PPB Unit CChapter Notes6–8 Marks Expected

Personal Finance

Principles & Practices of Banking | Unit C · Chapter 35

Chapter 34 covered bill finance laws under the NI Act 1881. This chapter shifts to retail lending — the fastest-growing segment of bank credit. Credit cards, home loans, personal loans, and consumer loans together account for a large share of banking income. The chapter covers RBI Master Directions on credit cards (April 2022), home loan LTV norms, disbursal regulations, and collateral-free personal/consumer loans.

By Bankopedia.co.inUpdated 2026JAIIB PPB · Module C

📌 Why This Chapter Matters in JAIIB

Expect 6–8 questions from this chapter. The examiner focuses on 5 credit card parties (cardholder, card issuer, merchant, merchant acquirer, card association); RBI Master Directions April 2022 — unsolicited card rule, penalty for unauthorised activation, MITC, 2FA mandate, tokenisation; home loan LTV ratios(80% for ≤₹30L, 75% for >₹75L); disbursal rules — stage-linked, no upfront disbursal for under-construction projects; and foreclosure charges — banned on floating-rate home loans.

Key Facts & References — Chapter 35 at a Glance

RBI Master Directions:Credit and debit cards — issued 21 April 2022

Unsolicited card penalty:2× the charges levied, reversed immediately

Interest-free period:15 to 51 days for credit card holders

Credit card parties:5 — cardholder, issuer, merchant, acquirer, association

EMV Chip + PIN:Mandatory for all new/replacement credit cards

2FA mandate:Two-factor authentication for card-not-present (CNP) transactions

Tokenisation:Actual card details replaced by a unique 'token' per card-device

Max LTV — ≤ ₹30L loan:≤ 80% (risk weight 35%); 80–90% (risk weight 50%)

Max LTV — > ₹75L loan:≤ 75% (risk weight 50%)

Home loan repayment max:Up to 30 years (or retirement/70 years, whichever earlier)

Foreclosure charges:Banned on floating-rate home loans (RBI instruction)

Stage-linked disbursal:No upfront disbursal for incomplete/under-construction projects

NACH dishonour:Criminal complaint under Sec 25, Payment and Settlement Systems Act

Personal loan repayment:36–60 months; higher interest — no collateral

Consumer loan margin:10–20%; hypothecation of article purchased

Credit Card — Introduction & Parties

Free

A credit card is a channel for delivery of credit. It is issued to approved clients for purchase of goods or services from authorised merchant establishments (MEs) on the guarantee of the issuer. The cardholder may pay for all purchases on the due date with no interest (interest-free period: 15 to 51 days), or carry forward the balance by paying at least the minimum amount due — in which case finance charges are levied on the outstanding balance.

35.1.2 The 5 Parties in a Credit Card System

Party	Role
1. Cardholder	Person authorised to use the credit card for payment of goods/services.
2. Card Issuer	Bank/NBFC that issues the credit card and guarantees payment to the merchant.
3. Merchant	Entity that accepts credit cards as payment for goods/services.
4. Merchant Acquirer	Bank/NBFC that contracts with merchants to process their credit card transactions.
5. Card Association	Body (Visa, MasterCard, RuPay) that licenses issuers, sets network rules, and provides settlement services.

Memory hook: C-I-M-A-A — Cardholder, Issuer, Merchant, Acquirer, Association.

35.1.3 Benefits of Credit Cards

To Cardholders

✓Purchase without carrying cash at thousands of merchants.
✓Interest-free credit period of 15–51 days.
✓Cash withdrawals from ATMs up to a ceiling.
✓Proof of purchase through banking channels for dispute resolution.
✓Delegate spending power via add-on cards for family members.
✓Additional facilities — insurance cover, discounts, reward points.

To Merchant Establishments

✓Higher sales — cardholder's unbilled credit increases purchasing power.
✓Assured and immediate settlement by the bank.
✓Avoids cost and security risks of handling cash.
✓National advertising and promotional support from card associations.
✓Development of a prestigious, loyal customer base.

