Banking and Finance in India

The Indian money market is classified in to,

1. The Organized Sector (comprising private, public and foreign owned
commercial banks and cooperative banks, together known as scheduled
banks); and
2. The Unorganized Sector (comprising individual or family owned indigenous
bankers or money lenders and non banking financial companies (NBFCs)).

The unorganized sector and micro credit and still preferred over traditional banks in
rural and sub-urban areas, especially for non-productive purposes, like ceremonies
and short duration loans.

Early History

Banking in India originated in the first decade of 18th century. The first banks were
The General Bank of India, which started in 1786, and Bank of Hindustan, both of
which are now defunct. The oldest bank in existence in India is the State Bank of
India, which originated in the "The Bank of Bengal" in Calcutta in June 1806. This
was one of the three presidency banks, the other two being the Bank of Bombay and
the Bank of Madras. The presidency banks were established under charters from the
British East India Company. They merged in 1925 to form the Imperial Bank of India,
which, upon India's independence, became the State Bank of India. For many years
the Presidency banks acted as quasi-central banks, as did their successors. The
Reserve Bank of India formally took on the responsibility of regulating the Indian
banking sector from 1935. After India's independence in 1947, the Reserve Bank was
nationalized and given broader powers.

Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West
Bengal, paralyzing banking activities for months. India's independence marked the
end of a regime of the Laissez-faire for the Indian banking. The Government of India

1
initiated measures to play an active role in the economic life of the nation, and the
Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed
economy. This resulted into greater involvement of the state in different segments of
the economy including banking and finance. The major steps to regulate banking
included,

 In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of India.
 In 1949, the Banking Regulation Act was enacted which empowered the
Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in
India."
 The Banking Regulation Act also provided that no new bank or branch of an
existing bank may be opened without a license from the RBI, and no two
banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the
State Bank of India, continued to be owned and operated by private persons. This
changed with the nationalization of major banks in India on 19th July, 1969.

Nationalization

By the 1960s, the Indian banking industry has become an important tool to facilitate
the development of the Indian economy. At the same time, it has emerged as a large
employer, and a debate has ensued about the possibility to nationalize the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of
the GOI in the annual conference of the All India Congress Meeting in a paper
entitled "Stray thoughts on Bank Nationalization”. The paper was received with
positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued
an ordinance and nationalized the 14 largest commercial banks with effect from the
midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described
the step as a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer
of Undertaking) Bill, and it received the presidential approval on 9th August, 1969.

2
A second dose of nationalization of 6 more commercial banks followed in 1980. The
stated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the GOI controlled around 91% of
the banking business of India.

After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer
to the average growth rate of the Indian economy.

Liberalization

In the early 1990s the then Narsimha Rao government embarked on a policy of
liberalisation and gave licenses to a small number of private banks, which came to be
known as New Generation tech-savvy banks, which included banks such as Global
Trust Bank (the first of such new generation banks to be set up) which later
amalgamated with Oriental Bank of Commerce, UTI Bank (now re-named as Axis
Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the
economy of India, kick – started the banking sector in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in
the norms for Foreign Direct Investment, where all Foreign Investors in banks may be
given voting rights which could exceed the present cap of 10%at present it has gone
up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.

Current Situation

3
Banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector
and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government. The stated policy of the Bank on
the Indian Rupee is to manage volatility but without any fixed exchange rate-and this
has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.

Currently (2010), India has 96 scheduled commercial banks (SCBs) - 27 public sector
banks (that is with the Government of India holding a stake), 31 private banks (these
do not have government stake; they may be publicly listed and traded on stock
exchanges) and 38 foreign banks. They have a combined network of over 53,000
branches and 49,000 ATMs. According to a report by ICRA Limited, a rating agency,
the public sector banks hold over 75 percent of total assets of the banking industry,
with the private and foreign banks holding 18.2% and 6.5% respectively.

Since liberalization, the government has approved significant banking reforms. While
some of these relate to nationalized banks (like encouraging mergers, reducing
government interference and increasing profitability and competitiveness) other
reforms have opened up the banking and insurance sectors to private and foreign
players.

4
 Structure / Constituents of Indian Finance System

The India Finance System is composed of different institutions and will see
subsequent address to certain roles and have accordingly brought out a variety of
instrumentation and helped create a healthy money market, which is fundamental
requisite of good finance system.

Categories of Bank

5
Banking in India falls mainly under two categories, viz. Commercial banks and Co-
operative banks, while commercial banks cater to the needs of industry and trade
largely; the cooperative banks play a major role in financing agriculture and allied
activities in rural areas, and trade and services in urban areas.

The commercial banks may be classified into four group in terms of ownershi,
1. Public Sector Banks
2. Regional Rural
3. Indian Private Sector Banks and
4. Banks incorporated outside India.

The commercial banks can be further classified into Scheduled banks and Non
Scheduled Banks. Scheduled Banks are those listed in the second schedule to the
Reserve Bank of India Act 1934

These banks satisfy the criteria laid down under section 42 (6) of the RBI Act that
they should have capital and reserve of Rs. 5 lakhs and their activities should not be
detrimental to the interests of depositors. The scheduled banks are required to
maintain cash reserves equal to 5 % of DTL which can go up to 15 % under section
42 (1). Those, which are not included in the 2nd schedule, are called the non-scheduled
banks. The number of take- oven/liquidation as also in some cases up gradation into
scheduled banks category.

Introduction to Finance

Finance is the handmaiden of economic growth Institutions like banks, which

command huge financial resources, can play a crucial role in shaping the economy of
a country by judiciously deploying their funds over such important activities as would
lead to an overall economic growth. A bank’s offer compared to a dam and the money
lying scattered with individuals and institutions in society to the water running its own
course without any direction. Money is collected by banks by way of deposits, and
from this fund money is turned back to the community in the form of loans. Thus,
banks act as a vital link between the savers and the needy.

