JAIIB PPB Paper-2 Module-B Unit 14: Personal Finance

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Mar 22

JAIIB Paper 2 (PPB) Module B Unit 14: Personal Finance (New Syllabus)

The Institute of Indian Banking and Finance (IIBF) has recently announced the revised syllabus and exam format for the JAIIB Exam 2023. The upcoming exam will comprise of four papers, with Paper 2 (Principles & Practices of Banking) covering Unit 14: Personal Finance. This particular unit holds significant importance for candidates, as it will greatly impact their performance in the exam.

To assist candidates in comprehending the topic, we will provide all the necessary details related to Unit 14: Personal Finance of JAIIB Paper 2 (PPB) Module B: Functions of Banks. We strongly recommend candidates to refer to this article and also utilize our Online Mock Test Series to enhance their understanding of Foreign Currency Accounts for Residents and other related aspects.

For candidates appearing for the JAIIB Certification Examination 2023, it is essential to comprehend each unit in the syllabus, including the Marketing unit. This unit holds great importance in the banking industry, and candidates must prepare thoroughly to excel in the exam and establish a successful career in the banking sector.

Credit Card

Credit card is one of the channels for delivery of credit. These are issued to approved clients for purchase of goods or services from authorised merchant establishments on the guarantee of issuer of credit card for payment.
The cardholder may pay for purchases made over a period on the due date and carry forward the balance amount, in which case finance charges are levied.

There are 5 parties involved

Cardholders - persons who are authorized to use credit cards for the payment of goods and services.
Card issuers - institutions which issue credit cards.
Merchants - entities which agree to accept credit cards for payment of goods and services.
Merchant acquirers - Banks/NBFCs which enter into agreements with merchants to process their credit card transactions.
Credit card associations - organisations that license card issuers to issue credit cards under their trademark, (e.g. Visa, MasterCard, RuPay) and provide settlement services for their members (i.e. card issuers and merchant acquirers).

Note: Normally cardholders can use their credit cards to make purchases at merchants in another country.

Benefits of Credit Cards

A To Card Holders

Customer can purchase goods/ services at a large number of merchants without carrying cash.
Card holder gets a period of interest free credit, ranging from 15 to 51 days.
Cash withdrawals through ATMs can be made up to a ceiling.
It provides proof of purchase through banking channels to strengthen his position in case of disputes with sellers.
It allows him to delegate spending power to add-on members.
It extends additional facilities like insurance cover/discount, etc.

To Merchant Establishments (MEs)

Increase in sales because of increased purchasing power of the cardholder due to unbilled credit available to him.
Preferred locations by a cardholder.
Less need for the MEs to provide customers with an extended credit facility, which is likely to be a costly burden to them.
Systematic accounting since sale receipts are routed through banking channels.
Advertising and promotional support on a national scale.
Development of a prestigious clientele base.
Assured and immediate settlement/payment.
Avoids all the cost and security problems involved in handling cash.

To Banks

Scope and potential for better profitability out of share earned from the traders' turnover.
Helps in establishing a banking relationship with new customers.
This also provides additional facility to the existing clients.
Better network spread of cardholders and their increased use means higher popularity and image for the banks.
Saving expenses on cash holding/stationery printing and workforce to handle clearing transactions.

Disadvantages to Credit Card Holders

May result in over spending.
Fraudulent withdrawals, due to loss of card in the intervening period till it is blocked.
May fall in debt trap credit limit is utilized beyond monthly repayment capacity.

Guidelines on Credit Card Operations of Banks

On 21st April 2022 RBI issued Master Directions on issuance and conduct of credit cards and debit cards, containing their latest guidelines.
SCBs (other than RRBs) with net worth of Rs. 100 crore and above can undertake credit card business departmentally or through a subsidiary or in tie-up arrangement with other card issuing bank/NBFC with approval of their Boards.
NBFCs registered with RBI can undertake credit card business, with its prior approval. Card-issuer shall have a Board approved policy for credit card business, in line with RBI instructions.
If a card is issued/ existing card upgraded and activated without explicit consent of the recipient and is billed for the same, the card-issuer shall reverse the charges, and also pay a penalty of twice the charges.

Sanction of Credit Card

The decision for issue of credit card shall be made by the card- issuer.
Banks/NBFCs shall ensure prudence in issuing credit cards and independently assess the credit risk, of the applicants, especially students and others with no independent financial means.
Banks/NBFCs should assess the total credit limit of a credit card customer considering all credit cards held.
Card issuing banks/NBFCs would be solely responsible for fulfillment of all KYC requirements, even where agents solicit business on their behalf.
Terms and conditions for a credit card facility should be listed in clear and simple language (preferably in English, Hindi and the local language) easily comprehensible to a card user.

