A

STUDY

ON

THE OF

EFFECTIVENESS FEDERAL

OF

THE WITH

LENDING

POLICY

BANK

SPECIAL EMPHASIS ON HOUSING LOANS

Organization Study
Submitted to

THE FEDERAL BANK LTD.

MASTERS DEGREE IN BUSINESS ADMINISTRATION (2010-2012)

In partial fulfillment of requirement for the award of

By: CHIPPI M VARUGHESE RAJAGIRI COLLEGE OF SOCIAL SCIENCES

DECLARATION

I, Chippi M Varughese, Master of Business Administration student of Rajagiri College of Social Sciences, Cochin, hereby declare that this project report titled A Study on the effectiveness of lending policy of Federal Bank with special emphasis on Housing Loans submitted to Federal Bank Ltd. (Chennai) in partial fulfillment of the requirement of the award of Masters Degree in Business Administration is my original work and effort and that it All information in this document has been obtained to use only for my academic purpose and is presented in accordance with the ethical conduct under the guidance of Mr. G Nandagopal, Chief Manager, Federal Bank ,Chennai Regional Head Office

Place : Chennai Date : 09th June, 2011

ACKNOWLEDGEMENT
With a deep sense of gratitude, I express my thanks to all those who have been instrumental in the development of this project report. This project would be incomplete without mentioning all the people whose guidance and encouragement were valuable to me. I take this opportunity to express my gratitude and indebtedness to thank the Organization Guide, Mr. G Nandagopal, Chief Manager, Federal Bank Ltd, Regional Head Office, Chennai for his valuable guidance and support.. I would also like to thank all the employees of the Federal Bank Regional Office, Chennai and those of Fedfina for cooperating with me for the successful completion of this project. Above all I thank the God Almighty for his immense grace and blessings at each and every stage of the project

SECTION 1 PROFILE STUDY OF THE ORGANISATION

INTRODUCTION
BANKING

Financial banking is the science of managing money and other assets pertaining to a specific business. Bank is an institution which deals in money and credit. It buys money from depositors and sells to the borrowers. It is the body of persons whether incorporated or not who carry on the business of banking. A bank may defined as a corporation or person which collects deposits from the public, repayable on demand and which supplies and facilitates all kinds of exchanges. Banks offer basic loans, deposits and financial advice. They also facilitate transactions on sophisticated financial instruments such as private equity, bonds and mutual funds. The Banking Regulation Act 1949, defines the term banking as the accepting for the purpose of lending or investment of deposits of money from the public or otherwise and withdrawable by cheque, draft, order or otherwise. Thus, the essentials of banking are: (1) There should be acceptance of deposited. (2) Deposits should be from the public. (3) Deposits should be repayable on demand or expiry of a term or after a specified periods. (4) The purpose of deposits should be lending or investment Most of the activities a Bank performs are derived from the above definition. A bank's relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign from one place to another. This activity is generally known as

"remittance business" in banking parlance. The so called FOREX (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies. Banking has come to occupy a pivotal position in a nations economy. According to the modern concept, banking is a business which not only deals with borrowings, lending and remittance of funds, but also an important instrument for fostering economic growth.

INDIAN BANKING INDUSTRY OVERVIEW The banking sector is the most dominant sector of the financial system in India, and with good valuations and increasing profits, this sector has been among the top performers in the markets. According to a Federation of Indian Chambers of Commerce and Industry (FICCI) survey, the chief strong point of the Indian banking industry is the regulatory system, which has enabled India to carve a place for itself in the global banking scene. The regulatory systems of Indian banks are rated above China and Russia; and at par with Japan and Singapore. The public sector banks (PSBs) maintained its dominance in the banking system. An exceptional feature of the reform of the public sector banks was the course of their financial restructuring. The Indian financial industry underwent rapid transformation post liberalization in the early 90s, resulting in greater inflow of investments from FII's into the capital market. Despite the foray of foreign banks in the country, nationalized banks continue to be the biggest lenders in the country, primarily due to their size and penetration of networks. In fact, Industry estimates indicate that over 80% of commercial banks in India are in the public sector and of the 50-odd private banks, less than half are foreign banks. The opportunities in this industry remain extremely promising due to its relatively low penetration of both basic as well as advanced financial products. According to a study by Dun & Bradstreet (an international research body)"India's Top Banks "there has been a significant growth in the banking infrastructure. The pace of development of the Indian banking industry has been tremendous over the past decade. While the global banking system is still reeling under the impact of the global financial meltdown, the domestic industry has been resilient while continuing to see growth. The Indian banking industry is entering into an exciting growth phase. Continued efforts towards achieving better asset quality, transparency, capital adequacy, strong corporate governance, coupled with a sagacious regulator have helped the Indian banking system remain largely untouched by the

global financial crisis. The banks witnessed a slightly subdued but respectable growth in total business in FY 09 while business generation tilted in favour of PSBs.