6
India is striving to transform herself into an industrially developed country based on a
rural and agricultural economy which should not only be able to feed the millions of
her populations but also to produce raw material for her mills. This can be done by
bringing about the necessary change from an agrarian economy to a diversified one.
Banks have crucial role to play not only in the achievement of this objective but more
significantly in determining how speedily and efficiently it is achieved. Since the
nationalization of the fourteen major banks, the banking industry has developed
adequately enough to meet the changing needs, both corporate and personal. Banks
now offer a wide range of financial services in an extensively varied environment.
The complex task of managing these changes and their consequences requires that
banker should be more professional than ever before.

The Business of Banking

Banking has been understood differently at different times and indifferent countries.
In India, the earliest legislation that dealt with the business of banking was the Indian
Companies Act 1913. The Banking Regulations Act came in 1936. Under this Act all
companies having their principal business, accepting deposits from the public were
classified as banks. Hence between 1936 and 1942 even trading and industrial
concerns accepting deposits were classified as banks, if accepting such deposits was
their principal business. The Government of India passed a compressive Banking
Regulation Act in 1949. Accordingly a banking company was defined as a company
which carries on the business of banking that is to say accepting for the purpose of
lending or investing deposits of money from the public, repayable on demand of
otherwise, and withdrawal cheque, draft, order of otherwise. The study group
reviewing legislation affecting banking is of the opinion that “banking should be
abroad based.” The definition given by the Banking Regulation Act 1949 is certainly
not exhaustive, and it needs certain alterations for the sake of simplification. The
purpose of accepting deposits is strictly not relevant for the definition of banking,
through it is basic for banking regulation. There is no need to distinguish between
“loans” deposits” in the context of banking regulation. The definition of banking

7
should cover all forms of deposits from the public, and banking regulation should take
into its ambit all the different types of banking.

Functioning of a Bank

Functioning of a Bank is among the more complicated of corporate operations. Since

Banking involves dealing directly with money, governments in most countries
regulate this sector rather stringently. In India, the regulation traditionally has been
very strict and in the opinion of certain quarters, responsible for the present condition
of banks, where NPAs are of a very high order. The process of financial reforms,
which started in 1991, has cleared the cobwebs somewhat but a lot remains to be
done. The multiplicity of policy and regulations that a Bank has to work with makes
its operations even more complicated, sometimes bordering on illogical. This section,
which is also intended for banking professional, attempts to give an overview of the
functions in as simple manner as possible.

Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose
of lending or investment of deposits of money from the public, repayable on demand
or otherwise and withdrawal by cheques, draft, order or otherwise."

Deriving from this definition and viewed solely from the point of view of the
customers, Banks essentially perform the following functions,
1. Accepting Deposits from public/others (Deposits).
2. Lending Money to public (Loans).
3. Transferring money from one place to another.
4. Acting as trustees.
5. Keeping valuables in safe custody.
6. Government business.

But do these functions constitute banking? The answer must be a no. There are so
many intricacies involved in the activities that a bank performs today, that the above
list must sound very simple to a seasoned banker. Please click on the activity to see
what a Bank has to do to give the above services to its customers. These activities can
also be described as back office banking. Banks are organized in a linear structure to

8
perform these activities at the base of which lies a Branch. The corporate office of a
bank is normally called Head Office

Forms of Advances

Advances by commercial banks are made in different forms such as loans, cash credit,
overdrafts, bills purchased, bills discounted etc. These are generally short- term
advances. Commercial banks do not sanction advances on a long-term basis beyond a
small proportion of their demand and time liabilities. They cannot afford to lock up
their funds for long period. Hence a considerable percentage of their advances is
repayable on demand.

Advances may be granted against tangible security or in special deserving cases on an

unsecured/clean basis.

1. Loans 7. Bridge loan

2. Overdrafts 8. Participation loan
3. Cash credits 9. Loans to small borrowers
4. Temporary Overdrafts 10. Hire purchase and leasing finance
5. Clean advances 11. Bills purchased
6. Term loans 12. Bills discounted

Loans

Bank loans are called indirect agents of production. For achieving a sustained rate of
economic growth over a long period, greater efforts have to be made to increase
agricultural and industrial production, and in this increased production, bank credit
plays a significant role. But banks in India are not free to employ their funds n an
arbitrary manner, while lending, they will have to keep in mind factors like a desirable
balance among liquidity, safely and profitability, legal and statutory requirements,
socio-economic conditions of the country, priorities set by economic planners, and so
on. Banks try to achieve this objective through maintaining a particular relationship
between their assets and deposits. As such, between advances and deposits in the form

9
of advances among as many different types of securities and over as wide an areas as
possible, and they avoid granting too large a proportion of their advances to one party
or to a single industry. While the se factors limit banks capability to lend, they are,
nevertheless expected to grant credit according to the changing economic scene
conditioned by the programs and priorities of different Five Year Plans.

In a loan account the entire amount is paid to the debtor at one time, either in cash or
by transfer to his current account. No subsequent debit ordinarily allowed except by
way of interest, incidental charges, insurance premiums, expenses incurred is
provided for by installment without allowing the demand character of the loan to be
affected in any way. There is usually a stipulation that in the event of installment
remaining unpaid, the entire amount of the loan will become due. Interest is charged
on the debit balance, usually with quarterly rests unless there is an arrangement to the
contrary. No cheque book is issued. The security may be personal or in the form of
shares, debentures. Government paper, immovable property, fixed deposit receipts,
life insurance policies, goods etc.

Bank of Baroda

10
Bank of Baroda was founded by Maharaja Sayajirao Gaekwad of Baroda on July 20,
1908 with a paid up capital of Rs 10 lakhs. Since then bank has traversed an eventful
and successful journey of almost 103 years. Today, Bank of Baroda has a network of
3211 branches including 80 overseas branches spread over 25 countries. In mid-
eighties, the Bank of Baroda diversified into areas of Merchant Banking, Housing
Finance, Credit Cards and Mutual Funds. In 1995 the Bank raised Rs 300 crores
through a Bond issue. In 1996 the Bank tapped the capital market with an IPO of Rs
850 crores.

