An old colleague called me up after reading one of my articles. We spent some time reminiscing about the old times and the people we had worked with before he came to the real reason he had called me. I knew he had lost his job in 2009 and his divorce had also put a lot of pressure on his finances. Although as a finance professional he understood the value of a good credit standing but circumstances had forced him to start defaulting on his car loan and credit cards after his entire savings were wiped out to pre-pay the home loan (his ex-wife got the flat) and to meet his day to day expenses during his unemployed days. He wanted to make a fresh start as he had just managed to get a job offer but his defaults were now beginning to affect his life. He was aware that he would need to repair his credit standing but was not aware of how to go about it. That rang a bell. I have been asked similar questions by a lot of people who either through circumstances (like my friend) or because of lack of financial discipline had defaulted on their financial obligations but were now wanting to make amends but did not know how to.

First a crash course on what happens when you default on your financial obligations. Today every lender is required to share data about the repayment history of their borrowers with at least one credit Information Company (generically known as CIBIL – since Credit Information Company of India Ltd Or CIBIL is the largest and the oldest of the 4 licensed credit information companies). It is a popular misperception that lenders share repayment data only about customers who default on loans. They are required to share data about the repayment of all their borrowers. So anybody who has taken in a loan (and that includes me as well) and is currently servicing it will find “his or her name in CIBIL”. But for most of us this is extremely useful. If I were in the market for a new loan now the banks will be happy to lend to me at good rates simply because they will discover that my existing loan repayments have been bang on time and the level of indebtedness is very reasonable. The issue of course arises if my credit information report shows defaults (current or past).

This credit report has special significance in today’s life (obviously after our school’s report card) as it determines the credit worthiness of any individual. The need for credit is important aspect of modern day life, which one can hardly do without. The day is not far when matrimonial alliances will be based on the credit reports of bride and the groom…so till death do us apart will probably be replaced by …till finances do us apart.

So if you have defaulted on your payments for any reason, your Credit information report will immediately disclose this status to any prospective lender. With a bad credit report it is highly unlikely that you can get any loan or credit card from any bank.

But all is not lost…you can slowly and gradually build your credit history all over again.

Now that you have been reported a defaulter, and you are burdened with debt, then what should you do? The help comes in the form of specialized credit counseling agencies who can assist you in such a situation. The well-known ones are ICICI initiated venture Disha Trust (www.dishafc.org) or Bank of India initiated Abhay Credit Counselling (www. abhaycreditcounselling.com) which assists you in negotiating with your existing lenders and re-structuring your debt, which can be curative and preventive both.

“The customized advise given by Disha Trust is absolutely free irrespective of the bank the customer has a defaulted with and not just ICICI bank,” shared Ms. Nutan Lugani - Counselor of Dish Trust. She adds, “ We hold extensive counseling sessions with the customers then work out an action plan and accordingly make recommendation to the banks. It is not mandatory for the bank to consider them but it is a win win situation for both, the bank and the customers. With restructuring or rescheduling of loans, banks recover their money without incurring costs of litigation etc. and customer gradually comes out of debt.”

So all is not lost. If you are considering obtaining a loan in future with low interest rates, you must have a healthy credit score. “Worrying too much about your bad credit history is not going to help, but doing the right things will certainly help, “ adds Ms. Lugani.

First start with paying off the re-structured debts and start the process of rebuilding your credit history. But remember, rebuilding your credit history is a slow process. It is a misperception that if you could somehow find the money and pay off all the debt now it will give you a clean slate. What the report will show is that you had defaulted in the past but that you cleared everything off at a particular point of time. That coupled with some other steps should help you in slowly rebuilding your credit history. Ms. Lugani says, “ Customers should not be obsessed about CIBIL credit report. They should first think about the loan, which they have to repay, and the need of the hour is how to come out of it, CIBIL report is secondary. Once you regularly start paying your debts in time then with the passage of time your credit history will improve.”

Remember CIBIL keeps your records for 7 years but displays the month-by-month repayment record only for the last 36 months. What it means is that if you start maintaining a clean history after re-structuring or paying off your loans than your credit history will start looking good after 3 years. Of course CIBIL also computes a Credit score (the process is internal to CIBIL) for each individual, which probably is based on the entire 7 years data. However, currently only a few banks use the Credit score so it is your visible data for 3 years that has more relevance.

In the meantime you can also start adopting measures, which enable you to rebuild credit history like taking secured credit cards, which are given against the security of your Fixed Deposits. Your credit limit will probably be raised in future if you have shown good financial behavior. These credit cards may not be your dream cards, but they are often the best option you have since you are unlikely to be eligible for their regular credit cards.

