Executive Summary

Buying a vehicle is a dream that almost everybody cherishes. However, you might not always have the money to fulfill your dream. In this kind of a situation, you can go for a vehicle loan to make your dream come true. Owning a car not only raises your social status, but also fulfills your transportation requirements. If you are making plan for a vacation, then reaching there using your own car will really be a thrilling experience. A car loan is a form of personal loan that you can use to buy a car. Car loans are also called as automobile loans. Car loans are becoming popular financing options all over the world and more and more people are going for car financing to buy different types of cars. When you have made a decision to buy a car, then you should select a good car loan in India - one which offers you a lot of financial independence and flexible repayment terms. As soon as you have chosen a model, it is advisable that you receive a quote from the car dealer. Normally, auto dealers have association with car financers and this might help you strike a good deal.

You can also visit 2-3 car loan companies and compare the interest rates and other terms and conditions offered by them. They will review your income details and decide whether you are a trustworthy borrower or not. You should be frank and disclose every detail that they want to know about you. If they find your details satisfactory, they can approve you for a car loan. The next
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thing that you should do is to decide the repayment term or the number of years for which you are taking out the loan. If you go for a long repayment term, the EMIs (equated monthly installments) will be low but the interest rate will be high. In contrast, a small repayment term will ask for higher EMIs but lower interest rate. If you want to pay off the loan quickly, you should choose a short repayment term. However, at the same time, you should be confident about your capacity to pay higher installments. If your financial capacity doesnt permit you to make bigger installment payments, then you should go for a longer loan term. You can receive a loan amount of up to 85% of the car value. Some finance companies might deal with other expenses. Therefore, you have the task of finding out the best financer for your automobile. You should go for a loan that comes with the most affordable rate since this lowers your EMIs. The study focuses on automobile loans let by banking companies in India. The most popular ones among them is the car loan and hence the study lays a little more stress on car loans than other automobiles.

Objective of the study

The study focuses on the importance of vehicle loans to borrowers and the lender with a case of the State Bank of India and how it also earns revenue to the bank.

Methodology
Period of Study June 2011 September 2011 Area of Study Mumbai Source of Data Primary and Secondary Primary An oral interview with Manager, State Bank of India , Branch 15 Borrowers of vehicle loans of state Bank of India Secondary Journals, Periodicals and books.

Chapter Introduction To Loans

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially does receive an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A loan is of the annuity type if the amount paid periodically (for paying off and interest together) is fixed. A borrower may be subject to certain restrictions under the terms of the loan. Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Bank loans and credit are one way to increase the money supply. Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for promise of a creditor to give another sum of money.

Utility of Loans and Advances

Loans and advances granted by commercial banks are highly beneficial to individuals, firms, companies and industrial concerns. The growth and diversification of business activities are effected to a large extent through bank financing. Loans and advances granted by banks help in meeting short-term and long term financial needs of business enterprises. We can discuss the role played by banks in the business world by way of loans and advances as follows :(a) Loans and advances can be arranged from banks in keeping with the flexibility in business operations. Traders, may borrow money for day to day financial needs availing of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as loan may be repaid within a short period to suit the convenience of the borrower. Thus business may be run efficiently with borrowed funds from banks for financing its working capital requirements. (b) Loans and advances are utilized for making payment of current
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liabilities, wage and salaries of employees, and also the tax liability of business. (c) Loans and advances from banks are found to be economical for traders and businessmen, because banks charge a reasonable rate of interest on such loans/advances. For loans from money lenders, the rate of interest charged is very high. The interest charged by commercial banks is regulated by the Reserve Bank of India. (d) Banks generally do not interfere with the use, management and control of the borrowed money. But it takes care to ensure that the money lent is used only for business purposes. (e) Bank loans and advances are found to be convenient as far as its repayment is concerned. This facilitates planning for future and timely repayment of loans. Otherwise business activities would have come to a halt. (f) Loans and advances by banks generally carry element of secrecy with it. Banks are duty-bound to maintain secrecy of their transactions with the customers. This enhances peoples faith in the banking system.

Borrowing Rate and Lending Rate

People make their funds available to the banks by depositing their savings in various types of accounts. In other words, bank funds mainly consist of deposits from the public, though banks may also borrow money from other institutions and the Reserve Bank of India. Banks, thus mobilises funds through its deposits. On public deposits the banks pay interest at and the rate of interest vary according to the type of deposit. The borrowing rate refers to the rate of interest paid by a bank on its deposits. The rates which the banks allow depend upon the nature of deposit account and the period for which the deposit is made with the bank. No interest is generally paid on current account deposits. The rate is relatively lower on savings account deposits. Higher rates ranging from 6% to 12% per annum are paid on Fixed deposit accounts according to the period of deposit. Loans and Advances :: 63 Banks also borrow from other institutions as well as from the Reserve
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Bank of India. When the Reserve Bank of India lends money to commercial banks, the rate of interest it charges for lending is known as Bank Rate. The rate at which commercial banks make funds available to people is known as Lending-rate. The lending rates also vary depending upon the nature of loans and advances. The rates also vary according to the purpose in view. For example if the loan is sanctioned for the purpose of activities for the development of backward areas, the rate of interest is relatively lower as against loans and advances for commercial/business purposes. Similarly for smaller amounts of loan the rate of interest is higher as compared to larger amounts. Again lending rates for consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators, etc. are relatively higher than for commercial borrowings. However, the Reserve Bank of India from time to time announces changes in the interest-rate structure to regulate the lending of funds by banks. Different rates of interest are prescribed for various categories of advances, such as advances to agriculture, small scale industries, road transport, etc. Graded rates of interest are prescribed for backward areas. Lower rate is normally charged from agencies selling food-grains at fixed price through Govt. approved outlets. Lastly, lower rate of interest is charged for loans granted to persons belonging to weaker sections of the society.