Bank of Baroda took the lead in shifting from manual operating systems to a
computerized work environment. Today, the Bank has 1918 computerized branches,
covering 70% of its network and 91.64% of its business.

Bank of Baroda gives high priority to quality service. In its quest for quality, the Bank
has secured the ISO 9001:2000 certifications for 15 branches.

In 2010, Bank of Baroda became the 3rd Largest Bank in India when it over took
ICICI Bank. Total Business crosses Rs 4,00,000 crores.

Centenary Year

On the 20th July 2007, the Bank entered its Centenary year. In its quest to become a
world-class bank with global best practices, the Bank is, now, well poised to take-off
with the most modern business and HR systems and processes. The Bank has already
initiated myriad HR interventions with special thrust on internal talent discovery,
upgrading the managerial skills through training, and improving the motivational
level of the employees of the bank

Mission Statement

11
“To be a top ranking National Bank of International Standards committed to
augmenting stake holders' value through concern, care and competence”.

A Saga of Vision and enterprise

It has been a long and eventful journey of almost a century across 25 countries.
Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda
Corporate Centre in Mumbai, is a saga of vision, enterprise, financial prudence and
corporate governance.

Achievements

1) Business Performance

The Bank continued scaling new heights of business size recording global
business growth of 24.07 per cent during 2007-08. Its domestic deposits
increased by 22.82 per cent and domestic advances rose by 25.63 per cent.

During 2007-08, the Bank’s overseas business grew by 24.56 per cent
primarily due to a substantial increase of 35.70 per cent in overseas advances.
The overseas business contributed 20.0 per cent to total business and 23.8 per
cent to net profit. The level of net profit at Rs 1,435.52 crore for the year
2007-08 reflected a robust year-onyear growth of 39.9%.

On the front of asset quality management, while the Gross NPA in domestic
operations stood at 2.18 per cent at end-March 2008, the same for Overseas
Operations was just 0.55 per cent. The global Net NPA was pegged at 0.47
percent by the year-end 2007-08 in line with the promise given by the Bank to
its stakeholders.

 Total Business (Deposit+ Advances) increased to Rs 2,58,735.45 crore

reflecting a growth of 24.07%.

 Gross Profit and Net Profit were Rs 3,028.55 crore and Rs 1,435.52
crore respectively. Net Profit registered a growth of 39.85% over
previous year

12
  Net NPAs to Net Advances declined from 0.60% last year to 0.47%.

Objective of Bank of Baroda

1. Special focus on improving “relations” with the existing corporate customers

as well as efforts to add new quality customers to the Bank’s Book.

2. Thrust on business process reengineering to reduce the “transaction costs”.

3. A dedicated effort to add 2.5 to 3.0 million quality customers to Bank’s book
in FY09 and in subsequent years.

4. By end of the current financial 2010-11, the Bank is targeting 54 more

branches for ISO 9001:2000 quality certification.

Global Presence of Bank of Baroda

Bank of Baroda Building in

Dubai

Branch Network (as of 22/06/2010)

13
International Operations

Wide Global Network

Bank of Baroda started its overseas journey by opening its first branch way back in
1953 in Mombassa, Kenya. Since then the Bank has come a long way in expanding its
international network to serve NRIs/PIOs and locals. Today it has transformed into
India's International Bank.

It has significant international presence with a network of 80 offices in 25 countries

including 43 branches/offices of the Bank, 27 branches of its seven Subsidiaries and 4
Representative Offices in Malaysia, China, Thailand & Australia. The Bank also
has one Joint Venture in Zambia with 9 branches.

The Bank has presence in world's major financial centers i.e. New York, London,
Brussels, Dubai, Hong Kong, and Singapore.

14
The "round the clock around the globe", Bank of Baroda is further in the process of
identifying/opening more overseas centers for increasing its global presence to serve
its 33 million global customers in still better way.

Recently, it upgraded its operations in Guangzhou, China from Representative Office

to a branch on 2nd August 2008. It also has plans to upgrade its Representative
Offices in Australia and Malaysia.

It has further plans to establish overseas offices in Houston (USA), Canada, New
Zealand, Qatar, Saudi Arabia, Mozambique, Russia etc. Besides this, it has plans to
extend its reach in existing countries of operations in UK, UAE, Uganda, Kenya and
T&T etc.

Customers Competitors
Individual State Bank of India
Stock Broking Entities Punjab National Bank
HUF (Hindu Undivided Family) Union Bank of India
Proprietorship Concerns HDFC
Public Limited Companies ICICI
Private Limited Companies Standard Chartered Bank
Corporate Partnership Firms HSBC

Strengths

It has diversified customer profile, including Blue chip companies, small and
medium sized companies, retail customers, self-help groups, and high net worth
individuals.
It has strong brand equity and a wide customer base of over 5 million.
Bank of Baroda’s financial strength has been recognized by international credit
rating agencies.
A strong capital base ensures that it is well placed for growth of business.
The bank, which has consistently earned profit since its inception, has committed
and competent human capital to power its aggressive growth plan.

The Values of the Bank Future of the Bank

 Management Team - The core strength of Bank of Baroda looks confidently
Bank into future to face & thrive in
 Technology and Tech Initiatives intense competitive environment
15
 Strategic Initiatives that is emerging in global era.

 Corporate Banking and Credit

 Product Profile

Wholesale Banking Deposit Products

SME Banking Loan Products
Retail Banking ATM / Debit Cards
Rural/Agri Banking Internet Banking
Wealth Management Rapid Funds2India
Demat Baroda e-Trading

Retail Loans

A wide range of solutions for your financial needs.

Bank of Baroda offers a wide range of retail loans to meet your diverse needs.
Whether the need is for a new house, child's education, purchase of a new car or home
appliances, our unique and need specific loans will enable you to convert your dreams
to realities.

