UNIT 2: BANKING SERVICES :
(PART 1)
BY: PURNIMA RANA
ASSISTANT PROFESSOR
SRCC
WHAT IS A BANK?
• A bank is a financial institution which performs the deposit and lending
function.
A bank allows a person with excess money (Saver) to deposit his money
in the bank and earns an interest rate.
• Similarly, the bank lends to a person who needs money (investor/
borrower) at an interest rate. Thus, the banks act as an intermediary
between the saver and the borrower.
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TYPES OF
BANKS IN
INDIA
• Central bank/Reserve bank/ Monetary bank
• Commercial bank
• Public sector banks
• Private sector banks
• Foreign banks
• Co-operative banks
• Short term agricultural institutions
• Long term agricultural institutions
• Non-agricultural credit institutions
• Development banks
• NABARD
• SIDBI
• EXIM BANK
• National Housing Bank
CENTRAL BANK/ RESERVE BANK/MONETARY
BANK
• Reserve Bank of India (RBI) is India’s Central bank
• RBI’s Previous Functions
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responsible for growth by managing liquidity as well as interest rates
Inflation management
borrowed money on behalf of the government
took care of the financial system’s stability by supervising banks and NBFCs
Role of Reserve Bank of India
• issues and regulates currency notes.
• securing monetary stability and is called banker to banks.
• vital role in economic growth of the country and maintaining price stability.
SCHEDULED BANKS
• Scheduled banks are banks that are listed in the 2nd schedule of
the Reserve Bank of India Act, 1934.
• paid-up capital and raised funds must be at least Rs5 lakh to
qualify as a scheduled bank.
• All commercial banks, including nationalized, international,
cooperative, and regional rural banks, fall under scheduled banks
NON- SCHEDULED BANKS
• Non-scheduled banks, by definition,. They are not mentioned in the Second
Schedule of the RBI Act, 1934, and are therefore deemed incapable of serving and
protecting depositors’ interests.
• Non-scheduled banks must also meet the cash reserve requirement, but not with
reserve banks, but with themselves
• generally smaller in size
• The reserve capital of these banks is less than 5 lakh rupees.
COMMERCIAL BANKS
• A commercial bank is a kind of financial institution that carries all the
operations related to deposit and withdrawal of money for the general
public, providing loans for investment, and other such activities.
• These banks are profit-making institutions and do business only to
make a profit.
TYPES OF COMMERCIAL BANKS
PUBLIC SECTOR BANKS
• Major or full stake is held
by government
• Only 8 public sector banks
in India(1969)
• Bank nationalisation in
1969( 14 banks
nationalised)
• Second phase (1980, 6
more banks nationalised)
• SBI, PNB, BoB, Canara,
Union bank
PRIVATE SECTOR BANKS
• Major stake is held by
individuals and corporates
• ICICI Bank, HDFC Bank, Axis
Bank, Kotak Mahindra Bank,
and Yes Bank
FOREIGN BANKS
• Registered offices outside
India
• Operate through branches
or wholly owned
subsidiaries
• Help in raising external
commercial borrowings
• City Bank, Bank of America,
Barclays Bank, DBS Bank,
Standard Chartered Bank,
Deutsche Bank
COOPERATIVE
BANKS
• A Co-operative bank is a financial entity
which belongs to its members, who are
at the same time the owners and the
customers of their bank
• It is registered under the State’s
Cooperative Societies Act.
• The Co-operative banks are also
regulated by the Reserve Bank of India
(RBI) and governed by
• Banking Regulations Act 1949
• Banking Laws (Co-operative Societies) Act,
1955.
FEATURES OF COOPERATIVE BANK
• Customer Owned Entities: Co-operative bank members are both customer and
owner of the bank.
• Democratic Member Control : Co-operative banks are owned and controlled by
the members, who democratically elect a board of directors. Members usually
have equal voting rights, according to the cooperative principle of “one person,
one vote”.
• Profit Allocation: A significant part of the yearly profit, benefits or surplus is
usually allocated to constitute reserves and a part of this profit can also be
distributed to the co-operative members, with legal and statutory limitations.