You can also opt for secured personal loans where an asset is required as collateral. It normally involves bigger sums of money, moreover secured personal loans are preferred by the lenders due to the fact that they are secured against your assets such as jewelry, securities such as shares/mutual fund units, bonds, NSC, KVP, Life Insurance policies with high surrender value, etc. All these loans (with the sole exception of Loan against property which is unlikely to be available for somebody who has defaulted in the past) are available irrespective of your credit record.

Ms. Lugani concurs, “Such customers should look at liquidating the existing liabilities by taking loan against some kind of security, whether it is of stocks and shares or gold, or consider borrowing from some rich relative who can give them at a much lower rate. But word of caution here is that check your expenses, do not increase your credit exposure and repay the present loan to salvage the situation immediately.”

You should pay more than the minimum payments each month if you cannot afford to pay off the credit card fully. Loan, whether big or small needs to be serviced and repaid regularly and on time. Service these loans religiously and the new disciplined you will also reflect in your repayment history in CIBIL records. In fact after three years the remanents of your bad history will no longer be visible.

So remember – slow and steady wins the race.

Next week I intend to cover how to get mistakes in your credit report corrected. I invite readers to share their experiences on this issue.

The biggest complaint of loan consumers in India who have taken loans on a floating rate has been that lenders are quick to raise rates for them when interest rates rise in the market but are very reluctant to reduce their interest rates when market interest rates drop. Till June 30, 2010 the floating rate products were priced with reference to their Benchmark Prime Lending Rate (BPLR). Clearly the BPLR system was not functioning in a transparent manner. After setting up a committee to examine the issue and a draft note inviting public suggestions the guidelines relating to the new “Base Rate” system have been made effective for all loans issued or renewed on or after July 1, 2010. So will this new Base Rate system be effective?

This article examines the difference between BPLR and Base Rate regime and the potential impact of the Base Rate system.

The rate is “to be computed taking into consideration (i) cost of funds; (ii) operational expenses; and (ii) a minimum margin to cover regulatory requirements of provisioning and capital charge, and profit margin”. No this RBI pronouncement is not about the Base Rate but about the Benchmark PLR. If you see the non-binding “illustrative methodology” for the Computation of the Base Rate in the guidelines, it also more or less lays out the same set of parameters but just in greater detail.

So if the calculation method is similar how will Base Rate system make a significant difference?

For starters there are two big differences. Whilst each bank can choose its own benchmark for the cost of funds they will have to document the detailed formula for the calculation of the “Base Rate” and the method of calculation and follow it consistently (except during a brief six month transition period). This formula will need to be disclosed to RBI, which can also scrutinize that it is being followed consistently. This is unlike the BPLR regime where the BPLR was supposed to take into account the same set of parameters but no documentation was required and it was not open to RBI scrutiny. This is a significant difference between the two regimes since this forces the banks to follow a consistent method of calculating the Base Rate unlike the BPLR.

The second big difference is that, unlike the BPLR, banks are not allowed to lend below the Base Rate (again there are a few exceptions but they are not very relevant for this purpose). Now we all know that blue chip corporates are always able to get good rates from the banks. They are likely to be borrowing at interest rates very close to the banks’ current Base Rates. When market interest rates fall they will naturally expect to get better rates and naturally the banks will be forced to drop their Base Rates if they still want to maintain their share of this market. So apart from the point mentioned in the first paragraph, this factor will also exert downward pressure on the Base Rate when market interest rates fall.

If the transparency is so built in then why the doubt on whether the Base Rate system will be effective or not? Clearly the Base rate system is designed to be more transparent than BPLR. But unfortunately there is no requirement that the detailed formula of each bank’s Base Rate be made public (it is only to be available for review and scrutiny by RBI). Clearly RBI will need to set up a machinery to monitor and review these calculations to ensure that they are consistent, which given their focus on ensuring transparency is likely to function as an effective check on the proper implementation of the Base Rate system. It would be very interesting to find out whether the general public under RTI can access a specific bank’s calculation of Base Rate that is available with RBI.

As is likely the effective functioning of the Base Rate regime will significantly change the retail lending industry in India. Firstly as changes in the effective interest rate for the customer will depend on the “average” cost of funds rather than the “marginal” cost of funds any increases in market rates will take time before they are fully passed on to the borrower (see box for difference between “average” and “marginal” cost of funds). Whilst this is beneficial when interest rates increase it is also not so bad when interest rates decrease as, unlike the current situation, the consumer is likely to get some decrease immediately compared to none or very little in the current scenario.

