Education loans as a sector is becoming increasingly popular, with lenders and borrowers. In fact, being a part of the priority lending, its also getting support through Reserve Bank of India’s (RBI) initiatives.

The RBI has taken measures to encourage the students to borrow and to facilitate the growth of the sector. The central bank cut down the risk weightage on education loans from 125 percent to 75 percent. This has been done to make it easier for potential loan applicants to get loans.

Also, since education loans above Rs. 4 lakh are backed by security, it is safe to assume that education loans will have a low ratio of non-performing assets.

Some media reports also spoke of a Higher Education Loan Guarantee Authority (HELGA). This proposed entity will aid needy students in getting easy loans. HELGA may also take care of the interest rate payments during the ‘moratorium period’ of the education loans.

The Finance Ministry is also promoting the sector. In media reports, the Finance ministry urged bankers to adopt a flexible approach to extending educational loans to students.

In another attempt to make things easier, the Indian Banks’ Association (IBA) set up a working group to study how education loans can become a lucrative business. The recommendations of the group were taken into account and the banks revised their norms.

The IBA also proposed the establishment of a Rs 2.5 billion Credit Guarantee Fund. The entity is to be formed on the lines of that of the Guarantee Trust Scheme for small-scale industries. The proposed fund will cushion loan defaults and will also serve as a group insurance product.

The IBA recommended that half of the corpus be funded by the Centre while the rest could be shared by the banks and the borrower. The student-borrower will pay a premium for the amount borrowed and the bank can claim the insurance, if the student defaults. The proposal is being considered by both the RBI and the Union Finance ministry.

At a ‘loan mela’ organised by Indian Overseas Bank (IOB) in September 2008, Finance Minister, Mr. P. Chidambaram said that banks should clear loan applications on a case by case basis. He was quoted in a media report in  saying, “Don’t follow strict rules. Bankers should apply the humanitarian angle while processing the loan applications.”

What has the RBI done?

On Saturday, November 1 2008 the RBI cut CRR by 100 basis points (50 bps effective October 25 and 50 bps effective November to 5.5%. Further the repo rate was reduced by 50 bps to 7.5%.

It also cut banks’ statutory liquidity ratio (SLR) by 1 percentage point to 24 percent of their deposits.

What are repo/reverse repo rates, CRR rate and SLR?

Repo and reverse repo rates are the tools of liquidity management. The RBI uses these measures either to inject liquidity into the system when the liquidity conditions in the markets are tight or suck out liquidity, when there is excess liquidity in the system.

Why does the RBI do this?

Excess liquidity in the system stokes up inflation. Higher inflation leads to higher prices, which in turn leads to lower demand adversely affecting the overall economic growth. In times like these, to control inflation, RBI sucks out liquidity from the market, thus reducing the money supply.
Similarly, tighter liquidity means banks have less money with them to lend, which forces them to raise interest rates. Raising rates leads to consumers postponing their purchases; businesses deferring their expansion plans, thus reducing the aggregate demand, adversely affecting the economic growth.

Thus it is the RBI’s prerogative to manage inflation without compromising on growth.

How does the RBI do this?

Simply defined, the repo rate is the rate at which RBI buys securities from the banks and lends them money. When the liquidity in the markets is tight, the RBI reduces the rate at which it lends to the banks to incentivise banks to borrow more money from them. Thus banks have more money with them to lend to consumers and businesses giving an impetus to economic growth.
Also, changes in repo rates have a direct bearing on other interest rates like your bank FD rates, home loan rates, and so on.

Cash Reserve Ratio (CRR): Banks are mandated to keep certain percentage of their deposits with RBI. This is the CRR. Thus, an increase in the CRR leads to banks parking more money with RBI reducing the funds available with banks.
On the other hand a reduction in the CRR keeps more money with banks boosting liquidity in the markets.

To put it simply, the repo rate is a rate management tool, whereas the CRR is a liquidity management tool of the RBI.

