The RBI has recently expressed its concern about the teaser loans, stating,

“In the area of housing loans, teaser rates are increasingly being offered which is a cause for concern. I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal.”

The point being made was that when the “teaser rate” period is over (2-3 years in most cases) and interest rates shift to the normal floating rates prevalent at that time the consumers may not be able to cope up with the resultant increases in EMIs (especially if, as widely expected, interest rates go up significantly in the meanwhile).

I give a small calculation here for the better understanding of ‘teaser rigmarole.’ Take the case of a typical 30-year-old salaried person with a net salary of around Rs. 40,000. As per the eligibility calculations he would be able to get a loan of Rs. 20,00,000 from State Bank of India (SBI). (See box for eligibility calculation)

How do “teaser rates” work?

SBI who pioneered these loans prefers to call them “Low cost” loans rather than “teaser rate” loans. Whatever be the label, in the Indian context, it has meant loans in which the interest rates are fixed for the first 2-3 years (5 years also in a couple of cases) and which reverts to regular floating rates after the initial fixed interest rate period is over. For example for a loan of Rs. 20 lakhs SBI would charge a fixed interest rate of 8% in the 1^st year and 8.50% in the next 2 years and from the 4^th year onwards it will have a floating rate of 2.75% below SBI Advance Rate (currently 11.75%) effectively meaning that if SBI Advance rate remains where it is today the rate in the 4^th year will be 9% (SBAR of 11.75% minus 2.75% = 9%). The EMI per lakh on this basis works out to Rs. 836 in the first year Rs. 867 in the next 2 years and Rs. 895 after 3 years.

If he went for the normal option of regular floating rate loans he will get an interest rate of 8.75% (EMI per lakh of Rs. 884) and will also be eligible for a similar loan amount of Rs. 20 lakhs.

If we run a simulation to see what happens if the interest rates rise by 2% in 2010, 1% in 2011 and another 1% in 2012 – or a total of 4% in the next 3 years. As a result in the case of the SBI home loan the interest rates from the fourth year goes up to 13%. If he had gone for the floating rate loan the interest rate would be 10.75% (original rate of 8.75% plus 2%) in the first year, 11.75% in the second year and 12.75% for the period after that. The Instalment to Income ratio in both cases go up sharply from 44% to 57% (indicating that a larger proportion of the income will go towards servicing the home loan) at the end of 3 years and in both cases are almost at the same levels. This means that irrespective of the type of loan the degree of difficulty in repayment would be similiar in both the loans if rates increase steeply by 4% over 3 years.  In both cases an 8% annual increase in income will ensure that the Instalment to Income ratio remains at the original levels. Of course in the regular floating rate loan the consumer ends up paying for the increase in interest rates in the first 3 years also.This increase will ensure that the Installment to Income ratio falls back to the mid forty levels that are considered safe by Indian standards.

How is loan eligibility calculated in a “teaser rate” loan?

The loan eligibility is calculated taking into account the EMI after the teaser period is over. As per the above example the EMI per Lakh of loan in the 4^th year would be Rs. 895. Typically the banks assume that 40% to 50% of the net income is available for repayment of home loan. Therefore from the income of Rs. 40,000 about Rs. 16,000 (40% of Rs. 40,000) to Rs. 20,000 (50% of Rs. 40,000) is available to be paid as an EMI. Based on an EMI repayment capacity of Rs. 16,000 to Rs. 20,000 and an EMI per lakh of Rs. 895 we can back calculate the loan eligibility amount at Rs. 18 lakhs to Rs. 22 lakhs or say around Rs. 20 lakhs.

So clearly whether the consumer chooses the “teaser rate” product or the regular floating rate product he would face some difficulty if interest rates rise steeply as the IIR will increase to uncomfortable levels of 55%+. The IIR can fall back to reasonably comofrtable levels if net income rises by 8% p.a. which should not be a big issue if our overall economic growth  does not falter.

