Lender’s Appraisal Procedure: CAIIB Retail banking (Module E),Unit 1

Lender’s Appraisal Procedure: CAIIB Retail banking (Module E),Unit 1

Dear Bankers,
We all know that CAIIB exams are conducted by the Indian Institute of Banking and Finance (IIBF).  CAIIB is said to be one of the difficult courses to be cleared for the bankers. But we assure you that with the help of our “CAIIB study material”, you will definitely clear the CAIIB exam.
CAIIB exams are conducted twice in a year. Candidates should have completed JAIIB before appearing for CAIIB Exam. Here, we will provide detailed notes of every unit of the CAIIB Exam on the latest pattern of IIBF.
So, here we are providing “Unit 1: Lender’s Appraisal Procedure of “Module E: Additional Reading Material On Home Loans” from “Optional Paper: Retail Banking”.

The Article is CAIIB Unit 1: Lender’s Appraisal Procedure

Application Form

The appraisal process begins with an application form. An application form is designed to collect all relevant information that a lender needs, to decide whether prima facie the loan exposure would be an acceptable risk and falls within the policy parameters of the bank. This is a first step preceding other processes. Housing loans are generally sanctioned against the security of immovable properties viz., land and building. Again, this is a personal segment loan and the source of repayment of these loans come from the existing income of the borrower/s. Therefore, banks need to gather full particulars of:

  • The land and building.
  • Existing income and the source of it. How long this income is expected to continue.
  • Existing liability, if any, and monthly financial repayment obligation on the proposed loansam other things.

Power Of Attorney

This act may be called as “POWER OF ATTORNEY ACT, 1882”, which was passed in the year 1882 on 24th feb and the act came into force on first day of May, 1882. This act applies to the whole of India. The main aim of passing this statute is to make it easy for your designated attorney to access your finances and, in that way, take care of your property.

Power Of Attorney’ is an authority given by an instrument by one person, called as the donor or principal, authorising another person, called donee or agent to act on his behalf. There may be possibility of giving ‘Power Of Attorney’ by two or more persons jointly to one or more persons. Here a legal authority is given by the principal to the agent which may be broad or limited and an agent can take all necessary decisions i.e. financial, property related matters and all other matters where principal cannot be present to sign or in the case of principal’s illness and disability. A paper signed by principal giving powers to an agent is sometimes itself called a power of attorney. A paper giving a power of attorney should be clear and understandable.

Appraisal of Loan Request

The appraisal comprises a validation of the information submitted by the applicant, collected by the various credit verification agencies, property appraisers, bank’s solicitors, etc. In the process of validation, the information is checked against the bank’s policy, budgetary guidelines, risk management practices any negative list, etc.

Agreements/letters/application forms required for the appraisal process:

  • Housing Loan application.
  • Appraisal form.
  • Term Loan agreement for Home Finance.
  • Guarantee Agreement (if required). Arrangement letter (Terms and conditions for Housing Finance).
  • Equitable Mortgage intent letter.
  • Equitable Mortgage confirmation letter.
  • Letter of undertaking (where finance is availed for purchase of plot).
  • Letter to be addressed by the borrower to his/her employer. An undertaking letter from the borrower that the construction will be carried out only as per the plan approved (in case of construction only).
  • Letter to be addressed by the borrower’s employer to the bank. Letter when the applicant himself/herself is the drawing officer.
  • Mortgage Deed (in case of Registered Mortgage).
  • Mortgage Confirmation Letter.
  • Documents in connection with pledge of other securities, wherever applicable.

Appraisal Form for a Home loan

Eligible loan amount

Eligible: The Lender could have a policy laying down the criteria for acceptance of a home loan exposure, against which a loan application is checked. The parameters could be:

  • A preferred age group.
  • Minimum salary/income level.
  • Score in credit information report
  • Areas/localities where home loan will be given; and areas where he will not take an exposure.
  • Negative list containing other disqualifications.

The banker/lender would be well advised to develop such Risk Asset Acceptance Criteria (RAAC). This will ensure that the portfolio quality is developed and maintained in terms of the policy of the bank. Leaving the same to the skills of the several credit officers of the institution could result in disparate credit standards being applied in selection of the borrowers.

Parameter 1:

Loan Amount Requested                                                                                Rs.

Cost of purchase/construction/renovation/repair of flat/house

Plus registration fee/stamp duty                                                                    Rs.

