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.

“I have a mediclaim policy for the last 5 years for myself and my wife. We were recently blessed with a child. The only thing that marred the joyful experience was the refusal of the TPA to reimburse the expenditure of Rs. 23,000 incurred during the hospitalization of my wife while giving birth. Is the TPA correct in refusing to reimburse this claim. How do I get this money? My agent had never told me that pregnancy expenditure is not covered. What is the use of a mediclaim policy that does not pay when you are hospitalized.”

This is one of many such emails that we receive at Apnapaisa daily from anguished mediclaim policy holders. Now pregnancy and childbirth related expenditure is permanently excluded from most individual mediclaim policies issued by the Insurance companies. Even in a few cases where it is allowed it is only for a limited sum of money (irrespective of the total sum assured) and that too after you have renewed the policy with the same company for quite a few years.

Similarly there are a host of other permanent (or temporary) exclusions that are not covered by most of the mediclaim policies such as :

• Wars, Invasion, Act of foreign enemy

• Nuclear weapons or radiations due to nuclear waste or fuel

• Circumcision unless necessary for treatment of a diseases or necessitated due to an accident

• Non-allopathic treatment

• Pregnancy and childbirth related complications

• Cosmetic, aesthetic and obesity related treatment

• Expenses arising from HIV or AIDS and related diseases

• Expenses arising due to misuse of liquor, intoxicating substances or drugs as well as intentional self injury

• Vaccination or Inoculation

• Vitamins, tonics, nutritional supplements covered only if needed as part of treatment.

• Any fertility, sub fertility or assisted conception operation or sterilization procedure.

• Cost of specs, lenses, hearing aids, crutches, limbs, artificial teeth

From the queries that we receive on our site it is clear that very few consumers are aware of these exclusions.

Clearly a lot of reasons exist for this ignorance :

First the consumers themselves :

For most people if you contrast the amount of time they spend on buying a pair of shoes versus buying a health insurance policy, the pair of shoes will show higher amount of time spent . Clearly unlike a pair of shoes that will be worn for maybe a year or at most a few years, a health insurance policy will be there with him for a substantial part of his lifetime. For that he will blindly depend on the suggestion of the agent without looking into the details himself. I think it is important enough purchase that he should spend some time to read the policy wording (or at least a detailed look at the brochure )

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There are two types of exclusions – permanent and temporary besides diseases covered with a limit.

Permanent Exclusions

• These are the main exclusions of the policy, which are never covered, in an insurance plan. These are the famous list of causes or condition because of which the claims are rejected and the company says that we don’t cover these diseases or we don’t cover these plans.

Temporary exclusions

• These are exclusions, which are there for some period of time say one year or two year. Diseases like cataract, hernia and many more come under this category. Other than that pre existing diseases if any are covered after certain number of years. This keeps on varying from policy to policy. It may start from completion of one policy year till five policy years.

Diseases covered with a limit:

• There are certain diseases which are covered within the policy but with a certain limit. Say for example a policy may say that it will cover Cataract but with a limit of only Rs. 15,000. This means that whatever cost you incur due to hospitalization for cataract, the maximum you can claim is Rs. 15,000.

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Second the Health Insurance Industry itself

A recent trend that has many disturbing implications for the future is the practice of having permanent exclusions that are worded very widely or sometimes specific exclusions that are particular to that company only. We tried to do the research on quite a few products available in the market. Some of the exclusions mentioned in the policy wordings took even us by surprise when we examined them a little deeply. This simply means how important it is to read these exclusions before buying the policy and how misleading it can be to buy a policy before understanding the exclusions of the policy.

Here is a partial list of such “surprising” and “individualistic” exclusions:

1. Injury caused due to the performance of hazardous sports of any kind

2. Act of terrorism

3. Puberty & ageing

4. Artificial life maintenance

5. Hereditary conditions

6. Treatment for any mental illness or psychiatric illness.

7. Treatment relating to birth defects and external congenital illnesses

8. Treatment by a Doctor which is outside his discipline; referral-fees or out-station consultations; treatments rendered by a Medical Practitioner who shares the same residence as an Insured Person or who is a member of an Insured Person’s family, however proven material costs are eligible for reimbursement in accordance with the applicable cover.

Lets take an example of hereditary conditions. So if any of my father or my grand father was suffering from heart disease and I happen to get the same long after I have taken the policy , it may not be covered even though it was not pre-existing at the time when I took the policy. Similarly, artificial life maintenance system forms a part of permanent exclusion of a particular policy where this is the most costliest part of the hospitalization expenses in today’s time.

