Retail Banking in India
Key Terminology
Terms What It Means Usefulness/Significance
Maximum amount that can be
Principal Loan disbursed. To be repaid by the
The principal of a loan is the amount borrowed.
Amount borrower in addition to interest and
fees.
The borrower’s contribution to the creation of an
Margin Amount/
asset. Banks insist on a predefined margin/down
Down Payment
payment.
The loan to value (LTV) ratio is calculated by dividing Ensures the borrower’s contribution
the loan amount by the estimated value of the and covers fluctuations in asset value.
collateral. It is usually expressed in percentage terms,
Loan to Value and shows the amount of money that can be
(LTV) salvaged from a borrower in case of default. Loans
with lower LTV ratios are considered safer, as the
lender is protected from larger fluctuations in the
security value.
For the lender, this offers a degree of
Collateral is a property or other asset that a
protection. If the borrower defaults on
borrower offers to the lender as a way to secure a
promised loan payments, the lender
Collateral loan; for example property, jewellery, automobile.
can seize the collateral to recoup their
A lender's claim to a borrower's collateral is called a
losses. The level of loss protection can
lien.
also help lower pricing to consumers.
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Helps the borrower customer to plan
The rate of interest applicable for a loan is fixed accordingly (without the reset clause).
Fixed Interest
throughout the loan repayment term (with or
Rate With the reset clause, customer takes
without reset clause).
the merits/demerits.
The rates are linked to the broader
interest rate scenario. Interest rates
The rate of interest applicable for a loan changes
Floating Interest increase when the cost of funding goes
with the change in the Marginal Cost of Funds-based
Rate up owing to either the increased costs
Lending Rate (MCLR)/bank's base rate.
of retail deposits or regulatory actions
to reduce money supply.
EMI is a fixed monthly payment towards principal
Equated and interest owing, calculated by taking into account With EMI, initially the larger portion of
Monthly the loan amount, the time frame for repaying the the payment instalment is interest and
Instalments loan, and the interest rate on the borrowed sum. gradually the principal portion
(EMI) increases.
The EMI may be subject to change when interest
rate changes or a part-payment of the loan is made.
Sometimes a loan is disbursed in instalments,
depending on the stages of completion of a housing
Interest is serviced from the first
project, for example. Pending final disbursement, the
Pre-EMI Interest disbursement of the loan, which helps
borrower is required to pay interest only on the
to maintain the quality of the asset.
portion of the loan disbursed. This interest is called
as pre-EMI interest.
Moratorium Period is better defined as an “EMI
Holiday”, during which the buyer need not pay any Generally this is extended for
Moratorium
monthly instalments to the bank. This is usually an generating income from the asset
(Holiday) Period
option taken by home buyers when they buy or build financed.
a property under construction.
FOIR is a parameter that banks use to calculate loan
eligibility. While estimating home loan eligibility, all
Fixed Obligation of the applicant’s fixed obligations are taken into
Helps to decide on the quantum of the
to Income Ratio account (i.e., instalments of all running loans,
loan.
(FOIR) including the home loan applied for, are excluded
from the eligible income). The loan amount depends
on the FOIR ratio.
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Costs involved in the loan. Banks charge a non- Fee-based income for the bank.
Processing refundable processing fee for every loan application.
Charges At times, the bank will waive this charge as a
promotional offer.
The Central Registry of Securitisation Asset Provides alerts for existing
Reconstruction and Security Interest (CERSAI) is a encumbrances and registers the bank’s
central online mortgage registry of India. It provides interest.
the facility to file security interest in immovables
created through all types of mortgages and in units
under construction. More than a statutory
CERSAI Charges
obligation, registration with CERSAI is a risk
mitigation tool for the banks, housing finance
companies, FIs, and the general public to prevent
multiple financing against the same property. Banks
charge a nominal amount for registration, called
CERSAI charges.
TransUnion CIBIL Limited is India’s first Credit
Information Company, also commonly referred to as
the “Credit Bureau”. The CIBIL Score plays a critical
role in the loan application process. After a loan
proposal is submitted, the bank first checks the CIBIL Due diligence for the bank.
Score and CIBIL Report of the applicant. If the CIBIL
CIBIL Score Helps customers understand their
Score is less than the prescribed range, a bank may
consider not to take the proposal forward. Normally borrowing eligibility.
a bank accepts a CIBIL score of 750 and above. The
decision to lend is solely dependent on the lender
and CIBIL itself does not in any manner decide if the
loan/credit card should be sanctioned.
The bank allows the borrower to repay the loan
Prepayment ahead of schedule (making lump sum payments Saves interest costs for the borrower.
apart from the EMI).
Balloon The amount of the repayment installments increases Repayments are aligned with the
Repayment incrementally at regular intervals. future earnings of the customers.
If the instalments are not received as per the
Prompts the customer to keep to the
Penal Interest repayment terms, the borrower will be charged
payment schedule.
interest on the delayed instalments.
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A title check on the property carried out by legal
advisors empanelled by respective banks. Some
Legal Opinion Ensures enforceability of the securities.
banks also insist on a second level of scrutiny by the
legal cell of the bank.
These inspections are carried out to protect
consumer interest in terms of construction quality,
adherence to local laws, approved building plans, etc.
A technical inspection also lets the bank understand
Valuation/ the progress of construction so as to release the
Helps in determining LTV ratio.
Technical Report staggered disbursements. The report also helps with
the valuation of the property in relation to similar
property in the surrounding area. The inspection and
report is carried out by a professional approved by
the bank.
The encumbrance certificate is important for those
applying for a home loan, obtaining a loan against a
property, or wanting to sell or buy a property.
“Encumbrance” means the charge created on a
Encumbrance particular property held as a security for any debt of Alerts for existing encumbrance and
Certificate (EC) its owner. The certificate is issued by the Sub registering banks charge.
Registrar of the respective jurisdiction; it contains
the history of transactions registered relating to a
property over a period of time. Normally banks
insists on an EC covering the past 12 years.
If someone is the co-owner of the property in
question, it is necessary that he or she also be the
co-applicant for the Home Loan. For a sole owner of
Co-applicant the property, any member of immediate family can Enhanced security.
be a co-applicant.
The same applies to including income eligibility.
Creating a charge against an immovable property.
The security for a housing loan is typically a
Mortgage
mortgage of the property, normally by way of
deposit of title deeds.
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A charge created against the security of movable
assets. For example, a car remains with the borrower
Hypothecation
but is hypothecated to the bank/financer. The bank’s
name would be noted in the vehicle’s RC book.
Secures the loan by the asset
A pledge is used when the lender (pledgee) takes acquired/created.
actual possession of assets from the borrower
Pledge (pledgor). Some examples of a pledge are
gold/jewellery loans, and loans against National
Saving Certificates.
The right of the creditor to retain the asset of the
Secures the loan with a right to
Lien debtor until the debt is repaid. Fixed/term deposit
appropriate.
receipts duly discharged in favour of the bank.
A type of charge registered for loans against life Secures the loan/assured
Assignment
insurance policies and loans against rent receivables. repayment/collections.