+++++++++++++++++Box++++++++++++++++++++++

Difference between average and marginal cost of funds

Assume a bank currently has funds of Rs. 100 crores at an average cost of 10% (total cost of funds is Rs. 10 crores or Rs. 2.50 crores per quarter). Now the cost of funds in the market goes up by 1% pa. On an arithmetic basis the banks cost of funds should go up by Rs. 1 crore per annum or Rs. 25 lacs per quarter. However since a lot of the bank’s funds are in time deposits which are at a fixed cost - where the cost will rise only when the deposit comes up for renewal - immediately its cost may go up by only say 12.50 lacs for this quarter or only 0.50% p.a. Of course over a period of time as all the fixed deposits mature and are renewed at new higher rates the cost of funds will go up to Rs. 11 crore per annum or 2.75 crores per quarter). Thus the average cost -10% in this example changing to 10.50% or a change of 0.50% only - will always change slower than the marginal cost - +1% in this example)

++++++++++++++Box ends+++++++++++++++++++++++

+++++++++++++++++Box+++++++++++++++++++++++

If you have an existing loan should you shift to the new Base rate regime?

Firstly there is no automatic shift to the new regime. You will have to ask your bank to shift you to the new Base rate regime for which they are not supposed to charge you any fees. If you are on an existing fixed rate loans (or in the teaser period where rates are still fixed) where the rate is lower than the current floating rate of 8.50% - 9% than wait till you are on a floating rate basis for shifting to the new regime. If you are paying interest rate in double digits then shift to the new regime immediately. If your existing lender is not giving you good terms for the shift or is not acting fast enough to shift you to the new regime then you should seriously consider shifting to a new lender altogether)

+++++++++++++++Box ends++++++++++++++++++++++

The National Housing Bank (NHB) which regulates the housing finance companies – HDFC, LIC Housing Finance, etc.- will also be forced to come out with a similar system for HFCs which will be good for the home loan consumers. Similarly the scheme will have to be extended to NBFCs also by RBI though that is likely to have a smaller impact on the loan consumers.

In any case the impact of this fundamental change will be felt only over a period of time – at least 6-12 months as interest rates change (likely to increase) during that period. Here’s hoping that this change has a fundamental impact on all loan consumers.

And No, this question is not asked in the political context with our Northeastern borders racked by chronic insurgency and of course the unrest in J & K.

It is not even in the context of a common single market where many foreign direct investors will testify that this is not just a rhetorical question. In fact the early investors in the India story discovered the maze of local taxes, levies and regulations divided India into many small markets (of which some were more profitably serviceable from manufacturing locations located outside India rather than from a location within India). Anyway much water has flown down the Ganges since those early days and the impending implementation of the Goods and Services Tax would perhaps be the culmination of a series of steps that have already been initiated in recent years to forge a common India market.

The question is in the relatively mundane context of Home loans. Recently I spoke to a friend of mine who wanted to a buy a flat in Kolkata while he was working in Mumbai. He wanted to use my expertise on home loan to suggest solutions for a problem that he was facing in getting a loan. He approached a bank in Kolkata who said they would have given him the loan as both the property and his income papers were in order, but they asked him to visit their branch in Mumbai to get a loan as he was working in Mumbai. When we came back to Mumbai after finalizing the property in Kolkata, he approached the branch of the same bank only to be informed to visit a branch in Kolkata as the property is in Kolkata and they need to value the property before giving the loan. This friend of mine had already paid Rs. 51,000 for booking amount and if he was unable to book the flat, the developer would return back only 50% of the booking amount (after negotiations as the developer was not ready to return a penny out of it). Tensed with all these issues, he called up asking me – Is India really one Nation? The property was ready to move in with all title documents and his loan eligibility was coming around to more than Rs. 20 lakhs (he needed only Rs. 14 lakhs).

I decided to do some research on the same as the number of people moving to other cities for work has been increasing significantly and this may be a common problem faced by quite a few of them who either have plans of relocating or to buy a property for their parents in their “home” city. We have also seen an increase in the number of similar queries we receive on Apnapaisa.com.

We did a round of mystery shopping as well as spoke to the major home loan players. Here is what we found. When we spoke to the players officially each of the players said that such loans are no problems as they have a single common system across the country. However the situation on the ground was a little different. From among the lenders we spoke to as mystery shoppers only HDFC and ICICI followed up on our initial call (we had dangled the bait of Rs. 70 lac home loan). Even the official we spoke to in a SBI branch assured us that they would be able to do the transaction subject to their normal credit and operational checks. The other two private sector banks and the one foreign bank that we spoke to (or visited) as mystery customers either told us that they could not do such a deal or did not respond back after taking down the initial details.

We already knew a few DSA’s (who are our clients as advertisers on our site) and we thought of getting this answered from them also. We spoke to a large DSA based out of Mumbai who serviced many banks. His feedback corroborated our own findings on mystery shopping.

Another DSA we spoke to in Mumbai (who did not work with either HDFC or ICICI) said he would be able to get the transaction done provided the project in Kolkatta was pre-approved by any of the banks he worked for.

I also did a bit of informal talking with the private sector banks that had turned down (or did not show much interest in) our mystery shopper. What came out was that none of them had an effective loan origination system across the country and unless the loan amount was big enough the amount of effort required to co-ordinate with another city was just not justified. Each office is driven by its own KRAs and as legal checking work done for another office was not counted as part of their KRAs this clearly did not enjoy any priority.