There is a huge necessity for the regulator to look in to the same, as most of the conditions mentioned in the exclusions part of the wordings are too complicated to be understood by the common person (in fact it took our team of seasoned experts here about 2-3 days to make some sense of all the exclusions ). Secondly, if we pick up brochures of any of the company, then they mention a synopsis of the exclusions and not all of them. Lastly, any particular exclusion mentioned in two policies is different in wordings in both the policies. And it is very difficult for anyone to understand that both the exclusions effectively mean the same.

There is a huge need to standardize these exclusions. Any of the insurance company, which wants to keep exclusions over and above this list (or in a different wordings), should highlight the exclusions, which are not a part of those standardized exclusions. This will need to be enforced by IRDA – which is the regulator.

Contrary to popular opinion exclusions are not necessarily bad for consumers as most of them prevent the abuse of the system. If the abuse is allowed it will add to the cost of the cover and all consumers will suffer for the acts of a few. There is then a big need to carry out an extensive public awareness program about the standardized exclusions (and the need for them) as well as how to look at any exclusions that are different from the standard set of exclusions.

Let’s all hope that urgent steps are taken to make the health insurance policies more transparent and effective so that this essential pillar of social need can be spread far more widely.

I would welcome the views of the readers on this most vital issue.

Recently, an incident reported in media caught everybody’s attention, where a lady who was allegedly drunk and was under the influence of alcohol banged her car into a traffic policeman, as well as a biker whom the traffic policeman was checking. Sadly both died in this unfortunate accident. There are many such instances which have been highlighted by the media in the past also. It is worth mentioning that at least in Mumbai we have seen that the traffic police’s consistent drive against drunk driving, has succeeded in reducing the road accidents to a significant extent, thus clearly establishing the connection between drunk driving and accidents.

In fact the Motor vehicle act states that if any person while driving (a) has in his blood, alcohol in any quantity, howsoever small the quantity may be or (b) is under the influence of a drug to such an extent as to be incapable of exercising proper control over the vehicle shall be punishable for the first offence with imprisonment for a term which may extend to six months. So drunk driving carries stiff legal penalties besides the social stigma that it brings and of course it also has an impact on your insurance policy.

Let’s turn to the impact of drunk driving on matters of insurance.

If we look at life insurance, there are two things to consider –

1) The death of the person herself/ himself while driving under the influence of alcohol. My colleagues and I spoke to various life insurance companies and also looked at various policy documents. We believe that the death caused in the above circumstances would still be covered under the basic life insurance policy, although in most cases if she/he has taken an additional rider for accident insurance (to pay additional sums of money over and above the basic sum insured in case of death due to an accident or the accidental disability benefit) , it will not be granted to the person driving under the influence of alcohol.

2) If we look at the Motor Insurance policy documents then the reading of the policy documents and discussions with the general insurance companies seem to suggest that the affected third parties ( in the reported case the policeman and the motor bike driver) will still be eligible to be paid the damages despite the driver causing the accident while under the influence of alcohol. Of course the courts reserve the right to decide who shall pay the damages (whether the owner of the vehicle or the insurance company) and in most such cases the court is likely to ask the owner to bear the payment rather than the insurance company. Coming to the damage to the car itself, this will not be payable by the Insurance company as the damage occurred due to the actions of the driver, who was drunk.

In most countries drunk driving or speeding gets you not only a suspension/cancellation of license but it also increases the insurance premiums for the future. But in India Car insurance policies are not issued with named drivers. In the UK your car insurance premium will depend on the age and the driving records of the named driver (and if you name more than one driver the premium will be higher) and the insurance monies are not payable if the accident is caused by a driver who is not named in the policy. In India this is a far cry as we are not even able to identify who was driving the car at the time of fatal accident ( Readers will remember the fatal accident at Bandra which was allegedly caused by a famous film star while under the influence but till today the prosecution has not been able to conclusively prove who was driving the car. Since selective increase in car insurance premiums is not an option in India ,everybody has to share the burden of the losses caused by a few drivers who indulge in drunk driving.

So more power to the Mumbai traffic policeman (and their counterparts in other cities) who make sure that the road accident rates come down by strictly enforcing the rules against drunken driving.