SLR: It is the amount that a bank has to maintain in the form of cash, gold, or approved securities. The quantum is specified as some percentage of a bank’s total demand and time liabilities i.e., the liabilities that are payable on demand anytime, and those liabilities that are accruing in one month’s time due to maturity. This ratio is fixed by the RBI.

What is the current scenario?

In line with its global peers, the RBI also was forced to reverse its tight monetary policy that was being followed to control inflation, to solve the problems arising due to shortfall of funds. Domestic events like advance tax payments, regulatory intervention by the RBI in forex markets to stabilize the depreciating rupee, (aggravated by merciless selling by FIIs in Indian equities) created a huge liquidity crunch in the markets. The liquidity shortage drove up the overnight call rates (rate at which banks give money to each other for short term needs) shooting up to over 20% levels. Banks raised their benchmark prime lending rate (PLR) and were reluctant to disburse loans against the sanctioned limits owing to the liquidity crunch. To cool off this liquidity crunch, the RBI in its credit policy on October 24 announced a 250 bps cut in CRR and 100 bps cut in repo rate. The cuts effectively added around Rs 1, 30,000 crore to the system. When even this was not enough to tackle the ongoing liquidity crunch, the RBI further announced a slew of rate cuts on Saturday.

• It cut CRR by 100 basis points (50 bps effective October 25 and 50 bps effective November to 5.5%. Further the repo rate was reduced by 50 bps to 7.5%.
• It cut SLR by 1 percentage point to 24 percent of their deposits.

If one considers the macro data points, the conditions for easing monetary policy appear favorable owing to:

1. Inflation showing signs of peaking out
2. Oil prices continuing their southward journey
3. Slowing economic growth

The one percentage point cut in CRR is set to release additional liquidity of Rs 40,000 crore into the system.

The SLR cut would inject about Rs 40,000 crore into the banking system.

The RBI now expects banks to pass on the benefit of rate cuts to final consumers in the form of lower interest rates on housing loans and personal loans to boost consumption and revive the slowing economy. Some of the banks have already reacted positively by proactively cutting the benchmark PLR.

Impact on equity markets:
The RBI move was a welcome trigger for the stock market, albeit a short-term one, as we saw the markets rallying from the lows of 7700 to 10600. As expected, banking stocks contributed the lion’s share to the rally on the expectation that lower rates will boost consumption demand positively affecting the margins of the banking sector. Also, a cut in CRR (on which banks don’t get any interest) and SLR would enable banks to earn higher margin on released funds.

Kapil Mokashi is an Associate Financial Planner, working with Sharekhan Ltd. as an equity advisor.

Is the person who has overextended credit a candidate for sympathy if he means well? He wants to pay back the outstanding amounts against his multiple credit cards, but what if he has just been fired from his job and cannot make his multiple credit card payments? Do you castigate him, telling him that he made the bed, he must lie in it? If that is so, does your lack of sympathy extend beyond the fact that recovery agents came to his house when he wasn’t at home and threatened his wife and child?

If you are the sympathetic kind (especially if you also have been in a similar jam) would you:

1. Tell the man that recovery agents are not allowed use force on borrowers or speak indecently to him or his family?
2. Tell the man that if he doesn’t want to speak to the recovery agent, the agent has to respect his wishes and withdraw?
3. Point out to him the RBI stipulation that “The bank and their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors’ family members, referees, and friends, making threatening and anonymous calls or making false and misleading representations.“?
4. Point him to the Banking Ombudsman site www.bankingombudsman.rbi.org.in where he can lodge a complaint?
5. Point out to him that his best option would be pay off the entire amount. And then give him tips on how to do it - apply for a loan against property, stocks, insurance policy, or jewelry? But that he should try his best not to go for a settlement?
6. That there are credit counseling agencies, such as ICICI bank’s Disha, that exist for the very purpose of helping people like him?
7. All of the above
8. None of the above

Here are some credit counseling agencies:

• Abhay (Bank of India), 61 A, Sadanand, 1st Floor, Above Bank of India Branch, Gokhale Road (north), Dadar (West), Mumbai- 4000 028. Call 022-24221843.
• Disha (ICICI Bank), Prince Apartments, Ground Floor, Karani Lane, Ghatkopar (West), Mumbai 4000 028. Call 65971815/86/87. Visit www.dishfc.org
• Union Mitra (Union Bank of India), Union Bank Bhavan, 239, Vidhan Bhavan Marg, Nariman Point, Mumbai- 400021. Call 022-22896502.