• Financial Inclusion: They have played a significant role in the financial inclusion
of unbanked rural masses.
STRUCTURE OF COOPERATIVE BANKS IN
INDIA
PACS
• PACS are village level cooperative credit societies that
serve as the last link in a three-tier cooperative credit
structure headed by the State Cooperative Banks
(SCB) at the state level.
• PACSs provide short-term, and medium-term
agricultural loans to the farmers for the various
agricultural and farming activities.
• The first PACS was formed in 1904.
• PACS provide small farmers with access to credit,
which they can use to purchase seeds, fertilizers, and
other inputs for their farms. This helps them to improve
their production and increase their income.
DEVELOPMENT BANKS
• Development banks are financial institutions (DFIs) that
provide long-term credit for capital-intensive investments
with long payback periods, such as urban infrastructure,
mining and heavy industry, and irrigation systems. It lays the
foundation for industrial growth and development in the
country
• Term-lending institutions and development finance
institutions (DFIs) are other names for development banks.
• IFCI (Industrial Finance Corporation of India), formerly known
as the Industrial Corporation of India, was founded in 1949.
• it does not accept public deposits.
NABARD
• The National Bank for Agriculture and Rural Development
(NABARD) was founded in July 1982.
• India’s apex development bank
• promote sustainable and equitable agriculture and
rural development.
• It was founded on the Shivraman Committee's
recommendation.
• It is the most important institution in the agricultural and rural
sectors.
• It serves as a refinancing institution
NABARD: CATERING TO THE GRASSROOTS
• NABARD’S SUBSIDIARIES
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NABKISAN
NABSAMRUDDHI
NABFINS
NABFOUNDATION
NABCONS
NABVENTURES
NABSANKRAKSHAN
SIDBI
• SIDBI, or the Small Industries Development Bank of India, was
set up on 2nd April 1990 under Act on Indian Parliament.
• Principal financial institution for promotion, financing and
development of MSMEs
• HQ-Lucknow
NATIONAL HOUSING BANK
• Seventh Five Year Plan: non availability of finance to individual
households , recommended setting up a national level
institution
• Dr . C. Rangarajan Committee( the then deputy governor of
RBI): setting up National Housing Bank
• NHB set up on July 9, 1988 under National Housing Bank Act,
1987
• Entire paid up capital was contributed by RBI
• Head Office at New Delhi
EXPORT IMPORT BANK OF INDIA
• EXIM Bank – Export-Import Bank – was founded in January 1982 and
is the premier institution for foreign trade investment.
• It was previously a branch of the IDBI, but as the foreign trade sector
grew, it was made into an independent body.
• Exporters are given technical assistance and loans.
• It also finances the import and export of goods and services from
countries other than India.
• Will offer short-term loans or lines of credit to foreign banks and
governments.
FUNCTIONS OF COMMERCIAL BANKS
• Major functions
• Acceptance of deposits
• Granting of advances
• Other functions
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Discounting of bills and cheques
Collection of cheques
Safe custody of articles
Remittances
Issue of letter of credit
Safe deposit of lockers
Handling grievances
ROLE OF BANKS IN ECONOMIC DEVELOPMENT
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Capital formation
Credit creation
Channelizing funds into productive investment
Fuller utilization of resources
Encouraging right type of industries
Bank rate policy
Finance to government
Bankers as employers
TYPES OF BANK ACCOUNTS
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Current account
Savings account
Salary account
Fixed deposit account
Recurring deposit account
NRI accounts
DIFFERENT TYPES OF NRI ACCOUNTS
• Who is an NRI?
• An Non Resident Indian (NRI) is an Indian Citizen who
resided in India for less than 182 days during the
previous financial year
• people who live outside India for employment, business,
or any other purpose for an uncertain period
NON-RESIDENT ORDINARY(NRO) ACCOUNT
• Normally called rupee accounts
• A non-resident Indian having a stipulated source of income
domestically from any source is required to open an NRO
account to deposit the same
• There are many types of accounts offered under the nonresidential rupee ordinary category. It includes options like
current, savings, recurring, fixed deposits, etc.