Remember this the next time you grumble about the delay caused at a check point while returning home late from the office or a party. And if you have downed a few and have still chosen to drive, I hope they put you in a cell and throw the key away.

The modern day consumer is in a perplexed state owning to the multiple loans he has to service for fulfilling his various needs/ wants.

So are these loans bad or bad?

Loans, probably being my ‘middle’ name, this question coming from me may surprise many as I have been advising consumers on various facets of loans for many years on a day-to-day basis. Here I would like to draw a parallel from Bollywood movie Dayawan where film ends with a question by child character – Was Dayawan (the protagonist who plays a mafia don with a heart of gold) a good person or a bad person?

So it depends on your perception.

They are good if you are able to manage and balance your loan portfolio, besides having a good repayment capacity. But it becomes a messy affair if they are not managed well or your repayment capacity takes a beating.

Ideally loans should be a means of creating assets or enhancing earning capacity. Then they are also a means to attend to unexpected emergencies. They are a “must” whatever situation you are in but the purpose of the loan plays a crucial deciding factor. The other deciding factor is the cost of the loan. The purpose of loan must also be cost effective. As you need loan to fulfill the need for more than one asset at a time, it is very important to priorities your loans.

If you are undertaking “hair cutting” course for Rs. 20 Lacs, it may not be worthwhile, as the earning capacity may not be enhanced that much. Even when the loan is for a good purpose say paying the fee for an educational course that will substantially add to the earning capacity but if the cost of the loan is too high, then it will not remain a good loan.

At the top of the hierarchy most loans taken to fund education for self or a family member would normally qualify to be a “good” loan as they create substantial earning capacity relative to their cost and are normally available at a reasonable interest cost. Tax breaks on the interest would also reduce the post tax of the loan substantially.

Second would be loan taken to fund a reasonable cost house for your own residence. Normally this asset price appreciates in value and will also act as a source of pension income or retirement through the medium of a reverse mortgage. Third would be a loan taken to buy your own reasonably priced vehicle (two-wheeler or four-wheeler). This may result in a boost in your productivity given that public transport in most cities in India is quite poor.

Then there are loans taken for consumption such as for funding or an expensive/ luxury consumer durable.

Basically there are two types of loans - Secured loans are loans such as home loan and vehicle loans. They are backed by your assets in order to minimise the risk assumed by the lender. The assets may be forfeited in case there is a failure to make the necessary payments.

Whereas unsecured loans are personal loans and credit cards, where the lender has no entitlement to any of the borrower’s assets in case borrowers fail to repay the loan. Such a loan normally carries a higher interest rate than a secured loan. Repayment plans of loans vary based on each type of loans. Home loan repayment plans can be as high as 20 years or more, whereas vehicle loans can be repaid in 3, 5 or 10 years, and the credit period for credit cards is around 50 days.

The consumerism boom fuelled by the presence of modern places of worship – Malls, has led to the phenomenal growth of plastic money. Swipe…swipe…swipe is the new mantra chanted by one and all. And the prasad of this mantra is debt…debt…and more debt. The debt on the credit card for longer duration will land you in a financial mess. The borrowing on credit card should not exceed 30 – 45 days, as interest charged is very high on such credit.

Last would be loan taken for speculative purpose such as investments in stock markets. These are strict No-No.

I would like to quote Benjamin Franklin here: “Remember, credit is real money,” which we tend to forget.

Thus it is important that you make it your personal goal to pay your credit on time as it will impact your credit rating.

So to end – remember loans can be very useful – nay – essential to improve the quality of your life and your future generations. At the same time it has the potential to destroy your life if used unwisely.

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.

My friend Raj was staying in a 5-star hotel while on a trip to Mumbai from New York, invited me and two of our other friends over for dinner at one of its posh restaurants. We enjoyed an excellent dinner and all went fine till the time comes for paying the bill. The maitre-d comes over and asks you if we are staying with them and if so whether you are staying in their regular room or their suites or the presidential suite. When we asked him the reason for the question, he tells you that the charges for the dinner will depend on the class of the room that you are staying in.

Don’t you find that strange? I bet you do. After all, this service (the dinner) is outside the room you are staying in, the ambience is the same for everyone in the restaurant, the chef and his staff and the kitchen is the same, the food is the same and it is delivered by the same set of waiters in the same room irrespective of which class of room you stay in (or whether you stay in the hotel at all or not). You will no doubt argue that for the room itself you will be required to pay a daily charge in accordance with the class you choose to stay in and why should any other service not provided in the room be charged on a differential basis.

