A REPORT

ON
THE STUDY OF DIFFERENT LOAN SCHEMES AT
SOUTH INDIAN BANK

Submitted in partial fulfilment of the requirements for

M.B.A Degree Course of Christ University

By
Alexander George

Under the guidance of

Mr. Harish K.
Assistant Manager, South Indian Bank.

CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT

CHRIST UNIVERSITY, BANGALORE

2009-2010
 DECLARATION

I, hereby declare that this project report, “The Study of Different Loan Schemes at South

Indian Bank” submitted to Christ University for the award of a degree of Masters in

Business Administration (M.B.A), is a record of original and independent work carried

out by me in M.B.A of Christ University.

Place: Bangalore

Name:Alexander Chundattu
 ACKNOWLEDGEMENT

I would like to take this opportunity to thank all those who have helped in the successful completion
of my project.

I thank the Almighty for his blessings and guidance for my every step.

I would take this opportunity to express my heartfelt gratitude and thanks to Mr. Harish K, my project
and external guide, not just for giving me an opportunity to carry out my study but also for guiding me
through my study at the Regional Office of South Indian Bank, Bangalore and for sparing his valuable
time for the same. It was truly a learning experience to work with him. I sincerely thank you Sir.

I am deeply indebted to my mentor and faculty guide Mrs. Sreeja Bhattacharya for guiding me all
through my internship and for being a moral support from the very beginning of this study. I sincerely
thank you ma’am.

Thank you,

Alexander George
 TABLE OF CONTENTS

SL NO PARTICULARS PAGE NO

1 EXECUTIVE SUMMARY

2 INDUSTRY PROFILE

3 COMPANY PROFILE

4 INTRODUCTION TO THE TOPIC

5 RESEARCH DESIGN

6 ANALYSIS & INTERPRETATION

7 SUGGESTIONS & RECOMMENDATIONS

8 CONCLUSION

9 BIBLIOGRAPHY
 EXECUTIVE SUMMARY

The study for this report titled “The Study of different loan schemes at South

Indian Bank” aims at understanding the different terms and conditions for availing

loans, to understand the various parameters involved in analyzing the repayment ability

of the customer and also the various charges charged by the bank in terms of penal

interest, upfront fee and early closure fee.

In this study my focus has been mainly on the following 4 types of loans.

Personal Loan
Vehicle Loan
Cash Credit Overdraft Limit(CCOL) continuance Loan, and,
Agricultural Loan.

In the study of the above mentioned loans I have tried to find out the maximum

and minimum quantum of loan for each type of loan granted by the bank, to understand

how the bank calculates the EMI and also to know the repayment period for each type

of loan. One of the other terms I came across during my study is holiday period. I have

also tried to find out the different documents collected by the bank for analyzing the

credit worthiness of a customer. The objective is to analyse the procedures followed by

the bank before sanctioning the loan to a customer.

 At the end I would conclude that at the end of this study I have made certain

suggestions and recommendations that I feel can be done to the best of my

understanding.

INTRODUCTION TO BANKING

INDUSTRY PROFILE

Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and the 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 Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That
honor belongs to the Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondichery, then a French colony, followed. HSBC established itself
in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade
of the British Empire, and so became a banking center.
The Bank of Bengal, which later became the State Bank of India. The first entirely Indian joint stock
bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was
the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now
one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the social,
industrial and other infrastructure had improved. Indians had established small banks, most of
which served particular ethnic and religious communities.

The Presidency banks dominated banking in India but there were also some exchange banks
and a number of Indian joint stock banks. All these banks operated in different segments of
the economy. The exchange banks, mostly owned by Europeans, concentrated on financing
foreign trade. Indian joint stock banks were generally under capitalized and lacked the
experience and maturity to compete with the presidency and exchange banks. This
segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to
found banks of and for the Indian community. A number of banks established then have
survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara
( South Kanara ) district. Four nationalised banks started in this district and also a leading
private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of
Indian Banking".

From World War I to Independence

The period during the First World War (1914-1918) through the end of the Second World
War (1939-1945), and two years thereafter until the independence of India were challenging
for Indian banking. The years of the First World War were turbulent, and it took its toll with
banks simply collapsing despite the Indian economy gaining indirect boost due to war-related
economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in
the following table:

Number of banks Authorised capital Paid-up Capital

Years
that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

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 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
could 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
nationalisation of major banks in India on 19 July, 1969.

Nationalisation
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 nationalise 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
Nationalisation." 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 9
August, 1969.
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. Later on, in the year 1993, the government merged New Bank of India with
Punjab National Bank. It was the only merger between nationalized banks and resulted in the
reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the
nationalised banks grew at a pace of around 4%, closer to the average growth rate of the
Indian economy.

The nationalised banks were credited by some, including Home minister P. Chidambaram, to
have helped the Indian economy withstand the global financial crisis of 2007-2009

Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy
of India, revitalized 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.

Currently (2009), 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.

In recent years critics have charged that the non-government owned banks are too aggressive
in their loan recovery efforts in connection with housing, vehicle and personal loans. There
are press reports that the banks' loan recovery efforts have driven defaulting borrowers to
suicide.

DEFINITION OF A BANK

The Banking Companies Act of 1949, Section 5(b) defines banking as “accepting for the purpose of
lending or investment of deposits from the public, repayable on demand or otherwise and
withdrawable by cheques, drafts, and orders or otherwise.”

CLASSIFICATIONS OF A BANK

Banks are classified into several types based on the functions they perform. The classification
is as follows

• Commercial banks
• Investment or industrial banks
• Exchange banks
• Co-operative banks
• Land development banks
• Savings banks
• Central bank

Each of the above mentioned banks is explained below:

Commercial banks

An institution which accepts deposits, makes business loans, and offers related services.
Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and
time deposit. . While commercial banks offer services to individuals, they are primarily
concerned with receiving deposits and lending to businesses. They provide funds only for
short term needs of trade and commerce. These banks accept three types of deposits namely
savings bank deposits, fixed deposits and current deposits.

Investment banks

These banks provide funds on long term basis for industries. The investment banks obtain
funds through share capital and debentures and long term deposits from the public. They are
also into the task of underwriting of shares of companies if the need arises. An investment
bank is a financial institution that raises capital, trades in securities and manages corporate
mergers and acquisitions. Investment banks profit from companies and governments by
raising money through issuing and selling securities in the capital markets (both equity, bond)
and insuring bonds (selling credit default swaps), as well as providing advice on transactions
such as mergers and acquisitions.

Exchange banks

They are also known as foreign banks. These banks provide foreign exchange for the import
trade. The purpose of these banks is to make international payments through purchase and
sale of exchange bills.

Co-operative banks

Co-operative banks are established too meet the banking requirement of not only the urban
population but also the rural as well. They function like commercial banks. They provide
short and medium term loans. Co- operative banks are classified into land development banks
and urban credit oriented banks.

Central bank

A central bank, reserve bank, or monetary authority is the entity responsible for the monetary
policy of a country or of a group of member states. It is a bank that can lend money to other
banks in times of need. Its primary responsibility is to maintain the stability of the national
currency and money supply, but more active duties include controlling subsidized-loan
interest rates, and acting as a lender of last resort to the banking sector during times of
financial crisis (private banks often being integral to the national financial system). It may
also have supervisory powers, to ensure that banks and other financial institutions do not
behave recklessly or fraudulently.
FUNCTIONS OF A BANK

The various functions of a bank are as follows:

1. Accepting deposits from the public

Accepting various types of deposits is an important function of the bank. Customers who have cash
balances and want to keep them in a safe place i.e. deposit the same with a bank. Banks not only
protect the cash, but also provide a convenient method of transferring funds through the use of
cheques.When bank accepts deposit it is obliged to repay the money either in part or in full in legal
tender money. The bank accepts three types of deposits from all types of income earners. They are:

a) Fixed deposit
b) Current deposit
c) Savings deposit.

a) Fixed deposit: A fixed deposit is one where a customer keeps a certain amount of money in a bank
for a specified period of time. It may be six months to five years. The fixed deposits carry higher rates
of interest when compared to savings deposits. The fixed deposit is not withdrawn before the expiry of
the period. The rate of interest varies with the period. The longer the period the higher is the rate of
interest and viceversa.In India, it varies from 8 to 10 percent.

b) Current deposit : Current deposits are those deposits which can be withdrawn at any time by
means of cheques.The banks do not pay interest on current account deposits. A customer who opens
an account has to maintain a minimum credit balance of Rs 1000.At the same time they will have to
pay service charges for operating the account. Any amount may be deposited and there are no
restrictions for withdrawals.

c) Savings deposit: Savings deposits are those deposits on which the bank pays a certain rate of
interest to the depositors. A person can open a savings account with a small amount and go on
depositing any amount. The customers are expected to maintain a minimum balance. There are certain
restrictions with regard to withdrawals. The banks fix the maximum number of withdrawals in a year.
The banks attract huge deposits from savings bank account.

2. Loans and Advances

Banks receive deposits with a view to lend. Providing loans & advances out of the money which the
bank receives by way of deposits is the second major function of a bank. Banks provide different
types of loans. Direct loans & advances are given to all types of persons against the security of
movable properties. The different types of loans given by banks are direct loans, cash credits, bills
discounted, and overdrafts etc.An overdraft is an arrangement where the customer is allowed to
overdraw from his account. Cash credit is given to manufacturers against the security of goods or
personal security of one or more persons.