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NRO ACCOUNT BENEFITS
• Multiple account holders: Two or more individuals can jointly open
an NRO account. While at least one individual has to be an NRI/PIO/
OCI, the other account holder can also be Indian.
• Ease of investment: invest in term deposits that have safe and
assured returns. . fixed deposit accounts are covered up to a sum of
Rs.1 lakh by the government of India in case the financial institution
fails or defaults.
• Safeguarding earnings: can have domestic earning sources such as
property let out rent, dividend income from stock market investments,
etc
• Increased credit availability: opt for loans against NRO fixed deposit
to meet any emergency expenses arising either in India or in the
respective country of residence
NRO ACCOUNT: LIMITATIONS
• Cannot be used to save money earned abroad. Thus arises the need
of NRE account
• Cannot be used to hold foreign exchange
• Subject to tax liabilities. Principal as well as interest is subject to TDS
@30%. NRIs can avail exemption under section 80TTA of IT Act.
NON-RESIDENT EXTERNAL( NRE) ACCOUNT
• A Non-Residential Rupee External (NRE) account is mandatory
for Indian citizens residing abroad who want to save their
foreign earnings in Indian currency
• earnings in foreign currency are converted and saved in Indian
currency (INR).
• earnings made within India cannot be deposited in such an
account.
• NRE accounts allow non-resident Indians to save or invest their
foreign earnings domestically in INR.
NRE ACCOUNT: BENEFITS
• Full repatriability: This benefit allows NRIs to deposit funds into
respective accounts without undergoing the hassles of currency
conversion.
• Multiple account Holding Benefits: individuals can maintain multiple
such accounts with various banks to earn higher interests on
deposits, or to ensure substantial remittance to meet all expenses
originating domestically
• Convenient maintenance: Non-resident individuals can appoint an
Indian resident as power of attorney holder, who can operate the
account, thereby facilitating withdrawal of funds within the domestic
territory.
• Investment
• Tax benefits
NRE ACCOUNTS: LIMITATIONS
• Cannot be used to deposit money earned by an NRI inside the
country
• Cannot be used to store foreign currency because it gets converted
into Indian currency at prevailing exchange rate
FOREIGN CURRENCY NON-RESIDENT(FCNR)
ACCOUNT
• This account allows you to save your money earned as an NRI in the
currency of the nation from which it was earned
• Non-resident Indians or people of Indian origin (PIO) can open an FCNR
account, which is a foreign currency-denominated account
• It's a term deposit account, not a savings account. It has a one-year
minimum and a five-year maximum tenure.
• According to Indian law, FCNR interest rates earned on these accounts
are not taxed.
• Both the FCNR interests and the principle income can be freely repatriated.
• Deposits in FCNR make you eligible for INR loans. The maturity proceeds
might be used to repay these debts.
• An FCNR account can be opened with two or more shared NRI account
holders.
TYPES OF JOINT ACCOUNTS
• WHAT IS A JOINT ACCOUNT?
• Two persons opening bank account jointly.
• Either (Or) Survivor – This is the most common form of joint account.
Only two individuals can operate the account i.e., primary account
holder and secondary account holder. Both can access the account
and transfer the funds.
• The final balance and interest (if any) will be paid to the survivor on
death of anyone of the account holders. The survivor can opt to
continue the account.
• If the nominee is a different person then the balance money is paid to
him/her after the death of the survivor.
• Example : Mother and daughter can open a joint-account. On death of
anyone of them, the surviving person can continue the account or get
the account balance transferred to her name.
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TYPES OF JOINT ACCOUNTS
• Anyone (Or) Survivor – This is similar to “either or survivor” option. The
only difference is, more than two individuals can operate the account.
• If you want your father, mother and spouse to be able to access and
operate your bank account then this is the best option. In case of death of
anyone of the account holders, the remaining survivors can continue to
operate the account
• Latter (Or) Survivor – This is similar to “former/survivor” option. The main
difference is, only the second account holder can access and operate the
account till the time he/she is alive. The primary/first account holder can
operate the account only on death of the secondary account holder.
