Loan beyond 80% of home value, not possible!!!

Reserve bank of India (RBI) has introduced new guidelines for home loans. The central bank has made it tougher for property loan valuing more than 75 lac.

The RBI has said that the banks can provide loan only 80 percent of the cost of property, rest 20 percent has to be necessarily arranged by the borrower. These new guidelines are introduced by the bank, considering the excessive flow of money from the banks in real estate sector.

According to a notification issued by RBI "In order to prevent excessive leveraging, the LTV (Loan to Value) ratio in respect of housing loan hereafter should not exceed 80 per cent," however the central bank said that the banks can provide upto 90 pecent loan to small housing loan upto 20 lacs.

Reacting to the revised policy, some banks like ICICI and HDFC have already withdrawn their teaser rate scheme while SBI will follow the renewed guidelines from next month.

LICHF says all loan approval norms duly followed

Central Bureau of Investigation arrested many top officials of financial services firms as well as public sector banks yesterday in pertanance to the housing finance scam. Amongst them was CEO of LIC housing finance (LICHF), Ramachandran Nair .

"All procedures and due diligence consistent with board approved guidelines have been adhered to in approving the loans, as has been followed in the past, by the competent authority," LIC Housing Finance said clarifying its stand.

Other than Nair, the arrested officials include Naresh K Chopra, Secretary (Investment), LIC, R N Tayal, General Manager of Bank of India (Delhi), Maninder Singh Johar, Director (Chartered Accountant) of Central Bank of India, Venkoba Gujjal and Deputy General Manager of Punjab National Bank (Delhi).

CBI also said that it has arrested Rajesh Sharma, CMD of Mumbai-based firm Money Matters Ltd and two of its employees -- Suresh Gattani and Sanjay Sharma.

LIC Housing Finance said, "All the loans are secured by the underlying assets to the full satisfaction of the approving authority. All the loans have been approved with relevant regulatory norms."

"As on date all the loans in question are performing assets," added LICHF.

CBI spokesperson R K Gaur commented on the issue saying that, "Officers of top management and middle management of various public sector banks and financial institutions viz. BoI, Central Bank of India, PNB, LIC and LICHF were receiving illegal gratifications from the private financial services company who were acting as mediators and facilitators for corporate loans and other facilities from financial institutions."

"They were also gathering confidential business information from financial institutions," added Gaur.

IDBI Bank and State Bank of Mysore raised lending rates

IDBI Bank and State Bank of Mysore have raised lending interest rates.

IDBI Bank is the first bank to raise its interest rates after the Reserve Bank of India (RBI) raised key policy rates by 25 basis points. The bank has raised its term deposit rates by 10-50 basis points across maturities to attract customers.

Bank has also revised its benchmark prime lending rate by 25 basis points to 13.5%. The new rates are effective from November 4.

IDBI Bank Chairman and Managing Director R M Malla said RBI has pointed to the issue of negative returns on deposits. He added, bank is willing to give better returns to small depositors.

State Bank of Mysore has raised its base rate by 25 basis points to 8%. According to bank statement, the revised rate has come into effect from November 1.

Central Bank to provide loan to rickshaw pullers

Central Bank of India will be providing finance for rickshaw pullers. Bank CMD S Sridhar will launch a rickshaw finance program in Uttar Pradesh capital on November 9.

Through this program the aegis of Rickshaw Federation plans to provide loans to rickshaw pullers to own their rickshaw units and thereby bringing them under the formal banking system. Sridhar will meet the state government officials regarding this.

Corporation Bank launches three new loan products in Mangalore

Corporation Bank has launched three products in Mangalore - Corp Shubha Vivah (loan scheme to meet expenses related to marriage), Corp Ghar Shobha (loan scheme for house renovation/extension/furnishing) and Corp SB Smile (flexi savings deposit scheme for micro traders). The products were launched by P Shivshankar, chief executive officer, zila panchayat.

Narendra Singh, executive director of the Bank said, “Corporation Bank has always been responsive to the social realities and needs. We understand the financial difficulties faced by parents at the time of marriage of their children, especially daughters Corp Shubha Vivah is specially designed to take care of the entire marriage expenses”.

While explaining about the Corp SB Smile Scheme he said, “Hawkers and street vendors are an important link in the overall supply chain in our marketing system. But, they are not formally integrated into the system. Their banking needs are limited. Owing to the limited exposure to education, they are not comfortable with the banking system and hence they try to fulfill their banking needs outside the system with a daily collection account or sometimes a term deposit. The Bank has come up with a novel scheme Corp SB Smile, especially focused to cater to the needs of this segment.”

Narendra Singh said, “Corp Ghar Shobha is designed as a complete housing solution, providing financial assistance for repair, renovation, extension, improvement, and furnishing of house.”

Products

Corp Shubha Vivah loan has been designed specially to take care of the expenses related to marriage. The loan will cover the entire expenses related to marriage such as shamiana, hall booking, food and catering, purchase of jewelry, clothes, etc. The loan repayment period is 7 to 15 years and at present bank is offering loan at an interest rate of 12% (4.25% above the base rate).

Corp Ghar Shobha is a loan designed to provide complete housing solution. The loan covers cost of repairs/renovation/extension/improvement/furnishing of house/flat. This loan also covers consumer durables like refrigerator, television, washing machine, laptops, digital cameras etc. In the metro centers the maximum loan amount is Rs 10 lac. The loan can be repaid in the form of EMI in maximum period of 10 years. At present the rate of interest is 10% (2.25% above the base rate).

The third product Corp S B Smile is a loan specially designed Flexi Savings Deposit with Sweep facility for Micro Traders. Under this scheme an account can be opened with an initial deposit of Rs 200. When in Corp SB Smile account balance touches to Rs 6000 the system will automatically transfer in units of Rs 5000 in the SB account

Govt proposes to include loan products in financial inclusion program

The government and Reserve Bank of India has been pushing public sector banks to adopt financial inclusion program in order to reach out to the unbanked segments in the country. Earlier under financial inclusion program banks were to provide basic banking facilities like opening accounts, issuing smart cards for transactions, now government is planning to include loan products. This was stated by Department of Financial Services Secretary R Gopalan. Around 10 PSU banks in the South including Indian Bank, Andhra Bank, Corporation Bank, Canara Bank, Indian Overseas Bank, Syndicate Bank, Vijaya Bank, State Bank of Mysore, State Bank of Tranvancore and State Bank of Hyderabad are carrying out financial inclusion program which was reviewed by Gopalan.

He said, “Corporation Bank is already undertaking such initiatives by opening credit lines to unbanked segment customers to start small businesses like saloon and cycle shops by granting small value loans of Rs 10,000 to Rs 15,000. This can be replicated by all banks after the ministry approves it at the national scale. It works somewhat like a kisan card.”

He said as per the finance ministry’s budget proposal to reach out to 72,300 habitats having population of 2,000 people, up till now the review of FIP implementation in Western and Eastern region has been done. He added in south, approximately 30,000 habitat locations were identified for FIP implementation.

“We are focusing on providing facilities including deposits, withdrawals, remittances, micro-pension, micro-insurance in the identified FIP pockets.”

He told the projected regulatory framework on microfinance institutions is in final stage and the department has getting feedback from public and other stakeholders. However, he said, regulation will not include interest rates as in the Indian financial markets the interest rates are deregulated.

He said, the banking sector is prepared for huge HR challenge as about 3-4 lakh staff is expected to retire in the next three to four years. He added, “New age banking workers has to reorient themselves for new situation. In the modern day banking, more work will be handled at the back offices with conventional banking adopting Business Process Re-engineering at the front-end to stay relevant. We need people with indepth skills in areas like Risk Management, Forex management, Treasury Management, Credit appraisal, etc to meet the demands of the modern era banking."

APGVB ‘Suvidha Vikas’ boon for poor borrowers

Andhra Pradesh Grameena Vikas Bank (APGVB), a government owned bank has a debt swapping scheme called ‘Suvidha Vikas’ for poor people in Warangal. But poor borrowers do not have awareness about the scheme due to which it has remained under utilized by these borrowers who go to private micro-finance institutions (MFIs) for help.

Although loan borrowers go to MFIs for help, the borrowers of Warangal unit of APGVB are in safe hands.

Suvidha Vikas’ loan book show loan of up to Rs 5 lakh given to self-help groups (SHG) (without any security) and monthly installment repayment, as against the weekly installment system followed by private MFIs.

Except for Chennaraopet, Gudur, Tadwai, Dornakal and Cheriyal mandals, the scheme is doing well in rest of the 45 mandals of Warangal.