Answers:
Correct answer - Option 7
Incorrect answer - Any other option or combination of options
So incorrect that it scares me! - Option 8

Check out this news story:

http://sify.com/finance/fullstory.php?id=14754431

The story is about banks, who seeing their interest incomes fall, are all set to increase the merchant fees on their Point of Sales (POS) machines.

How did it come to banks hiking the merchant fees on the POS?

The obvious reason behind this is that RBI has hiked CRR and repo rate. So for banks to lend money without charging any interest rate to the card holder for a period of 40 to 50 days (the period of credit) is becoming more and more difficult. The banks had to make some adjustment to cope with this rising interest rate scenario, and this POS rate hike was one way of doing it.

Another reason could be to cover the increase in the non-performing assets (NPA) of the credit card industry. As of now, banks are finding it difficult to control the rise in credit card payment defaults. While the hike will not help to entirely cover the defaults, it could help by defraying some of the losses – a higher POS charge might force the merchant to tap into a more financially sound clientele, thereby reducing defaults.

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company).

Major difference between Banks & NBFCs

NBFCs are doing functions akin to that of banks; however there are a few differences:

• A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand immediately or within a very short period like your current or savings accounts).
• It is not a part of the payment and settlement system and as such cannot issue cheque to its customers.
• Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

There are different types of NBFCs registered with the RBI:

• Equipment leasing company
• Hire-purchase Company
• Loan Company
• Investment Company

The important regulations relating to acceptance of deposits by NBFCs are as follows:

• The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
• NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
• NBFCs (except certain AFCs) should have minimum investment grade credit rating.
• The deposits with NBFCs are not insured.
• The repayment of deposits by NBFCs is not guaranteed by RBI.
• There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.

Non-banking financial companies (NBFCs) have seen considerable business model shift over last decade because of regulatory environment and market dynamics.

In the early 2000s, the NBFC sector in our country was facing following problems:

• High cost of funds
• Slow industrial growth
• Stiff competition with NBFCs as well as with banking sector
• Small balance sheet size resulting in high cost of fund and low asset profile
• Non performing assets

A majority of NBFCs were not able to face the pressure created on and were wiped out. However, since FY2001-2002, there has been significant improvement in the business model of existing NBFCs with improvement in overall business environment. NBFCs have been able to expand their resource profile by diversifying the funding avenues. Further a strict control on asset quality and overheads, coupled with use of innovative borrowing tools such as securitization has resulted in improved profitability of NBFCs.

NBFC sector reports robust growth – 2008

The RBI increased the increased the capital adequacy requirement of non-deposit taking non-banking finance companies from 10 per cent to 12 per cent by 31 March 2009 and to 15 per cent by 31 March 2010.

For the quarter ended 30 June 2008, the NBFC sector reported a robust top line growth of 45.4 per cent and well converted it into a robust bottom line growth of 43.2 per cent. Net profit margin expanded by 110 basis points to 12.8 per cent.

August 2008, the sector yielded a minimal 0.4 per cent returns during July 2008, but witnessed a surge in volumes from 14.4 million shares in June to 20.1 million shares in July.

NBFC capital adequacy hiked

On 12 December 2006, the RBI had stated that all non–deposit taking NBFCs with an asset size of Rs.100 crores and more as per the last audited balance sheet would be considered as systemically important (NBFC-ND-SI).Thereafter, with effect from 1 April 2007, specific regulatory framework involving prescription of capital adequacy and exposure norms was put in place. NBFCs-ND-SI were advised to maintain a minimum Capital to Risk-Assets Ratio (CRAR) of 10 per cent with effect from 1 April 2007. The RBI increased the minimum capital to risk assets ratio (CRAR) for NBFCs-ND-SI from 10 per cent to 12 per cent to be achieved by 31 March 2009 and further 15 per cent to be achieved by 31 March 2010.