• Example : Husband and wife are the joint-account holders. Wife is a second
account holder . Then in this case, only wife can operate the account. Only
after she is no more, can the husband have access to operate the account.
TYPES OF JOINT ACCOUNTS
• Former (Or) Survivor – In this type of joint account, only
the first account holder (primary) can access and operate
the account till the time he/she is alive. The second
account holder (second applicant) can operate the account
only on death of the primary holder (first applicant). The
survivor can also get the balance transferred to his/her
name (if required)..
• Jointly – In this type of account, all the transactions need
to be signed and mandated by all the account holders. If
any of the account holder dies then the account can not be
further operated. The balance proceeds shall be payable to
survivor.
TYPES OF JOINT ACCOUNTS
• Jointly or Survivor –This is similar to “jointly” option. The
only difference being, the survivor can continue to operate
the account. Alternatively, the proceeds of the account can
be transferred to his/her name.
• Minor Account: opened in the name of minor jointly with guardian.
The guardian will operate the account on behalf of minor
PAN CARD
• PAN (Permanent Account Number) is an identification number
assigned to all taxpayers in India.
• PAN is an electronic system through which, all tax-related
information for a person/company is recorded against a single
PAN number.
• Issuing authority: Income Tax Department
• PAN Card is issued to individuals, companies, non-resident
Indians or anyone who pays taxes in India.
PAN CARD:USES IN FINANCIAL
TRANSACTIONS
• For Income Tax Returns
• Opening bank accounts, DEMAT accounts and NRO Accounts
• Transactions exceeding Rs.50000
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Cash deposits in bank
Demand drafts
Hotels and restaurants bills
Cash payment related to travel
Life insurance premium
Mutual funds, debentures etc
PAN CARD: USES IN FINANCIAL
TRANSACTIONS
• Buying and selling
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Goods or services exceeding Rs. 2 Lakh
Immovable property and assets excluding Rs.10 lakh
All vehicles barring two wheelers
Securities exceeding Rs. 1 Lakh
Gold and bullion exceeding 5 Lakh
• While registering a business
• Registering a business
• Documentary Proof of Identity
LINKING AADHAR WITH PAN
• During the Union Budget 2017, linking your PAN with Adhaar
was made mandatory. This was done to eradicate the problem
of duplicate PAN cards.
• If you are not able to link it before the due date, your PAN card
will be categorised as “Inoperative”. Furning ‘inoperative’ PAN
details will be treated as not furnishing any PAN and will result
in the same consequences, penalties and charges as not
furnishing your PAN details.
KYC
• KYC is the abbreviation for “Know Your Customer”
• It is a part of a systemized process through which the banks
are able to procure information about the identity of their
customers.
• The process of KYC and its guidelines were introduced by
the Reserve Bank of India (RBI) in 2002. These guidelines are
issued under the Banking Regulation Act of 1949
• The process helps the banks to ensure that their services are
being used by the concerned customers and that they are not
misused.
KYC
• Keep a check on finance-related frauds
• Identify money laundering and other potentially harmful
activities
• Check the opening of Benami accounts
• Scrutinizing and monitoring large value transactions
• To ensure appropriate customer identification and monitor
transactions of suspicious nature.
• It includes the collection of recent photographs, identity
confirmation, address verification, and other data on
occupation or business and source of funds for the customer
opening the account.
KYC
• As per the most recent RBI guidelines for the KYC policy,
banks should frame their own KYC policies incorporating the
following aspects:
• Customer Acceptance Policy: Classifying customers into risk
categories of high, medium-low
• Customer Identification Procedures: Verifying customer
identity via independent sources of reliable information
Monitoring of Transactions: Monitoring transactions on the
basis of customers’ risk categories
• Risk Management: Period check at the risk category of the
existing customers and making amendments
E-KYC
• The Electronic Know Your Client or Electronic Know Your
Customer (e-KYC) is a concept wherein the customers’ identity
and residential address are electronically verified through
Aadhaar authentication.