Moreover, besides Warangal, the APGVB scheme is running in four other Telangana districts of Medak, Mahbubnagar, Nalgonda and Khammam and three more districts in Andhra.

The sources informed, APGVB Warangal is providing services to members of 14,590 SHGs under Suvidha Vikas, each group having an average 12 members. M. Balathimma Reddy, manager (advances), APGVB, Warangal, who looks after Suvidha Vikas said, “In the last two months, we have seen a sudden rise with 192 new SHGs, who constitute the majority of loan borrowers from private MFIs, being added in Warangal.”

Although APGVB officials are not able to market their loans efficiently as the agents employed by private MFIs do through sweet-talk, but APGVB charge low interest on loans as compared to what is charged by private MFIs.

Mr Reddy said, “As against the high rate of interest charged by MFIs, we charge only 14 per cent interest rate. Of this, the state government pays on 5 per cent interest rate as subsidy under Pavala Vaddi scheme to the poor borrowers.”

According to sources, there is a major drawback with Suvidha Vikas scheme, that it does not completely takeover loans of borrowers from private MFIs instead it only provided the SHG another loan to pay-off the first loan.

A. Vinayak Reddy, professor of Economics, Kakatiya University said, “As of now, Reserve Bank of India has not given permission to public sector banks (PSUs) to take over loans from MFIs.” Mr Reddy further said as the state government provides support for the setting up of SHGs, so it becomes the primary responsibility of the government to provide them loans when they require.

Loans to get costlier as banks hike base rate

Some banks have raised their base rates during quarterly review. The banks that have raised lending rates include Punjab National Bank, IDBI Bank, Allahabad Bank and Axis Bank. The rates have been raised due to increase in borrowing costs.

This year in July all the banks shifted to base rate system since then this is the first time banks are changing the benchmark. Few banks have raised their deposit rates – SBI, PNB and IDBI Bank.

SS Ranjan, CFO, State Bank of India told bank might revise base rate after mid-November. He said, “While the cost of deposits has gone up we can absorb the cost for some more time.”

MV Nair, CMD, Union Bank of India said, “We will review our base rate towards the end of October based on our funding cost.”

Bank of India’s asset and liability committee will be meeting on October 4 to decide on a base rate hike. The commercial banks like PNB, IDBI Bank and Allahabad Bank have hiked their base rate by 50 basis points to 8.5%.

Axis Bank has raised its base rate by 25 basis points to 7.75%. Few weeks back the Reserve Bank of India (RBI) had raised its key lending, the repo rate, by a quarter percentage point and the borrowing rate by half a percentage point to rein in rising inflation. However there will be no immediate impact on the existing loan borrowers with the hike in base rate as about 70% of the borrowers loans are linked to the BPLR. SBI has not revised its base rate, it is unchanged at 7.5%.

Earlier, on July 27, 2010 RBI had hiked its key policy rates as a result SBI and ICICI Bank raised their benchmark prime lending rates (BPLR) by 50 basis points each. PNB had hiked its BPLR by 75 basis points.

However, the revised benchmark PLR of SBI is 12.25% while that for ICICI Bank is 16.25%. to bring more transparency and effective transmission of policy rates RBI directed all banks to introduced base rate system and from July 1, 2010.

The two big commercial banks PNB and SBI have raised their deposit rates across maturities by 25 to 75 basis point and 25 to 50 basis points across maturity, respectively. IDBI Bank has raised its deposit rates by 15 to 50 basis points.

Meanwhile, SBI has extended its teaser home loan scheme till December 31, 2010, hence the new home loan seekers can avail the opportunity.

RPCB charges higher interest from loan borrowers who consume tobacco

Rajkot People's Cooperative Bank has derived an innovative idea to motivate people to say no to tobacco. It is the sole bank to take a lead in ‘No tobacco’ campaign from the banking sector. In Gujarat it is the first bank to enforce such a policy that discourages tobacco usage at all levels of operations.

Founder Chairman of Rajkot People's Cooperative Bank (RPCB) Shamji Khut told PTI, "As a policy, we charge one per cent higher interest from loan seekers who happen to be tobacco chewers."

He said, "The bank's board had passed a resolution to this effect around two and a half years ago, and since then it’s in force."

Khut said, "Till now only one customer has refused to take loan from us stating that I cannot quit tobacco chewing even if you charge me two per cent higher interest."

It has been over a decade the bank started operations in Rajkot district of Gujarat, RPCB since its set up has implemented a clause that empowers the management to terminate the services of employees who have a habit of taking tobacco. Khut said, "The bank does not recruit any persons who have any kind of tobacco addiction. We at present have strength of 74 employees."

Khut added, "As a rule we can terminate the service of an employee if he is found consuming tobacco in any form. Even a board of director has to submit his resignation if found consuming tobacco."

Corporation Bank launches Grand Festival Offer on loan and deposit products

Corporation Bank has launched Grand Festival Offer on loan and deposit products. Mr. Murugesh R Nirani, Honble Minister for Large and Medium Scale Industries, Government of Karnataka launched the Festival Bonanza offer in Bangalore.

On the occasion Mr. Ramnath Pradeep Chairman & Managing Director of the Bank, Mr. Asit Pal and Mr. Narendra Singh, Executive Directors, Mr. U B Bhat, Chief General Manager, Mr. C G Pinto & Mr. S M Swathi, General Managers, Other General Managers and Executives of the Bank were also present.

Under this festive offer bank is offering special interest rate on Home and Vehicle loans - Corp Home Smart and Corp Vehicle Smart. This special scheme will be for a limited period from 21st September 2010 to 31st December 2010.

Under Corp Home Smart Scheme, for loans up to Rs30 lakhs for the floating tenor, the bank is offering 7.75% interest for the first year and for the next two years the rate of interest will be 8.25% p.a. Processing charges have been fully waived.

Under Corp Vehicle Smart Scheme, for the first year the interest rate is 8% p.a. and 50% of the processing charges have been waived.

In the deposits segment bank is offering a new short-term deposit scheme called "Corp Diamond” for a period of 275 days. The interest rate of 7% (simple interest) per annum is being offered.

This interest rate will be applicable for a minimum deposit of Rs 500/- in case of Rural & Semi Urban Branches, in case of Urban, Port Town & Metro Branches the minimum amount is Rs 1000/- and has been restricted to less than Rs 5crore. This new offer will be effective from 21-09-2010 and will be applicable for a limited period of 3 months. The senior citizens will get an additional interest rate of 0.50%.

The bank is also offering a unique hi-tech, hassle-free Savings Bank account – Corp Classic under the festive bonanza. This unique scheme combines the high liquidity of a savings account and the flexibility of a term deposit.

In this account bank has reduced the minimum balance from Rs. 25,000/- to Rs. 15,000/-. The surplus over and above the minimum balance of Rs15,000/- will be converted into Term Deposits in units of Rs 1,000/- each.

PSU banks introduce festive offers for loan borrowers

A month’s time is left for festival season to start and banks have started introducing new schemes to attract more customers. Punjab National Bank (PNB), Allahabad Bank, Uco Bank and Bank of India have launched festival offers, such as loans at concessional rates and waiver of processing and documentation charges. These offers will be available till December end.

In its festive offer PNB is offering home loan at 8.5% - a teaser rate to attract new customers. Under this scheme the concessional rate of 8.5% will offered for three years for housing loans up to Rs50 lakh. Currently, lender is offering 9.25% for loans up to Rs30 lakh with a repayment period of 5 years, and for loans above Rs30 lakh bank is offering interest rate of 10% for similar maturity. For new car loan borrowers also bank is offering a rebate of 0.5 per cent under the fixed option.

Another public sector bank UCO has waived the processing and documentation charges. Bank will offer new car loans at 10.5% for the first three years, with an additional concession of 0.5% in cases where full collateral coverage or salary tie-ups were available, and for doctors and medical practitioners.

S . Srinivasan, general manager, finance, UCO Bank said, "Festive season is a good time to attract new customers as people buy new houses and vehicles."

Allahabad Bank is offering an interest concession of up to 1% on loans under its festive offer. The interest concession offered on housing loans under the floating rate scheme will vary from 0.25% to 1%, but for fixed rate scheme the new borrowers will get a concession of 0.50% to 1.75% for a limited period.

Bank of Indian has introduced a different offer – a deduction of Rs7per gram of gold coin and most probably waive off processing charges.

