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Almost all banks refused a housing loan to a mid-management executive in Mumbai, who earns an annual salary of Rs 28 lakh. The reason? He had bought a sample flat that the developer had furnished and charged him extra for the amenities. A non-banking finance company (NBFC) came to his rescue.
While the market value of the flat is Rs 1.21 crore, it cost the buyer Rs 1.55 crore, including amenities, stamp duty and registration charge. The borrower's requirement was Rs 1.15 crore. Banks didn't lend as the deal was way above the market value of the house. The NBFC not only provided the required amount, but also disbursed it within two days.
This is not an instance of reckless lending, but a calculated call by the lender. Some banks and NBFCs have carved a niche in the lending business. They cater to the class of borrowers generally not serviced by banks. They go beyond the income statement and tax returns to offer what is called as deviations to the standard banking practices. Most private and public sector banks prefer to do business with salaried people and follow the guidelines set by their managements.
One such lender among the NBFCs is Deutsche Postbank, which walks the extra mile to conduct due diligence.
Describing its method of functioning, Anoop Pabby, joint managing director, Deutsche Postbank Home Finance, said, "The strength of our credit evaluation process is quick screening of financials, personal meeting with the customer by our credit managers, a visit to his business premises to verify the nature and depth of his business, taking third-party feedbacks, corroboration of the facts from information available in the public domain, banking habits, existing loan repayments, facilities provided by other banks, audit reports and so on."
Some of these lenders even employ chartered accountants as part of their credit valuation team to take a call on the creditworthiness of a customer.
Following are some of the common areas where a large bank may not fit the borrower's criteria, but these lenders would give a loan if they feel the customer can repay.
100 per cent housing loan: Banks typically lend 75-85 per cent of the agreement value, which includes stamp duty, registration and car park. But if the developer asks for cash, the agreement value falls and affects the quantum of loan one can take.
Some lenders, especially privately-owned NBFCs do realise the prevalence of cash in such deals. They do their own valuation of the property before sanctioning a loan. So, if the agreement value is much below the real price of the house, these lenders provide even 100 per cent finance. The amount of loan in most cases is increased by dividing the loan in two parts a regular housing loan and another one for amenities to provide 100 per cent financing.
Track record: It is a standard practice for all lenders to check a customer's record in the credit information bureau. If the borrower is shown as a defaulter, banks don't lend unless the customer settles the issue with the company that has reported the person as a defaulter. Customers face rejection even if the default is on account of a dispute.
NBFCs such as Deutsche Post lend to customers who can justify the track record and provide supporting documents.
Self-employed: This segment of customers finds it most difficult to get a bank loan. While professionals have difficulties to produce receipts for every transaction to prove their actual income, business owners tend to split earnings among family members for tax purpose. This acts as a hurdle when a self-employed person requires a big-ticket loan.
Banks such as Kotak Mahindra Bank have specialised in lending to this category of customers. The bank goes through various documents to assess the actual income. This includes studying receipts and transactions on bank statements.
In fact, housing finance company HDFC has a product that caters to professionals such as doctors and chartered accountants. "If the customer is a young professional, there are structured repayment options available that provide flexibility and, in turn, a higher loan amount," said the spokesperson of the bank.
One such option from HDFC is a product called Step-up Repayment Facility. This is linked to the customer's expected income growth. Under this facility, the customer will be eligible for a higher loan amount as compared to the regular home loan product and as he would pay lower equated monthly installment (EMI) in initial years, which will rise over the years as the earning capacity improves.
Loan against property: While lending against a property, financial institutions usually provide 50 per cent of the value of the asset. A large bank would first assess the property and then look at the customer's income tax filings. If the EMI is more than the income declared in tax filings, lenders would usually reject the application.
In such cases, a borrower can approach the housing finance company, especially those having a large portfolio of self-employed persons and businessmen. These companies provide 30-40 per cent of loan against the property. They also lend even if a customer does not have income-tax returns to justify his income, provided the borrower can establish that he can pay the EMI.
