Credit cards, Home Loans, Personal Loans and Consumer Loans

Credit cards, Home Loans, Personal Loans and Consumer Loans: An Overview (Jaiib Paper 1, Module B, Unit 15)

Dear bankers,

As we all know that  is Credit cards, Home Loans, Personal Loans and Consumer Loans for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Credit cards, Home Loans, Personal Loans and Consumer Loans (Unit-15),FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

♦Credit Card

  • A credit card, in physical terms, is a plastic card issued by a bank or a financial institution. The card issuer, either a bank or a financial institution, provides a credit card to eligible individuals with a maximum credit limit. Cardholders can make purchases using the card within the specified limit on credit. The used amount should be paid back at a later date, typically within 30 to 45 days, called grace period or interest-free period, from the date of purchase.
  • If the used credit on the card is cleared on-time, banks will not charge any interest. Whereas unpaid dues on card will attract finance charges till they are cleared in full.

Credit Card Operations of banks- RBI Guidelines

  • Pursuant to the announcement made in the Annual Policy Statement 2004-05, the Reserve Bank of India had constituted a Working Group on Regulatory Mechanism for Cards. The Group has suggested various regulatory measures aimed at encouraging growth of credit cards in a safe, secure and efficient manner as well as to ensure that the rules, regulations, standards and practices of the card issuing banks are in alignment with the best customer practices. The following guidelines on credit card operations of banks have been framed based on the recommendations of the Group as also the feedback received from the members of the public, card issuing banks and others. All the credit card issuing banks / NBFCs should implement these guidelines immediately.
  • Each bank / NBFC must have a well documented policy and a Fair Practices Code for credit card operations. In March 2005, the IBA released a Fair Practices Code for credit card operations which could be adopted by banks / NBFCs. The bank / NBFC’s Fair Practice Code should, at a minimum, incorporate the relevant guidelines contained in this circular. Banks / NBFCs should widely disseminate the contents thereof including through their websites, at the latest by November 30, 2005.

Guidelines for Implementation

Issue of cards

  • Banks / NBFCs should independently assess the credit risk while issuing cards to persons, specially to students and others with no independent financial means. Add-on cards i.e. those that are subsidiary to the principal card, may be issued with the clear understanding that the liability will be that of the principal cardholder.
  • As holding several credit cards enhances the total credit available to any consumer, banks / NBFCs should assess the credit limit for a credit card customer having regard to the limits enjoyed by the cardholder from other banks on the basis of self declaration/ credit information.
  • The card issuing banks / NBFCs would be solely responsible for fulfillment of all KYC requirements, even where DSAs / DMAs or other agents solicit business on their behalf.
  • While issuing cards, the terms and conditions for issue and usage of a credit card should be mentioned in clear and simple language (preferably in English, Hindi and the local language) comprehensible to a card user. The Most Important Terms and Conditions (MITCs) termed as standard set of conditions, as given in the Appendix, should be highlighted and advertised/ sent separately to the prospective customer/ customers at all the stages i.e. during marketing, at the time of application, at the acceptance stage (welcome kit) and in important subsequent communications.

Interest rates and other charges

  • Card issuers should ensure that there is no delay in dispatching bills and the customer has sufficient number of days (at least one fortnight) for making payment before the interest starts getting charged.
  • Card issuers should quote annualized percentage rates (APR) on card products (separately for retail purchase and for cash advance, if different). The method of calculation of APR should be given with a couple of examples for better comprehension. The APR charged and the annual fee should be shown with equal prominence. The late payment charges, including the method of calculation of such charges and the number of days, should be prominently indicated. The manner in which the outstanding unpaid amount will be included for calculation of interest should also be specifically shown with prominence in all monthly statements. Even where the minimum amount indicated to keep the card valid has been paid, it should be indicated in bold letters that the interest will be charged on the amount due after the due date of payment. These aspects may be shown in the Welcome Kit in addition to being shown in the monthly statement.
  • The bank / NBFC should not levy any charge that was not explicitly indicated to the credit card holder at the time of issue of the card and getting his / her consent. However, this would not be applicable to charges like service taxes, etc. which may subsequently be levied by the Government or any other statutory authority
  • .The terms and conditions for payment of credit card dues, including the minimum payment due, should be stipulated so as to ensure that there is no negative amortization.
  • Changes in charges (other than interest) may be made only with prospective effect giving notice of at least one month. If a credit card holder desires to surrender his credit card on account of any change in credit card charges to his disadvantage, he may be permitted to do so without the bank levying any extra charge for such closure.