THE FEDERAL BANK, LTD

Federal Bank Ltd was founded as Travancore Federal Bank Limited in the year 1931, with an authorized capital of Rs. 5000. It was established at Nedumpuram, a place near Tiruvalla, in Central Travancore (a princely state later merged into Kerala), under Travancore Company's Act. Thirteen years later, in 1944, Shri K P Hormis and his close relatives /friends took over the controlling interest in the bank. The following year, the paid-up capital of the bank went up to 71,000 and its registered office shifted to Aluva, in Ernakulam district of Kerala. With the opening of its first branch at Aluva, Travancore Federal Bank commenced its business. It was in the Board Meeting of March 1947 that the name of the bank was changed to Federal Bank Limited. After a gap of 12 years i.e. in 1959, the bank was licensed under Sec. 22 of the Banking Companies Act 1949, after which it floated several kuries and launched various deposit schemes. In 1964, it took over and the liabilities of Chalakudy Public Bank Ltd. (Chalakudy), Cochin Union Bank Ltd. (Trichur) and Alleppey Bank Ltd. (Alleppey). In the next five years, Federal Bank took over St.George Union Bank Ltd. Puthenpally (1965) and Marthandom Commercial Bank Ltd. Trivandrum (1968). In 1970, it became a Scheduled Bank. Two years later, it became an authorized dealer in Foreign Exchange. Thereafter, Federal Bank came in an expansion mode and opened 53 branches in 1975 and 42 branches in 1976. In 1984, Federal Bank set up an Agricultural Finance Department in its head office, improving its performance in the field of agricultural and priority sector lending. The year 1985 saw Federal Bank opening a Personnel and Industrial Relations

Department and a Computer Department. Four year later, the bank had entered the arena of Merchant Banking Operations. In 1993, ICICI group was roped in as a shareholder, through private placement. The following year, the bank came out with its first public issue, which was oversubscribed around 60 times. In the year 1997, Federal Bank inaugurated its first ATM, at Ernakulam. It was in the year 2000 that Federal Bank started the Any Where Banking (ABB) service, in Bangalore, followed by the Depository Services, in association with NSDL. The same year, Internet Banking 'FedNet' was launched, with the Federal Millennium CD being just in tow. With the start of 2001, the bank saw the launch of Wide Area Network, connecting Regional

Offices at Mumbai, Bangalore, Chennai, Ernakulam and Chennai F & I with Head Office. The following year, all the branches of the bank were fully computerized (using FedSoft). In 2002, Federal Bank started the installation of switch for networking all the ATMs. Soon enough, it introduced FedAlerts and FedMobile, with real-time transaction alerts and customizable options. Two years later, a call centre was set up by the bank, attached to the Systems and Technology Department, and co-branded credit cards were launched, in association with ICICI Bank. Not much time later, Federal Bank claimed the distinction of becoming the first traditional bank with networked branches, having 100 percent connectivity.

Federal Bank is a fast growing premier private sector bank in India with business exceeding INR 3,600 million and INR 61.3 million. The total number of branches and ATMs has increased to 672 and 732, 13 regional offices across India with a customer base of 4 million across the country. Technology has played a major part in the banks aim to differentiate itself to its customers. ATMs, Internet, mobile banking and other channels have broken the barriers of location and time, and have expanded the reach of the banks operations, earlier confined to the branches. Across the globe, banks focus on IT investment protection, best use of available resources and reuse of developed components. Even though the objectives appear to be simple, putting these into practice has been a tough task and very few organizations have accomplished these objectives on a scale that is comparable with the global standards and demonstrated perceivable benefits. Federal Bank is one of the very few organizations that have accomplished these objectives.

Milestones in the History of Federal Bank 1931: The Federal Bank Limited (the erstwhile Travancore Federal Bank Limited) was incorporated with an authorized capital of rupees five thousand at Nedumpuram 1944: Shri K P Hormis ,an advocate of Perumbavoor and his close relatives /friends obtained controlling interest in the Bank. 1945: The paid up capital was increased to Rs.71000.The Board of Directors of the Bank was reconstituted in 1945 and fresh Articles of Association adopted 1947: In the Board Meeting held on 24-3-1947 ,it was resolved to change the name of the Bank as "The Federal Bank Limited". 1959: The Bank was licensed under Sec.22 of the Banking Companies Act,1949

1964: The Bank embarked for a massive takeover bids, which accelerated its growth horizontally and vertically. In that process it took over the assets and liabilities of the following banks. 1. The Chalakudy Public Bank Ltd., Chalakudy 2. The Cochin Union Bank Ltd., Trichur 3. The Alleppey Bank Ltd., Alleppey 1970: The Bank became a Scheduled Commercial Bank 1972: The Bank witnessed expansion beyond the home state. The Bank became an Authorized Dealer in Foreign Exchange. International Banking Department started functioning from Mumbai in 1973 1989: commenced Merchant Banking Operations 2000: On 24.1.2000 Bank started Any Where Banking (ABB) at Bangalore connecting all Branches located in the Bangalore metro. Launched Depository Services in association with NSDL on 24.2.2000. The Bank has commenced Internet Banking 'FedNet' on 28th April 2000 with software support from Infosys Technologies Ltd.Federal Millennium CD (MCD)is released on 18.9.2000 2004: Bank became the first traditional bank in the country to achieve 100% networking of branches 2006: Bank floated the first ever GDR and got it regularly traded in London Stock Exchange. 2007:Bank successfully concluded the 1:1 right issue at a premium of Rs.240/- per share aggregating Rs.1241 cr. Life Insurance Company promoted jointly by the Bank with IDBI and Fortis Insurance International became operational.

