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.

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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)

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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)

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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.

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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.

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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.

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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.

Amidst all the hype & hoopla surrounding the home loans (teaser loans), there are customers who are still facing the dilemma to remain fixed or to float. They do not want the risk of floating especially when interest rates move upwards, at the same time they do not want high pure fixed rates. They want to avoid the risk, at least for a certain portion of the loan, and some lender’s answer to such an arrangement is known as Hybrid loans.

So what are these Hybrid loans?

It is a combination of fixed and floating, also known as partly fixed and partly floating. Under this scheme, a part of your loan is locked under ‘fixed’ and the rest is under floating – the adjustable rate of interest. In fact it is supposed to be a median option between fixed and floating interest rates. This product works best for the people who are not clear about the rate movements and do not want to take the particular stance. Depending on the risk appetite and risk perception of future rate movements, you have evaluated the pros & cons of both fixed and floating but are unable to come to any conclusion. So, as per the companies, hybrid loan is another option which can work well for customers like you.

In case of hybrid loans, there are two parts to the loan agreements, one for fixed and another for floating.

That means that if you take a loan of Rs. 20 lakh and you feel that interest rates will increase, you can choose to take 60 per cent of Rs. 20 lakh as a fixed rate home loan and the remaining as floating. The proportion can change depending on your risk appetite.

In case rate moves up, you normally have an option of foreclosing your floating component of the loan with no pre-payment penalties. In case you decide to foreclose the loan locked under the fixed portion, standard pre payment penalty will apply unless you have negotiated otherwise.

Normally the company offers an option if interest rates move up, you can get the fixed portion of your floating loan into floating. You can convert the fixed component into floating by paying a conversion fee of 0.5% - 2% or as charged by your bank of the outstanding loan amount.

In the event that interest rates rise, the portion under fixed rate will be your buffer. And if they fall, then you gain on the floating component and lose on the fixed.

This product may work well for people who take large loans because they are more interested in hedging their risks. If instead of the hybrid loan, you decide to go for the fixed interest rate loan, make sure that your loan is indeed fixed for the entire duration of the loan. But lenders mostly put in a clause in some of their loans under which they reserve the right to amend the ‘fixed’ rate in the event of an ‘extreme change in money market conditions’.

Still fixed or floating dilemma has been eased out with the introduction of Teaser loans earlier this year, where interest rates are fixed for certain tenures say three years. After that option lies with you to choose either to chose fixed or floating which is 2.5% below the PLR.

Following suit, many PSU banks have come out with offers where they are offering low attractive fixed rates for the first 3-5 years (8-8.5%) with rates reverting to the standard floating rate after that period is over. These kind of loans are popularly referred to as Teaser loans where rate in the initial years is fixed as well as low. Private players HDFC and ICICI have recently joined the bandwagon. They announced a similar teaser loan product early December, 2009. Thus presenting clearly a good option for the consumers who want to stay away from tracking home loan rates at least for a certain period of time.

So what does a teaser rate home loan mean for the Indian consumer? It means that there is a low initial interest rate that is fixed for a specified period (1 year to 5 years) and the floating rate as specified becomes applicable thereafter.

Given below is an analysis of the some of the teaser rates home loans available in the market for a 20 year home loan of Rs. 30 lacs.

Home Loan interest rates for 20 years, Loan amount of Rs.30 Lakh - as on December 23, 2009

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BANK For first year Overall effective rate

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SBI Easy Home Loan **** 8 8.76

CANARA BANK *** 8 9.33

HDFC** 8.25 8.63

ICICI BANK * 8.25 9

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****SBI offers 8% fixed for the 1st yr, 8.5% fixed for the next 2 yrs, 4th yr onwards borrower has an option of choosing either floating rate which will be 2.75% below SBAR or fixed rate which will be 1.25% below SBAR. *** Canara Bank offers 8% fixed for 1 yr, 9% fixed for next 4 yrs, thereafter min. 10% for loans upto Rs 30 lakh.

**8.25% fixed till 31st March 2012, thereafter prevailing floating rate (currently 8.75%)

*8.25% fixed for 2 years , 3^rd onwards it is FRR (currently 12.75%) minus 3.50% = 12.75% -3.50% -= 9.25%

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But it is certainly not a one time decision, you need to review your decision at fixed intervals. Basically, partly fixed and partly floating interest rate loan lack interest rate transparency. The so-called fixed portion may be varied and there is no objective mechanism to ensure that floating rate floats down.

Mixed rates are normally not recommended mainly because of the non-transparency of the banks on both these (fixed & floating) rates. The risks are there even if you opt for pure fixed or pure floating, still you are not exposed to dual opaqueness.

It is advisable to use online home-loan calculators on sites like www.apnapaisa.com to estimate the Estimated Monthly Installments (EMI) for the loan amount you require. You will also need to understand the difference between Fixed-rate, floating-rate, the teaser rates or the combo (hybrid) rates to determine the rate type that is best suited for you.

Hence, it is important to evaluate all the pros & cons before making a decision in favour of hybrid loans.

In a surprise move the country’s largest bank State Bank of India (SBI) has slashed its interest rates for loans upto Rs. 50 lacs. The rates are fixed for the first 3 years at 8% for the 1^st year and 8.50% for the 2^nd and 3^rd year and the rate thereafter will be 2.75% below the State Bank Advance Rate (SBAR) which is currently at 11.75% - meaning that the floating rate from the 4^th year onwards will be 9% if SBAR remains constant. This works out to an average of 8.76% for loans upto Rs. 50 lacs for a 20 year loan. The existing sops such as waiver of processing fees as well as pre-payment charges (if paid from own sources) continues.