3. Agency services

Banks provide a number of useful services to the society they are:

(a) Popularising the cheque system: The banks have developed & popularized the cheque system
through which transfer of money is made possible. The cheque system has reduced the use of
cash to a considerable extent. The cheque system is a highly developed system of credit
instrument through which money can be transferred from one country to another.

(b) The bank also performs various miscellaneous functions such as undertaking the payment of
subscriptions, insurance premium, rent etc on behalf of its customers.

(c) The bank also collects cheques, bills, salaries, pensions, dividends, interests etc belonging to
customers & credit them to respective accounts of the customer.

(d) The bank follows the instructions given by the customer and make payments as & when directed.
The bank charges a certain amount of fee by means of commission for these services.

(e) The bank also undertakes to buy and sell securities on behalf of its customers.

(f) The banker acts as a trustee, executor, administrator and an attorney. As a trustee, the bank looks
after the funds of the customer. It helps in the proper management of the trust. As an executor, the
banker fulfils the desires of the deceased customer in terms of the will left by him. As an attorney,
the banker signs the documents on behalf of the customer.

4. General Utility Services

The General Utility Services include the safe- keeping of valuables and documents, the issue of credit
instruments for easy transfer of funds, collection of credit information regarding the customers
transaction in foreign exchange and provision of specialized advisory services to the customers.

(a)The bank provides safe deposit lockers to the customer to keep their securities, jewellery, vital
documents etc.The customers are required to pay an annual rent for this purpose. The banks discount
the foreign exchange bills drawn by Indian exporters on the foreign importers & thus help the
exporters to get money in home currency.

(b)A very useful service rendered to the customer by the bank is that of remitting the funds from one
place to another in the form of drafts, letters of credit, and travellers cheques etc.

(c) The banks underwrite the issue of shares and securities issued by joint stock companies.

These are the various functions performed by banks to satisfy the various needs of the customer.

COMPANY PROFILE

South Indian Bank is one of the earliest banks in South India. South Indian Bank came into being
during the Swadeshi movement in the year 1906. The establishment of the bank was the fulfillment of
the dreams of a group of enterprising men who joined together at Thrissur, a major town (now known
as the Cultural Capital of Kerala), in the erstwhile State of Cochin to provide for the people a safe,
efficient and service oriented repository of savings of the community on one hand and to free the
business community from the clutches of greedy money lenders on the other by providing need based
credit at reasonable rates of interest.

Translating the vision of the founding fathers as its corporate mission, the Bank has during its long
sojourn been able to project itself as a vibrant, fast growing, service oriented and trend setting
financial intermediary.

ICICI Bank Ltd, was the biggest shareholder of the South Indian Bank holding 11.25% of the bank's
equity which was later reduced to 6.71%. In the year 2006 they exited South Indian Bank. At present
as much as 22.9% is in the hands of FII’s such as Goldman Sachs, India Capital Fund, ABN Amro,
Credit Suisse First Boston and Citicorp Global. The bank turned into a scheduled private sector bank
under the Act of Reserve Bank of India in the year 1946. LIC has now picked up a 1.9 percent stake in
South Indian Bank.

MILESTONES

• The First among the private sector banks in Kerala to become a scheduled bank in 1946 under
the RBI Act.

• The First bank in the private sector in India to open a Currency Chest on behalf of the RBI in
April 1992.

• The First private sector bank to open a NRI branch in November 1992.

• The First bank in the private sector to start an Industrial Finance Branch in March 1993.
 • The First among the private sector banks in Kerala to open an "Overseas Branch" to cater
exclusively to the export and import business in June 1993.

• The First bank in Kerala to develop an in-house, a fully integrated branch automation
software in addition to the in-house partial automation solution operational since 1992.

• The First Kerala based bank to implement Core Banking System.

• The Third largest branch network among Private Sector banks, in India, with all its branches
under Core banking System.

Presently, South Indian Bank has a network of 546 branches, 9 Extension Counters and 298 ATM’s
spread over 23 States/UT.

VISION AND MISSION

VISION

To emerge as the most preferred bank in the country in terms of brand, values, principles with core
competence in fostering customer aspirations, to build high quality assets leveraging on the strong and
vibrant technology platform in pursuit of excellence and customer delight and to become a major
contributor to the stable economic growth of the nation.

MISSION

To provide a secure, agile, dynamic and conducive banking environment to customers with
commitment to values and unshaken confidence, deploying the best technology, standards, processes
and procedures where customer convenience is of significant importance and to increase the
stakeholders’ value.
PRODUCTS AND SERVICES

1. Personal Banking

(a) Accounts & Deposits

Opening an account with South Indian Bank would provide customers with an opportunity to
"experience next generation banking". With all the branches networked under Core Banking System
the bank assures its customers the latest product offerings, and value added services. These services
provide customers with a safe haven for their money and also giving them ease of access and use.

Savings Account- For routing personal cash flow.

Recurring Deposit – For managing periodic and constant cash flows.

Current Account – For smooth handling of business transactions.

Term deposits - For high returns on investments.

(b) Loans

The bank offers different types of loans to cater to the various needs of its customers. The
loans offered are personal loan, agricultural loan, home loan and flexi loans.

(c) Mutual Funds

South Indian Bank has tied-up with the leading Mutual Funds, so that customers may pick
and choose, as per there investment goals.

o ICICI Prudential AMC

o Franklin Templeton
 o TATA Mutual Fund
o Sundaram BNP Paribas
o UTI Mutual Funds
o Reliance Mutual Funds
o HSBC Investments
o HDFC Mutual Fund
o Fidelity Fund Management Pvt.Ltd.
o Principal Mutual Funds
o Fortis Investments
o Birla Sun Life Asset Management Company Ltd.
o DSP BlackRock Mutual Funds

(d) Insurance

At every point of life risks are many. Coverage for life and property are always advisable to
ensure protection. South Indian Bank provides its customers with the most beneficial policies
from insurance majors. Whether for households or for businesses, the bank provides all kinds
of policies.

General Insurance and non life insurance products - tie-up with Bajaj Allianz Insurance.

For distribution of export risk cover – tie up with ECGC.

For distribution of life insurance products – tie up with LIC.

(e)Money Transfers

Fast, reliable and with minimal charges, money transfers facility is available at South Indian
Bank and it has no-hassle affair. Be it within the country or abroad, there online money
transfer services make the business of transferring money look has one of the easiest jobs.
With all their branches networked under the Core Banking system,customers can send and
receive money in an instant and meet their urgent needs.

Domestic transfers- Transfer/Receive funds within India

International transfers-Transfer/Receive funds to/from abroad.

(g) Value Added Services

The bank offers different types of value added services which a customer can opt, as per
his/her convenience. The banks online services are excellent; this enables customers to assess
their account anytime they want.

New pension system, Any Branch Banking, Global ATM cum Debit Card, Internet Banking,
Mobile Banking, Credit Card through a tie up with Citibank, SIB Collect, Demat services,
KYC Certification of Mutual Fund Investors are some of the value added services provided
by the bank.
2. BUSINESS BANKING

(a) Business Services

The bank offers current account facility for businesses. These accounts allow customers the
convenience of conducting day-to-day banking operations. There are mainly two types of current
account facilities given by the bank.

Normal Account.

Premium Account.

Both normal and premium accounts offer very similar services the main difference between the two
being that the Premium Account facility allows for Any Branch Banking.

Some of the other business related services provided the bank are Overdrafts(OD), Cash Credit(CC)
and Mercantile Credits. These facilities help a long way in financing the working capital requirements
of business concerns.

(b) Domestic Finance

A business requires a constant flow of finance for its growth. The finance can be from various
sources, including Bank finance. The bank caters to this segment, which helps them
understand each and every requirement of the customers business, which helps them provide
the right mix of finance.

Working capital finance

Long term finance

Non Fund based finance

(c) International Finance

Export Finance

To cater to the high growth export sector, the bank offers the following:

• Pre-shipment credit to take care of purchase and processing of raw materials, for making the
goods ready for export. Advances such as Packing Credits (against LC’s/ confirmed orders)
shall help the customer to maintain his cash flow.

• Post-shipment credit is extended to exporters against assured sale receivables, till the actual
sale proceeds are realized. Facilities such as Purchase/Discount of export documents under
Export Orders, Advances against export bills sent on collection, are few of such advances.

• The bank also offers foreign currency loans, advances against export incentives receivables.
•
Their SWIFT services help instant financial services for exporters. They also facilitate
insurance through Export Credit Guarantee Corporation (ECGC).
•

Import Finance

• The bank provides Import finance services by Letter of Credit services and remittance
services.

• Import Bill collection services.

 INTRODUCTION TO THE TOPIC

Banks undertake to keep people’s savings – under safe custody for the purpose of making
profits by investing these funds. Profit motive is a characteristic of banks and that is why they are
called commercial banks. Banks undertake to invest directly in profitable ventures but then at the
same time they also look to make profits by converting their debts in terms of deposits accepted from
customers into debt claims of other people by lending money to borrowers and collecting the assets
pawned or pledged by them. Banks would easily prefer to invest the funds received by way of deposits
in profitable institutions but that would not make them an different from other financial institutions.
One of the major functions of commercial banks other than accepting deposits is to lend funds which
is why they engage in the activity of granting credit. The absolute positive arising out of this function
of the banks is that since banks are able to efficiently mobilise funds it can also disburse these funds in
an efficient manner to those in need since the public as individuals may not have enough money with
them to carry out the activities they are interested in but on the other hand banks create a huge pool of
money which by lending to the right people their needs can be satisfied. All of this leads to economic
development since a lot of these activities would not have been possible otherwise.