2008: Federal Bank opened its representative office in Dubai. In march 2008, FB entered into a joint venture IDBI Bank and Fortis Insurance International to form IDBI Fortis Life Insurance, of which FB owns 26%. The company ended the year with over 300 crore in premiums as on 31rst march 2009. March 2008: Banks Total No. of Branches crossed 600.Bank started providing Online Stock Trading facility to the customers in association with M/s Geojit Financial Services 2009: Bank won the award under category 'Best Customer Relationship Achievement' in the Banking Technology awards 2008 instituted by IBA, Infosys & TFCI for the outstanding achievements in technology infusion and dissemination. The Bank was winning IBA-TFCI awards for the fourth time: Total Business of the Bank crossed Rs.50,000/- Crores

January 2010: Launched Point Of Sale (POS) Terminal Business. Federal Bank became part of National Financial Switch ATM Network the largest ATM network in India: Total number of branches crossed 700. Launched Debit Cards in association with MasterCard Products & Services The Federal Bank Limited (Federal Bank) is an India based private bank, which provides various financial, banking, treasury, and investment management services to its customers in the country. In addition, it is engaged in offering various types of loans that include the agriculture loans, housing loans, vehicle loans, etc. It offers deposit products, such as recurring deposits, time deposits and current deposits, savings bank accounts. India's second largest private sector bank and is now the largest scheduled commercial bank in India. The bank offers 24 hour banking facility through ATM's. Services include internet banking, mobile banking and alerts, anywhere banking, interconnected Visa enabled ATM network, Email alerts, telephone banking and a centralized customer call center with toll-free number. In addition to the regular Banking Facilities, FB also provides a variety of Value added services like Cash management Service, Insurance, Mutual funds, Demat, etc Federal Bank also provides the following services: Advances BSNL Bill Payment Cash Management Services Cash -On- Line Express Cash Remittance Credit Cards

Depository Services Easy Pay-On-line Fee Payment System E-shopping Payment Gateway Export Credit Insurance Products in association with ECGC Express Remittance Facility from Abroad - FEDFAST General Insurance Products in association with United India Insurance Life Insurance Products, in association with ICICI Prudential Lock Box Service for NRI's in the US Merchant Banking Services NRI Services Online Kiosks for Customers Online LIC Insurance Payment Online Railway Reservation System Structured Derivative Products

VISION
Envisioned and backed up by a strong foundation . The federal Bank Limited aims: To develop into stronger and more efficient and profitable financial institution with a growing share of the market. To provide an expanding range of products and services to a growing clientele within and outside the country To adopt the best industry practices and employ contemporary technology To be counted among the top private banks of the country

MISSION:
1. Devote balanced attention to the interests and expectations of stakeholders, and in particular:

Shareholders: Achieve a consistent annual post-tax return of at least 20% on net worth. Employees: Develop in every employee a high degree of pride and loyalty in serving the Bank.

Customers: Meet and even exceed expectations of target customers by delivering appropriate products and services, employing, as far as feasible, the single-window and 24-hour-sevenday-week concepts, leveraging strengthened branch infrastructure, ATMs, and other alternative distribution channels, cross-selling a range of products and services to meet customer needs varying over time, and ensuring the highest standards of service at all times.

2.Pursue excellence in various facets of banking. 3.Adopt best industry practices. Develop, adopt, and review a well-conceived business plan for achieving realistic targets of growth, profitability, and market share over the medium term. Operate within a well-defined, diversified, risk profile and adopt prudent risk-management norms and processes and effective control practices. Employ and leverage appropriate modern information technology to: enhance the quality, speed, and accuracy of product/service delivery; provide anytime-anywhere banking facility; strengthen management information and control systems and processes; improve productivity; and reduce costs.

Increase awareness of the "Federal Bank" brand among targeted customer groups through cost-effective marketing. Adopt a robust corporate governance code emphasizing a high degree of professionalism of the Board and the management, and accountability and disclosure to shareholders.

Decentralise decision making with accountability for decisions made, and assign cascading profit responsibilities to middle and junior management.

Develop a conducive and transparent work environment that fosters staff commitment, competence, initiative, innovation, teamwork and service-orientation.

ACHIEVEMENTS

The Federal Bank has a line of Firsts to be proud of. It is

First traditional bank in India to launch Internet Banking Service (FedNet) First traditional bank in India to have all its branches automated First and the only traditional bank in India to have all its branches inter-connected First bank to launch Electronic Telephone Bill Payment in India.