Wrongful billing

  • The card issuing bank / NBFC should ensure that wrong bills are not raised and issued to customers. In case, a customer protests any bill, the bank / NBFC should provide explanation and, if necessary, documentary evidence to the customer within a maximum period of sixty days with a spirit to amicably redress the grievances.
  • To obviate frequent complaints of delayed billing, the credit card issuing bank / NBFC may consider providing bills and statements of accounts online, with suitable security built therefor.

 Use of DSAs / DMAs and other agents

  • When banks / NBFCs outsource the various credit card operations, they have to be extremely careful that the appointment of such service providers do not compromise with the quality of the customer service and the bank / NBFC’s ability to manage credit, liquidity and operational risks. In the choice of the service provider, the bank / NBFCs have to be guided by the need to ensure confidentiality of the customer’s records, respect customer privacy, and adhere to fair practices in debt collection.
  • The Code of Conduct for Direct Sales Agents (DSAs) formulated by the Indian Banks’ Association (IBA) could be used by banks / NBFCs in formulating their own codes for the purpose. The bank / NBFC should ensure that the DSAs engaged by them for marketing their credit card products scrupulously adhere to the bank / NBFC’s own Code of Conduct for credit card operations which should be displayed on the bank / NBFC’s website and be available easily to any credit card holder.
  • The bank / NBFC should have a system of random checks and mystery shopping to ensure that their agents have been properly briefed and trained in order to handle with care and caution their responsibilities, particularly in the aspects included in these guidelines like soliciting customers, hours for calling, privacy of customer information, conveying the correct terms and conditions of the product on offer, etc.

Credit Card Advantage and Disadvantage

Advantages

  • Purchasing Power: Credit Cards enable users to make big ticket purchases they might not otherwise be able to afford.
  • Rewards: Many cards offer rewards programs that will accrue points, discounts, or other benefits like frequent flyer miles.
  • Convenience: Credit cards reduce the need to carry cash. Most retailers accept credit cards and they are pretty much required for online purchases.
  • Trackability: The electronic record keeping that comes with credit cards make it easy to track your spending and identify fraud.
  • Use during an emergency: There are times when money is the simple solution to an emergency. If you get hit with an unexpected expense, credit cards can be the quick and easy solution you need.
  • Builds credit history: Responsible use of a credit card over time builds your credit history, qualifying you for better interest rates and other financial benefits.
 

Disadvantages

  • Overspending: Credit cards can make life easier, but they can also make overspending easier as well. With a credit card, you’re spending money you don’t necessarily have yet. If you’re not careful, this can quickly lead to unexpected debt.
  • Interest and fees: Using credit is essentially borrowing. And you’re not borrowing for free. Mismanaging a credit card can lead not only to a high balance, or maxed-out card, but also to debt in the form of interest and fees.
  • Fraud: Credit cards (and other electronic forms of payment) carry unique dangers. Credit cards can be stolen, their numbers can be copied, and they can be used to steal your money and identity.
  • Mounting Debt: If you carry a balance on your credit card from month to month, it can be very easy for charges and interest to rack up. Many people don’t expect credit cards to be gateways to extra debt, but if you’re not careful, that’s exactly what happens.

♦Home Loans

  • Generally take a home loan for either buying a house/flat or a plot of land for construction of a house, or renovation, extension and repairs to your existing house.

How much loan am I eligible for?

  • Before you start the home loan process, determine your total eligibility, which will mainly depend on your repaying capacity. Your repayment capacity is based on your monthly disposable/surplus income, which, in turn, is based on factors such as total monthly income/surplus less monthly expenses, and other factors like spouse’s income, assets, liabilities, stability of income, etc.