Loans
Loan is the amount borrowed from bank. The nature of borrowing is that the money is disbursed and recovery is made in instalments. While lending money by way of loan, credit is given for a definite purpose and for a pre-determined period. Depending upon the purpose and period of loan, each bank has its own procedure for granting loan. However the bank is at liberty to grant the loan requested or refuse it depending upon its own cash position and lending policy. There are two types of loan available from banks : (a) Demand loan, and (b) Term loan

(a) Demand Loan is a loan which is repayable on demand

by the bank. In other words, it is repayable at short-notice.
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The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum (one time) or as agreed with the bank. For example, if it is so agreed the amount of loan may be repaid in suitable instalments. Such loans are normally granted by banks against security. The security may include materials or goods in stock, shares of companies or any other asset. Demand loans are raised normally for working capital purposes, like purchase of raw materials, making payment of short-term liabilities.

(b) Term Loans : Medium and long term loans are called
term loans. Term loans are granted for more than a year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of a fixed amount. Term loan is required for the purpose of starting a new business activity, renovation, modernization, expansion/ extension of existing units, purchase of plant and machinery, purchase of land for setting up of a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and the like.

(II) Cash credit

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Cash credit is a flexible system of lending under which the borrower has the option to withdraw the funds as and when required and to the extent of his needs. Under this arrangement the banker specifies a limit of loan for the customer (known as cash credit limit) up to which the customer is allowed to draw. The cash credit limit is based on the borrowers need and as agreed with the bank. Against the limit of cash credit, the borrower is permitted to withdraw as and when he needs money subject to the limit sanctioned. It is normally sanctioned for a period of one year and secured by the security of some tangible assets or personal guarantee. If the account is running satisfactorily, the limit of cash credit may be renewed by the bank at the end of year. The interest is calculated and charged to the customers account. Cash credit, is one of the types of bank lending against security by way of pledge or /hypothetication of goods. Pledge means bailment of goods as security for payment of debt. Its primary purpose is to put the goods pledged in the possession of the lender. It ensures recovery of loan in case of failure of the borrower to repay the borrowed amount. In Hypothetication, goods remain in the possession of the borrower, who binds himself under the agreement to give possession of goods to the banker whenever the banker requires him to do so. So hypothetication is a device to create a charge over the asset under circumstances in which transfer of possession is either inconvenient or
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impracticable.

(III) Overdraft
Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to draw over and above the credit balance in his/her account. It is a short-period facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount of overdraft allowed as and when he/she needs it and to repay it through deposits in the account as and when it is convenient to him/her. Overdraft facility is generally granted by a bank on the basis of a written request by the customer. Sometimes the bank also insists on either a promissory note from the borrower or personal security of the borrower to ensure safety of amount withdrawn by the customer. The interest rate on overdraft is higher than is charged on loan. The following are some of the benefits of cash credits and overdraft :(i) Cash credit and overdraft allow flexibility of borrowing, which depends upon the need of the borrower. (ii) There is no necessity of providing security and documentation again and again for borrowing funds. (iii) This mode of borrowing is simple and elastic and meets the short term financial needs of the business.
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Discounting of Bills
Apart from sanctioning loans and advances, discounting of bills of exchange by bank is another way of making funds available to the customers. Bills of exchange are negotiable instruments which enable debtors to discharge their obligations to the creditors. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade. When the seller of goods has to realise his dues from the buyer at a distant place immediately or after the lapse of the agreed period of time, the bill of exchange facilitates this task with the help of the banking institution. Banks invest a good percentage of their funds in discounting bills of exchange. These bills may be payable on demand or after a stated period.
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In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so discounted , is retained by the bank till its due date and is presented to the drawee on the date of maturity. In case the bill is dishonoured on due date the amount due on bill together with interest and other charges is debited by the bank to the customers account.

Long-term and Short-term Loans

Commercial banks grant loans for different periods-long, short and medium term for different purposes.

(1) Short-term loans

Short term loans are granted by banks to meet the working capital needs of business. The working capital needs refer to financial needs for such purposes as, purchase of raw materials, payment of wages, electricity bill, taxes etc. Such loans are granted by banks to its borrowers to be repaid within a short period of time not exceeding 15 months. Short term loans are normally granted against the security of tangible assets like goods in stock, shares, debentures, etc. The rate of interest charged on short term loans ranges from 12% to
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18% p.a.

(2) Term Loans

Medium and long term loans are generally known as term loans. These loans are granted for more than 15 months. In case of medium term loan, the period ranges from 15 months to less than 5 years. Medium term loans are generally granted for heavy Loans and Advances :: 69 repairs, expansion of existing units, modernisation/renovation etc. . The normal rate of interest ranges between 12% to 18% depending upon the period, purpose, nature and amount of the loan. Though banks may grant long term loans, they avoid granting loan for more than 5 years.

