations of the company. The next part deals with enhanced credit process. After the execution of the enhanced process the credit risk would mitigate considerably and the company which is on the expansion mode would be able to operate efficiently and sustainably for business 4 times more than at present. The last part deals with the ERP input sheets and MIS report structures through which the company can analyze its business and grow further.

PART 1: The existing credit process of the company is efficient for small business volume and is done majorly manually. The main objective of studying the existing process was to get the insight into how the loans are processed and what all parameters are considered for sanctioning the loan. The result of the study helped in identifying the loop holes in the system, making it more robust to sustain almost 4 times more business than at present.

PART 2: The proposed process lays down all the procedures and intricacies of the entire credit process step wise which would immensely help the credit department team to sanction the loan filter the high risk applicants from the low risk applicants hence mitigating the risk considerably. It also standardizes the entire process so that it can be replicated at multiple branches of the company which is on the fast track expansion in the next 2-3 yrs as it will be operated through the ERP system already existing with the company which non-functional earlier is integrated in the proposed process.

PART 3: This part of the project proposes the new policies suggested to the company in order to upscale the business keeping a futuristic view. This will help the company have clarity in all the norms governing the credit process while appraising, sanctioning , disbursing loans as well as while collecting the repayments.

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1. INTRODUCTION

1.1 WHAT IS HOUSING FINANCE?

Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers. For example, what is understood by the term “housing finance” in a developed country may be very different to what is understood by the term in a developing country.

The International Union for Housing Finance, as a multinational networking organization, has no official position on what the best definition of housing finance is. However, the selection of quotes below is offered as a snapshot of what housing finance as a topic covers:

“Housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a country’s legal environment or culture, economic makeup, regulatory environment, or political system”

(2009) Loïc Chiquier and Michael Lea, Housing Finance Policy in Emerging Markets, p. xxx.

In addition, the concept of housing finance and housing finance systems has been evolving over time. Looking at definitions from the mid-1980s, we see that housing finance was defined primarily in terms of residential mortgage finance:

“The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.”

(1985) Mark Boleat, National Housing Finance Systems – A Comparative Study, p. 1.

However, in more recent years, a number of other much wider definitions have appeared:

“Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nation’s housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.”

(2009) Peter King, Understanding Housing Finance – Meeting Needs and Making Choices, p.3.

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or

“There is recognition of other relevant forms of housing finance [apart from residential mortgage finance] such as developer finance, rental finance, or microfinance applied to housing. Developer finance is often in the form of unregulated advance payments by buyers, and developers sometimes provide long-term finance to buyers through installments sales when mortgages markets are not accessible. Microfinance for housing is typically used for home improvement or progressive housing purposes. Loans are typically granted without pledging properties. Although the overall impact of microfinance in housing remains limited, this activity can represent an important source of funding for those in the informal sector.”

(2009) Loïc Chiquier and Michael Lea, Housing Finance Policy in Emerging Markets, p. xxxii.

1.2 Industry Overview

Traditional Structure of the Mortgage Market in India

The government’s support to housing had traditionally been centralised and directed through the State Housing Boards and Development Authorities. In 1970, the central government set up the Housing and Urban Development Corporation (HUDCO) to finance housing and urban infrastructure activities. In 1977, Housing Development Finance Corporation (HDFC) was the first housing finance company in the private sector to be set up in India.

The public sector insurance companies – Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) were also mandated to support housing finance activities, both directly through their housing subsidiaries (both established in 1989) and indirectly through a mandated requirement to invest a certain proportion of their annual accretion in socially oriented schemes which includes housing.

In 1988, the National Housing Bank (NHB) was established as a 100% subsidiary of the Reserve Bank of India, (the central bank of the country), to promote housing finance through a refinance mechanism to banks, housing finance companies (HFCs) and other institutions and also to function as the supervisory and regulatory body for housing finance companies.

Currently there are 20 HFCs approved for refinance assistance from NHB.

Although commercial banks were the largest mobiliser of savings in the country, traditionally banks were rather reluctant to lend for housing as they preferred financing working capital needs of industry. Several banks had set up housing finance subsidiaries which functioned as independent units with little support or interest from their parent bank.

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The housing finance sector in India has undergone unprecedented change over past ten years. As far as the contribution to GDP is concerned, it is among the most important sectors of the Indian economy. Its importance

Engine for equitable economic growth Poverty reduction Taking part in financial sector liberalisation Create and meet growing housing demand

Characteristics of growth over the years

Prior to 1980s

Specialised lenders, HFCs Bank/insurance companies sponsored HFCs Builder and Company promoted HFCs

1983-2003

Aggressive entry of banks- existing players lose their market share Irrational competition Rapid disbursement Credit quality issues

2003 onwards

Oligopolistic market share, but most incremental growth comes from a few More rational market Sustained mortgage growth at 25%

Influencing factors

Socio cultural factors such as lifestyle changes, regional shifts and growing population Economic factors such as fiscal concessions, interest rates and inflation Technological factors such as hardware and software improvements Regulatory factors such as RBI and NHB regulations

Low Mortgage Penetration

Despite the frenetic pace of growth in housing finance over the past five years in India, mortgage penetration as a percentage of GDP remains low; approx 6-7% (NHB, 2007).This is low when compared with countries such as the China and Malaysia, where the combined value of mortgages passes 12% and 22 % respectively of GDP. India’s performance has is on the upswing and is currently low as the trend has started not long ago. This means that there are considerable

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growth opportunities in housing finance. This is further corroborated by the fact that despite the recent, impressive rate of growth in the housing finance sector, financing through the organised/formal sector continues to account for only 25 % of total capital expenditure in housing in India (ICRA, 2003) which is primarily met by the formal sector. With growing demand for housing, there is plenty of room for entry and growth of the informal sector as well.

Trends and characteristics of Indian Housing Finance Industry

Increased Urbanisation

As the Indian economy’s dependence on agriculture keeps decreasing, stronger economic growth has also opened up many new avenues for employment, especially in urban areas. Growing urbanisation and occupational shifts from agricultural to manufacturing and services-related jobs have been well correlated with changing attitudes towards consumption and retail finance (SSKI, 2006). As a result, India continues to undergo a transformation with rapid migration to the urban areas. India’s urban population is expected to increase rapidly while the rural population experiences slower and eventually negative growth. An expanding urban population keeps the housing stock under pressure and creates demand for housing finance. This will also create newer segments that need to be tapped to sustain long term growth.

Favourable Socio-Economic and Demographic Factors

The socio-economic break-up of the Indian population can be seen as a pyramid, with a substantial low-income segment of the population at the base (incomes below INR 1 lakh), a growing middle class (incomes between INR 2 lakh and 5 lakh per annum) and a small, affluent/rich class (incomes above INR 5 lakh per annum) at the top. This structure is expected to change towards a ‘diamond’ shape by 2010, as the middle-income group becomes larger with a substantial segment of the lower income group expected to move up to the middle income segment. India is one of the youngest nations in the world with an average age of 28.4 years. Being more economically secure with a dynamic job market and strong growth, the new urban population is likely to resort to housing credit earlier in life. This is reflected in the fall in the age of an average home loan borrower from about 45 years to a 30-35 year range today. The ‘working population’, defined as being between 15 and 64 year old, is expected to increase from 62.5 % in 2002 to over 70 % in 2030 (NCAER, 2005). The target age group for retail, and for that matter housing, finance is between the ages of 25 to 59 years and is expected to grow at a CAGR of 2.1 % over 2002-2011, compared with an overall population growth of 1.5 % over the same period (SSKI, 2006).

Enhanced Affordability

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Housing today has hardly ever been at more affordable levels in Indian history. Estimates show that affordability (i.e., the ratio of the price of a residential property to the annual income of the borrower) has improved significantly. For instance, for a typical Mumbai suburb in 1995, it took about 22 times a borrower’s total annual income to purchase a house, while in 2006 this ratio dropped to only five times (HDFC, 2006). Such enhanced affordability can also be attributed to the rapid rise in household earnings over the past decade. The average household income in urban areas has grown at a compounded 10 % in nominal terms over the last decade (CRISIL,2006).

Tax Benefits

In order to help boost home ownership, the government has offered tax incentives to individuals who opted for home loans. Interest payments on a housing loan up to INR 150,000 per annum and annual repayments up to INR 100,000 are eligible for deduction from a borrower’s gross income. These tax benefits have considerably reduced the effective rates of interest on loans, to the extent that it is more beneficial to borrow from a bank or housing finance company than to use one’s own funds. For instance, a borrower opting for an INR 2 million, 15-year loan at 9.5 % per annum will effectively be paying an interest rate of 5.68 % per annum (HDFC, 2006). While various tax committees have declared in favour of removing a host of current exemptions and deductions in the Income Tax Act, it is unlikely that the government will eliminate those on housing loans, in recognition of the fact that fiscal incentives have boosted home ownership.

Key Dynamics of Housing Finance in India

The increasing availability of housing finance & low interest rates have driven the boom in housing purchases

Housing finance penetration is expected to improve in urban areas & reach 38% by FY13 & reach 6.5% in rural areas by FY13

Disbursements

Between FY03 -FY08, housing finance outstandings are estimated to have grown at a CAGR of about 31%, mainly driven by disbursements

Key drivers for growth in disbursements:

1. Extensive branch networks of lenders across India2. Increasing acceptability of loans among customers3. Comfortable customer earning profile, as the majority of customers earn salaries and have a stable source of income4. Comfort of lenders in the sale of collateral in case of defaults

Interest Rates: Indian HF principally based on floating rate lending

Reflected in LIC HFL’sloan portfolio, with ~96% of its individual loan approvals being floating rate loans as of the year ended FY 09

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Housing loans are offered for an average tenure of 13-15 years, while liabilities for lenders are generally for less than 10 years

Floating rates are reset when the cost of funds for lenders increase

Average Ticket Size (ATS)

ATS for new homes is estimated to have grown at a CAGR of 18% in urban areas & at a CAGR of 12% in rural areas

Competition- Here lays the growth

The industry has seen competition at level of borrowing at and above INR 10 lakh. However, majority of population requiring housing finance falls in the bracket of INR 3-7 lakh. As mentioned in above points, this segment is among the fastest increasing segment with enormous demand for housing finance. Almost all key players refrain from granting the above mentioned loan amount. Thus, this segment offers huge scope of growth. The customer base comes from upcoming Indian middle class which would require housing in abundance. With time, more players are expected to enter this segment. The above mentioned segment is a niche segment and more understanding of the customers of this segment is needed. This calls for more field research and developing more customer friendly offerings. With carefully drafted offerings, growth can be tremendous. As of now, there are hardly any players in this segment. And getting access to specialist housing finance companies is difficult for lower income group. Understanding the prospects offered by this sector, VHFL has targeted it with its unique offerings that can fulfil customer needs.

Challenges and Issues

Variation in standards Cost of funds Due diligence issues Industry fragmentation Conflicting interests Micro financing for houses Reaching a potentially large base of customers Getting access to reliable information about borrower’s credit history

The Way Forward

Segmented approach Introduction of new products pertaining to needs of the customers Consumer awareness and information Building information database Introduction of safety nets such as mortgage insurance, better access to credit history Address long term funding issues

1.3 Present Situation of Housing Finance Industry in India

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Life cycle position

Housing finance as a financial service is relatively young in India. The growth in housing and housing finance activities in recent years reflect the buoyant state of the housing finance market in India. The real estate sector is the second largest employment generator in the country.

In 1970, the state set up the Housing and Urban Development Corporation (HUDCO) to finance housing and urban infrastructure activities, in 1977, the Housing Development Finance Corporation (HDFC) was the first housing finance company in the private sector to be set up in India.

Currently there are 29 HFCs approved for refinance assistance from NHB.

The following types of home loans are generally available in the market:

·         Home Equity Loans: A form of finance to the customer by way of mortgage of existing property to the financier for taking a loan for some other purpose. The current market value of the property is the basis for providing home equity loans.

·         Home Extension Loans: The purpose of this loan is the extension of existing houses tike the addition of rooms, toilet facilities etc. Such loans fall under the category of home loans.

·         Home Improvement Loans: These loans are provided mainly for repairs and maintenance of existing houses- These could include internal and external repairing, waterproofing and roofing, complete interior renovation, tiling and flooring etc.

·         Home Purchase Loans: Finance provided for the purchase of ready-made houses.

·         Land Purchase Loans: These loans are being provided for the purchase of land for the purpose of construction of residential houses.

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Business cycle

External Factors

Government 

Policy Annoucement in Last Quarter 

NBFCs’ growth had been constrained due to lack of adequate capital.

On 2 January 2009, the government and the Reserve Bank of India announced another set of measures to stimulate the economy, after having announced a few measures in December 2008. The package focuses on:

Reviving demand for the housing sector by facilitating Rs.4,000 crore refinancing facility for National Housing Bank (NHB), granting priority sector lending status to loans upto a maxi mum limit of Rs.20 lakh per dwelling per family by housing finance companies with the approval of NHB, concessional treatment to commercial real estate loans which have been restructured upto 30 June 2009 and lowering the interest rates on home loans upto Rs.20 lakh.

The package will not provide a major boost to the residential market immediately as property prices play an important role while making a buying decision. Property prices continue to remain

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high with an average home in metro cities costing well above Rs.20 lakh, the upper limit of the amount on which interest rate concession is granted.

The government eased the external commercial borrowing (ECB) norms by allowing non-banking finance companies and housing finance companies to raise money overseas through FCCBs subject to RBI approval.

General Policy 

Policy Changes Expected in the Near Future 

Social

The mortgage penetration continues to remain abysmally low – in India the mortgage to GDP ratio is at around 6% (in FY08) against over 51% in the USA. Even if one were to benchmark against more comparable counterparts, the ratio ranges from 15% to 20% for most South East Asian nations.

High down payment requirement and non-availability of the title deeds in the absence of land records are some of the reasons responsible for the inability of the companies in reaching out to the vast population living in rural areas.

Demographic

Housing finance assistance of formal institutions has been limited to the middle-income and high- income groups. Companies have also not been able to penetrate the rural areas.

Demand Analysis

End users

The housing finance sector in India has undergone unprecedented change over the past two decades. The consumption pattern amongst the Indian population is expected to change by 2013. The strivers are less but aspirers and rich are significant higher compared to 2003.  

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Real and Nominal Growth

The tower interest rate regime, rising disposable incomes, stable property prices and fiscal incentives made housing finance attractive business for commercial banks. Further, housing finance traditionally has been characterized by low nonperforming assets (NPAs) and given the vast demand for housing loans, almost at t the major commercial banks plunged into the business of housing finance. The robust growth during the last decade has been triggered by a number of factors, some of which are listed below:

·         Tax rebates on housing loans announced consistently in the annual budgets of the country.

·         Fatting interest rates on home loans: Fixed interest rates calculated on an annual rest basis for a loan of Rs. 1 million for tenure of 15 years have fatten from 16% in 1997-98 to 9.5% in 2005-06. Floating rates for short maturity housing loans are today hovering in the range of 7.75-9.75%.

·         Greater amount of professionalism of the real estate developers and builders who are capable of acquiring clearer titles and completing the projects on time.

·         Borrowers can raise up to 100 % of even 110% (in which case the tenders provide financial assistance for the complete property value, stamp duty, registration and an additional 10% is given for the interior decorations) of their borrowing requirement from the tenders.

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The Home loan sector in India is the pi-votal role player in the growth of the real estate scenario in India. With tax incentives given to the housing finance sector in the annual budget of 2001, transactions related to buying and selling of residential properties increased considerably and was much higher as compared to previous years.

Since the new class of buyers are relatively younger set of customers who are more aware about legal documentation and approvals, buyers are now more 'end-users' rather than investors; the property market in India undergoes transformation to align itself with global standards with an increased emphasis on quality & cost control and documentation methods. In the current economy of India, the real estate sector has the maximum propensity to generate income and demand for materials, equipment and services. It can be said that housing finance companies were formed for co-existing with buyer's requirements of housing loans for investing in properties. Home loans are made available by financial institutions to both Indian and NRI customers at floating and fixed rate of interest and also at attractive EMI options.

For construction or buying a new home

For home repairs and renovations

For purchase of plots

Against mortgage of property

No tax benefits are available for NRI customers unless you file returns and thereby become eligible to avail of the tax benefits.

Besides home loans, Commercial property loans are also available and different financial institutions in India provide commercial loans at different rates and different upper limits.

Real estate loans are available to builders, promoters and real estate developers. The experience and financial standing of the builders is taken into account before the loan is granted which is to be returned with the minimum installments.

Today, the amount of money that a city dweller spends on rent is roughly the same, or only slightly less than the amount he pays as an EMI on a housing loan. Earlier the home loan sector in India was solely dependent on nationalized and public sector banks, but the entry of public sector banks into the housing finance business marked the beginning of the first round of interest

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rate cuts. And this reduction in interest rates has enhanced the borrowing power of customers. Moreover, HFCs are offering incentives to attract investors like

Some companies sanction the housing loan without requiring you to identify property as a pre-requisite for eligibility

Free accident insurance & property insurance

Waiving of pre-payment penalty

Waiving of processing fee

There are a few documents which the finance companies require for setting up criteria for eligibility of Home loans.

