The Reserve Bank of India has hiked the Cash Reserve Ratio by 0.75% to 5.75% (as against the existing 5%) in the third quarter review of monetary policy announced today which will be implemented in two stages. The Central Bank has left unchanged the Reverse Repo, Repo, and Bank rate at 3.25%, 4.75%, and 6% respectively.

So what does all this translate into for customers like you and me?

For what is CRR and how it affects interest rates, please see box.

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What is Cash Reserve Ratio (CRR)? Banks are mandated to keep certain percentage (now increased to 5.75%) of their deposits with RBI. This is the Cash reserve and the %age required to be kept as a cash reserve is called Cash reserve ratio or CRR. Thus, an increase in the CRR leads to banks being forced to keep more money with RBI reducing the funds available for lending. As less money is available to the bank to lend there is bias towards increase in rates as per the normal laws of supply and demand. So an increase in CRR will normally result in an increase in interest rates (and vice versa a reduction in CRR will normally result in a reduction in interest rates).

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The quantum of the increase is at 0.75 % was a tad higher than the market consensus of around 0.50%. RBI has increased the target growth for 2009-10 from 6% to 7.5% for the year, and have clearly indicated that their policies will now shift from ‘managing the crisis’ to ‘managing the recovery’, and thus reverse some of the earlier steps undertaken to provide liquidity in the market. They have also indicated that the “recovery is getting established and inflation fears are coming true”. In fact we can expect more such action including increase in Repo rates, Bank rates Reverse repo rates. (See box for what these rates are and their impact.)

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What is Repo Rate?

The repo rate is the rate at which RBI lends short-term money to banks under a specific secured mechanism. When the liquidity in the markets is high, the RBI increases the rate at which it lends to the banks to make it more expensive for the banks to borrow money from RBI. Thus banks have more expensive money with them to lend to consumers and have in turn to increase their own rates. Thus increase in repo rates have a bearing on other interest rates like your bank FD rates, home loan rates, and so on.

What is Reverse Repo Rate?

It is a mechanism by which banks can park short-term money with RBI. The rate of interest that the bank gets from RBI for such money thus becomes the floor rate for all interest rates at this return is guaranteed to the banks. When this rate goes up naturally the overall interest rate will tend to increase as well.

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How are consumers impacted with these economic moves?

If you strip away the conservative language favoured by all regulators, it clearly means that interest rates are on their way up as far as the regulator is concerned, and hence we will definitely see an increase in overall interest rate during this year. But the quantum of the increase will depend on how inflation shapes up, and that in turn will depend on a host of factors such as demand for credit, monsoon, etc.

Still the question remains how does it affect you and me?

For savers and investors: If you are thinking of depositing monies with banks, then it is advisable not to get into long term deposits. Instead of making a 5 - year deposit you should make a 6/12 month deposit, as it is very likely that when the renewal comes up then you will be in a position to get far better rates.

For new loan consumers:

If we look from a borrower’s perspective, interest rates may not get affected immediately (in the next 45 days or so) but clearly there will be an increase in interest rates the near future. So if you were going to buy a home or a car in the near future, then it makes sense for you to prepone your borrowings immediately and go in for the current teaser rates into the safety of fixed rates for at least 2-3 years. Teaser rates for a year or so are available in car loans as well and customers should look at that also.

For existing loan consumers:

Well if you were smart enough to have taken a teaser loan in the last 6-9 months then just wait and watch since you have already made the right move. But if you have borrowed on a regular floating rate, then you should immediately shift to a teaser rate loan. Do it in next two – three weeks itself before interest rates start to harden or the teaser rate schemes are withdrawn. I repeat – do it now!!! If necessary the shift can be to the same bank from their regular floating rate loan to a teaser rate loan.

Sure the teaser rate loan only secures you for the medium term (the first 2 -3 years)

But it is better than nothing. To quote John Keynes “ ….in the long run all of us are dead….!!!

Your best friend is getting his house furnished at a total cost of Rs. 10,00,000. The work is likely to take around six months to complete. His interior decorator proposed that he (your friend) could get a discount of 1% (Rs. 10,000/-) if he pays the full amount upfront rather than the normal practise of paying for the work as per the work’s progress. Your friend has approached you for advice.