What it boiled down to was that a loan that was clearly falling within their credit and legal norms of the bank was being given up simply because of the mismatch of KRAs between the two branch offices. Of course for a determined customer this would still be possible but it might take a lot more time than usual.

The only saving grace to come out of this story was that at least for a few lenders India was a “single” country.

Amen.

Disclosure: Most of the banks mentioned in the article are advertisers on Apnapaisa.

The education ministry headed by Mr. Kapil Sibal (the Ministry is called Human Resources Development but Education is under its purview) has been in the limelight following the path breaking initiatives it has proposed for not only education at the school level but also at the higher and professional level. Still plenty needs to be done to energize this sector by increasing capacity and quality, and making it more accessible to all classes of the society.

One important element of reform in this sector will necessarily be in the area of education loans. We have already seen the difference that easier availability of loans can make in the housing and consumer durables sector. Education can be another sector that can benefit tremendously by easier availability of education loans.

In most countries government funded specialized institutions (such as the older version of Sallie Mae in the US or the FFSAP - Federally Funded Student Aid Program) step in to ensure that loans are available for all students who are good enough to get into any accredited educational institutions that provides higher or vocational education. The institution normally does not lend directly but provides back to back refinance (provide loans to lenders to enable them to on-lend to students) and share in the risk (write-off part of such loans if the student defaults and is unable to repay) to make sure that this vital tool to make higher education accessible to everybody.

Let’s see what actually happens in India?

Today education loans in India lack any institutional backing and suffer from the disease of “good intentions”. At the best of times education loans are a risky business for the banks in any country. The typical higher education or vocation education student will take around 2-5 years to complete his education. He will need a fairly large loan to complete his education. Most likely he will not have any collateral security to offer for the education loan. In most cases his parents (or other close relatives) may be willing to stand guarantee for the due repayment of the loan but their own income may not be sufficient to repay the loan in case the student is unable to complete the course for any reason or is unable to find a job after he completes the course. In fact in a majority of cases the student’s family is not even in a position to pay the interest on the loan during the time when he is undergoing the course. They require that the interest amount also be accumulated and the repayment (of both principal and interest) begins only after the course is over and the student gets the job.

Education loans are a part of the priority sector but have no separate allocation. Also education loans cannot be priced higher than 1% above the particular bank’s PLR. Thus banks like to do the other kind of priority sector loans (loans to small transport operators, professionals etc.), which they consider less risky. In fact, the private sector banks and foreign banks who cannot be bullied by the government, have completely kept away from the sector (some of them have “education loan programs” but they all require collateral and/or guarantee from a well earning relative and interest servicing during the course period which effectively means that they service only the well heeled sections of the society). The public sector banks on the other hand are forced to show some disbursements under this head, do the minimum that they can get away with without offending the government. They naturally have restrictive rules on the type of courses as well requirement of collateral/income based guarantee for loans above Rs. 4 lacs.

A specialized education loan institution called Credila (in which HDFC holds a significant stake) is doing some good work in the area of education loan area though it also is restricted to the middle and richer classes as they are unable to provide loans without adequate collateral security or adequate income or both.

———————————————————————————————————–

Loan essentials:

• Education loans above Rs. 4 lakh require tangible collateral, security for the full value of the loan or third-party guarantee, depending on the amount.

• The co-borrower — the parent or guardian - is required to furnish his/her bank account statement, tax returns of the last two years, statement of assets and liabilities and proof of income.

• The usual security that banks accept are National Savings Certificates (NSCs), bonds, gold, vehicle, house, property, etc.
  
  For loan above Rs. 4 lakh and up to Rs 7.5 lakh, the collateral in the form of a suitable third-party guarantee is required. The bank may, at its discretion, waive third-party guarantee if satisfied with the net worth / means of the parent who is executing the document as a joint borrower.

• The loans above Rs 7.5 lakh require collateral security of a suitable value or a suitable third-party guarantee, along with the assignment of the student’s future income for payment of installments.

+++++++++++++++++++++++++++box++++++++++++++++++++++++++++

The expenses covered:

• Fees payable to the college,

• School or hostel including tuition fees,

• Examination, library and laboratory fees,

• Purchase of books, equipment, instruments and uniforms,

• Caution deposit,

• Building fund,

• Refundable deposit supported by the institution’s bills or receipts,

• Travel expenses for studies abroad,

• Buying computers essential for completion of the course,

• Any other expenses needed to complete the course,

• Study tours, project work and theses and

• Some banks also cover the cost of two-wheelers.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

So in summary the bank is expected to lend money to a borrower without any collateral security and without sufficient current income to pay back the loan solely on the hope that the student will acquire skills good enough to get a job that will pay him enough to enable him to pay back the loan. So left to themselves the banks are not going to disburse significant amount of education loans except to the well-heeled who can provide collateral/guarantee.