Policyholders can avail loan against ULIPs

The Insurance Regulatory and Development Authority (IRDA) has allowed life insurance companies to give loans against unit-linked insurance plans (ULIP), this will help those policy holders who are in need of short-term funds. However some companies have started offering this feature along with their new products. Before this, insurers used to sanction loans only against traditional plans, barring term insurance policies.

I Sambasivarao, appointed actuary, Star Union Dai-ichi Life Insurance told, “Earlier, policyholders were allowed to make partial withdrawals from their ULIPs after three years. Now, the lock-in period has gone up to five years, which means that policyholders who are in need of short-term funds will not have access to their money till then. Therefore, a need to offer the loan facility was felt. ” On Thursday Life Insurance launched its two new ULIP products with this option. Under these plans, policyholders can avail loan after completion of three policy years at an interest rate of 10% per annum, with half-yearly compounding. The loan repayment can be done during the policy term, but partial withdrawal from ULIP is not allowed unless the loan is closed.

Meanwhile LIC is providing loans against its traditional policies at 9% and the repayment of loan is to be done on a half-yearly basis. This year, in June the insurance regulator had issued a circular in which it had introduced sweeping changes in the ULIP charge structure, the insurance regulator had also specified the norms for sanctioning the loan. The maximum loan amount was set at 40% of the net asset value in ULIPs where equity accounted for over 60% of the total portfolio. In case of policies the limit was set at 50% where debt instruments accounted for more than 60%.

P Nandagopal, CEO of IndiaFirst Life Insurance said, “The rationale behind permitting the loan facility is to prevent policyholders in need of short-term funds from surrendering the policy. They can take a loan against the policy instead and stay with it through the original tenure.”

IndiaFirst Life Insurance Company will give loan against its ULIP products before the completion of five years. The interest rate on loan is benchmarked to the SBI’s Base Rate + 7%.

Both the companies do not give loans after five years, as the policyholder can avail the partial withdrawal facility then, in case there are any outstanding dues, are cleared.

Change in base rate won’t affect customers having fixed loan rate contract

The Reserve Bank of India (RBI) has clarified that banks will have to honor a fixed rate contract, even though the interest rates are raised in future. Some banks had doubts over introduction of fixed rate home loans.

Even customers of some banks also had doubts in case lender’s base rate rose above the contracted fixed rate, the bank might raise loan rates as per RBI guidelines no bank can lend below the new benchmark rate.

Some of the big commercial banks like Punjab National Bank (PNB), State Bank of India (SBI) and ICICI bank are offering special home loans scheme on fixed rate, so customers of these banks are worried that they might have to pay higher rate of interest in case lenders raised base rate as no bank is allowed to lend below the base rate.

RBI has also clarified that at the time of signing a fix rate loan contract if the lending rate (under the special scheme) is higher than the base rate, banks should not charge higher rate even if they raise their base rate in future.

For instance, PNB is offering a fixed rate loan of 8.5% on home loan for the first three years. At present bank base rate is 8-9% after a year, if bank raises its base rate, in such case RBI has said that bank cannot charge customers (who have opted for 8.5% three-year fixed rate scheme) interest rate more than 8.5% in the first three years.

The country’s largest lender SBI is offering 8% for the first year and 9% for the second and third year under its special scheme. SBI scheme is upto September, PNB’s scheme is till December 10.

However, RBI has instructed banks that if they hiked or lower base rate, that increase or cut in rates should be passed on to the new customers under the special home loan scheme. So, in case PNB raises its base rate, to suppose 9% in October, the customers who have availed the loan at a fix rate of 8.5% before October, need not have to pay more but for the new customers who avail fix rate home loan from October, the bank will charge a revised rate and cannot continue to offer 8.5% rate.

PNB has recently launched its festive loan offer and is keen to offer a fix rate scheme therefore, the lender asked for a clarification from RBI on this issue. Under the special scheme PNB is offering fix rate offer on loans up to Rs 50 lakh and from the fourth year onwards, the bank will charge home loan rate that is prevailing at that point of time for all its customers.

State Bank of Indore has raised its BPLR by 50 bps

State Bank of Indore has raised its BPLR by 50 basis points which will be 13.25 per cent. Thus home, auto and corporate loans will become expensive for the existing borrowers.

Earlier the parent bank State Bank of India (SBI) had raised its BPLR by 50 basis points to 12.25 per cent. Its new rates came into effect from August 17.

SBI has informed that the merger process of State Bank of Indore with SBI will start from August 26. Therefore the entire undertaking of State Bank of Indore will be transferred to and vested in State Bank of India from August 26.

On July 28, 2010, the government had issued the 'Acquisition of State Bank of Indore order 2010'. It said, as per the order the process of amalgamation will begin from the 30th day from the date of order that is August 26.

The SBI board had given its approval last year following this Centre also given an in-principle approval. SBI will have a 98 per cent stake in State Bank of Indore.

SBI has already made an announcement of swap ratio of 34:100 for the merger, thus SBI will be giving 34 shares for every 100 shares of State Bank of Indore held by minority shareholders.

Hence SBI will issue up to over 1.16 lakh shares of face value of Rs 10 each to minority shareholders of State Bank of Indore.

After this merger, there will be only five associate banks of SBI-- State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Among these, the State Banks of Bikaner and Jaipur, Mysore and Travancore are listed companies.

How to increase loan eligibility

While sanctioning loan to a borrower, banks check the income statement of the person in order to assess the repaying capacity of the individual and also reduce chances of risk.

There are some points which are taken into consideration for loan eligibility:

People with steady jobs and constant income are mostly preferred rather than people who frequently change jobs. To people whose retirement is close bank don’t prefer to give long tenure loans. However banks prefer young borrowers but applicant who have default history, credit score is poor, then there chance of getting loan minimizes. To some extent education also have bearing on loan eligibility. In case loan borrower is a senior citizen with sound financial position then banks take into consideration this factor while sanctioning loan.

The eligibility for loan can be enhanced by clubbing your income with that of your spouse, father, mother or son. If husband and wife apply for a joint loan, their combine income the eligibility will become double. Moreover co-owners will be eligible for tax benefits separately on the home loan repayments in proportion to their shares in loan liability.

Managing finances is also one of the factors to increase loan eligibility. If you have cleared previous debts then you will have funds for the repayment of the new loan you plan to take or have taken. Clearing of credit card payments, loan repayments will make you eligible for a greater loan amount.

In case of home loan you can increase the eligibility by opting for long tenure as this will reduce the monthly EMI burden.

Borrowers still have to decided whether to switch to new base rate system

Some of the banks have increased their benchmark prime lending rate (PLR) floating rate, on which they used to lend prior July 1, therefore the borrowers say they have to yet think on whether they should shift the loans to the new base rate system.

According to bankers the borrowers, who find that the rates offered under the base rate system are favorable and less volatile, would not think to move over to the new base rate system.

KR Kamath, CMD of Punjab National Bank, said, “Previous loans that are linked to PLR will get costlier. Hence, borrowers who feel that the hike in the rate will adversely impact them can shift to the base rate system”.

Recently PNB, IDBI Bank and Union Bank of India have raised their PLR rates they offered to their prime borrowers, thus the rates linked to rate will be more expensive.

PNB has raised its PLR to 11.75 per cent from 11 per cent, while Union Bank has increased it to 12.25 per cent from 11.75 per cent. IDBI Bank raised its PLR by 50 basis points. These banks have set their base rate at 8%.

The PLR rates are the rates offered by the bank to its best borrowers where loans can be offered at rates lower than benchmark rate, while the base rate system is rigid as banks cannot give loans below the base rate.

All floating rate loans will be affected by the raise in PLR but the borrowers of home loans will get impacted the most. PNB is offering home loan at 8.75 per cent for a 5 year tenure, 9 per cent for loans of 5-10 years, 9.25 per cent for 10-20 years and 9.5 per cent for above 20 years for Rs 20 lakh linked to its base rate.

Union Bank has set its floating rate loans up to Rs 30 lakh at 8.5 per cent for a 5-year loan (base rate plus 0.5 per cent), it is 8.75 per cent for loans of 5-15 years and 9 per cent for 15-20 years. IDBI Bank under the new regime is offering floating rate loan of up to Rs 20 lakhs at 8.5 per cent, Rs 20-30 lakhs 8.75 per cent, Rs 30-50 lakhs 9 per cent and above Rs 50 lakhs is 9.25 per cent.

CS Jain, head, personal banking, IDBI Bank said, customers should decide whether they want to move their loans to the base rate system, especially as it is more stable.

Jain said, “Customers would now have to decide whether to exercise the option provided by the RBI. This system is theoretically less prone to fluctuations when compared to the PLR system where banks keep adjusting rates frequently.”