Salaried Employee Self-employed

The latest salary slip showing statutory deductions

Computation of income for the previous two years, certified by a Chartered Accountant

Form 16 (showing tax deducted at source by employer)

Profit & Loss Account and Balance Sheet for the previous two years, certified by a Chartered Accountant

Proof of age (birth certificate/voter identity card/passport/school-leaving certificate/valid driving license

Proof of age (birth certificate/voter identity card/passport/school-leaving certificate/valid driving license)

Proof of residence (phone bill/electricity bill/ration card).

Proof of residence (phone bill/electricity bill/ration card).

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The realty boom in India has given a new dimension to the finance sector in India - both in Home Loans and Home Insurance segments. This has not only given a competitive edge to the finance companies to provide attractive options to customers but has also contributed to the increased investments in the real estate sector. This has resulted in 13 new institutions foraying into the housing finance business in the last three years.

Major Home Loan Providers

Banks & Public Sector Housing Finance Companies

State Bank of India, Corporation Bank, Punjab National Bank, Central Bank, Dena Bank, Allahabad Bank, Bank of Maharashtra, Bank of Baroda Housing Finance, Can Fin Homes, GIC Housing Finance, LIC Housing Finance, PNB Housing Finance, SBI Home Finance, Cent bank Home Finance, HUDCO, LIC, etc.

Financial Institutions

HDFC, ICICI Ltd, Citibank, HSBC, Standard Chartered- Grind lays, IDBI Bank, etc

Home Loan Providers in India.

Real estate in India is currently one of the hottest investments options in Asia. A recent survey of the real estate scenario acknowledge the Indian metropolis of Mumbai, Bangalore and New Delhi as the top three investors' choices for real estate investment in Asia. But there were concerns mainly related to the availability of necessary funds for investment and in the more recent times, the boom in the real estate market opened the doors for a host of realty funds from financial institutions. Prior to five years, the real estate segment in India was neither organized nor were there too many large institutions in the construction industry. But now with an organized finance sector and with the increase in transparency levels, it has become easier to create financing vehicles.

The decrease in housing loan interest rates and an increase of disposable income has contributed largely to an increased demand in the residential segment. In spite of a rise in home loans interest rates and qualitative sanctions being levied by the RBI on banks, buying interest has not waned because home loans are still cheaper than ten years ago. The retail markets are also undergoing a defining change with the introduction of larger retailing formats. The financial institutions also wasted no opportunity in tapping the fund requirement catering to the inflow of potential buyers in the retail sector. While most funds were initially floated by financial Institutions or banks such

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as HDFC, ICICI Bank and IDBI Bank to name a few, real estate developers like DLF Universal and even retailers such as Pantaloons Retails (India) have now entered the real estate sector for creating more retail facilities and have been hugely successful.

As the realty prices in India skyrockets, housing complexes mushrooming and city landscapes becoming unrecognizable, the growth across all real estate segments and experts estimate that demand will remain steady at the currently high levels because of the improving economic environment and the real estate sector is expected to grow 30% every year. This rising property prices encourage banks and financial institutions to lend more with the increase in collateral values. Although the home loan providers have hiked their rates twice in less than three months, home loans continue to be nearly 45 per cent cheaper than what they were in early 2001. Because if statistics are referred to, the interest rates which now range between 9-10 per cent, are still much lower than what they were ten years ago, at 16-17 per cent.

In addition to funds being raised by the Indian financial institutions like HDFC, ICICI and IDFC abroad, the money could be used to develop business and IT parks and townships. A study has revealed that as many as one million homes are financed every year in India now with an estimated home mortgages market of US$ 10.7 billion - contributing to India's phenomenal realty prospect.

Tax Benefits on Home Loans

As the Indian real estate market makes an upward swing, and investors opt for housing finance or home loans, tax benefits obtained from them is a lucrative option. Customers availing of Home Loans can claim a certain portion of the interest and principal that they pay towards the loan installments for reducing tax liability. Resident Indians are eligible for certain tax benefits on principal and interest components of a loan under the Income Tax Act, 1961. Moreover, an added tax benefits under Sec 80 C on repayment of principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce your tax liability by about Rs. 30,000 p.a.

Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assesses, who have taken a loan to either buy or build a house, under Section 24(b). Interest on borrowed capital is deductible up to Rs 150,000 if the following conditions are satisfied:

Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.

The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed.

The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house

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A loan for refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction.

If the conditions stated above are not fulfilled, then the interest on borrowed capital is deductible up to Rs 30,000 though the following conditions have to be satisfied:

Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property.

Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.

If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07.

Terms and conditions for availing Tax benefits on Home Loans

1. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject o the stated upper limit.

2. An additional loan for extension/addition to the same house and the person's deductions on the existing loan are less than Rs 150,000; he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year.

3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits for the same.

4. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates.

5. The interest on home loans taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 150,000.

6. A husband and wife, both of whom are tax-payers with independent income sources, get tax deduction benefits, with respect to the same housing loan; to the extent of the amount of loan taken in their own respective name.

7. If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains tax liability arises on the same for which the individual is liable to pay short-term capital gains tax since the sale took place in the same year. But, if

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the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen.

8. If it is proved that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.

9. Tax benefits on interest on housing loans are allowable only for the original loan and for a second loan taken to repay the first loan and not for subsequent loans. This means that if you have already availed of one loan to refinance the original loan and want to now avail a third loan to refinance the second loan, tax rebate on interest payments will not be permissible. This is because the Section 24 (1) only talks of the second loan and not of subsequent loans. Even if you take the second loan at a rate of interest higher than the original loan, you will be eligible for a tax rebate on the second loan.

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2. Vishwakriya Housing Finance Ltd.

Company Background

Vishwakriya Housing Finance Ltd. (VHFL) is a public limited company incorporated in 2000 with the Registrar of Companies (Regn No.: 55-104956).

It is a Housing Finance Company (HFC) registered and regulated by the National Housing Bank (NHB), a wholly owned subsidiary of the Reserve Bank of India. VHFL was registered in 2002 by the NHB, and subsequently issued with permission to raise public deposits (Certificate of Registration No. 01.0059.04 dated 7 October 2004). VHFL is one of only about 20 HFCs issued with such permission as of date.

The Company operates two satellite offices for purpose of loan origination and client service in Palwal and Gurgaon, both within Delhi NCR. It is anticipated that this network of service centres, supported by the controlling branch in Delhi (South Extension, NDSE-II), will grow further in the following year as disbursals grow in the core market of Delhi NCR, as well as in Jaipur-Alwar (Rajasthan) and Bhubaneswar-Cuttack (Orissa).

The Company has recently taken up a new corporate office in Green Park, New Delhi.

Brief about Promoters and Directors

The company, at the time of incorporation, was promoted by seven directors.Presently, the Board has 10 members, comprising notable individuals retired from the civil service (Indian Administrative Service, Indian Audit and Accounts Service, etc.) as well as young professionals holding engineering and management degrees. The Board guides the management by providing strategic input and oversight, reviewing performance, ensuring governance and compliance, as well as authorising key decisions. It acts in the long term interests of shareholders of the Company, and to this end, oversees management.

The Shareholding

The Company’s equity is closely held, with four shareholder groups owning over 85% of the Company. The combined shareholding of Directors with families is over 68%. The Managing Director, along with family holds substantial stake, and therefore alignment in long term objectives between owners and management is assured, and the Company does not take an unduly short term view of its business.

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Growth in Sanction and Disbursements

Disbursals have grown at a Compound Annual Growth Rate (CAGR) of 67% since inception, against an industry CAGR of about 25% as indicated in NHB annual reports.

Rs, lacs

LOANS SANCTIONED 2004-05 2005-06 2006-07 2007-08 2008-092009-

10(Jan.10) 2009-10E

HUSING LOANS 141.31 216.3 337.3 99.00 72.00 671.66 1010.93

NON-HOUSING LOANS 20.64 16.50 55.75 60.95 35.95 24.21 112.32

CUMULATIVE TOTAL 161.95 394.75 787.80 947.75 1055.70 1751.57 2178.95

LOANS DISBURSED 2004-05 2005-06 2006-07 2007-08 2008-092009-

10(Jan.10) 2009-10E

HOUSING LOANS 136.81 212.8 253.25 99.00 16.25 671.66 1010.93

NON-HOUSING LOANS 20.61 16.5 47.75 60.95 33.45 24.21 112.32

CUMULATIVE TOTAL 157.42 386.72 687.72 847.67 897.37 1593.24 2020.62

The outstanding loan portfolio stands at Rs 1222.75 lacs as of 31 January 2010.

LOAN PORTFOLIO

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (Jan.10)

2009-10E

Housing 208.62 286.64 379.37 540.57 579.11 509.56 1103.43 1612.80

Non-Housing 25.53 7.47 18.13 69.65 107.7 120.61 119.32 179.20

TOTAL 234.15 294.11 397.50 610.22 686.81 630.17 1222.75 1792.00

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Growth in Profitability

The Company has been profitable since inception, showing EPS of Rs 0.85 in 2007-08 and Rs 1.24 in 2008-09. Post tax profitability has grown at a CAGR of 85% since 2003-04, which demonstrates the soundness of the Company’s business model.

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2.1 SWOT ANALYSIS

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PART 1

3. THE EXISTING CREDIT PROCESS

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3.1 Introduction

The company primarily targets the MIGs with loan requirement of about Rs. 7-10 lakhs. Typically, such customers fall in the earning bracket of Rs. 3-6 lakhs per annum. The company is also targeting upcoming towns and semi-urban areas as the targeted customer base is expected to be found in these areas in abundance.

3.2 Market StrategyVHFL is focused on the ‘newly bankable’ segment of the market, i.e. those lower/mid middle income households that are newly entering the formal financial services sector as customers. The Company aims to meet their dwelling needs in terms of buying a plot, or a constructed house or flat, typically in a Tier II or Tier III urban area. The typical size of housing loans the Company advances has been in the range of Rs 5-10 L, although it is likely to go up in the coming years. The Company advances non-housing loans as well, within NHB guidelines, but these are a small percentage of its business. The promotional activities the company wishes to undertake in future-

o Appropriate use of electronic and print media

o Co- hosting and sponsoring property exhibitions

o Tie ups with developers

o Customer education through free information

o Appropriate credit infrastructure

o Newsletters providing key insights into business challenges and offering solutions to them

o Stress on the fact that the best industry practices are followed in the company

o The processes followed are customer oriented

o Pay special attention to needs of customers in target areas, design appropriate offerings and advertise them at the earliest

3.3 The Existing Credit Process

The process of getting a home loan starts with a formal application for the loan. This includes personal, residential, income, employment, educational details, details about the property, estimated costs and current means of financing the property.

The application form must be supported with valid documents to substantiate the facts. Generally the company asks to submit following documents.

Income proof

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Age proof

Identity proof

Address proof

Employment details

Proof of educational qualifications

Details about the property if finalized

Bank statements

The purpose of the entire exercise is to ascertain the suitability of a applicant for a home loan. The income documents and bank statements provide vital clues to the bank regarding applicant’s financial health.

Valuation and verification of home loan applicant

After applying successfully for the home loan and submitting the processing fees, the company evaluates application, decides in principal about home loan and requires a personal meeting. This decision for personal interaction is taken within 2-3 days of submitting a complete application. The purpose of this personal interaction is to know more about the borrower and his repayment capacity.

Satisfied by application and personal interaction, the company proceeds to verify all the facts that are mentioned in the application for home loan. A field investigation process is initiated - to confirm and validate everything stated in the application form. Qualified representatives are sent to applicant’s office and place of residence to ascertain the facts. The references provided in the application are cross checked and verified.

Verification of repayment capacity

Once the field investigations over, the company goes ahead to verify repayment capacity. This is the most vital part of any home loan process. If the company finds that all's well and is convinced by applicant’s repayment capacity, it sanctions the home loan.

Offer letter for home loan

The company then prepares an offer letter which contains the following detail:

The amount of home loan sanctioned

The interest rate applicable on your home loan

Whether the interest rate is fixed or floating

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Your home loan tenure

The mode of repayment of the home loan

If any special scheme applies to the home loan, its details

The terms and conditions associated with the home loan

If the applicant finds the offer attractive and agree with all the facts mentioned in the offer letter, then provides an acceptance copy to the company.

Verification of the property

The company verifies the property in question. The home loan is a secured loan with the property being used as the security or collateral. So, the original documents of the property are submitted to the company. The title deeds, no-objection certificates and other documents required by the company are to be submitted in original and the company keeps them safely until the entire loan amount is repaid. After taking the papers, company conducts a legal check so as to verify that the property has a clear title and the home loan is being disbursed to the right person and for the right reasons.

Along with the legal check, company also sends experts to the location of the property to conduct a technical valuation. If the property is under construction, the company verifies the stage of construction, quality of construction, progress of construction, locality etc. and evaluate the property on established parameters. In case where the property is ready or is being resold the company verifies the ownership, maintenance, age of property, quality of construction, locality and required legal clearances.

The sole purpose of all this exercise is to ensure that the property has a clear title, is technically sound and meets the valuation standards of the company.

The disbursal of home loan

Once the formalities are completed and the company is satisfied with the legal, technical and financial valuation of the property, the registration process for the home loan begins. The legal documents are to be prepared on stamp papers of required denominations in a format approved by the company's lawyer. The home loan agreement is then signed and the post dated cheques are submitted for the agreed term. After the home loan agreement the loan disbursal process begins. Depending on the home loan purpose, and the agreed type of disbursal (lump sum or in stages), company disburses the home loan amount.

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PART 2

4. THE PROPOSED CREDIT PROCESS

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4.1 OBJECTIVE

Currently, the company has an ERP system that can only maintain the database for not a very large number of clients and it can generate the EMI schedules of the clients. It is not equipped to handle the work load of a large number of clients. Since the company wants to expand, it needs a robust system to help it cope with work pressures as well as help in ensuring compliance and smooth functioning of the company. It would also help in monitoring company’s performance and keep a tight control over various processes. The company wants that the ERP system should be able to perform the following functions-

ERP as a monitoring and controlling system:

1. Maintain a database of large number of clientsThis is necessary since with expanding operations, the clientele would also increase. Without the aid of an efficient ERP system, it would be difficult to get access to client databases and thus, efficiency would go down.

2. Function across the various branchesWith expanding operations, there would be branches at different places. To integrate the data and have a hard look at the functioning of the company, an efficient ERP is needed

3. Providing reports on a daily, weekly, monthly, quarterly, half yearly and annuallyThis is necessary to prevent financial mismanagement and also monitor the company’s functioning

4. Comparative presentation across various parameters.Aids various types of analysis and also helps in fathoming opportunities and problem areas

5. Ready with current status of all clientsThis is needed to reduce time taken to perform various tasks and thus, increase efficiency

6. Giving information about clients approaching their repayment dates, the cheque no., amount, bank and branch details, etcThis aids the collection process

7. Maintenance of all accounts as well as calculating the dues, arrears or any other payments that a client is required to pay

8. Generating snapshots about collections, work in progress, new clients added and defaulters on a weekly basisThis is needed to keep the functioning of the company smooth and sound as well as keep efficiency levels high. It can also be an indicator towards future issues and can also tell about

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the chinks in different processes and also if some processes are not being properly performed

4.2 THE PROCESS MAP

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CREDIT PROCESS

STEP 1

ON LOAN REQUEST (KNOW YOUR CUSTOMER)

Objective:

To lay down explicit criteria for acceptance of customers. To monitor high value cash transactions and /or transactions of suspicious nature. To develop measures for conducting due diligence in respect of customers and reporting

of such high value transactions. To manage the risk.

Procedure :

On getting a loan request from the sales executive, the team manager / appraisal officer should do the following.

Identify the source whether it’s through referral, advertisement, sales team or direct sales associate & enter in the ERP system.

Confirm the availability of KYC (Know Your Customer) details and the financial documents as mentioned in the checklist in the next step.

Ask for login fees (Rs. 2500 + Service tax)

Filling up of the application form, personal discussion and collection of supporting document

OBJECTIVE:

To verify the identity and /or obtain documents required for the risk categorization. To ensure that the identity of the customer does not match with any person with known

criminal background or with banned entities such as individual terrorists or terrorist organizations, etc.

To prepare a profile for customers based on risk categorization. (The customer profile must contain information relating to the customer’s identity, social/financial status, nature of business activity, information about his clients’ business and their location, etc. The nature and extent of due diligence will depend on the risk perceived by the company. However, the seeking of such information must not be intrusive and the Company must not use such confidential information cross selling or any other purposes).

PROCEDURE:

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Categorize the customers according to the risk perceived to facilitate undertaking due diligence for the purpose of risk categorization.

(i) Low Risk

Low Risk individuals are those individuals (other than high net worth) and entities whose identities and sources of wealth can be easily identified and the transactions in whose accounts by and large confirm to known profile. Low – risk customers will include

salaried employees whose salary structures are well defined people belonging to lower economic strata of the society whose accounts show small

balances and low turnover

(ii) Medium Risk

 The medium and high risk customers will be categorized on the basis of the customer’s background, nature and location of activity, country of origin, sources of funds and client profile. Medium Risk customers will include.

Non- resident customers. high net worth individuals.

 (iii) High Risk

High risk customer will typically include

politically exposed persons (PEPs) . persons with dubious reputation as per public information available. persons whose sources of income are not clear.

Accounts of such customers should be subject to intensive due diligence.

At the time of filling up of the application form the copies of the mandatory documents required as mentioned in the checklist must be collected by the sales executive.

Checklist of documents to be collected.