Procedure and Practices for Home Loans

The steps to complete the home loan process are as follows:

  • Step 1: Fill The Loan Application Form & Attach The Documents
  • Step 2: Pay The Processing Fee
  • Step 3: Discussion With The Bank
  • Step 4: Valuation Of The Documents
  • Step 5: The Sanction/Approval Process
  • Step 6: Processing The Offer Letter
  • Step 7: Processing The Property Papers Followed By A Legal Check
  • Step 8: Processing A Technical Check & The Site Estimation
  • Step 9: The Final Loan Deal, Signing The Agreement, & Disbursal

Fill The Loan Application Form & Attach The Documents

Once the formal application is filled, the next step is to attach all the valid documents required by the bank with it. Usually, this includes the:

  • Applicant’s income proof
  • Applicant’s identity (or ID) proof
  • Applicant’s age proof
  • Applicant’s address proof
  • Applicant’s employment details
  • Applicant’s educational proof (school/diploma/degree certificates)
  • Applicant’s bank statements
  • Property details on which the loan is applied (if finalized)

Note: Most banks offer doorstep service. Hence, an applicant doesn’t have to spend his or her time waiting at the bank and having the documents submitted. However, a few banks might still want the applicant to visit their respective workplace at least once.

There are three important reasons banks ask for all the above proofs from an applicant:

  • One: to authenticate the applicant.
  • Two: to obtain valid clues on the applicant’s financial health.
  • Three: to check if the applicant is eligible and has sufficient income to pay back the loan.

Explanation Of Each Document

Income Proof: This is the applicant’s actual proof of income. This usually encloses a copy of the each:

  • ITR (Income Tax Returns) for the last 3 years
  • Annual accounts/Computation of Income (if any)
  • Salary slips for the last six months
  • Form 16 or Form 16A for the last three months
  • Bank statements for the last 6 months
  • Other bank accounts (active) if it reflects the current income

Note: You may also be asked to submit a few other employment details but this differs from one bank to the other. Overall, the documents mentioned above are mandatory.

Loan to Value (LTV) Ratio

  • As per the guidelines issued by RBI June 21, 2013 the norms have been revised and the following LTV ratios have to be maintained by banks in respect of Individual housing loans.
Category of Loan LTV Ratio (%)
(a)Individual Housing loan
Up to Rs 20 lakhs 90
Above Rs 20 lakhs and Up to Rs 75lakhs 80
Above 75 lakhs 75
(b) CRE- RH NA

♦Personal Loans

  • A personal loan is an unsecured advance offered by both banks and non-banking financial corporations to any eligible individual. It is very important to be aware of your personal loan eligibility details as this will simplify and quicken your application process. Each bank has separate minimum criteria for income, age, employment type, credit score, job status, etc. You will need to meet these criteria in order to apply for a personal loan from a particular lender. Personal loan eligibility criteria varies across lenders based on the borrower’s profile and relationship with the bank.

The general requirements and limits are outlined below:

  • Minimum Age: limit 21 – 28 years
  • Maximum Age: limit58 – 68 years
  • Type of Employment: Salaried, Business owner, Self-employed professional, Retired, Student & Home maker
  • Employment Status: Employed/In-business for at least 2 – 5 years
  • Minimum Net Monthly Income: Rs.5,000 and above
  • Work Experience: 1 to 3 years & Above
  • Credit Score: CIBIL score of 750 or more
  • Maximum EMI: Up to 65% of Income

Documentation Required

  • Duly-filled and signed application form
  • 2 passport-size photographs
  • Cheque – Processing fee

Proof of:

  • Identity – Voter ID/ Passport Copy/ Driving License / PAN Card (any one)
  • Address – Passport Copy/ Utility Bill (Electricity, Water)/ Rental Agreement/ Ration Card (any one)
  • Income (depending on type of employment) – Latest Salary Slips (3 months) / Bank Statements (3 – 6 months) / Passbook (3 – 6 months)/ Current Salary Certificate (any one)
  • Tax paid – Latest Form 16/ Income Tax Return
  • KYC Documents – Address proof, proof of date of birth, identity proof

 

♦Consumer Loans

Purpose

  • A Consumer Loan is a loan that banks offer to customers to buy household goods and appliances and even personal devices.
  • These include television sets, air-conditioners, home theatre systems, refrigerators, laptops, mobile phones, cameras and even modular kitchens.

Documents required for Consumer Loans?

You need minimal documentation when you apply for Consumer Loans. These include:

  • Income proof
  • Identity and signature proof
  • Address proof
  • Recent photographs
  • Self-employed individuals and professionals may need to submit different documents. Please confirm with your bank when you apply.

Margin:

  • Normally a margin of 10-20% is stipulated.

Repayment:

  • Banks allow period of 3 to 5 years for repayment of consumer loan. Normally repayment is allowed in EMI.

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