Key Products

16
Housing Loan Personal Loan
Housing Loans to NRIs / PIOs Vaibhav Lakshmi Loan (For Working Women)
Home Improvement Loan Desh Videsh Yatra Loan
Loan Against Future Rent Receivables Marriage Loan
Advance Against Property Advance Against Securities
Advance Against Property to NRI Loan to Pensioners
Education Loan Loan to Defence Pensioners
Car Loan Professional Loan
Two Wheeler Loan Loan to Doctors
Consumer Durables Loan Traders Loan
Baroda Loan for Laptop & Personal Loan for financing Individuals for subscription
Computer to Public Issues /IPO
Baroda Ashray (Reverse Mortgage Loan) Baroda Career Development Loan

Housing loan - Bank Of Baroda

1) Baroda Housing Loan - Be a Proud Home Owner

Bank of Baroda invites you to be a proud owner of your own home and offers easy
Home Loan with a number of conveniences to suit your budget.

Home Loan is available for,

 Purchase of new / old dwelling unit.

 Construction of house.

 Purchase of plot of land for construction of a house.

 Repaying a loan already taken from other Housing Finance Company / Bank.

17
 Repayment period up to 25 years (floating rate option).

18
2) Baroda Home Improvement Loan-

Bank of Baroda brings to you a unique loan product. A loan for Repairs / Renovations
/ Improvement / Extension of Home and for Furniture, Fittings & Fixtures.

Key Benefits
 Loan available for repairs / renovation / improvement / extension of the
existing house.
 Loan available for purchase of furniture / fixtures / furnishing / other gadgets
such as fans, geysers, air conditioners etc. required, to:
o Our existing housing loan borrowers
o New borrowers

Free Credit Card:

Free Credit Card (complementary for first year) will be issued to borrowers with loan
limit above Rs.2/-lacs.

19
RBI directive for home loans

The Reserve Bank of India (RBI) has in the latest directive asked the Indian
banks to be more "fair and transparent" while signing their agreements with the
consumers. This has come following complaints from various consumer sections
regarding home loans.

It has emphasized on the fact that while giving a home loan, the banks should not tie
their loans with their own prime lending rates (PLR) which often results in pro-bank
and against consumer interest.

 Households should get credit counseling before signing any loan agreement.
In such case, banks should give credit counseling to customer before giving a
loan. Any non-governmental organization can also give independent credit
counseling to small borrowers.

 Consumers often complain of not receiving benefits of falling interest rates as

banks tie their floating rate loans with its PLR and even when rates fall, the
banks kept the PLR unchanged. But when interest rates are hiked, the banks
increase the benchmark rate, thus making customers pay a higher rate and
consequently increase the number of EMIs too. The RBI has asked the banks
to mend rules for the same.

 Individual borrowers should ask for the exact tenure and EMI while taking a
fixed rate loan. The RBI has also resolved to look into all consumer
complaints if it is bought to the regulator's notice.

 The IRDA (insurance regulator) has powers to take action against banks if a
customer feels cheated while buying an insurance product. On its regulatory
role, the RBI is trying to maintain a balance between the extent of freedom
granted to the banks and the objectives of governance.

 RBI has made it mandatory for all banks - including private and foreign banks
- to offer a passbook to their customers with the address and telephone number
of the nearest branch.

20
  Customers have often been harassed by banks' call centers where there is no
accountability of the query made. The "do not call" registry has also been
flouted by banks as customers are bombarded with unnecessary product
offerings. The RBI has directed the Indian Banks' Association to come out
with a single "do not call" registry or when a customer adds his name to a
single bank registry it should then stop unsolicited calls from all banks.

 On rising credit card frauds and wrong statements given by the banks, the RBI
has asked the customers to approach the ombudsman to redress their problems.
This way the RBI feels would inculcate more consumer friendly practices
among Indian banks.

Tax benefits

There are certain tax benefits for the resident Indians based on the principal
and interest component of a loan under the Income Tax Act, 1961. It may help one get
tax benefit up to Rs.50, 490 p.a. (approx). if interest repayment of Rs.1,50,000 p.a. is
paid. In addition to this, one also is eligible for getting tax benefits under section 80C
on repayment of Rs.1, 00,000 p.a. that further reduces the tax liability by Rs.33.660
p.a.

These deductions are available to assesses, who have taken a loan to either buy or
build a house, under Section 24(b). However, interest on borrowed capital is
deductible up to Rs150, 000 if the following conditions are fulfilled:

 Capital is borrowed for acquiring or constructing a property on or after April

1, 1999.

 The acquisition and construction should be completed within 3 years from the
end of the financial year in which capital was borrowed.

 The person, extending the loan, certifies that such interest is payable in respect
of the amount advanced for acquisition or construction of the house

 A loan for refinance of the principle amount outstanding under an earlier loan
taken for such acquisition or construction.

21
If the conditions stated above are not fulfilled, then the interest on borrowed capital is
deductible up to Rs30, 000 though the following conditions have to be satisfied:

 Capital is borrowed before April 1, 1999 for purchase, construction,

reconstruction repairs or renewal of a house property.

 Capital should be borrowed on or after April 1, 1999 for reconstruction,

repairs or renewals of a house property.

 If the capital is borrowed on or after April 1, 1999, but construction is not

completed within 3 years from the end of the year, in which capital is
borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is eligible

for a deduction of up to Rs1,00,000 under Section 80C from assessment year 2006-07.

Terms and conditions for availing Tax benefits on Home Loans

1. Tax deductions can be claimed on housing loan interest payments, subject to

an upper limit of Rs1, 50, 000 for a financial year.

2. An additional loan for extension/improvement to the same house and the

individual's deductions on the existing loan are less than Rs1, 50,000; he can
claim further benefits from the additional loan taken, subject to the upper limit
of Rs1, 50, 000 for a financial year.

3. Tax benefits under Section 24 and deduction under section 80C of the Income
Tax Act can be claimed only when the payment is made. If an individual fails
to make EMI payments, he cannot claim tax benefits for the same.

4. According to the Income Tax Act, tax rebates can only be claimed by the loan
applicant.

5. The interest on home loans taken for repairs, renewals or reconstruction, also
qualifies for the deduction of Rs 150,000.

