ATM :: Why prepaying a home loan may be the best investment option in current yields scenario

ET CONTRIBUTORS | By Raj Khosla | Mar 12, 2018, 02.30 PM IST | Economic Times


Major banks and housing finance companies have raised their lending rates. Whenever home loan rates are hiked, borrowers want to know whether they should prepay their loans to save on interest. In the past, there was no clear answer because there were several investment opportunities that could yield better returns than the interest paid on the home loan.

Not any longer. Stock markets are looking jittery, fixed deposits are tax-inefficient and debt funds are giving poor returns. If a penny saved is a penny earned, prepaying a home loan may be the best investment option available. Where else can you get 8.5% assured ‘returns’ on the surplus cash? Another compelling reason to rework the math and at least partially repay your home loan is the new tax rule that caps the deduction on home loans at Rs 2 lakh a year. If you have a large home loan running, you would do well to make partial prepayments as soon as you can.

There are some obvious benefits of foreclosing a long-term loan. The longer the tenure, the higher is the interest outgo. Just like long-term investments build wealth for you, longterm debt burdens you with high interest. Yet, a long-term loan may be unavoidable in some circumstances. A young person who has just started working may not be able to afford a large EMI. The loan tenure would have to be increased so that the EMI fits his pocket.

In such situations, borrowers are advised to go for a ballooning repayment, where the EMI increases every year in line with an increase in the income. This can have a dramatic impact on the loan tenure. If you take a home loan of Rs 50 lakh at 8.5% for 20 years, the EMI will be Rs 43,391. But a 5% increase in the EMI every year will end the loan in 12 years and two months. If you tighten your belt a bit and increase the EMI by 10% every year, you can become debt-free in less than 10 years (see grphic)

Pay off a 20-year loan in less than 10 years
Hiking the EMI every year reduces the tenure drastically.


Contrary to what T.S. Eliot said, April is not the cruellest month. Any salaried individual will vouch for this. While annual increments are something to celebrate, people with large outstanding debts should also try and increase their EMIs in line with the increase in income. In a few weeks, they will also get their annual bonuses. At least some of that should be used to prepay the home loan.

Reducing your outstanding debt or closing the loan is naturally a psychological boost. It gives the individual a sense of financial freedom.

Some people argue that prepaying the home loan robs the individual of liquidity. That’s not correct. Several banks offer home loans with an overdraft facility that allows the borrower to withdraw money as and when he needs it. Though overdraft facilities normally entail annual maintenance charges, home loan overdraft facilities are exempt from this charge. It’s also a good idea to use a loan against property to repay other costlier loans. For instance, an unsecured personal loan that charges 18-20% can be replaced with a loan against property that costs 8.5%.

(Author is founder and managing director,
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of



ATM :: CIBIL-like regime for corporate loans need of the hour, CRISIL-like regime not enough

S Murlidharan | Mar 12, 2018 14:38:24 IST | First Post


Individuals are supposed to fret and agonise over their credit score awarded by CIBIL (Credit Information Bureau (India) Limited) so that they are not in disfavour with the lending banks and institutions. All payments made by them are passed on to CIBIL which together with three other companies in the same business keeps a running score of the credit behavior of individuals. While the efficacy of the regime is debatable, for which this is not the occasion, what raises eyebrows is the absence of a similar regime for corporates who are by far the heaviest borrowers and defaulters.

What CIBIL does is brought out in its blurb: “TransUnion CIBIL is India’s leading credit information company and maintains one of the largest collections of consumer information globally. We have over 2,400 members–including all leading banks, financial institutions, non-banking financial companies and housing finance companies–and maintain credit records of over 550 million individuals and businesses. Our mission is to create information solutions that enable businesses to grow and give consumers faster, cheaper access to credit and other services.”

To be sure, there is a regime for corporates as well—CRISIL—but that is extremely limited. CRISIL (Credit Rating Information Services of India) and its competitors are credit rating agencies whose services are used by corporates episodically, i.e. when they issue bonds, invite deposits or mobilise funds through commercial papers. To be sure again, it is not as if once these episodic events take place, the role of the credit rating agency is over; it does keep a vigil on the credit behavior of the borrower till the instrument through which funds were mobilized is redeemed or discharged. But the vigil kept by the credit rating agency is not as comprehensive, continuous and all-encompassing as it is for individuals under the CIBIL regime.

Time has come for the banking regulator, the Reserve Bank of India (RBI) to mandate constant monitoring of corporate banking behavior that if anything is more rigorous and thorough than the one for individuals given the enormous stakes involved.

The Punjab National Bank (PNB) fraud perhaps might have been pre-empted had there been a regime such as the one outlined above. Why did PNB scam happen? It happened because Nirav Modi had banking dealings with PNB and not with Axis or Union Bank, to wit. And the RBI has said banks should not entertain requests for Letters of Credit (LoC) unless the borrower had banking relationship with them.

Thus arose the need for an intermediary instrument—letters of undertaking (LoU). LoU assures the stranger-banks, as it were, that the familiar-bank vouchsafes for the creditworthiness of the unknown credit-seeker. Modi got the requisite LOUs forged in collusion with two corrupt Mumbai branch employees of PNB and got the credit from a clutch of Indian banks having foreign branches including Axis and Union Bank. The charade of LOU need not have been enacted had the banks had a CIBIL-like regime under which the banking behavior of Modi with PNB would have been shared with Axis and Union Bank.

Banks in India do come together and share vital information when they form themselves as a syndicate when the loan asked for is too big for their boots in terms of funding required and risks involved. But what is required is a more transparent, general and accessible information regimea la CIBIL.

The comprehensive CIBIL regime for individuals in juxtaposition with absence of a similar regime for corporates smacks of penny-wise pound foolish behaviour. It also gives credence to the long-held view that when you borrow in thousands you are in trouble with the bank but when you borrow in millions or billions, the bank is in trouble. Banks can correct this skew by putting in place a robust monitoring regime of corporate financial behavior that is accessible on real-time basis by everyone having a skin in the game.

(The writer is a senior columnist. He tweets @SMurlidharan)


ATM :: Can floating home loans become fair?

Currently, banks can decide their own benchmark lending rate, the MCLR. What if your loan was linked to a benchmark set by a third-party? Will you get a better deal?
Vivina Vishwanathan | Last Published: Tue, Mar 13 2018. 08 33 AM IST | LiveMint


India has floating home loans that become expensive as soon as the interest rates go up, but don’t float down when the rates fall. This happens because the banking regulator allows banks to peg their home loan rates to a benchmark that the banks themselves control—allowing them to benefit when they choose to, at the cost of you, the retail borrower. But it looks as if competition is finally arriving in this segment with a new home loan product from Citibank India, which uses a third-party benchmark. Here, we examine if such a thing is good for you or not. But first, some background.

Several times, the Reserve Bank of India (RBI) in its monetary policy review has flagged the issue of rate cut benefits not being passed on to retail customers. It has tried thrice to rationalize the benchmark lending rate linked to home loans, in a way that there is transparency and the benefits are passed on to consumers.

In the last 7 years, we have also seen home loans move through three benchmark rates—from benchmark prime lending rate (BPLR) to base rate in 2010 and then to marginal cost of funds based lending rate(MCLR) in 2016. However, none of these attempts seem to have worked and the desired goal of transparency in loan rates has still not been delivered.

Last year, during a monetary policy announcement, RBI governor Urjit Patel indicated that MCLR could be reviewed as the rate transmission to customers continued to be slow. While the banking regulator waffles on this, Citibank has come out with a home loan product that is linked to 3-month treasury bills (T-Bills).

Is it allowed to do this? “RBI permits banks to link their variable rate home loans to MCLR, provide fixed-rate loans, semi-fixed-rate loans or (even) link their loans to an external benchmark,” said Rohit Ranjan, head of secured lending, Citibank India. This is not the first time a bank has linked its home loan product to an external benchmark. ING Vyasa Bank Ltd, in 2005, had a home loan product that was linked to Mumbai Inter-Bank Offer Rate (Mibor) (you can read more about it here). Let’s understand the home loan products linked to T-Bills and see if you should opt for them.

Santosh Sharma/Mint

The product
Citi’s new home loan product is linked to the 3-month Government of India T-Bill benchmark. It is an external reference rate. Citi has decided to pick this data from the Financial Benchmarks India Pvt. Ltd (FBIL), which is a company that aims to develop and administer benchmarks relating to money market, government securities and foreign exchange in India.

How is the data for this benchmark arrived at? According to FBIL, it is based on T-Bills traded in the market. The benchmark rate is announced everyday at 5.30pm, except on holidays.

It is calculated from the data of secondary market trades executed and reported up to 5pm on the Negotiated Dealing System – Order Matching Platform (NDS-OM)—which is an electronic system for trading government securities in the secondary market. All trades of Rs5 crore or more, and having had a minimum of three trades in each tenure are considered. The benchmark T-Bill data is then published for seven different tenures: 14 days, 1 month, 2 months, 3 months, 6 months, 9 months and 12 months.

So that there is consistency, the bank has decided to pick the rate published on 12th day of each month. “Our endeavour is to provide as much stability as possible on rates to our customers. We believe a date towards the middle of the month best suits this objective,” said Ranjan. Usually, the RBI too comes out with its bi-monthly monetary policy in the first week of the month.

As this home loan product will be linked to 3-month T-Bill data, its reset clause will also be set for 3 months. This means, every 3 months your home loan interest would change based on movements in the external benchmark rate.

Is a 3-month T-Bill benchmark appropriate for 20-30 year loans? In a developed market such as the US, mortgages are linked to longer duration benchmark rates. “Linking long-term loans to longer-duration benchmark rates is more appropriate to the extend that it is based on duration. But at the same time in the US, for example, mortgages tend to be fixed. Then it makes sense to link to longer term loan. In case of Citi’s home loan product, the reset is more frequent and linking to a long-term rate may not be appropriate. It is just a strategy,” said R. Sivakumar, head, fixed income, Axis Mutual Fund.

The home loan also comes with a spread. In this case, it is around 200 basis points, plus T-Bill. The 200 basis points can vary depending on your credit profile. “As of today, home loan rate linked to t-bills will be around 8.5%….If your credit profile is good, then the spread could be lower,” said Ranjan. Remember that the spread that you agree to while signing a loan agreement will not be changed till the end of loan tenure.

How T-Bill is different
The RBI has said many times that there is no transparency in the way floating interest rate on home loans is calculated, and that there is need for a benchmark rate that is market linked so that any change in policy rates can be passed on to the consumers. Usually, banks keep the rates high even in a falling interest rate regime and you don’t see an immediate impact or cut in policy rates. To understand if home loans linked to T-Bills will bring in transparency, we compared T-Bills with MCLR and base rate. If you look at both comparisons, the drop in interest rates linked to MCLR as well as base rate come with a lag. If the home loan rates are linked to T-Bills, the reflection on falling interest rate is likely to be immediate on your home loan. The movement in T-Bill yields is a result of two parameters—repo rate and liquidity. Hence, if it is a falling interest rate regime, the fall will reflect faster in your loan rates.

Currently, when your home loan is linked to MCLR, the impact on your home loan rate is also a result of the banks’ cost of funds and other parameters associated with the bank that you take the loan from.

What should you do?
The concept of linking home loans to an external benchmark rate (instead of an internal one) is a good idea, as it makes the process transparent. Typically, banks have some leeway in controlling their rates. An external rate should obviate such a possibility.

However, is it possible for banks to manipulate the external benchmark too? “It is very difficult, since the cut off rate is decided by RBI. The central bank has the ability to manipulate it but a market participant can’t since it is a big and liquid market,” said Sivakumar.

As of now, the interest rate on home loans that is linked to T-Bills and MCLR are similar, due to the spreads attached to each one of them. A Citi home loan linked to MCLR has a spread of 40 basis points while the one that is linked to the T-Bills would have a spread of 200 basis points. Experts say that interest rates linked to an external benchmark will bring transparency and hence will help you to benefit more from falling interest rates.

“The rate will fall as well as rise faster. In T-Bills you will see a decrease before the MCLR decreases. There will be periods where the rates will lead or lag each other. But over the life cycle of the mortgage, say 20 to 30 years, the difference should not be huge, assuming the spread of 200 basis points,” said Sivakumar.

Currently, there have been signals of a higher interest rate regime kicking in. Hence, you may not benefit from T-Bill rates immediately. “The experience with base rate and MCLR has been that the rates tend to fall much more slowly when policy rates are falling. The moment you have an external benchmark, and there is no bank controlling it, the loan will be far more transparent and you are better off having that— especially when rates are falling,” said Vishal Dhawan, a Mumbai-based financial planner.

But what about the 200 basis point spread? “The spread is a function of what you end up believing is the cost of running a business. Ultimately, the bank will also be raising resources, which is not necessarily linked to 3-month T-Bill rate. It will be unfair to believe that the cost of fund for the bank is only the 3-month T-Bill rate and the spread is too much. The value will become far more evident when the rate cycle turns again and rates go down—right now it may not make a big difference,” added Dhawan.

As a borrower, however, you now have an option to pick a home loan based on an external benchmark. If it doesn’t work for you, you always have the option to switch to an MCLR-linked home loan.


ATM :: Credit score high, but loan rejected? Here are 6 possible reasons

A high credit score certainly boosts the chances of your loan approval. However, if you fail to qualify on other parameters, even your high credit score will not help.
Published: March 14, 2018 4:37 PM | Financial Express


A high credit score certainly boosts the chances of your loan approval. However, it doesn’t guarantee it. Credit score is just one of many parameters used for credit approval by lenders. If you fail to qualify on other parameters, even your high credit score will not help. Here are the some of the most common reason why loan applications are rejected despite a good credit score:

1. Minimum income eligibility: Most lending products have minimum income criteria for loan applicants. Lenders may also set varying income eligibility criteria depending on your location, i.e. metro, urban, semi-urban and rural areas. As this is often the first filter that lenders apply for processing loan applications, those who fail to meet this criterion are usually rejected outright, even without the consideration of other eligibility factors, such as credit score and EMI affordability. As this criterion may vary across lenders, visit online lending marketplaces to find out the loan options available to you basis your monthly income.

2. Age: Most lenders cap the age of loan applicants at 60 years. This is because monthly incomes usually dip after retirement, which increases of the risk of default. Some credit products may also cap the age by which the repayment has to be completed. For example, most lenders require the borrowers to complete their home loan and loan against property repayment before they turn 70. Those who fail to meet these requirements may have their loan applications rejected. If you too are approaching your retirement age, improve the chances of loan approval by making your spouse or employed children your co-applicants.

3. Frequent job changes: Nowadays it is quite common to frequently change jobs for better career prospects and higher income. However, frequent job changes is considered as a sign of an unstable career and hence, job hoppers are regarded as less creditworthy, especially for longer tenured loans like home loans and loan against property. If you too are planning to avail a longer tenured loan, avoid job changes for some time.

4. Guarantor of other loan: Whenever you become a guarantor to someone else’s loan, you become equally liable for its repayment. Hence, during fresh loan application, lenders will reduce your loan eligibility by the amount of outstanding loan guaranteed. This might lead to the rejection of your loan application. As banks do not allow changes in guarantor(s) unless requested by the borrower himself, ask the primary applicant of the loan to find another guarantor as your replacement.

5. High FOIR: Fixed obligation to income ratio (FOIR) is the proportion of your total income which goes out as EMIs (including the EMI for the new loan application) and other repayment obligations like house rent, insurance premiums, etc. As lenders prefer to lend to those with FOIR of 40-50% or lower, those exceeding it may have their loan application rejected. Hence, those with higher FOIR should prepay their existing loans in whole or part to increase their loan eligibility. Alternatively, opt for lower EMI for the new loan if that contains your FOIR within 40-50%.

6. Job and employer’s profile: Many lenders also consider your job description and/or your employer’s profile while processing your loan application. Lenders prefer government employees and those working with top corporates and MNCs the most due to their higher job certainty, whereas those working with lesser-known or financially-strained companies are less preferred. Employees with hazardous job profile have lower loan approval chances. Consider loans from NBFCs if banks reject your loan application due to your job or employer’s profile.

(By Naveen Kukreja, CEO & Co-founder,


NTH :: Have they changed the name of your favourite mutual fund scheme? Here’s what you should do

To ensure that all schemes launched by mutual funds are distinct in terms of asset allocation and investment strategy, SEBI proposed categorisation and rationalisation of mutual fund schemes.
Nikhil Walavalkar | Mar 16, 2018 02:24 PM IST | Source:


Mutual funds are busy changing the names of their schemes. Securities Exchange Board of India’s (Sebi) directive on the rationalisation and categorisation of mutual fund schemes has made mutual funds to drop the fancy names and fall in line. The idea is to simplify the process of understanding the mutual fund offerings and choosing schemes for investments by investors. But as the names change, there are some investors who may start worrying about their investments. If the investment you have invested into has disappeared or renamed do not get worked up. Do read on to understand how it impacts you.

What happened?

To ensure that all schemes launched by mutual funds are distinct in terms of asset allocation and investment strategy, SEBI proposed categorisation and rationalisation of mutual fund schemes. The SEBI prescription allows fund houses to offer schemes in 10 types of equity funds, 16 categories of bond funds and 6 categories of hybrid funds. Fund houses are also allowed to launch index funds, fund of funds and solution oriented schemes.

“SEBI has clearly defined norms and the asset allocation and the norms that will specify each category,” says Rupesh Bhansali, head of mutual funds, GEPL Capital. For example, a large cap fund must invest at least 80% of the money in large cap stocks. Large cap stocks are defined as top 100 companies in terms of full market capitalisation. “By introducing these norms the regulator has ensured that the apple to apple comparison of mutual fund schemes is possible,” says Bhansali.

The mutual fund houses too have started responding with change in names and investment strategy of the schemes, wherever applicable. For example, DSP Blackrock Focus 25 Fund is renamed as DSP Blackrock Focus Fund. Analysts used to treat it as a large cap fund so far. However, going ahead it will be placed in Focused Fund category.

The process of aligning with the SEBI norms will go on for a while and more fund houses will make necessary changes. The process however should not stop you from investing in mutual funds.

“Investors should first understand the category of mutual funds as each one of these has distinct characteristics,” says Swarup Mohanty, CEO of Mirae Asset Mutual Fund. Find out where your scheme is going to be placed and see what kind of investment strategy it will employ.

“If the scheme’s investment strategy and portfolio construction changes, then there is a very high possibility of changes in risks and returns associated with investing in that scheme,” Renu Pothen, head of research, For example, if a fund that was a primarily large cap scheme is shifted to a large and mid-cap scheme, then the risk associated with the scheme goes up as the fund manager invests minimum 35% of the money in mid cap companies. Possible higher returns come on the back of higher risks.

“The investor must assess the risk-reward in the light of his financial goals and his risk appetite before investing in that scheme. If there is a mismatch between the investor’s risk profile and the risk-reward offered by the scheme, the investor will be better off selling out his existing investments. He can look for better options elsewhere,” says Renu Pothen. While exiting a mutual fund scheme, there are implications such as exit loads and capital gains, which investors should not ignore.

“When there is a change in fundamental attribute of the scheme, the investors are given exit option without any exit load,” points out Bhansali. This exit option is not at all compulsory and should be availed if and only if there is a mismatch between your expectations and the offering. However, the capital gains will be payable in case of redemption in bond funds. Though the exits in current financial year from equity funds will lead to no tax on long term capital gains, the same will attract 10% tax after April 1, in case the gains exceed Rs 1 lakh.

Changes in regulatory framework and volatile markets may add to worries of mutual fund investors. However, mutual fund investors must take this opportunity to relook at their investment plans, say experts. If you do not understand the fine nuances of equity funds, better stick to multicap funds and let the fund manager decide what asset allocation should be within equity as an asset class.

“It is time to reassess your risk profile. Do not get carried away with high returns over last couple of years. Instead be realistic with your return expectation while building your financial plans and use short term volatility to your advantage by investing through systematic investment plan,” advises Mohanty.


Interview :: Home loan rates likely to go up marginally, says HDFC MD

Don’t see property prices going up for now: Renu Sud Karnad, Managing Director, HDFC
ANIL URS | Published on March 14, 2018 | The Hindu Business Line


Renu Sud Karnad, Managing Director, HDFC, in an interview with BusinessLine, explains how the realty and home-loan sectors are shaping up as the new regulatory regime sets in. Excerpts:

How is the property market doing pan-India?

Apart from New Delhi and Chennai, where we see slow offtake, the market is good in other major cities. By good I mean, we are doing good business.

How do you see property prices moving?

As I see it now, I don’t see any increase in property rates happening.

What about interest rates, especially in the wake of rising bond rates?

Yes. Interest rates are rising a little bit. But let me put it this way. I don’t think the rates are going to come down. I think next year we will see a quarter to 1 per cent increase in rates.

Is this rise in rates low, or how do we understand it?

A quarter to half a per cent is nothing when compared to the high interest rate days, when home loans were going at 13-14 per cent. Now they are at 8.3-8.4 per cent. So they may go up to 8.9-9 per cent.

How is HDFC’s home loan growth?

At 23 per cent, our home loan growth is excellent. We have seen good growth coming from Mumbai, Bengaluru, and Pune. In the National Capital Region (NCR) it is a little slow. Otherwise, home loan growth normally is about 15-18 per cent.

Are any banks on your radar for acquisitions?

We are always on the look out whenever an opportunity arises.

How far are you in picking up CanFin Homes?

Actually, you should ask them, because five to six people are talking to them. I don’t know what pressure of time they have and don’t know when they need to announce it. Yes, we are also talking to them.

Have you firmed up your business plan for the next fiscal (2018-19)?

We are in the process. But I can tell you we are looking at 15-18 per cent growth.

How is the borrowing by property developers?

They, I think, are now looking at new avenues. PE funds are giving them money. Banks have also started to explore. Once the sector gets used to new regulatory framework, we could see good amount of lending.

Definitely the last one year had been challenging from them. But I think in the next six months, things should settle down.


ATM :: Creditworthiness: Has PNB scam changed the dynamics of banking?

By Arshad Khan | Express News Service | Published: 04th March 2018 04:45 AM |


NEW DELHI: In the wake of Punjab National Bank scam and numerous other banking frauds detected in the days followed, it became clear that the process of granting loans to borrowers differs for different class of borrowers. While it becomes a nightmare of paper work for borrowers falling in the CBIL minus and CIBIL category, banks mends its ways for the people falling in the CIBIL plus category.

Banking experts say the approach of granting loan to everyone needs to be standardised. Ranjeet Mudholkar, vice-chairman and CEO, Financial Planning Standards Board India, said that banks need to make Cibil score of corporate bodies, mainly the listed ones, public, for the betterment of account and share holders. “Imagine a situation when you know in advance the credit score for Kingfisher, it will not only help rationalise the stock movement of the share holder but also bring a lot of stability in the system. The account holders will also know where their money is going,” Mudholkar said.

He adds that banks will have to become transparent in their working and there is a need to promote financial literacy among account holders. However, the two immediate requirements for a better banking system are far from international standards. In developed nations, accounts holders are much more aware as what is happening with their money, beside having easy available of CIBIL scores.

Another stark contrast is that many account holder in the India are not necessarily its share holder, hence they don’t see a need to know their bank’s working. Financial institutions, too, differentiate between an account holder and a share holder when it comes to revealing information. Even though, account holders are less likely to lose their deposit money in the whole scam episode, there is always a fear that there earning might get impacted, which, has an impact on every stake holder.

It was reported that post the illegal transfer of around $1.8 billion of taxpayers’ money from a single PNB branch in Mumbai, many account holders of the bank closed their fixed deposits in fear of the bank shutting down and they losing their money. A PNB clerk in a Delhi branch said the number of new account openings has seen sharp decline. Share price, too, continues to touch new lows.

But will things change in the way banks function. Mudholkar says that things are pretty much in place for middle class borrowers but for UHNIs, he hasn’t seen change in Bank’s approach yet. “Not taking ratings into consideration while granting loan to corporate bodies should stop and certain guidelines should be followed by banking official. In the absence of this, there will always be a crook who will try to take advantage of an outdated system,” he said.

When checked with a banking official whether they follow the standard norms while dealing while HNIs, she said sometimes they break limited norms while dealing with them as they are ‘valuable’ customers.

“A trust is built between them and bank. At the end of the day we do business and in most cases we know that the money is secured but problem comes in when there are wrong intentions,” she said.