TOUGH TIMES-Loans to get costlier as RBI ups rates

Mumbai: Get ready to pay more on your home loans, car loans and consumer loans. For industry too, the cost of funds is set to rise. Late on Tuesday, the Reserve Bank of India hiked two key policy rates — the repo rate and the cash reserve ratio — by a steep 50 basis points (100 basis points = 1%). The intensity of the hikes appears to have caught a lot of people by surprise, and leaves little doubt that for the Manmohan Singh government, runaway prices represents clear and present danger.
    Financial sector players say banks will raise interest rates by half a per cent or more, and the stock market could take another knock when it opens on Wednesday.
    Aimed at reining in an inflation rate that is now at a 13-year high of 11.05%, RBI raised the repo rate to 8.50% from 8% with immediate effect. It also decided to increase the CRR from 8.25% to 8.75% in two stages. From July 5, the CRR will be set at 8.50% and from July 19 at 8.75%.
    This is the second time in less than a fortnight that the RBI has raised the repo rate to contain inflation. It’s the rate at which banks borrow from RBI. A hike in the repo rate will make it more expensive for banks to get money from RBI, which is likely to force them to charge customers a higher interest rate. On June 11, the RBI had raised the repo rate by 25 basis points. Last month, it had raised CRR by 50 basis points.
    RBI’s decisions are expected to force banks to raise interest and deposit rates. Higher interest rates will affect those who wish to borrow to buy a house, a car, or consumer durables like fridges and TVs, and it will also hurt those who have taken home loans on a floating rate basis. Higher rates also mean that corporates now have to pay more as interest costs. ‘‘The question is not whether rates will go up, but by how much,’’ said a senior official with a domestic financial house.

 

To rein in inflation, RBI hikes repo rate and cash reserve ratio by 50 basis points. Repo rate raised to 8.5% from 8%, and CRR to 8.75% from 8.25%

 

Co-ops may find it easier to offer home loans

CO-OPERATIVE banks will find it much easier to extend home loans in the future, if the loans are for only a small portion of the property value. The Reserve Bank of India (RBI) has linked the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.
    Hence, for home loans up to Rs 30 lakh and below 75% of the value of the property, banks will need to set aside only 50% of the capital they are required to maintain earlier.
    If the loan is for more than Rs 30 lakh in absolute terms but still less than 75% of the property value, the capital requirement will be 75% of standard requirement. However, if the bank provides loans for more than 75% of the value of the property, there is no relief in capital adequacy requirement.
   
CO-OPERATIVE banks will find it much easier to extend home loans in the future, if the loans are for only a small portion of the property value. The Reserve Bank of India (RBI) has linked the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.
    Hence, for home loans up to Rs 30 lakh and below 75% of the value of the property, banks will need to set aside only 50% of the capital they are required to maintain earlier.
    If the loan is for more than Rs 30 lakh in absolute terms but still less than 75% of the property value, the capital requirement will be 75% of standard requirement. However, if the bank provides loans for more than 75% of the value of the property, there is no relief in capital adequacy requirement.
    For banks, the amount of capital they are required to set aside for each loan is decided by the minimum capital adequacy ratio prescribed by the central bank. Capital adequacy ratio is the ratio of a bank's net worth to its risk-weighted credit exposure. The risk weightage, in turn, is the ratio which determines the credit risk in a particular loan asset. Although capital adequacy ratio is fixed at a flat 10% for banks, RBI reduces the capital requirement by increasing or reducing the risk weightage for loans in certain sectors. For instance, for home loans up to Rs 30 lakh, the risk weightage on the loan is 50%. What this means is that banks will need to set aside only 50% of the capital they keep aside for loans with a 100% risk weightage.
    RBI increases or reduces the risk weightage depending on its perception of risk in a particular sector. The higher risk weightage reduces the banks loss in the event of a default. It also discourages lending to that sector by making it more capital intensive.
    The central bank has also relaxed branch and ATM licencing for co-operative banks, subject to their maintenance of a minimum CRAR of 10% on a continuous basis. The co-operative banks also needs to have net NPAs of less than 10% and should have made a profit in the preceding year.

For banks, the amount of capital they are required to set aside for each loan is decided by the minimum capital adequacy ratio prescribed by the central bank. Capital adequacy ratio is the ratio of a bank's net worth to its risk-weighted credit exposure. The risk weightage, in turn, is the ratio which determines the credit risk in a particular loan asset. Although capital adequacy ratio is fixed at a flat 10% for banks, RBI reduces the capital requirement by increasing or reducing the risk weightage for loans in certain sectors. For instance, for home loans up to Rs 30 lakh, the risk weightage on the loan is 50%. What this means is that banks will need to set aside only 50% of the capital they keep aside for loans with a 100% risk weightage.
    RBI increases or reduces the risk weightage depending on its perception of risk in a particular sector. The higher risk weightage reduces the banks loss in the event of a default. It also discourages lending to that sector by making it more capital intensive.
    The central bank has also relaxed branch and ATM licencing for co-operative banks, subject to their maintenance of a minimum CRAR of 10% on a continuous basis. The co-operative banks also needs to have net NPAs of less than 10% and should have made a profit in the preceding year.