A loan is primarily an advance granted by a bank to any outsider who seeks such funds. The
primary difference to note here is that it is the outsider who initiates the transaction in the first place
and not the bank. It is the outsider who needs the money and therefore it is the outsider who will apply
for a loan and then it is upto the bank whether or not to grant the loan or not. In other words we can
also say that a loan is like a deposit made by the bank. There are various terms and conditions under
which the banks grant loans to outsiders.

The banking system did not originate in any statute or Governmemt, or by any bye – laws of
private organisations. It has had a primitive origin by the name Bank itself, meaning a bench or desk
on which transactions took place in olden days. The name originated with the French word Banque or
Italian Banca, meaning an office for monetary transactions over the counter, benches or desks being
used as counters then. Banking activities are said to have been undertaken by early Babylonians and
other civilised peoples as early as 1700 B.C.

Earlier banking activities were undertaken by goldsmiths and also merchant traders who were
individually wealthy people and through mercantilistic practices amassed gold through foreign trade.
These goldsmiths and merchants, on account of their reputation as persons of high solvency and
honesty, had a large clientele. Later on banking activities were undertaken by moneylenders who were
ill – reputed for charging very high rates of interest. Middle ages saw the rise and spread of
professional money lenders institutionalising their business all over the world. In India it was the
Marwari community who thrived on money lending and money changing at high rates of interest and
commission. They had no general or uniform principles of banking, lending and in the rates of
interest. It was only in the 16th century that the modern baking system based on certain sound and
uniform principles was organised.

All in all it should be noted that the activity of lending be it by goldsmiths, moneylenders or
modern banks has it’s roots in ancient times. However it should also be noted that the entire activity of
lending began with the person in need of money. In the present scenario there are many reasons why
people seek loans such as,

1) For personal purposes,

2) For starting any business activity,

3) For construction of house,

4) For purchase of vehicle,

5) To finance education,

6) For renovation or expansion etc.

The topic under this report is loans and as per the circumstances under which the customer seeks the
loan, the banker grants the loan to the customer against his personal security and security of one or
more persons. The amount is credited to the customers account immediately after sanction and is
repayable in lump sum or in instalments. The period of loan ranges from one year to twelve years.
Accordingly it has been classified as

(a) Short-term: Short term loan will be for one year.

(b) Medium-term: Medium term loan will be from one year to six years.

(c) Long-term loans: Long term loans will be above six years. It can also be called term loans.

The interest rates are high when compared to cash credit or overdrafts. The interest rate is charged on
the entire amount. The interest is compounded quarterly, or half –yearly basis.

The different types of loans offered to a customer by banks are:

(a) Personal Loan

Personal loans are for general purposes loans to meet the various financial requirements like purchase
of household articles, white goods, electronic computer equipments, peripherals expenses for medical
treatment, inland or foreign leisure travel, inland or foreign business travel, travel abroad on
employment.

(b) Vehicle loans

Commercial vehicles or vehicles for agrarian purposes can be purchased by individuals and farmers at
minimum interest rates.

(c) Home Loans

Home loans are loans which are granted for the purpose of constructing a house, purchasing a flat, and
for renovating a house. This loan is provided for a minimum interest rate.

(d) Gold Loans

Loans can be availed by the customer against loan as security.

(e) Agriculture Loans

Agricultural loan is provided to farmers to meet their various agricultural needs. These loans are
provided for a minimum interest rate.

(f) Educational Loans

Educational loan is provided to students to pursue their higher studies. These loans are provided at
minimum interest rates.

(h) Flexi loans

Flexi loans are provided only to high net worth individuals. It is a loan against property.

(i) Priority Sector loans

These are loans granted towards activities in certain sectors that have been specified by the RBI to be
of priority sector. The priority sectors as specified by the RBI are agriculture, small enterprises, retail
trade, microcredit, education and housing. Banks as regulated by the RBI are to show preferential
priority towards lending to these sectors. All other sectors are considered non – priority sectors.
 SECURED AND UNSECURED LOANS

The bank loans are broadly classified into two categories:

• Secured Loans
• Unsecured loans

Section 5(n) of the Banking Regulation Act, 1949, defines a secured loan as “A loan or advance made
on the security of assets the market value of which is not at anytime less than the amount of such loan
or advance”.

Secured loans should have

(a) an asset as a security and

(b)The value of security should be equal to the advance made by the banker.

The security may be primary or collateral one. Primary security is one offered by borrower himself.
Whereas the collateral security is deposited by a third party to secure the advance made to the
customer. Security may be ‘tangible’ or ‘personal’. Tangible security is one which is visible and can
be sold or transferable. E.g. goods, documents of title of goods, real estate etc. Personal security refers
to the promise to the promise of the borrower himself to payback the borrowed money. In this case a
promissory note is executed and a surety is also obtained. Surety is a known respectable person who
stands as a co-obligant.

While considering the security for loans, the banker follows certain guidelines they are as follows:

1. Ready Conversion

The security considered for loan should have the character of ready convertibility. This means the
security offered should be readily converted into cash by sale in open market, so that when the
advance becomes overdue this amount can be appropriated to clear the loan.

2. No Encumbrance

The security taken should be free from encumbrance. There should not be any prior charge against the
security offered. Even if there is a prior charge, the security should be capable of bringing money even
to cover the bank loan. But the banker prefers normally the first change against the security.

3. Stable Price

As far as possible the security offered should have stable price. If the price of the security is subjected
to wide fluctuation, the security will be rated low. Because the banker cannot assess the real price of
the asset taken as security and also cannot determine the size of advance to be made. When the price
of the security is stable, the banker can easily determine the advance to be made.

4. Safety

Safe securities are capable of bringing more stability for advances. The banker should assess whether
the securities are safe. The term safe here refers to the certainty of recovery of money from that
security. Normally gold, government bonds, real estates are safe securities.

5. Yield

The security offered for advance should bring regular income. This income may act as a supporting
factor as it will reduce the interest burden of the borrower and repayment will be bit easier. Therefore
the banker should get such securities which have high yielding capacity as security against advance.
Normally debenture bonds of corporate enterprises will bear a fixed return & even the government
bonds and blue chips of the corporate enterprises have a definite return & they can be taken as security
for advance.

6. Margin

Another factor to be considered to take security against advance is that a considerable margin should
be left while assessing the value of security.

7. Valuation

The security obtained against the advance should be properly valued and the value should have
stability. The valuation of securities should be properly made. In accountancy two principles are
followed to value the assets of fixed nature and fluctuating nature. The assets of fixed nature are
valued at “cost-less depreciation”. The current or floating assets are valued at “cost price or market
price whichever is less”. The same principle should be followed by the banker also in the case of both
the types of assets and on the basis of this valuation, the margin can be determined.

UNSECURED LOANS

MEANING
Whenever the borrower does not have sufficient security to offer or if he has exhausted all securities,
he can request the banker to accept the surety of the third party. Such requests should come from the
borrower and not from the banker. The person who gives security for the loan raised by the principal
debtor is called “GUARANTOR”

The Indian Contract Act 1872 defines “Guarantee” as a “Contract to perform the promise or discharge
the liability of a third person in case of his default”. From this definition it is clear that a guarantor or
surety who is a third person agrees to discharge the liability of the principal debtor, if the principal
debtor fails to clear the money due to his creditor. This becomes secondary security to the banker.

Three parties are involved in this contract of guarantee. They are as follows:

• Principal Debtor: The person in respect of whose default the guarantee is given.
• Surety: The person who agrees to stand as guarantee is called surety.
• Creditor: The person to whom the guarantee is given.

ESSENTIALS OF A VALID GUARANTEE

1. Valid Contract
The contract of guarantee should have all the essential elements of a valid contract i.e. consideration,
free consent, competence of the parties, legality of object and consideration.

2. Primary Liability

There must be some one primarily liable as principal debtor other than surety. The contract of
guarantee pre-supposes the existence of liability enforceable by law.

3. Conditional

In a valid contract of guarantee there must be a conditional promise to be liable on the default of the
principal debtor .Thus the liability of surety arises only when the principal debtor makes a default.

4. No misrepresentation

While obtaining surety the facts should be revealed to him. The guarantee should not be obtained by
misrepresenting the facts of surety. However as it is not a contract of absolute good faith, it does not
require complete disclosure of material of facts to the surety either by principal debtor or creditor. But
the facts which are likely to affect the degree of surety’s responsibility must be truly revealed to him.
Otherwise it is not valid.

5. No Concealment of facts

The surety should be informed of the facts which are likely to affect the liability. If such facts are
conceded the guarantee becomes invalid.