• customers will have to authorize their UIDAI (Unique
Identification Authority of India) through explicit consent to
release the identity and/ or address details. It is done by way of
biometric authentication of the bank branches or business
correspondents (BCs)
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OTHER IMPORTANT POINTS
• The relaxation in the KYC procedures is applicable for the
customers belonging to the low-income group falling under the
“No Frill Accounts”. The No Frill Accounts was introduced
through the Pradhan Mantri Jan Dhan Yojana in August 2014
• The revised laws of RBI for the Know Your Customer process
must be fulfilled in the following format: High-risk customers –
once in 02 years
• Medium risk customers – once in 08 years
• Low-risk customers – once in 10 years
BANK LOANS
• A loan is simply a sum of money borrowed with the promise of repayment
over a specified time-period (tenor).
• The lender establishes a fixed interest rate that you must pay on both the
principal and the borrowed funds.
• 2 types
• Secured loans: must be backed by collateral worth at least as much as
the loan amount. These loans feature a lower interest rate as compared
to unsecured loans.
• Unsecured loans: without collateral based on a variety of factors such as
the borrower's repayment history, credit score, and other factors
TYPES OF SECURED LOANS
• HOME LOANS
• secured financing that can be used to buy or build the home of your
dreams
• These loans are usually for a longer period (20 years to 30 years).
• To purchase land for future building of home, to build a new home,
• LOAN AGAINST PROPERTY
• You can use any residential, commercial, or industrial property as
collateral to get the money you need.
• The amount of the loan varies by lender and is based on a percentage of
the property's value.
TYPES OF SECURED LOANS
• LOANS AGAINST INSURANCE SCHEMES
• receive a loan secured by your insurance policy
• It's worth noting that this form of financing isn't available for all
insurance policies.
• Unit-linked plans are not eligible for loans because the returns are
not guaranteed and are susceptible to market fluctuations.
• LOANS AGAINST SHARES AND MUTUAL FUNDS: A loan upto 70
percent of the value .
• LOANS AGAINST FIXED DEPOSIT: between 70 to 90 percent of the
value of FD
• GOLD LOAN
TYPES OF UNSECURED LOANS
• Personal loans
• Loan on credit card: It has become a popular loan kind because it is
one of the most convenient ways to pay for the products you buy.
• Vehicle loans: The loan amount is determined by your credit score,
debt-to-income ratio, loan duration, and other considerations.
• Loans for small businesses
• Education loans
TERM LOANS
• A term loan provides borrowers with a lump sum of cash upfront in
exchange for specific borrowing terms
• Term loans are commonly used by small businesses to purchase fixed
assets, such as equipment or a new building.
• Borrowers agree to pay their lenders a fixed amount over a certain
repayment schedule with either a fixed or floating interest rate.
• Borrowers o en choose term loans for several reasons, including:
• Simple application process
• Receiving an upfront lump sum of cash
• Specified payments
• Lower interest rates
TERM LOANS: FEATURES
• Are secured loans.
• Obligation to pay principal and interest whether business
organisation earns profits or not.
• Fixed rate of interest being negotiated by both parties.
• Maturity depends on type of term loan
• Restrictive clauses such as maintaining minimum asset base and not
raising loans from elsewhere may be included.
• Term loans may be converted into equity
TYPES OF TERM LOANS
• Short-term loans: These types of term loans are usually offered to firms
that don't qualify for a line of credit. They generally run less than a year,
though they can also refer to a loan of up to 18 months.
• Intermediate-term loans: These loans generally run between one to
three years and are paid in monthly installments from a companyʼs cash
flow.
• Long-term loans: These loans last anywhere between three to 25 years.
They use company assets as collateral and require monthly or quarterly
payments from profits or cash flow. They limit other financial
commitments the company may take on, including other debts,
dividends or principals' salaries, and can require an amount of profit set
aside specifically for loan repayment.
• Both short- and intermediate-term loans may also be balloon loans and
come with balloon payments.
TERM LOAN-ADVANTAGES AND
DISADVANTAGES
MICROFINANCE: INTRODUCTION
• The term “microfinancing” was first used in the 1970s during
the development of Grameen Bank of Bangladesh, which
was founded by the microfinance pioneer, Muhammad
Yunus.
• Micro Finance is defined as ‘provision of credit and other financial
services and products of very small amounts to the poor in rural,
semi urban or urban areas, for enabling them to raise their
income levels and improve living standards.