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MANDATORY DOCUMENTS / KYC DETAILS.

a. Residence Proof

For residence proof the following documents should be collected. (Self attested copy of any one) later to be verified with the originals by the verification officer/in charge before appraisal as mentioned in the verification step.

Ration card Passport Telephone bill Electricity bill Bank statementb. Identity Proof

For identity proof collect (Self attested copy of any one) later to be verified with the originals and concerned authorities as mentioned in the verification step.

PAN (permanent account number) Card Driving license Election Identity Card Passport.

Financial Documents.

1) For Salaried (Self attested copy of all of the following).

Salary slips of last 3 months. Latest Form -16. If salary above Rs.15, 000 p.m. Copy of bank Statement of salaried account or any other bank account for last 6 months. Company profile if it is a lesser known organization. Loan statement with current outstanding balance and overdue if any and repayment

schedule.

2) For Self-employed professionals. (Self attested copy of all of the following).

Last 3 years IT returns of the applicant along with computation of income self attested. Last three years Balance sheet and Profit & loss A/C of the firm self attested. Brief Business Profile on letterhead of the firm by the applicant. All bank statements for last 1 yr for saving A/C and Current A/C. Shop & Establishment License/registration/VAT registration/any other mandatory

license. Partnership deed (if applicable) TDS certificate i.e. Form 16-A(if applicable) Details of major financial transactions with the clients (if applicable)

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Advance tax paid/self assessment tax paid challan.

3) For Self-employed business. (Copy of all of the following).Self attested.

Last 3 yrs income tax return with computation of income self attested. Last 3 yrs Balance sheet and Profit & Loss A/C of the company self attested. Brief business profile on the letter head of the company. All bank statements for last 1 year for saving A/C and current A/C. Shop & Establishment License/registration/VAT registration/any other mandatory license. If Pvt. Ltd then MOU Partnership deed (if applicable) TDS certificate i.e. Form 16-A(if applicable) Details of major financial transactions with the clients (if applicable) Advance tax paid/self assessment tax paid challan. Details of contracts undertaken during last 2 yrs.(If applicable)

GENERAL DOCUMENTS

a. General documents (for all 3 categories of applicants i.e. salaried, self-employed, business)

Recent Passport size photographs of the applicant as well as the co-applicant. Details of existing loan (loan outstanding, total no: of installments and balance no: of

installments with schedule.) Property documents of the proposed property along with necessary approval & chain

title.

b. General document (for salaried)

Copy of employee Identity Card (to be verified with original at the verification step.)

c. General documents (for self employed professionals) (Copy of all) to be verified with original at the verification step.

Professional Qualification certificate. Practice Certificate. Salary certificate(in case of having salaried income)

d. General document (for self employed business) Copy of list of clients.

NOTE: Collect the Login fee/charges before the interview is conducted.

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Fix the interview.

The interview is fixed after the login fee is collected. The sales executive fixes the interview of the applicant with the team manager preferably at his/her residence/work place/branch office.

Also the applicant needs to be informed to bring the originals of the documents submitted with the application for verification.

INTERVIEWInterview of the applicants

OBJECTIVE:

To verify the details furnished by the applicant in the application form , documents submitted and during the personal discussion are consistent.

To assess the attitude of the applicant/s & elicit additional information.

PROCEDURE After the documents are collected, the team manager conducts the interview of the

applicants either at his work place or residence or branch office. It should be done within 2 days of the filing of the documents. The Interview

sheet should be attached along with the form as per the format and handed over to the appraisal officer.

Essential Points to be evaluated while interviewing applicant

A discussion /interview sheet has to be filled up by the team manager and put on record with his observations.

The discussion/interview sheet must contain the following information

Present accommodation / communication address with PINCODE.

Type of accommodation should be found as to whether it is (own, rental, parental).

Permanent accommodation with PINCODE should be recorded.

No. of dependants with their income, age, health issues like prolonged illness and education must be recorded.

Employment history must be known like :

Present Date of joining: Present Designation:

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Presently reporting to:

Record the past experience as well.

List of asset details like parental property, agricultural land, consumer durables, vehicles, other than current property.

List of liabilities details like loan availed from, current outstanding amount and no: of EMI, repayment schedule & any loan closure track record.

Check clients Banking habit:

Salary received through –cash/cheque. Salary variance: (If any) Like big cash flows and fund transfers from unknown accounts The above needs to be verified from the bank statements.

Get the information of the property to be financed like: landmark, land area, built up, market value.

Ask for collateral security like Life Insurance Policy, NSC and FDs .etc. if available.

Verification VERFICATION OF KYC DETAILS AND OTHER DOCUMENTS.

OBJECTIVE:

To ensure the authenticity of all the information furnished by the applicant in the application form, submitted documents, during personal discussion and interview.

PROCEDURE:

1. Residence Verification: This can be done by field executive/sales executive by personal visit and capturing information as:

The duration of stay. No: of family members. Life style (vehicle maintained, mobile brands, furniture, other appliances, travelling

mode (public/private). Locality. Accessibility of the address. Also the address verification like house no:/landmark needs to be recorded. Check the address with the telephone bills, electricity bills, ration card and election

Identity card or rental lease agreement.

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2. Photo Identity verification :

Driving license: The photocopies of Driving license should be verified by the original and if doubt, it can be cross checked with the respective RTO. Compare the photograph & signature.

Election I card: Verify by the original. Check the ID card No: photo, name, age, address, place of issue and date of issue.

Passport: Verify by the original and in case of doubt get it verified from the Regional Passport Office or from their official website.

Permanent Account Number Card: To be verified from the Income Tax department website: http://tin.nsdl.com/onlinepanintro.asp.

In case of valid PAN, name of the PAN holder, date of birth, father’s name , last date of PAN update as per ITD database and the status as “existing and valid” will be displayed.

If the PAN is a fake PAN as per ITD database, the status will be shown as “Fake PAN”.

In case the PAN is not found in database, the response will be “not in ITD database”. In such cases, if the user is able to provide a proof of this PAN (copy of PAN card or PAN allotment letter), NSDL will forward the same to ITD for investigation.

Check the signature of the applicant on the card with the signature on the form & login fee cheque.

3. Financial documents verification:

(For salaried)

Income Tax Return: The TDS amount can be verified from the website: http://tin.nsdl.com/onlinepanintro.asp. using the Permanent account number or from Income Tax Office.

Pay slips: The Salary amount can be verified by contacting the company’s accounts/finance/HR/administration department by asking about the last gross & net salary drawn by the employee and cross check the amount mentioned in the salary slip submitted by him.

Check for employers name and logo on the submitted pay slip.

Check the date of pay slips, as to whether they are latest pay slips.

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Check the name of the borrower, his designation and department, place where he is posted (site/branch/office), date of joining etc.

Check the structure of the pay slip and verify the same with appointment letter/F-16

Check the mode of payment. Cross verify and check the salary credits in the bank account.

Bank statements: The bank statements of (salary account as well as any other account) can be verified by checking the entries thoroughly for minimum of 6 months.(Checked for 6 more months in case of variances and doubt)

Checklist for bank statements.

Check the bank’s name and logo in all the statements.

Check for the name of the applicant in all the statements.

Check the Account No: of the applicant in all the statements.

Check the salary deposit amount whether it tallies with the pay slip submitted or not.

Check the EMI amount deductions for the loans availed earlier if any.

Check the deposits and withdrawals frequency and amount. (If in cash/cheque)

Check the cheque no: if withdrawals are through cheques.

Check the balance maintained every month.

Check for any peculiar variations in the deposits and the withdrawals. (Eg.1. If all withdrawal cheque no’s are in sequence and deposit cheque on same date of different months 2. Huge cash flows should be carefully examined and the source should be verified with the applicant)

Match the processing fee cheque a/c no: with the accounts disclosed, if it doesn’t match ,then ask for the statements of that account.

If any fund transferred from other account and not disclosed note it and ask for the statements of that account.

Cheque dishonored (deposit/withdrawal) if any, clarifications to be seeked.

Check for maintainance of minimum bank balance, cheque dishonored charges & ECS returns.

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(For self employed professionals)

Income Tax Return: The TDS amount can be verified from the website: http://tin.nsdl.com/onlinepanintro.asp. using the Permanent account number or from Income Tax Office.

Check name, address, father’s name and permanent address details. Check the status of the assessee, assessment year, ward, range where he has filed ITR Compare the acknowledgement seal by the IT department with range and ward whether

they are same. Check the serial no. & amount of ITR. Check the date of filing of each ITR to confirm that all the ITR’s are filed regularly. In

case 2 or more ITR’s are filed in one stroke or within a short period of 12 months, then such income should normally be not considered and we should ask for the copies of the TDS certificates or advance tax paid challans. If the documents prove the genuineness of income and if a satisfactory rationale is formed for not filling ITR’s regularly in respective years the case may be considered as special case with permission from sanction authority.

The payment of the Income Tax from the copies of challan should be counter checked from the bank statement of the applicant.

Mark one time income and expenses, if any in P&L account. Mark any cash losses for the current year as well as previous years. Check the carry forward losses in the financial submitted. Examine the no: of years it has continued to reflect in the ITR’s Check the source of “other sources of income” and the regularity of the same in previous

years. Examine whether the profit and depreciation have been calculated as per accounting

standards. Check the notes on accounts for any change in the accounting practice that may have

impact on the profitability. The business should be analyzed to understand the nature of risk, the dependence of

applicant’s income on the business and risk associated with the business should be analyzed. By calculating the following ratios:Current Ratio = Current Assets/Current Liabilities

Liquidity Ratio= Current Assets-Inventory/Current Liabilities

Debt Equity Ratio: Long Term Debt/Net Worth.

Interest Coverage Ratio: (EBIT+Depreciation)/interest payments

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Net Profit Margins: Net Profits/Sales

b. Profit - Loss Account and Balance sheet: Income-expenses in P & L A/c should be verified with ITR filed, expenses bills, salary slips of employees (if any) that are self attested. If income is more than Rs. 5 Lac p.a then should be certified by Chartered Accountant.

c. Bank statements: The bank statements of (personal as well as firm accounts) can be verified by checking the entries thoroughly for minimum of 12 months.

Checklist for bank statements.

Check the bank’s name and logo in all the statements.

Check for the name of the applicant in all the statements Check the Account No: of the applicant in all the statements Check the client fee deposit amount in the company account. Check the EMI amount deductions for the loans availed earlier if any. Check the deposits and withdrawals frequency and amount. (If in cash). Check the cheque no: if deposits and withdrawals are through cheques. Check the balance maintained every month. Check for any peculiar variations in the deposits and the withdrawals. .(eg.1. If all

withdrawal cheque no:s are in sequence and deposit cheque on same date of different months Huge cash flows should be carefully examined and the source should be verified with the applicant)

Match the processing fee cheque a/c no: with the accounts disclosed, if it doesn’t match then ask for the statements of that account.

If any fund transferred from other account and not disclosed note it and ask for the statements of that account.

Cheque dishonored (deposit/withdrawal) if any, clarifications to be seeked.

Check for maintenance of minimum bank balance, cheque dishonored charges & ECS returns.

4. Financial documents verification: (For self employed business)

a. Income Tax Return: The TDS amount can be verified from the website: http://tin.nsdl.com/onlinepanintro.asp. using the Permanent account number.

b. Profit - Loss Account and Balance sheet: Should be verified with ITR filed, expenses bills, salary slips of employees (if any)

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c. Bank statements: The bank statements of (personal as well as company accounts) can be verified by checking the entries thoroughly for minimum of 12 months.

Checklist for bank statements.

Check the bank’s name and logo in all the statements. Check for the name of the applicant in all the statements Check the Account No: of the applicant in all the statements Check the EMI amount deductions for the loans availed earlier if any. Check the deposits and withdrawals frequency and amount. (If in cash) Check the cheque no: if deposits and withdrawals are through cheques. Check the balance maintained every month. Check for any peculiar variations in the deposits and the withdrawals. Match the processing fee cheque a/c no: with the accounts disclosed ,if it doesn’t match

then ask for the statements of that account. If any fund transferred from other account and not disclosed note it and ask for the

statements of that account. Cheque bounces if any. Maintenance of minimum balance.

5. Employment Verification ( For salaried)

Call or personally visit the admin/HR dept. of the company/employer .The field executive/sales executive/appraisal officer/operations head where the applicant is working should verify the following details.

Date of joining. Employment nature( technical/ administrative/field/sales/high risk) Qualification details. Designation. Salary drawn gross & net (previous month) Other benefits entitled and availed.

6. Profession Verification ( For self employed professionals)

To check the financial stability of the applicant who is self employed professional verify the following details.

Office owned, or on rent?

No. of contracts on an average in a month. to be verified through their records maintained.

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Profit margin.

Type of service whether it’s in demand or not.

Competition level. (high or low).

7. Business Verification (For self employed business)

The business strength can be verified by checking

The turnover of business from the VAT payments paid by the company. Verify the stock of the company by checking the stock register or physically visiting the

factory. Check the no: of employees, salary paid to employees The product demand in the market. The daily sales of the business. No. of orders on an average in a month from their records. The profit earned. Other expenses as phone, transportation, rent, electricity by checking the bills. Competition faced (high or low) Locality of business should be identified as Industrial, commercial, semi-commercial,

residential colony, slum. The business premise ownership should be verified as to whether it is owned by the

applicant, family, on rent or is shared.

After the verification is done mark the documents collected and verified in the ERP software template.

If after verification the applicant’s financial position and other details are satisfactory then the team manager forwards the file to the branch manager or else asks for further information required from the client through the concerned sales executive.

Check for pendency of the additional documents required and confirmation of the documents & fees collected .

This should be done by the branch manager before the appraisal is done.

All the documents must be collected as per the observations made while verifying and then a list of pending documents needs to maintained and collected immediately within a week.

The pending documents required may be as:

Additional loan that applicant might have already taken before.

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Additional bank a/c statements that might have been observed during verifying the documents.

Other documents corresponding to reflections made while verifying the ITR.

The collected documents should be filed and recorded in the ERP system for appraisal.

Fee credited or not?

The branch manager should ensure that the fee is credited from the accounts officer before the file login. If the fee is credited then the file should be logged in or else it should be kept on hold and the team manager should be informed who further informs the applicant and gets the fee.

File Login

The file login takes place once the interview sheet information and the application form information is keyed in the ERP system by the team manager and the back office staff respectively.

Verification by personal visits

Appraisal process takes place in two phases.

Phase 1: The field officer visits the residence and the work place of the applicant and verifies the information in the interview sheet as well as application form and gives his observation about the same as follows:

Residence Verification:

The duration of stay no: of family members life style (vehicle maintained, mobile brands, furniture, other appliances, travelling

mode (public/private) locality Accessibility of the address. Also the address verification like house no:/landmark needs to be done. Check the address with the telephone bills, electricity bills, ration card and election

Identity card.

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Employment Verification (For salaried)

Call or personally visit the admin/HR dept. of the company/employer .The field executive/sales executive/appraisal officer/operations head where the applicant is working should verify the following details.

Date of joining. Employment nature Qualification details. Designation. Salary drawn. Other benefits entitled and availed.

Profession Verification (For self employed professionals)

To check the financial stability of the applicant who is self employed professional verify the following details.

Office owned, or on rent? No. of contracts on an average in a month. to be verified through their records

maintained. Profit margin. Type of service whether it’s in demand or not. Competition level. (High or low).

Business Verification (For self employed business)

The business strength can be verified by checking

The turnover of business from the VAT payments paid by the company. Verify the stock of the company by checking the stock register or physically visiting the

factory. Check the no: of employees, salary paid to employees The product demand in the market. The daily sales of the business. No. of orders on an average in a month from their records. The profit earned. Other expenses as phone, transportation, rent, electricity by checking the bills. Competition faced (high or low) Locality of business should be identified as Industrial, commercial, semi-

commercial, residential colony, slum. The business premise ownership should be verified as to whether it is owned by the

applicant, family, on rent or is shared.

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Phase 2: Interview 2 by appraisal officer:

Appraisal officer would conduct a telephonic interview or a personal interview of the applicant as well as the co-applicant and key in the financial and property details into the ERP system.

Appraisal Financial Appraisal

OBJECTIVE:

To check the creditworthiness of the applicant and the loan eligibility so that the repayment of the EMI is regular and on time.

To mitigate risk by considering the income, no: of dependents, assets & liabilities of applicant/s.PROCEDURE

After verifying all the documents the appraisal officer would evaluate the applicant on the following parameters and give his observations on the creditworthiness of the applicant.

(For Salaried)

Net Monthly Income. This can be computed as follows:

Calculation of Net Monthly Income for IIR (applicant and co-applicant)

Add Gross salary Add Incentive 50% of avg. of last six months. 50% of avg. of last six months (rental/part time/any other income) Deduct PF Deduct installment of Personal loan/other loan Misc. deductions Net income for IIR (applicant+ co-applicant): (Gross income- Gross deductions).

2. For Self Employed Professionals

Net Monthly Income.

This can be computed as follows:

Calculation of Net Monthly Income for IIR (applicant and co-applicant)

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Calculate average of last 3yrs Net profit as per P&L A/C after deducting tax paid for the respective year- (A)

Average Net Profit (A) x Multiplying Factor = B

Add:

a. Average of last 3 years depreciation(100%) as per the P & L A/C if assets are physically verifiable.

b. Any other income, not recorded in balance sheet whose source is verified at verification step.