What would perhaps help, both banks and consumers, is if a transparent regime is put in place to ensure that increases in interest rates (and decreases for that matter) are worked out on a transparent and objective basis so that consumers are better prepared for such increases and the actual increase doesn’t come as a shock to them.

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.

The new Policy from United India Insurance is a good idea. Now only it’s own offices knew where the application forms are available.

http://www.apnainsurance.com/health-insurance-india/super-top-up.html

The education ministry headed by Mr. Kapil Sibal (actually the ministry is called Human Resources Development but the most important thing it looks after is education) is in the limelight following the realization that higher education and vocational training are the best poverty alleviation tools in the long run.

Lot has already been written about what needs to be done in the higher and vocational education sector. There are plenty of valid suggestions on how to energize this sector by increasing capacity, improving quality, making it more accessible and removing it from the clutches of the government bureaucracy and bringing in the private sector.

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.

Today education loans in India lack any institutional backing and suffer from the disease of “good intentions”. Let me explain. 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. 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.

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 loans are not cheap but the important thing is that they are available in spite of the credit issues surrounding education loans. 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 (and not just the middle and rich classes as is the case in India). Contrast this with what happens in India. The total incremental education loan disbursements made by the entire banking sector for last year was around Rs. 8,500 crores which is quite negligible considering the bank’s total deposit base. Compare this with the estimated home loan disbursements in excess  of Rs. 1,00,000 crores for the same period and the contrast is very clear.

So what is the reason for this dismal state of affairs? It is the attitude of the government that “talk” can substitute for action. The finance minister had promised to set up an Education Re-finance Corporation from part of the “education cess” that all of us pay. That promise is languishing in the bureaucratic by lanes of Delhi for the last 3 years. Meanwhile the policy makers hope that good intentions and strong words will somehow produce results.

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. All this means that there will be restricted finance available for potential students even as the education sector itself is becoming diversified and more vibrant.

In the current budget announced on July 6, 2009 the finance minister, in a clever play of words, has promised to subsidise  the entire interest expenses incurred during the course period  of students from the economically weaker sections who somehow manage to get the loan sanctioned from banks. He has said that about 5 lac students are expected to benefit from this scheme. This looks more like a statement aimed at the galleries rather than actually getting some results on the ground. It is very doubtful that the PSU banks in India will give loans to so many students belonging to economically weaker section of society.

In fact if a poor student was bright enough to get admission in say “Harvard” but did not qualify for student aid from the university, perish the thought that a education loan will enable him to do the course. He will probably have to do the rounds of the charitable institutions for grants/aid or probably some politician will take up his cause after the story is played up in the media. If he is not willing to do that he will probably loose the chance of completely remaking his (and the country’s) future.

Finance Minister routinely exhort the public sector banks to lend more towards education loans. It is no surprise that public sector equally routinely ignore this exhortation after paying lip service to education loans by releasing a few prominent advertisements in the media.

Then hon’ble education minister must ensure that the government puts its money where its mouth is and creates the state funded institution that was promised long ago. After that more education loans will actually get disbursed .

To that day – Amen

Health care costs for hospitalization in India have risen sharply in recent years in tandem with global trends. Many a family has seen their financial planning go for a complete toss due to unexpected costs on hospitalization of a family member. Also due to increasing exposure to media there is a far bigger consciousness about medical insurance. In fact the biggest question asked to us by first time mediclaim buyers is which is the cheapest mediclaim policy?

Unfortunately if this is the only parameter used by a consumer he is likely to end up making a wrong choice. An example will illustrate this point:

If you have diabetes, would you (all other things being the same) rather buy a mediclaim policy that may be a little more expensive but will immediately cover the hospitalization expenses arising from complications connected with this disease (heart problems, kidney or eye problems associated with diabetes) without considering them as pre-existing disease rather than a comparatively cheaper policy which treats all such diseases as pre-existing and hence not immediately coverable.

