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.
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