6. A husband and wife, both of whom are tax-payers with independent income
sources, get tax deduction benefits, with respect to the same housing loan; to
the extent of the amount of loan taken in their own respective name.

22
7. If an individual buys a house and sells it within the same year or after 3 years,
and if any profit is made, then a capital gains tax liability arises on the same
for which the individual is liable to pay short-term capital gains tax since the
sale took place in the same year. But in case, if the sale had taken place after 3
years, then a long-term capital gains tax liability would have arisen.

8. On being proved that the home loan is simply an arrangement between the
loan-seeker and the builder or with a third party for the purpose of claiming
tax benefits, then tax benefits will not be allowed and benefits, previously
claimed, will be clubbed to the income and taxed accordingly.

9. Tax benefits on interest on housing loans are allowable only for the original
loan and according to Section 24 (1), tax benefits can also be availed for a
second loan taken to repay the first loan but not for subsequent loans. This
means that if you have already availed of one loan to refinance the original
loan and want to now avail a third loan to refinance the second loan, tax rebate
on interest payments will not be permissible.

23
 Research Methodology

Research forms the foundation of any project that is undertaken: Research in

common parlance refers to the search of knowledge. One can also define research as a
scientific and systematic search of pertinent information on a specific topic.

Redman and Moray define research as “systematized effort to gain new knowledge”.
Humans are generally very inquisitive in nature and this inquisitiveness is the mother
of knowledge and the method employed by humans to gain knowledge of the
unknown is research.

Research thus is an original contribution to the existing stock of knowledge making

for its advancement. It is the pursuit of the truth with the help of study, observation,
comparison and experiment.

Research methodology is a way of systematically solving the research problems. It

may be understood as a science of how research is done. The purpose of research is to
discover answer to the question through application of scientific procedures.

All this means that the researcher has to design a separate mythology for the problem
undertaken by him which may differ from problem to problem. Research carried out
in their project is based on theoretical and field study.

Research Objective

The Objective of this study is to compare housing loan products and educational loan
products of different banks with products of Bank of Baroda. This will help us to
know the Competitive Advantage of Bank of Baroda’s loan products over its
competitors.

24
Steps in Research Methodology

Defining the Problem &

Research Objective

Develop Research Plan

Collect the Information

Analysis the Information

Present the Findings

Make the Decision

25
Sources of Data

A. Primary Data

This data can be collected through experiment or through survey. The

various method of primary data collection is,

1. Observation Method
2. Interview Method
3. Questionnaire Method

The methods adopted in this study are,

Personal interview through structured questionnaire of Finance and
Marketing head of RLF’s etc. Sample of questionnaire is attached as an
annexure.

B. Secondary Data

Secondary data refers to the data which have already been collected and
analyzed by some one else usually published data are available in form of,

1. Various publication of central, state and local government.

2. Books Magazine and Newspapers.
3. Accounting records, sales force reports etc.
4. Websites of banks.

The methods adopted in this study are,

Collecting data from websites of various banks, articles given in various
sites etc. which are mentioned in the references of the project.

26
Diagrammatic Approach

Data analysis involves converting a series of recorded observation (data) into

descriptive statements (information).

The Analysis will be showed with the help of,

a. Tables

Steps in Research Methodology

Step 1: Objective of Study of Home-Loans and Educational Loans

The first step in this study is the defining the objectives of the study and according to
that develops the further plan.

Step 2: Developing plan for gathering information

The second stage calls for developing the most efficient plan for gathering the need
information. Decide the methods of data collection and the data sources, sampling
method and contact method. Decide the primary and secondary sources for collecting
the data.

Primary Data:
Primary data is a data, which is gathered by the researcher himself. Primary
data of this project is collected by the personal visit to the banks.

Secondary Data:
Secondary data is a data is data which is gathered from the available sources
i.e. newspaper, magazine, Internet, financial books. Etc
.
Step 3: Collect the Information
This is the most important step in the study. This is up to the individual’s ability to
gather the information from the selected samples.

27
Step 4: Analyze the Information

Step 5: Present the Findings

Sampling Plan

This plan calls for the main three decisions for selecting the sample of banks from
whole population of banks in the city.

1. Sampling Unit
Here we define the target population that will be sampled. Total numbers of
banks working in India are approximately 48.

2. Sample Size
How many banks and financial institution should be surveyed?
Large samples give more reliable results than small samples. Here 14% of he
population of study i.e. 5 units (branches) are undertaken for study.

3. Data Collection Procedure

Here I took all the information needed for this study, by means of personal visits
to the banks and by interview. This is the most versatile method. The interviewer
can ask more number of questions; can record additional observations about the
respondents.

28
 Home Loans in India

You'll soon realize that home loan companies do exist, and they continue to
exist to provide Basic Home Insurance as well as Home Loan Information including
Home Loan Resources because of the very people who desire to own a house the
soonest possible time - like you!

It is definitely one of the major things that one can board on in his / her lifetime. The
bad news is: however is that not everyone in this globe is like you, loaded enough
(financially, of course) to be able to build a house as soon as he wants to.

Whether you are Non Resident Indian or Resident of India, and you are thinking to
start your journey of buying a new house, looking to move to a new house, investing
in property or are looking forward to refinance, Consider answering these questions to
yourself:

 Which type of home loan should I prefer?

 What interest rate and repayment period will be affordable by me?

 Will it be the best scheme that will be fitting my budget?

 Can any insurance plan cover for an unpaid monthly due?

 Is there a fine or penalty or even some reward as well if the whole amount of
loan is paid ahead of the due date?

These are just a dash of the questions to be answered when considering taking the
plunge… into the loan journey. The different home loan types are hereby presented to
you to make your journey that more smoother or step by step, safer and comfortable.
Yet, Got a fix on fixed rate or variable rates, offset accounts, lines of credit or
bridging loans!!