Kamath added PNB will review its base rate quarterly. He said, “Our base rate would be reviewed after every quarter. One of the inputs towards this will be our cost of deposits. We have also raised our deposit rates by matching amount to give our customers a fair deal.”

According to Ashish Jindal, regional director (north), Knight Frank India for home loan borrower’s base rate is more beneficial.

He said, “I feel that borrowers would be better off under a more transparent base rate system. The previous system was anything but transparent where the benefits were often not passed on to the borrowers.”

Banks asked to speed up financing of over 59,000 projects under PMEGP

Banks have been asked to speed up the disbursal of loans under the Prime Minister's Employment Generation Programme (PMEGP). The government said banks should ensure that they meet the set target of financing over 59,000 projects in the current fiscal.

Minister of State for Micro, Small and Medium Enterprises Dinsha Patel said, "I request all the CMDs of banks to issue policy circulars to the financing branches to ensure fulfillment of the targets allocated."

At National Workshop on the Prime Minister's Employment Generation Programme Patel said, for the current fiscal, the ministry has set a target of implementing 59,714 projects under the PMEGP with margin money assistance of Rs 836 crore which will generate employment for 5.97 lakh persons.

The minister informed that up till now only 10 per cent of the loan amount has been disbursed for this financial year. He said, it is important to bring Khadi and Village Industries Commission (KVIC) to every village.

Under the scheme, from the total amount of loan to be disbursed, 15% has been sanctioned for scheduled castes, while 7.5 per cent will be for scheduled tribes, 27 per cent for other backward classes, 5 per cent for minorities and 30 per cent for women.

The scheme was launched in 2008, since then around one lakh projects have been sanctioned and about 10 lakh people have been provided jobs.

However under PMEGP scheme urban and rural entrepreneurs in the general category have also been provided a subsidy of 15% and 25% on the project cost while the urban and rural businessmen of the weaker sections of society have been provided a 25 per cent and 35 per cent subsidy.

The KVIC is the nodal agency responsible for the implementation of PMEGP, set the targets for its field officers and the Khadi and Village industries boards of various states.

At the workshop an agreement was signed between Union Bank of India and KVC for a 'one bank, one nodal branch' concept, under this agreement bank will be coordinating the operations of its branches across the country through a single nodal branch.

Southern states to seek direct sanction of loans to tenant farmers and no collateral security on loans

The southern states want the bank loans to the tenant farmers should be directly sanctioned and no collateral security should be taken from small and micro enterprises in the state for giving loan. The southern states finance ministers conference is going to be held on July 20 and the Chief Minister K Rosaiah told that the state will taking up this agenda, to arrange for sanction of loans directly to the tenant farmers with suitable guidelines so that they can get loans at 7 per cent interest and other benefits including crop insurance, with Union finance minister Pranab Mukherjee, who will be attending the meet.

The chief ministers or finance ministers of the southern states including Andhra Pradesh, Tamil Nadu, Karnataka, Kerala and Union Territories of Pondicherry, Andaman and Nicobar Islands and Lakshadweep will be attending the meet.

All the CEOs, CMDs of public sector banks and financial institutions, Reserve Bank of India deputy governor and NABARD chairman will also attend the meeting.

Rosaish reviewed the arrangements and issues with the chief secretary S V Prasad, special chief secretary (finance) G Sudhir and other officials, to be taken up in the meeting.

The chief minister told that his main focus will be on getting loans without collateral security for micro, small and medium enterprises (MSMEs). He told a certain percentage of bank loans be given to MSME sector under the Credit Guarantee Trust.

Rosaiah added that he will ask for 2% interest subvention for the loans that were rescheduled due to floods and drought in the state also for waiver of the service charge, being collected on SMART cards of NREGS beneficiaries.

In a press release, the CMO stated in the meeting the financial issues confronting the states and the will also be taken up, also the CMDs of public sector banks and Union finance minister will respond to their queries and problems.

The other issues to be taken up in the meeting include state wise flow of credit and credit related parameters like agriculture credit, MSME credit, housing and education loans, credit to weaker sections and minority communities and CD ratio etc.

Also, the progress of Centrally sponsored schemes like Swarnajayanti Gram Swarogar Yojana (SGSY), Swarna Jayanti Shahari Rozgar Yojana (SJSRY), Prime Minister's Employment Generation Programme (PMEGP), revival package for short term cooperative credit structure, implementation of Aam Admi Bima Yojana and implementation of co contributory pension scheme by the states for unorganized sector under the Swavalamban Pension Scheme of the Government of India will be part of the agenda in the meeting.

SBH extended special home and car loans rates

After the two big lenders the State Bank of India and HDFC bank, State Bank of Hyderabad has extended its special interest rates for home and car loans.

The bank said the interest rates of home loans for first year will remain at 8.5% (fixed) and for the second and third years for loan up to Rs 50 lakh it would be offering 9.25% (floating) further for the second and third years for loans above Rs 50 lakh it is offering 9.5% (floating).

The bank will link the rate to base rate from the fourth year onwards which will be 9.75% for loans up to Rs 50 lakh and for loans above Rs 50 lakh the rate will be 10.75%.

SBH has set its base rate at 7.75%.

On car loans bank is offering interest rate of 8.5% (fixed) for new cars for the first year and for second and third years it is offering floating rate at 10.5%. Thereafter from fourth year onwards, bank will link the rate to base rate which will be 11.5% for loans up to Rs 5 lakh and for loans above Rs 5 lakh the rate will be 11.25%.

LIC Housing Finance introduced three loan products with special rates

With the introduction of base rate system for loans change in market home loan market is expected. Anticipating the change in home loan market LIC Housing Finance Ltd. has announced three different products offering various options to the customers.

1. Floating Rate: New home loan borrowers who prefer Floating rates ab-initio for them the company is offering special rates of 8.75% for loans up to Rs 1.50 crore. Before this special rates were offered at 9.75% for loans above Rs 75 lakhs up to Rs 1.50 crores.

2. New Fix-O-Floaty: Home loan borrowers who want to go for short term fixed rate, company is offering the new Fix-O-Floaty loans at competitive rate of 8.90% for loans up to Rs 1.50 crores. Up to 31.03.2012 fixed rate will be offered and thereafter the rate will be floating. Earlier the rate of interest offered for loans above Rs 75 lakhs up to Rs 1.50crores was 9.90%.

3. Advantage 5: In today’s scenario it is not possible to predict the movement of interest and many borrowers might opt for fixed lending rate for a considerable long period. To meet the borrowers need LICHFL has introduced a unique product called ‘Advantage 5’ under which the lending rates are fixed at 9.25% for 5 years and thereafter on floating basis.

The new rates will be effective from 1st July 2010.

Borrower should check credit report before applying for loan says bankers

Many people have faced this situation when their loan applications have been rejected because their in front of your credit report it is written defaulted in repayment of loan or credit cards. To avoid rejection of loan one should check his/her credit report with Credit Information Bureau of India (Cibil) before starting negotiations for the loan.

According to bankers if the borrowers have the prior knowledge of their credit report it might help many from facing the situation of loan rejection due to an adverse report on credit history, especially loans to be taken for purchases such as buying a house.

The State Bank of India official handling retail banking said, “It is advisable that borrowers who have had past loans or have had credit cards should check out their credit score with Cibil before scouting for the best loan deal available. If the report has some adverse remarks, the person should try and get the issue resolved with the concerned bank which had reported the adverse credit history.”

According to officials to know about the credit report is very important for people who want to apply for a housing loan. The SBI official added, “Buying a house is often a once-in-a-lifetime purchase. Being denied a loan could be traumatic for the person who has identified the property.”

C S Jain, head of personal banking, IDBI Bank points out that people who might have any past disputes with lender or have some doubt that there might be some adverse remarks from Cibil due to default in repayment must try to gain prior knowledge of their credit history. Jain said, “If a person has a doubt that some past defaults might find a place in the Cibil report, he or she should approach Cibil for the details. However, it might not be required for persons who are sure about their past banking history.”

Cibil has the database of borrowers of 175 lending institutions which include banks, housing finance companies, financial institutions and non-banking finance companies, among others. These lending institutions can access the database which helps them to assess the history of those who have applied for loan, to avoid defaults, frauds and minimize non-performing loans. If there is any adverse remark from Cibil in a person credit report can endanger the chances of getting loans.

Recently Financial Chronicle has reported that, in many such instances it has been noticed that borrowers loan application are rejected by the lenders due to adverse credit report from Cibil showing past defaults or credit card transactions of which the borrowers are not aware.