This boils down to the fact that there will be restricted finance available for potential students even as the education sector itself is becoming diversified and more vibrant.

All this need to change & change soon! Clearly the government needs to step in and fullfil the promise made by the finance minister 5 years ago to set up a education guarantee fund that will provide refinance for education loans as well as share in the credit risk that is inherent in this product. Afterall in education loans interest rates are not that big a consideration whereas availability and the timeliness are essential. This is what the long delayed education guarantee fund can provide.

The regulator does not like them. The consumers cannot seem to have enough of them. Yes I am talking of the teaser rate home loans that have become so popular in 2009. Whilst most of the banks had withdrawn these schemes in the first quarter of this year, India’s largest bank State Bank of India doggedly kept the scheme on (albeit with increased rates from its earlier scheme). Given the universal expectation that interest rates are bound to go up this year, the customers found the safety of fixed rates even if only for a limited period quite attractive relative to a regular floating rate product. This consumer preference has forced market leader HDFC to come out with its own teaser rate loan scheme and ICICI bank has also joined the party this week. The teaser schemes, Bank of Rajasthan and LIC Housing Finance always had the scheme on and their schemes are continuing. As of now the teaser rate loan schemes of HDFC, ICICI and SBI are scheduled to apply only for sanctions till April 30, 2010. The partial disbursement should be latest by June 30, 2010 in case of HDFC and ICICI. However it is expected that the schemes will be extended at least till the end of this quarter.

Let’s take a quick look at some of these schemes and their salient features for a loan of Rs. 30 lacs for 20 years:

So how should a consumer decide on which schemes to go for?

Firstly if you are in the market for a new home loan, it is advisable to choose from one of the above teaser rate schemes (versus a regular floating rate product from them or other lenders) since it will give you the safety of low fixed rates during the next few years during which interest rates are likely to rise. Between them also the real difference will arise once the fixed rate period is over and the time comes for the floating rates to take over. At that time how accurately the lenders reference rates reflect the changes in the market interest rates will determine what the actual effective cost is for the consumer. (See article on how lenders do not pass on benefit of lower interest rates to their existing loan consumers in the DNA of February 13, 2010) . It is here that the public sector banks have a relatively better record. The Mohanty committee set up to suggest changes to make credit pricing more transparent found that whilst the BPLR of all banks moved up when RBI increased Repo rate the BPLR of public sector banks were impacted (lowered) more significantly than their private or foreign sector counterparts when RBI dropped Repo rates.

In any case this is an area with developing implications as the new Base Rate system scheduled to be operational in the second half of 2010 should improve the transparency on fixation of reference rates for floating rate loans.

However the biggest opportunity is for existing home loan borrowers who are in a regular floating rate loan. Chances are that you are already paying a fairly stiff rate (probably in excess of 9.50%) compared to what is available for new loan consumers today. Get rid of your inertia and shift now to a teaser rate loan and do it now. This is a small window of opportunity, which may not remain open for too long.

with a deep concern on the standard of advertisements being shown by financial institutions like banks and insurance companiesit feels like they have no actual products or services to be sold left that can be publicised about in the adverts, but the superficial claims on their personal relations and stuff, like icici states that chhotti baatein hamesha chhoti nahin hoti and they show a women whoi discusses her sons reasoning for hours even after office hours, this is somethign that noone is ever gonna do for any client but yet they want to make a claim about how they would want it to be rather than how it is.

so these over claiming of adverts should be taken into consideration and not be linked to actual performance ability of the service provider, so with these forms of ads it only one thing for the buyer that u be aware as the companies are only trying to play with the clients emotions and nothign else as an actual service offering

Be an Investor

Use Money in Order to Make More Money follow the “Cash Flow Quadrant”

There are four types of income generators in the world
1.    E – The Employee safe and secure job.
2.    S – The Self - Employed own their own job.
3.    B – Business owner why to do it yourself if you can hire someone to do it for you like Tata, Birla etc.
4.    I – investor who makes money with money.

AS SAID RICH V/S MIDDLE CLASS

Rich Earns    - 30% from E or S and 70% from I
Others Earns - 80% or more from E or S and 20% or less from I

Let’s resolve in 2010 to be an INVESTOR:

The Must Haves!

• “Health is wealth” Absolute Truth; when it comes to health. Remember, for yearly executive health check up. Cover your family under Regular Mediclaim / Family Floater Plans & enjoy tax benefit u/s 80D. Sec 80D allows deduction of max limit of 15000, additional limit of 15000 for coverage of dependant parents and for senior citizen the limit is 20000. Opt for LIC’s Health protection plus alongside  and enjoy tax benefit of Rs 15,000 from 2 different files. Sec 80DD allows deduction of max amt of 50,000 or Rs 1, 00,000 for treating maintenance of severe disability for dependent family members. Sec 80DDB includes deduction of medical expenditure on treatment of prescribed ailments.