To Banks

✓Better profitability from share of merchant turnover (MDR).
✓New banking relationships with previously unbanked customers.
✓Additional facility for existing clients — cross-sell opportunity.
✓Higher cardholder base improves bank image and network reach.
✓Savings on cash handling, stationery, and clearing workforce.

35.1.4 Disadvantages to Cardholders

✗May result in over-spending beyond repayment capacity.
✗Fraudulent withdrawals possible if lost card is not blocked immediately.
✗Risk of falling into a debt trap if credit limit is used beyond monthly repayment capacity.

Home Loans — Introduction & Key Parameters

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Home loans form the predominant component of retail loans. Banks consider Age, Profile, Repayment Capability (Income), Repayment Track Record, Property Location, and Verification Reports when sanctioning home loans.

Target Group

Salaried employees, professionals, self-employed, businessmen, and NRIs.

Purpose

Purchase of plot for construction, construction of house/flat, repairs and renovation, and in some banks — purchase of house sites.

Quantum of Loan

Based on gross/net monthly income and cost of house. Banks ask for salary certificate (salaried) or IT returns (others) and 12-month bank statement.

Age Criterion

Banks fix lower and upper age limits considering remaining service period (salaried) and income-earning capacity (others).

Repayment Period

Up to 30 years — but not beyond retirement age or 70 years (whichever is earlier). Longer tenure = lower EMI but higher total interest.

Track Record

Credit history and credit score from Credit Information Companies (CICs) are checked. Good repayment record leads to competitive terms.

Security

Mortgage on property purchased/constructed out of the loan. Spouse co-borrower if income is considered; joint property owners added as co-borrowers.

Insurance

Building must be insured against fire, earthquake, floods. Some banks also require life insurance to cover the loan amount (one-time premium).

RBI Guidelines on Credit Card Operations

Members Only

RBI issued Master Directions on issuance and conduct of credit and debit cards on 21 April 2022. Scheduled Commercial Banks (excluding RRBs) with net worth ≥ ₹100 crore may issue credit cards departmentally, through a subsidiary, or in tie-up with another card-issuing bank/NBFC — subject to Board approval. NBFCs registered with RBI can also issue credit cards with RBI's prior approval.

A — Unsolicited Cards (Strictly Prohibited)

▸Issue or upgrade of credit cards without the explicit consent of the recipient is strictly prohibited.
▸If an unsolicited card is issued/activated and billed, the card issuer must reverse all charges and pay a penalty equal to twice the charges levied.
▸Card issuer must have a Board-approved policy hosted on its website.

B — Sanction & Issuance Norms

▸Direct Selling Agents (DSAs) must not make the final credit decision — the card issuer is solely responsible.
▸Banks must assess the total credit limit across all cards held by a customer.
▸Banks/NBFCs are solely responsible for KYC compliance.
▸Most Important Terms and Conditions (MITCs) — standardised by RBI — must be given at marketing stage, application, card issuance (welcome kit), and in all important subsequent communications.
▸EMI conversion to 'zero-cost EMI' must not camouflage an interest component. EMI with interest shall not be presented as no-cost EMI.
▸Credit information shall not be reported to Credit Information Companies (CICs) before the card is activated.

C — Insurance Offers

▸Insurance cover (for lost cards, frauds, etc.) may be offered at the customer's option — not mandatory.
▸Explicit written/digital consent of the cardholder is required, along with nominee details.
▸Cardholder must be given contact details of the insurance company.

D — Types of Credit Cards

▸Co-branded cards — due diligence on the non-bank partner is mandatory to guard against reputation risk.
▸Corporate credit cards — account in company's name, used by employees; liabilities of both clearly specified.
▸Add-on cards — issued to family members of principal cardholder; principal cardholder is liable.