Cibil’s managing director, Arun Thukral, told FC that borrowers can avail the Cibil window that provides individuals access to their credit history. Thukral said, “We provide the individual the details of their credit history on payment of a nominal fee.”

He said that the credit report provided to the individual will have the exact detail of the transaction on which the default is understood to have happened in the past.

But the credit history that is shared with lenders does not show the names of the institutions with which the individual has been in default. Thukral said, “If there is any dispute over the defaults, the individual can approach us or the bank in question to get the issue sorted out before taking a loan.”

Cibil’s credit information report (CIR) can be obtained by sending an email along with documents such as providing an identity proof, address proof and the requisite fees.

SBI offering loan up to Rs 2 lakh to ex-Servicemen under Jai Jawan Scheme

The State Bank of India (SBI), largest public sector lender has launched a special loan scheme Jai Jawan Scheme for ex-Servicemen.

B M Sangrolli, president of Dharwad unit of National Ex-Servicemen Co-ordination Committee, in a convention of ex-Servicemen said that ex-Servicemen who have completed 50 year of age can avail loan of up to Rs 2 lakh under Jai Jawan Scheme of SBI.

He also apprised the ex-Servicemen about the various schemes introduced by the central and state governments for them. The convention was attended by more than 300 ex-Servicemen.

Vidya Sahakari bank offers three new loan schemes on its 36th anniversary

Vidya Sahakari Bank has launched three new loan schemes called ‘Hafta Band Karz Yojana’, ‘Pramanik Karz Yojana’ and ‘Sone Kharidi Karz Yojana’ on the occasion of its 36th anniversary celebration.

According to a bank press release, “It has been observed that the salaried customers face acute financial crisis during the months of October and November because of the increase in expenses on the occasion of Dussehra. So we have come with “Hafta Band Karz Yojana” wherein during such months the respective customers will be given a break from the payment of installments.”

The release added, in ''Pramanik Karz Yojana” bank will give 1% rebate in the interest rate on takeover of the loan for customers who have paid loan installments regularly for three years with previous bank. Under ''Sone Kharidi Karz Yojana” customers will be given loan for purchase of gold. The customer can take loan of any amount but bank will charge 25% margin money without any identity proof or any guarantor, as the gold will be kept as security with the bank itself. The customers will have freedom to sell the gold when the price rises and earn profits. If the customer takes loan of one lakh or less, it can avail early installment scheme.

HDFC re-launches its ‘Loan against Property’ scheme

The resident Indians who have a property of their own get good opportunity with HDFC bank re-launching its product ‘Loan against Property’ (LAP). People who own property can take loan from bank against their property to meet business requirements, marriage in the family or for emergencies in the form of a medical crisis or any such needs. Under this product customers can leverage their equity in the property without disposing it off.

However the existing home loan customers of HDFC bank can avail 60% of the market value including the present loan outstanding, whereas all other customers are eligible for 50% of the market value of the property. But in both cases, the loan amount is subject to their loan eligibility. In this scheme bank offers attractive interest rates of 11.25% pa for loans up to Rs. 1 crore and 11.00% pa for loans above Rs. 1 crore. The loan tenure period can be set up to 15 years for both residential properties and non-residential properties.

As Renu Sud Karnad, Managing Director, HDFC Ltd. explains, “One may not always be able to plan for a lot of things in life as both, opportunities and emergencies can be unexpected and could be equally important to be ignored. HDFC’s ‘Loan Against Property’ helps customers take advantage of such opportunities or attend to emergencies by making available one of the important ingredients required in both cases, which is funds. If you own a property, it can probably serve as the best possible avenue to generate a decent amount of funds within a short period of time while you continue to comfortably live in the house. Availing a personal loan from a lending institution may also be an option. However the advantage of LAP is that not only is the interest rate lower than a personal loan, but the tenure of the loan is also much longer. This enables a person to take a larger loan as compared to a personal loan where the period is very short which has a huge impact on the cash flow and thus the repaying capacity”.

SBI has hiked short-term corporate loan rates

The country's largest lender State Bank of India (SBI) has not taken any final decision about continuing its home loan teaser rates but it has hiked short-term corporate loan rates by 0.25-50 basis points.

SBI chairman OP Bhatt, said, “With surplus liquidity gradually disappearing from the system, we have re-priced certain segments of our short-term corporate loans by 0.25-0.50 bps upwards.” He added at present bank has no plans of hiking its deposit rates and agreed that liquidity will remain in the system. SBI said the public sector units will be giving out close to Rs 18,000 crore for 3G auctions.

“We have got requests and demands for that kind of money. At the maximum we will lend Rs 18,000 crore. Having said that, we are still having a surplus liquidity of Rs 26,000,” Bhatt said. On an average there is still a fair amount of liquidity in the system. If you see, the 10-year government security bond is close to 7.40%. There is not much pressure on the liquidity at the moment. It is too early to say if the impact on liquidity will have a temporary or a permanent impact on the liquidity condition,

Meanwhile, Union Bank of India CMD MV Nair said the bank would be giving out Rs 2,000 crore for 3 G auctions. “Liquidity will not be impacted with the money flowing out as we already sitting on adequate liquidity,” he said. Regarding bad loans, Bhatt said in the last few quarters NPAs have decreased and that the worst is over. Talking about recent credit growth numbers, Bhatt agreed there is no improvement in credit growth and it can be due to the drooping season.

He added, “Usually in April there is always a negative growth. So it is too early to say if it is because of the slack season or if there is more to it”.

NHB launches reverse mortgage loan-enabled annuity scheme for senior citizens

The reverse mortgage loan (RML) scheme has been specially designed to help senior citizens to get finances to meet their expenses without depending on others. National Housing Bank (NHB) has restructured its reverse mortgage loan. With its new reverse mortgage loan – enabled annuity scheme ensures to offer senior citizens assured lifetime payments instead of the earlier cap of 20 years, thus NHB is expecting there will be more takers of the product. With a view to expand its pool of RML facilitators NHB is having talks with banks and insurance companies.

In just first four and half months since the launch of reverse mortgage loan-enabled annuity scheme (RMLeA) scheme NHB has been able to sanction 40 loans estimating to Rs 100 crore. However in the beginning RML received very low response in India, thus NHB believes that new offering is more attractive to borrowers in terms of higher payments and better risk mitigation.

RV Verma, executive director, NHB explained, “Annuity link provides comfort to participants. The original RML format has seen fairly good response. However, senior citizens were apprehensive about the scheme because of the cap on 20 years on payments. We should see a much bigger offtake in the coming days.”

The lenders pointed out that in the original RML scheme has some limitations which includes the cap of 20 years on payments to senior citizens as well as low quantum of payments. Also, higher the interest rate, lower was the payment. To counter this, NHB launched annuity linked plan in which lifetime payment is made even after the completion of the fixed term of 20 years and also promises nearly 1.5 times higher annuity as compared with the earlier one.

The Central Bank of India in collaboration with Star Union Dai-ichi Life Insurance Co. has launched RML annuity scheme. Verma said the talks are being undertaken to bring major banks and insurance players into the scheme.

He also said that NHB is trying to get tax exemption for annuities offered to senior citizens under its RMLeA scheme with the Central Board of Direct Taxes. To provide information about RML in India, NHB has set up counseling centers in various cities including Delhi, Mumbai, Bangalore, Chennai and Hyderabad.

Banks planning to expand loan against gold segment to boost their lending biz

Giving loan against gold has boosted lending business of banks, thus many banks and non-banking finance companies are planning to expand this business. In the past few months monetization of the yellow metal has increased in the country. Previously loan against gold was limited to south Indian states where NBFCs like Mannapuram General Finance and Muthoot Finance have strong hold and are aggressively expanding their base in this segment.

According to Ajay Mitra, managing director- India, Middle East & Turkey, and World Gold Council, the monetization of yellow metal will open new sector and increase the circulation of roughly 18,000 tones (worth approximately Rs 30 lakh crore at current prices) back into the economy.

Mitra further said, “Acceptance of gold for loans by banks and financial institutions is an important development that will infuse greater confidence in gold as an asset class. With banks entering gold bar business, availability of infrastructure for storage, and with medallions being accepted for securitization purposes, the role of gold is surely bound to change from a commodity to a monetized asset that would encourage consumers to invest more in gold, a time-tested secure and now a monetized asset class.”

The banks like State Bank of India (SBI), Andhra Bank and HDFC Bank have already entered into this segment with big boom.