• “Review Liability Portfolio “ when Too Much is Dangerous clear all your liabilities especially when we are not getting tax benefit out of it e.g. personal loan, car loan, other than business loans and education loan so that we have complete financial independence. Sec 80E includes tax relief of interest payment on education loan for higher studies of child, spouse & self.

• “Home Loan” Let You Family Inherit the House Not the Home Loan; owing a house is not just a dream but a necessity and there are several tax benefits as well. We can always opt for housing loan, as interest paid on home loan can be deducted up to 1.50 lacs, it can be doubled in case of joint borrowers. Further there is no cap on deduction of interest if the house is either let out or deemed to be let out u/s 24 as this can be worked out as a good tax planning tool at the same time it creates asset for you.

• “Life Insurance “is a plan that exalts life and defeats death; At any time human life value in society is far greater in magnitude than value of all property put together.Life insurance plans not only gives peace of mind, but also help us in securing our liabilities. Premiums paid also qualify for sec 80C & 80 CCC. The maturity proceeds are tax free u/s 10(10D)

• “Ready to retire rich ?” Chase your passion, not your pension; With stretched work hours and strenous routines, saturation level are setting in earlier for the youth today. In such a scenario, early retirement has beecome more a need than desire. Remember, the later you start for your destination, the faster you have to travel …the later you start saving for retirement, the more you have to accelerate your rate of saving You can earn tax free monthly income per month by investing monthly from today. Retirement planning assures dignified and independent life.

• Key Person Insurance ; It is an old cliché, but a true one nevertheless, that one of the most essential elements in the success of any business is the quality of people working within it. As a business owner you are a valuable asset to the company ensuring yourself can ensure your company’s future and protect the future of your business. Cost (premium) under Key man Insurance is 100% exempt from business income u/s 37(1).

• “Prepare for Education and Childs Marriage” through mutual funds. With higher apetite to take risk at younger age we can consider investing in mutual funds or unit linked policies  with respect to short term planning. Investing amounts is SIP’s can lead to better results than having lump sum in traditional bank by taking advantage of the volatility in the market.ULIP and few mutual fund schemes are eligible for deduction u/s80C.

Note;The premium can be paid upto Rs 1,00,000/-to avail deduction u/s 80C,80CCC. However the limit of 1Lac can be exhausted by paying premium under any of the said section

• “Succession planning “the key to better planning; Succession Planning combines elements of business design, ownership/management succession, wealth accumulation, retirement design, and estate planning. For further reference we have added the factor on our website www.bharatparekh.com at InstaWILL

• “New Direct Tax Code”; In this budget finance minister is planning to introduce the DTC code which is believed to more simplified and easy but lets talk abt it once it comes.

Please check if you’ve taken the benefit

• Sec 80C/80 CCC  -  Investments upto Rs 1.00 Lac in Life insurance, ULIP, NSC, tax saver - bank deposits, mutual funds, post office schemes, EPF, PPF, Prin. Payment - home loans & children’s tution fees

• Sec 24  -  Upto Rs 1.5 Lacs on home loan interest payments - For joint borrowers Rs 3.00 Lacs. For let out property, no limit on deduction of interest

• Sec 80E  -  Interest payments on education loan taken for higher studies

• Sec 80D -  Deduction upto Rs 15,000 under mediclaim/ health insurance policies. Additional Rs 15,000 for cover of dependent parents. Sr. Citizens, limit is Rs 20,000

• Sec 80 DD  -  Upto Rs 50,000 for treating  maintenance of a handicapped dependent/ Rs 1,00,000 for treating maintenance of a dependant family member with severe disability. E.g. amt deposited with LIC under Jeevan Adhar plan.

• Sec 80 DDB  -   Deduction on medical expenditure on prescribed ailments

• Sec 37(1) - Cost(premium) under Key person Insurance is 100% exempt from business income u/s 37(1)

Last but not least the “Right Choice”: choose your financial advisor with

• Service Attitude
• Thorough knowledge in his domain
• Efficient team
• Rich experience
• Strong client base.

Markets have really choppy for quite some time now. The largest of the investment banks across the globe are shutting down or writing off huge losses. Recently I got an SMS from one of my friends on analysis of the balance sheets of various investment banks globally:

There is nothing left on the right hand side and nothing right on the left hand side of the balance sheet of investment banks.
At this point of time, the biggest question for you as an investor is to what to do with your savings. Put it in to the equity markets where you not sure if you can ever see your money back or search for some other alternatives to park your surplus funds. Banks are giving out good returns of around 6 to 8 per cent annually for fixed deposits (FDs). The returns offered by them are completely risk-free. But the biggest problem they face is tax deductions. Interest earned of Fixed deposits are taxed at the same tax bracket as the assessee. So if the assessee is in a tax bracket of 10%, effective return on a 8% per annum would come down to 7.18%. Similarly,  20% would come down to 6.35% and 30% tax bracket would effectively become 5.53%. Looking at the current inflation numbers, such returns are nothing but eroding wealth in long term.