First and only one of the older banks with e-shopping payment gateway. First traditional bank in India introduce Mobile Alerts and Mobile Banking service. First bank in India to implement an Express Remittance Facility from Abroad. First bank in India to provide RTGS (Real Time Gross Settlement) facility in all its branches. First traditional bank to issue GDR and get listed in London Stock Exchange

DEPARTMENTS OF FEDERAL BANK Federal Bank has got 19 different departments. These departments are grouped into three different heads namely i. Business Group ii. Support Group iii. Control Group

A. BUSINESS DEPARTMENTS

1. Large Corporate Department (including credit control division) 2. Treasury Department 3. Retail Business Department 4. NRI Services Department 5. SME & Agri-Business Department 6. Asset Recovery Department B. SUPPORT DEPARTMENTS

7. Information Technology Department 8. Operations Department 9. Human Resource Department 10. Legal Department 11. Finance & Accounts Department 12. Corporate Services Department 13. Corporate Planning Department 14. Public Relations & Publicity Department

15. Integrated Risk Management Department 16. CEOs Secretariat 17. Secretarial Department C. CONTROL DEPARTMENTS

18. Inspection & Audit Department 19. Vigilance Department

ORGANISATION CHART

SECTION 2 PROBLEM CENTRIC STUDY OF FEDERAL BANK

A STUDY ON THE EFFECTIVENESS OF THE LENDING POLICY OF FEDERAL BANK WITH SPECIAL EMPHASIS ON HOME LOANS

REVIEW OF LITERATURE

In the paper of W. Boyd (1994), the results of the study on home loans reveal that reputation, interest charged on loans, and interest on savings accounts are viewed as having more importance than other criteria such as friendliness of employees, modern facilities, and drive-in-service. A study by Clarkson et al. (1990), suggests that the characteristics and financial service requirements of consumers vary with age, and that these differences could be used in developing marketing strategies for such services. Breslaw et al. (1996) postulate two possible behavioural models of consumer behaviour for choosing a mortgage. The first occurs when payment constraints become strongly binding. The second occur where the monthly payment constraint is less binding and a borrower has the latitude to choose a longer term and a shorter amortization. The most important general result is that borrowers react to market conditions in a risk averse and cost minimizing manner. Talaga and Buch (1998) explore the process by which the consumers choose among financial institutions for obtaining the right mortgage. Their study control for interest rates, and look at five variables: interest rate, additional fees, reputation of lender, type of mortgage and term in years of mortgage. The most important variable to the respondents was thought to be additional costs and the second most important variable was the interest rate. Devlin (2002) investigates the relative importance of choice criteria according to consumers and also analyses differences in the importance of choice criteria with respect to a number of demographic and related factors. The study shows that choosing a home loan institution on the basis of professional advice is the most frequently cited choice criterion, closely followed by interest rates. Differences in the importance of choice criteria with respect to gender, class, household income, educational attainment, ethnicity and financial maturity are apparent

RETAIL BANKING

Retail Banking Industry in India covers industry segments like housing loan, auto loan, personal loan, education loan, consumer durable loan, credit card, debit cards, bank assurance and the regular operation of the banks. The major players(including Public, Private, and Foreign sector) in the Indian Banking Industry includes Bank of Baroda, State Bank of India, Canara Bank, Punjab National Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Citibank, Standard Chartered Bank, HSBC Bank, ABN AMRO Bank, American Express, etc. During 2006-07, gross credit extended by Indian commercial banks grew by 34.83% to touch INR 19,495 billion. Retail credit constitutes about 25% of the total credit and has grown by 28.0% to INR 4,218.3billion The annual growth in bank credit to the commercial sector is at 25.4% as on March 31, 2007 and was lower than 27.2% against previous year. Until 2012, retail banking is expected to grow at a CAGR of 28% to touch a figure of INR9, 700 billion. India's retail-banking assets are expected to grow at the rate of 18% a year over the period 2007 to 2011. Housing loan accounts for major chunk of retail loan. Indian retail banking is likely to grow at a CAGR of 28 per cent till 2012 and touch US$ 203.7 billion. It has provided need of the hour services like around-the-clock accessibility through automated teller machines (ATMs), mobile and internet banking. It has also offered services like D-MAT, plastic money (credit and debit cards), and online transfers. ATMs Banks have increased their ATM network over the past three years. According to the RBI, by June 2008, the number of ATMs in the country had gone up to 36,314 against 27,088 and 20,267 at end-March 2007 and 2006, respectively. Loan disbursement Retail loan disbursements have become simpler and faster. The sector has been growing at around 30 per cent per year over the past 45 years. According to the RBI data, the growth of retail portfolio of banks (29.9 per cent) was higher than the overall credit portfolio of the banking sector (28.5 per cent) in the recent years. Plastic Money With the use of credit cards increasing significantly over the last few years, it has played

an important role in promoting retail banking. Core Banking Solutions (CBS) The concept of CBS which enables a customer to fulfill numerous banking operations online has grown since the past four years. The number of bank branches providing CBS increased in the recent years. Electronic fund transfer facilities and mobile banking is expected to further strengthen the retail banking segment in the future. With very few focused multi-line banks, non banks are often significant players in retail lending, as HDFC is in house loans. Yet, many non-banks lack the minimum size to make the necessary investments and address the challenges of retail banking

HOUSING FINANCE SECTOR IN INDIA

Housing finance as a financial service is relatively young in India. The growth in housing and housing finance activities in recent years reflect the buoyant state of the housing finance market in India. The real estate sector is the second largest employment generator in the country. In 1970, the state set up the Housing and Urban Development Corporation (HUDCO) to finance housing and urban infrastructure activities, in 1977, the Housing Development Finance Corporation (HDFC) was the first housing finance company in the private sector to be set up in India. The housing sector plays an important role in the economic development of the country. Every rupee invested in housing adds 78 paise to the GDP. Over 269 industries are directly or indirectly dependent on the housing sector.