• Micro Finance is defined as ‘provision of credit and other financial
services and products of very small amounts to the poor in rural,
semi urban or urban areas, for enabling them to raise their
income levels and improve living standards
COMPONENTS OF MICROFINANCE
• MICRO CREDIT
• extension of very small loans to borrowers who typically lack
collateral, steady employment or income stream and verifiable credit
history.
• support small-scale entrepreneurship, alleviate poverty, empower
women and uplift the poor social class
• delivered through a variety of institutional channels including
Scheduled Commercial Banks (through Business Correspondents),
Regional Rural Banks (RRBs), Cooperative Banks, Non-Banking
Financial Companies (NBFCs) and Microfinance Institutions (MFIs).
MICROFINANCE : COMPONENTS
• MICRO INSURANCE:
• insurance with low premiums and low coverage.
• covers low income/net-worth persons and transactions are of low
value.
• it can cover wide range of risks including damage to crops and
livestock.
• MICRO SAVING
• targeted at people with low incomes and low savings.
• They are similar to saving accounts, but designed for small deposits.
• the limit of minimum deposit/balance is low and there are no service
charges
MICROFINANCE: COMPONENTS
• MICROFINANCE INSTITUTIONS
• Institutions providing Microfinance services are called Microfinance
Institutions (MFIs). A large number of organisations with varied size
and legal forms offer Microfinance services
• Some microfinance institutions are:
TYPES OF MICROFINANCE INSTITUTIONS IN
INDIA
• JOINT LIABILITY GROUPS
• informal group of 4-10 people that seek mutually assured loans.
• Agriculture-related loans are typical. Farmers, rural labourers, and renters
are among the debtors in this category.
• equally responsible for loan repayment
• SELF HELP GROUPS:
• group of people in similar socioeconomic situations who come together to
help each other.
• self-governed.
• This type of cooperative financing does not necessitate the use of collateral
• the NABARD-SHG linkage program, allows numerous self-help groups to
borrow money from banks if they can show that their borrowers have made
regular payments.
TYPES OF MICROFINANCE INSTITUTIONS IN
INDIA
• REGIONAL RURAL BANKS
• boost the rural economy
• created to serve rural areas with basic banking and financial services.
• COOPERATIVES
BENEFITS OF MICROOFINANCE
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Credit to Low-Income Borrowers
Collateral-Free Loans
Financial Inclusion
Income Generation
Women Empowerment
Rehabilitation
Rural Development
Encourage Self-Sufficiency and Entrepreneurship
CHALLENGES OF MICROFINANCE
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Financial Illiteracy
Inability to Generate Funds
Heavy Dependence on Banks
Weak Governance
Interest Rate
Regional Imbalances
BANK OVERDRAFT
• provided to some customers by the bank in the form of
an extended credit facility, which comes into effect
once the main balance of the account reaches zero.
• unsecured form of credit that is mainly used for
covering short term cash requirements.
• The bank levies separate interest and charges towards
non-maintenance of account
BANK OVERDRAFT: FEATURES
• Credit limit differs from person to person.
• Withdrawal or deposit of an amount can be done
• Bank charges an interest on the overdraft, to be calculated on daily
basis and billed monthly to the customer
• System of EMI is not applicable to bank overdrafts.
• There can be joint borrowers of an overdraft loan and both parties
are equally responsible for paying of loan
TYPES OF BANK OVERDRAFT
• AUTHORIZED OVERDRAFT: arrangement made in advance
between the account holder and the bank
• UNAUTHORIZED OVERDRAFT:This type of overdraft occurs
when the bank account holder has spent more than his
available balance without prior authorization or any
such arrangement
BANK OVERDRAFT: ADVANTAGES
• managing the availability of cash for a business or an
individual
• urgent cash requirements.
• Interest needs to be paid only on the amount that is
utilized and not the total limit.
• Less amount of paperwork
• no requirement of collateral.
BANK OVERDRAFT: DISADVANTAGES
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Higher interest rate
only to the bank account holders.