6. The contract of guarantee must be oral or in writing. But as per the English Law it should be in
writing.

STEPS FOLLOWED BY BANKS FOR GRANTING LOANS:

To assess the credit worthiness of the customer, the banker should obtain the credit information. There
are certain sources that provide information to the bankers. They are as follows:

1. Loan Application

Today loan applications of banks are so designed that they provide information about the credit
worthiness of the customer. The application contains questions about assets, liabilities, business
experience, facilities with other banks, repayment schedule etc which provide credit information.

2. Transactions with the bank

If the proposed borrower is having any account with the bank, the account will render some
information. This account will reveal the habit of customer, his dealings with the bank etc and this
will help the banker assess the integrity of the customer.

3. Financial Statements

The prospective borrower will be asked to submit the balance sheets of previous years, tax statements
etc, which will help the banker to assess the credit worthiness. Fund flow statements are to be studied,
Technical feasibility, Economic viability has to be analysed. Cash budget has to be analysed to assess
the repayment situation.

4. RBI Credit Information Bureau

It is a statutory obligation u/s 45(c)1 of RBI Act,1934 that everyone has to submit a list containing
particulars of advances made by them to RBI at the end of each quarter ending March, June,
September and December. Particulars of advances contain the name of the firm to whom the advance
is made, the extent of advance, repayment schedule, security offered etc. This information will be
compiled by the RBI. Any bank which needs credit information can apply to the RBI in the prescribed
form. The RBI on receipt of application will provide the information. This information will help
bankers to assess the creditworthiness of the customer.

5. Other sources like auction notices published in newspapers, registration, revenue and municipal
records, also provide some credit information will help bankers to assess the creditworthiness of the
customer.

6. Interview

Finally the banker should have an interview with the prospective borrower and ask any question that
provides information about his creditworthiness. This will help the banker to take a correct decision
regarding the loan to be granted.

RBI GUIDELINES:

LENDING TO PRIORITY SECTOR

At a meeting of the National Credit Council held in July 1968, it was emphasised that commercial
banks should increase their involvement in the financing of priority sectors, viz., agriculture and
small scale industries. The description of the priority sectors was later formalised in 1972 on the
basis of the report submitted by the Informal Study Group on Statistics relating to advances to the
Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the
Reserve Bank prescribed a modified return for reporting priority sector advances and certain
guidelines were issued in this connection indicating the scope of the items to be included under the
various categories of priority sector. Although initially there was no specific target fixed in respect of
priority sector lending, in November 1974 the banks were advised to raise the share of these
sectors in their aggregate advances to the level of 33 1/3 per cent by March 1979.
At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks
held in March 1980, it was agreed that banks should aim at raising the proportion of their advances
to priority sector to 40 per cent by March 1985. Subsequently, on the basis of the recommendations
of the Working Group on the Modalities of Implementation of Priority Sector Lending and the
Twenty Point Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial
banks were advised to achieve the target of priority sector lending at 40 per cent of aggregate bank
advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker
sections within the priority sector. Since then, there have been several changes in the scope of
priority sector lending and the targets and sub-targets applicable to various bank groups.
On the basis of the recommendations made in September 2005 by the Internal Working Group
(Chairman: Shri C. S. Murthy), set up in Reserve Bank to examine, review and recommend
changes, if any, in the existing policy on priority sector lending including the segments constituting
the priority sector, targets and sub-targets, etc. and the comments/suggestions received thereon
from banks, financial institutions, public and the Indian Banks’ Association (IBA), it has been
decided to include only those sectors as part of the priority sector, that impact large sections of the
population, the weaker sections and the sectors which are employment-intensive such as
agriculture, and tiny and small enterprises.

Accordingly, the broad categories of priority sector for all scheduled commercial banks will be as
under:

CATEGORIES OF PRIORITY SECTOR

(i) Agriculture (Direct and Indirect finance): Direct finance to agriculture shall include short,
medium and long term loans given for agriculture and allied activities (dairy, fishery, piggery, poultry,
beekeeping etc.) directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability
Groups(JLGs) of individual farmers without limit and to others (such as corporates, partnership firms
and institutions) for taking up agriculture/allied activities. Indirect finance to agriculture shall include
loans given for agriculture and allied activities.

(ii) Small Enterprises (Direct and Indirect Finance): Direct finance to small enterprises shall
include all loans given to micro and small (manufacturing) enterprises engaged in manufacture/
production, processing or preservation of goods, and micro and small (service) enterprises engaged in
providing or rendering of services, and whose investment in plant and machinery and equipment
(original cost excluding land and building and such items as mentioned therein) respectively, does not
exceed the amounts specified in Section I, appended. The micro and small (service) enterprises shall
include small road & water transport operators, small business, professional & self-employed persons,
and all other service enterprises. Indirect finance to small enterprises shall include finance to any
person providing inputs to or marketing the output of artisans, village and cottage industries,
handlooms and to cooperatives of producers in this sector.

(iii) Retail Trade shall include retail traders/private retail traders dealing in essential commodities
(fair price shops), and consumer co-operative stores.

(iv) Micro Credit: Provision of credit and other financial services and products of very small
amounts not exceeding Rs. 50,000 per borrower, either directly or indirectly through a SHG/JLG
mechanism or to NBFC/MFI for on-lending up to Rs. 50,000 per borrower, will constitute micro
credit.

(v) Education loans: Education loans include loans and advances granted to only individuals
for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad,
and do not include those granted to institutions.

(vi) Housing loans: Loans up to Rs. 20 lakh to individuals for purchase/construction of dwelling
unit per family, (excluding loans granted by banks to their own employees) and loans given for
repairs to the damaged dwelling units of families up to Rs. 1 lakh in rural and semi-urban areas and
up to Rs. 2 lakh in urban and metropolitan areas.

DIFFERENT LOANS AT SOUTH INDIAN BANK

• Personal Loan - Easy general purpose loans

• Vehicle loans - for private, commercial or agricultural purposes

• Home Loans - for residents, NRIs and Senior Citizens

• Gold Loans - Easy Loans against Gold.

• Agriculture Loans - for various agricultural needs

• Educational Loans - for higher studies

 • Flexi loans - Loan against property (Residential/Non-residential)

• Other Loans - For certain specific purposes

1. PERSONAL LOAN SCHEME

Purpose of the loan

This loan is availed by individuals for meeting their personal requirements like purchase of household
articles, white goods , electronic computer equipments, peripherals expenses, for medical treatment ,
inland or foreign leisure travel ,inland or foreign business travel ,travel abroad on employment.

(For persons traveling abroad on employment contract - Certified copy of international qualifying
examination like CGFNS / IELTS, certified copy of valid Passport; certified copy of Employment
offer letter / Work permit, certified copy of registration obtained by the recruitment agency etc to be
obtained)

The purpose of the loan should be indicated in the application form and proposal.
Target group

There shall be two types of Personal Loans.

(a) Individuals Loans

(b) Group Loans

1. Individual Loans

(a) Individuals permanently employed in reputed companies / firms / organizations / Govt.service

having remaining period of service equal to the repayment period.

(b) Practicing / employed Doctors - having professional Medical Degree

(c) Business men

(d) Other categories having sufficient income /IT Return and who are capable of remitting EMIs.

(e) NRIs

2.Group Loans

Group loans are given to permanent employees of GOI and State Government, PSUs, Blue Chip
companies and reputed institutions etc.

Maximum quantum of loan

Maximum Rs. 3.00 lacs subject to the following:

Salaried persons:

15 times of the monthly net salary excluding the proposed loan deductions subject to a maximum of
Rs.3.00 lacs.

Persons engaged in business/profession and filing IT Returns:

Equal to the annual income declared as per the latest IT Return (without considering capital gains)
subject to a maximum of Rs.3.00 lacs.

Persons traveling abroad on employment contract:

75% of total expenses / 5 times of monthly salary whichever is lower as per contract terms subject to a
maximum loan of Rs. 3.00 lacks.

NRIs:
50% of the average annual remittance to their NRI account /spouse’s domestic account (excluding
bulk remittance) subject to a maximum loan of Rs. 3.00 lacs.

Persons who do not come under the tax bracket and gives a declaration to that effect:

Equal to the annual income declared by the applicant supported by appropriate documents to the
satisfaction of the Branch Manager, subject to a maximum loan of Rs.3.00 lac

Mode of disbursement

By credit to the SB/CD account of the borrower. In the case of NRIs, by credit to NRO account only.

Security

Individual Loans

(i) (a) for doctors (as mentioned earlier) and (b) SB account holders whose salary is credited to the
account: Guaranty optional

(ii) For persons going abroad on employment Up to Rs. 1.00 lac – one guarantor.Above Rs.1.00 lac –
Property / acceptable collateral security for 125% of loan amount

(iii) For others- at least one guarantor having Net Worth not less than thrice the loan amount.
(iv)Group Loans One permanent employee of the organization, who can be principal debtor as well as
co-obligant for one loan only.

Rate of interest

Fixed at BPLR + TP-1.25% (fixed) (BPLR = 16%)

Upfront fee

One-time upfront fee 0.50% of the loan amount

Repayment period

Maximum 48 months (EMIs). In the case of group loans, single monthly payment covering the total
monthly instalments of all members of the group to be obtained from the institution.
2. HOME LOANS

South Indian Bank's home loan scheme provides loans not only for purchasing a new flat but also for
renovation, purchase of land, flat or house at concessional interest rates. This loan can be availed by
Resident Indians, NRI s and senior citizens.