E — Issuance Rules

▸All new and replacement cards must be EMV Chip and PIN enabled.
▸If credit limit is proposed to be reduced, the bank must inform the customer immediately with reasons (via SMS/e-mail, followed by written confirmation).
▸Cancellation must be confirmed within 7 working days of a valid written/e-mail request, provided the outstanding is settled.

F — Credit Card Statements

▸Monthly statement — free of cost — must be dispatched on a predetermined date by post/courier or e-mail, and also available on internet banking.
▸Before reporting a default to CICs, banks must follow a Board-approved procedure that includes sufficient notice to the cardholder.

G — Interest Rates & APR

▸Card issuers must quote Annualised Percentage Rate (APR) separately for retail purchases and cash advances.
▸Late payment charges, their method of calculation, and applicable number of days must be prominently displayed.
▸Bills must be dispatched with sufficient time — at least one fortnight — before interest starts accruing.
▸Monthly statements must prominently display: 'Making only the minimum payment every month would result in the repayment stretching over years with consequent interest payment on your outstanding balance.'
▸No charge may be levied that was not explicitly indicated at the time of issuing the card.

H — Wrongful Billing

▸Banks must ensure wrong bills are not raised.
▸If a customer protests a bill, the bank must provide explanation and/or documentary evidence within 30 days of the complaint.

I — Grievance Redressal

▸Card issuer must constitute a Grievance Redressal Machinery and publicise it widely.
▸Grievance Redressal Officer's name and contact number must be printed on the credit card bill.
▸If not resolved within 30 days, the complainant may approach the Banking Ombudsman.
▸For card-not-present (CNP) fraudulent transactions where 2FA was not in force, the bank must reimburse the customer without demur.

J — Fraud Control & Tokenisation

▸Lost card must be blocked immediately on being informed — FIR formalities can follow within a reasonable period.
▸SMS/e-mail alerts must be sent for every transaction.
▸Two-Factor Authentication (2FA) is mandated by RBI for all card-not-present (CNP) transactions.
▸Tokenisation — the actual card details are replaced by an alternate code called a 'token', unique for each card–device–requestor combination. Tokenised transactions are safer because actual card details are not shared with the merchant.

Home Loans — Purposes, LTV Ratios, Documents & Disbursal

Members Only

35.2.3 Purposes of Housing Loans

I — Acquisition of Land

Finance for purchase of a plot is permitted provided the borrower submits a declaration of intent to construct a house on the plot (using bank finance or otherwise) within a specified period.

II — Construction / Ready-Built House

Finance for purchase/construction of dwelling unit; a second house in the same or another town; a house proposed to be let out on rental basis; an old house being occupied by the borrower as a tenant; and construction to improve slum-area conditions (directly to slum-dwellers on Government guarantee, or through State Governments).

III — Lending to Housing Intermediary Agencies

Term loans to State-level housing boards, public agencies, and housing finance companies for acquisition/development of land and construction projects. The project must be completed within 3 years. Banks may also lend to private builders — linked to specific projects on commercial terms — but not for land acquisition by builders.

Prohibited Purposes

Banks must NOT finance: (a) buildings purely for Government/Semi-Government/Panchayat offices (except where NABARD refinances); (b) public sector entities that are not corporate bodies; (c) any project where bank finance substitutes budgetary resources without a commercial mandate.

35.2.4 Quantum of Loan — LTV Ratio & Risk Weights

Category	LTV Ratio	Risk Weight
Individual Housing Loan ≤ ₹30 lakh	≤ 80%	35%
Individual Housing Loan ≤ ₹30 lakh	80% – 90%	50%
Individual Housing Loan > ₹30L to ≤ ₹75L	≤ 80%	35%
Individual Housing Loan > ₹75 lakh	≤ 75%	50%
CRE – Residential Housing (CRE-RH)	N/A	75%

Stamp duty, registration charges, and other documentation charges are excluded from property cost for LTV calculation. For affordable housing (cost ≤ ₹10 lakh), these elements may be included.