But strangely nobody argues when hospitals charge for everything based on the class of room that you stay in. If you choose to stay in single air conditioned room (called first class or deluxe or whatever) not only the daily room rent but even the operation room charges, medical procedure charges, doctors fees, etc. will be 2-5 times higher than if you were staying in one of their general wards. In fact, if you are unfortunate enough to be shifted to the ICU from your room, the charge in the ICU (which is exactly the same for everyone irrespective of which room you originally were in) also follows the same lop sided pricing pattern. The only reason hospitals have this pricing basis is because unlike the hotel (where the guest can go to another hotel/restaurants for dinner) they know that their consumer is captive and can not go anywhere else for his treatment. In fact for the only item where the consumer has some choice (medicines) most hospitals do not have this differential pricing based on class of bed. A quick check with medical practitioners reveals that this kind of differential pricing is unique to India and not practiced in any other major country. The only argument given in favour of this practise is that this is to cross subsidise the poor general ward patients who the hospitals are required to treat for free (or at highly concessional rates) as most of them (the hospitals) have got the land at a cheap rate from the government and/or have also availed other fiscal concessions from the government.

Most consumers may be forgiven if they think this only affects the rich people since they are the only ones wanting to stay in first class (or deluxe) rooms where such differential is the highest. However, as anyone who has had the unfortunate experience of trying to get an unplanned admission for a loved one will attest, invariably most hospitals will say that all beds are available only in the private first class rooms. Consumers have no choice but to accept that or do the round of the hospital administration pleading with them to give them rooms in the lower class, which are more affordable.

The Indian health insurance industry is becoming large and accounts for a significant portion (around 8%) of the hospitals billings and one would have thought that they would use their clout to get such practices changed. However, very clearly the health insurance industry has yet to acquire that much clout. Most insurance companies try to reduce the burden by restricting the daily room rents that they will reimburse under the health insurance plan. In such cases consumers have to bear the difference between the maximum room rent payable under the insurance plan and the actual room rent charged. However, in a worrying trend, at least one company has introduced a co-pay provision under which the consumer will pay for the higher expenses (on operations, doctor’s fees, etc.) charged due to the customer opting (or being forced to take) for a private air conditioned room even though the total expenditure may be well within the policy limits. Clearly the insurance company is transferring the entire burden arising from such differential pricing practices on to their consumers.

Health care reform, especially for issues that affect only the middle classes, is still not big enough to become an election issue in India. However with the growing assertiveness of the middle class which is no longer prepared to accept the below standard services in public hospitals and who bear the brunt of such differential pricing policies in the private health care hospitals will ensure that sooner rather than later these kind of practices will invite regulations from the government. Till then the consumers must take care to choose their insurance company appropriately or just grin and bear it.

guarantee on the highest NAV of their ULIP scheme. ULIP funds invest in market listed securities which can be both

equity and debt related. Since these schemes are long term in nature, investors invariably choose 100% equity

allocations. Such investors had taken a huge beating during the crash of 2008 and have seen significant erosion in

their investment values. This volatility had put off potential as well existing investors from committing more funds into

these schemes.

Now “Assured Highest NAV” schemes have been projected as the ultimate solution to market risk. You are guaranteed

the highest Nav during a certain period, or fund value whichever is higher at the end of term. What sold to investors is

the idea that the fund will be invested completely in equities and the highest returns from such an equity portfolio will be

made available to them. This is not the truth.

First let us understand how these products work

1. The initial investments may be 100% equity or a combination of debt and equity depending on the strategy followed

by the fund manager

2. The fund manager follows a portfolio insurance strategy that can be done by allocating funds between debt and

equity – Here the fund manager sells equity as the market falls, so as to protect the downside. Unfortunately the

‘guarantee’ on highest Nav does not allow for the reverse to happen i.e. to buy equities as the market recovers. This

results in sub-par returns from the Equity portfolio

3. Money removed from the Equity portfolio is invested in debt. The proportion of debt increases steadily and soon the

debt part of the portfolio will become large enough to ensure the highest NAV.

So let’s say over the next 10 years a 100% equity portfolio will deliver a 15% CAGR. A ‘highest NAV assured scheme’

will deliver anything between 6 to 10% CAGR during the same period. From this further deduct costs that when spread

over the duration of the scheme could range from 3 to 4% p.a. You also pay for insurance (mortality charges). So cut

out that too from your returns and you will see that these are really inferior products. In fact they are inferior to even

regular ULIP products because the guarantee on highest NAV is available only if you survive the term. If you die during

the term, your nominees will get the prevailing value of the fund. They are inferior to even a regular debt product

because of the high cost structure.