(a)Resident Indians

Target Group: Individual or individual jointly with spouse (Group of individuals not permitted)

Purpose of the loan:

a) Purchase of Flat or House
b) Construction of Flat for own use or House
c) Purchasing land & constructing House
d) For major repair, renovation, extension or improvement of flat or house.
e) Takeover of Housing loans from other banks & reputed housing finance companies.
f) Reimbursement of investments already made by the borrower provided the investment has taken
place within one year.

Quantum of loan: Maximum Rs.1.00 crore;

For renovations/additions/major
repairs/ improvements etc.: Maximum Rs.10 lacs

Interest Rates

A. Domestic & upto & including upto & above Rs.30.00 lacs above
NRI home Rs.30.00 lacs including Rs.30.00
Loans Rs.30.00 lacs lacs

Period Fixed rate Floating rate Fixed rate Floating rate

5 years 100 bps above BPLR + TP – 100 bps above BPLR + TP -

corresponding floating rate 4.50% p.a corresponding floating rate 4.00% p.a
with 2 year reset clause with 2 year reset clause

>5 yrs 100 bps above BPLR + TP – 100 bps above BPLR + TP
corresponding floating rate 4.00 % p.a corresponding floating rate – 3.50% p.a
with 2 year reset clause with 2 year reset clause

BPLR = 16%

Primary security: Land and building under Equitable Mortgage

Minimum Margin:

(a) construction of new house/ purchase of land and construction of new house / purchase of ready
built house/ flat: 25% of estimated cost

(b) 30% of cost for purchase of old house/ renovation of existing house

Repayment (including holiday):

Minimum 5 years & Maximum 20 years by Equated Monthly Instalments (EMIs).

Holiday period interest:

Can be funded or serviced at the option of the borrower as decided at the time of sanction.
Upfront fee:

One time upfront fee 0.50% of the loan amount.

Early Closing Fee:

If closed from own sources after 2 years:: Nil

If closed from own sources before 2 years: 1% of the prepaid amount.
If closed through take over by other banks: 2% of the pre-paid amount

Penal Interest: 2% of the defaulted amount for the defaulted period

(b) Non Resident Indians

Rate of interest and terms and conditions similar to that of domestic home loans subject to the
following exceptions:

1. Maximum Repayment Period: 10 years

2. Eligible loan amount: 50 times average monthly remittance made by the borrower from
abroad for credit to his / her NRE account with any bank in India, for a minimum period of 12
months, excluding bulk remittances, if any. If necessary, remittances made by the NRI
directly to his / her spouse’s domestic account (excluding bulk remittances) for the previous
12 months also shall be taken into account to reckon the loan amount

3. Minimum project cost: Rs.10 lacs

4. Property may be in the name of a NRI or jointly with another NRI /resident spouse.

5. Margin should be brought in by way of foreign inward remittance through normal banking
channels or debit to NRE, FCNR, and NRO account of the NRI.

6. Repayment of the loan shall be by way of foreign inward remittance through normal
banking channels, debit of NRE, FCNR, NRO or the rental income from the house financed
by us.

7. Close relatives of the borrowers in India as defined under Section 6 of the Companies Act 1956
(given below) also are permitted to repay the loans through their bank accounts directly to the housing
loan accounts of the NRIs

The list of relatives as defined in the section is given below.

a. Members of a Hindu undivided family

b. Husband and wife

c. Related to one another in the manner indicated below:
i) Father, ii) Mother (including step-mother), iii) Son (including step-son) iv) Son's wife,
v)Daughter (including step-daughter), vi) Father's father vii) Father's mother, viii) Mother's
mother, ix) Mother's father, x) Son's son, xi) Son's son's wife, xii) Son's daughter, xiii) Son's
daughter's husband, xiv) Daughter's husband, xv) Daughter's son, xvi) Daughter's son's wife,
xvii)Daughter's daughter, xviii) Daughter's daughter's husband xix) Brother's wife, xx) Brother
(including step-brother), xxi) Sister (including step-sister), xxii)Sister's husband.

8. As the employment abroad may not be considered as permanent especially in gulf countries,
comfort available from other sources of income in India may also be taken into account while
sanctioning the loan.

9. Once the NRI customer returns to India for permanent settlement as declared by him/her, the
repayment may be permitted from local sources also.

10. Copy of the employment contract, salary certificate / pay slip, current work permit, copy of
identity card, copy of stamped visa, relevant pages of passport, name and full address of the
employer / sponsor abroad, contact number of the NRI applicant, name, address and contact phone
number of a close relative in India for local contacts etc. may be collected.

11. The number of housing loans (both domestic and NRI) to a person can go up to a
maximum of two only, subject to eligibility. The total amount sanctioned to an individual
[balance outstanding in the first housing loan plus the new (second) housing loan] should not
exceed the individual branch discretionary power for housing loans.

(c)Senior Citizens

Target Group:

Those who are drawing pension from State/ Central Government / banks/ Insurance Companies / other
reputed companies and completed the age of 55 years.

Purpose:

For construction of house in own plot / purchase of land and construction of house / purchase of ready
built house with plot / purchase of flat / repairs and / or renovation of existing houses owned.\

Fixed rate with reset clause after every 2 years.

Rate of Interest:

50 bps less than the rates applicable for general home loans.
Quantum of loan:

Maximum quantum of loan limited to Rs. 25.00 lacs or 50 times of monthly pension drawn at the time
of application, which ever is less, subject to the condition that EMI should not exceed 50% of the
monthly pension.

Minimum Margin:

(a) construction of new house/ purchase of land and construction of new house / purchase of ready
built house / flat: 25% of estimated cost

(b) 30% of cost for purchase of old house/ renovation of existing house

Pension account to be maintained with our bank or post-dated cheques for 12 EMIs (initially) drawn
on the pension account with the concerned bank to be submitted on the date of execution and
thereafter every 12 months.

Guarantor:

If spouse is alive he/she should join the documents.

Security:

(a) Prime: Residential property being financed

(b) Collateral: (any one among the following is mandatory)

• Insurance policy ( whole life) for value of loan

• Lien on bank’s own deposits for full value of loan

• Combination of insurance policy / bank’s own deposit for equal value of loan

Repayment period: Maximum repayment period 15 years including repayment holiday or till the
borrower attains the age of 75 years , which ever is earlier, through Equated Monthly
Instalments(EMIs) .

Holiday period interest: Can be funded or spot serviced

Upfront Fee: One-time upfront fee of 0.25% of the loan AMOUNT.

Premature closure charges: NIL, provided the account runs with our bank for a minimum period of
one year after completion of disbursement. Otherwise @1% of balance outstanding.

3. EDUCATIONAL LOAN

South Indian bank provides customized education loans to cater to the needs of students desirous to
pursue higher studies, they have loans exclusively to meet

their requirements, all these loans can be availed by students at lower interest rates, some of the
schemes are Vitjnan Pradhan, SIB excellence, and Vidyanidhi scheme.

Vitjnan Pradhan Scheme - students desirous of pursuing professional courses

SIB-Excellence - for students seeking admission to premier educational institutions such as IITs, IIMs
etc

For Meritorious Students - Pursue Higher Education in India or abroad

Vidyanidhi Scheme - exclusive for students securing admission in Professional colleges in Kerala.

1. Name of the Scheme : VITJNAN PRADHAN SCHEME (VPS)

 2. Target Group: Students desirous of pursuing professional courses in India and abroad.

3. Courses eligible & amount of loan: Various courses for details please contact the branch.

4. Purpose of finance
a) Fees
b) Caution deposits and refundable deposits
c) Cost of study books / equipments
d) Cost of uniform
e) Hostel Boarding and lodging
f) One time premium of life insurance policy of ICICI-Prudential without maturity return
covering the entire period of loan with sum assured equal to the loan amount.

A. Borrower

Borrower shall be the student him/herself if he/she is major (completed 18 years). In the case of minor
students, parents shall be the borrowers

B. Minimum Margin

a) Up to Rs. 25,000: NIL

b) Above Rs.25, 000: 15%
c) Overseas studies: 25%

C. Period of loan / Repayments

Repayment period will start from 1 year after qualifying exam or six months after obtaining
employment, whichever is earlier. For overseas studies, the holiday is restricted to 6 months fixed
after the qualifying examination.

Loan should be repaid in 60 equal monthly installments after the holiday/moratorium as above.

Rate of Interest: fixed at BPLR +TP –2.50%.(BPLR = 16%)

(b) Meritorious Students

The scheme is to provide financial assistance on reasonable terms to:

i) The poor and needy to undertake basic education.

ii) The meritorious students to pursue higher/ professional/technical education.

(a)Eligibility Criteria:

i) Student should be an Indian National

AND

ii) Secured admission to professional/ technical courses through Entrance Test / Selection process

OR

iii) Secured admission to foreign University/ Institutions.

(b)Expenses considered for loan:

Fee payable to college/school/hostel.

Examination/ Library/ Laboratory fee.
Purchase of books/ equipments/ instruments/ uniforms.
Caution deposit/ building fund/ refundable deposit supported by Institution bills/ receipts.
Travel-expenses/ passage money for studies abroad.
Purchase of computers - essential for completion of the course.
Any other expenses required to complete the course- like study tours, project work, thesis, etc.

(c)Quantum of finance:

Need based finance subject to repaying capacity of the parents/ students with margin and the
following ceilings.

