CA Parth B. Talsania
Introduction : Due to the unequal distribution of wealth, India has arrived at a situation where the affluent class gets richer and richer and the underprivileged becomes poorer and poorer. To bridge this financial gap and to satisfy the day to day requirements of the underprivileged, banks play a vital role by offering various loans to the finance seekers. If you already have a loan, more likely than not it is costing you more than it should. Even though there are a number of great opportunities to make your money work harder, most people don’t bother changing their loan and hence stick with a loan rate that doesn’t reflect the best deal. To avoid this, every borrower should have prior knowledge about the various bank loans in India, for which they are eligible.
A. Home Loan
If you thought Home loans are just available as a standard offering, you’re clearly mistaken.
Home Loan Types:
1. Home Purchase Loan
This type of loan is a simple home loan that allows you to purchase a new residential property.
2. Home Improvement Loan
If you ever wanted to renovate your home with a new aesthetic look or just wanted to structurally enhance and strengthen it, this type of home loan is what you’re looking for. It is basically concerned with the costs to renovate or repair your existing home.
3. Home Construction Loan
This type of loan is taken when the borrower wants to construct a new home on a given plot of land.This type of home loan is linked to a current account thereby reducing your interest outflow depending on the idle balance in your bank accounts.
Inference :
Every bank has its own set of eligibility criteria so as to properly assess your repayment capacity. The repayment capacity per se is based on your monthly disposable income or surplus income, (which is based on factors such as total monthly income / surplus and monthly expenses) and other contributing factors such as your spouse’s income, assets, liabilities, stability of income and so on.
The main concern from the bank’s perspective is to make sure that you can comfortably repay the loan on time. The higher your monthly disposable income, the higher the amount you will be eligible for. A bank typically assumes that about 55-60 % of your monthly disposable income is available for repayment of the loan. However, there are exceptions to this where some banks calculate the income available for EMI payments based on an individual’s gross income and not on the disposable income. As always, the loan amount depends on the loan tenure and the interest rate. Banks generally also fix an upper age limit for home loan applicants.
Pointers to know:
Different banks have different eligibility criteria’s. We can broadly classify them into the following buckets:
Monthly Income
One of the most important considerations which a bank takes into account while deciding the maximum loan amount it can disburse is your monthly income (Yearly profit in case of a self-employed person).Thus, the loan amount basically depends upon the net income of an individual. A bank usually provides home loans up to 60 times an individual’s net monthly income. For e.g. if a person’s take home salary is Rs 30,000 he /she may be offered a home loan of around Rs 18 lacs. However, the finality of this decision is based on a few other factors.
Other EMI
If you have any previous loans or EMIs pending, a bank will always consider the risk and the financial load you are taking on while deciding whether to give you a home loan.
Available Income
In such a case, the income that is left in your bank account after deduction of any EMIs would be the important consideration. The Home Loan Eligibility Calculator will calculate your eligibility after deduction of the EMI’s payments.
Property Attributes
For loan amount upto 75 Lacs, a bank will provide upto 80% of your agreement value as a loan amount and for loan amount above 75 Lacs it will provide upto 75% of your agreement value. However, in case the property you are buying is not from builder i.e. resale, then few banks may provide you 100% of agreement value or 75% – 80% of market value, whichever is lower. Here, based on your income and property value, a bank will decide your exact home loan eligibility.
Banks also have certain norms for the property before granting a loan. These are with respect to the minimum area requirements for a flat (which may be carpet area or built up area), the age of the property in case of an existing property, the location of the property and also the reputation of the builders constructing the property. Thorough analysis and inspection of the property is also carried out in order to check whether the title is clear, ownership disputes and so on.
Credit History
The credit history of an individual also plays an important role in deciding the amount of the loan. Credit history is basically the credit report of an individual based on credit information recorded by CIBIL through his loan transactions. Based on your credit score, a bank or any other financial institution decides whether an individual is eligible for a loan. The credit history is generally affected by outstanding credit card payments and any unsecured loans.
Age
Age plays a crucial role in determining your eligibility for a home loan. One has be at least 21 years of age to apply for a home loan. The minimum age requirement may be different for different lending institutions. The maximum age may vary from 58 to 65 years depending on the income source of the individual. Age also determines the tenure and EMI of the loan. For e.g. if an individual is 35 years of age and retires at 60 then his/her loan tenure will be 60-35=25 years and the EMI will be calculated accordingly. The longer the tenure the lower will be the EMI’s. However the longer the tenure, the costlier the loan is as one ends up paying more interest.
Co-applicant
In order to enhance the eligibility for taking a loan one can have a co-applicant such as a spouse or a close nominated relative or a friend. As a result of this the total eligible income for the home loan increases and so does the loan eligibility. However banks permit only certain relationships for co-applicant.
As mentioned earlier, every bank has its own set of Eligibility Criteria.
B. Loan against Property (LAP)
Eligibility Criteria:
• Income
• Age (min. 21 years)
• Property Valuation
• Existing Liabilities (if any)
• Current Work Experience
• Financial Documents
• Number of Dependants
The eligibility for LAP is calculated on the basis of the percentage of property value that you own or the amount of income you have to pay the EMI on the loan. So you can get Loan against property upto x% of property value or the net amount that you earn after other EMI has been deducted from your net income, whichever is lower.
The property types on which you can get a Loan against Property along with percentage of loan you can get is given below:
Loan against Property – For a Residential Property *
Self Occupied – 65% of Property Value (i.e Loan to Value ratio (LTV) – 65%)
Vacant – 55% of Property Value
Rented – 55% of Property Value
Loan against Property – For a Commercial Property *
Self Occupied – 50% of Property Value
Vacant – 40% of Property Value
Rented – 40% of Property Value
*This varies from Bank to Bank by 5 – 10% of the above mentioned percentages.