There is an estimated shortage of 20 million housing units in the country with an estimated investment requirement of over Rs 1500 billion. The organized housing finance industry barely accounts for 30% of the home loans disbursed in the country. The last few years have seen the home loans market growing at a CAGR of over 30 percent. The growth has been mainly fuelled by certain fiscal, social and regulatory drivers: Changes in demographic profile including increase in the rate of household formation due to structural shift from joint family system to nuclear family

 Ever increasing middle class, migration of population and increasing urbanization resulting in acute shortage of housing units Increase in disposable income levels due to decrease in marginal tax rates and increase in total income levels Tax benefits and other fiscal incentives announced in the Union Budgets Increasing affordability of housing property purchase due to declining interest rates and stable property prices Decline in the average house cost to annual income ratio to around 4-5 from 11-14 during the last decade resulting in an affordable EMI as a percentage of monthly income Aggressive lending by banks to the housing sector due to lower credit offtake by the corporate sector, attractive spread and lower nonperforming assets The housing finance industry is getting increasingly commoditized. Competition within the sector is ensuring that payers offer consumers flexibility and features to choose from. Features such as adjustable rate plans, lower processing fees, monthly rest, low interest rates, low EMI, lower margin money, no pre-payment penalty have become common across the industry. There is a growing trend among Banks and HFCs to include the cost of registration, stamp duty, society charges and other associated costs while sanctioning loans to differentiate and make the home loans products more attractive. This has resulted in further lowering the threshold limit for buying a house For differentiation of their home loan products, companies are also resorting to offering of free add-ons such as life insurance, credit cards and consumer loans at reduced rates for furnishing the house. Several housing finance companies have now begun to offer tailor-made loan schemes to renovate, repair, extend, convert or otherwise improve ones home. Companies like HDFC and others provide home improvement loans for purposes like external repairs, water-proofing, roofing, internal and external painting, plumbing and electrical work, tiling and flooring, grills and aluminum windows, construction of underground or overhead water tanks, paving of compound walls and setting up bore wells, among other things. Currently there are 29 HFCs approved for refinance assistance from NHB. The major players in Indian housing finance industry are the Housing Finance Companies (HFCs), Scheduled Commercial Banks, and Co-operative Banks.

The following types of home loans are generally available in the market: Home Equity Loans: A form of finance to the customer by way of mortgage of existing property to the financier for taking a loan for some other purpose. The current market value of the property is the basis for providing home equity loans. Home Extension Loans: The purpose of this loan is the extension of existing houses tike the addition of rooms, toilet facilities etc. Such loans fall under the category of home loans. Home Improvement Loans: These loans are provided mainly for repairs and maintenance of existing houses- These could include internal and external repairing, waterproofing and roofing, complete interior renovation, tiling and flooring etc. Home Purchase Loans: Finance provided for the purchase of ready-made houses. Land Purchase Loans: These loans are being provided for the purchase of land for the purpose of construction of residential houses. Private housing finance sector is also doing very well in catering the need for housing finance. Dewan Housing Finance Corporation Ltd. is one of the best options in private housing finance sector. Having 22 branches all over the country and dealing in the market for more then 15 years, the group is well established in the market. Rural housing finance is one of the best schemes in India offered by Dewan Housing. With most competitive interest rates in private sector housing finance market, and personalized finance is made available to informal sectors besides formal sector like service class.

Institutions Providing Housing Loans

BANK LENDING POLICIES

The purpose of written lending policies is to ensure that customers receive uniform treatment from all representatives of the bank, and to establish clear policies and procedures. Under the Banking Law, banks are required to have, as a part of their general statutes, lending policies that determine the procedures and manner for granting loans, other placements and potential liabilities, as well as the procedures and manners of assuring repayment of claims, the calculation and collection of interest, fees and other remuneration as well as procedures related to other aspects of exposure provided for in this law (Article 76, paragraph 6). Also, banks are required to write a policy of asset and liability management, measures for management of liquidity, interest rate risk and exchange rate risk (Article 76, paragraph 7). Due to these requirements, banks have expended extra efforts on their written lending policies in the recent years. Determining an apt lending policy is an important step in the successful functioning of a lending institution, since the prime reason for the failure of many such institutions revolves around their ineffective lending practices. Bad planning compounded with bad lending equals impending failure. Investigating the properties of banks lending policies is of interest because of both the household channel and the financial market channel

BANK LENDING: POLICIES & PROCEDURES

Objectives of Lending Policies Resource planning to match lending outlay. Strategy to win over the nearest competitors. Augment good lending base with moderate risk involvement. Increased profitability. Ensure balanced loan portfolio. Quick disposal of loan cases. Development of efficient & capable loan personnel. Building up market reputation & goodwill by satisfactory services to the loan customers

