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Chapter 2
Introduction to Loans and advances
Meaning of Loans and Advances
The term loan refers to the amount borrowed by one person from another. The
amount is in the nature of loan and refers to the sum paid to the borrower. Thus
from the view point of borrower, it is borrowing and from the view point of
bank, it is lending. Loan may be regarded as credit granted where the money
is disbursed and its recovery is made on a later date. It is a debt for the
borrower. While granting loans, credit is given for a definite purpose and for a
predetermined period. Interest is charged on the loan at agreed rate and
intervals of payment. Advance on the other hand, is a credit facility granted
by the bank. Banks grant advances largely for short-term purposes, such as
purchase of goods traded in and meeting other short-term trading liabilities.
There is a sense of debt in loan, whereas an advance is a facility being availed
of by the borrower. However, like loans, advances are also to be repaid. Thus a
credit facility- repayable in instalments over a period is termed as loan while a
credit facility repayable within one year may be known as advances. However,
in the present lesson these two terms are used interchangeably.
Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial to
individuals, firms, companies and industrial concerns. The growth and
diversification of business activities are effected to a large extent through bank
financing. Loans and advances granted by banks help in meeting short-term and
long term financial needs of business enterprises. We can discuss the role
Lending of Money
Commercial banks lend money in four different ways: (a) direct loans, (b) cash
credit, (c) overdraft, and (d) discounting of bills. These are briefly discussed
below:
(I) Loans: Loan is the amount borrowed from bank. The nature of borrowing is
that the money is disbursed and recovery is made in installments. While lending
money by way of loan, credit is given for a definite purpose and for a predetermined period. Depending upon the purpose and period of loan, each bank
has its own procedure for granting loan. However the bank is at liberty to grant
the loan requested or refuse it depending upon its own cash position and
lending policy. There are two types of loan available from banks : (a) Demand
loan, and (b) Term loan
(a) A Demand Loan is a loan which is repayable on demand by the bank. In
other words, it is repayable at short-notice. The entire amount of demand loan
is disbursed at one time and the borrower has to pay interest on it. The
borrower can repay the loan either in lumpsum (one time) or as agreed with the
bank. For example, if it is so agreed the amount of loan may be repaid in
suitable instalments. Such loans are normally granted by banks against security.
The security may include materials or goods in stock, shares of companies or
any other asset. Demand loans are raised normally for working capital
purposes, like purchase of raw materials, making payment of short-term
liabilities.
(b) Term Loans : Medium and long term loans are called term loans. Term
loans are granted for more than a year and repayment of such loans is spread
over a longer period. The repayment is generally made in suitable instalments
of a fixed amount. Term loan is required for the purpose of starting a new
possession of goods to the banker whenever the banker requires him to do so.
So hypothetication is a device to create a charge over the asset under
circumstances in which transfer of possession is either inconvenient or
impracticable.
(III) Overdraft: Overdraft facility is more or less similar to cash credit
facility. Overdraft facility is the result of an agreement with the bank by which
a current account holder is allowed to draw over and above the credit balance in
his/her account. It is a short-period facility. This facility is made available to
current account holders who operate their account through cheques. The
customer is permitted to withdraw the amount of overdraft allowed as and when
he/she needs it and to repay it through deposits in the account as and when it is
convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of a written
request by the customer. Sometimes the bank also insists on either a promissory
note from the borrower or personal security of the borrower to ensure safety of
amount withdrawn by the customer. The interest rate on overdraft is higher than
is charged on loan. The following are some of the benefits of cash credits and
overdraft :(i)
(ii)
(iii)
loans are granted by banks to its borrowers to be repaid within a short period of
time not exceeding 15 months.
Short term loans are normally granted against the security of tangible assets
like goods in stock, shares, debentures, etc. The rate of interest charged on
short term loans ranges from 12% to 18% p.a.