Net monthly income = {B + (a+b)} / 12

NOTE:

In case applicant is a partner in a partnership firm, the multiplying factor will be allowed to the extent of applicant’s share in the net profit of the firm that too if it is a closely held partnership firm (family members). Similarly for considering depreciation it should be added only to the extent of the applicant’s share.

In case there is any extra ordinary income or expenses, deduct/add the amount from/to Net profit before arriving at the average profit.

Income Multiplier Norms:

1.5 -3 times depending on the qualification, and no: of yrs in practice.

Loan Eligibility Calculation:

Multiply NAI with respective IIR =(a) Total Fixed Obligation (if any) =(b) Amount available for servicing VHFL loan – (a-b) = c EMI per lac as per chart = d Loan amount c/d = Rs.____ lacs.

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3.For Self Employed Business

Net Monthly Income.: This can be computed as follows:

Calculation of Net Monthly Income for IIR (applicant and co-applicant) Calculate average of last 3yrs Net profit as per P&L A/C after deducting tax paid for the

respective year- (A) Average Net Profit (A)*Multiplying Factor =B

Add:

a. Average of last 3 years depreciation(100%) as per the P & L A/C

b. Any other income

Net monthly income ={ B + (sum of a+b)}/12

NOTE:

In case applicant is a partner in a partnership firm, the multiplying factor will be allowed to the extent of applicant’s share in the net profit of the firm that too if it is a closely held partnership firm (family members). Similarly for considering depreciation it should be added only to the extent of the applicant’s share.

In case there is any an extra ordinary expense or income, deduct/add the amount from/to Net profit before arriving at the average profit.

1. Income Multiplier Norms:

Max. 2 times of net profit after tax with proper justification.

2. Loan Eligibility Calculation:

Multiply NAI with respective IIR = (a)

Total Fixed Obligation (if any) = (b)

Amount available for servicing VHFL loan – (a-b) = c

EMI per lac as per chart = d

Loan amount c/d = Rs.____ lacs.

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4. Saksham /Samarth/NIP (for Non Income Proof Category)

Net Monthly Income. : This can be computed as follows:

Verify the business by personally visiting the business premises or work place.

Estimate the income and expenses by talking to the applicant as well as his clients and customers.

Minimum income of the applicant and the co-applicant together should be

a. If residing in Metropolitan :

Minimum Income: Rs. 7500

PCRI: Rs. 1500

b. If residing in State Capital:

Minimum Income: Rs. 6000

PCRI: Rs.1000

c. If residing in District or rural area:

Minimum Income: Rs. 5000

PCRI: Rs.750.

Per Capita Residual Income (PCRI): It is calculated by deducting all the liabilities like car loan installments, home loan installments other expenses from the Net monthly income calculated, the balance income left is divided by no. of members. It can be calculated by clubbing the income of all the working members of the family. The expenses estimate must commensurate with his lifestyle, the city where he resides and his spending habits.

Income Installment Ratio (IIR): It is calculated by dividing the monthly loan installment to net take home income. Lower the IIR, better the chances of an individual to service the loan efficiently.

Higher IIR can be considered for

For high net worth individuals. Highly qualified professionals Large savings in bank account If the margin money is higher i.e. more than 40% of the property cost. Additional liquid securities being provided as collateral

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EMI being paid by the employer directly.

Check the eligibility

The appraisal officer then checks the eligible loan amount after assessing the financial health of the applicant as explained above.

If the loan amount varies from the amount requested then branch manager views should be taken if the client accepts then the technical and legal appraisal should be triggered. If not then the process should be stopped at this step itself.

If the applicant is eligible for the requested amount or in case of any variations, if applicant accepts the variation then the documents must be handed over to the panel valuer & lawyer for the technical and legal appraisal.

LEGAL & TECHNICAL APPRAISAL

OBJECTIVE:

To ensure that the property proposed to be financed & mortgaged is marketable, enforceable and with clear title.

To reduce risk. To assess the quality of security for the loan, the margin provided i.e. value of property

minus loan amount.

To calculate Loan To Value Ratio & Loan To Cost Ratio to arrive at the decision of recommending the proposal for sanctioning.

PROCEDURE:

The panel lawyer & valuer submit their verifications and observations in the Legal scrutiny report and valuation report respectively as in the ERP system.

The Technical inspection must be done by the internal technical officer who should check the following aspects.

1. FOR PROPERTY

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Owner/possessor of the property Proper accessibility Boundaries properly demarcated Approximate area of plot and its shape. Locality: Whether it is residential, commercial, industrial, semi- industrial, developed or

developing. Basic Amenities: Check whether following amenities are available or not such as: water

supply, sewerage, electricity, hospital, pucca road, school, garden etc. The residents’ type: Is it High Income Group, Middle Income Group or Low Income

Group. The marketability of the property: Is it Good, Fair or Poor. Vulnerable: Is it prone to fire, flooding, earthquake etc. Any other factors that may affect its marketability then provide details.

FOR SITE/BUILDING PLAN

Verify the sanction plan no:, date of sanction and the sanction authority of the sanctioned plan.

Verify the area of the plot mentioned in the sanctioned plan.

Verify the no: of storey /floors and the area of each storey/floor as per the sanctioned plan.

Verify the name of the owner of the plot/building as mentioned in the sanctioned plan.

OTHER DETAILS

Note the stage of construction as on date of inspection.(Describe in details)

Verify whether the construction is carried / being carried out as per the sanctioned plan. Specify the type of deviation clearly in detail.

Check the type of construction: brick/masonry/hollow cement Solid cement Bricks.

Check the quality of the construction: as good/ average/poor.

Note the approximate built up area (if construction is completed)

If already existing building then note the approximate age of the existing building. Verify the purpose of the existing construction is used or is proposed to be used. Verify whether the structure appears to be maintained in good condition or not.

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Verify whether the address of the property matches with the route map provided or not.

LEGAL

The proposed property to be financed should be enforceable with clear marketable title along with chain title if applicable.

The property mortgaged should be unencumbered and not subject to any charge lease, lien and mortgage.

A detailed Legal Scrutiny Report should be included by panel lawyer should include map of the property, also clearly trace the title of the owner as clear, undisputed and marketable.

The collateral security, if available should be enforceable, clear and marketable.

HOUSING LOANS & LEGAL ASPECTS

There as certain legal enactments which have bearing on the operations of a housing finance company. It is therefore important to know the basics of these enactments like:

Transfer of property Act. Stamp Act and Registration Act Laws relating to inheritance and succession including personal law Urban land (ceiling & regulation )Act. Rent Control Act.

From the point of view of investigation of title it becomes essential to know whether the property being offered as security is transferable or not.

TRANSFER OF PROPERTY ACT.

The transfer of property act deals with five kinds of transfer of properties viz., Sale, mortgage , lease, gift and exchange. It is an act by which a living person conveys property , in present or in future , to one or more other living persons, or to himself.

SALE: It is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. It can be made by a registered instrument.

MORTGAGE: A mortgage is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by the way of loan ,an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

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The transferor is called a mortgagor, the transferee a mortgagee, the principal money and interest of which payment is secured for the time being are called the mortgage money and the instrument (if any)by which the transfer is effected is called a mortgage deed.

Simple mortgage-This mortgage is affected by a registered instrument irrespective of the amount. The mortgagor binds himself to repay the loan. In case of default, court’s decree is required to be obtained for sale of the property. There is no transfer of possession or ownership of the property. The mortgagee does not get the right of foreclosure.

English mortgage: It is affected by a registered instrument. There is absolute transfer of property with the provision of retransfer in case of repayment of the amount due. There is a built in provision for the power of attorney and in case of default the remedy available is by the sale of the property. As the stamp duty and registration charges are substantial, this mortgage is not much in use. However, transaction where utmost security is required, this type of mortgage is still preferred.

Mortgage by conditional sale: The mortgagor ostensibly sells the mortgaged property----

on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute,or

on condition that on such payment being made the sale shall become void,or on condition that such payment being made the buyer shall transfer property to the seller,

The transaction is called mortgage by conditional sale .The mortgage is created by a single document which is required to be registered. This system is not popular.

Unsufructuary mortgage: The mortgagor delivers possession of the mortgaged property to the mortgagee and authorizes him to retain such possession until payment of the mortgage-money and to receive the rents and profits accruing from the property in lieu of interest or in payment of mortgage-money, he has no right of sale and foreclosure, the transaction is called an unsufructuary mortgage.

Anomalous mortgage: A mortgage which is not a simple mortgage, a mortgage by conditional sale, an unsufructuary mortgage, an English mortgage or a mortgage by deposit of title deeds within the meaning of the section is called an anomalous mortgage. In this the possession is not delivered and the remedy available to the mortgagee is sale or foreclosure as per the terms of the mortgage.

Equitable mortgage /Mortgage by deposit of title deeds: Here a person in any of the following towns namely Calcutta,Madras and Mumbai and in any other town which the State Governmnet concerned may by notification in the official Gazette, specify in this behalf, delivers to his creditor or his agent documents of title to immovable property,

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with intent to create security thereon, the transaction is called a mortgage by deposit of title deeds.

It may be noted that the restriction regarding the names of towns refers to the place where the title deeds are delivered and not to the situation of the property mortgaged. Thus in case where the property mortgaged is outside the names mentioned by the act of deposit of title deeds is performed within the areas specified, the transaction will be legally valid. A deposit of title deeds outside the specified/notified towns will not create equitable mortgage. The letter/memorandum of deposit of title deeds is not required to be registered. However stamp duty as per the stamp Act of the concerned state may be payable.

It will be seen from the above that whatever may be the form of the mortgage, there is only a transfer of some interest in the property. This is what differentiates a mortgage from a sale. Normally HFCs accept equitable mortgage in usual transactions.

STAMP ACT

The Indian Stamp Act is a central piece of legislation. Many states have their own Stamp Act. There are certain subjects which are exclusively governed by the Indian Stamp Act viz. Bills of exchange, Cheques, Promissory Notes, Bills of lading, Letter of Credit, Policies of Insurance, Proxies, Receipts etc. Similarly there are certain subjects governed states. If an instrument is not properly stamped, it is liable to be impugned by any person having authority to receive evidence or any person in charge of public office before whom it is produced. No instrument chargeable with stamp duty shall be admitted in evidence unless it is duly stamped except in those cases where there is provision of payment of penal stamp duty equivalent to ten times of such duty.

As such , while examining the documents or accepting any document it should be checked whether the documents have been properly stamped.

REGISTRATION ACT:

The Indian Registration Act does not require that a transaction affecting the immovable property should be carried out a registered instrument. It only enacts that when a document is liable to effectuate any other transactions specified in section 17 of the Act, such document must be registered. The transaction of sale, mortgage, lease, gift or exchange are required to be in writing and compulsorily registered as provided by the Transfer of Property Act. Other transactions affecting immovable property such as partition, release relinquishment, surrender, compromise, family arrangements, or charge on property do not require being in writing and may be made orally. However, if these

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transactions are reduced to writing, they will be required to be compulsorily registered. This is because under the Indian Registration Act, a non-testamentary instrument that purports or operates to create, declare, assign limited or extinguish any right, title or interest to or in immovable property requires to be compulsorily registered.

There are some instruments, which though in writing do not require to be compulsorily registered like decree or order of the court relating to an immovable property which is the subject matter of a suit or proceeding, a grant of an immovable property by the govt. an instrument of partition of an immovable property made by Revenue Officer and a certificate of sale granted to the purchaser

of any immovable property sold by public auction by a civil on Revenue Officer. Section 49 of the Indian Registration Act, provides that no document required by Section 17 thereof or by any provisions of the Transfer of Property Act, to be registered shall affect any immovable property comprised therein, or be received as evidence of any transaction affecting such property, unless it has been registered. While examining a document which is not registered it should be checked whether it is required to be compulsorily registered.

The registrar of a District in which a Presidency town is included like Mumbai, Calcutta and Madras and the Registrar of Delhi District may receive and register a document without regard to the situation of the property.

A document must be presented for registration at the proper registration office by:

A person executing the same. A person claiming the same.

The representative or assignee of such persons, OR the agent of such persons, representative or assign duly authorized.

If a document has not been presented by a competent person, the registration thereof will be valid. In case a document requiring registration has been accepted for registration by the registering authority from a person not duly empowered to present the same and has been registered, any person claiming under such document may within four months from his first becoming aware that the registration of such document is invalid, present such document for

Registration as provided in section 23 A of the Act. If the document is duly re-registered, it shall be deemed to have been duly registered for all purposes from the date of its original registration. While examining a document that is registered, it should be checked whether it has been properly presented and duly registered.

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SUCCESSION ACT:

While dealing with a property belonging to a deceased person, it must be inquired by what law his estate is governed. As regards inheritance and succession, Hindus including Buddhists, Jains and Sikhs are governed by Hindu Succession Act 1956. Muslims are governed by their personal laws, Jews, Indian Christians, Parsis and Foreigners are governed by the Indian Succession Act 1925.

TENURE OF LAND:

While examining the title, it should be inquired as to what is the tenure of land. Tenure is the right and the manner in which land is held and possessed. The tenure of land may be freehold, leasehold or held under Government Grant or Sanad. The right to hold property in perpetuity makes it heritable. The occupant is entitled to use land and remain in possession against Government as long as he observes the conditions of grant laid down is sanad. The contravention or non-observance of the conditions renders the

possession of land unauthorized and the collector has power to summarily evict him. Generally agricultural lands can be transferred only with the prior permission of the competent authority whereas non-agricultural lands are normally transferable and heritable. While dealing with the urban lands and properties, the provisions of Urban Land (Ceiling and Regulation ) Act-1976 should be kept in view.

URBAN LAND CEILING LEGISLATION:

The Urban Land (Ceiling and Regulation ) Act, 1976, was enacted mainly with the object of promoting equitable distribution of surplus land in the urban agglomerations. Under this Act, no objection certificate (NOC) is required from the competent authority before alienation of land in the urban area. As such while examining the title, it should be ensured that the requisite NOC under the URBAN LAND (Ceiling and Regulation) Act, 1976 is obtained by the vendor. Without this NOC a conveyance cannot be registered.

RENT CONTROL ACT:

Each state has its own Rent Control Act . The relevance of the Rent Control Act is to see whether the person in occupation of premises has acquired by rights like protected tenancy etc., under the Act. To that extent the security value of the property, relevant provisions of the Rent Control Act must be examined.

Thus, while checking the title, the following things should be ensured:-

The property is heritable and transferable. The transferor has the right to transfer. The transferor has the capacity, power or authority to transfer

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The transferee is competent to take the transfer. If the consent of any person, body or authority to transfer was necessary, the same is

obtained. All necessary parties have been joined in the document The whole interest of the transferor has been transferred. The identity of the property is preserved The consideration or object of transfer is lawful The document has been duly stamped, executed and attested. The document was presented for registration by a competent person and all executing

parties had admitted execution and it was duly registered.

Besides the above, the other things which should also be observed are:-

The vendor has produced all material documents of title relating to property. All original documents have been produced. The facts and events material to title have been satisfactorily proved. All documents, permission, NOCs for transfer of the property by the vendor to the

purchaser have been obtained. Identity of the property has been established. Links in the chain of title have been properly established. All outstanding encumbrances have been cleared. There are no cases before the court wherein title to the property is questioned. There is no doubt about the title. The property stands in the name of the vendor in the Government and Municipal Records

and all Municipal and Property taxes etc. have been paid up-to-date.

MISCELLANEOUS

Where Original Title Deeds constituting the chain of Title are missing:

In such cases while examining the title, the following safeguards should be taken.

Copy of General Diary Report(GDE) made in local Police station. Affidavit from the applicant or his predecessor in the title who has lost the concerned

original documents explaining the circumstances in which the original documents were lost and confirming that no charge had been created against the property by depositing the documents in question.

Publication of notice by the legal advisor , at the applicant’s cost, notifying the loss of concerned documents and the proposed mortgage arrangement in two widely circulated newspapers – one in English and the other in Vernacular. The notice shall give 15 days time to the claimants of the property to file claim failing which the property will be presumed to be free from encumbrances.

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Applicant will furnish surety of sound means to indemnify VHFL in the event of any loss or damage on account of non-production of the concerned documents.

Applicant may jointly execute the indemnity bond or stamp paper of requisite value. If the applicant has lost the document by which he has become the owner of the proposed

property to be mortgaged, a FIR must be lodged. The applicant will have to produce certified copy of the lost document from the Sub-

Registrar. Normally in doubtful cases Registered/English mortgage should be preferred

NON-AVAILABILITY OF ORIGINAL TITLE DEEDS FOR DEPOSIT:

In the following cases the original title deeds are not likely to be available with the applicant.

I. Where the property proposed to be mortgaged forms a part of larger property.II. Where such document is the last document in the chain of title and is lodged for

registration.III. Where the property in question is a partitioned property.

In the case (I) it would be in order if the applicant submits original documents in respect of the portion of the property proposed to be mortgaged.

In case (II) the applicant should furnish the following:

A true copy of the last document Lodgment receipt issued by the Sub-Registrar. Certificate from the Sub-Registrar that the document has been registered/ordered to be

registered. A letter from the applicant to the Sub – Registrar saying that the document after

registration to be returned to VHFL on an acknowledged copy of the letter along with an undertaking on requisite stamp paper that in case he receives the original document duly registered from the Sub-Registrar, the same would be deposited.

In case of (III) copies of the Original Title Deeds certified by Sub-Registrar along with undertaking from co-partner who retains the original , to produce the original partition deeds when required.