Up till now the total anticipated market size of loans against gold is marked at Rs 1,20,000 crore in which 50% of market share is of organized sector like banks and financial institutions. And rest of gold is being deposited with NBFCs and small players like money lenders. SBI has a loan portfolio of Rs 300 crore against gold.

Biju Pillai, executive vice-president & business head, gold loans, HDFC Bank, told, “The bank’s portfolio has been growing at over 60% year-on-year for the last two years. With the opportunity being vast, we will continue to look to grow this portfolio. We plan to increase the number of branches offering gold loans from 150 to 600 over the course of next year.”

Pillai said, there is variation in interest rates which lies between 12% and 15.25%, depending on the tenure of the loan and borrowers’ relationship with the bank.

Andhra Bank, a state-owned bank in just eight-month has witness growth in the segment thus it has ambitious plans to offer loans against gold through all its branches within a couple of month.

M Anjaneya Prasad, general manager (Mumbai zone) of Andhra Bank, said, “We have projected the target to achieve Rs 50-crore loan disbursement as against Rs 10 crore in 2009-10.’’ At present gold loan is being provided at 60 branches of the bank

“We are planning to involve all the branches of the bank for the business by June.’’ Generally Andhra Bank gives 75% of value of gold pledged as loan and is planning to have one value per branch for the appraisal of gold while finalizing loans.

Prasad told the customers will have to bore the fee to be charged by the value.

An anonymous senior official of Mannapuram General Finance, the traditional player of the segment said, the company is targeting to achieve a business growth of Rs 4,500 crore under the segment as against Rs 2,550 crore in 2009-10.

The official added, “Thus, we are looking at a business growth of 50-100% under the segment during the current financial year.”

NBFC offer rate of interest between 12% and 21% depending on the value of the gold pledged.

The rate of interest for the NBFC varies between 12% and 21% depending on the value of the gold pleged.

Though the repayment period can be stretched to one year, in most of cases, Mannapuram gets its loans repaid by customers over a period of 100 days, said the official.

Banks witness dip in deposits & loan demand; park funds in mutual fund schemes

By the end of fortnight on April 23 banks have witnessed reduction in loan demand and deposits. According to RBI's latest data the deposits have dipped by Rs 23,328 crore during the fortnight ending April 23 to Rs 4,506,747 crore. Both demand deposits and term deposits have dipped by Rs 20,834 crore and Rs 2,494 crore, respectively, during the fortnight.

During the fortnight as on April 23 the loans have dipped to 1,437,363 crore from Rs 26,483 crore. On the other hand both food credit- loans given to the government for food procurement and non-food credit- loans to individuals and businesses, have dipped by Rs 170 crore and Rs 26,313 crore, respectively. While investments in government and other approved securities have dipped by Rs 17,169 crore to Rs 1,437,363 crore during the fortnight.

Generally in the beginning of the fiscal banks do not focus much on business as they are busy in previous year’s accounts. The Indian economy is almost back on the track and industry is also reviving, thus banks are expecting loan demand to increase so the focus will be on increasing the deposits to fund the loan demand. DL Rawal, chairman and managing director of Dena Bank, said, this year credit demand will increase as corporates will be taking the loan amount which was sanctioned last year. He told his bank’s loan book is growing by 22% this year.

S Sridhar, CMD of Central Bank of India also said his bank is witnessing strong demand for loans (25%) and added, the bank will be focusing on raising low-cost certificate of deposits to raise resources to meet the growing loan demand.

However RBI in its annual monetary policy statement has given indication about loan growth at 20% for FY11, way above 16.9% loan growth achieved in FY10.

As banks are not seeing any increase in the loan demand banks are parking their funds in mutual funds. Although latest figures are not available but, approximately the banks have collectively parked more than Rs 100,000 crore in various mutual fund schemes.

Muthoot Finance plans to start gold loan biz in UK

Muthoot Finance has plans to start gold loans business in UK. For this the company has approached banking regulators in the UK, officials of Muthoot Group said.

It is a major non-banking finance player in India having more than 1,700 branches and 60 tonne of gold in its custody. Muthoot Group managing director George Alexander Muthoot informed, “There is a large NRI population in the UK and we see potential in Europe for gold loans even from foreigners. We have opened an office in London and will start operations as soon as we get approval."

The group is offering remittance services in US and Dubai. Recently in Dubai, group has launched a new company, Muthoot Exchange, has been launched to handle the service. He added, "We are handling one lakh units worth Rs 250 crore of remittance annually and expect it to increase substantially with the US operation."

Firm 90% of revenue comes from gold loans, and it is aiming to do business of Rs 14,800 crore from gold loans and Rs 5,100 crore from gold bonds this fiscal. During 2009 fiscal company achieved a recorded growth of 119% through distribution of gold loans. During the fiscal company achieved revenue of Rs 7,401 crore by lending gold and earned Rs 3,102 crore from gold bonds. The firm is planning to open 1,075 new branches this fiscal out of which 575 will be opened in South India and 500 in the North. The group also has interests in financial and commodity broking, IT, power generation, media, healthcare, education, infrastructure, plantations and hospitality.

Banks speed up sanctioning of loans, companies picking up cautiously

Although banks have speed up sanctioning of loans but they are crying out as companies are not picking up even half the money. According to SS Ranjan, deputy managing director and CFO, State Bank of India, the nation’s largest lender, “Our sanctions grew by around Rs 60,000 crores in the last financial year. Of that undisbursed loans stand at about Rs 45,000 crores.” Thus bank has not started getting interest on three-fourths of the loans it had sanctioned last year.

Suresh Ganapathy, head of Macquarie Securities Group’s financial research team said, “Corporates are very cautious about capacity expansion due to which there is a lag in sanctions and disbursements.”

Bank of India is facing the similar problem, it had sanctioned loan of around Rs 48,000 crore by the end of March 31 this year.

M Narendra, executive director of India’s No. 4 lender said, “Our undisbursed sanctions are about Rs 25,000 crore. Projects are taking time to get implemented.” “We charged an average interest of 10% on what we disbursed.”

Even the private sector and smaller banks are facing the same problem.

Jaideep Iyer, president, financial management at Yes Bank informed that in the last financial year bank had sanctioned Rs 22,000 crore, which was 73% more than in fiscal 2009, but from this two-third or around Rs 15,000 crore, is still undisbursed.

Since in the last fiscal the credit growth was slow, net interest income (the difference between interests earned and interest paid) of banks had slowed down, informed Vaibhav Agrawal, vice-president-research, Angel Broking.

Last year loans sanctioned by banks, around third were for infrastructure projects, stated Indranil Sen Gupta and Dick Li, analysts with Bank of America-Merrill Lynch, in a report on March 25. For this year, they predict 35% rise in infrastructure loans. According to RBI data there has been growth of 42.3% in infrastructure loans between April 1, 2009, and February 26, 2010.

N Sivaraman, executive vice president (financial services), Larsen & Toubro pointed out, “In the first 12 months post sanction, only 20% to 30% of a loan gets disbursed because projects get caught up in various approvals. Usually a major part of disbursements happen after 18 to 30 months of sanction.”

According to E Sudhir Reddy, chairman & managing director, IVRCL Infrastructures & Projects, one of India’s biggest road builders it’s the nature of the beast. “If you take up NHAI (National Highways Authority of India) projects, they take a lot of time (to execute),” he explained.

Reddy quickly adds that it’s not because of poor execution. “Project executions have been fine,” he said.

At present IVRCL is working on three development projects, three road projects and one desalination plant.

Pradeep Singh, vice-chairman and managing director, IDFC Projects, another lender, have the same view. “There is usually a time lag and because there has been a significant increase in sanctions the gap is more pronounced this time,” Singh said.

IDFC Projects is currently developing a 1050 mw power project in Chhattisgarh, Madhya Pradesh.

According to some in the last quarter of last fiscal the banks speed up sanctioning of loans is a clear attempt to bulk up their loan book - called ‘window-dressing’.

“Most banks were showing loan growth of around 16%. But to ratchet this up, they went on a sanctions binge in the last quarter of the last fiscal. Not all of these were disbursed by the time the year ended,” said Abizer Diwanji, executive director and head of financial services at KPMG, the audit firm.

“Credit growth will gather pace primarily driven by infrastructure this year too,” Diwanji said.

As Indian economy is expected to grow at around 8%, therefore Reserve Bank of India has predicted a growth of around 20% in loans by the end of the current fiscal on March 31, 2011.

On the other hand analysts are expecting rise in non-infrastructure loan after September.