Nature and Security of Loans

To ensure the safety of funds lent, the first and most important factor considered by a bank is the capacity of borrowers to repay the amount of loan, The bank therefore, relies primarily on the character, capacity and financial soundness of the borrower. But the bank can hardly afford to take any risk in this regard and hence it also has the security of tangible assets owned by the borrower. In case the borrower fails to repay the loan, the bank can recover the amount by attaching the assets. It can sell the assets offered as security and realize the amount. Thus from the view point of security of loans, we can devide the loans into 70 :: Business Studies
15

two categories: (a) secured, and (b) unsecured. Unsecured loans are those loans which are not covered by the security of tangible assets. Such loans are granted to firms/institutions against the personal security of the owner, manager or director. On the other hand, Secured loans are those which are granted against the security of tangible assets, like stock in trade and immovable property. Thus, while granting loan against the security of some assets, a charge is created over the assets of the borrower in favour of the bank. This enables the bank to recover the dues from the customer out of the sale proceeds of the assets in case the borrower fails to repay the loan. There are various types of securities which may be offered against loans granted, but all of those are not acceptable to the banks. The types of securities generally accepted by the bank are the following: l Tangible assets such as plant and machinery, motor-van, etc. l Documents of title to goods, like Railway Receipt (R/R), Bills of exchange, etc. l Financial Securities (Shares and Debentures) l Life-Insurance Policy l Real estates (Land, building, etc). l Fixed Deposit Receipt (FDR) l Gold ornaments, Jewellery etc.

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Procedure

of

granting

Cash

Credit,

Overdraft and Discounting Bills

We have studied in this lesson that banks provide financial assistance to its customers in the form of loans, advances, cash credit, overdraft and through the discounting of bills. The procedure of applying for and sanction of loans and advances differs from bank to bank. However, the steps which are generally to be taken in all cases are as follow:

(I) Filling up of loan application form

Each bank has separate loan application forms for different
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categories of borrowers. When you want to borrow money from a bank, you will have to fill up a loan application form available with the bank free of cost. The loan application form contains different columns to be filled in by the applicant. It includes all information required about the borrower, purpose of loan, nature of facility (cash-credit, overdraft etc) required, period of repayment, nature of security offered, and the financial status of the borrower. A running business limit may be required to furnish additional information in respect of : assets and liabilities profit and loss for the last 2 to 3 years. The names and addresses of three persons (which may include borrowers, suppliers, customers and bankers) for reference purposes.

(ii) Submission of form along with relevant documents

The loan application form duly filled in should be submitted to the bank along with the relevant documents.

(iii) Sanctioning of loan

The bank scrutinizes the documents submitted and determines the credit worthiness of the applicant. If it is found to be feasible, the loan is sanctioned. If the loan is for Rs 5000 or less, normally the Branch Manager himself can take the decision and
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sanction the loan. In case the amount of loan is more than Rs 5000, the application is considered at regional, zonal or head office level, depending on the amount of loan.

(iv) Executing the Agreement

When the loan is sanctioned by the bank and the borrower is informed about it, he will have to execute an agreement with the bank regarding terms and condition for the amount of loan raised.

(v) Arrangement of Security for Loan

The borrower will now arrange for security against the loan. These securities may be immovable properties, shares, debentures, fixed deposit receipts, and other documents, like, Kisan Vikas Patra, National Savings Certificate, as per agreement. When the borrower completes all the formalities, he is allowed to get the amount of loan/advance/ over draft as sanctioned by the bank. In case of discounting of bills, the bank credits the amount of bill to the customers account before the realization of the bill and thus, makes available the fund. In case, the bill is dishonored on due date, the amount due on the bill together with interest and other charges are payable by the party whose bill is discounted.

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Types of Loans
Due to the unequal distribution of wealth, India has arrived at a situation where the affluent class gets richer and richer and the underprivileged becomes poorer. To bridge this financial gap and to satisfy their day to day requirements, Bank plays a vital role by offering various loans to the finance seekers. Hence every borrower should have prior knowledge on the various Bank Loans in India, which are eligible for meeting their financial objectives.

Types of Bank Loans Offered by Banks in India

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The various Loans offered by Banks in India are mentioned as under:

Personal Loans
Personal Bank Loans are the credits which a bank offers to its customer to meet his instant personal requirements ranging from home renovation to purchasing of new laptop, a getaway with family or for reimbursing the credit card liabilities, for buying a new car or for child's education, etc. Personal loan simplifies the cash flow of the customer besides handling its immediate needs.