Sara Jain is Portfolio Manager at Ajmera Group of Companies.

While those of you who are wondering what does F.D have to do with life insurance…Beware…you could be a victim of it.

As it happened with Mr. Mangesh Pai who went to the largest private sector bank to rollover his F.D maturity into another F.D; he landed up rolling over his maturity amount into a life insurance policy instead. He was told by a bank officer that this would be like a F.D with life insurance cover and 10% interest minimum. Mr. Mangesh found it attractive and signed the papers.

Being a busy heart surgeon, he didn’t get time to go through the papers he got after few days until to his surprise he got notice from insurance company intimating payment for renewal premium after a year. He started wondering “when did he buy this company’s insurance policy, that too with such a huge premium?” (his F.D maturity was huge). While digging through all his financial papers in his file, he found that he was cheated and been sold a life insurance policy instead of F.D which he wanted. Moreover the policy has annual premium paying term of 20 years. He further found out that it was a ULIP with 35% charges and very low life cover. He has filed complaint with RBI and is fighting against the bank.

With thirst of earning huge commissions, bank hire people mostly young who have inadequate knowledge and experience on insurance. These people with tag of “Financial Advisor” or “Relationship Officer” are given targets and incentives. On the verge of achieving those targets and earning incentives, they tend to mis-sell in a big way. Same is the case with “Relationship Managers” of most broking firms. They are trained for aggressive sales and thus have only one thing in mind…sell insurance to anyone anyhow and achieve targets. The ultimate losers? Consumers. Beware…

In another case, Mrs. Priya Arora got call from a MNC bank where she holds a credit card. Despite showing no interest in an insurance product being pitched to her, she found insurance premium being debited in her credit card bill. Mr. Ahmed who went to a public sector bank for opening a savings a/c was asked to take an insurance policy. “You need to take this product along with a/c opening,” said an officer at the bank.

While the advent of private life insurance companies have definitely increased insurance penetration in India which is still very low, it has also definitely increased mis-selling of insurance products. With increasing number of insurance companies so are increasing number is insurance agents. Companies are hiring agents very aggressively to boost sales as a result of which you will find many college students, housewives, doctors, teachers, and people with part time jobs as insurance agents who sells insurance part time merely to earn some extra buck. These people lack knowledge, skills and experience; result of which – wrong product being sold or mis-selling. Insurance agents merely push the product which is earning them higher commission irrespective of weather such product meets your needs and requirements or not. As is happened with Mr. Kamlesh the only earning member in the family who ended up paying 70000 p.a merely for 5 lakh of insurance cover, most of them are ULIPs with high charges. Being bread earner of the family he should have been given much higher life insurance coverage at a lower premium.

Most of the agents typically are trained on only two or three ULIP products and they sell only those products. If you ask such agents about an endowment or term plans most of them don’t know much about it and they will try to convince you that this or that ULIP product is better, that it has given 30% returns in last 5 years.

It is recommendable to avoid buying insurance from part time agents primarily because you may be victim of the wrong product which may not meet your needs, you would suffer from bad service from the agent and secondarily this is their part time work, they would be out of it anytime and then you would be all lost.

So shouldn’t we buy insurance at all? If we have to, where do we get it from?

While life insurance cover is one of the most important things to have for an earning member of the family, we need to determine goals, requirements and how much insurance do we need. Typically, when we think of buying insurance we ourselves don’t know how much cover we should take. Most of us decide it on the premium. We opt of whatever Insurance cover we get on lower premium. Some of us just opt for whatever cover the agent says. Most of us land up being underinsured. You need to look upon various aspects such as cost of living, expected cost of living, your income and increase in your earnings, your dependents etc. before taking a cover.

“It’s a complex process, I don’t have time, skills, and expertise to access all these factors and determine my insurance need!”