In order to calculate how much you would be estimated to pay, most banks use a formula which is given below:
Loan against Property for Salaried Individuals:-
{(Cash Accruals**- Obligation) * 60%} / EMI per Lac
Loan against Property for Self Employed Professionals i.e. Doctors, CAs:-
{(Cash Accruals** – Obligation) * 65%} / EMI per Lac
**Cash Accruals in case of Self Employed Professionals shall be Cash Profit and in case of Salaried Individuals shall be take home salary/Net Income.
In case of a self-employed Businessman, let’s run through this example:
Suppose that you are a self-employed businessman and are working in a commercial premises.
| Market Value of the property (say): | Rs.1,00,00,000 |
| Loan Amount i.e.50% of market value of commercial property: | Rs. 50,00,000 |
| Rate of Interest (say) : | 12% |
| Tenure: | 15 years |
| Number of installments: | 180 |
| EMI Payable based on above attributes: | Rs.60,008 |
| Let’s run through the income side now | |
| Profit After Tax: | Rs. 2,00,000 |
| Add: Depreciation | Rs. 50,000 |
| Add: Director’s Remuneration | Rs. 5,50,000 |
| Total | Rs. 8,00,000 |
Since, Rs.8,00,000 – income earned annually ( i.e. monthly Rs. 66,667 ) is greater than EMI obligation of Rs.60,008 , the businessman is eligible for the loan.
Pointers to Know:
- The maximum Loan tenure is 15 years.
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You can choose either a fixed or a floating rate of interest. You also have an option of changing from Fixed to Floating interest rates and vice versa once every year.
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Processing fee is usually 0.05% to 3% of the loan amount and is payable upfront. This fee however will be deducted from the disbursal amount payable to you. You should always ask for 0% processing fee or negotiate the processing fees.
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You pay your loan in EMIs through post-dated cheques or through ECS.
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You can also prepay the entire loan outstanding anytime after 180 days of availing the loan. Pre-payment charges will be levied accordingly. If you intend to do so, please ask for the pre-payment amount to be waived or a reduction in the penalty charges.
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Other eligibility criteria revolves around the maximum age of the person applying for the loan:
For salaried employees – 60 Years
For self-Employed – 70 Years
C. Loan Against Rental Deposits / Lease Rental Discounting (LRD)
Lease Rental Discounting (LRD) is a term loan offered against rental receipts derived from lease contracts with corporate tenants (i.e. securitization of future rent receivables).
The loan is provided to the lessor based on the discounted value of the rentals and the underlying property value.
Funding is generally done against ready (i.e. completely constructed) property. Your eligibility shall be computed on the basis of the rentals that you receive against the property even though you may not have documented financials but do have the repayment capacity. Your EMI shall be up to 70% of the gross rental income (i.e. before TDS and Property tax / Maintenance) or 90% of the net rental income (i.e. after TDS and Property tax / Maintenance) whichever is lower. Some banks may restrict the funding to 85% of the net present value of the future rentals or 50%- 70% of the value of the property, whichever is lower.
The tenor may run from minimum 3 yrs to max 10 yrs.
The rate of interest varies depending upon your loan amount, property type, lessee profile, rental income, etc
The bank will enter into a tripartite agreement with the proposed lessee and the owner, where the lessee will recognize that the bank has provided a loan to fund the property. The lessee will also undertake to pay the rentals directly into the designated escrow account opened in the bank. Thus, the rental flows will close the loan amount.
Banks may differ on their pre-payment charges and foreclosure charges.
Let’s take an illustration:
Suppose you have a commercial property which is on rent with some Government Department with a fixed rental for 9 years.
| Area Sq. ft( Built Up ) | 30,076 |
| Lease Rental per Sq.ft | 112 |
| Lease Rental per Month | Rs. 33,68,512 |
| Less: Deductions | |
| – T.D.S.@ 10% of Lease Rental | Rs. 3,36,851 |
| – Property tax / Maintenance @ 7.5 % of Lease Rental | Rs. 2,52,638 |
| Net Lease Rental per Month | Rs. 27,79,022 |
| Period of Lease (in months) | 108 |
| Total Lease Rental for the period | Rs. 30,01,34,419* |
-*- Banks may take net present value of the lease rental. In that case, the figure may change.
Loan Eligibility:
Rate of Interest: 14% (say)
Number of Installments (Monthly): 108 (9 years * 12 months)
Loan Amount (let’s say): Rs.17,00,00,000
EMI Payable Monthly: Rs.27,76,729
Important Note:
If we take the Loan Amount to Rs.18 Cr instead of Rs.17 Cr, then EMI payable monthly shall be Rs.29,40,066 which is more than the net lease rental per month of Rs. 27,79,022 making us ineligible for the loan. Thus, EMI shall always be less than Net Lease Rental per Month.
D. Unsecured Dropline Overdraft
Overdraft is an efficient form of borrowing since you pay interest only for the time you use the money. It also gives you a lot of flexibility as at any time you can deposit money into the account to reduce the outstanding balance or draw out money as long as the limit is not exceeded. Interest is calculated daily on the fluctuating outstanding balance and is normally charged at the end of each month. The overdraft utilized determines the interest that will be payable by the customer.
Dropline overdraft is a facility granted to you where you can overdraw your current account up to an agreed limit.
This product is useful for Self Employed Professionals and Self Employed Non Professionals (i.e. private ltd co and partnership firms). The firm should be audited with a minimum turnover of 60 lakh. It should have minimum 3 years in current business with 5 years of total business experience and should be making profits for the last 2 years.
Concluding Remarks
Surely, the above list is not an exhaustive one but a preliminary one. If sincerely looked into, the decision to select the correct financial product is an imperative one.