Interest rate is not fixed and changes frequently
not an ideal option for long term financing.
MORTGAGE
• Mortgages are loans that are used to buy homes and other types of
real estate or for any other emergency purpose.
• The property itself serves as collateral for the loan.
• The cost of a mortgage will depend on the type of loan, the term
(such as 30 years), and the interest rate that the lender charges.
• Mortgages are also known as liens against property or claims on
property. If the borrower stops paying the mortgage, the lender can
foreclose on the property.
MORTGAGE VS HOME LOANS
HOME LOAN
MORTGAGE
ONLY FOR CONSTRUCTION OF NEW HOUSE OR
PURCHASE OF NEW HOUSE
NO RESTRICTION ON HOW THE AMOUNT CAN BE
USED- PERSONAL, BUSINESS, EDUCATION, MARRIAGE
ETC.
LOAN AMOUNT UPTO 90 PERCENT OF VALUE OF
HOME
LOAN AMOUNT UPTO 60-70 PERCENT OF VALE OF
PROPERTY
PROCESSING FEE LESS: NIL TO 0.50%
PROCESSING FEE UPTO 1.50%
TAX BENEFITS AVAILABLE
NO TAX BENEFITS AVAILABLE
MORTGAGE PROCESS
• Borrower will apply to one or more mortgage lenders
• Lender asks for evidence whether the borrower can pay loan( bank
and investment statements, recent tax returns, proof of current
employment etc)
• Approval of application and grant of loan( preapproval of properties
for home buyers)
• Closing of deal: borrower and lender meet, and borrower gives the
downpayment
TYPES OF MORTGAGES
• FIXED RATE MORTGAGE/TRADITIONAL MORTGAGE
• ADJUSTABLE-RATE MORTGAGE : Fixed initially , may be changed/
adjusted later on based on prevailing interest rate; have limits, or
caps, on how much the interest rate can rise each time interest is
adjusted
• NOTE: In the U.S.A mortgage lending discrimination made on basis of
race, religion, sex, marital status, nationality, disability or age is illegal.
REVERSE MORTGAGE
• A reverse mortgage is a loan, in the sense that it allows an eligible
homeowner to borrow money
• A homeowner who is 62 or older and has considerable home equity
can borrow against the value of their home and receive funds as a
lump sum, fixed monthly payment, or line of credit.
• a reverse mortgage doesnʼt require the homeowner to make any
loan payments during their lifetime.
• the entire loan balance, up to a limit, becomes due and payable
when the borrower dies, moves out permanently, or sells the home
HOW A REVERSE MORTGAGE WORKS
• Instead of homeowner making payment to lender, the lender makes
payments to homeowner
• Here also the home acts as a collateral
• When the homeowner moves or dies, the proceeds from the home’s
sale go to the lender to repay the reverse mortgage’s principal,
interest, mortgage insurance, and fees.
REVERSE MORTGAGE: MORE
• SBI Reverse Mortgage Loan provides an additional source of income
for senior citizens of India, who have a self-acquired or self-occupied
home in India. This product is beneficial for senior citizens who do
not have adequate income to support themselves. The Bank makes
payments to the borrower /borrowers (in case of living spouse),
against mortgage of his / their residential house property.
HYPOTHECATION
• Hypothecation occurs when an asset is pledged as collateral to
secure a loan. The owner of the asset does not give up title,
possession, or ownership rights, such as income generated by the
asset.
• Like a mortgage lending, where the home serves as collateral but
the bank does not have any claim on cash flows or income
generated from it unless the borrower defaults.
• The borrower technically owns the house, but because the house is
pledged as collateral, the mortgage lender has the right to seize the
house if the borrower cannot meet the repayment terms
• Unsecured loans , on the other hand, do not work with
hypothecation because there is no collateral to claim in the event of
default.
HYPOTHECATION
• Margin lending in brokerage accounts is another common form of
hypothecation.
• A mortgage is taken for a huge amount whereas hypothecation is
done for a small amount.
• Mortgage is done for immovable properties like land, building,
warehouse etc.
• Hypothecation is done for movable properties like cars, vehicles,
stocks etc
• Hypothecation deed