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.
Friday, February 26, 2010
Tuesday, February 23, 2010
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.
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.
Friday, February 19, 2010
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.”
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.”
Wednesday, February 17, 2010
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.
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.
Tuesday, January 19, 2010
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.
“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.
Monday, January 18, 2010
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.
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.
Tuesday, December 29, 2009
Fraud case against Yes Bank employee
Shruti Panchal, an employee of Yes Bank was a relationship manager in the bank's wealth management division. She with the help of other people, cash in money from one its client’s Rajesh Rathi mutual funds worth about Rs 66 lakh, leading to a loss of about Rs 34 lakh to the client.
In 2007 along with her superior approached Rajesh Rathi, a MD of Gandhinagar-based MGD Electronics, and suggested him to invest in mutual funds through the bank's wealth management services. He agreed and a total of Rs 1 crore was invested in four funds in December 2007. The mutual funds were in the name of the company.
When Rajesh came to know about the fraud he approached the police. But police refused to register a case. Then MGD Electronics moved the court. In view of this Gandhinagar court passed an order in a case of alleged forgery against Shruti Panchal. She had forged the signature of Rajesh Rathi, also prepared a duplicate company seal, changed bank mandates with forged signatures and the seal, and cash in money invested in mutual funds worth about Rs 66 lakh.
The court has also instructed the police to investigate other unnamed bank officers as there is possibility that she might have committed fraud with the help of other people. The court stated that people keep their money in banks as they find it safe, but due to such cases people can loose confidence in banks.
MGD Electronics has also filed a case against Yes Bank in consumer court. The next hearing of the case will be held on January 19.
In 2007 along with her superior approached Rajesh Rathi, a MD of Gandhinagar-based MGD Electronics, and suggested him to invest in mutual funds through the bank's wealth management services. He agreed and a total of Rs 1 crore was invested in four funds in December 2007. The mutual funds were in the name of the company.
When Rajesh came to know about the fraud he approached the police. But police refused to register a case. Then MGD Electronics moved the court. In view of this Gandhinagar court passed an order in a case of alleged forgery against Shruti Panchal. She had forged the signature of Rajesh Rathi, also prepared a duplicate company seal, changed bank mandates with forged signatures and the seal, and cash in money invested in mutual funds worth about Rs 66 lakh.
The court has also instructed the police to investigate other unnamed bank officers as there is possibility that she might have committed fraud with the help of other people. The court stated that people keep their money in banks as they find it safe, but due to such cases people can loose confidence in banks.
MGD Electronics has also filed a case against Yes Bank in consumer court. The next hearing of the case will be held on January 19.
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