You need not - hire a Certified Financial Planner (CFP). The role of a qualified Financial Planner is to look at all aspects of your lifestyle, goals, and requirements and develop a financial strategy suitable for you. The recommended strategy should help you reach your goals effectively and efficiently. Insurance Planning is a part of it in which they would recommend you how much insurance you should have and what mix of products you should opt for viz. term plans, ULIPs etc which would make you financially secure and help you meet your requirements and goals. Once you have a plan designed by a CFP, you can buy various kind of insurance products as recommended by him/her. This will help you getting what you actually need and not what actually an insurance agent needs.

Do not fall in pit of aggressive insurance agents or bank officers who may sell you a ULIP with high charges and low cover. It would be very difficult for you to get out of it!!

Get a strategy and plan developed by a CFP and be financially secure.

Happy Financial Freedom!

In India, as per regulation, every bank must park a certain amount with the Reserve Bank of India (RBI). This amount is a certain percentage of the total customer deposits held by the bank. This ratio of the cash held at the bank to the reserve at the RBI is called the Cash Reserve Ratio (CRR).

The RBI pays a certain amount of interest to the bank on these reserves.

The ratio is used as an effective tool in monetary policies of the country, regulating the money supply in the economy and thereby curbing inflation. It also helps in meeting the banks’ withdrawal demands.

For instance, if the CRR is 10%, a bank with deposits to the tune of Rs. 1 crore has to deposit Rs. 10 lakh at the RBI.

Know your rights as a credit card customer. Because, it is not just that your payment record is independent of anything else. Your payment record can affect your financial planning, such as loan applications.

Consider the consumer who has been pristine in keeping up card payments, without defaults and on time. This person has a personal loan as well which he has been exemplary in keeping up with EMI payments. Now, if this person were to default on just one payment, his credit rating goes for a toss. The next credit card he applies for, nine out of ten times he would be rejected as being a defaulter.

Credit rating agencies do not capture the accent of defaults. One-off defaults are given the same weightage as serial defaults. Which means, in the above-mentioned example, the guy is on par with the slacker who has taken a personal loan, defaulted multiple times on his repayments and is waiting for divine intervention or daddy to get him through to safe ground.

The sad part is we cannot do anything about this. But there is an indirect way of dealing with this. Always be aware that you are well within your rights to know the reason why your credit card application was rejected. The RBI, on 24 July 2008, has issued fresh guidelines for the credit card issuers that the issuers should not reject a credit card application without assigning reasons in writing. So if the bank refuses to give a reason for the rejection, you can and should approach the Banking Ombudsman (www.bankingombudsman.rbi.org.in)

Any disputed charges from the credit card company, please raise a formal dispute and get an acknowledgment. Disputes raised on the telephone have no legal standing. Instances where customers act on assurances on the phone from a bank’s helpline abound. Few of them ever have a happy ending.

Most cases of disputed charges are because of fraudulent transactions. Credit card companies gear themselves to ensure that it becomes well nigh impossible for even a well-meaning customer to find a solution to such issues. There are many instances where the customer has been asked to send in a dispute letter; the customer sends it and the company says it hasn’t received it. The customer faxes it, the company still claims to not have gotten it. The customer mails the scanned copy of the fax, still nothing.

The RBI states that “the persons in whose name the card has been issued cannot be held responsible for the same (misuse of credit cards by other persons).” If the bank still does not rule in the customer’s favor despite him/her not having incurred the charges, the customer should immediately complain to Banking Ombudsman. Details are available on www.bankingombudsman.rbi.org.in.

I took Rs. 2 lakh from ICICI as a pre-approved personal loan at EMI Rs. 5, 466. Out of the said amount, I actually received only Rs. 19, 7753. Rs 2, 247 were deducted as ‘Processing fees’ charged by the bank. Now, from my first EMI of Rs. 5, 466, the bank has deducted Rs 3, 000 as ‘Pre-approved loan facility charges’ which they claim are as per RBI directives (1.5 % of whole loan amount, here Rs. 2, 00, 000 * 1.5 = Rs. 3, 000) of this credit facility. My question is that is there some pre-approved personal loan charges imposed genuinely by RBI?