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Check list for Equitable Mortgage of Property

Identification of the mortgagor.

Original title deed

Legal opinion (by panel advocate/other advocate) with search report for 13 years, chain of documents.

Non encumbrance certificate to establish clear and marketable title.

Valuation report by the approved panel valuer.

Inspection report by VHFL officer relating to title of the property and actual physical possession.

Declaration of the mortgagor on non judicial stamp paper, duly notarized that property is free from all sort of encumbrances.

NOC from appropriate authority to mortgage.

Certificate relating to “Lal Dora” property (if applicable)

Lien in the record of appropriate authority.

Insurance policy- Property if insured then Risk cover/copy of premium receipt. Policy to be assigned in favour of VHFL.

POINTERS TO INVESTIGATION OF BORROWER’S TITLE TO THE PROPERTY:

One of the conditions of the sanction of loans under the various schemes is that the company has to find out conclusively and beyond doubts that the title to the property proposed to be offered as security is clear and marketable and free from all encumbrances in favour of the applicant.

The legal advisor for this purpose should ensure the following and verified by the appraisal officer.

Abstract of title: The in house official should prepare abstract of title. It is a orderly summary of the deeds and other instruments in the chain of title of immovable property arranged in a chronological order and containing a statement of encumbrances and charges to which the immovable property may be subject. He must take steps to examine any transactions made within a period of 13 years affecting the property concerned by the mortgagor or his predecessors in interest.

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Inspection of title deeds: It is necessary for the in-house official/legal advisor to scan all the title deeds in chain of title to the property covering a minimum period of 13 yrs.

If there was no transaction exactly 13 years prior to the title investment, the title deed immediately before 13 yrs is to be obtained so that the root of the title is established.

The original title deeds which relate to the property but pertains to the larger property, of which the property offered as security forms a part, the certified copy of such title deeds are to be examined & obtained.

If the title deeds are not forthcoming and no satisfactory explanation is given about their non-production, one would naturally suspect that the documents must have been pledged elsewhere and no record thereof may be available in the Registrar’s office. If this is the case the loan should be rejected.

1. Possession Enquiry: The legal advisor should also enquire about the title of the person who is in actual possession of the property. It is always necessary to make particular enquiry if the property is in possession of a person other than the transferor or the applicant.

2. Examining title deed:

The name of the parties to the transaction i.e buyer and seller, donor and donee, lessor and lessee must be verified.

An express covenant from both parties representing their capacity to enter into the transaction and execute the deed.

Description of the property including the area comprised therein, clearly mentioning the boundaries of the property.

Mandatory Attestation: All the documents require compulsory attestation. It means to bear witness to the execution of the document. There should be at least two witness. It is an affirmation to the executants’ signing and affirming his signature to the instrument.

Verify :

In Sale deed

The exact consideration amount exchanged between the parties The transfer of ownership is absolute and there are no negative covenants restricting the

title in favour of the buyer. The sale deed should be accompanied with a receipt from the seller and a possession

letter in favour of the buyer.

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In Lease deed

The exact terms of the lease should be enumerated i.e. the term of the lease, the lease rental payable or lease rental paid etc.

The restrictive covenants of the lease should be clearly mentioned.

In Gift deed

An express covenant from the Donor representing his/her capacity to execute the Gift deed and stating that the gift is being made out of the Donor’s free will voluntarily and without coercion of any sort.

The transfer of title (as in the name of the donor) should be absolute and there should be no negative covenants restricting the title in favour of the done.

Through Will

The property being transferred by way of a will should have been acquired by the testator himself and not inherited during his/her lifetime.

The Will should be the last Will of the Testator. The death certificate of Testator. Probate of the Will.

In case of vesting rights of ownership in an immovable property:

Broadly, the properties can be classified into leasehold and freehold.

For all leasehold properties, permission letter from the Lessor shall be a mandatory requirement. If it is transferred directly to the borrower, search report or a non-encumbrance certificate is not necessary.

In case of resale transaction of leasehold properties, the documentation will vary from one state to another as some states may allow a transfer of leasehold through power of Attorney, whereas some states may be ready to transfer on payment of transfer charges in which case there shall be a transfer letter and a

mutation certificate from the lessor. Legal opinion by a reputed advisor must be obtained and kept on record in the ERP system.

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In case of lease hold properties- Power of Attorney Transactions:

There are some states, where as a market practice lease hold properties can be sold through power of Attorney (POA). Such POA transactions are recognized as a valid form of transfer by Development Authorities also on payment of specified charges.

Transactions through POA route are funded by HFC’s in a state that allow such transfers. It is necessary in such cases to verify the chain of POA.

VHFL shall accept only the first POA cases.

The laws applicable to the transactions through POA are the same that govern transfer of property. The agreement to Sell In favour of the borrower should have been registered.

Documents in respect of POA transactions will include:

Agreement to sell (duty registered and stamped as per requirement)

General Power of Attorney.

Special Power of Attorney in favour of the company.

Will.

Possession Letter.

Receipt All original documents of title in favour of the Original Allottee. At present these kind of transactions have been permitted only at Delhi.

In case of security

1. Simple Mortgage

Under this type of mortgage without delivering possession of the mortgaged property the mortgagor binds himself personally to pay the mortgage money and agrees expressly or impliedly that in an event of failure to pay accordingly to his contract, the mortgage shall have the right to cause the mortgage property to be sold and the proceeds of the sale to be applied in payment of mortgaged money.

The Mortgagor undertakes personal liability No possession is delivered No foreclosure. No power of sale out of court. It must be affected by a registered instrument.

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2. By deposit of title deeds (Equitable Mortgage)

A mere deposit of title documents would not create equitable mortgage unless there is an intention to create equitable mortgage.

Physical delivery of documents is not the only mode of deposit

Constructive delivery is also sufficient.

If documents deposited show no title no mortgage is created. A copy is not a document of title and its deposit cannot create an equitable mortgage.

However, where the original is lost and a certified copy is obtained (with safeguards such as police FIR, public notice in newspapers publishing such loss) and deposited , it may be accepted as a document of title.

It must be made out that the document is lost.

The documents deposited should show completely good title.

It is sufficient if the deeds deposited bonafide relate to the property or are material evidence of title and are shown to have been deposited with the intention of creating security there on.

CHECKLIST OF TITLE DOCUMENTS

A) For properties already acquired/owned by the borrower.

1. Free hold properties.

Registered deed by which the property is transferred in favour of the borrower in original.

All previous registered title deeds in original.

2. Lease hold properties.

--- Lease hold properties of statutory bodies/development authorities allotted directly to the borrower.

Lease deed and allotment letter in favour of borrower in original. Permission to mortgage the property in favour of lender from development authority.

--- Lease hold properties of other than statutory bodies/development authorities.

Registered lease deed in favour of applicant in original. Permission from the lessor to mortgage the property in favour of lender.

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Certified copies of title deed of the lessor.

3. Purchase of property.

---Purchaser of plot from Cooperative Group Housing Society.

Allotment letter issued by the Society in original.

Share Certificate issued by the Society in original.

Registered lease/sale deed in favour of the borrower in original as soon as it is executed by the society.

NOC from society.

Possession letter confirming handing over possession of identified plot.

Certified copy of the Bye-laws and Title deeds of the society.

Approved layout sanctioned plan.

---- Purchaser of plot/flats/house allotted by statutory authority/development authority.

Allotment letter/allocation letter issued by the Statutory

NOTE:

Deviations permitted: (for salaried)

In case the applicant is on probation on the first job but he/she is professionally qualified.

Applicant is on probation in the second job with good past experience.

Salary without PF deduction. The case can be considered in case the total staff strength is less than 20 employees and the turnover is more than Rs.3 crores supported by the branch verification of the firm.

Cash salary from Public sector firms.

Cash Salary from private sector firms with turnover of more than Rs.3 cr.

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Deviations: (for saksham / Samarth/NIP category)

No deviations permitted.

Recommendation

The appraisal officer on the basis of the Legal Scrutiny Report & Valuation Report forwards his recommendations and comments about the following to the BRANCH MANAGER.

Loan Amount

Per Capita Residual Income (PCRI)

Loan To Value (LTV) should not be more than 75%

Loan Cost Ratio (LCR) should not be more than 75%

Positive views along with deviations.

POINTERS TO APPRAISAL DECISION

1) For all the four categories (salaried, self employed professionals, self employed business, NIP)

a. Income: If it is up to Rs. 10,000 p.m.

PCRI-(Per Capita Residual Income) - Rs. 1000

IIR-(Income Installment Ratio) - not more than 45%

Deviation of 5% can be permitted if the family size is small. (i.e. If PCRI is high)

b. Income: Rs. 10,000 to Rs. 30,000 p.m.

PCRI-(Per Capita Residual Income) - Rs. 1500

IIR-(Income Installment Ratio) - not more than 50%

Deviation of 5% can be permitted if the family size is small (i.e. If PCRI is high) and if additional income exists.

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c. Income: Rs. 30,000 to Rs.60, 000 p.m.

PCRI-(Per Capita Residual Income) - Rs. 3000

IIR-(Income Installment Ratio) - not more than 60%

Deviation of 5% can be permitted if the family size is small. (i.e. If PCRI is high) and if additional income exists.

d. Income: Rs. 60,000 and above

PCRI-(Per Capita Residual Income) - Rs. 4000

IIR-(Income Installment Ratio) - not more than 65%

Deviation of 5% can be permitted if the family size is small. (i.e. If PCRI is high) and if additional income exists.

POINTERS TO LOAN REDUCTION, ENHANCEMENT & TOP UP

In case loan disbursement is made in parts, At time of disbursement or before the final disbursement , loan amount may reduce or enhance, due to technical reason or may be management decision (like default in Pre-EMI/Cheque dishonored). The appraisal is re examined.

If the loan amount enhances, then the latest income proof and bank statement should be collected, , recalculation of loan amount , IIR, PCRI, LTV, LCR should be done and Revised Sanction Letter, Supplementary Loan Agreement, Promissory Note for Enhanced amount should be issued.

If loan amount reduces, than confirmation from applicants and supplementary loan agreement should be signed and revised payment schedule should be generated.

In case of Top Up Loans the loan request should be considered on completion of one year track record of repayment with VHFL. New File no: must be generated, and should be resrutinized as per the process of new application, the New File no: should be linked with Old file for purpose of creating lien on security. While calculating IIR, PCRI, earlier loan installment must be taken as fixed obligation and should be deducted from gross income.

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SANCTION

OBJECTIVE:

To check the appraisal of the applicant and the property be financed is executed diligently.

To mitigate risk by reconsidering the loan policies.

PROCEDURE The file is then forwarded to branch manager for sanctioning if the loan amount is within

his limit order, then he checks for the Loan policies, re verifies the appraisal conditions of IIR, PCRI, LTV, LCR and instructs for the issue of the sanction letter.

If the loan amount is not within his limits then the file is forwarded to the Operations Dept at Head office. They reviews the appraisal process and if they find it satisfactory the file is forwarded to sanction authority at Head Office.

If while reviewing the case is found unsatisfactory it is forwarded back to Branch Manager for further views.

The Sanction authority at Head Office assesses the appraisal process done at Branch, if the assessment is clear then the sanction conditions are put in the file through ERP system & forwarded to Branch for issuing sanction letter.

If not then the file is forwarded back to Branch with the clearance requirements.

AGREEMENT OBJECTIVE:

To get the acceptance of the applicant(s) on the terms under which the loan has been sanctioned.PROCEDURE

On the sanction of the loan the sanction letter is issued with the sanction conditions mentioned in it generated by the ERP system.

The letter has to be given in person to the client and the remaining fee has to be collected. After the client accepts the sanction conditions & pays the remaining fee the loan

document is printed and the following documents are collected and mentioned as collected in the ERP system also.

Loan Agreement –Housing (if applicable) Loan Agreement – Personal (if applicable) Demand Promissory Note

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Affidavit (General) Declaration of Plot Deed of guarantee Disbursement request letter General Power of Attorney Delivery Note Memorandum of Deposit of Title deeds

Third Party Undertaking.(if applicable) Affidavit cum undertaking relating to construction as per NHB guidelines to abide by the

rules, regulation, terms, conditions and directions as applicable from time to time for proper utilization of loan sanctioned.

EM of property offered as security. Other collaterals required. Execution of guarantee deed by the guarantor Undertaking relating to PDCs / Cheques. Deposit of Security cheques for the full amount of loan by the borrower as well as the

guarantor. Submission of Pre EMI PDCs & EMI PDCs. (MICR)

DISBURSEMENTOBJECTIVE:

To disburse Loan to the client on time ensuring fulfillment of all the sanction compliances.

PROCEDURE:

The Manager Operations & Branch Manager should ensure that there is no pendency left before disbursing the loan amount to the applicant.

The disbursement letter should mention the amount of loan sanctioned, favoring person’s name, cheque no:, cheque date

The disbursement details to be furnished in the Disbursement letter /memo are: Eligible disbursement Amount. Amount Disbursed so far Disbursement requested now Disbursement approved now. Balance to be disbursed. The memo has to be forwarded to accounts officer for the preparation of the cheque.

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The Cheque has to be forwarded to Head Office Manager Operations for approval.

Manager Operations must check the sanction compliances and get the cheque signed by the sanction authority at Head Office and must forward it to the respective Branch Manager.

Branch Manager then should get the loan account created by the branch account officer, ensure the collection of the processing and the administration fee, book disbursement and generate the pre EMI and EMI schedule.

The Branch Manager then approves disbursement and hands over the cheque to Manager Operations.

Manager Operations should ensure collection of loan document, security papers, approval of Branch Manager, collection of PDCs and mention as received in the ERP system before releasing the cheque.

After the above condition is met the cheque must be issued along with the disbursement letter and EMI payment schedule at the time of final disbursement.

COLLECTION The collection process is undertaken for collection of monthly installment/ interest

(Pre-EMI interest & EMI) as non collection of EMI/ Pre-EMI acts as a burden on regular income of the company. The process deals with collection of PDCs/cash/ ECS & subsequently depositing them in bank and getting the dues cleared. It also guides about the steps to be followed in different cases such as delinquency, cheque dishonour etc.

CLIENT GRADING

Purpose

Client grading is done so as to differentiate regular defaulters, occasional defaulters and regular payers.

It also helps to identify if actions against some clients need to be taken at a faster rate and also helps to judge the efficiency of the collection process

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A Grade – The clients who have no EMI/Pre-EMI due for last 30 days B Grade – The clients who have EMI/Pre- EMI due for last 30 days C Grade – The clients who have EMI/Pre- EMI due for 61-90 days D Grade – The clients who have EMI/Pre-EMI due for a period of over 90 days. These

are essentially NPAs

EMI DUE

The EMI gets due on the 1st of every subsequent month, or on the date specified by the client on his PDCs, for the previous month. For example, The EMI for the month of March would be due on 1st of April or on the date for the month of April specified by the client on the PDC and is payable by maximum 15th of April (i.e. 15 days is the grace period)

Non Performing Asset (NPA)

Any asset that has failed to pay towards its principal and interest for a time period exceeding 90 days is classified as NPA.

COLLECTION PROCESS

1. 7 days prior due date The ERP system shows the following client detailsa. Client nameb. Client Gradec. Client contact no.

Course of action-

Calls to be made to clients-a. A grade – No calls to be madeb. B grade – 1 call to be made before the due date arrivesc. C grade – 2 calls to be made before the due date arrivesd. Ungraded – Call to be made about payment of Pre- EMI amount

The calls should be made to clients requesting them to ensure sufficient funds in their account and informing them that they have been called because of their past defaults

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On Due Date

The ERP system shows Information* for the day’s Collection / deposit

Course of action

A pay in slip is generated by the system The systems asks for a payment mode viz. PDC, Cash or ECS In Case Of a PDC- Verify the PDC physically to ensure that it is in good condition And its details match with those shown by the ERP system If the PDC is verified, present the PDC in bank. Reduce PDC no.by 1 Credit the Loan Account in good faith if the account is standard For non- standard account, credit it only if funds are cleared

If the PDC is in an unacceptable condition

Check for whose error is it – the company or the client If it is a company error, rectify it and present the PDC in the bank If it is a client error, return the PDC to the client along with letter 1**.

If the client arranges the requisites of letter 1, i.e. a fresh cheque / cash within 7 days, present the same in the bank. If the Client does not do the requisite

Call the client to ask him to do the requisite Send him reminder 1**

If the client does the requisite within 7 days, present the cheque / cash in the bank. If the client does not do the requisite again-

Call him to ask him to do the requisite and inform him that if he does not comply, his would be regarded as a serious offence Follow dues recovery process***

In case of cash

Deposit cash in bank

Credit loan account if standard and if its non-standard, credit it after funds are cleared

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In case of ECS

Intimate bank with ECS details

Credit loan account if standard and if its non-standard, credit it after funds are cleared.

In case there’s no instrument to pay & or client refuses to pay

Send Notice 3**

If the client arranges for a payment instrument, follow the collection process. If the client still persists with non provision mode, follow up by 1-2 visits agent and phone calls.

If the client doesn’t arranges for a payment instrument within 30 days past due date, the EMI becomes over due for next month and is treated as a pendency

If the client doesn’t arranges for a payment instrument for 90 days, his loan is recalled and legal action is initiated against him

2. After depositing the PDC in bank

Confirm for bank reconciliation and credit in VHFL account

If the cheque is cleared and VHFL account has been credited, the transaction is settled.

If the cheque bounces, ask the bank for the reason.

If there’s a company error, rectify it and present the cheque again in the bank

If there’s an error from the client’s side, inform him by a phone call and Notice 1**. Debit loan A/c by Rs. 250 + Service Tax

If the client takes the requisite action and gives a confirmation to present the cheque again in the bank within 7 days of receiving the notice 1**, present the cheque in the bank. If the cheque bounces again, follow the previous step.

If the client doesn’t responds positively to the notice sent, initiate the dues recovery process

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*

a. Client Name

b. PDC number

c. The Bank, branch & A/c no. Of bank in which the PDC is to be presented

Dues Recovery Process

Purpose

Collection of dues and discourage clients from defaulting

Send the client the demand notice within 21 days past due date

If the client arranges for the funds, deposit them in bank.

If the client doesn’t respond to the demand notice, send him a reminder** along with a phone call and follow up with an agent visit if the client doesn’t respond to the reminder also.

If the client fails to pay the EMI amount within 30 days past due date, it is regarded as a pendency for the next month

If the client defaults for two consecutive months and there are indications that he might default again, send him notice 2** and follow up by an agent visit.

If the client fails to pay the EMI amount or defaults for a period of 90 days, the Loan Account turns NPA. Then, the client is sent the notice for a legal recourse and his loan is under recall.

Reminder for next lot of PDCs

The ERP system generates a reminder when the PDC no. In a client’s account become <=3.

The client is sent a letter asking him to provide with the next lot of PDCs

The client may opt for payment of EMIs through cash or ECS under special circumstances. However, the consent of the company is necessary in such cases.

In case the client refuses to pay or fails to provide the payment instrument within the given time frame, a reminder letter** is sent to him and follow up is done by phone calls/ SMS and agent visit. For a period of 30 days, usually 1-2 visits are made.

For two consecutive months, non- availability of payment instrument or client’s ignorance towards payment is treated as pendency. However, if the time period of 90 days elapses, the loan is under recall and client becomes liable for legal action.

CLOSURE Check if all the EMIs are paid along with other dues and arrears.

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If the EMIs &/or other dues are pending, initiate the recovery process.

In case the dues are to be written off, refer to the Recovery Policy**

Once all the dues are cleared, the accounts dept. issues the No Dues Certificate

The operations deptt. then issues the NOC to the client and returns all the documents submitted by him back to him.

In case the dues are to be written off, refer to the Recovery Policy**

The client is granted the NOC and all the documents submitted by him are returned once all the dues are cleared/ written off

The loan account is then closed.

In case of prepayment of outstanding loan amount leading to pre-closure

Inform the client about the outstanding loan amount On client’s consent, collect the cheque/ cash and deposit it in the bank If the cheque bounces, inform the client and send Notice 1** If the cheque clears, all the dues are cleared and all transactions are complete, the client is

returned all the documents submitted by him along with the NOC and leftover PDCs (if any)

The loan account is then closed.

4.1 BENEFITS OF THE PROPOSED PROCESS

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Integration

Integration can be the highest benefit of all. The only real project aim for implementing ERP is reducing data redudancy and redudant data entry. If this is set as a goal, to automate the entire process, then it might be a successful project. Those companies where integration is not so important or even dangerous, tend to have a hard time with ERP. ERP does not improve the individual efficiency of users, so if they expect it, it will be a big disappointment. ERP improves the cooperation of users especially with respect to multiple branches which the company will be expanding to in the next 2-3 yrs.

Efficiency

This process focuses on integration of the process. I think individual efficiency as well as the team efficiency will increase as the process will be free from repetitive steps.The benefit of integration and cooperation will make up for the loss in manual process.

Cost reduction

It reduces cost as the process becomes faster, free from errors and without delays. Internal reporting will become more efficient and can be monitored easily.

Less personnel

Less reporting or accounting personnel will be required.

Accuracy

Human errors will be removed. It will force the people and the company to be accurate, or it falls.

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PART 3

5.PROPOSED LOAN POLICY

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Interest Rate Setting & Benchmark ROI

AVERAGE COST OF FUNDS

PNB 1

Month O/s Principal Interest

May '10 1,12,43,014 101363

Apr '10 1,14,28,214 101825

Mar'10 1,16,13,414 107273

Feb'10 1,17,98,614 98087

Jan'10 1,19,83,814 110842

Dec'09 1,21,69,014 112327

1,17,06,014 631717

PNB 2

MonthO/s

Principal InterestMay '10 14073600 127310

Apr '10 14258800 127448

Mar'10 14444000 133739

Feb'10 14629200 121981

Jan'10 14844000 137287

Dec'09 14999600 136679

14541533.33 784444

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SBM

MonthO/s

Principal InterestMay '10 50000000 510417

Apr '10 50000000 503774

Mar'10 50000000 520522

Feb'10 50000000 472315

Jan'10 39600000 429687

Dec'09 0 26581

39933333.33 2463296

Dec Jan Feb Mar Apr May 2716861

4 664278147642781

47605741

47568701

4 753166146618088

1275587 677816 692383 761534 733047 739090 3879457

1.01% 1.02% 0.91% 1.00% 0.97% 0.98% 5.86%

Total O/s Principal(Dec'09-May'10) 66180880.67Interest(Dec'09-May '10) 3879457

AVERAGE COST OF FUNDS 11.72%

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Bank's lending rate 12.25%

Weighted average cost of fund as on 31/3/2010 A B A x B Amount Cost % Net worth (Equity + Reserves) 45583000 0.12 5469960Secured debt 75687014 0.1225 9271659Unsecured debt 569045 0.14 79666.3Total 121839059 14821286 Weighted Average cost of funds 12.16% spread 4.00% Benchmark ROI 16.16%

Cost % For equity, this is taken to be 10% plus dividend cost, approximated to 12%. For secured debt, this is taken as past 6 month average of term loan cost OR current term loan

interest rate, whichever is higher (12.25%) For unsecured debt, this is taken as SILA rate or SILA plus rate (for Directors deposits or ICD),

weighted average, plus 15% (12%+1.38%= approx. 14%)

Loan Policy TYPE OF LOANS

Who can take : Individual

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HOUSING LOAN NON-HOUSING LOAN1. Loan for purchase of ready built

house/flat.2. Loan for construction of house.3. Loan for extension of house.4. Loan for renovation

/improvement/repair of house.5. Loan for purchase of residential

plot.

1 .Loan against property.

2. Personal loans.

Husband & wife jointly. Father & son(s) jointly Two or more brothers jointly Loans to unmarried daughters jointly with parent(s) (exceptional cases).

Purpose

Housing loans for purchase of house/flat/plot / or for construction/extension/repairs/renovation of dwelling units.Non-housing Loans for loan against property & personal loans.

Eligibility Indian Nationals either single or jointly who are otherwise not disqualified from entering

into contract. Non-Resident Individuals (NRIs)

As per Foreign Exchange Management Act, 1998 Non-Resident Indians are Indian citizens who stay abroad for employment or for carrying

on business or vocation outside India or for any purpose in circumstances indicating an indefinite period of stay abroad.

Government Servants who are posted abroad on duty with Indian mission and similar other agencies set up abroad by the Government of India where the officials draw their salaries out of Government resources.

Government Servants deputed abroad on assignments with foreign governments/international agencies.

Officials of State Governments and public sector undertakings deputed abroad on temporary assignments or posted to their branches and offices abroad.

Amount of loanType Amount

1. Loan for purchase of ready built house / flat Rs.15,000,00 relaxable up to Rs.20,000,00

2. Loan for construction of house/flat Rs.15,000,00 relaxable up to Rs.20,000,00

3. Loan for home extension Rs.10,000,00 relaxable up to Rs.15,000,00

4. Loan for repair/renovation /improvement. Rs.10,000,00 relaxable up to

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Rs.15,000,00

5. Loan for purchase of residential plot. Rs.10,000,00 relaxable up to Rs.15,000,00

6. Loan against property Rs.15,000,00 relaxable up to Rs.20,000,00

7. Personal loans Rs.10,000,00

FEE STRUCTURE

Login Fees (Legal & Technical Fee) Rs.2500 + Service Tax(non- refundable)

Processing Fees 1.00% of sanctioned loan amount + service tax.

Administrative Fees 1.00% of sanctioned loan amount + service tax.

Re-schedulement fee Rs. 1000 + service tax

Interest type conversion 1.00% of the principal loan outstanding + service tax

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Prepayment in takeover/BT 2.00% of the principal loan outstanding + service tax .

Prepayment from own source 5% to 2.00% of the principal loan outstanding + service tax subject to sanction conditions.

Stamp charges for loan documents Actual

Recovery charges Actual

Cheque return charges Rs. 250/-per instrument.

Penal charges for delayed payments 36% p.a. ( 3.00% p.m.)

Note: The management may allow suitable rebate in charges at its discretion.

Loan tenure1.Loan for purchase of ready built house / flat

Up to 12 yrs , relaxable up to 15 yrs.

2.Loan for construction of house/flat

Up to 12 yrs , relaxable up to 15 yrs.

3. Loan for home extension Up to 12 yrs , relaxable up to 15 yrs.

4. Loan for repair/renovation /improvement.

Up to 12 yrs , relaxable up to 15 yrs.

5.Loan for purchase of residential plot.

Up to 12 yrs , relaxable up to 15 yrs.

6.Loan against Up to 12 yrs , relaxable up to 15

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property/mortgage loan yrs.

7.Personal loans 1 yr to 5 yrs.

Note:The tenure of Home Loan /mortgage loan ranges from 3 yrs to 12 years relaxable up to 15 yrs. The term however does not extend beyond the retirement age or 60 years whichever is earlier (65 years for self employed individuals and private company employees if certified by the company).

The size of EMI depends on:Quantum of loanInterest rate applicable Loan tenure

Our existing retail prime lending rate is 16.25%.

LOAN TO VALUE RATIO (LTV):

1.Loan for purchase of ready built house / flat

75% of estimated cost

2.Loan for construction of house/flat

75%.

3. Loan for home extension 50% of market value.

4. Loan for repair/renovation /improvement.

50% of market value.

5.Loan for purchase of residential plot.

60 %

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6.Loan against property/mortgage loan

50 %.

Note: However Management may permit relaxation of 5%.

LOAN TO COST RATIO(LCR):

INSTALLMENT TO INCOME RATIO: For all the four categories (salaried, self employed professionals, self employed business, NIP)

Income: If it is up to Rs. 10,000 p.m.

PCRI-(Per Capita Residual Income) - Rs. 1000

IIR-(Income Installment Ratio) - not more than 45%

Deviation of 5% can be permitted if the family size is small. (i.e. If PCRI is high)

Income: Rs. 10,000 to Rs. 30,000 p.m.

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1.Loan for purchase of ready built house / flat

75%.

2.Loan for construction of house/flat

75%.

3. Loan for home extension 100% of improvement estimated cost .

4. Loan for repair/renovation /improvement.

100% of improvement estimated cost.

5.Loan for purchase of residential plot.

65 %

Note: However Management may permit relaxation of 5%.

PCRI-(Per Capita Residual Income) - Rs. 1500

IIR-(Income Installment Ratio) - not more than 50%

Deviation of 5% can be permitted if the family size is small (i.e If PCRI is

high) and if additional income exists.

Income: Rs. 30,000 to Rs.60, 000 p.m.

PCRI-(Per Capita Residual Income) - Rs. 3000

IIR-(Income Installment Ratio) - not more than 60%

Deviation of 5% can be permitted if the family size is small. (i.e. If PCRI is

high) and if additional income exists.

Income: Rs. 60,000 and above

PCRI-(Per Capita Residual Income) - Rs. 4000

IIR-(Income Installment Ratio) - not more than 65%

Deviation of 5% can be permitted if the family size is small. (i.e. if PCRI is high) and if additional income exists.

Other Income Considered for IIR Norms

Rental Income: 75% of rental income can be considered in case the applicant submit either of the following documents:

o Lease agreement.o Copy of bank passbook/bank statement reflecting the rent received along with the

ownership proof.o Copy of ITR’s if rental income is shown in the ITR.

Agricultural Income: 50% of agricultural income can be considered subject to a maximum of 30% of Net Annual Income if the income is shown in the ITR.For the consideration of agricultural income if not shown in the ITR, a certificate of agriculture income from the village officer can be obtained. In both cases ownership of

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Agricultural land along with the visit report by Branch Manager assessing the agricultural income is a must.

Pension Income: 100 % of pension income as reflected in the bank statement can be considered as other income. Copy of pension order to be collected from the customer.Note: In case of the future pension the Basic + DA should be more than Rs.10000/-p.m. at the time of application. For calculation of loan eligibility for the extended period (up to the age of 65) 50% of the Basic + DA at the time application is considered.

Tuition Income: 50% of tuition income is considered for Net Annual Income. The branch has to submit a verification report by Branch Manager. 100% of tuition income if declared in ITR & bank statement.

Part Time Job Income: 100% of income can be considered for Net Annual Income if it is reflected in ITR/bank statement of the customer. However only 50% of income is considered if the customer is getting the compensation in cash. Proof of cash income has to be supported by the contract letter on the letterhead of the company duly verified by the branch.

SECURITY: a. Equitable Mortgage of properties for which loan is advanced.

b. Guarantee cheques from borrower for Housing loan

c. Guarantee cheques from borrower as well as guarantor for personal loans.

ADDITIONAL SECURITY: a. Collaterals e.g. Insurance Policy, NSC, Bonds etc. as required. b. Guarantor

INTEREST RATES: 1. Housing Loans

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a. Fixed Rate: Up to 5 years 17.00% > 5yrs up to 10 yrs 17.50% > 10 years 18.00%

b. Floating Rate: Up to 5 years 16.50% > 5yrs up to 10 yrs 17.00% > 10 years 17.50%

Note: However rate of interest should be charged 1% higher in case of salaried employee with proprietorship or pvt.ltd company, 1% higher in case of self employed professionals if cash accrual income is considered and 2% higher in case of self-employed business if multiplier factor is applied at the time of net income calculation, also for NIP (Non-Income Proof) Category it must be charged 2.00 % higher for any of the slabs described above.Management can provide interest rate concession up to 2% in case of low LTV, low IIR and high income stability.

2. Loan against Property: a. Fixed rate: Up to 7 yrs 22% > 7 yrs 24%

b. Floating Rate: Up to 7 yrs 20% > 7 yrs 22%

Note: 1% higher rate in case of salaried employee with proprietorship or Pvt.ltd Company , 1% higher in case of self employed professionals if cash accrual income is considered ,2% higher in case of self-employed business if multiplier factor is applied at the time of net income calculation. Incentives may be given for regular payments on due dates as decided by the Management. Management can provide interest rate concession up to 2% in case of low LTV, low IIR and high income stability.

3. Personal Loan: Interest rates

o For salaried employee with Govt. or Known Public Ltd company: 24%-30% p.a.o For salaried employee with Pvt. ltd company: 30%-36% p.a.o For self employed professionals: 24%-36% p.a.o For self employed Businessmen: 24%-36% p.a.

Note: Management is authorized to vary the incentive in suitable cases & give interest rate concession in case of higher income group individuals that fall in low risk category.

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4. Changes in Interest rates: Management is authorized to effect suitable changes in Interest rates from time to time as deemed necessary. All such revisions may be placed before the board subsequently. Interest will be calculated on “Yearly Rest Basis” (YRB)

Special Facilities (Added Values).

1. Incentive for regular and prompt payment: If the borrower pays all his EMIs regularly on due dates without fail. The company may extend a rebate of 0.25% which will be credited to his account at the closure of the loan. This facility is available on both fixed and floating rates but is not extended to pre EMIs and to cases where concessional interest rate is charged. Management is authorized to vary the incentive in suitable cases.

2. Re-schedulement: Re-schedulement of housing loan is permitted under the following circumstances:

Re-payment of loan account becoming overdue on genuine reasons like loss of job, unexpected events to the customer or family members and customer requesting for increasing tenure.

Customer prepaying part of loan and requesting to reduce the tenure or EMI.

Present income not sufficient to service the EMI and requesting for a lower EMI and a longer tenure(having sufficient balance service period).

With the increase in salary/income, customer requesting to enhance EMI and reduction in tenure.

Increase in EMI on account increase in ROI by VHFL and customer requesting for increasing the tenure.

3. Enhancement of loan: The necessity for enhancement of loan arises out of cost escalation of construction, extension, improvement etc. In some cases where the customer fails to bring in the required margin for reasons beyond his/her control, need for enhancement of loan arises.

Enhancement option is available before the disbursement of loan as well as before the final disbursement.

Enhancement will not be allowed after the last disbursement of loan.

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The enhanced portion as well as the existing portion should be within the applicable LCR/LTV and IIR and other credit norms.

Income earlier not considered for Net Annual Income as well as increase in income during the gap can be considered for enhancement of loan.

4. Foreclosure/Pre-payment of loan:

Pre-payment of loan may be permitted.

.5% to 2.00% pre-payment fee shall be charged if paid from own source like saving, retirement benefit, sale of asset etc.

2.00% prepayment charge plus service tax shall be collected for takeover by FIs/Balance transfer etc.

No fee shall be charged for part payment provided the amount of part payment do not exceed 75% of the loan outstanding for that particular financial year.

5. Delayed Payment: In case of delayed payment of pre-EMI or EMI the present practice of charging an additional interest of 3% for the delayed period, calculated on daily basis will continue.

6. Collection Charges: For collection of cash/cheque from the borrowers an appropriate charge will be levied. Rs 250 per visit by messenger. Rs. 500 per visit by agent/officer. Rs.750 per visit by any higher management representative. Management is authorized to revise these rates as and when necessary.

Pre-Sanction Requirementsa. Submission of application

Prescribed application form duly filled with supporting documents is to be logged in and a suitable identification number has to be generated by the service centre. Referred as File number, this is the unique identity of an application for all future references.

b. Application requirements.Non-refundable processing fee.

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Checklist of documents to be collected.

MANDATORY DOCUMENTS / KYC DETAILS.

e. Residence Proof

For residence proof the following documents should be collected. (Self attested copy of any one) later to be verified with the originals by the verification officer/in charge before appraisal as mentioned in the verification step.

Ration card Passport Telephone bill Electricity bill Bank statement

f. Identity Proof For identity proof collect (Self attested copy of any one) later to be verified with the originals and concerned authorities as mentioned in the verification step.

PAN (permanent account number) Card Driving license Election Identity Card Passport.

Financial Documents.

4) For Salaried (Self attested copy of all of the following).

Salary slips of last 3 months. Latest Form -16. If salary above Rs.15, 000 p.m. Copy of bank Statement of salaried account or any other bank account for last 6 months. Company profile if it is a lesser known organization. Loan statement with current outstanding balance and overdue if any and repayment

schedule.

5) For Self-employed professionals. (Self attested copy of all of the following).

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Last 3 years IT returns of the applicant along with computation of income self attested. Last three years Balance sheet and Profit & loss A/C of the firm self attested. Brief Business Profile on letterhead of the firm by the applicant. All bank statements for last 1 yr for saving A/C and Current A/C. Shop & Establishment License/registration/VAT registration/any other mandatory

license. Partnership deed (if applicable) TDS certificate i.e. Form 16-A(if applicable) Details of major financial transactions with the clients (if applicable) Advance tax paid/self assessment tax paid challan.

6) For Self-employed business. (Copy of all of the following).Self attested.

Last 3 yrs income tax return with computation of income self attested. Last 3 yrs Balance sheet and Profit & Loss A/C of the company self attested. Brief business profile on the letter head of the company. All bank statements for last 1 year for saving A/C and current A/C. Shop & Establishment License/registration/VAT registration/any other mandatory

license. If Pvt. Ltd then MOU Partnership deed (if applicable) TDS certificate i.e. Form 16-A(if applicable) Details of major financial transactions with the clients (if applicable) Advance tax paid/self assessment tax paid challan. Details of contracts undertaken during last 2 yrs.(If applicable)

GENERAL DOCUMENTS

c. General documents (for all 3 categories of applicants i.e. salaried, self-employed, business)

Recent Passport size photographs of the applicant as well as the co-applicant. Details of existing loan (loan outstanding, total no: of installments and balance no: of

installments with schedule.) Property documents of the proposed property along with necessary approval & chain

title.

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d. General document (for salaried)

Copy of employee Identity Card (to be verified with original at the verification step.)

g. General documents (for self employed professionals) (Copy of all) to be verified with original at the verification step.

Professional Qualification certificate. Practice Certificate. Salary certificate(in case of having salaried income)

h. General document (for self employed business) Copy of list of clients.

i. Documents to be submitted for NRI loan proposal. Copy of visa stamped on the passport. Copy of the latest work permit. Copy of employment contract. Salary certificate from the employer. Copy of sanctioned plan of the house to be constructed or a copy of the building plan in

case of flat. Detailed estimate of construction cost for self construction cases from a qualified

architect. Agreement for Sale/Title document and other documentary evidences as per the local

laws and acceptable to the panel advocate for submitting non-encumbrance and marketability report of the property.

In case the property is to be purchased from Housing Board/Development Authority or a housing Co-operative society, an allotment letter from the agency concerned, along with No-Objection letter, for creating mortgage in favour of VHFL.

e. Security documents Original documents In case of security document lodged for registration under the Indian Registration Act,

the receipt issued by the Registrar. Certified copies/original of receipt for payment made to the builder or co-operative

society.

CHECKLIST OF TITLE DOCUMENTS

4. For properties already acquired/owned by the borrower.

Free hold properties.

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Registered deed by which the property is transferred in favour of the borrower in original. All previous registered title deeds in original.5. Lease hold properties. --- Lease hold properties of statutory bodies/development authorities allotted

directly to the borrower.

Lease deed and allotment letter in favour of borrower in original. Permission to mortgage the property in favour of lender from development authority.---

Lease hold properties of other than statutory bodies/development authorities. Registered lease deed in favour of applicant in original. Permission from the lessor to mortgage the property in favour of lender. Certified copies of title deed of the lessor.6. Purchase of property.

---Purchaser of plot from Cooperative Group Housing Society.

Allotment letter issued by the Society in original. Share Certificate issued by the Society in original. Registered lease/sale deed in favour of the borrower in original as soon as it is executed

by the society. NOC from society. Possession letter confirming handing over possession of identified plot. Certified copy of the Bye-laws and Title deeds of the society. Approved layout sanctioned plan.

---- Purchaser of plot/flats/house allotted by statutory authority/development authority.

Allotment letter/allocation letter issued by the Statutory

f. Interview

The applicant and co-applicant are to be interviewed to verify the details furnished by the applicant in the application form, documents submitted and during the personal discussion are consistent & to assess the attitude of the applicant/s & elicit additional information across the table and to judge the general credit worthiness.

While interviewing the service centre official should record his impressions in the prescribed interview sheet.

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g. AppraisalIt should be done in 3 stages financial, technical and legal. Financial appraisal needs to be done to check the creditworthiness of the applicant and the loan eligibility so that the repayment of the EMI is regular and on time & to mitigate risk by considering the income, no: of dependents, assets & liabilities of applicant/s.While working out the repayment capacity, credit should be given for voluntary savings like additional provident fund contribution, contribution to saving plans, premium for insurance policies not assigned as collateral security.Average of income based on ITR ignoring abnormal fluctuations.Depreciation to the extent of 75% to be added back to arrive at disposable income of applicant. In exceptional cases 100% of depreciation may be considered.While technical & legal should be done to ensure that the property proposed to be financed & mortgaged is marketable, enforceable and with clear title, to reduce risk , to assess the quality of security for the loan, the margin provided i.e. value of property minus loan amount & to calculate Loan To Value Ratio & Loan To Cost Ratio to arrive at the decision of recommending the proposal for sanctioning.Care to be taken to avoid financing property having location handicaps or other types of infirmities.

SANCTIONA. ParameterLoan-Cost Ratio (LCR) up to 75% (with 5% deviation) as mentioned in LCR normsLoan to Value Ratio (LTV) up to 75% (with 5% deviation) as mentioned in LTV norms.Installment-Income Ratio (IIR) 45% -65% (with 5% deviation) as mentioned in IIR norms.Per Capita Residual Income (PCRI) should be adequate and comfortable as mentioned in PCRI norms.

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Guarantors One guarantor preferable should be of similar financial status as that of the applicant preferably a Govt. employee.

i. Net income should be arrived at after due consideration of tax relief.ii. IIR may be relaxed in the cases of high income group as the saving capacity is generally

better.iii. Young professionals with prospects of increase in salary/income may be allowed higher

IIRiv. Where the property is intended to be let out, net rental income should be added to the

income to determine eligible loan amount. It generally happens in the case of govt. employees entitled to quarters even after buying a house. Certain organizations allow the system of self-lease where the employee is allowed to put his own flat on lease for self-use. In such cases due credit may be given for lease rent available to the employee.

v. Normally acceptable loan term is 3-20 yrs. However , 15 yrs term is the most advantageous. Loan term is allowed up to 75 years of age.

vi. The sanctioning authority should ensure: The value of property is adequate and the LCR is comfortable. The financial position of the applicant is satisfactory and his repaying capacity is

properly assessed vis-à-vis his personal and social obligations. The IIR and PCRI should be meeting the acceptable norms. The authenticity of the documents of proof of income & resources should be verified.

B. ISSUE OF OFFEROn sanction of loan, loan offer should be issued in duplicate in the prescribed format. It should be ensured that special conditions if any prescribed by the sanction authority are incorporated in the loan offer letter.The duplicate copy is to be marked “Acceptance Copy” and the applicant is given 30 days time from its date to return it duly signed signifying the acceptance along with administrative fee and is valid for 90 days from the sanction date. In exceptional cases it can be revalidated for further period by the sanction authority.

C. ACCEPTANCE OF OFFEROn acceptance of the loan offer, it is due for disbursement.

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DISBURSEMENT:c. Pre-requisite:

A sanctioned loan is due for disbursement when following requirements are completed. The title is approved as clear and marketable. Supported by valuation report. The applicant has invested his share and it is substantiated by documents, if any. Loan documents are duly executed. Post-dated cheques towards pre EMI/EMI are collected. Additional conditions as per Sanction note are compiled with.

d. List of documents to be executed. Loan Agreement –Housing (if applicable) Loan Agreement – Personal (if applicable) Demand Promissory Note Affidavit (General) Declaration of Plot Deed of guarantee Disbursement request letter General Power of Attorney Delivery Note Memorandum of Deposit of Title deeds

e. DISBURSEMENT OF INSTALLMENTS & FINAL DISBURSEMENTThe amount of loan to be disbursed should be in the same proportion as the value of the work completed bears to the total cost, after deducting previous disbursements, if any through A/c payee cheque duly approved by the Managing Director/Sanction authority at Corporate Office/Registered Office.Under no circumstances loan disbursements will be made in cash.

The final installment of loan will be disbursed when the house/ flat is completed and technical inspector certifies that the construction is complete and ready for occupation.

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NOTE: In case of loan for purchase of completed house/flat or on second purchase, as the entire purchase consideration will have to be disbursed in one lump sum, the borrower has to bring in his share before we disburse.

RECOVERY MANAGEMENTAfter the disbursement of loan has been made to the borrower. As per the Loan Agreement, the borrower has to repay the loan In Equal Monthly Installments (EMI) by way of Post Dated Cheques (PDC). Any delay in payment or non-payment of dues attracts additional interest. Hence the borrower should be duly considered about the repayment terms at the time of disbursement. The PDC are generally accepted for a year and replenished annually. The effective running of any Company depends on its cash flow, the repayments of loan has to be managed effectively.

The recovery procedure can be divided into following:

a. Management of PDCThe PDCs should be collected at the time of first disbursement. The borrowers need to deposit a minimum of 12 cheques to 36 cheques.Fresh PDC are to be called once the old bunch is exhausted. Since the loan term ranges from 3-20 yrs, while PDCs are collected in lots, a constant monitoring is to be done.When the PDCs are exhausted borrower needs to be informed 2 months in advance by the way of written communication and thereafter telephonically. In case the cheques are not received then borrower needs to be given a second reminder before 1 month and get them replenished.Any delay in deposit of cheques attracts penal interest which needs to be communicated to the borrower.The PDCs may have to be exchanged due to various reasons as:

Borrower may take additional loan. In such cases either fresh cheques for new loan should be asked or PDCs for total loan may be taken in which case previous cheques are returned.

Due to revision of ROI, the term or EMI of the loan may change. In such cases due intimation needs to be sent to the borrower, either for new cheques of revised EMI or extension of the term of loan

Borrower changing / closing Bank Account.

b. Management of Cheque dishonoursDishonour of cheques in any loan account has to be monitored diligently. A cheque can be dishonoured due to many reasons. In case of cheque dishonor the borrower has to be immediately contacted on phone and simultaneously a written intimation can be sent

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citing the reasons for the same. It should be insisted that the payment in lieu of cheque dishonor should be made by cash. However dishonoured cheques can be represented on request of the borrower if the reason for dishonor is other than for insufficient funds.

Follow up of irregular / overdue / NPA advances

Generally loans and advances become irregular because of non payment of installments and/or / interest and or due to non renewal of the operative credit facilities. Such accounts turn NPA if timely care is not taken for their recovery/regularisation. As the interest on such NPA's cannot be recognised, the profitability of the company is adversely affected.  With a view to avoiding the accounts turning NPA steps are required to be taken immediately on an account becoming technically irregular.  In view of the following steps would be initiated-

1. In case of term loans if two monthly, one quarterly, one half yearly or one annual installment remain unpaid, the borrower be personally contacted and a notice demanding the due installments be issued simultaneously.

2. In case two monthly, one quarterly, one half yearly or one annual installment and the interest on the account remain to be unpaid for more than two months, steps be taken for taking possession of the securities for the loans.

3. In case of operative credit facilities which are to be renewed annually a notice be issued to the concerned borrower two months before the due date advising to submit the papers required for the renewal of the limit.  This would help to judge whether the limit is going to be renewed or otherwise and to take appropriate steps.

4. Even after taking above mentioned steps the account is not regularised/renewed and it is turned NPA, the documents of such loan accounts be thoroughly examined and discrepancies therein if any be got rectified.  Acknowledgement of debt would be obtained from the borrower and the guarantor.  The securities for the loan facility would be taken into possession.

5. All the fixed deposits obtained as security/collateral security for the loan/credit facility would be appropriated towards the outstanding immediately after the account is identified as NPA.

6. The borrower and the guarantor would be constantly followed up for recovery/regularisation of the account and in case no desired response is received, a legal notice through an advocate on the Company's panel would be issued to the borrower and the guarantor in six months from the date of identification of the account as NPA with prior approval of the Head Office.

7. Considering the genuine difficulties of the borrowers, their accounts may be rescheduled/ restructured if they turn NPA.

8. In case the borrowers difficulties are genuine and in case he is ready to pay the outstanding in one lump sum if the penal interest is waived, his request may be

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considered sympathetically and the penal interest be waived. Such proposals, however, are to be got approved from Corporate Office.

9. It should be ensured that the statements showing position of NPA's for the quarter ending March every year are received at Corporate Office immediately after the financial year is over.  Such statements be thoroughly scrutinized and the data of all the branches be consolidated.  Based on these figures targets for recovery be fixed in consultation with the Service center in charge .  Corporate Office should follow up with the branches for achievement of targets by reviewing the position on quarterly basis.

Control over Irregular Advances and Non Performing Assets

1. In case of term loans where two monthly installments, one quarterly, one half yearly or one annual installment have remained unpaid, such account be classified as irregular account.  Similarly in case of Cash Credit/Operative Credit facilities if the facility is not renewed/ reviewed within two months from the due date such account be classified as irregular.

2. The accounts which have been classified as irregular be reported by branches on monthly basis to Corporate Office in a prescribed format. Such statements would be scrutinised thoroughly by the Corporate Office and the branches be guided suitably for recovery.

3. All the loans and advances would be classified in four categories as per the norms prescribed by Reserve Bank of India namely 1) Standard, 2) Sub-standard, 3) Doubtful and 4) Loss Assets.  The classification made by the branches would be verified by Internal Inspecting Officers and / or Concurrent Auditors.

4. Statements showing position of NPA accounts would be called from the branches to Head Office on quarterly basis.  Such statements be scrutinised thoroughly by the Head Office and the branches be guided for recovery.

5. The position of recovery in NPA accounts would be called from branches on monthly basis and the position of recovery would be placed before the Board of Directors on monthly basis.

6. Position of top 10 NPA accounts would be placed before the Board on quarterly basis.  Similarly the comparative position of amount involved in NPA's, Recovery and provision held for the NPA's be also placed before the Board on quarterly basis.

7. Recoveries affected in doubtful and loss assets would be first appropriated towards principal.

Collection of dues and security repossession Policy:

The debt collection of the company is built around dignity and respect to customers. The Company will not follow policies that are unduly coercive in collection of dues. The policy is built on courtesy, fair treatment and persuasion. The Company believes in following fair practices with regard to collection of dues and repossession of security and thereby fostering customer confidence and long - term relationship.

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The repayment schedule for any loan sanctioned by the Company will be fixed taking into account paying capacity and cash flow pattern of the borrower. The Company will explain to the customer upfront the method of calculation of interest and how the Equated Monthly Installments (EMI) or payments through any other mode of repayment will be appropriated against interest and principal due from the customers. The Company would expect the customers to adhere to the repayment schedule agreed to and approach the Company for assistance and guidance in case of genuine difficulty in meeting repayment obligations.Company's Security Repossession Policy aims at recovery of dues in the event of defaults and is not aimed at whimsical deprivation of the property. The policy recognised fairness and transparency in repossession, valuation and realisation of security. All the practices adopted by the Company for follow up and recovery of dues and repossession of security will be inconsonance with law.

General Guidelines.All the members of the staff or any person authorised to represent our Company in collection or/and security repossession would follow the guidelines set out below:

1. The customer would be contacted ordinarily at the place of his / her residence and if unavailable at his / her residence, at the place of business / occupation.

2. Identity and authority of persons authorised to represent Company for follow up and recovery of dues would be made known to the borrowers at first instance. The Company staff or any person authorised to represent the Company in collection of dues or / and security repossession will identify himself / herself and display the authority letter issued by the Company upon request.

3. The Company would respect privacy of its borrowers.

4. The Company is committed to ensure that all written and verbal communication with it s borrowers will be in simple business language and Company will adopt civil manners for interaction with borrowers.

5. Normally the Company's representatives will contact the borrower between 0800 hrs and 2000 hrs, unless the special circumstance of her/his business or occupation requires the Company to contact at a different time.

6. Borrower's requests to avoid calls a particular time or at a particular place would be honoured as far as possible.

7. The Company will document the efforts made for the recovery of dues and the copies of communication set to customers, if any, will be kept on record.

8. All assistance will be given to resolve disputes or differences regarding dues in a mutually acceptable and in an orderly manner.

9. Inappropriate occasions such as bereavement in the family or such other calamitous occasions will be avoided for making calls /visits to collect dues.

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 Giving Notice to borrowers

While written communications, telephonic reminders or visits by the Company's representatives to the borrowers place or residence would be used as loan follow up measures, the Company will not initiate any legal or other recovery measures including repossession of the security without giving due notice in writing. Company would follow all such procedures as required under law for recovery/repossession of security.

Repossession of SecurityRepossession of security is aimed at recovery of dues and not to deprive the borrower of the property. The recovery process through repossession of security will involve repossession, valuation of security and realisation of security through appropriate means. All these would be carried out in a fair and transparent manner. Repossession will be done only after issuing the notice as detailed above. Due process of law would be followed while taking repossession of the property. The Company will take all reasonable care for ensuring the safety and security of the property after taking custody, in the course of the business.

Valuation and Sale of PropertyValuation and sale of property repossessed by the Company will be carried out as per law and in a fair and transparent manner. The Company will have right to recover from the borrower the balance due if any, after sale of property. Excess amount if any, obtained on sale of property will be returned to the borrower after meeting all the related expenses provided the Company is not having any other claims against the customer.

Opportunity for the borrower to take back the security

The Company would resort to repossession of security only for the purpose of realisation of its dues as the last resort and not with intention of depriving the borrower of the property. Accordingly, the Company would be willing to consider handing over possession of property to the borrower any time after repossession and before concluding sale transaction of the property, provided the Company dues are cleared in full. If satisfied with the genuineness of borrower's inability to pay the loan installments as per the schedule which resulted in the repossession of security, the Company may consider handing over the property after receiving the installments in arrears. However, this would be subject to the Company being convinced of the arrangements made by the borrower to ensure timely repayment of remaining installments in future.

Norms with respect to filing of suits  

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Considering the long drawn process in the litigation and difficulties in executing the decrees action of filing of suit be taken as a last resort.  Following norms be observed before filing of a suit.

1. A suit be filed only after making all the efforts such as personal contacts, demand notice from the branch or through advocate etc. and if the branch and the recovery department at Corporate Office comes to the conclusion that there is no alternative but to file a suit for recovery.

2. Before filing of the suit it should be ensured that the loan documents are complete in all respects and that the suit is well within the limitation period.  The position of documents be got examined form the Company's approved advocate.

3. Before filing of the suit final notice through Company's advocate be issued.

4. All the deposits obtained as security and / or collateral security be got appropriated towards the outstandings before filing of the suit.

5. All the assets such as machinery, vehicles, shares etc. in the custody of the Company would be disposed off and the sale proceeds would be appropriated towards the outstandings in the account and the suit would be filed for recovery of residual amount.

6. Suit would be filed through an Advocate on the Company's panel only.

7. Before filing of the suit information regarding movable/immovable assets of the borrower and the guarantor would be ascertained and steps be taken for attachment of these properties before judgement.

c. Recovery in case of default by the borrower.1. Default in Repayment.

There can be varied reasons for default in any account. Each and every account has to be scrutinized for the reasons of default. Every month the following statements should be generated after running PDCs.

a. Period wise defaultb. Account wise defaultc. Location wise defaultd. Cheque dishonor liste. List of NPAs

After generating the statements the same are to be analysed and appropriate action has to be initiated.The default recovery entails the following line of action.

a. Written and telephonic communication in case of cheque dishonor.b. First reminder letter to be sent in the first month of default followed by telephonic

reminder.

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c. After fifteen days the second reminder to be sent followed by a telephonic reminder.d. In the second month a third reminder to be sent and a telephonic intimation

communicating the further line of action which the company is going to take.e. The third reminder must be sent with a warning letter to recall the entire loan if full

payment is not made within the stipulated time.f. After this if no payment is received, appropriate legal notice must be sent.2. Default of SecurityA borrower may be regular in monthly installments but he may

default in creation of security or mortgage. In such cases a written communication has to be sent to the borrower to fulfill the requirements as per the terms of the loan in due time. If he does not comply within time the entire loan may be recalled.The loan is recalled in case of following events.

If the account has become NPA If any information given by the borrower in loan application form or otherwise is found

misleading or incorrect. If security for loan depreciates in value and additional security is not provided by the

borrower in lieu of it. Non creation of mortgage If the property or any part thereof is sold, disposed off, charged, encumbered or otherwise

alienated in any manner Security becomes unenforceable Inability to pay debts

REGISTERS/RECORDS TO BE MAINTAINED

1. Sanction register

2. Disbursement register

3. PDC register

4. Equitable mortgage register

5. Collateral Security register

6. Insurance register

7. Outstanding loan register

8. Default follow up register/file

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SEQUENCE OF FILING OF LOAN PAPERS/DOCUMENTS

The papers/documents should be filed in the following sequence in the CARD FILE and the LOAN DOCKET COVER.All the papers/documents pertaining to appraisal, sanction, disbursement, monitoring, follow-up, recovery, closure, loan security documents are divided into two parts for filing purpose namely, PART-1 and PART-2.

PART-1:Consists of papers pertaining to information needed in appraisal, sanction & disbursement of loan. Thereafter, all correspondence relating to follow up, till closure of the loan such as loan reminders, notices etc; are also required to be filed in this file, only All papers pertaining to Part-1 should be filed in the CARD FILE, which can be stored in the ordinary cupboard/storage cabins etc, so that these card files can be taken any number of times in a day for reference purpose, if needed. These files need not be stored in the fire proof cabinet. Access to these files ,can generally be by the credit department staff and there is no restriction in this regard.PART-2This part of papers pertains to security documents which are required to be kept in the loan DOCKET COVER and stored in the fire proof storage cabinets. Accesses to these documents are restricted only to the authorized persons.(Security documents consist of papers which are required to be filed in the court, in case of an account becoming NPA & recovery is through intervention of the court.

PART- 1 CARD FILE: In this file, all the papers needed /pertaining to appraisal of loan, sanction,

disbursement, monitoring, follow-up, are required to be filed in the following sequence (wherever applicable)

Application form with photos of the applicants and guarantor wherever applicable.

Papers pertaining to identity of the applicants(namely, passport copy ,pan card copy, voters identity copy, driving license copy, ration card copy ,employment identity copy, membership identity card copy (in case of professionals etc).

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Supporting information papers. (As applicable) Salary certificate/salary slip as applicable Appointment letter/qualification certificate copy. Form-16/form-16 A as applicable. Income tax returns for the last 3 years. Bank statement for the last 6 months. Latest electricity/telephone bill copies. Copy of credit card bills Brief profile of business/profession Rent receipt wherever applicable Membership certificate in case of professionals. Registration certificate copy for professionals, service tax, VAT copy etc. Personal Discussion form(salaried/self employed/business people –as

applicable) Supplemental income supporting papers such as agricultural income,

Tuition income, rental income, other income etc. Verification reports, such as: IT verification report. Residence verification report Verification of bank statement Legal scrutiny report Technical scrutiny report Applicants evaluation form Letter of offer/Acceptance(one copy of this form is also required to be

kept along with the loan documents) Assignment of LIC policies. Declaration from the borrower for assignment of LIC policies. Assignment of policies. Notice of assignment of policies. Post sanction inspection reports, copies of notices sent to the borrowers for

payment of EMIs, recall of loans in case of accounts where installments are not coming as per the terms of sanction, and all other correspondence relating to recovery.

Memorandum for reschedulement of loan wherever applicable. Memorandum proposing legal action, Recovery under SARFAESI act,

Waiver of legal action, Memorandum for compromise settlement, writes of memorandum, Notices under SARFAESI ACT etc; as applicable.

Reassignment of policies upon closure of loan amount.

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Application form should be at the bottom of the card file followed by the above papers in ascending sequence from 1 to 13.(In other words the sequence of filing the papers pertaining to PART-1 should be form 13 at the top to 1 at the bottom in descending order)

The above order facilitates easy reference, at any point of time.

PART -2 LOAN DOCKET COVER:The loan docket cover should contain the following papers, in the sequence in which they are stated. The loan docket cover should be stored in the fire proof cabinet only.

Demand Promissory Note(DPN) Loan Agreement(LA) Letter of request for disbursement of loan Deedr of Guarantee (DG)-wherever applicable. Papers relating to Equitable mortgage/Registered mortgage Power of Attorney Affidavit cum undertaking Original Title deeds to the property, as per legal opinion, along with original chain

documents. Original LIC policies,(duly assigned) NSCs, FD receipts etc; duly discharged. Encumbrance certificate as per legal scrutiny report. Original copy of registration receipt from the sub-registrar wherever applicable. Society allotment letter & share certificate (wherever applicable) NOC from govt./semi-govt. organizations, societies,agencies. In construction cases: a) original approval plan b) Original estimates. Letter of offer cum Acceptance.

The following additional documents as applicable in each account. Supplementary loan agreement for Home Improvement loan/home extension loan. Consent letter from the existing guarantor for fresh guarantee for additional loan or

variation in terms of sanction or a new guarantor. Extension of equitable/Registered mortgage for additional limits. Request letter for reschedulement of loan, change from floating rate to fixed rate or vice

versa. Supplementary loan agreement for change from floating rate to fixed rate or vice versa. Acknowledgement of securities. Original payment receipt to the builder.(wherever applicable) Possession of the flat/house(wherever applicable)

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All the service centre in charge /appraisal officers/accountants at the service centre are advised to follow the above procedure, for uniformity without fail.

6.CONCLUSION

Looking into the following plans of the company the above proposed process will definitely provide a route map to the desired goals

Non-retail led growth in the mid term

The Company intends to pursue aggressive growth targets in loan disbursements, while maintaining lending spreads of 2.5-3.0% in its target lending to the mid/lower middle classes (i.e. of an average loan advance of Rs 6 L or so) on housing loans and spreads of 5-5.5% on non-housing loans.

The Company expects to continue to acquire customers through its relationship with real estate developers, including those it has existing relationships with.

This referral process from developers reduces customer acquisition costs and is expected to continue till at least the Rs70 cr loan portfolio level, which will serve the Company’s growth target till 2010-11.

Past the Rs70 cr loan portfolio size, the Company will develop a retail presence, starting with a branch network at key locations its existing and prospective borrowers are located at, primarily NCR, Haryana (Ambala and Rewari), and in Orissa (Bhubaneswar). This is planned in 2009-10.

Managing Risk

1. Security: The Company manages the risk of default by relying on high levels of security of the underlying asset mortgaged to the Company. This has two aspects. Firstly, LTV levels are typically lower than the industry average which serves are primary security. Also, additional security in terms of LIC policies, personal guarantees, etc., add further security. This leads to adequate and very prudent levels of security. Second, the means of enforcing foreclosure of the loan in the event of willful default is made possible by adequate documentation and process (deed of mortgage, etc.), as well as ensuring that the secured asset is equitable mortgage in all respects. This ensures that recovery is possible through the courts in the event of default, and the Company will apply to NHB to take up provisions of SARFESI aided recovery. Together, the high levels of security as well as enforceable recovery lead to adequate de-risking.

2. NPAs: The Company manages the risk of poor servicing of loans by loanees primarily through

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rigorous sanctioning process, where income proof and background checks are required. This is especially important since IIR is typically as high as the industry average. It is well understood that adequate checks during sanctioning de-risk the possibility of default, and that recovery subsequently (in the event of default) is only a tool of limited use. With this in mind, the Company focuses on prudent sanctioning process managed by ex-bankers and PSU housing finance companies, typically more risk averse than the market norm.

The above risk mitigation techniques will work well for the Company.

Deployment Plan

Loan Schemes of the Company

The Company develops loan schemes in various developments that real estate developers the Company is associated with may offer for sale to the public. These loan schemes take up the bulk of disbursals of the Company.

The advantage of these bulk loan schemes is the reduced due diligence and transaction cost the Company bears, while still being secured through equitable mortgage assets.

Upcoming deployment proposals are indicated below.

1. Affordable Housing Projects in Orissa - It is expected that Rs12-14 cr will be able to be deployed in affordable homes (sub Rs7 lacs) being developed in Bhubaneswar area, where equitable mortgage is offered.

2. Affordable Housing Projects in NCR for which MoU being negotiated at present - It is expected that Rs 10-12 cr will be able to be deployed in affordable homes (sub Rs 7 lacs) being developed in Bhiwadi-NCR area, where equitable mortgage is offered.

This is over and above the Rs 2 cr + per month that the Company disburses through the NCR offices in Delhi and Palwal. This it is expected that Rs12-17 cr can be prudently deployed within 2009-10, leading to a portfolio of Rs20-25 cr by March 2010. This is achievable as per demonstrated performance, but this target is currently hampered by a shortfall in borrowings.

Scaling Up the Company

Scale of Operations and Deployment

The Company expects to grow even faster in the subsequent years, having achieved initial success over the past 3 years.

During this period, VHFL has implemented significant management change, tightened shareholding, introduced high governance standards, and aligned accounting practices with the industry. It has thus been able to convince lenders to come forward with debt funds, while growing shareholder equity enough to satisfy regulatory guidelines (not so much that the logic of debt leveraging is diminished). 2007-08 shows the result of this turnaround with outstanding loans growing by over 52% year-on-year, although 2008-09 has been compromised on account of an inability to raise funds in the difficult credit scenario.

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At the same time, with increased accountability by managers to the Board, greater professionalism in daily execution has led to rising efficiencies in loan operations, deployment, processing times, and other such metrics. The Company’s ability to deal with the issues of small scale and regulatory oversight has been demonstrated.

The Company, in the view of management, is poised for strong growth over the next 3+ years. This will occur over two phases. The first is by leveraging up through substantial debt with rising equity/NOF, which is to say, to exploit the leveraging permitted under NHB guidelines. The second is by substantial equity infusion on the basis of a strategic sale to an institutional investor, who will also bring in the matching levels of debt to maintain relevant leveraging ratios.

The table below projects such a growth plan.

LOANS DISBURSED 2009-10E 2010-11E 2011-12E CAGR

HOUSING LOANS 1010.93 1750.50 2106.00

NON-HOUSING LOANS 112.32 194.50 234.00

TOTAL 1123.25 1945.00 2340.00 TOTAL

LOAN PORTFOLIO 1792.00 3737.52 6085.90 21.3%

Loan Groth Chart

0

1000

2000

3000

4000

5000

6000

7000

8000

2009-10E 2010-11E 2011-12E 2012-13E 2013-14E 2014-15E 2015-16E

NON-HOUSINGLOANS

HOUSING LOANS

Increase in NOF

As of 31 March 2009, The Company has Net Owned Funds of Rs 337.75 lacs, rising to Rs 462.80 lacs as at 31 January 2010. Under NHB Directions, a HFC is permitted borrowings of up to 16 times NOF (risk weighted), although a more usual leverage ratio is x8-10. The Company has outstanding borrowings of Rs 771.05 lacs as at 31 January 2010, or a leverage ratio of 1.67 times NOF. By any measure, it is clear that the Company is underleveraged.

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Upon availing of the proposed term loan, and reaching a more reasonable leveraging of 5-6 times NOF, the Company will further increase in its paid-up equity, through infusion by existing shareholders and, in due course, through strategic divestment to new investors. As an estimate, the Company expects to increase paid-up equity so as to reach NOF of Rs10 cr in 2010-11.

Credit Rating

The Company has commenced preliminary discussions with credit rating agencies to achieve credit rating of financial instruments, such as fixed deposits, that the Company expects to mobilize in 2010-11. It is required that the rating is of investment grade, and the Company will meet this requirement so that public deposits may be taken. The Company is making the necessary arrangements to get the external rating done as on 31-03-2010.

Organisational Structure of the Company

The Company has strengthened the organisation through key hires in the recent past.

As General Manager, Operations, Rajender Gaur leads the sustainable growth in loans portfolio, while ensuring that credit appraisal remains best in industry. As a veteran in the housing finance sector in NCR, he is well placed to achieve retail led growth, along with his team of origination and service staff.

A recent initiative is the rollout of an extensive software system of ERP, a critical part of which is a Loans Management System. All loan accounts, and their financial and daily management such as alerts, reminders, dues, etc are managed in a highly efficient manner. This is overseen by the Compliance team.

Branch network of the Company

The Company currently has no branches currently, but will start several small branches in 2009-10. It is expected that a minor branch network will gradually evolve over the next 1-2 years to enhance the Company’s customer service at key locations its existing borrowers are located at, primarily NCR and Haryana, in addition to serving new customers in Orissa.

Thus the process proposed will sustain the development plans of the company efficiently as the company has a very good prospects in future as there is phenomenal growth in the industry.

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7.BIBLIOGRAPHY

1. Books:-

The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors, Jonathan Golin.

Credit Appraisal, Risk Analysis And Decision Making, D D Mukherjee.

Credit risk : Pricing, Measurement And Management, Darrell, Duffie &Kenneth J. Singleton.

2.Websites:- www.refinancetoolbox.com/refinance loanprocess .htm

www.deal4 loans .com/ loans /.../sbi-hdfc-witness- flow -in- home - loan -offtake/

www.rupeetimes.com/.../ home _ loans / rate_cuts_unable_to_augment_ credit _ flow _to_housing_sector_2120.html

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