Eligibility

For Individuals

salaried For Self-Employed Individuals 25 years and 65 years respectively ` 1,50,000

Minimum Maximum Age Maximum Income

and 21 years and 58 years respectively ` 1,20,000

Annual

Minimum years in service/ business Loan Amount ----

1 year ` 50,000 to ` 50,000 to

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3 years ` 15,00,000 ` 15,00,000

Loan Tenure Interest Rates Mode of Repayment

1 years to 7 years 12-24%. Post-dated cheques or

1 years to 7 years 12-24%. Post-dated cheques or Standing

Standing orders to debit from personal A/c

orders to debit from personal A/c

Home Loans
To buy a dream home is the dream of every person. Home Loan has helped in changing every Indian's dream into reality. However, the every increasing property rates and escalating rates of interest sometimes act as an obstacle. Therefore, before opting for a home loan it is advisable to check every prospect of the product. For Self-Employed

Eligibility Minimum and Maximum Age

For salaried Individuals

Individuals

21 years and 65 years 21 years and 70 years respectively respectively ` 1,50,000 3 years
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Maximum Annual Income ` 1,00,000 Minimum years in service/ 1 year

business Loan Amount ---Loan Tenure Interest Rates ` 2,00,000 to ` 2,00,000 to 5 years to 20 years 9-16% ` 2,00,00,000 ` 2,00,00,000 5 years to 20 years 9-16%

Tax Benefits on Home Loans: Any person who opts for home loan
is entitled for tax benefits under Income Tax Act, 1961 on principal and the interest amount in the form of deductions from the chargeable earnings.

Bank Loans against Property

Property Loan or Loan against property is a kind of loan which is allowed by the bank on the condition of keeping the customer's current assets as a security with them. These loans are very useful when other resources of financing get exhausted. It is significant to recognize that a loan against property is not similar to mortgage. While loan against property is obtained from the bank by allocating customer's current assets as a security against the credit, a mortgage is an instrument for purchasing an asset. On the basis of the current market
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situations, the paid up cost of the asset and other aspects, the cost of the credit against asset can range anywhere from 40% to 60% of the asset costs.

Loans against Property

Eligibility For salaried Individuals For Self-Employed Individuals

Minimum and Maximum 21 years and 60 years 21 years and 65 years Age respectively respectively ` 1,50,000 3 years ` 1,50,00,000 ` 1,50,00,000 1 years to 15 years 50% of commercial cost

Maximum Annual Income ` 1,20,000 Minimum years in service/ business Loan Amount ---Loan Tenure Loan to cost ratio 1 year ` 2,00,000 to ` 2,00,000 to 1 years to 15 years 60% of residential cost
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60% of residential cost Tax Rebate

50% of commercial cost NIL NIL

Business Loans
Before starting a business, the entrepreneur should be mentally and financially prepared to encounter the fiscal setbacks during the process. To bail the companies out from the fiscal crunch, several banks in India offers business Loans both for meeting urgent official growth and expenses. Other details of Business Loans offered by Banks in India are:

Education Loans
Education Loans offered by various banks in India provide much required assistance to fund your child's education when all other resources of finance get exhausted. Education Loans are offered by almost every Indian bank thus providing ample opportunity to students to undergo higher education both in India and abroad.

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Education Loans

Eligibility Minimum and

For Students 16 years and 26 years respectively

Maximum Age Expenses covered Loan for studies in India Loan for Amount Upto ` 20,00,000 Amount Upto ` 10,00,000 course and examination fee, refundable deposits, procurement of books, travel expenses

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studies abroad Repayment Period 5-7 years

Car Loans
Every individual want to own a car. Hence, the need for car loans emerges at some point or the other. While selecting a car loan it is always wise to scrutinize the various options accessible in the market besides analyzing its fiscal Car Loans For Self-Employed Eligibility For salaried Individuals Individuals Minimum Maximum Age Maximum Income Loan Amount Annual and 21 years and 60 years respectively 1,00,000 21 years and 65 years respectively ` 60,000 suitability.

` 1,00,000 (new) and ` 50,000 ` 20,00,000

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(old) to ---Loan Tenure Loan to cost ratio ` 1,00,000 (new) and ` 50,000 (old) to 1 years to 7 years 85-90% of car cost ` 20,00,000 1 years to 7 years 85-90% of car cost

Advantages of car loans

Given below are the key benefits offered by car loans to the customers: 1. 2. 3. 4. 5. Flexible repayment terms Fast loan processing Simple monthly installments Cheap interest rates Minimum documentation requirements

6. A new car might be very tempting, but the strange fact is that greater

number of used cars are sold than new ones. Buying new or used, both have their own benefits and drawbacks. Your budget, the amount you can afford as monthly installments, how you want to use the car etc. many such considerations go into taking the decision to buy a car. If you are also one of those thousands, who face this dilemma every time they go out to buy a car, here are the benefits and drawbacks of buying used or a new car.

Benefits of a buying new car

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The experience of being the first owner and no problems associated with shady pasts, mechanical problems or any accidents. The model is latest and has all the recent gadgets, accessories and safety measures. The car comes with a comprehensive warranty directly from the manufacturer for a longer duration. So, there is someone to bank upon in case the vehicle gives trouble.

Drawbacks of buying a new car

The price. It will always be much much higher than a used car. The depreciation. The car value will instantly decrease by 20 to 40 percent the moment you buy it. The cost of insuring a new vehicle and installing protection measures against theft will definitely increase the cost.

Benefits of buying a used car

Buying a used car won't hurt your pocket that much. It will definitely be very cheap compared to a brand new model. So, in the same amount as that of a new car one can get higher range models, or maybe a luxury edge. The depreciation in used car is considerably less than that of a new car. So, it retains most of its original value when you want to resell it. The insurance costs for a used vehicle are less.

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Drawbacks of buying a used car

It is an old car and won't carry the same amount of features and latest gadgets. The maintenance, accident and ownership history can't be easily verified, thus making it a risky proposition. The maintenance costs associated with a used car are generally higher than a new car. This increases the ownership costs of the car.