Fill that life insurance form with care

IN an age when shares can be purchased at the click of a mouse, filling a life insurance proposal continues to be a major chore. More often that not it is the insurance agent who, in his eagerness to sell, fills in the details on behalf of the insured.
    What the proposer doesn't realize is that such a casual approach can make a crucial difference when it comes to pricing, and in ensuring that claims are not prejudiced. Unlike other transactions, insurance is based on faith. Since the insurance company cannot verify every bit of information, it accepts in good faith whatever details the proposer provides. The flip side is that this gives the company the right to reject claims if there is non-disclosure of a fact that is material to the pricing of premium.
    If there is a vague or incomplete entry in the proposal, the underwriter may play it safe and bracket the insured in a higher risk category. This is more applicable in case of policies where there is a high sum insured.
    Taking a little more trouble in filling the proposal form can, however, help the insured save premium money. Here are some disclosures that make a difference in price:
Age proof
    Proposers may be tempted to give a self declaration, in the absence of certificates. take this route when their age certificates are not readily available. However, it makes more sense to make available photocopies of birth certificates, passports or school leaving certificates, especially if you are above 40 years of age. The underwriter may raise the premium to accommodate the possibility of the applicant being older than the declared age. Sometimes, the increase can lead to a premium payable for a life five years older than that for the declared age.
 
Income
    Indians often fight shy of disclosing their full income. But there is a legitimate reason for an insurance company to seek the proposers' income, particularly if the proposer is seeking a high sum insured. Insurance companies usually accept the sum insured as a multiple of present income. Under-declaring income could result in the company declining the proposal for a high sum insured.
Occupation
    It's best if the occupation is not left vague. For instance, when you mention your occupation as 'engineer' with ABC Construction, the underwriter wants to know if you are a design engineer or a site engineer or an IT engineer maintaining the company's systems. Do mention if you toil in an environment with high safety norms. This reduces premium hike on the grounds of "occupational extra."
Medical history
    Here again, most applicants are reluctant to share information, and agents misguide proposers by asking them not to declare some medical procedures.
    The information, however, need not increase your premium. If a claim has arisen out of any pre-existing condition not disclosed in the proposal form, the insurer has a ground not to pay it.
Family history
    Being clear on this front works in your favour if the family is seen enjoying higher life expectancy with good health. It makes a stronger case for cover at a higher age.
Other details
    List all the life insurance policies you have. Give details of the cover you enjoy under those policies along with the policy numbers, name of the insurer, sum assured and the date on which the policy started. If you have bought a policy from the same insurer at a standard rate in the recent past, you may get a favourable underwriting treatment. A lethargic attitude here can deprive you of better underwriting treatment. Mention the reasons behind the purchase of life insurance. If you don't have any insurance and are going in for a large sum assured due to a fresh home loan, mention it. Employment, wedding and child birth and are some valid grounds.

Should you prepay your home loan?

With the fuel price hike, costs are rising. So, many with some cash in hand ponder over prepaying their home loan. It seems like you will be better off if you get rid of this debt. Kavita Sriram analyses

    Most homeowners began their home loan journey with a modest seven percent in the year 2003. Today, the interest rate hovers around 12 percent with most banks. Now, if you have a huge loan, a long tenure ahead and some extra cash, should you prepay? Borrowers must analyse a variety of factors before jumping to a conclusion.
    Here are some factors you must take into account:
Prepayment penalty
    Is there a penalty associated with prepayment? Some lenders are happy getting their money back sooner. Others charge a fixed percentage like two percent or allow you to repay some fixed amount every year without penalty. Evaluate the penalty and see if it is worth prepaying.
Pay off more expensive loans first
    If you have other higher interest commitments like car loan, personal loan or the more critical credit card debt, consider if it is feasible paying them off. This is because home loan rates are supposed to be cheaper than these and additionally provide you with income tax benefits.
Invest for higher returns The more aggressive can explore investment options that yield returns greater than the home loan rate. If your excess money is coming from breaking such an investment, prepayment does not make sense. However, keep in mind that high return investments come with high risks.
Prepay a fraction
    While prepaying a loan entirely may be a prudent decision, prepaying small amounts of the loan can be attractive in the long run. In a home loan, as the years roll by, the interest component decreases and principal component goes up as a proportion of the EMI. Some borrowers prefer not to prepay the loan after more than half the tenure has elapsed. Most borrowers are seen to repay their loans in eight years.
Evaluate job and salary
    Are you close to retirement? If so, prepaying may be an excellent choice.
    Is your job situation jittery? In case the borrower fears that he will lose his job, it is better he repays his loan with the extra cash he has. This ensures that unpaid EMIs dues don't pile up and he doesn't default. There will lesser pressure and some peace if he is without a job.
    It is better for new borrowers to opt for short home loan tenures. The EMIs will be huge, but you can pay off the loan faster.
HOW PREPAYMENT WORKS
    Let us assume a person has purchased two houses for Rs 30 lakhs each, five years ago. He lives in one house and the other house has been rented out by him. Let us consider the income tax implications on prepaying one of the two houses after five years.
    When computing tax savings on the rented property, a rental income of Rs 8,000 per month is assumed. This amount is assumed to increase at a rate of five percent per annum. As much as 30 percent of the rental income can be deducted towards expenses incurred on periodic maintenance and property taxes.
Details of loan
Initial loan amount: Rs 30 lakhs Interest rate: 10 percent fixed Loan tenure: 15 years Years elapsed: 5 Years left: 10 Outstanding principal at the end of 5 years: Rs 24,39,500
If the self-occupied property is prepaid, the net tax savings (combined for both the loans) for the years 6 to 15 is Rs 1,05,097. If rented property is prepaid, net tax savings (combined for both the loans) for years 6 to 15 is Rs 3,26,470 Hence, it is prudent to prepay the loan on the rented property, provided all factors and parameters are similar between the two home loans.