“Retail loans are already leading the turnaround in credit demand in a repeat of 2003-05. Anecdotes suggest the urban consumer is returning to borrow - especially, for housing - as confidence improves with better job prospects,” Sen Gupta and Li said in another note last week.

“We expect corporate loan demand to pick up in second half. Industrial credit had shown a lag even in the last upturn. Most banks have already reported an increase in loan sanctions. These should translate into higher disbursals as corporates gain better growth visibility,” they said.

Loan tenure and EMI are linked to each other

In a loan EMI and tenure of loan are linked to each other. The EMI and tenure of loan should be decided very carefully calculating all you’re spending, and any other costs which can add to your expenditure in the future.

The loan amount is sanctioned for a particular duration that is known as tenure of a loan. A loan sanctioned for a period of 3-4 years is known as short tenure loan. If a loan is sanctioned for 15-years it is known as long tenure loan.

The outflow of EMI will be in accordance to loan tenure. If a loan of Rs 10 lakh is sanctioned at a 10 per cent rate of interest then for tenure of four years, the EMI outflow will be Rs 25,300.

In case of longer tenure of 20 years, the EMI outflow will be around Rs 9,600. If it is difficult for a borrower to make high EMI repayments, then he should increase the loan tenure. The longer the loan tenure the EMI repayment amount will be less.

But the interest rate of the loan will be low in case of short tenure loans.

In case you have any other source of income or expect to add to your income in few months then it is better to opt for a short tenure loan. Because if considering your present income you decide for long tenure loans and later on your income increases and want to pay back your EMIs faster then bank will charge prepayment penalties for this.

In case your retirement is near then go for short tenure loan. After retirement there will not be a regular income due to which you can face difficulty in repaying the loan.

If you have just taken up a job then you can take a long tenure loan but you will not be able to change a job easily.

Generally a borrower opts for longer tenure if he has taken a huge loan amount and this is better option, otherwise repayment of EMI will be huge which is difficult to manage.

Loans against FDs may lose sheen after the proposed Base Rate scheme

From April 1, banks will decide their actual lending rates on loans and advances on the bases of Base Rate system. Thus bankers are saying after the proposed Base Rate scheme comes into effect the loans against fixed deposits (FDs) are going to lose sheen.

At present commercial banks are giving loans against FDs at 1% over the FD rate which means if a depositor he/she is investing money for two-year time period (at 6.5 per cent interest) with a bank, then he/she can get loan up to 90% of the deposit amount at 7.5 per cent.

According to bankers from April 1, as per regulator’s draft circular the fresh loans cannot be given below Base Rate, which can range from 8to 9.5 per cent, in turn increasing the rates on loans against FDs.

A senior public sector bank official pointed out, “People generally avail themselves of loans against FDs in case of an emergency. The advantage of such loans is that even as they meet urgent funds requirement, the collateral (i.e., FDs) continues to earn interest. Therefore, there is always demand for such loans. We hope the RBI makes an exception for such loans”.

On February 10 RBI had issued the draft circular that Base Rate system will replace the existing benchmark prime lending rate system, in order to make credit pricing more transparent.

The base rate will include, cost of deposits, overhead costs, and adjustment for negative carry on cash reserve ratio and statutory liquidity ratio.

Besides loans against FDs, RBI in the circular has not given any clear specification on loans given by banks to their staff. The banker said, “Some banks grant interest-free/concessional loans as part of staff welfare. The RBI circular is silent on whether such loans will also have to be moved to the Base Rate regime.”

Commenting on the flaws in the methodology for computation of base rate, a senior banker said, “One of the main inputs for the computation is the cost of funds. One of the features of cost of funds is the average residual tenor of all the liabilities. Thus, if the residual tenor for any bank is higher, then, there is the likelihood of cost of funds being more.”

As the base rate is not tenor specific therefore, the average remaining tenor of deposits can be around two years.

Thus, rate calculated for a tenor of around two years might not be applicable for loans below that period, say one year.

The banker pointed out, thus it was necessary to lend below the BPLR, which can adjust for the negative tenor.

Vehicles purchased on loan can be sold without defaulters consent

The National Consumer Disputes Redressal in its ruling said the finance company can sell off the vehicles purchased on hire-purchase schemes with out taking consent from loan defaulters, to recover the price amount.

The commission gave the ruling in view of a petition filed by a Tamil Nadu resident who had alleged that her vehicle’s financing firm had sold off her vehicle without issuing any notice.

The Commission, comprising Justices R C Jain and Anupam Dasgupta, said, "The complainant has not been able to demonstrate to us what prejudice was caused to her by the finance company on account of the latter selling the vehicle without issuing any notice to her, when she had failed to remit the due installments of the loan for several months."

Complainant Parameswari had filed the case before Commission, challenging Tamil Nadu State Consumer Commission order of dismissal of her complaint relating to deficiency of service by the Tata Finance Limited in 2005.

The Commission stated that Chennai-based Tata Finance Limited took this step in accordance to the terms of the Hire Purchase Agreement.

It added the finance company had the right to sell the vehicle without taking complainants consent as the vehicle was still in the firm’s name and was done to recover the loan amount when Parameswari failed to pay the installments.

The finance company sold the vehicle to a third party as Parameswari had purchased it under the agreement on loan and failed to remit the installments of the loan amount.

Senior citizens want reverse mortgage loans to become more attractive

India senior citizens are gradually looking at reverse mortgage loan scheme for their financial needs. But according to some senior citizen banks are not offering good value of their property.

One of the senior citizen, retired professor M.R. Santhanam (74) a year ago had decided to avail a reverse mortgage loan but with held his decision. He said, “The loan offered by the bank was low. My house is worth Rs.1 crore. But they offered 15 per cent of the value as the reverse mortgage loan. This is far below my expectation.”

He added, “I do find reverse mortgage fairly attractive. But I am looking forward to some more favorable terms”.

There are some banks that are offering mortgage loan up to 20 per cent of the value of the house. Another citizen V. Kannan said, “Increase in the loan component will attract more people like me.”

Bank officials said some of the senior citizens choose to mortgage their property at a higher rate of interest when they are not able to get the required loan amount under the reverse mortgage scheme. They said in some of the aspects further modification is required such as the age difference of the couple that seek the loan.

Most of the banks which are offering the reverse mortgage loan have reported decline in the number of reverse mortgage loans disburse in the past one year. A public sector bank official said, last year in the city, reverse mortgage loans were given to only seven senior citizens.

C.A. Jaya Senan (81), who applied for a reverse mortgage loan last year, did not get it. “This is a good scheme. But officials of a bank did not give me an answer. I was not able to get the loan.”

K. Krishnan, another customer who could not avail the loan said, “Banks officials show reluctance to speak to us.”

Bank officials stated many senior citizens who want to take reverse mortgage loans do not understand that the scheme has been introduced as a social security measure and to help people in need. An official of a public sector bank pointed out that many people want to take reverse mortgage to rebuild their old house. The official added, many senior citizens did not fulfill conditions such as self-acquired property, self-occupied and a registered will in favor of the bank.

According to State Bank of India officials, the bank has been encouraging reverse mortgage loans to help senior citizens.

In Chennai, in the current fiscal loan of Rs.5.83 crore has been sanctioned to only 59 borrowers. Since the launch of the scheme in Chennai bank has sanctioned 509 reverse mortgage loans amounting to Rs.50.31 crore.

The main aim of the scheme is to help senior citizens who normally invest their bulk of savings in a house or property. The loan helps them raise money without selling or vacating their house during their lifetime.

The ways are being searched to make reverse mortgage loan more appealing. Insurance companies and banks are having talks to offer an annuity cover with reverse mortgage.

Recently one of the insurance companies has tied up with Central Bank of India and is having discussions with other banks and housing finance companies.

Mr. Santhanam said, “We have waited for a year. We are waiting for things to get more attractive.”

To save tax which is better loan prepayment or ELSS?

The fiscal year is close to the end and many of you have surplus of Rs 1 lakh lying in bank account which you need to break to save tax. If you have taken home loan then you might be thinking whether you should repay your home loan or invest the money in an ELSS scheme?

On both home loan pre-payment and investment in mutual funds you get the same tax benefits. In case through out the year the total repayment that you do through monthly installments includes a principal repayment of close to Rs 1 lakh then, you won’t get any benefit as under Section 80C the investment limit is up to Rs 1 lakh.

The borrower who’s EMIs is largely made up of interest payment or a borrower with a relatively small loan where repayment of principal is far below Rs 1 lakh per year faces such situation.