At this point of time Fixed Maturity Plans (FMP) have come as true saviors. FMPs are very similar to FDs in structure. The only major difference in the structure of FMPs and FDs is that in case of FDs the returns are guaranteed, but in case of FMPs, the returns are indicative.

FMPs usually invest in certificate of deposits (CDs), commercial paper (CPs), money market instruments, corporate bonds and even in bank deposits. The tenure of the FMPs can vary from 30 days to 3 years. Depending on the tenure of the scheme, the fund manager invests the money collected in to a mix of all the instruments mentioned above. The expense ratio for the same is also quite low which varies from 0.25 per cent to 1 per cent. The indicative yield is generally, the yield minus the expense ratio.

Generally, the fund house has a specified amount which it looks to collect during the new fund offer (NFO) of the FMP which is open for generally 2 to 3 days. The fund house ties up with many borrowers informally before the scheme opens. Based on the interest rates paid to them by the borrowers they calculate the indicative yields.

The main difference other than structure of the products comes on the tax treatment of FMPs. In the dividend option, investors have to bear the Dividend Distribution Tax (DDT) which is 14.025 per cent in case of individuals and Hindu Undivided Family (HUF), and 22.44 per cent for corporate customers. In the growth option, the returns earned are treated as capital gains considered short-term if less than one year and long-term if the tenure is more than one year. In case of short-term capital gains, the interest income is added to your income and taxed at the marginal rate of tax.

For long-term capital gains, the tax liability is calculated using two methods, with and without indexation. Indexation is a technique where inflation doesn’t erode the real value of the investments. This is generally done to maintain the purchasing power parity of investors. Due to the indexation benefit on FMPs, they manage to give more tax efficient returns compared to FDs. For example, if the return on FMP is 10 per cent for a year. Then the post-tax return for the same would not be less than 8 percent considering the effect of indexation. Even without taking the benefit of indexation, the returns would be in a range of 7.5 to 7.6 per cent which is fairly higher than what is offered by FDs.

These schemes are not advertised heavily as the brokerage is too low. Thus, keeping track of new fund offers of FMPs is really a tough job. You need to really be after the brokers for information on open FMPs in the markets or keep track of them on the Internet. However, at any given time, there are many FMPs open with varying maturity. So searching out an FMP for a desirable tenure is not that a tough job. And looking at the kind of return, the FMPs are worth that effort.

“ My father aged 69 years was retired and staying with me. He had a credit card since the last 15 years. He expired last year in October and since January this year I have been harassed by phone calls from the bank claiming that there is an outstanding of Rs. 32,000 on his card. Now they want me to pay this outstanding. Is it legal for the bank to demand the dues of the father from his son? What should I do? - Rajesh Batra, Gurgaon*.

As soon as I saw this query on our Ask the expert section of Apnapaisa, the memory of late Bollywood actor Kanhaiyalal (who played money lender Sukhi Lala in Mother India) flashed in mind…Circa 1959.

Here was the new age Sukhi Lala (Circa 2009) who is passing the debt baton from one generation to another…till now I thought that times had changed. The tradition of passing the debt from one generation to another was long dead say since independence.

I always felt that Sukhi Lala - the villainous moneylender in old Hindi films – notably Mother India – extracting money from sons for loans taken by their father was more a caricature than the truth. But here was Rajesh with exactly the same dilemma in 2009.

To rescue people like Rajesh, I consulted a few legal expert friends who gave me the low-down on this:

1) First they corrected me about the “Mother India” analogy. In Mother India the father (played by “Jaani” Raj Kumar) had mortgaged his farmland for taking the loan. Hence the repayment was forced from the heroine (the incomparable Nargis) and her two sons because they were emotionally attached to that land and wanted it to be released from the moneylender’s clutches. If they had refused to pay, the moneylender could have proceeded to take possession of the property and sell it to recover his dues along with interest (at a draconian rate). In the case of Rajesh’s father, it was an unsecured loan, hence clearly this was not applicable.

2) Second the bank only had the ability to proceed against the estate of the deceased. So Rajesh would be liable for the credit card debt only if he had inherited something from his father and that too, up to the value of what he had inherited.

Acting in accordance, I wrote to Rajesh to check if he had inherited anything from his father. He mentioned that he only inherited some personal stuff (such as a ancient copy of Ramayan that his father had nurtured his entire adult life) with almost nil economic value. We told him to write to the bank giving all these details and if they still persisted to file a complaint with both the RBI as well as the police for undue harassment. My lawyer friend also advised him that he would have a good case for damages against the bank if they persisted in trying to recover the money even after they had been advised about the facts in this case.