Steps Required in Framing a Lending Policy

 Demarcate market area, market share & define profit goals. Determine the types of loans that will best serve the bank in realizing set market area, market share & profit goals. Arrange due legal sanctions from the appropriate authorities, i.e. central bank or others. Arrange proper & effective communication of the lending policy decision to loan officers & others & others likely to be interested, i.e. existing & potential loan customers. Arrange regular periodic review, updating & improvement of the policy to suit the demand of time & situations. Contents of a Bank Lending Policy Lending Budget Composition(Types of Loan) Periodicity Documentation Standard Acceptable Securities Evaluating Credit Worthiness
Pricing: Lending Cost + Profit

Lending Cost = Cost of fund + Cost of lending operation + Liquidity of the advance + Risk. Lending Authority Compensating Balance Risk Average Supervision & Control Collection Procedure Loan Accounting & Record Competition Loan Grading System Procedures of handling problem loans Development of Efficient Loan Personnel Policy Review & Improvement in new policy

The starting point of every loan is the application. When lending institutions receive an application for a loan, the process by which it is evaluated and its degree of sophistication can vary greatly. Most continue to use rather nave, subjective evaluation procedures. This could be a non-formalized analysis of an applicants personal characteristics or scoring with integer numbers on these characteristics. Some banks, however, use a statistical credit scoring model to separate loan applicants that are expected to pay back their debts from those who are likely to fall into arrears or go bankrupt.

CREDIT RATING FORMAT FOR RETAIL LOANS IN FEDERAL BANK

GUIDELINES FOLLOWED IN CREDIT RATING Risk rating is done under 3 broad parameters: personal factors, financial factors and security factors. Specific weights are prescribed for each parameter Relevant factors under the 3 parameters are described in rating format. Scores for each factor along with different criteria have been suggested. This score for each parameter has to be added; average found out and then multiplied with the prescribed weight to find out the final average weighted score. RATING SCALE Weighted Average Score 6.00-5.25 5.24-4.75 4.74-4.75 4.24-3.75 3.74-3.25 3.24-2.75 2.74-2.25 2.24-1.75 Rating FB-1 FB-2 FB-3 FB-4 FB-5 FB-6 FB-7 FB-8 Category HIGHEST SAFETY HIGH SAFETY ADEQUATE SAFETY MODERATE SAFETY MARGINAL SAFETY THRESHOLD SAFETY POTENTIAL WEAKNESS DEFINITE WEAKNESS

1.74-1.25

FB-9

DEFAULT

1.24-1.00

FB-10

LOSS

FUNCTIONAL SYNOPSIS OF LOAN SANCTIONING FEDFINA 1. Sourcing of loan application 2. Borrower document verification 3. Legal/technical scrutiny 4. Execution of loan documents 5. End to end customer contact

CREDIT PROCESSING CENTRE 1) Verification of file forwarded by Fedfina 2) Credit decision- credit appraisal and loan sanction 3) Loan account opening 4) Disbursement/DD printing 5) Collections 6) Follow up 7) Liaison with Fedfina and coordinating with service provider agencies 8) Creation of EM 9) Verification and confirmation of appropriateness of loan documentation / post disbursement documents 10) Safe custody of DD and documents BRANCH 1) Parking of loans booked through Fedfina channel

RESEARCH METHODOLOGY

OBJECTIVE The main objective was to determine the effectiveness of the Home Loan Policy of Federal Bank Ltd in Chennai region. SECONDARY OBJECTIVE To understand the concept of loan policy in general and Home loan Policy in particular. To study the various processes involved in the Credit Processing System of the bank To study the performance of The Federal bank Ltd of Chennai region in home loan sector. To find out the factors determining the effectiveness of the lending policy of Federal Bank TYPE OF RESEARCH The type of research is Descriptive. The study was done to find out the effectiveness of the loan policy of the bank and the factors that determine it. SOURCES OF DATA The study is primarily based on secondary data, collected from published reports of Federal bank and MIS data. Data from media reports, various websites and banking related journals are also collected. Primary data is limited to an extent in the form of information through personal discussions with officials of Federal Bank. A survey was also conducted among the home loan customers of Fedfina (Retail Hub of Federal bank) TOOLS AND TECHNIQUES The study is analytical in nature. The main tools and techniques used for data collection and data analysis in this study are

DATA COLLECTION Semi-structured interview method for subjective information regarding reasons for specific performance of retail loan portfolio during specific years. Scrutiny of published reports Annual Reports of Federal Bank, MIS furnished by Retail Banking Department of the Bank, RBI journals, etc.
Bank manuals and bank intranet(Drishya)

Questionnaires Samples Sampling elements- Home Loans Population- Home Loans marketed in Chennai Sample size- 100 Home loans
Sampling method- As 100 home loans were taken, the suitable method for sampling

was simple random sampling. Every member of the population had a known and equal chance of being selected.

INQUIRY MODE Structured approach (Quantitative Research): Everything that forms the research process objectives, design, sample and questions to respondents- were pre-determined. RESEARCH TOOL The questionnaire was used as a research tool. This comprised of a structured combination of both open-ended and closed ended questions. It contained a series of closed ended questions in the beginning, with boxes to tick or scales to rank, and then finished off with a section of open-ended question for more detailed response. RESEARCH METHOD Telephone interviewing was used for the survey.