Terms and Conditions

Card-issuer shall provide, along with the credit card application form, a one-page Key Fact Statement containing the important terms of the card such as rate of interest, quantum of charges, among others.
No card-issuer shall report any credit information relating to a new credit card account to Credit Information Companies prior to activation of the card.

Insurance Offers

Card-issuers may provide, at the option of the customer, an insurance cover for the liabilities arising out of lost cards, card frauds, etc. If an insurance cover is offered, in tie-up with insurance companies, the card-issuer shall obtain explicit consent in writing/ digital mode from the cardholder along with the details of nominee/s that should be recorded with the insurance company
The cardholder should be sent a letter containing the contact particulars of the insurance company for lodging a claim.

Types of cards

Various types of credit cards are issued viz. co-branded credit cards, corporate credit cards, add-on credit cards.

Issuance of cards

When a customer applies for a credit card, bank/ NBFC shall explain the relevant terms and conditions and any other information that may be required to operate the card.
Banks shall advise clients about targeted time for issuance of card.
At request of the customer, banks may set a lower credit limit than the overall limit for the add-on card(s).
New cards/replacement cards will be EMV Chip and PIN enabled cards only.
If the limit on a card is proposed to be reduced, bank will inform customer immediately with reason, by SMS/e-mail followed by confirmation in writing.
Banks will comply with any request for cancellation promptly and confirm cancellation/closure of the card to customer within 7 working days of the request received provided the outstanding amount, if any, is settled in full.

Credit Cards Statement

To help customer manage their credit card account and check details of purchases/cash withdrawals, banks will send a monthly statement, free of cost, with details of the transactions on the card.

Interest rate and other charges

Credit card dues are non-priority sector personal loans. The interest charged should be justifiable having regard to the total cost incurred in extending the loan and the extent of return reasonably expected. Banks should also prescribe a ceiling for rate of interest and processing/ other charges.
In case banks/NBFCs charge interest rates which vary based on the payment/default history of the cardholder, there should be transparency in this.
It should be indicated in bold letters that, even where the minimum amount indicated to keep the card valid has been paid, the interest will be charged on the amount due, from the due date of payment.
Changes in charges (other than interest) may be made only with prospective effect, giving notice of at least one month. If a credit card holder desires to surrender his credit card on account of any change in the charges to his disadvantage, he may be permitted to do so, without any extra charge for such a closure.

Wrongful Billing

In case a customer protests any bill, the bank/NBFC should provide an explanation and if necessary, documentary evidence to the customer, within a maximum period of thirty days of complaint.

Fraud Control

With a view to reducing the instances of misuse of lost/stolen cards, RBI had recommended issuing (i) cards with photograph of the cardholder (ii) cards with PIN and (iii) signature laminated cards or (iv) cards with any other advanced methods. Now cards with EMV chip based and PIN is mandatory.
Tokenisation refers to replacement of actual card details with an alternate code called the "token", which shall be unique for a combination of card, token requestor and the device. Tokenised card transaction is considered safer as the actual card details are not shared with the merchant during transaction processing

Home Loans

Target Group: These cater to salaried class, professionals, self-employed and businessmen. Home loans are extended to both resident Indians and NRIs.
Purpose: Home loans are extended for purchase housing plot for construction, or construction of house or flat, repairs and renovation of house, and in case of some banks, for purchase of house sites also.
Quantum of loan: The loan amount is decided based on gross monthly income/net monthly income and cost of house.
Age: Banks fix the lower and upper age limits, taking into consideration the remaining period of service (salaried class) and the income earning capacity (other segments) during the period of loan.
Repayment: Repayment period may extend upto 30 years, but will not ordinarily extend beyond a person's age of retirement if he/she is employed or on reaching 70 years of age, whichever is earlier

Track Record: Lenders would check the credit history and credit score from CIC to check their past repayment practice. A good repayment record would help in getting loan on competitive terms.
Security: Mortgage on property purchased or constructed out of the loan is taken as security. If the income of the spouse is taken for arriving at the quantum of loan, he/she is included as a co-borrower or a guarantor Also, if the property is in joint name with another person that person is added as a co-borrower.
Interest Rate: Banks can charge interest rate as per their own policy, and as Fixed rate or Floating rate.