(2) Term Loans:
Medium and long term loans are generally known as term loans. These loans
are granted for more than 15 months. In case of medium term loan, the period
ranges from 15 months to less than 5 years. Medium term loans are generally
granted for heavy repairs, expansion of existing units, modernization /
renovation etc. Such loans are sanctioned against the security of immovable
assets. The normal rate of interest ranges between 12% to 18% depending upon
the period, purpose, nature and amount of the loan. Though banks may grant
long term loans, they avoid granting loan for more than 5 years.
Loan. The plot on which the construction is being erected is purchased within a
period of one year, the cost of the plot is then also included as the component for
the valuation of total cost of the property. But in case the date of purchase exceeds
one year to the date of application the above condition is not applicable.
Home Extension Loans:
Home Extension Loans is offered for meeting the operating cost of alteration to an
existing building. Extension here means addition of an extra room etc.
Home Conversion Loans:
Home Conversion Loans are offered to those who want finance for the purchase of
another home by converting the already existing home and on which loan is
already sanctioned. Through this loan, the existing loan is transferred to the new
home including the extra amount required and there is no need for pre-payment of
the previous loan.
Land Purchase Loans:
Land Purchase Loans can be availed for purchasing land for both home
construction as well as investment purposes.
NRI Home Loans:
NRI Home Loans are meant for Non-Resident Indians who wish to build or buy a
home or property in India.
State Bank of Mysore offers loans for construction or purchase of a new house
or flat. It also offers loans for repairs / renovation / extension of existing house.
One can also avail of plot loans as well as loans for resale property. It also
offers loans against second charge. Loans are offered at fixed and floating
interest rates to Indian residents and NRIs.
Under Personal Segment, You can avail a loan for
Construction or Purchase of a new house or flat
Repairs / Renovation / Extension of existing house
For purchase of plot for construction of house within two years
For purchase of built houses not more than 15 years old
Housing loan against II charge
For Purchase of Furnishings / Consumer durables as part of the project
cost
Quantum of Loan amount
Upto Rs. 2.00 lacs
Above Rs. 2 lacs to Rs. 5 Lacs
Above Rs. 5 lacs
:
:
:
40% EMI
50% EMI
55% EMI
Rate of Interest
Float Interest Rate 9.25
Float EMI 18317.0
Tenure 20
Charge for Changing Fixed to Floating: Rs 1000
Security
Equitable mortgage of house property.
Interest
Penal interest of 1% in case of default of three or more consecutive
installments.
Processing charges
Disbursement
- Direct to the sellers in case of purchase.
- For Construction / Repairs / Renovations in a phased manner
Repayment
Repayable in monthly installments. Repayment period ranging from 5 to 25
years, including a moratorium period ranging from 6 to18 months from the date
of the first disbursement.
If the loan is pre-closed from own resources for which proof is submitted by the
borrower to the satisfaction of the Branch Manager, pre-closure penalty shall
not be levied irrespective of the period for which the account has run. In other
cases, where such proof is not produced by the borrowers, 2% penalty on the
amount prepaid in excess of normal EMI dues should be levied in case of preclosure of Home loans within 3 years from the date of commencement of
repayment.
Housing Loan
Under Personal Segment, You can avail a loan for
Construction or Purchase of a new house or flat
Repairs / Renovation / Extension of existing house
For purchase of plot for construction of house within two years
For purchase of built houses not more than 15 years old
Housing loan against II charge
For Purchase of Furnishings / Consumer durables as part of the project
cost
EMI / NMI
Upto Rs. 60000/Above Rs. 60000 to less than Rs.1,20,000/Above Rs. 1,20,000/- to less than Rs.2,00,000/Above Rs. 2,00,000 to less than Rs.5,00,000/-
Ratio
20%
25%
30%
50%
55%
65%
Margin
Amount
Margin (%)
20%
20%
25%
40%
Margin for Purchase of New houses which are ready for possession (Applicable to
First sale only)
Amount
Margin (%)
15%
20%
30%
Interest
Penal interest of 1% in case of default of three or more consecutive instalments.