35.2.5 Documents Required for Home Loans

•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 (wherever applicable)

•Valuation report from bank's approved engineer

•Bank statement for last 12 months

•Salary Certificate (salaried applicants)

•IT Returns for 3 years (professionals / businessmen / self-employed)

•KYC documents

After sanction: DPN, home loan agreement, guarantee agreement, building insurance policy, and NACH mandate for EMIs are taken. A processing fee (typically 1% of loan amount) is charged. Dishonour of NACH payment authorises the bank to file a criminal complaint under Section 25 of the Payment and Settlement Systems Act.

35.2.6 Disbursal Rules

▸Statutory Clearances First: Disbursal must happen only after all government/statutory/regulatory approvals are obtained, even if the loan is already sanctioned.
▸Stage-Linked Disbursal: For under-construction properties, disbursal must be linked to construction stages — no upfront full disbursal for incomplete/greenfield housing projects.
▸Builder-Financed EMI Schemes — Risky: Schemes where the builder pays the borrower's EMI during construction expose the bank to risk of project delays, builder defaults, and lower credit ratings of borrowers. RBI has advised against these.
▸Government/Statutory Authority Projects: Disbursal may follow payment stages prescribed by the authority (even if not construction-linked), provided such authorities have no history of project non-completion.

35.2.7 Foreclosure Charges / Pre-payment Penalty

RBI has instructed banks not to charge foreclosure charges or pre-payment penalties on home loans on a floating interest rate basis. This was introduced because banks were reluctant to pass on the benefit of falling interest rates to existing borrowers.

Personal Loans & Consumer Loans

Members Only

35.3 Personal Loans (Salary Loans)

Target Group

Permanent employees with minimum 3 years of service in Govt./quasi-Govt./reputed corporate organisations. Exact minimum service varies by bank.

Purpose

Marriage, education, medical expenses, family functions, and any other household needs.

Eligible Amount

Multiple of gross/net monthly salary. Banks ensure minimum take-home pay is maintained after the proposed EMI.

Security

No collateral. Some banks recover EMI directly from employer through a mandate/undertaking from the employer.

Interest Rate

Higher than secured loans — the absence of collateral is compensated by a higher rate.

Repayment Period

36–60 months (3–5 years).

Processing Fee

Typically a percentage of the loan amount, charged upfront.

Documents Required

Proof of employment, salary certificate, DPN, salary loan agreement, and guarantor agreement (if applicable).

35.4 Consumer Loans

Parameter	Details
Target Group	Salaried, pensioners, professionals, self-employed, and others with regular income.
Purpose	Purchase of consumer durables / white goods — TV, VCR, air conditioners, refrigerators, personal computers, vehicles, etc.
Eligible Amount	Based on cost of article and margin to be brought by borrower. Minimum take-home pay after EMI must be ensured.
Security	Hypothecation of the article purchased out of the bank loan.
Margin	10–20% of article cost.
Repayment	3 to 5 years.
Documents	IT returns/Form 16 (2–3 years for professionals); salary certificate (3 months); quotation from dealer; 1-year bank statement; debit mandate.
Post-Sanction	DPN, hypothecation agreement, guarantee agreement, processing fee, debit mandates (NACH) collected.

Personal vs Consumer Loan — Key Difference

Both are collateral-free in spirit. However, consumer loans involve hypothecation of the article purchased — technically creating a charge over the asset — whereas personal (salary) loans carry no security at all, which is why their interest rates are higher.