Home Loan For Various Purposes

Acquisition of land: Bank finance can be granted for purchase of a plot, provided borrower gives a declaration that he intends to construct a house on the said plot within specified period.

Construction of Building/ Ready-Built House:

When financing a person for constructing a house on own plot/land, a copy of the sanctioned plan by competent authority in the name of the person must be obtained.
An affidavit-cum-undertaking must be obtained from the person that he shall not violate the sanctioned plan, and it shall be his sole responsibility to obtain completion certificate within 3 months of completion of construction, failing which the bank may recall the entire loan with interest, costs and other usual bank charges.
An Architect appointed by the bank must also certify at various stages of construction of building that it is strictly as per sanctioned plan, and shall also certify that the completion certificate of the building has been obtained.
When financing for purchasing a ready house/flat, an affidavit-cum- undertaking that the property has been constructed as per the sanctioned plan and/ or building bye-laws, and as far as possible has a completion certificate.
No loan should be given for properties meant for residential use but intended to be used for commercial purposes.
Banks can extend supplementary finances within the ceiling for alterations/ additions/repairs to the house already financed by them.
Banks should not grant finance for construction of buildings meant purely for Government/ Semi-Government offices (ii) Projects undertaken by public sector entities which are not corporate bodies may not be financed by banks.

Lending To Housing Intermediary Agencies:

Financing of Land Acquisition: Banks may extend finance to public agencies (not private builders) for acquisition and development of land, as a part of a complete project by way of term loans.
Lending to Housing Finance Institutions: Banks may grant term loans to housing finance institutions taking into account (long-term) debt-equity ratio, track record, recovery performance and other relevant factors.
Banks may extend term loans to state level housing boards and other public agencies.
Where land is acquired and developed by State Housing Boards and other public agencies. Commercial banks may extend credit to private builders on commercial terms by way of loans linked to each specific project.

Quantum Of Home Loan

Home Loan Documents

Agreement of Sale/ Sale deed
No Encumbrance Certificate - NIL EC (for 13 years or as decided by the bank)
Title Search document for 30 years
Approved building plan
Patta (NOC from Housing Board, etc., wherever applicable)
Valuation report from the Bank's approved engineer
Bank statement for last 12 months or a period as decided by the bank
Salary Certificate for self and spouse
IT Returns for 3 years in case of professionals/businessmen/self-employed
KYC documents

Disbursal Of Home Loan

Approvals: The disbursements should be made only after requisite clearances and approvals from Statutory/ Regulatory Authorities have been obtained
Stage of Construction Linkage: Disbursal of housing loans should be closely linked to the stages of construction of the housing project/ houses and upfront disbursal should not be made in cases of incomplete/ under-construction/ green field housing projects.
Projects sponsored by Government/Statutory Authorities: For such projects, banks may disburse the loans as per the payment stages prescribed by such authorities, provided such authorities have no past history of non-completion of projects.

Note: RBI has instructed banks not to charge foreclosure charges/ pre-payment penalties on home loans on floating interest rate.

Personal Loans

Target group: Permanent employees with a minimum service/ experience of say three years, with a Govt/ corporate industrial establishments, etc. The stipulation of minimum period of service may vary from bank to bank.
Purpose: For meeting marriage, educational, medical, family functions, any other household expenses.
Eligible Amount: The eligible amount is based on the applicant's income level and is calculated based on number of times of the gross/ net salary.
Security: In case of non availability of collateral security, banks may ask for third party guarantee.
Documents: Proof of employment and salary certificate are normally obtained. After sanction, banks take the necessary loan documents such as; DPN, salary loan agreement, etc., from the borrower and a guarantee agreement from the guarantor, if any.

Consumer Loans

Target group: Salaried, pensioners, professionals, self-employed, others with regular income.
Purpose: For purchase of consumer durables and white goods like TV, VCR, VCP, air conditioners, refrigerators, personal computers and accessories, vehicle, etc.
Eligible Amount: cost of the article to be purchased and margin to be brought by the borrower are taken into account. The minimum take home pay after the proposed EMI should also be ensured.
Security: Hypothecation of the article purchased out of the bank loan.
Margin: Normally a margin of 10–20% is stipulated. Repayment: Banks allow period of 3 to 5 years for repayment of consumer loan
Documents: Salary certificate for three months for self and spouse (ii) IT returns/Form 16 of 2 to 3 years for professionals, businessmen, Self-employed persons. (iii) Quotation of the articles to be purchased from a reputed dealer. (iv) Statement of account/ passbook, showing one year's transactions. (v) Debit mandates are collected from the borrowers.