In this scenario most of us would correctly advise him to forget about the discount. It is not a sound practise commercially to pay in advance for a promise of delivery that is so far in the future. By paying in advance you are completely under the power of the supplier and run the risk of loosing your advance amount completely or being forced to accept delays in delivery or accepting lower than acceptable quality. There is no leverage at all that you have on the supplier unlike a case where you pay on progress where at least the incentive of future progress payment can make the supplier toe the line.

Would your advice be any different if your friend was taking a loan to pay for the cost of furnishing? In fact that will make the advice even stronger because the risk that you are taking is now not your own money but money borrowed that you have to repay.

Given this I am constantly amazed at the number of people who will swallow a similar bait of a discount in price in lieu of full payment for an under construction property that may be delivered after a couple of years. Given the maze of local and state and central regulations and the number of permissions required at every stage even the most well intentioned builder cannot really promise a firm delivery date. In the opinion of most consumers, builders (of course like all classes there are exceptions) are not exactly known for keeping all their promises. So one would expect that hardly any consumer would opt for the “Pay in full now and get attractive discount with delivery after 3 years” scheme.

Not really! Consumers opt of this because one - these schemes are attractively packaged and many times builders have tie-up with specific Bank under which you pay your down payment (say 15-20% of the total cost) and the balance amount is disbursed by the bank immediately to the builder as your home loan.

The options are:

• The EMIs can begin immediately. The consumer may be led to believe that he will get tax benefits on the EMI but he does not know that you cannot get tax benefits on such EMIs. Tax benefit on repayment of principal and interest on a loan taken to buy a house is eligible for tax benefit only from the year in which the construction is complete. For any year if the house remains under construction as on March 31, no tax benefit is available in that year notwithstanding the fact that you might have begun repayment of the loan through an EMI.

• The builder promises to fully or partially pay the EMIs till the construction is complete. But remember this is an arrangement between you and the builder only and it does not involve the bank. The liability to pay the EMI to the bank remains yours and if for any reason the builder stops paying the EMI, your liability to pay the bank remain as it is. If you refuse to pay the EMIs to the bank if the builder stops paying his share, your credit history will be damaged in the Credit bureau.

In both the cases effectively, you are taking a loan to pay off the builder in advance. In my opinion no amount of discount can justify your taking such an open-ended risk.

So should you not buy an under construction property?

It is always preferable to buy ready to move in property but that is not always possible. You may not have good properties with all the facilities that you require available on a ready to move basis. Or a delayed delivery schedule may actually suit your requirements in many cases.

You can minimise the risk while buying under construction property by doing the following:

1. Look at the full cost of under-construction property by figuring out the Value added Tax, Service tax and works contract tax liability, if any.

1. Always opt for construction linked payment scheme.

1. Choose only under construction projects pre-approved by at least couple of banks as this indicates that the legal title of the property including building plans has been vetted by these banks and found to be satisfactory. Also choosing one of those banks will smoothen your disbursement formalities. However, even in these cases, the risk of delayed construction remains yours in spite of the project being approved by the bank. Your liability to pay Pre-EMI interest and/or EMI on the disbursed loan amount remains even if there is delay in construction in this bank “pre-approved” project.

Incidentally an innovative scheme needs mention here under which Nahar Builders in Mumbai have tied-up with HDFC Ltd. wherein the customers pay 20% of the property value upfront and the balance 80% is disbursed by HDFC to the builder only on possession being handed over to the consumer. So here by paying 20%, the customer is able to book the property and the liability for the balance 80% commences only on possession. Unfortunately I am not aware of such a scheme being replicated anywhere else.

Many of my friends have disagreed with my opinion in this matter and I would be eager to receive feedback from readers on this issue.

The ever imminent problems which the country of India faces are money laundering, corruption, black money which leads to the main problem of terrorism. When we say that there is terrorism is affecting the country’s security and hence leading to an environment not worthy of investing in the country leading to FII taking out the existing money from our country and not putting in money if they were planning about doing it.

The very simple way of solving this problem is by stopping the printing of notes with high denomination. Like in the UK there is no note above 50 Pounds and very rarely will you find a $100 note in the USA. This is something very important in stopping the fake currency scandal which in turn will stop all the other problems on its own.