The following paragraphs lays down the broad parameters apart from premium which you must compare before you buy:

1) Pre-existing disease: This is probably the most important parameter. The relevance is because if a disease is treated as pre-existing then the policy normally provides no coverage or very restricted coverage for expenditure incurred due to that disease in the immediate future. The various things to be considered under this head are

a. Definition of Pre-existing disease: Most policies provide that any disease that was present at any time in the past (including any disease which the insured person may not have been aware of) is treated as pre-existing. But some have a narrower definition, which may extend to only diseases for which the insured person had sought consultation for or was treated for or he was aware of during say the last 4 years. The narrower the definition the better it is for the consumer

b. After how many years of continuous coverage by the company will the pre-existing disease get covered: This is important as after the expiry of the cooling off period even pre-existing diseases get covered. A fine point is to find out if the company you are considering allows your track record of continuous coverage from another insurance company for the purpose of calculating this cooling off period or insists only on continuous coverage with itself for this purpose.

c. Special dispensation for diabetes/hypertension: Diabetes and hypertension have acquired epidemic status in India with one estimate putting the figure at around 5% of India’s population. Also a host of illnesses/diseases such as heart disease, kidney failure, paralysis, stroke, eye problems can trace their root cause to either diabetes or hypertension or both. Since the definition of pre-existing illness includes any complications arising there from, this has been a major reason for disputes between the mediclaim providers and the consumers in the past. Now some insurers provide immediate coverage for at least complications arising from this (ese) disease(s) even though expenses on treating the main disease itself may not be covered. If you already have diabetes/hyper tension then this is a vital consideration for you. Off course it comes at an additional cost and may also involve pre-acceptance medical tests. All these factors need to be taken into account before taking a decision.

2) Sub- limits: Sub limits mean where the overall coverage is broken down into the maximum payable for a particular kind of expense. For eg. A few insurance companies now provide that room rent cannot exceed 1% of the covered amount or that doctors/consultants fees cannot exceed 20 or 25% of the covered amount. Whilst most of these sub-limits are reasonable it is better to take a decision after being aware of them.

3) Co-Pay requirements: Quite a few companies now require that the insured bear a certain percentage of the eligible expenses either unconditionally or under certain conditions. This is called a co-pay requirement. Some companies provide a discount in premium if you agree to co-pay. Some others might want a co-pay if you choose to get treated in a non network hospital or others may have a co-pay for choosing a single air conditioned room or for getting treated in a hospital in a higher cost city. The co-pay feature is built in to ensure that the insured chooses the appropriate hospital/room/doctor level relevant to his economic status and also watches the reasonableness of the charges levied by the hospital to ensure that there is no overspend or overcharge just because of the existence of the mediclaim policy. Again there is nothing inherently unfair about this provision as long as you take a conscious decision after being aware of it.

4) Specific Exclusions: Almost all policies have general exclusions such as costs incurred for Aids/Sexually transmitted diseases or congenital diseases, etc. However some policies have specific exclusions that may be relevant to you.

5) Maximum Coverage Amount: This is important, as a particular policy that suits you may not be available for the amount of coverage that you seek.

6) Maximum age at entry: This is relevant for senior citizens as quite a few policies may not be available to them.

7) Renewability upto what age: This is relevant for senior citizens as well as people in their 50s since they need to be able to enjoy the benefit of their track record

This is not a comprehensive list of parameters by far. Each policy may have specific positive or negative features that may be relevant to you such as restricted coverage for angioplasties or certain other kind of treatments or features such as free diagnostic tests offered after a certain number of claim free years, etc.

Now presumably it is far clearer why you need to study the policy features rather than just buy the cheapest policy available. The parameters listed have been summarized in the accompanying table.

In the next article in this series I will cover the debate on whether to go in for individual policies or for a family floater policy.

So best of luck with your hunt for the most suitable mediclaim policy.

The entry load on Mutual Funds, generally 2.25% of the total investment sum, has been officially abolished by SEBI (Securities and Exchange Board of India) in June 2009. This charge was one of the major sources of revenue for mutual fund agents.