Chapter Summary & Flashcards

Members Only

Chapter 35 in 6 Lines

A credit card system has 5 parties — Cardholder, Card Issuer, Merchant, Merchant Acquirer, and Card Association (Visa/MasterCard/RuPay).
RBI Master Directions (April 2022): unsolicited cards are prohibited; penalty = 2× charges levied; all new cards must be EMV Chip + PIN; 2FA is mandatory for CNP transactions; tokenisation replaces card details with a unique token.
Home loan LTV ratios: ≤80% for loans up to ₹30L (35% risk weight); ≤75% for loans above ₹75L (50% risk weight). Foreclosure charges are banned on floating-rate home loans.
Disbursal of home loans must be stage-linked to construction; upfront disbursal for incomplete/under-construction projects is not permitted by RBI.
Personal (salary) loans are collateral-free, repaid over 36–60 months, at higher interest rates; quantum is a multiple of gross/net monthly salary.
Consumer loans carry hypothecation of the article purchased, a 10–20% margin, and a 3–5 year repayment period; target group includes salaried, pensioners, and professionals.

Flashcards — Chapter 35

1. How many parties are involved in a credit card transaction?▼

5 — Cardholder, Card Issuer, Merchant, Merchant Acquirer, and Card Association (e.g., Visa, MasterCard, RuPay).

2. What is the interest-free credit period for credit cards?▼

15 to 51 days from the date of purchase.

3. What RBI penalty applies if an unsolicited credit card is activated and billed?▼

The card issuer must reverse all charges AND pay a penalty equal to twice the charges levied.

4. What type of card is mandatory for all new and replacement credit cards?▼

EMV Chip and PIN enabled cards.

5. What does MITC stand for in credit card context?▼

Most Important Terms and Conditions — standardised by RBI, to be given at marketing, application, card issuance (welcome kit), and in subsequent communications.

6. What is tokenisation in the context of credit cards?▼

Replacement of actual card details with an alternate code called a 'token', unique for each card–device–token requestor combination. Actual details are not shared with the merchant.

7. What is 2FA and for which credit card transactions is it mandated?▼

Two-Factor Authentication — mandated by RBI for all card-not-present (CNP) transactions.

8. If 2FA was not in force and a CNP transaction is fraudulent, who bears the loss?▼

The bank — it must reimburse the customer without demur.

9. Within how many days must a bank confirm credit card cancellation?▼

Within 7 working days of a valid written or registered e-mail request (provided the outstanding is settled).

10. Within how many days must a bank address a wrongful billing complaint?▼

30 days from the date of complaint.

11. What is the APR disclosure requirement for credit cards?▼

Card issuers must quote Annualised Percentage Rate (APR) separately for retail purchases and cash advances, with examples.

12. What must every monthly credit card statement display prominently?▼

A legend that making only the minimum payment every month would result in the repayment stretching over years with consequent interest on the outstanding balance.

13. What is the LTV ratio for an individual housing loan up to ₹30 lakh?▼

Maximum 80% (risk weight 35%). For LTV between 80–90%, risk weight is 50%.

14. What is the LTV ratio for an individual housing loan above ₹75 lakh?▼

Maximum 75% (risk weight 50%).

15. What is the maximum repayment period for home loans?▼

Up to 30 years — not beyond retirement age or 70 years, whichever is earlier.

16. Can banks charge foreclosure charges on floating-rate home loans?▼

No — RBI has instructed banks not to charge foreclosure charges or pre-payment penalties on home loans on a floating interest rate basis.

17. What is the rule on upfront disbursal for under-construction housing projects?▼

RBI prohibits upfront disbursal for incomplete/under-construction/greenfield housing projects. Disbursal must be stage-linked.

18. What action can a bank take if a NACH payment for home loan EMI is dishonoured?▼

File a criminal complaint under Section 25 of the Payment and Settlement Systems Act.

19. What is the repayment period and key feature of personal (salary) loans?▼

36–60 months; no collateral — higher interest rate compensates for the absence of security.

20. What security is taken for consumer loans?▼

Hypothecation of the article purchased out of the bank loan (e.g., TV, refrigerator, vehicle). Margin: 10–20%. Repayment: 3–5 years.

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