There should be no notes of value greater than Rs. 100 so that like in many developed countries. And take out all the notes of higher denominations out of circulation. This will make it very difficult for corrupt parties to carry black money from one place to another unlike now due to the large Rs. 1000 notes they can carry a large amount in a very small briefcase unnoticeable by officials, but if the same amounts were to be carried in Rs. 100 or Rs. 50 notes then the loads and size of the parcel will be more than 10 to 15 times the original load making it very difficult to transport the bribe amounts.

The next topic about black money, only because of the high denominations people are able to hide a large amount of their black money in their house floorings and walls so if these notes are to be cancelled and new low value notes to be brought in then they will not be able to use it or even hide it as they will have to get the notes changed and In the process the black money can come in broad day light and the offenders can be punished and at the same time the government should only take back the notes which are in their serial order lists so that all the notes that are not in the records can be tagged as fake currency and be burnt

The next stage is of discussing about the printers of fake currency, they are able to do so as they get a very high margin and value out of printing a high valued currency bills and getting profits many times over their cost and also worth the risk that they take in doing the illegal act of printing and transporting the notes inside our country. So if these notes are only of Rs. 50 then it will not be feasible to take so much risk and hurdles involved in printing these fake currencies. So the printing will also stop

So now finally coming to the main problem of terrorism, the main way in which they are able to buy the weapons is through the way of fake currencies. Because they are very closely linked to the people who are directly associated with printing fake currencies and once they have injected these fakes into the main monetary system it is really difficult to get it out as it spreads very swiftly.

So finally we can understand and link all these elements and conclude that a simple solution of getting these high denomination currency bills out of circulation will be of enormous help and benefit towards solving all these problems of money laundering, black money, fake currency bills and last but not the least terrorism

I would like you to spread this word which will work out to be the best means of improving our country’s economic development and security issues. I would like to thank ‘Yogi Ramdeo Maharaj’ for this in genuine idea.

Married Women’s Property (MWP) Act

It helps a married man to make a settlement for the benefit of his wife & children or any of them without the legal formality of a deed of settlement

• Beneficiaries - Only wife & children can be beneficiaries
• Trust/ Trustee - Policyholder can appoint trust/ trustees - can be wife or his adult child. The moment policy is issued, it shall insure as a trust; no stamp deed required
• Free from attachment - Insurance under MWP Act is free from Court attachments, tax attachments and also creditors. Even the policyholder will have no stake in the policy
• Ideal for: People who consider that it is imperative to make certain amount available for wife and children free from creditors and court attachments

Life Insurance is not for the people who die…..

It’s for the people who live…..

The main perception of any retail bank was that the poor are not capable to repay loan and it would increase the non performing assets of the bank, if they provide loans to them so loans were not available to the poor segment of the society.

The most important innovation in the banking arena in last two decades has been microfinance. The microfinance has empowered the poor to a great extent. Microfinance development is based on sound economic theory, made possible through community banks called micro-finance institutions. Microfinance institutions work through the same principles as credit unions. They are designed to bring maximum benefits to their customers, with their profits recycled into further loans.

How Does it work

The system of any microfinance bank is based on the idea that the poor have skills that are under-utilized.

There are different types of loans provided by microfinance bank but the primary and the most successful has been group-based loans. A group-based credit approach is applied which utilizes the peer pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The important factor in the whole process is the fear of rejection by the society. Mostly microfinance banks provide loans for very small amounts like 500-1000 rupees with a little or no collateral. They gave lot of importance to the credit report of the borrower; they only provide a second loan, once the previous dues have been cleared.

The most interesting feature of most successful microfinance bank “the grammen bank” is that it provides the group-based loans only to women; this led to increase in loan repayment in a huge way.

There has been spectacular growth in the number of microfinance institutions (MFIs) and their providing services to the poor in last few years. In 1997 there was estimated 618 MFIs in India, which reached 13.4 million people including 106 million of the poorest. The growth in the number of the poorest people to get micro credit was therefore 1300% during the period.

Microfinance has provided a win-win situation for borrowers, lenders and the government. It is one of the most effective social schemes which has empowered the poor, provided a successful business model for the banks and financial institutions, where the repayment percentages is much more than normal loan products for the middle-class and high-net individuals. The microfinance is here to stay, it will be a panacea for the poor and needy.