Hence, there is very less chance why an agent should sincerely advice a prospective investor on the various mutual funds schemes available and which one to opt. The only reason for this is that there is no consistent incentive for the agent to do the same. They now don’t have any stable source of income. However we cannot completely ignore the fact that distributors can charge a negotiable fee which for the “advice” they give you on choosing a suitable scheme.

Does this mean that now agents may focus toward selling other financial products like ULIP plans which give them better commissions? More often than not, agents do end up pitching for products which are more rewarding to them. Hence there is a very high probability that they don’t suggest you to invest in mutual funds at all.

On the 19th of June 2009, one of the leading newspaper reported that India will become a trillion-dollar wealth management market by 2012. The wealth management market in India will have a target size of 42 million households by 2012, as against just about 13 million in 2007. But can this be possible with such an unstable business model? Will this result in loss of jobs? These questions now remain unanswered and only time will explain what happens next!

In 2002 i applied for a rather large term insurance policy and a critical illness rider. since the amount was large i was required to go through a battery of medical tests. It was a surprise for me when the insurance agent called and said that since the medical reports showed some problems the insurance company wanted  to charge extra premium for the critical illness rider (normal premium for the base term policy). I was more worried about my health than insurance at that stage and requested the agent to get the insurance company to send the medical reports to me. That was when i got the shock of my life - The insurance company turned around and said that they would not share those reports with me and that I was not entitled to my own medical reports. I felt that was completely outrageous. At that time i was not as clued on to insurance matters as i am today. So i requested a senior person in the insurance company and he found a via - media. They agreed to share the reports with my family doctor who had been named as such in the insurance proposal. I conveyed my thanks to my friend and felt obliged. (Incidentally the problem was not very serious - i am still around to write about it )

It was only recently that i was going thru the Insurance Act, 1938 (that still governs the Insurance business in India) that i came across Section 51 of act that says as under :

Quote

51. Every insurer shall, on application by a policy‑holder and on payment of a fee not exceeding one rupee, supply to the policy‑holder certified copies of the questions put to him and his answers thereto contained in his proposal for insurance and in the medical report supplied in connection therewith.

Unquote

So asked my colleagues at Apnapaisa to check around on the practices followed by the various life insurance companies. My colleagues reported back that most companies have no problems in sharing the consumer’s medical reports though a couple of them still followed the practice of non sharing of medical reports.

It seems that the contents of this section is not well known. IRDA regulations already require that a copy of the proposal form be attached along with the policy. Perhaps IRDA needs to re-iterate the provisions of section 51 above to ensure that the companies not following the act do so immediately.

Any views on the subject or on practices followed overseas ??

Indian cricket team skywalks in Australia.

If you are wondering what these headlines are doing in a personal finance blog let me explain.

Millions of dollars are riding on these celebreties. In fact for the cricket team it is probably in billions rather than millions. I am sure they are insured to the gills against accidents. Given the amounts involved  i am sure the packages are specially designed for them. Am very curios to find out if their policies cover accidents that may be caused while engaged in such adventure sports . Did the thought of insurance coverage cross their minds at all while they were engaging in these high risk sports ?

Any information is most welcome ……

In any case even if the celeberities are covered because they have access to high quality insurance brokers what about the common folks. A close friend of mine was recently describing his bungee jump in South Africa.  He had no problems but he clearly was not aware that he had no insurance coverage if he had suffered from any injuries. I have myself done para sailing on a trip overseas (even after going through the policy wordings i am not sure i would have been covered in the event of an accident) . We have already read reports of the unfortunate death in Bangalore from a bungee jumping accident. Off Course Life insurance cover is available for death from this accident but the medical expenses would not have been covered if he had survived.

Shouldn’t these facts be known more widely and shouldn’t the people running these sports be required to provide warnings to their clients apart from the release forms that they normally get signed.

Views welcome………

P.S. Preity - if you ever read this - my daughter is a big fan of yours