Studies in India - Maximum Rs.7.50 lacs.

Studies abroad - Maximum Rs.15 lacs.

(d)Margin

Upto Rs.4 lacs - NIL

Above Rs.4 lacs: Studies in India: 15%
Above Rs.4 lacs: Studies abroad: 25%
Scholarship/ assistantship to be included in the margin.
Margin to be brought-in on year-to-year basis as and when disbursements are made on a pro-rata
basis.

(e)Rate of Interest & other charges:

Rate of Interest: as applicable for Vitjnan Pradhan Scheme (i.e. fixed at BPLR+TP-2.50% (BPLR =
16%)

Penal interest @2% to be charged for loans above Rs.2 lacs for the overdue amount and overdue
period.

Processing/ upfront charges need not be collected.

1% interest concession if the interest is serviced during the study period.

(f) Repayment:

Repayment holiday/ Moratorium shall be Course period + 1 year (which may be extended up to 2
years in case student is not able to complete the course within the scheduled time) OR 6 months after
getting job, whichever is earlier.
The loan to be repaid in 60 months after the holiday as above.
The accrued interest during the holiday period is to be added to the principal and repayment as EMI.

4. FLEXI LOANS

Flexiloans can be extended to residents and non-residents. Flexiloans can be extended only in the form
of Term Loans.

The quantum of loan will be based on the annual income and repayment capacity of the borrower,
security offered etc, unlike the case of project / industry loans, where finance is granted on the
strength of the project / activity chosen.

Target Group: High Networth individuals (single/joint)

Purpose of the loan: Purpose of the loan should be specified in the application form and sanction
order. Purpose should not be for hoarding, speculation or activity restricted by GOI or State
Governments or local bodies

In the case of NRIs, loan shall not be granted for the purpose of investment in non- banking business
or in Agriculture or Plantation or Real Estate business or construction of Farm House or for trading in
Transferable Development Rights (TDRs). Branches to obtain an undertaking also to this effect from
the NRI borrowers.
Quantum of loan: Minimum: Rs.2.50 lacs

Maximum:

• against prime urban property - Rs.50.00 lacs

• against non-urban residential property : Rs.30.00 lacs

Loans above Rs.50.00 lacs will not be considered under Flexiloan Scheme

The annual repayment obligation shall not exceed 75% of the total an annual income from all sources
for business people. For salaried class, annual repayment obligation shall not exceed 60% of the
annual income.

Value of security: Prime urban property (residential/non-residential) or Non- urban residential

property: value at least 200% of the loan amount.

Rate of Interest: (fixed rate) BPLR + TP –0.50% (BPLR = 16%).

Upfront Fee: one-time upfront fee 0.50% of the loan amount irrespective of the quantum of loan.

Mode of disbursement: by credit to the borrowers SB/CD/NRO account.

Repayment Period: Minimum 6 months; Maximum 60 Months through EMIs. If the loan is to be
closed before 6 months, interest applicable for full 6 months to be collected. For loans with maturity
period up to 12 months bullet repayment can be fixed.

Penal Interest: 2% p.a. for the defaulted amount for the defaulted period.

Other terms & conditions: a) In the case of married persons, spouse also should join the documents.
5.VEHICLE LOANS

Mobiloan Personal

Target Group :

(1) Salaried persons working in reputed companies/ firms/ organisations having remaining period of
service more than the repayment period fixed (2) Business men, professionals, large scale
agriculturists etc.

Type of vehicle : Any private registration vehicle

Cost of vehicle : Shall include Basic cost + duties + taxes + octroi + one time life tax +
comprehensive insurance premium for the first year.

Margin : Depends on collateral security:

(a)10% margin with 100%collateral

(b) 15% margin with 50% collateral
(c) 25% margin without collateral

Loan amount : For two wheelers , upper ceiling Rs.75,000/- No upper ceiling for other categories.
The total cost of the vehicle less the applicable margin shall be the loan amount , subject to the
borrowers income level and repayment capacity.
Collateral Security : Please contact the nearby branch.

Rate of Interest :

up to Rs. 2.00 lacs : fixed rate at BPLR + TP - 1.75% (BPLR = 16%)

above Rs.2.00 lacs: fixed rate BPLR +TP - 2.25% (BPLR = 16%)

Repayment period : Maximum 60 months. Loan to be repaid by monthly installments.

Upfront Fee : 0.50% of loan amount ( one-time)

Penal Interest : 2% for the defaulted amount for the defaulted period.

Pre-payment penalty : Nil

*All loans are granted at the discretion of the Bank and conditions as stipulated by the Bank

Mobiloan Commercial

Type of vehicle : Any commercial registration/ / taxi vehicle

Cost of vehicle : shall include basic cost + duties + taxes + octroi + one time road tax +
comprehensive Insurance premium for first year

Loan amount : No upper ceiling fixed. The costs mentioned in the above column less the applicable
margin shall be the loan amount , subject to the borrowers income level and repayment capacity.

Collateral Security : Please contact the nearby branch

Margin :

25% of cost of vehicle if collateral cover is less than 50%

15% of cost of vehicle if collateral cover is 50% or above but not fully covered
10% of cost of vehicle with full cover collateral .

Priority Sector Status : Advances to Small Road and Water Transport Operators (SRWTO) owning a
fleet of vehicles not exceeding ten vehicles, including the one proposed to be financed shall be
included under Priority Sector.

Rate of Interest :

Fixed rate @ BPLR + TP –1% irrespective of loan amount (BPLR = 16%)

Repayment period : Maximum 60 months. Loan to be closed by Equated Monthly Instalments.

Upfront Fee : 0.50% of loan amount ( one-time)

Penal interest : 2% for the defaulted amount for the defaulted period.

Pre-payment penalty : Nil

6.AGRICULTURAL LOANS
Planter’s Choice

Target group : Individuals and / or jointly with family members / Firms / Companies.

Eligibility : Traditional Plantations – Tea, Coffee, Rubber, Coconut & Cardamom.

Purpose : Purchase of agricultural land/existing plantation and development.

Quantum of loan : Min. Rs.5.00 lacs

a)Purchase of vacant Agricultural Land – 75% of the purchase value / sale consideration which ever is
lower and 75% of developmental expenses as per the unit cost of NABARD.

b) Purchase of existing plantation which – 60% of the purchase value + 75% of the
has not started yielding development expenses for the remaining period as per the
unit cost of NABARD

c) Purchase of neglected plantations – 60% of the purchase value + 75% of the expenses for the
development of the estate as per estimate.

d) Take over of the existing agricultural loans from other banks.

Rate of Interest : BPLR +TP – 3.00% irrespective of the extent of holding (BPLR = 16%)
Processing/Upfront fee : 0.25% for loans up to & including Rs.10.00 lacs
0.50% for loans above Rs.10.00 lacs.

Security

a) Hypothecation of crops and assets acquired / created.

b) EM of property to be purchased and developed and / or additional collateral security, subject to a
minimum of 150% of loan amount.

Repayment As per repayment suggested by NABARD subject to a maximum of 15 years including

gestation period. However loan to be closed within the economic life of the crop.

Fore-closure penalty : 2% on the outstanding amount / DP as on the date of closure whichever is

higher.

Mode of disbursement : Amount of purchase of land direct to the seller. Reimbursement of

expenditure incurred for purchase within a period of 6 months, to be credited to the SB / CD account.
Development expenses in stages.

Other terms and conditions : In case of married persons, spouse to join the document as co-obligant.

- Penal interest and Inspection charges as per rules.

- Up to 25% variation in unit cost of NABARD is permitted.

Category of Loan : Priority Sector – Agriculture.

*All loans are subject to the discretion of the bank and subject to such conditions as may be stipulated
by the Bank. Interest rates are subject to change without notice

Agriflex

Target Group : Individuals and / or jointly with spouse / parents or joint Property owners.

Net worth by way of landed property should be at least twice the loan amount.

Purpose : Any agricultural / allied activity.

Eligibility : Based on unit cost of NABARD / scale of finance of the Agrl. /

allied activity undertaken by the borrower.

Quantum of loan : Term Loan – Minimum Rs. 1.00 lac

Maximum Rs.25.00 lacs

Rate of Interest :

Loans upto Rs.2.00 lacs : BPLR+TP-4%

Loans above Rs.2.00 lacs : BPLR+TP-3.00%

Repayment capacity : 75% of the annual income certified by the Br.Manager will be treated as the
annual repayment capacity of the borrower.
Security

Primary : Hypothecation of crops / assets created.

Collateral : Please contact the nearby branch.

Repayment period : Up to 7 years in monthly / quarterly / half yearly instalments.

Disbursement : Loan proceeds to be credited to the SB/CD account of the borrower.

Foreclosure penalty : 2% of the outstanding amount / DP at the time of closure, whichever is higher.

Other terms & conditions :

- Spouse to join documents, in case of married persons.

- Declaration from the borrower to the effect that loan will be utilised for Agricultural / Allied
activities.

- Loan should not be granted to liquidate any existing liabilities other than agricultural loans.

- Flexibility up to 25% of the unit cost / scale of finance permitted to arrive at quantum of loan.

Processing charges : 0.25% for loans up to & including Rs.10.00 lacs

Upfront charges : 0.50% for loans above Rs.10.00 lacs.