Rajesh accepted the advice and wrote to the bank. Post that the recovery calls from the bank stopped.

However the story had an unexpected ending. Rajesh checked with me whether his fathers name would show up as a defaulter in the Credit Bureau’s records. I informed him that I was not sure of how the bureau dealt with records of people known to be deceased but it was most likely that his father’s record will show up as a default for the next 7 years. This was not acceptable to Rajesh as he said that his dead father had led a blameless life and had never defaulted in his entire life. Rajesh said that he would settle up with the bank to ensure that his dead father’s name was not sullied anywhere. Last I heard he was in the process of settling the bank’s dues to get the name of his father cleared.

For me this was an extra ordinary ending as it highlighted not just Rajesh’s love for the memory of his dead father but also the efficacy of the newly established credit bureau to bring down the overall outstandings in the retail lending scenario.

Hail the spirit & concern of people like Rajesh!

* Name changed to protect the identity.

Interest rates on home loans for new consumers have come down by around 4% since September end 2008 but consumers who had the misfortune to take their loan before that have only seen their rates drop by around 1.50% – 2.25%.  

We are inundated with anguished queries from existing customers where they raise concern about this partial treatment like “I have taken a floating home loan from XXX bank in 2005. At present the interest rate I am paying is 12.5% whereas for new customers it is around 9.25%. Why this discrepancy? Isn’t there any rule that forces the banks to pass on benefits to existing consumers as well? Can I take legal recourse? “

Firstly fixation of floating rates in this manner is in direct contravention of existing RBI regulations. See this article for details of this regulation (http://blog.apnapaisa.com/2009/09/15/why-some-regulations-are-more-important-than-others/) . So your best bet is to file a complaint to the banking ombudsman about the non following of the regulations.

But if that is too slow for your tastes you as a consumer have other options as well to benefit from the drop in rates.

You too can take advantage of the drop in interest rates if you have maintained a good track record of payment with your existing lender.

As a first step, you will have to devote a bit more time on this major financial obligation than you probably have done so far.

Secondly find out what interest rates the lenders  (including your existing lenders) are offering in market for new consumers. This can easily be done from the comfort of your home or office by referring to price and feature comparison sites such as www.apnapaisa.com.

Thirdly if your existing lender is more or less in line with the market, your best bet is to make that valuable call to your existing lender to say that you want to pre-pay the loan and want a statement of overall dues so that you can make the pre-payment. Almost every single bank will offer you an option to shift to the rates that they offer to new consumers (or very close to that) on payment of a fee.  If you are the lazy type and cannot be bothered to do much more, you can accept this offer and still save significant monies over what you are currently paying. But ideally if you are of the type that wants to get the best possible deal and are willing to work for it then read on…

Before you decide to switch lenders, shop for a better deal. It is necessary to get a fair idea of the offers available from other potential lenders. Remember for these other lenders you are a new customer and they will offer their best rates to you. Approach various lenders with the intent of transferring the loan.

With new lender, the process largely resembles that of taking a new home loan. You will have to fill in an application form with the requisite details annexed with photocopies of all the property documents that you had   submitted to your existing lender. The new lender will do the legal and technical vetting of the property as well as valuation and then you will get a sanction letter from them outlining the terms and conditions of their loan to you.

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Pointers:

1.      Maintain good track record of payment

2.      Shop for the better deal

3.      Compare various deals offered by banks/ lenders

4.      Approach lenders with the intent of transferring the loan

5.      Be prepared to undergo some operational grind before the loan is taken over

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Now comes the tough operational part before you can actually start enjoying the lower interest rates from the new lender.

You will need the following letters from your existing lender:

A) Letter giving the details of the amount to be paid to completely settle the entire loan. This letter will have to mention the details like total loan amount taken, the loan amount outstanding as well as the prepayment charges, if any. The amount mentioned will be calculated as on a future date, to enable time for the buyer to arrange the payment. This letter is pretty standard and should not be too tough to get from the existing lender.

B) Letter listing all the documents held by them as security for the home loan. In most cases if you have an official receipt for the documents submitted to them at the time of disbursement then this letter may not be needed.

C) Letter from your existing lender addressed to your new lender agreeing to release the documents of title directly to them (the new lender) within a fixed number of days after receiving the full payment from them. It’s this letter that causes the issue particularly if your existing lender does not want to cooperate (after all he is loosing a good customer). There is no compulsion on your existing lender to give any such letter to a third party (your new lender) with which it has no contract. This is the letter for which you have to do a couple of rounds to your existing lenders office to get them to issue it.  

Once you get this letter from the existing lender, the new lender will make payment in favour of the existing lender to close the account and also collect the documents from the old lender.

You can then go ahead, enjoy the fruits of your labour.