Amount under b) above less margin stipulated                                             Rs.

Loan amount: (a) or (c) whichever is less                                                       Rs.

Parameter 2:

  1. Gross monthly income Rs.

Gross income of the applicant                                                                        Rs.

Add: Income of the spouse, if any                                                                  Rs.

Add: Other income, if any (say 50-60% of future rental)                               Rs.

Total                                                                                                               Rs.

  1. Net monthly income: Rs.

Net income of the applicant                                                                           Rs.

Add: Net Income of the spouse, if any                                                           Rs.

Add: Other net income, if any                                                                        Rs.

(say 50-60% of future rental)

Total                                                                                                               Rs.

  1. Certain multiples of (a) (say 36 times) Rs.
  2. Certain multiples of (b) (say 60 times) Rs.
  3. Loan amount (c) or (d) whichever is higher Rs.

Eligible loan limit: Lower than Parameter 1 or Parameter 2

(In case of take-over, the loan amount should not exceed the balance principal outstanding)

  1. EMI for eligible loan amount for a repayment period of… years
  2. Net monthly income minus 40% of Total Monthly Gross Income

(B should be equal to or more than A)

Service Eligibility

Minimum years of service ……… years (applicable for loan to salaried class people)

III. Age Eligibility

  • Present age of the borrower
  • Repayment period
  • Age at the end of the repayment period
  • Retirement age (in case of salaried class people)

Legal Opinion

  • Date of opinion
  • Name of the advocate (who should be in the panel of the financing institution)
  • Layer’s opinion on the title of the property

Valuation Details

  • Date of valuation
  • Name of the valuer (who should be in the panel of the financing institution)
  • Value of the property as per valuer’s report: …………..
  • Estimated cost of construction/repair …………..

Whether the property is encumbered: Yes/No

  • If yes, name of the mortgagee
  • Amount of loan take …………..
  • Amount of loan outstanding …………..

Inspection Details

  • Date of inspection by staff of the financing institution: …………………………….
  • Inspection done by: ……………………………………………………………….

Observation: Specific comments on interaction with neighbours/officials of society in case of existing building, discussion with builder and observation regarding the state of construction in case of a building under construction, land mark of the area, approach details to the building, boundary details of the building and any other relevant information

VII. Rate of Interest

  • Rate of interest: …. % per annum
  • Type of interest: Fixed/Floating

VIII. Security Details

  • Market value of the land and house/flat (proposed to be financed)
  • Collateral security value, if any
  • Total
  • Margin (…..%)
  • Drawing limit (Total minus Margin amount)

Repayment Details

  • Holiday period, if any ……………………… months
  • Repayment to start from ……………….. (Month)………………… (Year)
  • Type of EMI: Regular/Variable
  • Repayment in …………………… EMls of Rs. …………………… each

Other Charges

  • Processing Fee/Administrative Fee Rs. ……………….. Date of collection…………………….. .
  • Upfront Fee Rs. ………………….. Date of collection …………………..

Litigation Details, if any

XII. Relaxation/Concession, if any

XIII. Disbursement details

  • First Stage: …………… Date of disbursement ………….
  • Second Stage: …………… Date of disbursement ……………
  • Third Stage: …………… Date of disbursement ………….
  • Total: ……………

Typical Format used by Banks for Assessment of Housing Loan

Loan for Construction of House

1.In Case of House

  • Area of Plot ft.
  • Proposed built up area ft.
  • Purchase Price of Plot
  • Architect’s fees
  • Cost of construction
  1. In case of Flat
  • Area of undivided share of land ft.
  • Cost of undivided share of land
  • Cost of semi-finished flat
  • Cost of Completion and/or additional items
  • Registration Charges
  • Total Cost
  • Market Value as per Report
  1. Loan for Purchase of House/Flat (Ready Built)
  • Is the Unit New Old
  • Age of existing structure if old ……………. Years
  • Purchase Price
  • Cost of additional items
  • Total Cost
  • Area of Plot undivided share of land             …………….
  • Built up area in Sq. Ft. …………….
  • Market Value/Land Value
  • Structure Value
  1. Loan for Extension
  • Age of Existing structure ……………
  • Plot Area/Built up area of Flat …………. In sq. ft.
  • Market value of existing structure
  • Is the property mortgaged to any institution? YES/NO
  • If yes, name of Institution ………….
  • Value of outstanding loan …………
  • Mortgage Value
  • Details of proposed repair extension ………….
  • Estimated cost of repairs/extension
  1. Loan amount request:
Cost of Property