Category of loan : Priority Sector – Agriculture

Factors that influence interest rate of loans.

Money lent by banks and financial institutions for various purposes come with a cost, which is known
as the loan rate or the interest rate at which the loan is lent.

In recent times there has been a spate of CRR and repo rate cuts following which interest rates on
home loans have been slashed. This has been a welcome relief for potential first time home buyers
who have been waiting for this to happen for a long time. What do CRR, repo rate, reverse repo rate,
SLR etc. mean in the context of your home loan interest rate?

All of these factors have a direct impact on the PLR, prime lending rate, which correspondingly
increases or decreases the interest rates of loans. Some of the factors that affect tne loan interest rates
are:

1. Prime lending Rate

2. Cash Reserve Ratio (CRR)
3. Repo Rate
4. SLR (Statutory Liquidity Ratio) Rate
5. BPLR – Benchmark Prime Lending Rate
Prime lending Rate

This is the benchmark interest rate on the basis of which financial institutions decide the interest rates
on the various loan products. For example, a bank might say a loan interest rate will always be 0.5%
above the PLR. So this means if the PLR increases or decreases by a certain amount, the interest rates
charged on the floating rate loans offered by the bank also increase or decrease by the same amount.

Cash Reserve Ratio (CRR)

It is the percentage of cash deposits that banks need to keep with the RBI on an everyday basis.
Increasing the CRR also means banks have lesser money to lend. The RBI adjusts the CRR to change
the amount of liquidity in the financial system, which helps to keep the inflation within reasonable
limits. Also, when CRR is increased, the interest rates also increase as the amount of liquidity in the
financial system decreases. RBI has made frequent CRR cuts in the recent past to inject liquidity into
the financial system. This is expected to impact the interest rates bunched with other favourable
aspects for home loan applicants.

Repo Rate

This is the interest rate at which RBI lends money to the banks whenever they need to borrow funds
from the RBI. When the repo rate decreases its good news for the banks as they can avail more funds
at a lower interest rate and vice versa.

Reverse Repo Rate

This means just the opposite. Here, the RBI borrows funds from the banks and when the Reverse
Repo Rate increases banks are very happy to lend money to RBI because of the attractive interest rates
RBI offers to obtain the loans.

SLR (Statutory Liquidity Ratio) Rate

Every commercial bank needs to maintain a certain amount of funds in some form, which includes
cash, gold, government bonds etc. before they can provide credit to its customers. This measure helps
RBI have a control over the bank’s credit expansion, keeping it realistic.

The collective impact of all these rates influence the liquidity in the financial system and lead to an
increase or decrease in PLR, which in turn affects loan lending rates.

BPLR – Benchmark Prime Lending Rate

A while ago, those who had been subjected to steep interest hikes in the past eagerly looked forward
to see the interest rate cuts from their banks. Some banks were planning to pass on the benefits to the
existing customers while some others were cutting down interest rates only for their new customers.
What were the factors that came into play here? How are banks able to give the lower rates only to
new customers while keeping older customers at a higher rate? Well, banks have something called the
benchmark prime lending rate, which is a reference interest rate that is used as a benchmark to
determine the interest rate that is passed on to the customer. The interest rate that is finally passed on
to the customer is X% plus or minus this benchmark prime lending rate.

This X% is termed a spread, and is left to the discretion of the bank to set and depends on the other
factors involved in loan eligibility like the credit profile of the loan seeker, for instance. According to
RBI regulations, banks are required to make changes in existing loans except fixed interest rate home
loans, when they change their existing BPLR. However, since banks are given the freedom to set the
spread from the BPLR at whatever value they choose for new customers, they are able to provide
attractive rates to new customers while continuing to charge a much higher interest rate for older
customers.

For example, suppose Suresh took a home loan at a floating rate of BPLR minus 2% at a time when
the bank’s BPLR was 9%. The floating rate of 7% that he received was attractive and it seemed to be
the right decision to choose this loan. Over time the BPLR of the bank increased to 15% and Suresh’s
floating rate became13%. However, Suresh’s bank is now offering a floating rate of BPLR minus
3.5% to new customers, which means that new customers are paying a rate of 11.5%, while Suresh is
stuck with an interest rate of 13%. The irony of this situation is that Suresh signed up for a floating
rate knowing that his rate would increase or decrease according to market conditions, not realizing
that his bank has the power to not share the benefit of a falling rate with him. From the bank’s
perspective this is profitable, as they will end up making more money off Suresh’s loan if they charge
him a higher interest rate.

Banks have various clauses in the loan agreement that keep the best interests of the lender in mind as
the money outflow from banks, even on an everyday basis is enormous. As shown in the example
above, the clause that dictates banks can opt to choose the "spread" from the BPLR is the catch that
loan consumers need to be aware of. However, after what seemed like a long wait banks have started
to effect changes in their BPLR in the wake of the current spate of repo and CRR rate cuts. Every
bank has a cycle to bring the benefit of this change to the existing customers. According to bank
policies, this change or floating interest can come into effect on a quarterly or yearly basis or with
immediate effect.
 RESEARCH DESIGN

1. TITLE OF THE PROJECT

A Study on the different loan schemes at South Indian Bank.

2. STATEMENT OF THE PURPOSE

This project is undertaken to find out the different issues faced by bank in granting loans to customers,
and to know the various steps involved before granting a loan, and to know the different criteria
involved in fixing the maximum and minimum criteria.

3. OBJECTIVES OF THE STUDY

• To know the different types of loans granted by banks.

• To know how the EMI is calculated.

• To understand the different terms and conditions for different loans.

 • To find out the different parameters used by bankers to grant loans.

• To understand how banks fix the maximum and minimum quantum criteria for granting loans.

• To understand the meaning of upfront fee, penal interest and early closure fee.

• To understand the different documents to be submitted by the customers to avail a loan.

4. SCOPE OF STUDY
The study is undertaken at the regional office of South Indian Bank, Bangalore.

DATA COLLECTION METHODS

PRIMARY DATA

Observation method

During the internship period the different loan schemes available at the bank were closely observed to
understand how each loans eligibility criteria is different, the terms and conditions involved in each
loan scheme, the different rate of interest in each loan were observed closely.

Case Analysis

Case analysis method is undertaken to analyse the different types customers who approach the bank
for different types of loans and how the banker deals with each type of customer, by following the
various procedures involved before granting the loan.

SECONDARY DATA

Finance Text Books.

Websites.

LIMITATIONS OF THE STUDY

 • This study is limited to only certain types of loans as covered under this report and therefore
my knowledge is not complete with regards to all types of loans.

• The study conducted is limited only to the loans available at South Indian Bank.

• I was able to gather enough information required to write the report. However due privacy and
confidentiality reasons most of this data cannot be revealed as it is.

TERMINOLOGY:
Holiday period:

This is a grace period given by the banks given immediately after the loan has been sanctioned or the
completion of the purpose for which the loan was taken whichever is later during which the party is
exempt from repayment of the loan. It does not occur under any of the loans I have covered however it
does come under educational loans.

Upfront fee:

It is the fee payable to the bank for making the loan. It is made right in the beginning and is usually
calculated as a nominal percentage of the loan amount. It is usually non – refundable.

Penal interest:

It is the interest rate charged by the bank or lending institution from the borrower if he misses a
repayment. It is also called the late payment penalty. It is usually calculated as a fixed percentage on
the defaulted amount for the defaulted period and is not refundable.

Early closing fee:

Under normal circumstances the party is expected to repay the loan as per the conditions agreed to in
the loan agreement. However in certain cases it could so happen that the party repays the entire
amount of the loan well before the repayment period as agreed to. In such cases the bank charges a fee
on the party for closing the deal earlier than agreed to. This is early closing fee. It is usually calculated
as a percentage on the amount paid in advance for the period of advance and is also non – refundable.

ANALYSIS AND INTERPRETATION

1. Personal Loan

Mr. Srinivas, a salaried employee wants to avail a personal loan for Rs 100000. He submits the
following documents to the bank to avail the loan.

1. Application form

2. Photograph

3. Personal Details

4. Income details and

5. Bank statement.

After analyzing his repayment ability the bank will decide whether to sanction the loan amount or not.
Analysis:

(The rates and figures mentioned in this analysis are purely illustrative.)

From his salary slip the following details were obtained.

(b) Gross salary is 2.5 lakhs.

(c) Net salary is 15000.

Maximum Quantum of loan = 1.00 lakhs.

Since he is a salaried employee the calculation is as follows:

15 * Net salary = 15 * 15000 = 225000.

Networth Rs. 10.12 lakhs

Since the maximum amount of loan that can be sanctioned is 1.00 lakhs.He can get only 1.00 lakhs.

Rate of Interest

Fixed at BPLR + TP-1.25% (fixed)

BPLR = 16

TP = 0.50

16 + 0.50 -1.25 = 15.25%

Prime Security: Negative lien on property already secured to Housing loan valued at Rs. 12 lakhs.
Upfront Fee

0.50% of the loan amount.

= 100000 * 0.50/100 = 500.

Repayment Period

Maximum 48 months (4 yrs)

EMI Calculation

Loan amount = 100000

Interest Rate = 15.25%

Tenure = 4 yrs

EMI = Rs.2849.