A guaranteed NAV does not guarantee ‘equity linked’ returns. There is no way of knowing what the highest NAV would

be and that Nav would probably have nothing to do with the stock market’s highest level during the same time. The so

called guarantee is a marketing gimmick and is implicitly a result of the way the investment is structured i.e. with high

proportion of debt. As an investor you are paying for such a guarantee, by accepting less than optimal returns.

Please evaluate your insurance needs and asset allocations before investing in any product. And it is best to avoid

expensive investments for your long term goals. To get equity related returns invest in equities. A good quality, well

constructed portfolio is a better guarantee to optimal returns.

by kavitha menon

A small headline in a leading paper caught my eye. A “Right to health bill” has just been introduced in the Assam state assembly. In any case we have a draft National Health Bill 2009 that has been open for public debate for the last several months. Clearly the long neglected health sector is finally seeing some much needed attention from the Central and State governments.

It is in this context that one is surprised to see the proposal in Pranabda’s budget which seeks to impose service tax on the services rendered by the hospitals where the payment is made to them by the Insurance companies and/or the TPAs directly. This happens on what is popularly called as “cashless” facility under the health insurance facility.

I have already written about how hapless “mediclaim” (as hospital expense reimbursement policies are popularly known) consumers are already being denied the cashless facility (see my column in DNA on February 20, 2010 weblink: http://blog.apnapaisa.com/2010/02/19/will-the-health-insurance-imbroglio-ever-get-solved/) due to the problems between the Insurance companies/TPAs on the one side and the hospitals on the other side. If Pranabda’s proposal service tax proposal is approved even in the cases where this facility is available it will become far more expensive. This is adding salt to injury since the consumer has already paid service tax on his insurance premium. And the irony is that, this levy is unlikely to yield a single rupee in extra revenue to the government.

Consider this example. The Insurance Company approves the cashless facility for a particular patient to the hospital for treatment costing Rs. 2 lakhs. In such a case the hospitals will have to charge a service tax of 10.30% on the total bill amount (that is the bill amount will be Rs. 2 lakhs plus Rs. 20,600 as service tax) and the Insurance Company will pay Rs. 2,20,600 to the Hospital. Now the Insurance company is likely to have the right to set off this service tax amount of Rs. 20,600 against it’s own liability to pay service tax on the Insurance premiums that it collects from all its consumers. This in effect will mean that the government is actually collecting this service tax amount from the Hospitals as against collecting it from the Insurance companies with zero increase in overall service tax revenues. Meanwhile the consumers are likely to suffer, as the amount of service tax paid to the hospitals is likely to use up their claim amount limit even though it may not result in a net cash outflow for the Insurance Company. To summarise the end result will be – Hospitals – not affected because they will collect it from the Insurance companies, Insurance companies not affected because this will not result in any additional cash outflow for them due to adjustment against their service tax liability but consumers can be the only ones who are affected as this is likely to reduce the amount of their health coverage. Of course the Hospitals and Insurance companies cannot rest easy till the rules (most experts Apnapaisa spoke to were not sure about them) are clear that this levy will follow the basic principle of allowing input credit that is a cornerstone of the modvat and service tax regime (as well as the GST that is slated to take over next year).

Given this situation of no extra revenue accruing to it, it is unclear why the government has chosen to impose this tax in this manner at this stage.

The Draft National Health Bill 2009 states that health is a fundamental human right indispensable for, and intricately linked with, the exercise of all other human rights. It is also a fact that India is among the bottom 5 countries in the world (that’s right we are in the bottom 5 countries) in terms of public health expenditure as a percentage of the total health expenditure. So given that the government is unable to provide this basic human right to its own citizens and he is forced to turn to private insurance providers and what’s more is already paying service tax on such premiums, the imposition of this tax in this manner is rubbing salt to the injury.

Nobody can argue with the government’s need to raise more resources but in this case, if the tax is imposed in a reasonable manner, no additional revenue can result as discussed above. One only hopes that better senses will prevail and the tax in its current avatar will be dropped. If that is not possible then a quick clarification on how it will work may also ensure that the fallout from this levy causes the least amount of damage to the consumers.