The extra costs of a used car loan

Though the used car loan might be of a lesser value due to the low cost of the vehicle, it is definitely not a cheap loan. Here are few things that make a used car loan costlier

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Chapter STATE BANK OF INDIA (SBI) BANK

State Bank of India (SBI) (LSE: SBID) is a Public Sector Banking Organization (PSB), in which the Government of India is the biggest shareholder. It is the largest bank in India and is ranked at 380 in 2008 Fortune Global 500 list, and ranked 219 in 2008 Forbes Global 2000. Measured by the number of branch offices, SBI is the second largest bank in the world. SBI traces its ancestry back to the Bank of Calcutta, which was established in 1806; this makes SBI the oldest commercial bank in the Indian subcontinent. SBI provides various domestic, international and NRI products and services, through its vast network in India and overseas. With an asset of $126 billion and its reach, it is a regional banking behemoth. In recent years the bank has focused on four priorities, 1. Reducing its huge staff through the Golden handshake scheme known as Voluntary Retirement Scheme. 2. Computerizing its operations. 3. Implementation of Business Process Re-Engineering(BPR) &
4.

Trying to change the rude attitude of its staff through a program aptly named Parivartan or Change.
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On the whole, the Bank has been successful in the first three initiatives but has failed in Parivartan. After a 20year, the Bank is recruiting 20000 clerks and 3500 officers. The pick of the universities aspire to join more than 2.5 million applications have been received.

Vehicle loans offered by SBI

SBI AUTO LOAN

State Bank, the largest bank in India, offers attractive auto loans. State Banks Auto Loan has low interest rates, easy repayment options, and total transparency, Finance package includes vehicle registration charges, insurance, one-time road tax and accessories. And as State Bank Branches are located even in remote areas, it is easy to apply. Loan can be availed for new or old car, jeep or Multi Utility Vehicles.

Features
Low Interest rates Repayment period of up to 84 months No administrative charges Expenses for one-time road tax, registration fee, insurance premium and accessories included in finance.
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 One need not pay any advance EMI Interest is levied on daily reducing balance method. When a customer pays one instalment, the interest automatically calculated on the reduced balance thereafter.

Eligibility
Anyone with net annual income of Rs One Lakh is eligible for auto loan of SBI. The individual must be between the age of 21-65 years of age. He must be a permanent employee of State / Central Government, Public Sector Undertaking, Private company or a reputed establishment or a professional or self-employed individual who is an income tax assesses. agriculture and allied activities can also avail SBI loan. People engaged in

Loan Amount
The upper limit for car loan amount is not fixed. The bank could sanction a maximum loan amount of 2.5 times the net annual income. Spouses income could also be considered if the spouse becomes a co-borrower. The sanction amount includes finance for one-time road tax, registration and insurance. Loan amount for used car has the maximum limit of Rs 15 lakhs.

Documents Needed
The applicants need to furnish residence proof, identity proof and income proof besides the copy of PAN card. SBI account holders need not produce proof regarding residence and identity. The interest rate on car loans has

33

dropped to 8% with the countrys largest lender State Bank of India launching a special scheme. Under the scheme, auto loans will be offered at a fixed rate of 8% for the first year and 10% for the next two years. For the remaining years of the loan, borrowers will be charged an interest of 25 to 75 basis points below the banks prime lending rate. In February this year, the bank had launched a scheme where the interest rate was fixed at 10% for one year. Loans worth Rs. 1,200 cr were sanctioned under this scheme. The new offer, announced on Saturday, will be effective from July 1 SBIs foundation day and will be valid till September 2009. beneficiaries of the new offer. For a loan of Rs. 1 lakh, the equated monthly instalment (EMI) will work out to Rs. 1,559 in the first year and Rs. 1.647 in the second and third year. Most auto loans are between three and five years, and a few up to seven years. The rate cut by SBI could prompt other lenders like ICICI and HDFC bank to review their lending rates. Axis Bank is likely to review its rates on Monday. We have reduced our loan rates by 30-40 basis points to around 11.25%. If there is a policy action which results in lowering of our interest costs, we will pass it on to the customers, said Sumit Bali, CEO, and Kotak Prime. The successful applicants for Nano, the Tata small car, will be among the immediate

34

The spread on the floating interest rate that will be applicable from the fourth year will be spelt out to a borrower the day she takes the loan. Currently, SBIs car loan rates are 25 to 75 bps below the banks PLR of 11.75%. Thus if a borrower takes a five-year auto loan from SBI on July 1, the floating rate on the fourth year will be 50 basis points lower than the banks PLR at that point. Since February, SBI has waived the processing fee on loans and is also providing free accident cover for loan outstanding up to Rs 40 lakh.