LIMITATIONS: Some of the Respondents were reluctant to discuss personal questions with the interviewer.
Study concentrated mostly on home loans sanctioned through the Retail hub.

Loss of some major financial data due to damage of files on fire. There was some amount of hesitancy in revealing confidential financial data. Telephonic interview made the cost per respondent higher. Lack of proper versatility in local language made communication difficult. The survey was carried out under considerable time pressure. The retail department of the bank started functioning in recent years, so there was difficultly faced in collection of data. Few general observations on performance and conclusion arrived thereon is based on oral information derived during discussion/interview with officials of the Bank. Therefore there is a certain element of subjectivity also in the study.

DATA ANALYSIS AND INTEPRETATION

Total Home Loan amount Sanctioned through Fedfina, Federal Bank in Past Three Financial years FINANCIAL YEAR LOAN AMOUNT (in crores) 2008-2009 2009-2010 2010-2011 30.5406 61.1947 62.8151 PERCENTAGE GROWTH

Total Home Loan Number Sanctioned through Fedfina, Federal Bank in Past Three Financial years

FINANCIAL YEAR 2008-2009 2009-2010 2010-2011

LOAN NUMBER 169 310 350

From the above graphs and tables it is clear that the Federal Housing Loan is showing an upward trend both in numbers and total amount outstanding. The main reason for this hike is the periodic product improvement to make it market oriented. Upto 2007-08 there was boom in the economy. This motivates the customers to take more loans. Even though there was recession in the economy during 2008-09, Federal Housing Loan was increasing in numbers and amount outstanding due to the market oriented approach.

SURVEY The study involved a survey of 100 bank customers using questionnaire as the research instrument, augmented with informal interviews of the customers and also make thorough use of the information available on the internet The survey was conducted among respondents in Chennai who had taken home loans from the Federal Bank. The data set consisted of 100 customers of the bank, who were sanctioned home loans through the Fedfina (Retail Hub) channel of Federal Bank.

Questionnaires were filled up by contacting each respondent through telephonic interviews. 1. Period of association with the bank Out of the 100 respondents interviewed, 70% of them has been a client of Federal Bank for the past 1 year, 28% of them, for the past 2-3 years and 2% for the last 3-5 years

2. Type of home loan product Out of the 100 respondents, 60% of them availed the loan for Home Purchase, 23% of the for Home construction, 2% for Home improvement3% for Home Extension and 12% opted for a balance transfer

3. Sufficiency of Home Loan Out of the 100 respondents interviewed, loan amount was sufficient for 86% of them. The loan Amount was not sufficient for 7% percent of them and 7% refused to respond to the question.

4.Availability Of Loan At Required Time 93 of the respondents were able to avail the loan at the right time of their need. The remaining 7could not avail the loan in time

5. Frequency Of Visits To The Bank For Getting Loan Sanctioned Out of the 100 respondents, 21% had to visit the bank once, 52% had to visit twice,13% Thrice and the remaining 14% has to visit the bank more than 3 times for getting the loan sanctioned.

Frequency of visits to the bank Once Twice Thrice More than 3 times

No: of respondents 21 52 13 14

6.Time Taken For Loan Sanctioning Out of the 100 respondents, 38 of them got their loan sanctioned in less than a weeks time. 44 of them got in 14 days and 11 of them in a months time. The remaining 7 got their loan sanctioned in a period of more than 30 days

Time Duration for Loan Sanctioning Less than a week 2 weeks

No: of Respondents 38 44

1 month More than a month

11 7

7.Source Of Popularity Of Federal Bank Home Loan Product Out of the 100 respondents, source of obtaining knowledge about Federal Bank Home Loan product was Builder/ Constructor for 33 of them, friends/family for 51 of them, Internet for 4, Advertisement for 2 and other Sources for 10 of them. Source Builders tie-up Friends suggestion Internet From Advertisement Print Media Others No: of Respondents 33 51 4 2 0 10

FINDINGS
Analysis of the changes in composition of the Retail Loan portfolio of the Bank The share of housing loans has increased from a level of 57% in 2006 to 59% in 2009. The growth in housing loans and gold loans perhaps indicates the Banks increased thrust to these products. Housing loans constitute the largest component of the retail loan portfolio. Housing loans continued to receive the largest focus of the Bank, as this is a long-term relationship building product. Federal Banks retail loan portfolio has recorded spectacular growth over the period under study. There has been a sharp upward trend in growth since 2005-06, which has been sustained during 2010-2011.

Housing Loans comprise the major share of the retail loan portfolio of the Bank. Over the years, the share of housing loans in the total retail loan portfolio has risen from 57% in 2006 Federal Banks retail advances have grown at a higher rate when compared to its total advances. The share of retail advances in total advances of the Bank has seen an increase from 1523 Crores to 7165 Crores. Therefore it can rightly be said that the growth of Total Advances of the Bank has been fuelled by the growth in Retail Advances.

Federal Banks performance in the retail loan segment is above the average performance of the Indian banking sector as a whole.

 Growth of Retail Advances of Federal Bank is mainly due to the market/competition

oriented philosophy of the Bank introduction of new products, refinements/updation of existing ones, etc. As far as the asset portfolio mix of the Retail Hub is concerned nearly 94% is contributed by home loan sector and the rest is by personal vehicle loan. So its clear that the focus is on the home loan sector which is definitely an appreciating asset which again indicates the banks concern for safety.