Yearly Repayment

2849 * 12 = 34188

Penal Interest

2% of the defaulted amount for the defaulted period

In this case the loan will be sanctioned since 15 times the net salary exceeds the quantum of loan
as requested in this case and also the personal networth of Mr. Srinivas is more than 3 times the
quantum of the loan as required by the bank in the case of a loan of this type.

2. VEHICLE LOAN (MOBILOAN)

Mr. Ramesh wants to purchase a motor vehicle; he wants to avail a vehicle loan for Rs 5 lakhs. He
submits the following documents to the bank.

1. Application form

2. Photograph

3. Personal Details

4. Income details and

5. Bank statement.

The procedure followed by the bank to sanction the loan is analyzed below:

Analysis:

(The rates and figures mentioned in this analysis are purely illustrative.)

Minimum Margin
The party has agreed to a margin of 70% i.e, the party will have to contribute 70% towards the
purchase of the vehicle and the remaining 30% will be contributed by the bank. This is because the
party already has a housing loan on which he is paying an EMI of Rs. 5200.

Repayment Period

He will have to pay back the amount of the loan within 60 months from the sanction of the loan.

Loan should be repaid in 60 equal monthly installments and there is no repayment holiday.

EMI Calculation

Quantum: Rs. 2 lakhs.

Rate of interest: 14.75%

Tenure: 60 months.

EMI: Rs. 4800

Rate of Interest

BPLR + TP + Risk Premium – 2%.

BPLR = 16

TP = 0.50

Risk weight 125%

16 + 0.50 + 0.25 -2 = 14.75%

Prime Security: Hypothecation of the vehicle.

Upfront fee = Rs. 1000 (one – time).

Penal Interest

2% of the defaulted amount for the defaulted period.

The individual’s networth is Rs. 34.5 lakhs which is favourable. However he has an aanual
income of around Rs. 240000/-. As per bank regulations only 50% of monthly salary can be
allowed towards settling monthly obligations such as loan settlement which comes roughly upto
Rs. 10200. Since he already has a monthly obligation towards settling the EMI of Rs. 5200
towards a housing loan the bank has worked out a balance EMI of Rs. 4800 as ideal based on
which the loan has been sanctioned for an amount of Rs. 2 lakhs.

3. BUSINESS LOANS

Mr. Vijay Kumar a businessman carrying out business of wholesale rice processing seeks a
continuance in his cash credit overdraft limit (CCOL limit) of Rs 45 lakhs for the purpose of using
it as his working capital.

Analysis:

(The rates and figures mentioned in this analysis are purely illustrative.)

The following are the details of this case:

Rating given by the bank: SIBAA

Limit: Rs. 45 lakhs

Purpose: To fund working capital.

Prime Security: Hypothecation of stock/ book debts.

Rate of interest:

BPLR = 16%

ROI = BPLR – 2.75%(fixed) = 13.25%

Guarantors: Two of his partners have agreed to stand as personal guarantee for this loan. They
have a combined networth of around Rs. 25 lakhs.

Collateral secrurity: Mr. Vijay Kumar has agreed to put his individual commercial property as
collateral security. This property has been valued by an external expert at Rs.161.79 lakhs and
by the bank at Rs. 111.55 lakhs. Such a huge difference lies in the two valuations because the
bank is usually cautious when it comes to valuating assets which are to be pledged as security.

Rating given by South Indian Bank Remarks

SIBAAA Highest Safety
SIBAA High Safety
SIBA Adequate Safety
SIBB Inadequate Safety
SIBC Risk Prone
SIBD Default

The above table shows the various ratings South Indian Bank gives it’s business loans. This
rating is given based on the risk associated with issuing the loan. There are various factors
involved such as the performance of the business in the recent past, current market conditions
and also the forecasted trends for that business.

The following are the profit figures for the above business over the last 3 years:

2005 – ’06: Rs. 329468/-

2006 – ’07: Rs. 462596/-

2007 – ’08: Rs. 646273/-

Based on the above figures and the various other parameters involved the bank has given this
loan a rating of SIBAA which symbolises a high safety in granting this loan. Therefore the bank
has agreed to grant continuance for the CCOL limit of Rs. 45 lakhs for a period of another year.
4. AGRICULTURAL LOAN

Mrs. Indira an agricultural loan for Rs 22.5 lakhs, against her property. Her property is worth Rs. 120
lakhs.

After analyzing her creditworthiness the bank will decide whether to sanction the loan amount or not.

Analysis:

(The rates and figures mentioned under this analysis are purely illustrative.)

Name: SIB Planter’s Choice.

Nature: Fresh Fully Secuured Loan.

This loan is a fresh loan since it is being issued for the first time and it is not for expansion of
agricultural activities which are currently ongoing.
This loan is also a fully secured loan since the prime security for this loan is agricultural land
owned by the party which has been valued at Rs. 120 lakhs which fully covers the value of the
loan requested for.

Purpose: To purchase agricultural land.

Rate of interest:

BPLR = 16%

Transfer Price (TP) = 0.5%

Therefore ROI = BPLR + TP – 3.5%(floating)

= 13%.

Prime Security: Title deeds to 4 acres of agricultural land owned by Mrs. Indira valued at Rs.
120 lakhs.

Collateral Security: Hypothecation of standing crops.

Co-guarantors: There are three other partners along with her. These three partners have a
combined networth of around Rs.12.7 crores.

In addition to this Mrs. Indira’s networth herself is around Rs. 1.73 crores.

Repayment:

The loan is to be repaid in 20 equal half – yearly instalments of Rs. 112500 + interest.

Interest is to be served as and when debited.

Penal Interest

2% of the defaulted amount for the defaulted period.

 SUGGESTIONS AND RECOMMENDATIONS

• In personal loan schemes a differential maximum quantum of loan can be fixed

instead of the fixed Rs. 3 lakhs at present.
I make this suggestion based on criteria relating to the place of residence of the applicant
with regards to urban or rural( Tier I, Tier II city etc.) and also on the criteria of the nature
of his employment in terms of his pay or on the nature of his business or profession as the
case may be. As per the personal loan scheme of the bank the maximum possible loan is
Rs. 3 lakhs subject to certain conditions such as for salaried persons it is 15 months net
salary and for individuals with business or profession it is the income declared as per the
latest IT returns. In both of the above cases it could so happen that the amount may far
exceed the maximum extent of Rs. 3 lakhs and also taking into account that the maximum
repayment period is 4 years I am sure that there is definitely scope to increase the
maximum quantum of loan.

• In personal loan scheme a differential repayment period can be fixed instead of the
present maximum of 4 years.
 The rationale for this suggestion is based on the suggestion made above thus enabling the
entire scheme of personal loans to be a whole lot flexible. And keeping in mind the
previous suggestion it would make sense to fix a differential repayment period since the
quantum of loan can get bigger in amount. By doing so the bank will be able to reach out to
a much wider customer base.

• The upfront fee charged can be increased nominally and make half refundable on
repayment.
By doing so the bank will be able to earn a little more by way of nominal interest which it
can earn on the nominally increased upfront fee. My suggestion would be to make half of
the upfront fee refundable on complete repayment of the loan. This can be done to attract
more customers to avail personal loans.

• The rate of interest charged in personal loans can be reduced nominally by the bank so
that many customers will avail the loan & that way the bank can increase profits.

• Penal interest can be increased nominally to avoid defaulted payments by customers.

• The documents required to avail the loan can be mentioned in the website so that
customers can get all the documents which will help them avail the loan quickly.

• The bank can fix a minimum gross income to avail any loan that way the bank need not
have to waste time by calculating the creditworthiness of customers who do not fall under
that criteria. By fixing certain slabs of income in relation to certain quantums of loan they
could skip certain steps in the appraisal thus speeding up the entire process of sanctioning
of the loan as well as initial screening that needs to be done.

• The approximate time required by the bank to sanction any loan can be mentioned in
the website this will help them to attract more customers.

• The website can have some information about the assessment criteria. This will help
the customers to find out whether they are eligible or not.
CONCLUSION

I would like to conclude my report by saying that the granting of credit plays a major role in the
development of an economy. That having said no bank for that matter can take granting of credit in a
light manner. One needs to be cautious when it comes to granting loans because there are a lot of risks
involved in granting loans to customers wherein lies the importance of the credit department in any
bank. The activity of granting loans in simpler terms is nothing but the bank making deposits in
outsiders. It is very important that a bank gets it’s terms and conditions of credit right because it is out
of the income generated from this activity that a bank is able to repay the deposits made in it by other
customers. There may be a lot of procedures that a banker needs to go through before granting a loan,
however these procedures are very much necessary and required since there is a lot of risk and return
involved and the slightest misjudgement could result in losses for the bank.

At the end of this project I was able to know the different loans available at South Indian Bank and the
different procedures followed by the bank to check the creditworthiness of a customer. It helped me
understand the crucial role played by the credit department in South Indian bank.
BIBLIOGRAPHY

LIST OF BOOKS

1. Banking Theory and Systems – K.K.Panikkar

2. Credit Appraisal, Risk Analysis and Decision Making – D.D.Mukherjee

3. Modern Banking – H.R. Appaniah

LIST OF WEBSITES

1. www.southindianbank.com

2. www.wikipedia.com

3.www.google.com

4. www.businessline.com

5. www.rbi.org
6. in.finance.yahoo.com

7. glossary.reuters.com