Chapter State Bank of India Auto Loans at 10% for one year
MUMBAI: After causing a stir in the home loan market, the State Bank of India (SBI) has once again surprised competitors by slashing interest rates on loans for new cars. The countrys biggest bank has also reduced its lending rate against warehouse receipts for farmers. SBI will offer new car loans at a fixed rate of 10% for one year, 1.75 percentage points lower than the prevailing rate offered by market leader, HDFC Bank. After one y ear, rates will be linked to the banks existing prime lending rate (PLR). The borrower will be charged 75 basis points (bps) below PLR for a three-year loan of Rs 7.5 lakh ad above. Loans below Rs 7.5 lakh will carry an interest rate of 50 bps below PLAR. An HDFC Bank official said that the bank is not considering a rate cut. Banking circles said the new schemes success would depend on how the SBI promotes it among auto dealers. The 10% offer is the lowest in the industry,
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with most commercial banks offering car loans in the 11.5-13% range. Up until now, SBI offered new car loans at 11.5-12.5%. The new auto loan rate announced on Friday will be applicable only for new cars. If a borrower already has a car with another bank, and if she applies to the SBI, it will be deemed as a loan for the used car. Thus, she may not get the benefit of the new rate, said an SBI official. The 10% auto loan scheme will be available only from February 23 to May, 2009 and will be applicable for all types of passenger cars. Last month, the bank decided to freeze interest rate on home loans at 8% for one year. The new home loan rate has generated a lot enquiries, but incrementally, HDFC has not witnessed any major loss of business to SBI so far, according to an Edelweiss Research report released on Friday. HDFC, the parent of HDFC Bank, is Indias biggest mortgage lender. with respect to existing customers, we believe the likelihood of switching from HDFC to the SBI is low, considering the prepayment penalty, tedious and time-consuming process, said the report. SBI officials said they expect the new auto loans scheme to generate substantial incremental demand for passenger cars. As of now, SBIs auto loan portfolio is close to Rs 9,000 crores against HDFC Banks outstanding of 13,000 crores. According to the Society of Indian Automobile Manufacturers, overall automobile production in January 2009 fell by 11.92% over the same month last year. They were, however, more than December 2008. However, January sales are generally more than December sales as customers wait for new
36

models in January, which fetch a better value in the used car market, according to the SIAM website. The cumulative production data for April 2008-January 2009 shows growth o f 2.32% over April 2007-Janurary 2008. However, with lower prices and huge discounts, though January 2009 sales registered more than December 2008 sales, they were not enough to make the year-on-year growth positive. The car loan initiative was not the only measure SBI announced on Friday. Indias biggest bank also announced a reduction in lending rates against Warehouse receipts. With the objective of increasing credit flow to rural arrears and helping farmers avoid distress sales during the harvest season, the bank will disburse loans up to Rs. 10 lakh against warehouse and cold storage receipts directly to farmers at a fixed rate of 8% against the floating rates of 10.5-14.25%. The 8% interest announced by the bank on Friday will come to force with immediate effect and be valid for 12 months in respect of loans sanctioned and disbursed across the country till May-end. After May, a farmer will not be able to avail of the package. The loans will be made available to farmers, irrespective of whether or not they were give crop loans for raising the produce. It has been our experience that these kind of produce marketing loans have extremely low delinquency rates, KJ Taori, General Manager, SBI Agribusiness Unit, said, We expect SBIs warehouse receipt-based outstanding to increase from Rs 500-600 crores to Rs 2,000 crores by the end of May.
37

SBI lends against warehouse receipts issued by public and private sector warehouses that are recognized by the bank. Prices of agri products tend to decline during the harvest season. If a farmer deposits his produce with a warehouse, he could avail of a loan of up to 65-75% of the value of the produce against a warehouse receipt from the bank which holds the goods as collateral. The bank can sell the goods in the event of the borrower defaults on repayment of loan or interest. Prices on an average tend to rise around 40% three months after the harvest season ends. This means that if a farmer borrows Rs 100 from the bank, under the current package, he will end up paying just Rs 2 to the lender after three months and get a 40% appreciation in price. He thus, enjoys the twin benefit of getting his immediate credit needs met and securing a higher price for his product by selling during the lean season.

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Chapter A Case study of SBI Car loan

SBI Car Loan
SBI car loans are available at the banks personal banking branches and more than 6000 other branches. Car loan is available for new car, jeep or Multi Utility Vehicles (MUVs); used car or jeep (not more than 5 years old) and take over of existing loan from other banks and financial institutions.

Loan Amount
There is no upper limit for the amount of a car loan. A maximum loan amount of 2.5 times the net annual income will be sanctioned. If married, spouses income could also be considered provided the spouse guarantees the loan. The loan amount includes finance for one-time road tax, registration and insurance!
39

There is no ceiling on the loan amount for new cars, while the loan amount for used car is subject to a maximum limit of Rs 15 lacs.

Margin
New / Used vehicles: 15% of the on the road price.

Repayment Period
Repayment Maximum repayment period for new vehicle is 84 months from the date of original purchase of the vehicle.

Documents Required
Documents Required You would need to submit the following documents along with the completed application form if you are an existing SBI account holder: 1. Bank Statement for the last 6 months 2. Two passport size photographs 3. Latest salary slip and Form 16, in the case of salaried persons 4. IT returns for the last two financial years, in the case of self employed individuals and professionals

40

If you are not an account holder with SBI you would also need to furnish documents that establish your identity and give proof of residence.