 

Amount in INR Source of funds Amount in INR
1.      Cost of land

2.      Cost of construction extension

1.      Cost of amenities, service charges.

2.       Cost of repairs, improvement

3.      Cost of flat/house

4.      Cost of stamp duty, electrical connections, municipal charges

Total costs*

 

  1.      Amount already invested

2.      Saving in Bank

3.      Disposal of investment, property

4.      PF (a) refundable

(b) non-refundable

5.      Other, specify

6.      Loan applied for

Total Funds

 

 

*Total cost should equal Total funds

Other Relevant issues at Pre- Sanction Stage

  • Interest: Both Fixed rate loans and floating rate loans may be offered.
  • Insurance: The house/ flat should be insured against the risk of fire/riots/earthquakes/lighting/floods, etc..
  • Moratorium: A repayment holiday may be allowed for a home loan when the construction is undertaken by a reputed builder, a Government agency, etc. and the borrower makes payments in stages over the construction period. The moratorium will be upon 18 months after the first disbursement of the loan or two months after completion of construction whichever falls first.

If the loan under consideration is for purchase of land with building/flat, a maximum holiday period of 3 months may be allowed.

  • Equated Monthly Instalment (EMI)
  • Pre EMI Interest
  • EMI Reset

Mortgage

The next section deals with an important part of the security documentation, viz. mortgage. The basic steps in creating a mortgage are listed herein. The legal position surrounding the creation of mortgage and the precautions to be taken by a lender to secure his position are discussed in some detail.

Mortgage

Section 58(a) of the Transfer of Property Act, 1882 defines mortgage as “a transfer of an interest in specific immovable property for the purpose of security, for the payment of money advanced or to be advanced by way of a loan, an existing or future debit or the performance of an engagement which may give rise to a pecuniary liability”.

Types of Mortgage:

In India, Immovable property is accepted by the banks as security usually by way of:

  • Registered or Simple Mortgage,
  • Mortgage by Deposit of Title Deeds.

Registration of Documents

In each State the relevant Stamp Acts and registration formalities are required to be followed. The following points are relevant in connection with registration of documents in respect properties located in Maharashtra. Those persons who are referring this courseware should study the relevant provisions as prevailing in the particular State.

The Bombay Stamp Act (BSA), 1958 is applicable in the State of Maharashtra. This Act pertains to levy of stamp duty on certain types of documents executed in the State. The rates at which stamp duty is levied on these documents are mentioned in Schedule I of BSA. The stamp duty is payable on instrument and not on the transactions. Instrument means any document by which any right or liability is created or recorded. The payment of proper stamp duty on instruments bestows legality on them. The instruments which are not properly stamped are not admitted in evidence.

The Documents relating to the following transactions of immovable properties are required to be compulsorily registered:

  • Gift
  • Lease of immovable property from year to year or for any term exceeding one year
  • Instruments which create any right in an immovable property of a value of more than one hundred rupees.

Fees for Registration of a Document

The State Government has been empowered to fix the fees for registration of the document. The registration fees at present fixed by the Govt, of Maharashtra are approximately 1% of the consideration of the document but subject to a maximum limit of Rs. 30,000. The registration fee for the following immovable property transactions is leviable on the market value of property on which stamp duty is charged.

The transactions are as under:

  • Conveyance,
  • Exchange
  • Gift,
  • Partition,
  • Transfer of Lease by way of Assignment,
  • Sale,
  • Settlement,
  • Power of Attorney given for consideration, and
  • Authorising the attorney to sell the property.

 Detection of Forged And Fabricated Title Deeds

The title deeds submitted by the applicants need to be examined to detect any fake/forged title deeds. The following are certain tips:

  • Schedule of property and Registration of the document: It is necessary to verify the Schedule of the property where it is situated and the Registration of the same with the Sub-Registrar Office concerned. Any discrepancy could indicate forgery/fraud.
  • Stamp Duty affixed on the document and the consideration shown in the document: It is necessary to verify the consideration paid in the document and also verify the Stamp Duty affixed on the document.
  • Affixation of stamps, cancellation and date of execution: It is necessary to verify the source of purchase of stamps and its cancellation and also the execution of the document. The execution of the document should be subsequent to the cancellation of stamps/date of purchase.
  • Examine security marks on the stamp paper, which are visible only on a close examination.

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