From the study conducted, it was found that the popularity of Federal Bank home loans were increasing each financial year, and subsequently the NPAs were also coming down in this sector. The bank has a firm lending policy which helps in assessing the proper credit worthiness of the borrower. This has helped in bringing down the NPA level in the home loan sector of the bank and has also helped in drawing more customers to it.

In order to analyse the factors that deterimine the effectiveness of Home loan lending policy of the bank, certain features of the home loan products were listed out to the customers and they were asked to rate them. From their responses, the following findings were made Best feature of Federal Bank For considering it for availing a loan: There were mainly 6 features that made customers go for Federal bank for availing Financial Services. The responses obtained are tabulated below: FEATURE General service quality Reputation of the Bank Attractive Product Package Good Customer Care Service Cordiality of Staff Proximity of branch/bank No: of Respondents 25 22 19 15 12 7

The Home loan customers were asked to rank the features of Federal bank Home Loan Products. The results were tabulated as shown below.

Rank FEATURE 1 2 3 4 5 6 7 8 9 10 Low interest rates Speed of delivery Sufficient loan amount Less hidden Charges Proper communication of terms and conditions Less frequent number of visits to bank Simple procedures Convenience of Pay back period Convenient emi amount Less processing and Service Charges

The 10 different factors that could be identified, approximately in the order of their importance, were (1)Interest Rates (2) Speed of Delivery (3) Loan Size and sufficiency (4) Less Hidden Charges (5) Proper communication of terms and conditions (6) Less frequent number of visits to banks (7)Simple procedures (8)Convenience of Pay back Period (9) Convenient emi amount (10) Less processing and service charges According to the findings, based on the empirical study, the first five factors exert the greatest influence, next three have moderate importance, and the rest two have relatively lower influence The loan policy of any bank is said to be effective if and only if:

The interest rates match the current market rates The lending procedures are simple. The customers need to visit the bank minimum number of times for getting their loan sanctioned. The EMI plans are customized upto a certain level The loan amount sanctioned is sufficient for the purpose of loan

The timely availment of loan is possible. The terms and conditions for sanctioning loans as specified by the loan policy could be easily communicated to and understood by the customer. There are practically no hidden charges to be borne by the borrower. The service and processing fee are reasonable From the study conducted in the Federal Bank, it was found that the lending policy

of the bank satisfies the above said criteria, to an appreciable level. This fact is supported by the customer responses obtained through the survey. Hence the lending policy of Federal Bank Ltd. is effective by all means.

SUGGESTIONS
A humble effort has been made to provide few suggestions to the Federal Bank, as follows
Majority of the customers were satisfied with the interest rate of their home loans obtained

through Federal Bank. But a slight matter that was under concern was that the consumers being uninformed about the frequent revisions in their EMI amount. The Bank can improve its service quality if it could provide more care on timely communication of the rate and emi revisions.
The RBI norms and the fact of frequent revision of the standards can be explained to the

customers when they approach for a home loan.

The bank could improve its customer loyalty by popularizing online emi payment

systems. Business opportunities can be exploited for further thorough cross selling of various other products with home loan product. This is under consideration and is believed to be in action in the current financial year itself.

 Showing the presence in the industry would help in increasing the brand image and there

by increase the business. So the bank should conduct campaigns and other exhibitions for attracting the public to avail the home loan advance facility provided by the Bank. The Bank could consider entering into more tie-ups with builders associations, Merchant associations, Marketing companies, etc to make their clients use Federal Banks loans. Strict promotion schemes should be introduced, as there is a huge competition within the banking industry.

CONCLUSION

With branches all over India and a clientele across the world, The Federal Bank is considered to be one of the most pro active banks in India with a competent tech savvy team of professional at the core of services. This bank that focuses on service delivery has always come up with innovative banking products to meet the growing demands of the customers.

Even though, the banking sector all over the world has been affected by the recession due to the global meltdown in economy, especially the US banking system, the Federal Bank Ltd proved its competence not only in terms of increased profit but also in providing boundless customer service. Among so many players and competitive products, Federal Bank could maintain its premier and prestigious position only with the support of the customers. This show how bank functions and how the bank fulfills its mission and vision. The Federal Banks overall strategy and execution has been creditable over the past few years, with the Bank maintaining its market share comparatively stable. While bank expects a loss in market share for its peers in the banking industry, due to its customer based services, it hopes to deliver profitable growth above the average growth rate of its peer groups in the coming years.

BIBLIOGRAPHY

www.rupeetimes.co- Retail loans in India ; Facts and Reviews Ashok H. Advani (2000), Indias Best Banks, Business India, Feb. 7-20 www.bharatbook.com ; Indian Retail Banking Sector Analysis Federal bank 2009 pdf

www.drishya.com www.federalbank.co.in www.rbi.org Suchintan Chatterjee Banking in India-Banking on Retail J P Morgan Report on Indian Retail Banking - Mahrukh Adajania Kanchan Mishra-A MASS MARKET FOR RETAIL FINANCE 1