If you repay your home loan the interest burden will get reduced but investing in ELSS will get you benefits of equities. According to Value Research conducted on February 4, over the past one year ELSS has posted 84.29% returns. When share market turns weak, ELSS becomes more attractive. Let us look at some details before reaching to final conclusion.

You can get tax relief in two ways on home loan prepayment. Under section 24 of the Income Tax Act, 1981, you get tax relief on interest component in the EMI up to the extent of Rs 1.5 lakh in a financial year.

The second one is on home loan principal repayment you get tax relief under section 80C up to Rs 100,000 per financial year. It is the same overall Rs 1 lakh limit as you get tax benefit for investing in ELSS scheme.

At the beginning of the fiscal the lenders issue the provisional statement going through this statement you can get an idea of how much principal and how much interest you are paying. This will be helpful for tax purposes. For several borrowers, the principal amount can be less than Rs 100,000.

Thus, borrowers have to invest the deficit in some other investing instruments such as public provident fund, mutual funds or life insurance to avail of full tax benefits.

Then prepaying loan is better option. As there is no cash return thus the borrower will save a large amount of interest on the pre-paid amount for the term of the loan. Earlier the conservative investors used to avoid taking loan to maintain their debt-free status. But the Rs 1.5 fiscal incentive a borrower gets can make investors think about this.

Veer Sardesai, a Pune-based financial planner points out, "If you have a very long-term home-loan outstanding, it makes sense to prepay the home loan. For loans outstanding with short timeframe, typically below five years, taxpayers may consider investing in ELSS."

Just looking a the fiscal incentive one should not think of prepaying the home loan if the cost of the home loan stands to be low than the post tax returns, in such case investing in ELSS is better option. If a pre-tax home loan rates is at 12% and the investor expects a post tax annualized yield of anything more than 12%, it is better to invest in ELSS.

However 12% might seem to be higher from the fixed income market, but equities are still better in the long-term. Vinod Ohri, president — equity, Gupta Equities says, "Investors can reasonably expect 15-18% returns per year from the equity markets over the next three years."

On the other hand bankers have imposed restrictions on prepayment. Some banks do not allow repayment in the first three years. Moreover some of them charge hefty pre-payment fee and processing fee and many banks do not bother if the borrower is repaying a small part of the loan though his surplus funds. While analyzing cost –benefit, consider these costs also.

After analysis ELSS returns look much better than the home loan repayment benefits. But home loan repayment is predictable whereas ELSS cannot always be value accretive- it is not possible to analyze the losses in extreme cases. As per the survey conducted by Value Research, the three years returns stand at 5.61% as on February 4, 2010.

According to financial analysts in the next credit policy review the rate can increase. Therefore, if you have the floating rate option and your bank follows the central banker, you might end up paying higher. In such a case it is better to repay home loan now so that impact can be minimized.

Check few things before taking gold loan

Most of the banks are giving loan against gold. In this regard to target mindset of Indian women ads are being aired in which you hear Indian women saying:

“Jab ghar girvi rakh sakte ho, toh gehne kyon nahi (When you can mortgage your home, why not jewellery)?” goes one.

“Ek locker se doosre locker mey hi toh jaa rahe hai (the jewellery is just moving out of one locker into another)” says another.

Earlier in India selling or mortgaging the gold jewelry of one’s mother or wife to get money for financial needs was not considered good. With time change has come in thinking now people are ready to mortgage gold jewelry, even ladies easily give their gold to get loan.

But there are few things to be kept in mind while taking loan against gold.

There are private financial companies that offer loans against gold and the interest rates vary widely.

Among the banks HDFC Bank, ICICI Bank, State Bank of India and its associates, Allahabad Bank, Development Credit Bank, etc. are giving loans against gold. There are a host of cooperative banks also that are offering these loans. There are some non-banking financial companies (NBFCs), which do not take deposits of money from public but give loans. Major Private Players include south-based players such as Manappuram Finance and Muthoot Group.

The interest rates on gold loans are lower than those charged for personal loans. For instance, one leading private sector bank charges up to 18% interest on personal loans, but on gold loans the bank charges 15.75% or less. Then another bank charges 14.5-16.5% for personal loans while on gold loans it charges 12.5%.

However NBFCs interest rates are high in comparison to banks. For example Muthoot gives loans at a fixed rate of 33.6%. The difference in rates charged is quite huge.

There interest rate varies depending on the quality of gold jewelry. If your jewelry is hallmarked and have a ‘BIS’ stamping by a hallmarked jeweler which indicates the purity of the gold used, the interest rate charged on this jewelry will be lower than on non-hallmarked jewelry. The difference can be based on carats of gold, whether 22 or 18, etc.

The gold jewelry is not 100% pure. Pure gold is available only in the form of gold coins and bars, which are not accepted by most banks and financers. People have an attachment to their jewelry thus when prices of gold move up or down the borrower comes back to take back the jewelry but in case they gold coins or bars, when the gold prices fall down the borrower never come back to free his gold.

The head of a leading NBFC told DNA, “If the value of gold falls below the loan amount, the borrower will never come back to free his gold. But if he has mortgaged his grandmother’s necklace, whether the price goes up or down, he will come back for it.”

Then the loan amount is much less than the jewelry is worth, even though the jewelry is hallmarked and of high quality.

At present the gold price is around Rs 16,785 for 10 gram but all the banks do not take into account, leave alone NBFCs.

Every bank might have its own method of calculating the value of the jewelry you offer to mortgage. Some banks have fixed the consideration price at a level (say Rs 1,005-1,215 per gram) for about 6-12 months and a year later it can revise it, regardless of market price of gold in the international markets.

Few others take an average of two weeks’ market price and value of the jewelry to that extent. Some of them take into consideration the day’s international trading price and offer a loan according to the value of gold on that price.

Bankers keep an extra cushion because of purity issues and also there have been cases where banks have been cheated by some jewelry valuers on purity in recent times.

The method of calculating price of gold by the bank can create a huge difference in the amount of loan you are eligible for- it can be as much as 5-10% of the loan amount.

The amount of loan can also be based on the period for which the loan is needed and the frequency of repayment.

Before finalizing the financer for a loan against gold, do the entire enquiry. Check for the difference on the offering per gram, and whether it is after deducting the processing fees, etc. Also check bank or NBFC is giving the loan amount you need.

Choose the big branches of banks offering loans against gold jewelry as small branches do not have huge storage space, wouldn’t be offering loan against gold.

Corporates go for short-term loans

Corporates are going for short duration bank loans with low interest rates at regular intervals rather than taking long –term loans at higher interest rates. This will help them in bringing their borrowing costs down as the banks have surplus liquidity and offering low interest rates.

The banks have surplus liquidity therefore corporates are looking for short-term loans of 30 days to less than a year’s duration at interest rates between four per cent and eight per cent. However banks give long-term loans at 11 per cent plus interest rate.

On the other hand banks are not interested to cater corporates’ demand for short-term loans as the banks have ‘other easy avenue' to invest the surplus liquidity i.e. the Reserve Bank of India's reverse repo window from this they are getting a meager 3.5 per cent return.

However, in comparison to T-Bills, the banks earn more interest from short-term loans. Thus banks don’t find any difficulty in giving these short-term loans.

Bankers warn against short-term loans. They say if corporates to meet their long term funds requirement go for short-term loans, in it a lot of risk is involved as there are chances of sudden drying up of funds and interest rates turning adverse.

A banker pointed out, “This is not a healthy trend, because if for some reason the loan cannot be rolled over then the corporate could face serious repercussions. But the cost saving in terms of interest rates, which works out to as much as 1-3 per cent, is quite substantial for corporates.”

Mr S.C. Kalia, Executive Director, Union Bank of India, says, corporates are ready to take risk as they can get cheaper funds.

He added, “Corporates know that there is liquidity in the system. Hence, they are prepared to take the risk. Therefore, they prefer to take short-term loans and roll them over''.

Mr Parthasarathi Mukherjee, President-Credit, Axis Bank pointed out for a bank it is better to give short-term loans rather than not giving any credit at all.

For the current fiscal the credit offtake for the entire banking system was quite sluggish at 10-12 per cent.

“More loans that are disbursed nowadays are of less than one year duration. When interest rates start nudging upwards people will stop looking at this kind of funding,” Mr Mukherjee said.

Mr Manish Kothari, Business Head, Corporate Banking, Kotak Mahindra Bank, explained, “Right now, most corporates are borrowing short-term money for refinancing their older expensive debts.”

According to bankers, through short-term credit they are earning credit growth. At present around 20 per cent of loans that are being given are loans are of one year or less duration. But these will automatically change with increase in interest rates.