With so many real estates sites coming up in Indian market, finding an ideal house
isn't that big issue nowadays, when you can virtually see all across the home you need
to purchase by the various real estate simulation programs and videos available, but
you still need to purchase it, right? - To really say "own" it. A home loan, also

29
popularly identified as a mortgage, is an easier financial option to own a house. Once
you've decided to endeavor on a home loan, there are so many things that you need to
be informed with. Not only is it going to be an emotional experience, it is also going
to be a very informative monetary journey, as you will be dealing with the whole
caboodle of the mortgage process along the way.

There are thousands of home loan companies waiting to provide you with your
financial needs. Part of the success of this whole financial move is partly in your
hands, the greater part relies on the efficiency of your chosen mortgage company.

Home Loan Types

Owning a piece of land or property is a lifetime dream for every individual. There
are many home loans provider in the market to make your dream come true. But
before you opt for any home loan provider, you need to consider certain factors
related to property that you are interested in buying and also about the salient features
offered by a home loan provider and also study some Home Loans and Home
Insurance FAQs which helps in applying a Home Loan in India.

And the most important thing is you should know about each and every term related
with Home Loans before applying for a Loan. It is always advisable to consult a home
loan expert or consultant before applying for a home loan or purchasing a property.

You can take different types of home loans like

 Home Purchase Loans: These are the basic forms of home loans used for
purchasing of a new home.

 Home Improvement Loans: These loans are given for implementing repair
works, healing and renovations in a home that has already been purchased.

 Home Construction Loans: These loans are available for the construction of
a new home.

 Home Extension Loans: These loans are given for expanding or extending an
existing home. For eg: addition of an extra room etc.

 Home Conversion Loans: These loans are available for those who have
financed the present home with a home loan and wish to purchase and move to

30
 another home for which some extra funds are required. Through home
conversion loan, the existing loan is transferred to the new home including the
extra amount required, eliminating the need of pre-payment of the previous
loan.

 Land Purchase Loans: These loans are available for purchasing land for both
construction and investment purposes.

 Bridge Loans: Bridge loans are designed for people who wish to sell the
existing home and purchase another one. The bridge loans help finance the
new home, until a buyer is found for the home.

Why take a Home Loan?

What's an average middle class Indian's most cherished dream?

Purchasing and moving into a dream house would generally rank among the top three
things on the wish list of most people. After all it’s what been proved by Maslow’s
Law of Hierarchy as well. That entire house hunting every few years, grumpy
landlords, killing rents would be a thing of the past. Hey, you even get to use nails to
hang your favorite paintings and pictures. Don’t you???

Taking a home loan nowadays has become very simpler. The RBI has been regularly
slashing interest rates, with the result that housing finance loans that came at an
interest rate of 16.5% to 18% eight years ago are now available at 9.50% to 14.50% or
lower. Each year the Finance Minister's generosity during the Budget seems to be
solely concentrated for the housing sector and construction sector. The Budget 2000's
allowed interest payment up to Rs1lakh and principal payment of Rs20, 000 to be
exempted from income tax. To top it all, the Housing Finance Companies (HFCs) are
aggressively wooing customers. Now, when the sun shines, it’s the best time to make
hay. Isn’t it?

31
Home Loan Tips

The home buying process can seem complicated, but if you take things step-by-step
and you know how to choose the right home loan, you will soon be holding the keys
to your own home!

Ten steps to buying a home

Step 1: Figure out how much you can afford. What you can afford depends on your
income, credit rating, current monthly expenses, down payment and the interest rate.
The calculators can help, but it is best to visit a lender to find out for sure. A housing
counselor can help you figure out how to manage and pay off your debt, and start
saving for that down payment!

Step 2: Know your rights

Step 3: Shop for a loan. Save money by doing your homework. Talk to several
lenders, compare costs and interest rates, and negotiate to get a better deal. Consider
getting pre-approved for a loan.

Step 4: Learn about home buying programs

Step 5: Shop for a home. Choose a real estate agent, Wish list - what features do you
want, Home-shopping checklist - take this list with you when comparing homes.

Step 6: Make an offer. Discuss the process with your real estate agent. If the seller
counters your offer, you may need to negotiate until you both agree to the terms of the
sale.

Step 7: Get a home inspection. Make your offer contingent on a home inspection. An
inspection will tell you about the condition of the home, and can help you avoid
buying a home that needs major repairs.

Step 8: Shop for homeowners insurance Lenders require that you have homeowners
insurance. Be sure to shop around.

Step 9: Sign papers. You're finally ready to go to "settlement" or "closing." Be sure to

read everything before you sign!

32
Step 10: The House is yours now. Have Puja or hawan.

Terms used in Loans

 EMI: Equated Monthly Installment till the loan is paid back. It consists of a
portion of interest and the principal

 Floating Rate of interest: Rate of interest which varies with the market
lending rate. This means that there is an element of risk of paying more than
budgeted amount in case the lending rates goes up

 Monthly Reducing balance: In this system interest reduces monthly with

repayment of Principal amount

 Annual Reducing Balance: In this system principal is reduced annually at the

end of the year so you end up paying interest even for the portion of principal
you have actually paid back

 Fixed rate of interest: Rate of interest remains unchanged throughout the

period of the loan

 Processing charge: It's a fee payable to the on applying for the loan

 Prepayment Penalties: When loan is paid back before the agreed term of the
loan, then banks/ institutions charge penalty for the prepayment

 Commitment Fee: Some institution charge commitment fee in case the loan
is not availed within a stipulated period, after it is processed and sanctioned.

 Miscellaneous Cost: It is quite possible that some lenders may charge

documentation or consultant charges.

Eligibility
Home loan eligibility for Resident Indians depends upon the repayment capacity of
the loan applicant. The maximum loan that can be sanctioned varies with the banks

33
and other housing finance companies (HFC) and generally, the maximum loan
amount granted is 80 to 85% of the cost of your home.

Home loan eligibility corresponding to repayment option is based on the following

factors. Even though, the eligibility criteria may vary according to the HFCs
regulations.