SBI freezes car loan rates for one year

The scheme applies to all auto loans disbursed up to May 31 and interest rates will revert to the applicable rate after June 1 next year. In a statement, the bank said it would offer loans for a seven-year period, with interest calculated on a daily outstanding balance basis, which reduces the interest burden on the borrower as against the monthly outstanding balance or flat rate basis as changed by a few others. SBI also said it offered loans without the payment of an advance equated monthly installment for the industry, the average tenure of an auto loan is 48 month. The weighted average cost through the special
41

scheme comes to under 11 percent, against current rates of 11.50 percent and 12 percent. In contrast, ICICI offers auto loans at 12.25-12.50 percent and HDFC Bank 12.50%. Public sector players Bank of Baroda (BoB) and Bank of India (BoI), however, said they would not follow SBI. BoB offers car loans at 10.5 percent and BoI at 10.25-12.25%. After large players such as ICICI Bank, Standard Chartered and Citibank scaled down operations in auto finance due to higher default prospects in the wake of the economic slowdown, HDFC Bank and SBI, along with its six associate banks, have been battling out for the top slot during the current financial year. According to industry sources, SBI, HDFC Bank and ICICI Bank accounted for around three-fourths of the market and are followed by Kotak Mahindra Bank and Axis Bank. Through the latest move, the public sector player was trying to emerge as the market leader in the segment, said a rival lender. A senior SBI executive admitted the bank was looking to increase its market share. We are so far more focused on entry-level cars and by expanding the auto portfolio we hope to improve our market share, he said. So far, the bank was booking around 10,000 car loans each month and with the last move, it intends to double the number of proposals cleared. So, till May-end, we will finance an additional 30,000 cars, the executive said. The average ticket size was Rs 3lakh. The auto loan head at a large private bank said SBIs move might not have the same impact as the home loan offer, where rates are frozen at 8 percent for a year. The home loan scheme has already created a storm of sorts, with the
42

countrys largest mortgage player HDFC, crying foul and calling it a teaser scheme. Like HDFC, an executive at a public sector bank described SBIs auto loan scheme as a gimmick. While HDFC Bank refused to comment, ICICI Bank Executive Director V Vaidyanathan said: The auto industry is very important for the economy in a signaling since, as well as what it does for the real economy. This move will bring back excitement into the market. This will expand the market and thats good news. As far as ICICI Bank is concerned, we have a strong service proposition, our rates are competitive, we are focused on this business and so, we are sure we will continue to very well and support the industry. It makes sense if you borrow for a year but only 1 percent of the auto loans have a one-year tenure, said an executive at another large private bank.

Pricing is a by-product of the cost of funds, the cost of operations and the risk associated with the loan. By offering loans at a very low price, you can affect the construct of the product. This is more the case with players such as SBI, as they have not factored in the cost of running the business as a separate unit and the recovery cos associated with auto loans. They will lose money on this business, he added. Another rival said the customers might not find the scheme attractive because public sector banks took longer to process loan proposals. Further, he said, in most cases, customers would be required to approach branches, while the auto finance business was driven through presence at dealerships.
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But public sector banks have tried to fill up the gap by signing executive finance arrangements with auto makers. During the last 10 days, lenders such as Punjab National Bank, Syndicate Bank and Central Bank of India have tied up with Tata Motors and Hyundai to offer loans to grab a share of the pie at a time when private and foreign banks have pulled out or scaled down operations in the segment.

CAR LOANS
Interest Rates w.e.f. 01.09.2011 (Base Rate 10 % p.a.)

SBI ADVANTAGE CAR LOAN SCHEME

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SL. PARAMETER No SCHEME 1 Applicable to

DETAILS All New Car Loans to Public At present the following Interest rates are applicable: For Term Loan: 1.25% above Base Rate, i.e.

Interest Rate

11.25% p.a. For Overdraft: OD will attract 0.50% more than the existing rate for Term loans.

NRI Car Loan Tenure Rs.5 lacs For above Two- Wheeler Loan Tenure Up to 3 years Rate of Interest 8.25% above Base Rate i.e. 18.25% p.a. Used Vehicles
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Rate of Interest p.a. of 3.75% above Base Rate i.e. 13.75%

For loans below 4.00% above Base Rate i.e. 14.00% loans

Rs.5 lacs and p.a.

Tenure Up to 3 years Above 3 yrs

Rate of Interest 7.25% above Base Rate i.e. 17.25% p.a. 7.50% above Base Rate i.e. 17.50% p.a.

Certified Pre-owned Car Loan scheme Tenure Up to 3 years Above 3 yrs Rate of Interest 6.00% above Base Rate i.e. 16.00% p.a. 6.50% above Base Rate i.e. 16.50% p.a.

BIKE LOANS
Financing Options / Auto Loans For New Bikes
Picking the right auto loan is an individual choice and depends on various loan options, banks, and vehicle type and credit history. Hence, pre-calculated EMIs are usually inaccurate. Rather than comparing the absolute EMIs, it is recommended that a buyer examines various options available to him and make the best choice suitable for him.
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Besides this, getting information from an auto dealer about the varied options in the offing may be useful. Find ideal auto dealers in India to avail the best deals in car purchase. In order to simplify the process of obtaining finance for purchasing a vehicle, we have gathered the loan information from most of the Indian banks in one place. The information presented below will give you an indication of the prevailing rates, application process etc. You can use this information to calculate your EMI or pick the best loan using our Loan / EMI Calculator.

Chapter LOANS:

DIFFERENT

BANKS

PROVIDING DIFFERENT KINDS OF

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Bank Name Andhra Bank

Repayment Period Minimum:12 months,Maximum:60 months

Down Payment 10 %

Interest Rate As applicable on the date of loan

Axis Bank

from 1 Year to 3 years

15% Two Model

to

20% 17.00% per annum on a Wheeler

depending on the monthly reducing basis.