And to sweeten the deal further SBI is also offering its overdraft account facility (called SBI Max Gain) at the same interest rates enabling consumers to further save interest amounts by parking their temperory/permanent surpluses in an account with them which will reduce their interest liability on home loans. You can use this link to find how this facility works.

http://www.apnaloan.com/home-loan-india/homesavers.html

This average rate compares very favourably with HDFC’s rate of 8.75% for loans upto Rs. 15 lacs , 9% for loans between Rs. 15 lacs and Rs. 30 lacs and 9.50% for loans greater than Rs. 30 lacs. The rates of the other leading market players such as ICICI and LIC housing Finance are even higher.

Clearly SBI has laid down the gauntlet. As far as they are concerned the small time skirmeshes are over. It is time for a full fledged war. Let’s see how the other players react to this step. Whatever happens it is the return of happy times for the home loan consumers and by extension for the real estate players who supply residential properties to these consumers. We will need to wait and watch to see if the interest rate cuts can spur new home purchases higher in this otherwise off season quarter.

Keep watching this space for developing implications.

The home loan war seems to be hotting up.  The private sector players (HDFC, ICICI, Axis,LIC housing Finance) are all providing loans at around 9.25% floating to their new consumers (including to existing borrowers of other banks wishing to shift their loans). For once the PSU banks seem to be using attractive structured offerings to provide stiff competition to the private lenders.

Suddenly the PSU banks are raining offers on the home loan consumers (including long suffering existing consumers of other banks).  The Canara bank offer of completely fixed rates for the next 5 years (see http://blog.apnapaisa.com/2009/06/23/canara-bank-new-home-loan-scheme-does-it-make-sense/) was quite popular and SBI has also come out with a good offer.

For Loans upto Rs. 30 lacs the details are as under :

8% fixed for 1st year , 9% fixed for 2nd and 3rd year and the consumer can decide today between a floating rate thereafter at 2% below SBAR prevalent at that time (current SBAR is 11.75% so if SBAR remains the same the rate will be 9.75% after 3 years but actual rate will be known only at that time) or a fixed rate after 3 years for the 4th and 5th year at 1% below SBAR prevalent at that time (so if SBAR remains constant for 3 years then the fixed rate after 3 years will be 10.75% but actual fixed rate for 4th and  5th year will be known only then) . There are no processing charges and no pre-payment charge if the pre-payment is made from your own sources.

Sources within HDFC have correctly pointed out that if you take the average rate (assuming that the rate from 4th year onwards will be 9.75% floating) then it works out to 9.35% for SBI versus 9.25% for them.

However given the uncertainity surrounding interest rates and more importantly the tendency of all lenders (contrary to popular opinion the PSU banks also have a similiar behaviour pattern) not to pass on the benefit of reduction in interest rates to their existing “floating rate” customers , it is always safe to go for fixed rates as long as they are economically priced and even if only for a few years.

It is here that the SBI plan scores over the other lenders who lend only on “floating rate” basis. Personally I would still rate the Canara Bank scheme higher than SBI as it provides for a fixed rate for 5 years with other charges that are the same as SBI.

The mighty sales machinery of SBI is already in full flow and their local level managers seem keen to do business for once. Let us see how the consumers re-act to this new scheme. Afterall the consumer is supreme.HDFC

Today, its is seen that every other person uses credit card for their daily usage eg: shopping for grocery, for petrol or for things which he knows he would be able to pay by next month . This comes in very handy when you can divide you expenses month wise. You know that you can always pay the minimum on your credit card bill and pay the rest by next month , the only problem is you will have to pay interest on your reducing balance eg HDFC charges 3.25% per month and 39 %  annually. So, you can imagine how expensive it is when you try to divide your o/s credit card bill.

People may still be OK with the credit card charges when they have to bare it for only 2 or 3 months.

But, have you ever wondered what would happen if you default on few payments? How much impact can this have on your future or you may ask does it even have any impact? You can imagine similar situation, when you borrow money from your friend and family and forget to repay, they tend to loose faith in you and will not give you a single penny until you can prove you have improved or someone who can assure others you will be able to pay their money.

In the above example, we have used friends and family but who is the big brother who watches in the banking world? Who keeps a tab on our credit history? If you ask a common man he would say the respective bank keeps a track. or he may simply say “don’t know”.

The Big Brother or the big boss who watches all our credit history and repayment history is none other than Credit Information Bureau (India) Limited, also known as CIBIL. It is a repository of information that contains history of all the borrowers as it generates credit report of all borrowers. The report keeps a tab of our repayment history, settlement , defaults, contact details and the important point over here is that this information is shared between all banks. So, if you forget to pay and if the trend continues then be very sure you are in trouble, big time.

Anyone who borrows money from the bank gets automatically listed under CIBIL and all the defaulters gets punished in a very badly. They are blacklisted for next 7 years. When I heard it for the first time, I said, “Are they nuts?”. But, what can you do, rules are rules. It seems a bit unfair that you have to wait 7 years before you can borrow money from any bank. This may affect your dreams when you want to buy a house or car or go for your vacation.

One may ask , can I clear my name under CIBIL? Yes, but the fresh loan that you may get may not be at the current market rate but much higher. To get fresh loan the person must follow the steps below:

1) Clear old dues.

2) Create a fresh history through fully secured debts.

3) Inform the bank to rectify the status.

4)To get faster resolution send a mail to CIBIL with the credit report.

The database gets update every 45-60 days that way the person will get a fresh loan but at a very costly price.

One must always try to pay of their credit dues on time to avoid complications or the mistake may prove every painful.