Home loan Eligibility Criteria

Age (Minimum) 21 Years

Age (Maximum) 58(salaried)
60(Public limited/Government
Employees)
65 (self employed)
Qualification Graduation
Income Stable source of income and saving
history
Dependents Number of dependents, assets, liabilities
Other income sources Spouse's income

About the Home loans in Nanded city:

As far as the Nanded City is concerned it has the population of about ten lacks. And
it has developed due to the strong industrial area and political background. Nanded is
the second fast developing city in Marathawada after Aurangabad. There are number
banks e.g. co-operative, commercial, scheduled, and nationalized.

Total number of banks in Nanded, which denotes the whole population

1. MARATHWADA GRAMIN BANK

2. STATE BANK OF INDIA
3. BANK OF MAHARASHTRA
4. NANDED MERCHANT’S CO-OPERATIVE BANK
5. ICICI LOANS
6. STATE BANK OF HYDERABAD
7. BANK OF BARODA
8. BANK OF PATIYALA

34
 9. CENTRAL BANK OF INDIA
10. BOMBAY MERCANTILE CO-OPERATIVE BANK
11. CANARA BANK
12. ING VYSYA BANK
13. HDFC LOANS
14. NANDED DISTRICT CO-OPERATIVE BANK
15. HINGOLI PEOPLES CO-OPERATIVE BANK
16. AKOLA URBAN BANK
17. DENA BANK
18. BHAGYALAXMI MAHILA BANK
19. PUNJAB NATIONAL BANK
20. SANGLI BANK
21. ANDHRA BANK
22. CENTURIAN BANK LOANS
23. UNITED WESTERN BANK
24. SHANKAR NAGARI BANK
25. JAI SHIVRAI CO-OPERATIVE BANK
26. GODAVARI URBAN CO-OPERATIVE BANK
27. ALAHABAD BANK
28. MAHARASHTRA STATE CO-OPERATIVE BANK
29. MARKANDEYA NAGARI SAHAKARI BANK
30. DEVELOPMENT CREDIT BANK
31. PEOPLES CO-OPERATIVE BANK
32. PUNJAB SINDH BANK
33. UNION BANK OF INDIA
34. VIJAYA BANK
35. BANK OF INDIA

SAMPLE BANKS THAT REPRESENT WHOLE POPULATION:

36. STATE BANK OF INDIA

37. BANK OF MAHARASHTRA
38. BANK OF BARODA
39. MARATHWADA GRAMIN BANK

35
 40. NANDED MERCHANT’S CO-OPERATIVE BANK

By using the sampling technique these five banks are selected i.e. Nationalize, state,
schedule and co-operatives, which REPRESENT the characteristics of whole
population of banks present in Nanded City.

36
 Procedure for getting Approval of Home Loan :

 First of all the applicants have to make an application to the Concerned bank
in which he/she wants to get loan.

 The next step is identification and selection of the property. Bank or financial
institutions will verify the all documents and the customers i.e. Income and
ability to repayment.

 Documents required at the disbursement stage as per the “procedure & draft
booklet” for the location in which the property is located.

 Additional documents may be required as per the nature of the application.

 Disbursement of loan will be in stages as the construction is progressing.

Documents required for sanctioning of the Home Loan:

For General Applicant:
 Passport size Photograph
 Age verification (school/college/leaving certificate or mark sheet, PAN card.
Election Identity card, Passport, Driving License, Ration Card, Birth
Certificate.)
 Bank statement for past 36 months or salary Account and any other operating
A/C.

For salaried people Additional:

 Latest salary certificate/sleep showing all the deduction of the employer.
 Four months salary statements required in case of variable salary.
 Latest form 16/ I.T. Returns
 Appointment/Increment letter from the employer for annual benefit to be
considered.

37
For self employed:

 Computation of Income, Balance sheet, the Profit and Loss A/C along with
schedules of company and individuals for past 3 ears duly certified by
C.A.
 Memorandum/Article of Association or partnership as applicable.
 Brief profits of the company.
 A/C continuity proof for the last one year.
 Office address proof.
 Residence address proof.
 Qualification certificate for self employed professionals.
 Sale deed/ Agreement of sale
 Letter of allotment of Housing Board or society.
 Copy of approval plan if applicable.
 Permission for construction if applicable.
 Valuation of property which is to be financed.
 In case of agricultural land conversion into – copy of relative order.
 NOC under the provision of ULC Regulation Act,1976 in original
(* More or less documents may be required as per the banks rules.

38
A. COMPARISON OF BANK LOANS :

 With compare to all the five banks i.e. State Bank of India, Bank of
Maharashtra, Marathwada Gramin Bank, Bank of Baroda & Nanded
Marchant’s Co-Operative Bank, in which Bank of Baroda And SBI Bank
having very good performance in Loan Sector.

 In terms of Interest rate comparison also Bank of Baroda loan is leading with
having lowest interest rate of 10.5% p.a. (floating rate) only.

 But banks like SBI & Maharashtra bank and Marathwada Gramin bank &
Nanded merchant’s co-operative bank are having more number of schemes for
loan rather than home loan.

 The interest rates of co-operative banks such NANDED MERCHANT’S CO-

OP. BANK & MARATHWADA GRAMIN BANK is not in the race and
behind in Home loans disbursement due to the high rate of interest.

 In comparison SBI & bank of Baroda are in with competition and provided
several schemes like. Bank of Baroda gave free insurance & SBI given 0.25%
discounts for selected professional customers.

B. BANKING POINT OF VIEW:

 In the bank point of view the main businesses of bank is accepting deposits
with low interest rates & lend it on high interest rate and enjoy the variation
for long period of time.

 Maximum interest rate will help the bank but it will not attract customer to
earn the interest for long period. And home loans are more reliable to gain
constant interest for long period of time. And the recovery will be more.

39
 Maximum fund will be disbursed and will have less risk rather than other
loans, which are in short term and high interest rate schemes.
 That is why the in these five banks bank of Baroda & SBI will enjoy long term
benefit & other may have problem in future course. The number customers
that banks are chosen for home loans are salaried employ in which it reduces
the risk involved in recoveries.

