JAIIB PPB Unit 25 - Credit Cards, Home Loans, Personal Loans and Consumer Loans

Credit card is the one of the delivery channels of the banking services. It is a small plastic card issued to users as a system of payment.

It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.

The issuer of the card creates a revolving account and grants a line of credit to the consumer from which the user can borrow money for payment to a merchant or as a cash advance to the user.

Benefits to Credit Card Holders

• They can purchase goods and services at a large number of merchant outlets up to the inbuilt ceiling credit limit amount without using cash or cheque. This is generally useful in emergencies.
• Card holder has a period of interest free credit, depending upon the issuing bank and the card scheme, i.e. the normal card and gold cards, as offered by various banks. The period of interest free credit ranges from 15 days to 51 days.
• Cash up to a ceiling, within the credit limit is obtainable from the banks' branches or ATMs (Automated Teller Machines).

Disadvantages to Credit Card Holders

• Often results in over spending.
• Frauds, due to a loss of card in the intervening periods.
• Since signatures are already on the cards, forged signatures could cause a loss to the card holders. Such kind of a forged signature loss is avoided with the use of photo credit cards.

Parties involved in Credit Card

Cardholder: The holder of the card used to make a purchase; the consumer.

Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards.

Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.

Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.

Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.

Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.

Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.

Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.

Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.

Home Loans

Home loans are available to resident Indians and NRIs for the purchase or construction of house or flats, repairs and renovation of house.

The Procedure and Practices for Home Loans

Target Group: Normally, the target group is the salaried class, professionals, self-employed and business¬men. Banks fix the age criteria for availing the loan.

Purpose: The purpose of the loan is for the purchase or construction of house or flats, repairs and renovation of house, and in some banks, for purchase of house sites also.

Quantum of loan: The quantum of eligible loan is fixed based on the gross monthly income/net monthly income. For this, banks ask for a salary certificate for the salaried class or the Income tax return for others. Bank also ask for the statement of bank account for a prescribed period.

Age: Banks fix the lower and upper age for availing the loan taking in to consideration the remaining period of service, in the case of salaried class and the income earning capacity during the period of loan for others.

Repayment: Most of the banks are giving long repayment period, say 20-25 years. The repayment will be based on equated monthly instalments (EMI). In case of loan for purchase of a ready built house, it should be ensured that the remaining life of the building should be longer than the repayment period allowed, plus a cushion period, says ten years. Normally banks allow a holiday period for repayment. The holiday period for construction will be more than it is, for the purchase of ready built house.

Security: Generally, the property purchased or constructed out of the bank loan is taken by way of mortgage. Sometimes, when the income of the spouse is taken for arriving at the quantum of loan, his/ her guarantee is also taken as personal security.

Margin: Banks stipulate that a certain percentage of the project cost, say fifteen per cent, is to be borne by the borrower from his own sources. When the loan is for repairs/renovation, banks stipulate a higher margin.

Rate of Interest: When compared to the rate of interest for other loans, the rate of interest for home loan is cheaper. Most of the banks offer a rate of interest below the 'Bench Mark Prime Lending Rate' (BPLR). Banks also offer a floating rate and a fixed rate option to the borrower.

Documents Required

At the time of applying for the loan, the banks ask for some necessary documents namely;

• Agreement of Sale/Sale deed
• No Encumbrance certificate NIL EC (for 13 years)
• Parent document for 30 years
• Approved building plan
• Patta (NOC from Housing Board, etc., wherever applicable)
• Valuation report from the Bank's approved engineer
• Bank statement for last 12 months

Personal Loans

Procedure and Practices for Salary Loans

Target group: Permanent employees with a minimum service/experience of say three years, with a Govt./quasi Govt./boards/endowments/reputed companies/corporate industrial establishments, etc. The stipulation of minimum period of service may vary from bank to bank.

Purpose: For meeting of marriage/educational and medical expenses, to celebrate family functions and for other household expenses.

Eligible Amount: The eligible amount of a loan is calculated based on so many times of the gross/net salary. While arriving at the quantum of loan, the minimum take home pay say, forty per cent of the gross salary, will be stipulated after the proposed EMI.

Security: Sometimes banks insist on the guarantee of another person, if there is no collateral security, or in case, the account is with the branch, a letter giving an undertaking from the borrower to debit his account for the EMI. When the employer of the borrower sponsors the
loan, h is asked for an undertaking, to the bank to recover the EMI from the salary and remit into the bank.

Documents: Proof of employment and salary certificate are normally obtained. After sanction of the loan, banks take the necessary loan documents such as; DPN, salary loan agreement, etc., from the borrower and a guarantee agreement from the guarantor, if any.

The rate of interest on this loan will be higher than other loans as there is no collateral security.

Some banks are taking post-dated cheques for the future EMI.

Banks allow 36-60 months as repayment period.

Normally banks levy a certain percentage of the loan amount; say one per cent, as a processing fee.

Consumer Loans

Target group: Salaried class, pensioners, professionals, self-employed business persons and other individuals who have regular income.

Purpose: For purchase of consumer durables and white goods like TV, VCR, VCP, air conditioners, refrigerators, personal computers and accessories, etc.

Eligible amount: While arriving at the quantum of loan, the cost of the article to be purchased and the margin be brought by the borrower are taken into account. The minimum take home pay, say forty per cent of the gross salary, shall also be ensured after the proposed EMI.

Security: Hypothecation of the article purchased out of the bank loan.

Margin: Normally a margin of 10-20 per cent is stipulated.

Repayment: Banks allow a thirty six to sixty months repayment period.

Documents: The documents to be obtained are: salary certificate for three months for self and spouse (if spouse income is also taken into account for arriving at the eligibility) IT returns/Form 16 for two to three years in case of professionals, businessmen, Self-employed persons. Quotations of the articles selected from a reputed dealer. Statement of account/passbook, showing one year's transactions. Some banks are taking post-dated cheques for the future EMI.

After sanction of the loan, banks take necessary loan documents such as DPN, hypothecation agreement, etc., from the borrower and a guarantee agreement from the guarantor if any.

Normally banks levy a certain percentage of the loan amount, say one per cent, as a processing fee.