Processing charges
Loan Amount
Upto Rs 25 Lacs
Rs 10,000/-
Lacs
Above Rs 75.00 Lacs
Rs 20,000/-
Insurance
The house property has to be insured covering all risks. Group insurance is
available to cover the life of the borrower on payment of one time upfront
premium.
Disbursement
Direct to the sellers in case of purchase.
For Construction / Repairs / Renovations in a phased manner
Repayment
Repayable in monthly instalments. Repayment period ranging from 5 to 25 years,
including a moratorium period ranging from 6 to18 months from the date of the
first disbursement.
Schemes and Interest Rates are subject to changes from time to time.
Attractive features of State Bank of Mysores Housing Finance scheme
Loans from State Bank of Mysore are cheaper than housing finance agencies
/ companies.
Nominal processing charges.
No administration charges.
No commitment charges.
Interest charged on reducing balances.
Facility available at all branches in India.
Exemption from wealth tax for one house under Wealth Tax Act.
Pre-payment Penalty
No Pre-closure / Pre-payment penalty on all Home Loans.
Terms and Conditions subject to change.
Minimum loan amount Rs. 10000/-. Demand Loans upto Rs.25000/- payable in
36 months. Demand Loans above Rs. 25000/- repayable in 36 months Term
loans repayable in more than 36 months and upto 60 months.
Simple security needed.
Hypothecation of assets created (articles bought)
Third party guarantee acceptable to the bank if check off facility is not
available.
Insurance Cover
Vehicles bought to be insured for full value.
For articles above Rs.10000/- insurance will be for market value or atleast
110% of the loan amount whichever is higher.
A small one-time service fee of 1% of the loan amount.
21years to 70years
Rs.2,00,000 (p.a.)
5,00,000 - 2,00,00000
Tenure
Current Experience
Documentation
5years-20years
5years-20years
2years
3years
1) Application form with 1) Application form with
photograph 2) Identity
photograph 2) Identity
Education qualifications
business existence 4)
credit statements 6)
Documents
(1) ADVOCATE Check List: (Prepare separate set)
Copies of Mother deed/parent document link deeds, allotment letter, Khatha
certificate/endorsement, up to date encumbrance & tax paid receipts. (In
case of flats, if the project is already approved by SBI panel advocate then
this is not required).
Copies of Agreement for sale, Construction Agreement
ORIGINAL Sub Registrar certified copy of the Sale Deed(for takeover loans
ORIGINAL of updated encumbrance certificate.
Copy of Plan sanction.
Copies of latest Khata certificate,Khata extract etc.
Upto date Tax paid receipts (Form-16).
Proof
of
Identity
(passport/pan
card)
2)
Proof
of
Residence
Employment Proof
Identity card issued by your employer
Visiting card
Age Proof
Passport
Voter's ID card
PAN card
Ration card
Employer's Identity card
School leaving certificate
Birth certificate
Residence Proof
Ration card
Passport
PAN card
Rent agreement, if you are staying currently on rent
Bank Pass book
Allotment letter from your company if you are residing in company
quarters.
authority)
Mortgage deed if the Bank opts for a registered mortgage.
No Objection Certificate from the developer, society or development authority
as applicable
Personal Guarantees, if applicable.
In case of alternate or additional security, documents for the same
depending upon the security details.
For self-construction: Approved plans and clearance certificates along
with estimates
Post dated cheques for the EMIs.
Confirmation of Rental Income Copy of the existing tenancy agreement, or a
rental appraisal, from a local real estate agent signed by branch manager, or
rental manager.
Deposit or Investments
Evidence of your deposit or investment funds, i.e. a bank statement or
term deposit receipt.
For low equity loans (5-19% deposit), copy of your savings account
statements over the last six months.
Sale and Purchase Agreement
If you are planning to buy a property, please provide a copy of the
successful sale and purchase agreement signed by both you and the
vendor.
If you are planning to sell or have already sold your existing property,
please provide a copy of that property's sales and purchase agreement.
PURPOSE
The bank offers home loans for purchase and/or construction of house property
as well as plot loans.
It offers loans for: