Banks and NBFCs follow different guidelines when it comes to lending and, thus, home loans disbursed by them are also done on certain different parameters. Here’s all you need to know.
By: Adhil Shetty | Published: May 3, 2018 1:03 PM | Financial Express
When buying a house, we all want to get the best deal on the home loan we avail as it is probably the longest financial commitment we will make impacting our overall portfolio and expenses. However, deciding on the right financial institution to avail the loan from is a rather tricky task, given the market is competitive.
With the rise of non-banking financial corporations (NBFCs) in India, the choice has only gotten wider as customers can now choose not only among banks, but also NBFCs. But did you know that availing a home loan from a bank and an NBFC may seem similar, but work in very different ways?
Banks and NBFCs follow different guidelines when it comes to lending and, thus, home loans disbursed by them are also done on certain different parameters. Find out how these two differ when it comes to assessing an individual for a home loan and which one can you resort to for your home loan.
1. Interest Rates: MCLR vs PLR
Banks operate their housing loan interest rates based on Marginal Cost of Lending Rate (MCLR), which serves as their lending benchmark and is closely monitored by the RBI. On the other hand, loans by Housing Finance Companies (HFCs) and NBFCs are not linked to the MCLR. They are linked to the Prime Lending Rate (PLR), which is outside the ambit of the RBI. So while banks can’t lend at rates below the MCLR, PLR-linked loans do not have such restrictions.
Banks have both floating and fixed rates, of which before only floating rates felt the occasional impact of MCLR. But in February this year it was announced by the RBI that all new loans whether with floating interest rates or base rates will be linked to the MCLR.
An MCLR-linked loan clearly mentions the intervals at which its interest rate will automatically change. In a falling interest rate scenario, this allows customers to receive RBI-mandated rate cuts in a transparent, time-bound manner.
As NBFCs and HFCs are free to set their PLR, it gives them greater freedom to increase or decrease their loan rates as per their selling requirements. This sometimes suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. But in many cases, for those who easily meet the criteria this may also result in inflated interest rates compared to banks.
2. Loan Eligibility via Credit Score
As paperless financial technology takes prominence, more and more lenders are depending on credit scores to determine loan eligibility. While there are upper caps set on interest rates through MCLR and PLR, the actual interest rate you pay on your loan is linked to your credit score. Leading lenders are known to offer their best rates to customers with a CIBIL score of 750 or more.
While both banks and NBFCs consider credit scores carefully, NBFCs tend to have more relaxed policies towards customers with low credit scores. However, with a very low score, both banks and NBFCs will likely charge you a higher interest rate. In some cases, banks may ask to convert the home loan into a secured loan by mortgaging some asset if the credit criteria is not met, but you still need the loan.
A customer with a low score can in fact start with a loan from an NBFC. Through timely repayment, s/he can improve his credit score. After this, once the bank’s eligibility criteria is met, the loan balance can be transferred to a bank.
To keep yourself ready, make sure to access credit reports by CIBIL or Experian. This will allow you to be ready even before you approach a lender. Since credit scores change every quarter, you can take your time to improve it before you decide to avail the loan in order to get a better rate of interest and disbursal amount.
3. Loan Amount
The actual cost of property is never just the selling price promoted by developers and builders. During acquisition it typically goes up as other costs like stamp duty, registration, an assortment of payments towards brokerage, furnishing, repairs and more always add up. Based on where you are in India, you may have to pay between 3 and 11 per cent of the property value as registration cost alone.
Banks are allowed to fund up to 80% of a property’s value. For example, if you are buying a property worth Rs 50 lakh, you may receive a loan of Rs 40 lakh from banks excluding the registration cost and associated charges of course. The rest of the fund requirements would have to be met by you and often these last mile costs weigh heavily on the final decision to buy a property.
Although both NBFCs and banks are not allowed to fund stamp duty and registration costs, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount as per his eligibility.
4. Pre-Payment, Foreclosure and Late Payment Charges
Just like other loans, home loans also have associated charges attached. Both banks and NBFCs will have charges for pre-payment and foreclosure but NBFCs tend to charge much higher. In addition, late payment charges by NBFCs may sometimes be close to 10 or 20% of your monthly EMI, giving you no respite in case you default on any payment. NBFCs also tend to have higher processing fees, although some banks may charge similar amounts.
Whoever the lender may be, make sure to calculate you future interests and factor in additional costs associated with your repayment as home loans range between 10 and 30 years and you may have to bear such high charges in future.
(The writer is CEO at Bankbazaar.com)
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.
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.
Growth in mortgages in the banking sector slipped to 11.4% year-on-year (y-o-y) in October from 12.8% in September, data released by the Reserve Bank of India (RBI) on Thursday showed.
By: FE Bureau | Mumbai | Published: December 1, 2017 4:51 AM | Financial Express
Growth in mortgages in the banking sector slipped to 11.4% year-on-year (y-o-y) in October from 12.8% in September, data released by the Reserve Bank of India (RBI) on Thursday showed. Home-loan outstandings at banks had grown 16.6% y-o-y in October 2016. The total outstanding on mortgages in the banking system stood at Rs 9.03 lakh crore as on October 27 this year. Retail loans as a category grew 16% y-o-y in October, a shade slower than 17% in October 2016. Outstanding retail loans as on October 27 stood at Rs 17.45 lakh crore. Loans to individuals had been clocking growth figures in the mid-to-late teens since May 2015, before signs of a slowdown began to surface in November 2016.
In September, outstandings on credit cards grew the most, at 37.7%, among all categories of loans to individuals. Vehicle loans grew 7.4%, significantly slower than 23.5% in September 2016, while consumer-durable loans dropped 9.4%, as compared to a year-ago growth figure of 20.3%. Credit to industry contracted on a y-o-y basis for the thirteenth straight month in October, falling 0.2% y-o-y to Rs 26 lakh crore. In October 2016, the corresponding figure stood at Rs 26.05 lakh crore, 1.7% lower than the October 2015 level.
Industrial credit has been falling almost consistently since August 2016, with September 2016 being the only month of positive growth ever since. Credit deployment in industry fell 13.5% y-o-y in the medium industry segment. However, loans to large industry and micro-and-small industry recorded positive growth, rising 0.2% and 1.2%, respectively, over the year-ago period. Bank credit to industry has been muted for the past couple of years as lenders turned cautious amid worsening asset quality and well-rated corporates chose to raise money from the bond market.
Loan growth has been suffering partly due to capital-starved public sector banks. Analysts expect the recapitalisation of state-owned banks to fuel credit growth in the months ahead. In a recent note, Kotak Institutional Equities wrote that lenders like Bank of Baroda, Canara Bank and Union Bank of India should see loan growth improving. “Loan growth for PSU banks is also partly supported by loan buy-outs from NBFCs and private banks. Retail cycle continues to hold up well, prompting many banks to pursue this segment more aggressively,” Kotak said. Trends in the corporate loan growth appear anaemic, according to the brokerage, with few signs of a turn in the capex cycle.
By Saloni Shukla – ET Bureau | Updated: Aug 25, 2017, 12.05 PM IST | Economic Times
MUMBAI: A Reserve Bank of India appointed committee on Household Finance has suggested that banks link their home loan rates to the RBI’s repo rate, the rate at which it lends to banks, instead of the Marginal Cost of Funds based Lending Rate (MCLR), which the banks follow now.
“Banks should quote loans to customers using the RBI repo rate rather than based on their own MCLR rates,” the committee report chaired by Dr Tarun Ramadorai, Professor of Financial Economics, Imperial College Business School, London, suggests. “To facilitate ease of comparison for prospective borrowers at the point of purchase, every floating-rate home loan should be quoted to prospective borrowers in the form of a market-wide standardised rate + spread as opposed to MCLR + spread.”
While these recommendations need not be accepted by the regulator, it comes when the RBI had hinted it was unhappy with the rate transmission under the MCLR regime. In the past three years the central bank has reduced the policy rate by 200 basis points, but the weighted average lending rates have fallen by 145 basis points. A basis point is 0.01 percentage point.
“The experience with the marginal cost of funds based lending rate or MCLR system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory even though it has been an advance over the earlier base rate system,” Viral Acharya, deputy governor RBI had said on August 2. “We have constituted an internal study group across several clusters to study various aspects of the MCLR system and to explore whether linking of the bank lending rates could be made direct to market determined benchmarks going forward. The group will submit the report by September 24th 2017.”
The committee has also recommended that all banks use the same reset period of one month for loans. Under the current system, floating rate loans have a fixation period of roughly one year. The report argues that the current system impedes monetary transmission mechanism and does not allow borrowers to immediately benefit from interest rate drops.
“If the bank decides to link home loans to the one-year MCLR, it should pass through any changes in the one-year MCLR rate to borrowers every month,” the report says. “And if the bank decides to link home loans to the six-month MCLR, it should pass through any changes in the six-month MCLR rate to borrowers every month.
Source : https://goo.gl/kBksEU
Mayur Shetty | TNN | Updated: Jun 7, 2017, 03:10 PM IST | Times of India
MUMBAI: In a move that will encourage banks to lend more for housing in large cities and make high value home loans cheaper, the Reserve Bank of India reduced the risk weightage on home loans above Rs 75 lakh to 50% from 75% earlier.
“Considering the importance of the housing sector and given its forward and backward linkages to the economy, it has been decided as a countercyclical measure, to reduce the risk weight on certain categories. It has also been decided to reduce the standard asset provisioning on such loans,” RBI said in its monetary policy.
In its monetary policy review the RBI retained the repo rate at 6.25% and the reverse repo rate at 6%. The marginal standing facility (MSF) – an emergency funding facility continue to remain at 6.5% as also the cash reserve ratio of 4%.
In another move that will ease liquidity in the banking system by close to Rs 50,000 crore, Reserve Bank of India has reduced the statutory liquidity ratio (SLR) – the prescription for minimum holding of government securities. As against investing 20.5% of their deposits in gilts, banks will now have to invest only 20% with effect from June 24, 2017. RBI said that the reduction was aimed at allowing banks to comply with the international norms on liquidity coverage that come into effect from January 2019.
It was widely expected that the central bank would keep rates on hold. However, economists believed that RBI would ease its stance from `neutral’ to `accommodative’ to send a message that easy money conditions would prevail. The central bank however continued to maintain a neutral stance on the ground that easing of prices might be temporary. It also pointed out that fuel prices have been hiked since the inflation numbers were published and prices might rise further.
Should you take a home loan from a bank or an NBFC?You would find NBFCs more willing to lend even if you have a poor credit score
Adhil Shetty | June 10, 2017 Last Updated at 22:13 IST | Business Standard
Lending rates have trended downwards over the last two years. Currently, several lenders are offering home loans at an interest rate of 8.35 per cent, way lower than the 10-11 per cent rate that prevailed four years ago. For customers this translates into a lower Equated Monthly Installment (EMI) on an existing loan, or allows them to borrow more to finance a bigger home. As they begin the process of short listing a loan provider, customers may find themselves wondering whether they should borrow from a bank or an NBFC (non-banking financial company). Here’s a look at some of the key criteria that will help you make this decision.
MCLR vs PLR
All new loans with floating interest rates offered by banks are now linked to the Marginal Cost of Lending Rate (MCLR). This departure from the base rate regime began on April 1, 2016. The MCLR serves as a bank’s lending benchmark, upon which they charge an interest rate spread. For example, for home loans up to Rs 30 lakh, a leading bank has a spread of 35-40 basis points above its one-year MCLR of 8 per cent. An MCLR-linked loan clearly mentions the intervals at which its interest rate will automatically change. In a falling interest rate scenario, this allows customers to receive RBI-mandated rate cuts in a transparent, time-bound manner. This wasn’t the case with the base rate-linked loans where transmission of rate cuts was weaker.
On the other hand, loans by Housing Finance Companies (HFCs) and NBFCs are not linked to the MCLR. They are linked to the Prime Lending Rate (PLR), which is outside the ambit of the RBI. While banks can’t lend at rates below the MCLR, PLR-linked loans do not have such restrictions. NBFCs and HFCs are free to set their PLR. This allows NBFCs greater freedom to increase or decrease their loan rates as per their selling requirements. This suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. This also needs to be understood in context of a customer’s credit score, explained below.
Loan to value ratio
The actual cost of property acquisition typically goes up to 105-110 per cent of the property value, including cost of stamp duty, registration, and an assortment of payments towards brokerage, furnishing, repairs, etc. Based on where you are in India, you may pay between 3 and 11 per cent of the property value as registration cost. Banks are allowed to fund up to 80 per cent of a property’s value. For example, if you are buying a property worth Rs 50 lakh, you may receive a loan of Rs 40 lakh from banks. The other 25-30 per cent of your fund requirements would have to be met by you. Often, these last mile costs weigh heavily on the final decision to buy a property. Both NBFCs and banks are not allowed to fund stamp duty and registration costs. However, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount as per his eligibility, thus giving the NBFC an edge over competition.
Both banks and NBFCs may bundle products. For example, it’s not unusual for lenders to sell a loan protection insurance plan along with a home loan. The insurance plan helps settle the loan in case the borrower were to pass away during the tenure. Both banks and NBFCs have cross-selling targets. While banks have a much larger range of products to sell, NBFCs push more aggressively to sell third-party products like insurance to bring in more profitability per customer. Compared to banks, NBFCs have a smaller customer base. They have fewer branches and operate in fewer locations. As a result, there is an increased focus on profitability per customer. Customers need to evaluate whether the bundled products are useful to them. If not, they can refuse them and save costs.
Today, there is heightened focus on customers’ credit scores. Increasingly, the interest rate you pay on your loan is linked to your credit score. For example, a leading bank had recently offered its best rates to customers with a CIBIL score of 750 or more. You needn’t wait to apply for a loan to find out your score. You can access one free report a year by visiting the websites of credit rating agencies such as CIBIL or through third-party credit report generators.
If you scan the loan market, you will see that NBFCs have more relaxed policies towards customers with low credit scores. However, with a low score, both banks and NBFCs will likely charge you a higher interest rate. Loan seekers can make the best of both these options. A customer with a low score may start with a loan from an NBFC. Through timely repayment, he can improve his credit score. After this, he may meet a bank’s eligibility criteria and may transfer the loan balance to the bank. If the outstanding loan amount at this point is small, it’s better to continue with the NBFC.
A home loan is typically a long-term commitment with significant interest costs. If you borrowed Rs 50 lakh at 8.6 per cent for 20 years, your total interest paid over the loan tenure will be Rs 54.89 lakh, which is more than the principal borrowed. Therefore, loan holders look to reduce their interest outgo through timely pre-payments. An overdraft (OD) loan facility helps in this regard. An OD loan is linked to the customer’s bank account in which he can park surplus funds. The surplus over the EMI amount is treated as pre-payment towards the home loan, thus bringing down the overall loan liability and interest charged on the balance. Moreover, the customer can still withdraw the surplus as and when he requires it. At present, only banks provide the OD loan facility and NBFCs don’t. This facility is useful to families with the ability to generate regular surplus income, such as a working couple. It is also useful for someone who may be in frequent need of short-term funds, such as a businessman who can withdraw this surplus based on his needs.
Paperwork and processing
Banks have more stringent paperwork requirements for home loans. This is not necessarily a bad thing for the loan seeker. In lieu of the greater scrutiny, he stands to receive an attractive interest rate. NBFCs are known for relaxed paperwork policies and faster processing. For example, in Bengaluru banks will not finance properties that do not have a ‘B’ Khata, but NBFCs will.
The writer is CEO, BankBazaar.com
Neha Dasgupta, Suvashree Choudhury, Savio Shetty | Sat, Nov 26 2016. 05 37 PM IST | Live Mint
RBI says banks will need to transfer 100% of their cash under the central bank’s cash reserve ratio from deposits generated between 16 September and 11 November
New Delhi/Mumbai: The Reserve Bank of India (RBI) on Saturday unexpectedly ordered banks to deposit their extra cash with it, in a bid to absorb excess liquidity generated by a government ban on larger banknotes.
Many Indians deposited their old notes with their banks after the ban on Rs500 and Rs1,000 notes on 8 November, which is aimed at tax evaders and counterfeiting.
Banks had put some of this cash into government bonds, sparking a rally that saw the benchmark 10-year bond yield fall more than 50 basis points to its lowest in more than 7-1/2 years.
The central bank said banks would need to transfer 100% of their cash under the RBI’s cash reserve ratio from deposits generated between 16 September and 11 November, saying it was a temporary measure that would be reviewed on or before 9 December.
Traders called it a drastic move intended to dent the rally in bond markets, adding that the RBI could have opted for more modest measures such as sucking out some of the liquidity through sales of market stabilisation bonds or telling banks to park funds under reverse repos.
The action could also temper market expectations that the central bank would cut interest rates by 25 basis points at its next policy review scheduled for 7 December, after already easing them by the same amount at its last review in October.
“The move is more of a ham-handed one than the finesse expected from the RBI,” said Shaktie Shukla, founder of boutique investment advisory firm Kaithora Capital.
“The liquidity sweep will definitely halt the down move in (bond) yields,” he added. “It will also temper the euphoria pre- RBI policy.”
The move is likely to drain over Rs3.24 trillion from the banks, according to Reuters estimates.
Traders said bond market yields could rise 8-10 bps on Monday, given that the RBI move would deprive the key source of funding seen in the past two weeks, while banking shares would likely take a hit.
Bond investors had also bet India’s demonetisation action would dent economic growth as consumers held back on purchases, raising the prospect of a rate cut by the RBI.
At the same time the bond rally had increased hopes it would lower borrowing costs in the economy and allow banks to reduce some of their lending rates.
On Friday the central bank also relaxed its liquidity auction rules by expanding its basket of securities that it accepts as collateral. Reuters
The platform owners & investors hail the move as regulation gives RBI’s stamp of approval to a business that is completely banned in countries like Japan & Israel
Anup Roy & Abhijit Lele | Mumbai | April 29, 2016 Last Updated at 00:25 IST | Business Standard
The Reserve Bank of India (RBI) on Thursday came up with a discussion paper on peer-to-peer lending (P2P), seeking to regulate the fast emerging crowdfunding platforms as the new financing model has assumed importance too significant to be ignored.
Interestingly, the platform owners and investors welcomed the development as regulation gives RBI’s stamp of approval to a business that is completely banned in countries like Japan and Israel.
“Any space where money changes hand should be regulated. Regulation is good for the industry, but it should be light regulation” said Mohandas Pai, former board member of Infosys and investor in Faircent.com, a P2P lending platform. “Regulation will help us in our business and we can approach the court of law as legal entities for our needs and even for recovery,” said Bhavin Patel, co-founder of LenDen Club, a P2P platform.
In fact, RBI itself is aware of this and sounded a little hesitant in giving this recognition to the business model. But the central bank officials, including Governor Raghuram Rajan, have said the RBI cannot remain indifferent to new innovation in financing activities and growth in P2P sector. To allow regulation, RBI’s discussion paper said the platforms should adopt a company structure that can then be regulated by the central bank. Currently, the P2P platforms are run by individuals, proprietorship, partnership or limited liability partnerships — areas outside RBI’s jurisdiction. The P2P platforms are largely technology companies registered under the Companies Act and acting as an aggregator for lenders and borrowers thereby, helping create a match between them.
“Although nascent in India and not significant in value yet, the potential benefits P2P lending promises to various stakeholders (to the borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored,” RBI said.
Presently, there are around 30 start-up P2P lending companies in India, RBI said. Globally, the cumulative lending through P2P platforms at the end of fourth quarter of 2015 reached £4.4 billion, from just £2.2 million in 2012. While banned in some countries, in some other jurisdictions, the P2P platforms are either considered part of banking, or are intermediaries.
RBI’s own discussion paper favoured the platforms to act as intermediaries, to be registered as non-banking finance companies with a minimum capital of Rs 2 crore, so that promoters have “skin in the game”. The discussion paper also sought to curtail the freedom of these companies significantly and said funds raised through the platforms should go directly from the lenders’ bank account to the borrowers’.
P2P LENDING BUSINESS
- The business size globally is £4.4 billion but nascent in India
- Completely banned in Israel and Japan but allowed elsewhere
- RBI plans to treat it as intermediary NBFC
- Minimum capital requirement is Rs 2 crore
- Should not take deposits
- Cannot show lending and borrowing funds in its balance sheet
- Money should go directly from lender to borrower
- Can only take fees, provide creditworthiness info
- Should not provide cross-border transactions
- Management should be stationed in India
Source : http://goo.gl/HB0yhG
By Preeti Kulkarni & Pratik Bhakta | ET Bureau | 12 Apr, 2016, 10.24AM IST | Economic Times
Smartphones are not just useful for social media, videos and taking selfies. They will now become an important part of your daily life by doubling up as a portal for making payments, sending and receiving money etc.
Ten of the country’s biggest banks along with the Reserve Bank of India have just launched a Unified Payments Interface (UPI) — a mega app that will sit on your smart phone once you have downloaded it and dramatically reduce the cost and time taken for making simple payments. What’s more, you can use this app to pay for any transaction below Rs 1 lakh, even something as low as Rs 50.
The biggest impact of this app will be on third-party payments. Today, if you want to pay someone, you need to add him or her as a beneficiary. You need the IFSC code and bank account number and branch etc. The UPI app does away with all this. All you need is the receiver’s unique ID. Open the UPI app, select the amount to be paid, add the unique ID of the beneficiary and select ‘send’. The app will ask for a mobile pin to authenticate the payment after which it is done.
This can be useful not just in making regular payments but also in transactions between friends. You have just had a drink at the bar and want to share the bill. One person pays and the others just transfer the money to his account. No need to use cash, no need for the IFSC code and all that.
Remittances will also become easier and the same process applies here as well. Cash on delivery, the big driver behind the ecommerce boom, will probably die a natural death for people with smartphones. They can use the UPI app to pay after receiving the goods. All they need to know is the unique ID of the ecommerce firm. The buyer can also scan a QR code that the delivery boy carries through his UPI app or pay directly to the unique ID of the delivery boy.
How can a customer use UPI
1. He will need to have a bank account and a smart phone.
2. Download the UPI app of a bank from PlayStore
3. Connect the bank account
4. Create a Unique ID
5. Generate a mobile pin
6. Also link Aadhaar number
Only 10 banks are part of this now but others are expected to join. Another big feature of UPI is that you can use any bank’s systems to transfer money or make payments. You don’t need an account with that specific bank to be able to use its UPI app. All you need to do is to download that bank’s UPI app, register yourself and make the payment.
Source : http://goo.gl/oou2db
While PSU banks offer 4% interest on savings deposits, private players offer as much as 6%
Press Trust of India | Mumbai | March 16, 2016 Last Updated at 00:06 IST | Business Standard
The Reserve Bank of India (RBI) has asked banks to pay interest on savings bank accounts on a quarterly basis or shorter duration, a move which will benefit crores of savings account holders.
At present, the interest is credited in savings bank accounts on a half-yearly basis. The interest rate on a savings bank account is calculated on a daily basis since April 1, 2010.
“Interest on savings deposits shall be credited at quarterly or shorter intervals (on domestic savings deposits),” RBI said in a circular issued on March 3.
While public sector banks offer four per cent interest on savings deposits, private players offer as much as six per cent. In 2011, the central bank had decided to give freedom to commercial banks to fix savings bank deposit rates, the last bastion of the regulated interest-rate regime. While giving banks this freedom, RBI had said a uniform rate would have to be offered on deposits of up to Rs 1 lakh.
On higher amounts, banks are allowed to offer differential rates to depositors. According to analysts, the lower the periodicity, the higher will be the benefit to savers.
Banks will have to shell out more for customers. According to estimates, the lower periodicity of interest payments might put a burden of Rs 500 crore on banks.
Earlier, banks used to give interest of 3.5 per cent on savings accounts on the basis of the least amount deposited in an account between the 10th and the last day of each month.
-At present, interest is credited in savings a/c on a half-yearly basis
-While PSU banks offer 4% interest on savings deposits, private players offer as much as 6%
-In 2011, RBI bank had decided to give freedom to commercial banks to fix savings bank deposit rates
-Lower periodicity of interest payments might put a burden of Rs 500 crore on banks
Source : http://goo.gl/QthRXy
Aparna Iyer & Vishwanath Nair | Last Modified: Fri, Dec 18 2015. 12 35 AM IST | LiveMint.com
RBI aims to make rates responsive to policy changes; change may make loans cheaper for new borrowers
Mumbai: Indian banks will soon have to price their loans based on rules announced by the central bank on Thursday in a move that is aimed at making lending rates more responsive to policy rate changes.
Starting 1 April, lenders will calculate their lending rates based on the marginal cost of funds, or the rate offered on new deposits. The new rules will likely to make loans cheaper for new borrowers. For existing borrowers, it may take as much as a year for the benefits to be transmitted.
Banks currently set their lending rates based on the average cost of funds on deposits outstanding.
Reserve Bank of India (RBI) governor Raghuram Rajan has repeatedly emphasized the need for banks to pass on interest rate cuts, saying less than half had been passed on to consumers this year.
While RBI has cut its benchmark rate by 125 basis points in 2015, lending rates have come down only by 60 basis points, RBI said in its December monetary policy review. One basis point is one-hundredth of a percentage point.
“While these guidelines will benefit new customers, existing customers will also have an option to shift to the new regime with some conditions,” Arundhati Bhattacharya, chairman of the nation’s largest lender State Bank of India, said in an emailed statement. “Sufficient time has been given to banks to switch over to the new regime of marginal cost of funds-based lending rate.”
By allowing banks to move to the new system for fresh loans and giving them the option to stay with the base rate system for existing loans, lenders will be spared a one-time hit to profits, which some had feared.
The Indian banking sector has struggled through a number of rate-setting methods over the last few years and has moved from a benchmark prime lending rate (BPLR) system to a base rate (or minimum lending rate) system and now the marginal cost of funds-based lending rate (MCLR). This time around, the shift was once again driven by weak transmission of interest rate cuts.
According to the new rules, every bank will be required to calculate its marginal cost of funds across different tenors. To this, the banks will add other components including operating cost and a tenor premium. A tenor premium is the compensation for the risk associated with lending for a longer time.
Taking all these components into account, banks will then publish an MCLR for overnight loans, one-month, three-months, six-months and one-year loans. This MCLR will act as the minimum or base lending rate for that tenor of loans irrespective of the borrower.
The final lending rate will be MCLR plus the spread that banks will charge for individual categories of borrowers.
“Apart from helping improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances,” RBI said in a statement on Thursday.
“The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks,” it said.
Bankers said the new rules related to differentiation based on loan tenor will help them price their loans better.
“The differentiation based on tenor will be a big positive for banks as now we would be able to price our loans based on the deposits of the corresponding tenor, rather than the older practice of considering 3-6 month deposit rate for computing base rates for all loans,” said R.K. Bansal, executive director at state-owned IDBI Bank Ltd. “Now we would be able to avoid this mismatch.”
With the inclusion of shorter term MCLR rates, banks can compete with the commercial paper market as well, Bansal added.
The new rules will reduce the cost of borrowing for companies, according to a Canara Bank official, who declined to be named as he is not authorized to speak to reporters.
“This has made the lending rate framework more dynamic as different banks could have different MCLRs for different tenures,” the official of the state-run lender said
In its circular, RBI said banks should specify the dates on which interest rates would be reset for borrowers. This reset must have at least once a year but can happen more frequently as well.
“The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period,” said RBI.
Banks, however, have been given the option to keep outstanding loans linked to the base rate system even though it said existing borrowers will also have the option to move to an MCLR linked loan “at mutually acceptable terms”.
Most banks are unlikely to offer this option easily, said a banker who declined to be identified, which means that any immediate hit to profitability may be avoided.
“We don’t expect much of an impact on margins since the existing loans have been left untouched,” said Bansal.
Certain loans such as those extended under government schemes or under restructuring package, advances to banks’ depositors against their own deposits, loans to banks’ own employees including retired employees and loans linked to a market-determined external benchmark will be exempt from the MCLR rule, RBI said.
Fixed-rate loans granted by banks will also be exempt from MCLR. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.
RBI had mooted adoption of marginal cost of funds for calculation of lending rates in its April policy citing lack of effective transmission of its rate cuts into bank base rates. Bankers cited the stickiness of deposit rates and lack of credit demand as reasons for the delay in passing on lower rates.
“There might be short-term problems when dealing with the new norms as banks might want to offer better spreads to their larger customers who can negotiate a better rate. However, once the system stabilizes, it will be more or less uniform across the board and borrowers will get rates which reflect the interest rates in the economy better,” said Vibha Batra, senior vice-president at rating company Icra Ltd.
Batra added that there could be some shuffling in the home loan segment since existing borrowers will also want to move to an MCLR-linked rate if they see that as being cheaper. Banks, however, may be reluctant to allow existing borrowers to move.
“Lenders will have to come up with better schemes to retain home-loan customers by allowing them to move to the MCLR regime,” said Batra.
Source : http://goo.gl/2RGbeJ
By Atmadip Ray, ET Bureau | 14 Dec, 2015, 09.12PM IST | Economic Times
KOLKATA: Reserve Bank of India on Monday refuted rumours which is making people believe that currency notes with scribbling on them would cease to be legal tenders from January.
Rumours are doing the rounds in the social media that banks would not accept currency notes with writing on them from next month.
The central bank has denied having issued any such communication.
It has reiterated that all currency notes issued by it are legal tender and banks and members can freely and without fear accept them in exchange for good and services.
Source : http://goo.gl/6ttmFc
By Shilpy Sinha, ET Bureau | 26 Oct, 2015, 07.17AM IST | Economic Times
MUMBAI: The National Housing Bank is considering allowing lenders to levy pre-payment penalty on housing loan customers who transfer the outstanding amount to another lender in the first two years of the loan tenure, a dampener for borrowers wanting to make the most of falling interest rates.
Sriram Kalyanaraman, chairman of National Housing Bank, the regulator for housing finance companies (HFCs), believes that home loan ‘shopping’ could lead to risks building up in the system as banks and HFCs are vying for the same customers to expand their market share.
“I think there should be some form of lock-in for the customers in the initial days, say 18 to 24 months, before they are allowed to transfer loans,” said Kalyanaraman. “Companies/HFCs/banks are trying to woo customers with lower interest rates, which is good for customers, but there could be a bubble due to everyone concentrating on the same segment and also topping up loans when they do balance transfer.”
In October 2011, NHB had waived off prepayment penalty on money borrowed from housing finance companies on floating rate. So, borrowers could prepay the loan by borrowing from a bank or a nonbanking finance company while moving to lower interest rates.
The following year, the Reserve Bank of India barred banks from levying foreclosure charges, or pre-payment penalties, on home loans with floating interest rates. In 2014, the RBI asked banks not to levy pre-payment penalties or foreclosure charges on all floating rate term loans sanctioned to individual borrowers.
Other than housing, floating loan products include corporate, vehicle and personal loans. Earlier, banks were charging pre-payment penalty of up to 2 per cent of the outstanding loan amount.
Banks, HFCs and non-banking finance companies try to woo customers with lower interest rates. As loan demand from corporates is yet to pick up, lenders are focusing on their retail portfolio, especially home loans, which is more secured lending.
The housing loan market continues to be dominated by the five large groups — SBI Group, HDFC Group, LIC Housing Finance, ICICI Group and Axis Bank. Together they accounted for 60 per cent of the total housing credit in India on December 31, 2014. Since then, a number of new HFCs have emerged in niche segments like affordable housing and self-employed customer segments, growing at more than 50 per cent and slowly gaining market share, according to recent report by rating company Icra.
With competition intensifying, lenders have dropped rates after the recent policy action by the RBI. SBI had recently cut its base rate by 40 bps but raised spreads on home loans so borrowers can look for loans at 9.55 per cent. HDFC, which prices home loans over a retail prime lending rate, had reduced rates by 25 basis points to 9.65 per cent.
The RBI has cut the repo rate by 125 basis points since January this year, while banks have reduced base lending rates by 50 basis points.
The Icra report said the government’s focus on affordable housing and favourable regulations could push overall housing credit growth to 20-22 per cent from financial year 2015-16.
Source : http://goo.gl/4p5R96
The minimum deposit at any one time shall be raw gold — bars, coins, jewellery excluding stones and other metals — equivalent to 30 grams of gold of 995 fineness.
By: ENS Economic Bureau | Mumbai | Published:October 23, 2015 12:58 am | Indian Express
The Reserve Bank of India (RBI) on Thursday issued directions to all scheduled commercial banks on the implementation of the Gold Monetisation Scheme which will replace the Gold Deposit Scheme of 1999.
According to the guidelines banks will be allowed to fix their own interest rates on gold deposits.
The deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them, according to a press release issued by the RBI. The central bank said that resident Indians that include individuals, HUFs (Hindu Undivided Families), trusts including mutual funds/exchange traded funds registered under Sebi (mutual fund) regulations and companies can make deposits under the scheme.
The minimum deposit at any one time shall be raw gold — bars, coins, jewellery excluding stones and other metals — equivalent to 30 grams of gold of 995 fineness.
“There is no maximum limit for deposit under the scheme. The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central government under the scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold,” it said.
The RBI notification in this regard comes ahead of the formal launch of the scheme by Prime Minister Narendra Modi on November 5. The gold deposit scheme is aimed at mobilising a part of an estimated 20,000 tonnes of idle precious metal with households and institutions.
As per the guidelines, banks will be free to set interest rate on such deposit, and principal and interest of the deposit will be denominated in gold. “Redemption of principal and interest at maturity will, at the option of the depositor be either in Indian rupee equivalent of the deposited gold and accrued interest based on the price of gold prevailing at the time of redemption, or in gold. The option in this regard shall be made in writing by the depositor at the time of making the deposit and shall be irrevocable,” it said.
The interest will be credited in the deposit accounts on the respective due dates and will be withdrawable periodically or at maturity as per the terms of the deposit, it said. “The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of Government of India,” it said.
The short term bank deposits will attract applicable cash reserve ratio (CRR) and statutory liquidity ratio (SLR), it said.
Source : http://goo.gl/kT3v54
September 18, 2015 by Chandrakant Mishra | PlanMoneyTax.com
SBI Gold deposit Scheme is there to give you recurring income while original gold will remain intact. Of course from this income you can buy more gold as well. In either words when you put your gold in this scheme it starts to grow. The SBI gold deposit scheme is superseded by the Gold Monetization scheme. This scheme is more flexible and gives better interest.
SBI Gold Deposit scheme accepts all types of gold whether it is jewelry or bullion. The scheme will give interest on the pure gold irrespective of the form
Should I Deposit The Jewelry?
You can deposit the gold jewelry in Gold deposit scheme, But you should beaware that the gold deposited to this scheme is subjected to the melting. Hence, it is not advisable to deposit those jewelry which are used. Instead, you should deposit the idle gold. You can deposit those jewelry which are old fashioned and kept as an asset.
Why Should I Deposit in SBI Gold Deposit Scheme?
Depositing your idle jewelry in SBI Gold Deposit Scheme will give you many benefits.
- Peace of mind. You need not to be concerned about its safety. Not threat of burglary or stealing.
- You will get the interest for nothing.
- Your gold will get tested and you will get pure gold after that. No melting assaying charge.
- You will save the locker charge.
- You will serve the nation by reducing the import bill.
Tax Benefits of SBI Gold Deposit Scheme
- No income tax on the interest from this scheme
- No capital gain tax if you take back cash instead of the gold after the maturity.
- You will not be charged wealth tax for the deposited gold.
Will Your Gold Stay Safe?
Your gold deposit will be as safe as your money in the bank. Actually banks do not put all the gold in its safe instead major chunk of the gold is given to jewelers as loan or it remains in RBI mint. Bank gets interest over it and pays the majority of this to the depositor.
What interest rate will I earn?
Interest rate is not very lucrative in SBI Gold Deposit Scheme. It is from 0.75% to 1%. Don’t frown; you get nothing when you keep your gold in home. As well this interest is in gold currency. This simply means that if you deposit 1 Kg Gold the bank will give price of 10 gram gold (1% of 1 Kg) after one year. Assume gold price doubles in one year then effectively you are getting 2% interest rate.
Also don’t forget to add your expense of locker.
Why Interest Rate is so low?
- Gold do not produce anything itself such as farm land.
- People don’t take gold jewelry on rent such as property.
- You will get your whole gold with all the appreciated value.
What are the restrictions?
Now government has eased the restrictions from SBI Gold Deposit Scheme. The most important is the reduction of minimum tenure. Now you can deposit your gold for 6 months as well. Earlier the minimum tenure was 3 years.
You have to deposit more than 500 gram of the gold for this scheme. This is a major deterrent. Hopefully government will give some relaxation in weight also. The Gold Monetization Scheme has the minimum limit of 30 gram only.
What will I do if I need fund for exigency?
You can take loan from any branch of the SBI by mortgaging your gold deposit certificate. It same as you take loan by depositing your FD certificate. Loan can be taken up to the 75% of the gold value. Interest rate will be lower than the personal loan.
Where should I Deposit My Gold ?
Not all banks provide Gold Deposit Scheme. Till now only SBI this scheme and at the designated branches only. But now RBI has given permission to the banks to start Gold Deposit scheme on its own. Banks do not need prior permission. So in future You can expect that more banks will start this scheme.
What is the procedure of SBI Gold Deposit Scheme?
Go to your nearest branch with your ornaments or gold bar biscuits etc. Bank will take the gold and give you the provisional certificate. Bank will send the gold to the reserve bank gold mint. Purity of the gold will be determined there and it is melted. According to the purity the weight of the gold will be fixed. After that Bank will give you the Final certificate. You can demand standard certificates of 500 gm, 1000 gm or 2000 gm also. Either you can opt for statement or passbook also. Note often it may happen that actual weight of the gold becomes less because of impurity. Don’t fret, you must rely on RBI.
How Will I Get Back My Gold?
After Completion of the tenure you can claim your gold with the interest. For the Interest you have the option of cumulative and non cumulative.
Either you can take the cash instead of the gold. No capital gain tax will be charged in this amount.
How can I check that Gold returned is pure?
Gold returned will 0.999 finesse pure, certified by RBI Mint. It is the purest form of the gold. It will be in bar form.
How Gold Deposit Scheme Works
Banks give your gold to the jewelers on loan. Bank earns interest on it. Major part of the interest is given to the customer.
Source : http://goo.gl/SwS7e9
Amid falling rates, it makes sense for home-loan borrower to increase his EMI and accelerate repayment of principal
By: Saikat Neogi | October 13, 2015 12:08 AM | Financial Express
THE Reserve Bank of India (RBI) cut its repo rate by 50 basis points on September 29, taking the total reduction since January to 125 bps. But banks and housing finance companies offering home loans have cut their rates by up to 50 basis points only.
State Bank of India is offering interest rate on housing loan at 9.55% to salaried individuals. Similarly, HDFC is offering housing loan at 9.6-10.15% across all loan amounts and ICICI Bank at 9.6-9.65% for loan amounts less than Rs 75 lakh. So, if a new borrower takes a Rs 50-lakh loan for 20 years at 9.55% interest rate per annum, the equated monthly installment (EMI) will be Rs 46,770.
Lower risk weight
The central bank has also lowered the risk weights on select home loans of up to Rs 75 lakh where borrowers are willing to put in more money and lower the loan-to-value ratio. A Crisil research expects interest rate on home loans to come down by another 25-30 bps over the next few months because of this move. The RBI has lowered risk weights on housing loans of up to Rs 75 lakh from 50% to 35% in cases where the borrower puts in at least 20% of the value of the home as own equity for loans up to Rs 30 lakh and 25% of the value of the home as own equity for loans between Rs 30 lakh and Rs 75 lakh.
Home loan borrowers in smaller cities are likely to be the biggest gainers. In fact, Crisil estimates that around 80% of home-loan borrowers and 70% of home loans by value would meet the criteria for lower risk weights set by the central bank. The loan-to-value ratio for home loans has come down from 75% in the third quarter of FY10 to 66% in the same quarter of FY15, which means a higher proportion of new loans would meet the criteria for lower risk weights.
Increase EMI or tenure
Borrowers benefit from an interest rate fall, especially in case of a floating rate home loan. Also, one of the immediate benefits of a rate cut is that the new borrower’s loan eligibility amount increases. Ideally, one’s EMIs should not exceed 40-50% of his monthly income. If the EMI is much lower than this, increasing the EMI is an effective way to ensure the loan is paid out early. Increase in EMI can be requested at any point of time during the loan and, usually, there are no charges for such a request.
Whenever lenders reduce the interest rate of home loan, for an existing borrower, however, they either keep the EMI unchanged and reduce the loan term or reduce the EMI and increase the loan tenure. It always makes sense to keep the EMI amount unchanged. If possible, increase the EMI so that the interest outgo for the entire tenure is reduced significantly. Analysts say when the interest rate drops, the borrower should increase the EMI and accelerate the repayment of the outstanding principle.
For instance, an existing borrower of Rs 50 lakh who has paid for five years from the total tenure of 20 years, a 20-bps decrease in interest rate (1 bps a hundredth of a percentage point) will reduce his EMI by Rs 550 from Rs 48,583 to Rs 48,033. This would mean a total savings of Rs 99,000 as interest payment for the remaining period of the loan. On the other hand, if the borrower keeps the EMI amount unchanged and reduces the period of the loan by four months, then the net savings on interest would be over Rs 2 lakh, provided the interest rate remains the same for the entire period of the loan. One can opt to make partial payments at regular intervals, say, every six months or one year, to repay the loan quickly and save the interest as banks and housing finance companies do not charge any pre-payment penalty for principal repayment.
If your lender is charging you higher interest rates than others, switch the bank. Ensure that the difference in the interest rate between your existing lender and the new one is at least 75-100 bps as you have to pay processing (around 0.25% of the loan due) and legal fees to switch the existing loan to the new lender. Analysts say it will make sense to switch only if more than seven years of repayment remain. It is not always advisable to shift the home loan from one bank to the other just because of lower interest rate. The borrower must calculate the actual amount that he can save by switching the loan and after adjusting all the charges.
WHAT TO DO
* Ideally, EMIs should not exceed 40-50% of monthly income
* If EMI is much lower than this, increasing the EMI is an effective way to ensure loan is paid out early
* When the interest rate drops, the borrower should increase the EMI and accelerate the repayment of the outstanding principal
* If your lender is charging you higher interest rates than others, switch the bank
* Ensure the difference in the interest rate between your existing lender and the new one is at least 75-100 bps as you have to pay processing and legal fees for the switch
* Calculate the actual amount that you can save by switching the loan after adjusting all charges
Source : http://goo.gl/MIg3iL
Allows 90% loan to value ratio on home loans up to Rs 30 lakh
Friday, 9 October 2015 – 7:10am IST | Place: Mumbai | Agency: dna | From the print edition
Giving a boost to low-cost and affordable housing, the Reserve Bank of India (RBI) on Thursday said banks can provide home loans up to 90% for properties that cost up to Rs 30 lakh.
In a circular, the central bank said that in the case of ”individual housing loans” falling under the loan category of up to Rs 30 lakh, the loan-to-value (LTV) ratio is now up to 90%. Earlier, the facility was available only for properties that cost up to Rs 20 lakh.
This will definitely benefit home buyers who seek to buy properties in the range of Rs 20-30 lakh.
For properties above Rs 30 lakh and up to Rs 75 lakh, the LTV is up to 80% and those above Rs 75 lakh, the ratio is 75%.
The RBI has also modified the provisioning or risk-weights norms for home loans. Reducing the risk weights for individual housing loans to promote low-cost and affordable housing combines well with the government’s declared policy of ‘Housing for All’ by 2022. Banks can now push more housing loans given the lower risk perception of the regulator on the affordable housing segment.
The move by RBI comes in the wake of banks reducing interest rate on home loans following a 0.5% cut in repo rate last week by the central bank.
The move now is the last in a series of measures the RBI has initiated to boost the affordable housing sector. In July 2014, RBI had made home loans up to Rs 50 lakh in metros and Rs 40 lakh in non-metros, given by banks from the proceeds of long-term bonds (of minimum seven years maturity) qualified as affordable housing loans.
The RBI had also promised that it would periodically review the definition of affordable housing, on account of inflation.
Industry officials have pointed out that slashing risk weights attached to home loans and increasing loan amount are definitely going to help home buyers. Many believe that the step by the central bank would also improve customer confidence and provide a trigger to improve the overall sentiment.
However, in markets like Mumbai, where the real estate prices have moved up much above Rs 50 lakh even for affordable houses, this may not bring in any significant change, say the officials.
In its policy review last month, the RBI had proposed to lower the minimum risk weight on housing loans from the current 50%.
“With a view to improve affordability of low-cost housing for economically weaker sections and low income groups and giving a fillip to Housing for All, while being cognizant of prudential concerns, it is proposed to reduce the risk weights applicable to lower value but well collateralised individual housing loans,” it had said.
Lowering of minimum risk weight means that banks will have to set aside less capital for affordable housing loans leading to availability of more funds for the segment.
Source : http://goo.gl/VSwCgt
When Reserve Bank of India increases repo rates banks are prompt to pass it on to borrowers, but fail to pass on the rate cut benefits
Khyati Dharamsi | Tuesday, 6 October 2015 – 6:35am IST | Agency: dna | From the print edition
Have you been planning ways to divert the amount saved on equated monthly installments made as a result of the repo rate cut of 0.50% announced by the Reserve Bank of India (RBI)? Have you been elated as your home and car financier announced rate reductions too with effect from October 2015?
Your EMI-saving dreams may be shattered if you take a peek at the rate reductions announced by banks. Since 2010, when the base rate was introduced, banks have passed on almost the entire increase in repo rate to customers, but they have been reluctant to reduce base rates when the RBI has reduced repo rates. Repo rate is the interest rate at which the RBI lends to other commercial banks, while base rate is the rate below which a bank cannot lend.
During 2015 when RBI reduced repo rates on four instances to the tune of 1.25%, banks have reduced rates marginally by 0.60-0.70%.
The RBI too remarked in its Fourth Bi-monthly Monetary Policy for the fiscal, stating, “Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. The median base lending rates of banks have fallen only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank.”
While the RBI publicly announced the lower transmission of rate cuts only during the calendar year 2015, we studied the behaviour of five major banks in response to repo rate cuts and hikes ever since the base rate was introduced in July 2010.
In 2012, the repo rate was cut 0.50% to 8%. Banks, however, reduced the rates only to the tune of 0.25%, barring HDFC Bank, which had slashed its rates by 0.30%. In 2013, the RBI had reduced the rates by 0.75% after increasing then by 0.50% earlier. This was a net reduction of 0.25%. But three out of the five major banks increased their rates by 0.25-0.30%.
In contrast, when the RBI has increased repo rate, banks have been very prompt to pass on the rise.
Between calendar years 2010 and 2011, RBI increased the repo rate on 10 instances to the extent of 3%. Acting in tandem with the rate hikes, five major banks increased base rate to the tune of 300-275 bps. But in 2012, when the repo rates were reduced by 50 bps on April 17, 2012, banks slashed the base rates by 25-30 bps over tranches, some reduced the rates toward the fag end of the calendar year.
Similarly, banks have been prompt in reducing deposit rates too. “Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible,” RBI remarked on September 29, 2015.
The peak repo rate of 8.50% was notched on October 25, 2011. The rates have been reduced by a net 1.75% since. But if one compares the net reduction in base rates, the average comes to 0.73%, with the highest reduction being 1.15% and the lowest being 0.25%. Couple of banks still have their base rates the same level as seen in October 2011.
Though the base rate was considered to have an edge over the benchmark prime lending rate methodology followed earlier in transmitting monetary policy effectively, the banks have failed to pass on the benefit of rate cuts to the end borrowers.
But why do banks hold on to rates?
Vipul Patel, founder of Mortgage World, an advisory on loans, says, “Each bank is has a different method of calculating the base rate – some adopt the average cost method, while other use the marginal cost method. There is hardly any impact when the central bank announces a rate cut as a result of this anomaly.”
The scene is set to change with the RBI notifying the draft regulations on the new base rate proposing a shift to marginal cost of funds by April 2016. The motive said the central bank was, “Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates. In order to improve the efficiency of monetary policy transmission, the Reserve Bank will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate’.”
The final guidelines are likely to be issued by end November 2015. As a result, bank base rates could fall further, say experts. “Things should change with the new policy coming into force. The RBI called all bank chiefs and has mandated banks to pass on the benefit of the rate cut. I see a big discount coming into effect. Overall, the rates should be in the range of 9%.” says Patel.
If your bank doesn’t reduce the interest rate then one should consider a shift as even a 0.25% difference in the interest rate can result in a saving of six EMIs if your home loan tenure is 15 years, while seven EMIs on a 20-year home loan tenure.
But before you shift the loan to another bank, be careful of moves such as a lower reduction for new borrowers (0.20% difference) similar to what the State Bank of India has proposed.
Source : http://goo.gl/PUXsaA
Partha Sinha, TNN | Oct 7, 2015, 03.25AM IST | Times of India
A study by India Ratings, a subsidiary of global rating major Fitch, says the banks passed on less than half the volume of RBI’s rate cuts to their borrowers.
MUMBAI: At a time when both the Centre and the industry have been clamouring for lower interest rates, banks have not fully passed on rate cuts amounting to 125 basis points (bps) made by the RBI over the last one year to their borrowers. Instead, they have strengthened their own revenues. What’s more, lakhs of depositors have been singed as banks have cut deposit rates more than the RBI’s cut in rates, thus giving them lower returns on their savings.
A study by India Ratings, a subsidiary of global rating major Fitch, says the banks passed on less than half the volume of RBI’s rate cuts to their borrowers. Though it’s a problem of transmission of repo rate cuts at the banks’ end, RBI has been facing flak from both the government and the industry for not cutting rates enough to help spur growth in the economy, which for the last few months has been showing signs of a slowdown.
The study shows three interesting facts. First, compared to RBI’s 125 basis points cut in rates in 2015, the banks have cut fixed deposit rates — the money they pay to their customers as interest on fixed deposits, etc — by 130 basis points. This has resulted in customers getting less from their savings in banks. Second, at the same time, these same banks have cut lending rates — the rate of interest paid by their borrowers — by just 50 basis points. And third, transmission of RBI’s decision — that is, how the central bank’s rate cut percolates down to the banking sector — has been more efficient in the market for short-term papers where the rates have dropped more than 150 basis points in 2015.
“Interest rate cuts and hikes have been utilized by banks to absorb the upside and pass on the downside to customers,” India Ratings and Research noted. In its recent policy meet, RBI governor Raghuram Rajan said, “Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.” Rajan, who was under pressure for a long time from corporates, industry trade bodies and politicians to cut rates further, in a speech on September 18 had also said that RBI’s tasks included ensuring rates of interest that would satisfy “not just the vocal borrowers but also the silent savers”.
In its report, the rating agency said that transmission in rates “is being held back by banks and they have been repricing with a lag only the unfavourable movements in rates”, and the “policy cycle is being used by banks to their advantage”.
For example, soon after RBI’s 50 basis points rate cut last week, the banking sector leader SBI reduced its lending rates by 40 basis points, thus transmitting only 80% of RBI’s decision. Worse, its new home loan customers will benefit only by 20 basis points, that is just 40% of the RBI’s cut. Among the private sector banks, ICICI Bank and HDFC Bank both cut their lending rates by 35 basis points, that is only 70% transmission.
Not only the RBI governor but top leaders from India Inc too have started raising their voice for banks to do more. On Tuesday, L&T chairman A M Naik criticized domestic banks for denying relief to corporates by not cutting lending rates in line with the reduction in benchmark rates RBI.
According to bankers, one of the reasons for lack of transmission is that with corporate loans takeoff at a low ebb, and bad loans rising, they have to make some profits from some segments and that segment happens to be retail banking. The other reason is that the blended cost of funds—the cost at which banks raise money—for every bank is different. Depending on the cost of funds, every bank decides its lending rates with larger banks able to pass on about 70% of their benefits from rate cuts. “If the corporate loan growth picks up, better rate transmission will be possible,” a banker said.
The study by India Ratings show that in the last 10 years, in most cases when RBI has cut policy rates, banks have cut deposit rates at a faster pace and the quantum has also been higher compared to lending rates. “The same was also true when policy rates were hiked, where lending rates went up and the quantum was also higher compared to deposit rates,” the report said.
The report also pointed out that some of the banks cut base rates, but at the same time they increased their spreads, denying part of the rate cut benefits to their consumers. “Some banks have cut lending rates, to a larger extent for new customers and not as much for their existing customers, while charging existing customers if they wish to switch to the lower rates,” the report said.
Source : http://goo.gl/aYcQ5c
Mayur Shetty, TNN | Sep 29, 2015, 03.49PM IST | Times of India
MUMBAI: The country’s largest lender State Bank of India has been the first off the block to lower interest rates with a 40 basis point cut in its base rate to 9.3%. The reduction follows a 50 basis point reduction in the repo rate by Reserve Bank of India on Tuesday.
The rate cut, which is effective October 5, will put pressure on other home loan providers such as HDFC and ICICI. With this rate cut the gap between SBI and it’s rivals has widened. SBI currently extends home loans at 9.7% for women and 9.75% for others. It’s nearest rivals offer loans at 9.85% and 9.9%.
From October 5, the home loan rates will fall to 9.3% and 9.35%.
Unlike most other lenders who extend car loans at fixed rate, the SBI’s auto loans are linked to its base rate. This means that interest for existing borrowers will come down as well.
According to sources, both HDFC and ICICI Bank will announce new rates before the end of the week.
After lowering the interest rate by 50 basis points to boost economy, Reserve Bank governor Raghuram Rajan said the RBI will work with the government to ensure a faster transmission and also hoped that banks will pass on the benefits to customers.
“We believe that some (monetary policy transmission) would take place very soon and more will take place over time,” Rajan said during the customary post policy meeting with the reporters.
Rajan said markets have transmitted the RBI’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.
Anup Roy | Last Modified: Tue, Sep 01 2015. 01 21 PM IST | LiveMint.com
The banks have been named Domestic Systemically Important Banks (D-SIBs), with SBI falling in bucket three while ICICI Bank is in bucket one
Mumbai: The Reserve Bank of India (RBI) on Monday designated State Bank of India (SBI) and ICICI Bank Ltd, the country’s two largest lenders, as Domestic Systemically Important Banks (D-SIBs), meaning their collapse could have a cascading impact on the entire financial system and the economy.
The designation effectively means SBI and ICICI Bank, the nation’s biggest public sector and private sector banks respectively, are deemed “too big to fail”, or so integral to the national economy that their failure would have to be prevented at any cost to prevent the calamitous effects it would otherwise have.
This is the first time the central bank has designated any banks as D-SIBs; this will now be an annual practice every August. Originally, the plan had been to list four to six banks in that category.
SBI and ICICI have been so designated on the basis of a systemic importance score, arrived at after an analysis of the banks’ size as a percentage of annual gross domestic product (GDP). Banks with assets that exceed 2% of GDP will be considered to be part of this class of lenders.
As of 30 June, SBI’s loan book was worth Rs.12.8 trillion and ICICI’s loan book was close to Rs.4 trillion.
SBI accounts for 16.3% of the total market capital of all listed banks, which was Rs.11.47 trillion at the close of trading on the BSE on Monday; ICICI’s share is 14.08%.
“From regulatory perspective, SBI and ICICI will have the highest level of systemic importance, but other banks, for example, large public sector banks like Bank of Baroda or Punjab National Bank, will have significant strategic importance,” said Naresh Takkar, managing director and group CEO of rating agency Icra Ltd.
“This is a signal that the two banks chosen are in a different level in terms of importance to the financial system,” Takkar said.
SBI’s gross bad loans, at Rs.56,420.77 crore as of June-end, make up 18% of the combined sticky assets in the banking system. ICICI Bank’s gross non-performing assets (NPAs) make up 5% of the total industry bad loans of Rs.3.2 trillion.
Banks which are considered systemically important will have to maintain a progressively higher share of risk weighted assets as Tier-I equity, which is a measure of the bank’s core capital.
Out of four systemic importance buckets, SBI falls in bucket three while ICICI Bank is in bucket one. The higher the bucket number, the more systemically important the bank. So, among the two, SBI is more systemically important.
Under the framework, systematically important banks (SIBs) will fall under four buckets initially. Banks which fall in the fourth and the highest bucket will need to maintain an additional 0.8% of their risk weighted assets as common equity Tier-1—a measure of the bank’s core equity.
Banks in the third, second and first buckets will need to maintain an additional 0.6%, 0.4% and 0.2% of additional Tier-I capital respectively to maintain buffers they hold to balance out the higher risk they pose to the financial system.
The original plan was to maintain additional capital in the range of 1-2.5% of the risk-weighted assets, depending upon the order of the buckets.
A theoretical empty fifth bucket will be there at the top of the list, with an additional Tier-1 capital requirement of 1%, down from 3.5% proposed earlier. As and when a bank moves to the fifth bucket in importance, another bucket will be introduced, RBI said in its July 2014 framework for dealing with such big banks.
The two banks named will be “subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system”, the framework said.
All banks have been given time until April 2019 to meet the additional requirements. RBI intends to review the list of SIBs once every year from now on.
The heads of both banks said they have adequate capital.
“RBI has named State Bank of India as Domestic Systemically Important Bank as expected. However, the additional capital requirement of Tier I Capital has been lowered by 20 bps (basis points) as compared to the draft guidelines. SBI currently has a much higher level of Tier I at 9.62% as opposed to 7.00% required under the current guidelines,” said Arundhati Bhattacharya, chairperson of SBI, in an emailed statement.
ICICI Bank’s capital adequacy is “well in excess of regulatory requirements and the bank is not expected to require fresh equity capital for the next couple of years”, said Chanda Kochhar, managing director and CEO. ICICI’s Tier-I capital was 12.26% as on 30 June.
In November 2011, the Basel committee of the Bank for International Settlements announced a framework for identifying global systemically important banks and the additional buffers that such banks need to hold.
Following this, most countries have moved to institute similar frameworks. RBI released its framework for dealing with domestic SIBs in July 2014.
“SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress,” RBI said then.
“Due to this perception, these banks enjoy certain advantages in the funding markets. However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future,” RBI said.
These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risk and moral hazard posed by them, RBI said.
The chief financial officer (CFO) of a large public sector bank said he expects more banks to figure in the list next year as aspects other than the size are considered for making up the list.
“Significant oversight does not mean that the central bank will check each and every business decision of these banks. It simply means that the central bank will force these banks to maintain a healthy net worth and keep bad debts under check,” said the CFO, who did not wish to be named.
Ashwin Ramarathinam contributed to this story.
Source : http://goo.gl/xZIJiy
Will allow increase in loan amount, extension of repayment period
Bureau | MUMBAI, AUG 26, 2015 | Hindu Business Line
ICICI Bank, India’s largest private sector bank, has launched the country’s first Mortgage Guarantee-backed home loans for first-time borrowers in the affordable housing segment.
‘ICICI Bank Extraa Home Loans’ will allow a borrower to increase the loan amount by up to 20 per cent of the original amount, and also gives the option to extend the repayment period up to 67 years of age.
This increase in loan amount and tenure will come at a premium — an upfront fee of 1-2 per cent of the entire loan amount, including the incremental component.
“The fee will depend on the age of the borrower, extension in tenure, the nature of income — whether salaried or self-employed — and the loan-to-value ratio,” said Rajiv Sabharwal, Executive Director, ICICI Bank.
The facility will be suitable to largely middle-aged, salaried and self-employed individuals with seasonal income, seeking home loans of a maximum amount of ₹75 lakh.
Such loans will be available in four cities, Greater Mumbai, the National Capital Region, Bengaluru and Surat.
ICICI Bank has launched this initiative in association with India Mortgage Guarantee Corporation (IMGC), which will guarantee the incremental risk on default, Sabharwal said, adding that such products are popular in the US and Canada.
IMGC is a joint venture between National Housing Bank, an RBI subsidiary that regulates housing finance companies in India, NYSE-listed Genworth Financial, International Finance Corporation and Asian Development Bank.
Chanda Kochhar, MD and CEO of ICICI Bank, said, “We foresee that a young population and rapid urbanisation will lead to the emergence of enormous demand for affordable housing in Tier II and Tier III cities. This initiative will catalyse the growth of the Indian mortgage market by giving consumers improved affordability without incremental risks for lenders.”
The bank’s average ticket size of home loans is about ₹35-37 lakh with an average tenure of 12-13 years.
ICICI Bank’s housing loan portfolio is growing at 25-27 per cent and constitutes about 55 per cent of the total retail book.
Source : http://goo.gl/lKjTHp
by Vivek Kaul | Jul 28, 2015 19:53 IST | Fisrt Post
Paul Volcker, the chairman of the Federal Reserve of the United States, the American central bank, is once said to have remarked: “the only thing useful banks have invented is the ATM”. I would like to add “home-loans” to the list as well.
Home loans allow people to buy a home at a point of time in life when they are really not in a financial position to buy a home by making the entire payment upfront from their savings. Home loans allow individuals to buy a home and repay the loan over a period of time.
This essentially ensures that an individual can enjoy the benefits of owning a home much earlier in life than if he would have had to simply depend on accumulating enough money to buy a home.
But what if the home loan turns into a nightmare? And believe me it can. How, you may ask?
In the recent past, there have been many cases of builders collecting the money from prospective buyers and disappearing. This, other than leading to a situation where a buyer does not get the home he has already paid for, also leads to other problems.
Let’s try and understand this through an example. A builder wants to build apartments on a piece of land that he owns. He offers this land as a collateral to a bank and takes on a loan. After he has taken on the loan from the bank he starts marketing the project and starts collecting money from the prospective buyers as well. The buyers who want a home to live in, obviously take on home loans to pay the builder.
The builder is supposed to complete the project by a certain date, but doesn’t complete the project. At the same time he defaults on the loan he had taken on from the bank. The buyers are stuck because their homes are nowhere near completion. And there is another problem.
The builder before marketing the project had taken on a loan from the bank against the land on which apartments were to be built. What happens after that? The buyers take on home loans offering the apartments that are being built on that land as a collateral.
What is happening here? Basically the same asset has been offered as a collateral twice. But given that the builder took the loan first, the first charge is created in favour of the bank which gave the loan to the builder. A first charge ensures that the loan given by the bank to the builder takes precedence over the home loans that have been taken on against the same collateral.
What happens next? The bank which gave the loan to the builder goes after the collateral following the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESAI Act).
What happens to the buyers? They will have to fight a legal battle trying to establish their ownership over the apartments. Meanwhile, they will have to continue paying their EMIs on the home loans that they had taken on. If they stop paying their EMIs, their banks will come after their other assets. In India, home loans are recourse i.e. the banks can go after the other assets of the borrower as well, other than the asset offered as a collateral, in order to recover their loan.
This situation is referred to as “dual-finance”, where multiple loans have been taken against the same collateral. This leaves the home-buyers in a total mess. The Reserve Bank of India (RBI) does not allow primary urban cooperative banks (UCBs) to carry out this kind of lending. As the Master Circular- Finance for Housing Schemes – UCBs points out: “The builders / contractors generally require huge funds, take advance payments from the prospective buyers or from those on whose behalf construction is undertaken and, therefore, they may not normally require bank finance for the purpose. Any financial assistance extended to them by primary (urban) co-operative banks may result in dual financing. The banks should, therefore, normally refrain from sanctioning loans and advances to this category of borrowers.”
The term to mark here is “dual financing”. The situation is exactly similar to the example that I took earlier in the column. The problem is that while the urban cooperative banks are not allowed to carry out dual financing, there is nothing that stops scheduled commercial banks from doing the same.
As the Master Circular—Housing Finance for scheduled commercial banks points out: “In view of the important role played by professional builders as providers of construction services in the housing field, especially where land is acquired and developed by State Housing Boards and other public agencies, commercial banks may extend credit to private builders on commercial terms by way of loans linked to each specific project. However, the banks are not permitted to extend fund based or non-fund based facilities to private builders for acquisition of land even as part of a housing project.”
The phrase to mark in the above paragraph is that: “… commercial banks may extend credit to private builders on commercial terms by way of loans linked to each specific project.” This is something that the RBI does not allow urban cooperative banks to do. The moment a bank is lending against a specific project, the collateral offered by the builder to take on the loan is the same as the collateral that will be offered by prospective buyers who will borrow home loans from banks in the days to come.
And this creates the problem of dual financing. In the recent past, there have been many cases of builders disappearing and leaving buyers in a lurch. Interestingly, the RBI Master Circular on housing finance points out: “In a case which came up before the Hon’ble High Court of Judicature at Bombay, the Hon’ble Court observed that the bank granting finance to housing / development projects should insist on disclosure of the charge / or any other liability on the plot, in the brochure, pamphlets etc., which may be published by developer / owner inviting public at large to purchase flats and properties.”
Hence, banks need to make sure that builder tells the prospective buyers very clearly that he has already borrowed money against the land on which apartments are being built. Further the circular also points out: “While granting finance to specific housing / development projects, banks are advised to stipulate as a part of the terms and conditions that: (i) the builder / developer / company would disclose in the Pamphlets / Brochures etc., the name(s) of the bank(s) to which the property is mortgaged. (ii) the builder / developer / company would append the information relating to mortgage while publishing advertisement of a particular scheme in newspapers / magazines etc.”
The point being that the builder has to communicate very clearly that he has borrowed money against the project from a bank(s). As the Master Circular points out: “Banks are also advised to ensure compliance of the above terms and conditions and funds should not be released unless the builder/developer/company fulfils the above requirements.”
While, this sounds very good on paper, such disclosures are rarely made. And my guess is that even if they are made, there are not many buyers going around who have the wherewithal to understand these things. Further, at the point of buying a home there are so many terms and conditions that a buyer has to go through that it is worth asking whether it is possible to mentally process and understand everything.
In this scenario, it is important that the RBI works towards stopping this practice of dual financing and making life slightly easier for a prospective home buyer.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
Source : http://goo.gl/iAUedJ
Sanjeev Sinha | ECONOMICTIMES.COM | Jun 19, 2015, 12.06PM IST
Kumar, a businessman, always prided himself on being financially well organized. From maintaining a monthly financial budget to keeping accounts, he was sure that he was keeping a tight leash on his numbers, be it personal or business-related. Despite this, it came as a jolting shock to him to know that he had a poor CIBIL score. On further research, he learned that an unintended and inadvertent cheque bounce was the culprit
Cheque bounce, in fact, is one of the most common financial offences in India that can lead to disastrous consequences for the issuer. Here is a look at the various ways in which a bounced cheque can affect you:
Penalty by the bank: If your cheque happens to bounce due to insufficient funds or any other technical reason like signature mismatch, both the defaulter and the payee are charged by their respective banks. If the bounced cheque is against the repayment of any loan, you would have to additionally bear the late payment charges (which vary from Rs 200 to Rs 700) along with the penalty fee charges by the bank.
“The penalty charges for cheque outward return are close to Rs 300 for most banks, while charges for cheque inward return are about Rs 100. The exact penalty charges vary with banks and are different for different account types. Premium accounts usually have higher penalty charges,” says Adhil Shetty, founder & CEO of BankBazaar.com.
Negative Impact on your CIBIL score: A bounced cheque can dent your financial credit history. Even a single bounce can impact your CIBIL score irreparably to such an extent that you can possibly be denied a loan in the future. The best way to keep your CIBIL score healthy is to make sure your cheques are never dishonored and that there would be at least a few thousands more than the minimum balance for your account even after the cheque is encashed.
Filling of civil and criminal charges by the aggrieved party: If you are lucky, you can get away with only a small fine paid to the bank for a bounced cheque. On the other hand, if your stars are aligned against you, the aggrieved party that does not receive the promised funds can file a civil or criminal case against you as an issuer of the cheque.
“If the cheque dishonor is willful, the defaulter can be prosecuted under Section 138 of Negotiable Instruments Act, 1881 or Sec 417 and 420 of the Indian Penal Code (IPC) 1960. Under Section 138, the aggrieved party may send you a legal notice first. If you are found guilty as a willful defaulter, you can be punished with a prison term of two years and/or a fine as high as twice the cheque amount,” informs Shetty.
Under Sec 417 and 420, a non-bailable immediate warrant can be issued. However, in both the cases, a case of cheating has to be proven. If more than 1 cheque is bounced, the payee can file separate suits against each dishonoured cheque, which can compound issues for the defaulter.
The payee, however, cannot straight away go the legal way. “He can re-present the returned cheque within 3 months from the date of the cheque, giving a second chance to the issuer. If it is returned the second time too, then he can go the legal way within 30 days of the receipt of Cheque Return Memo. On receipt of a legal notice or summons, the defaulter can settle the payment amicably out of the court at any time or proceed with a lawyer for hearing, at the court where the complaint has been registered,” says Shetty.
Other Risks: As per the RBI guidelines, banks can stop issuing cheque book facilities to any customer booked for repeated cheque bounce offence at least four times on cheques valued at over Rs 1 crore. If you have kept any collateral security with the bank for any loan and if repayment EMI cheque bounces, the banks are well within their right to issue a legal notice or deduct money from your account.
“Other than insufficient funds, cheque dishonors can happen in case of signature mismatch of the drawer on the cheque as per the bank’s records. Overwriting on cheques without authentication and issuance of cheques that have expired validity are also reasons for cheque bounce. However, legal support can be taken only if a clear case of cheating can be proven. Legal route cannot be adopted if the issued cheque is against a donation or gift,” observes the CEO of BankBazaar.com.
No need to say that always make sure that all the cheques issued by you are honored on time. If you happen to exhaust the money in your account before the cheque date, inform the payee about it through writing and issue stop payment / cancellation at your bank, or infuse sufficient funds into your account before the date of the cheque. Also, do not issue a non-account payee cheque or a cheque without crossing it in order to avoid the cases of forgery.
PTI | Jun 2, 2015, 09.02PM IST | Times of India
NEW DELHI: In a big relief to home and auto loan borrowers, several banks led by market leader SBI on Tuesday slashed lending rates by up to 0.3 per cent after RBI cut key policy rate.
State Bank of India (SBI) reduced its base rate or minimum lending rate to 9.70 per cent from 9.85 per cent effective June 8. This is the second rate cut by SBI in about two months.
While the Reserve Bank of India (RBI) has cut its lending rates by 75 basis points (0.75 percentage point) in three installments since January, the SBI has done so by 30 bps (0.30 percentage point) in two tranches.
Meanwhile, another state-owned lender Allahabad Bank cut base rate 0.30 per cent while Dena Bank, Punjab & Sind Bank reduced their base rate by and 0.25 per cent each.
The base rate has been be reduced to 9.95 per cent from 10.25 per cent, effective June 8, Allahabad Bank said in a filing to the BSE.
At the same time, Dena Bank and Punjab & Sind Bank lowered their base rate by 0.25 per cent to 10 per cent.
With the reduction, all loans linked to the base rate will come down proportionately.
IDBI Bank, however, has reduced bulk deposit rate, a move which is a precursor to a cut in lending rate.
Other banks are likely to follow suit in the next few days.
As part of its second bi-monthly monetary policy review on Tuesday, RBI cut the repo rate (short-term lending rate) from 7.5 per cent to 7.25, but left all other policy tools like cash reserve requirement unchanged at 4 per cent and statutory liquidity ratio (SLR) at 21.5 per cent.
RBI governor Raghuram Rajan on Tuesday also urged banks to pass through the sequence of rate cuts into lending rates. Despite two repo rate cuts by RBI, very few banks have passed on the benefits to customers.
Source : http://goo.gl/5CDsiI
Press Trust of India | Apr 07, 2015 at 08:24pm IST | @ibnlive
Mumbai: Nudged by the Reserve Bank of India, leading banks, State Bank of India, ICICI Bank and HDFC Bank, on Tuesday cut their lending rates. While SBI and HDFC Bank cut rates by a token 0.15 per cent, ICICI Bank slashed its lending rate by 0.25 per cent after the central bank maintained status quo on policy rate but termed as “nonsense” lenders’ claim that cost of funds was still high.
The action of the two banks could have a snowballing effect forcing others to follow suit, a move that can bring relief to corporate and retail borrowers including of home and auto loans.
The lowering of the base lending rate the banks was announced hours after a war of words erupted between RBI Governor Raghuram Rajan and the top bankers, who had appeared reluctant to effect a cut.
After two cuts in three months, the RBI kept the repo rate, at which the central bank lends to banks, unchanged at 7.5 per cent on fears of unseasonal rains impacting food prices.
The cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.
“I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said.
After his announcement and plain-speaking, leading bankers including SBI Chairman Arundhati Bhattacharya initially maintained that it takes time to lower the lending rates, which could happen in two or three months.
Hours later, SBI took the lead in effecting the rate cut, followed soon by HDFC Bank, whose CEO Aditya Puri had also hinted earlier in the day that it would take some time for rates to be cut by the lenders.
Bhattacharya later said she expected other lenders to follow suit by cutting their rates, as it was a competitive market. She also hinted at lowering of deposit rates.
On possibility of more cuts, she said, “I think there is an elbow room, but it all depends on credit growth pick up. We really want to see that happening.”
Promising an “accommodative monetary policy”, Rajan on his part said rate cuts going forward would depend on favourable macro economic data and whether banks pass on the benefits of two rate cuts so far on 2015.
While industry expressed unhappiness over the status quo on rates, Rajan said the market dynamics will force banks to lower their interest rates, while adding that sooner they cut the rates, better it would be for the economy.
“Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy,” he said.
Bhattacharya replied to this, saying that “it takes a little time for things to pass through. And, it is not only the cost of deposits that determines this.
“The passing through is also determined by the amount of liquidity, the amount of credit demand and competition which also drives rates up or down. There are very many factors and repo is only one of the factors.”
She also said that Indian banks work differently, as compared to the international banks.
Supporting SBI chief, ICICI Bank’s Chanda Kochchar said it is not just the repo rate change that determines the base rate change, it depends on cost of funds, deposit mix, liquidity situation and also on credit off take.
However, Bank of India chairperson Vijaylaxmi Iyer said, “The impact of reduction in cost of deposit experienced during the last quarter will encourage banks to pass on the benefit to customers. Retail borrowers may see lower EMIs.” RBI has surprised the markets with two rate cuts of 0.25 per cent each outside the scheduled review meetings in 2015, but banks have yet to respond to these policy rate cut by lowering their lending rates.
After the policy announcement, bankers said that most of them will have their asset liability committee meeting week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.
“We would see rates coming down as we see easing of interest rate cycle,” Bhattacharya said.
On the reluctance of banks to pass on the benefit of 0.50 per cent rate cut announced by the central bank since January, Rajan said, “We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission.”
“Given that there has been very little transmission from rate cut so far… we are waiting to see transmission take place… I have no doubt that this will happen. If it happens sooner it is better for the economy,” he told reporters after the announcement of first bi-monthly monetary policy.
“The Reserve Bank will await the transmission by banks of its front-loaded rate reductions… into their lending rates,” the central bank said.
HDFC Bank’s Puri said the base rate cut is a function of the deposit cost.
“If the deposit cost goes down, then there will be a base rate cut. If it doesn’t there won’t be any base rate cut. However we feel between now and June, there should be repricing of cost and that will lead to a lower cost of funds for borrowers,” he said.
On the issue of bad loans, bankers lobby IBA chairman and Indian Bank head T M Bhasin said the lenders are optimistic that coming quarters will be better than the past few years, while other bankers refused to specify saying this is the silent period.
Source : http://goo.gl/V1pNkf
Tuesday, 17 March 2015 – 5:15am IST | Agency: dna | From the print edition
Home loan consumers can be forgiven if they ask in frustration – will the home loan rates ever come down? Most home loan consumers seem to think that RBI controls the home loan rates and since RBI has dropped rates they wonder why they have not seen it being reflected as reductions in their monthly EMI’s.
They have heard the RBI governor say that it has done what it can and it is now for the banks to take up the cue. The finance minister has also been ‘nudging’ the public sector banks to get them to reduce “interest rates” but only three of them have responded so far with token cuts in base rates.
Here is why home loan consumers can forget about any reduction in their monthly EMI burden any time soon.
In the past whenever the banks have faced pressure to drop interest rates they have tom-tommed the reduction while glossing over the fact that the “reductions” were only for new consumers and the old borrowers continued to pay the high rates. The banks were able to do this by reducing the spreads without changing the base rates. Every single bank (whether public or private) has done this after the “transparent” base rate mechanism was put into place in July 2010. (See box for examples of the two largest banks). As a result of this continuous reduction in spreads however a situation has been reached where the spreads are close to nil (around 15 to 25 basis points) for most banks. Now the scope for banks to reduce the rates only for new home loan consumers is very small as banks are not allowed to drop spreads below zero.
Hence if the banks have to reduce interest rates now they have to look at reducing the base rate itself. In that the banks are absolutely correct in arguing that the average cost of funds comes down only after a lag and hence it will be sometime before the base rates can come down. If this truthful and correct explanation is met with a howl of disbelief the banks have only themselves to blame as in the past they have raised the base rates when RBI raised rates (and market interest rates went up) without waiting for their average cost of funds to rise first. RBI has winked at this increase in base rates which was against its own regulations.
In fact in a quite move RBI has now officially allowed the banks to change the basis of its base rate calculation every 3 years (instead of 5 years earlier) and more importantly without requiring any RBI approval. The umpire has officially allowed one side to change the rules without even informing them or the other side about it.
In any case even if the interest rates were to reduce the existing home loan consumers will not see any actual reduction in monthly EMI amount since the benefit will be passed on by way of reduction in number of EMI’s left to be paid. Effectively the saving will come after a really long time. So much for theory that the consumer will spend more from the EMI savings and provide a fillip to the economy.
The one segment of borrowers who can probably get some relief are the small and medium businesses who are currently paying a very high spread over the base rates and in that segment the banks can probably announce some cosmetic reductions that will only apply to new borrowers in that segment.
In fact the current situation is ripe for a move towards complete transparency since that will justify the non-reduction of interest rates in the near future. This will also reduce the pressure on the finance ministry as they can point to the transparent linkage mechanism. Hopefully the new way of doing things will ensure that if not immediately at least sometime in the not-so-distant future even home loan consumers will see Acche Din.
Harsh Roongta, director, Apnapaisa
Source : http://goo.gl/5M2NU7
Saturday, 21 March 2015 – 5:30am IST | Place: Mumbai | Agency: dna | From the print edition
With home loan interest rate cuts staying elusive and freebies not working, realtors siting on huge residential inventory are thinking ‘out of the box’ to push sales.
With home loan interest rate cuts staying elusive and freebies not working, realtors siting on huge residential inventory are thinking ‘out of the box’ to push sales.
A Delhi-NCR-based realtor has come out with an offer that shouts ‘home loans at 4.99% fixed interest rate for the next five years’ to lure buyers deterred by high bank home loan interest rates that are in 10.10-1.25% range.
The realtor, International Land Developers (ILD), a part of ALM Group, has tied up with home search portal Housing.com to offer ‘online only apartments’ across its four sites in Gurgaon.
Under the four-day offer that ends today, the buyer can book an apartment of his/her choice by paying Rs 18,000.
Explaining the scheme, a Housing.com customer service executive said after booking the apartment, the buyer will have to complete the formalities with the developer and make an additional down-payment. The buyer can then avail of a 15-year home loan from a set of banks preferred by the developer or any other lender.
“Once the equated monthly installments (EMIs) start, the developer will refund buyer to the tune of 50% to 60% of the interest component, thus bringing down the home loan rate of interest by 50%.”
For example, if the buyer’s EMI comes to say Rs 35,000, of which principal component is Rs 5,000 and balance is interest, then the realty firm will refund the buyer Rs 15,000 i.e. 50% of the interest component on the loan.
This will be done for the next 60 installments, or a period of five years, after which the buyer will have to bear the entire interest cost. In case the purchase is self-funded, the buyer gets a 10% discount.
Samantak Das, chief economist and director – research, Knight Frank India, ILD is making the home loan interest rate a very attractive proposition.
“Banks haven’t yet reduced interest rates on home loans despite the Reserve Bank of India cutting repo rate cut 50 basis point this year. In such a scenario, developers are seeking ways to bring the fence sitters into the market. While this is an interesting approach buyers need to be careful and have a clear understanding of the caveats before making the purchase,” said Das.
However, it is very typical of realtors to build into the total cost any sort of discounts/ freebies that are offered, he said.
A search at few other home portals like Commonfloor.com and Magicbricks.com revealed that the per square feet (psf) rate of ILD’s projects located in Gurgaon’s Sector 33 and 37 C are between Rs 4,500 to Rs 4,800.
However, the rate offered on Housing.com for both projects is Rs 4,950 psf. That’s a premium of 3.1% to 10%, and a back-of-the-envelope calculation show a buyer will save 10% if the apartments are bought on Housing.com.
Rahul Purohit, principal partner and co-founder, Square Yards Consulting, said, “If we look at this offer more logically, it is the same payment plan as any other project in the market but the catch is the interest rate, which is 4.99% for five years fixed. Rest of the payment plan is same as construction linked plan, wherein buyer has to pay 10% of the total amount in 60 days.”
He said a closer look into the location reveals that the projects on offer are not really well connected currently. “Most of all these sectors have not performed really well in past few years on investment front. Appreciation is lowest in these sectors as compared to rest of the Dwarka Expressway sectors. In fact, certain areas are still under litigation near project sites resulting into delay of Dwarka Expressway,” Purohit said.
The Indian real estate sector has been going through challenging times for over a year now with bookings not really coming through the way it did during 2010-12. Industry experts feel realtors need to do a lot of introspection and get realistic about rates rather then resorting to marketing gimmicks.
The issue in the industry, Anuj Puri, chairman and country head, Jones Lang LaSalle India said, “Despite having the ability, the buyer today is not willing to pay the rates that developers are asking. Besides, I am not sure if giving a marketing spiel around small benefits will in any way enhance the saleability of the project.”
Source : http://goo.gl/MhulGM
Narendra Nathan | ET Bureau Jan 19, 2015, 08.00AM IST | Economic Times
RBI surprised the street by cutting the repo rate from 8% to 7.75%. Though small, this ‘between-the-meetings cut’ has given the signal that the RBI is confident of achieving its inflation targets and the focus is shifting towards growth. Since the RBI has always wanted policy action to be consistent with long term rate stance, this cut heralds the start of a new ‘rate cut cycle’. Now the only questions are ‘how much’ and ‘by when’ these rate cuts will happen. Since most experts (see box) see measured rate cuts, how is it going to impact you?
Investments: The Sensex and Nifty jumped by 729 and 259 points respectively on 15 January, when the rate cut was announced. Stocks from rate sensitive sectors rallied. While the bank Nifty hit a new high, the realty index jumped more than 8%. A lower rate increases purchasing power and therefore, is good for most other sectors as well.
Debt investments can be classified according to how the impact of this cut will be felt. The first part, where the market forces decide the price of bonds, has already rallied based on the expectations of a rate cut after the budget.
The 10-year yield came down by a further 10 bps on Thursday. Most experts are predicting a further fall in the 10-year yield. Long term gilt funds and long term tax free bonds should generate double digit returns in 2015 as well.
The second part includes bank FDs and RDs, where the rates are fixed by the banks. Since this rate has not yet fallen, it still provides a good opportunity to lock in at higher rates. Go for FD if you have enough liquidity; else start an RD.
Loans: To protect their margins, banks first cut the rates on FDs and RDs before reaching for the loan rates. In the recent past, banks have refused to bring their base rates below the 10% mark, despite significant deceleration in loan growth.
Though banks may do some token cuts to pacify the RBI, no major cut in lending rates are expected. Borrowers may have to wait for a few more months for the arrival of the “achhe din”.
Since demand for automobiles is weak, the first rate war may start in the auto loan segment. This reduction is possible without tinkering with the base rates because the interest rates on most auto loans are at a significant premium to the base rates. Bargain hard to get a better deal on auto loans.
Since home loan rates are only slightly above the base rates, the reduction will be in line with the reduction in base rates. One should not expect more than 25 bps reduction in home loan rates. This reduction will be only for borrowers who have availed the ‘floating rate’.
However, overall home loans rates are going to come down significantly in 2015. Borrowers who can afford to should wait for better rates. The same applies to those who want to shift between lenders now. Wait for a few quarters, let the borrowing rates stabilise at lower levels and then make the move towards the lowest lenders.
TNN | Jan 23, 2015, 02.32AM IST | Times of India
The significance of this fact sheet is that it will make it possible for borrowers to compare loans from two lenders. Also, by making the charges a part of the contract, the central bank has reduced leeway for lenders to vary pre-payment charges subsequently.
MUMBAI: Borrowers availing home, auto and personal loans can now be assured of a fair deal with the Reserve Bank of India (RBI) making it compulsory for banks to set out every possible cost in respect of the loan in a fact sheet at the processing stage. Banks will also have to publish the ‘annual percentage rate’ representing the total cost of credit to an individual borrower. Besides, they will have to display on their website the interest rate range for various contracted loans for the past quarter for different categories of advances.
The fact sheet drafted by the central bank requires lenders to spell out the interest rate, the spread above the benchmark rate, date of reset of floating rates, mode of communication of interest rate changes, all fees payable, refundable fees, charges for conversion from floating to fixed rate loan and penalty for delayed payments.
The significance of this fact sheet is that it will make it possible for borrowers to compare loans from two lenders. Also, by making the charges a part of the contract, the central bank has reduced leeway for lenders to vary pre-payment charges subsequently.
Today, an objective comparison is difficult because terms differ vastly. For instance, some of the personal loans have deleterious charges for pre-payment in the first year. Asking banks to disclose an annual percentage rate representing the total cost of credit ensures that customers are not taken in by deceptively low rates with a step-up structure. At the same time, it does not take away the ability of banks to innovate in product design.
The new norms on transparency follow the central bank’s revised guidelines for calculating the benchmark base rate to ensure that changes in interest rates are passed on to all borrowers fairly. The new norms are based on recommendations by a working group on cost of the pricing of credit. The committee – which had submitted its report a few months ago – had said that despite efforts via policy to usher in transparency and fairness to the credit-pricing framework, there have been certain concerns from the customer service perspective. These mainly relate to the downward stickiness of the interest rates, discriminatory treatment of old borrowers vis-a-vis new borrowers, and arbitrary changes in spreads.
One of the major recommendations by the committee was that the Indian Banks’ Association should develop a new benchmark for floating interest rate products, namely, the Indian Banks’ Base Rate, or IBBR. It had also proposed a penalty for banks that refuse or delay transfer of loan for refinance. RBI is yet to take a stand on these two recommendations.
Source : http://goo.gl/8acJlp