Bank of Baroda

Maximum from the

60

months 10% date of amount

on

loan 12.75%(Fixed)

disbursement of loan. Bank of Maharshtra Maximum 5 years 10% 10.75%(upto years) Canara Bank 48-60 months 20% 11.50% 3

years).11.75%(Above 3

Central Bank of India

Maximum 48 months

15%

Upto Interest

36 rate-

months, 10.50.

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Bank Name

Repayment Period

Down Payment

Interest Rate Above 36 months,

Interest rate- 11.50 Centurion Punjab Bank of Minimum months.Maximum months. Corporation Bank Maximum 60 months Minimum 10% of 12% the invoice value, life tax and insurance premium DCB Bank(Development Credit Bank) Dena Bank Federal Bank HDFC Bank Maximum 60 months Maximum 48 months 12 to 48 months 20% 10% 15% 11.50%-11.75% 14.25% Data Not Available Minimum 12 months- 10% 10.50%(floating rate) 12 Minimum 10% 36 22% upto 3 years

Maximum 36 months

ICICI Bank

6 months to 36 months

15%

13.75%.Interest reducing balance.

rate

charged on a monthly
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Bank Name

Repayment Period

Down Payment

Interest Rate

Indian Bank Karnataka Bank

Maximum 60 months Upto 60 months

10% Data Available

12.00% fixed Not 13%-On balance reducing

Karur Vyasa Bank

Maximum 36 months

25 %

11.5%

Oriental Commerce

Bank

of Maximum 60 months

10%

For 3 years-11.5%. For 5 years-12.0%

State Bank of India

Upto 3 years
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Data

Not 15.50%.Floating Rate

Bank Name

Repayment Period

Down Payment Available

Interest Rate

State Bank of Mysore

Data Not Available

Data Available

Not 14.25% for 3 years & 5 years

Union Bank of India

Maximum 60 EMIs

of for

36 20% of cost of 11.5%-12.00% Bajaj up,10%

months.A Maximum of vehicle.Under tievehicles. Vijaya Bank Maximum 5 years 20% Within 3 years,10.50% (floating rate).Beyond 3 years,11.00%

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Asset Backed Securities (ABS) Existing assets a case of Auto loans and securitisation in India
(a) Auto loans: Though securitisation was made popular by housing finance companies, it has found wide application in other areas of retail financing, particularly financing of cars and commercial vehicles. In India, the auto sector has been thrown open to international participation, greatly expanding the scope of the market. Auto loans (including instalment and hire purchase finance) broadly fulfil the features necessary in securitisation. The security in this case is also considered good, because of title over a utility asset. The development of a second hand market for cars in India has also meant that foreclosure is an effective tool in the hands of auto loan financiers in delinquent cases.

Originators are NBFCs and auto finance divisions of commercial banks.

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Auto loans Citibank Case Citibank assigned a cherry-picked auto loan portfolio to Peoples Financial Services Ltd. (PFSL), an SPV floated for the purpose of securitisation by paying the required amount of stamp duty (0.1%) to ensure true sale. This is a limited company and can act only as SPV for asset securitisation. This SPV is owned and managed by a group of distinguished legal counsels. PFSL then proceeded to issue Pass Through Certificates to investors. These certificates were rated by CRISIL and listed on the wholesale debt market of the National Stock Exchange (NSE), with HG Asia and Birla Marlin as the market makers. Global Trust Bank acted as the Investors Representative. Citibank played the role of servicer. The certificates are freely transferable and each of the transfer will have a stamp cost of 0.10%. The coupon of the security was high in spite of good quality of the underlying asset portfolio, because investors expected a premium to compensate for their unfamiliarity with the certificates. The investor base was limited mostly to MFs. FIs were hesitant because of the unsecured nature of the instrument and the absence of clarity on whether the certificates could be treated on par with other debt securities in their investment policy. Although the certificates were listed on the NSE, there was very little secondary market activity because there was absence of adequate amount of alternative security of similar risk profile. Besides Citibank, NBFCs like Ashok Leyland Finance, 20th Century Finance etc. have securitised their auto loan portfolio, though, of course, these transactions involved assignment of receivables only and not issuance of
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securities. The asset portfolios were bought by one or two large institutions. TELCO has also reportedly sold over Rs 550 crore of its auto loan portfolio in multiple tranches through this route. Chapter Result and Discussion of primary study On interviewing 15 respondents outside SBI, Branch. All of them opined that it has become easier to acquire a vehicle now with this facility of banks granting vehicle loans. Most of them prefer going in for a new vehicle. They also prefer availing a credit as the EMI on vehicle loans is not very high and is affordable. On interviewing a few auto drivers, they said that vehicle credit is a boon for them as they are able have their livelihoods by availing a credit, buy a vehicle and earn their living and earn much more which otherwise would have become a bit difficult as they would be losing out on the rentals of the vehicle. On interviewing the bank officials, these loans are much demanded by the people and they have also boosted up the sectors revenue. To conclude, it can be said that vehicle loan facility has made the country mobile. Its not just the haves but the have nots are also affording to buy a vehicle today which is the life blood of a business world today.

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