C. CUSTOMERS POINT OF VIEW:

In customer’s point of view: -

i. Bank of Baroda is better because it have lowest rate of interest.

ii. Bank of Baroda bank sanction loan within short time period with respect to
Nationalize banks.
iii. Nationalize banks takes maximum time for selecting application.

iv. In co-op. Banks loan will be sanctioned but it depends upon the relation with
banking personnel & member of the banks.

v. The very important benefit that the customer getting is getting tax benefit.
Home loans is the only loan which Government Of India have given relief &
tax deduction upto 1,50,000 p.a. for the income tax payee.
That is the reason customer paying less interest that he actual is having.

40
 LIMITATION OF STUDY

 I was unaware of their operation. The banking activities are very large in
number. I wish to know the whole gamut of policy and operations.
 Financial terminology was new to me and that was a limitation to
understand the whole process.
 I had no work experience earlier, so I had a hesitation in approaching my
colleagues. Soon I overcame this problem.
 Time Constraint was one of the limitations. Document verification requires
more time and concentration. A minute mistake in the exercise could be
costly.
Financial terminologies were new. Felt the deficiency within myself to
understand them in their perspectives.

41
 SUGGESTIONS:

1. In this era of Globalization it is very difficult to the banks to keep the high rate
of interest for facing the competitor -

i. To reduce the interest

ii. To launches the new attractive schemes

iii. To choose the new methodology for recovering balances

iv. To select the sectors in which the large number of funds are invested
for long time period such as Home Loan.

v. To attract not only salaried people but also attract the businessmen and
contractors in which more money will be disbursed and may enjoy
large rate of interest.

42
 Conclusion

 With compare to all fire banks. Bank of Baroda and SBI have a very good
performance in home loan sector.

 Max. interest rate will help the bank but it will not attract thee customers to
earn long term interest and home loans are more reliable to gain constant
interest so, interest rate of housing loan should be minimum.

 The days for sanctioning loan also affect the loan proposal because in the era
of competition thee bank should keep thee sanctioning period minimum.

43
 BIBLIOGRAPHY:

 Practical Banking Advances

By: Bedi & Haldikar

 Financial management
By: Arun Kumar & Rachana

 Fund management in commercial bank

By: Malhotra & Verma

 INTERNET :
www.bankofbaroda.com
www.googlesearch.com
www.sbi.co.in
www.mahabank.com
www.bankrate.com
www.apnaloan.com

44
 Questionnaire

Name of the Bank

Address
E-mail

1) What are your housing loan products?

2) What is the rate of interest for housing loan?

Floating rate of interest –
Fixed rate of interest –

3) What are the documents required for housing loan?

4) What is the amount of total disbursement loan in one year ?

5) What is the amount of housing loan in the total disbursement of loan ?

a) 0-20%
b) 20-40%
c) 40-60%
d) 60-80%
e) 80% and above
f)
6) How many customers/A/C’s of housing loan ?
a) 0-15A/c
b) 15-30A/c

45
 c) 30-45A/c
d) 40A/c and above

7) What is the repayment period?

a) 0-5 years
b) 5-10 years
c) 10-15 years
d) 15-20 years
e) 20 years and above

8) How many days are required for sanctioning of a housing loan?

a) 0-10 days
b) 10-20 days
c) 20-30 days
d) 30-40 days
e) 40 days and above

46
 BALANCE SHEET
( As on 31st march,2008)

Balance Sheet as on 31st March, 2008

Amount in Rupees
(000's Omitted)
Schedules As on As on
31.3.2008 31.3.2007
Capital & Liabilities  
Capital 1 365,52,77 365,52,76
Reserves & Surplus 2 10678,39,91 8284,41,00
Deposits 3 152034,12,72 124915,97,93
Borrowings 4 3927,04,80 1142,56,16
Other Liabilities & Provisions 5 12594,41,42 8437,69,61
Total 179599,51,62 143146,17,46
       
Assets  
Cash and balances with Reserve Bank of 6 9369,72,34 6413,52,02
India
Balances with Banks and Money at Call 7 12929,56,33 11866,84,51
and Short Notice
Investments 8 43870,06,78 34943,62,75
Advances 9 106701,32,41 83620,86,98
Fixed Assets 10 2427,00,81 1088,80,75
Other Assets 11 4301,82,95 5212,50,45
Total 179599,51,62 143146,17,46
     
Contingent Liabilities 12 82362,32,83 61375,31,76
Bills for Collection 8315,01,73 6627,59,33
Significant Accounting Policies 17    
Notes on Accounts 18

PROFIT AND LOSS ACCOUNT

47
 For the Year ended 31st March, 2008

Profit & Loss Account for the Year ended 31st March, 2008
Amount in Rupees
(000's Omitted)
Schedules Year ended 31st March, Year ended 31st March,
 
2008 2007
I. Income  
Interest Earned 13   11813,47,67   9004,08,55
Other Income 14   2051,03,61   1381,79,27
Total   13864,51,28   10385,87,82
II. Expenditure
Interest Expended 15   7901,67,06   5426,55,70
Operating Expenses 16   2934,29,21   2544,31,34
Provisions and   1593,02,86   1388,54,33
Contingencies
Total   12428,99,13   9359,41,37
III. Profit  
Net. Profit for the year     1435,52,15   1026,46,45
Available for
    1435,52,15   1026,46,45
Appropriation
Appropriation    
     
Transfer to :
a) Statutory Reserve     358,88,04   256,61,61
b) Capital Reserve     84,64,85   14,31,65
c) Revenue and Other 651,05,38 65,503,07,35
     
    Reserves
I) General Reserve     650,35,08   502,50,35
II) Statutory Reserve
  70,30 57,00
(Foreign)
d) Dividend (including
    340,93,88   252,45,84
Dividend Tax)
I) Interim Dividend   0 124,60,65
II) Proposed Dividend   340,93,88 127,85,19
TOTAL     1435,52,15   1026,46,45
Basic & Diluted
    39.41   28.18
Earnings per Share
Significant Accounting
17        
Policies
Notes on Accounts 18  

48