Banks lower rates on personal loans.

Nandini Sen Gupta & Aparna Ramalingam, TNN 

CHENNAI: In an effort to grow their lending book, many banks are now offering lower interest rate on personal loans. With the slump in auto sales continuing and certain real estate markets showing signs of sluggishness coupled with corporates shying away from major expansion, banks are looking at new segments for growth

Said Sumit Bali, executive vice president, Kotak Mahindra Bank: "Due to the slowdown in cor.porate lending, there's pressure to increase the book on the retail side as ticket sizes are small and delinquencies are less. Banks are targeting select few 'good' customers from its existing base for personal loans at aggressive rates." Kotak also offers such schemes for its 'good profile' customers where rates can go down to 13.5-13.25%.

The personal consumption segment is holding up despite the slowdown - a comeback after the 2008-09 when unsecured loans had completely skewed the market and many lenders burnt their fingers. "Since then the lenders have wizened up and there are many more firewalls to prevent a repeat," said Bali. "And the personal consumption segment - home loans, car loans, personal loans and credit cards - is doing well even in the slowdown. There is not too much stress of delinquency." The risk factor becomes even lower when the loan is offered to a preferred customer with whom the bank already has a relationship in the form of another loan or a long-standing account and whose credit history is impeccable. Hence the lower rates, say sources.

Sometime back, HDFC Bank too sent mailers to its elite customers with attractive offers on personal loans. Accordingly, those who have a take home monthly salary of over Rs 75,000 per month can avail a minimum loan of Rs 10 lakh at reduced interest rates ranging between 12.99% and 14% per annum on a reducing basis. The bank's personal loan portfolio grew by 26% to touch Rs 17,500 crore during 2012-13 as compared to Rs 13,891 crore during 2011-12. This has now moved up to Rs 19,314 crore as at September end of this fiscal.

Some others like Federal Bank are offering overdraft facilities to salaried account holders at an interest rate of 12.55%. "Under this scheme, the interest rate is just two per cent above our base rate (10.55%) which itself is very competitive from the industry stand point," A Surendran, general manager and head (retail), Federal Bank said. Such customers can avail overdraft limits up to six times of their monthly salary.

Last month, as part of its festive offer scheme, Indian Overseas Bank slashed its interest rate on consumer loans (mainly for purchase of durable and white goods) by 200 basis points to 13.5% from 15.5%. This interest rate offer is on till end of January next year. "The whole idea was to revive consumer spending in certain categories," M Narendra, chairman and managing director, Indian Overseas Bank said.

Some others like Karur Vysya Bank are not going in for a revision immediately. "Personal loan segment is still a high risk area. This segment also entails high cost of servicing in terms of repayment and loan recovery. Some growth in the loan book could be achieved by managing the cost of funds and yields," K Venkataraman, managing director and chief executive officer, Karur Vysya Bank said. "We are not looking to reduce rates immediately," he added.

Key Word: Personal loan in Chennai.

Developers want banks to lower interest rates.

NDORE: A slowdown in economy, coupled with high interest rates have forced people to cut down on spending hitting the once booming realty sector hard. Real estate developers in the state are facing problems as inventories pile up and there are no takers.

The situation has reached a stage where realtors want banks to lower lending rates while the bankers want realtors to lower prices. Bankers have refused to budge on the issue of lowering lending rates stating that slackness in realty sector is due to high prices and poor quality offered by developers.

An estimate says that there are about 30-40,000 houses under construction by various big developers in Indore at the moment. Managing director of an Indore-based real estate firm, Silver Lake Vista, Kunal Jhaveri, said, "The cost of construction has gone up and hence it is difficult for us to lower prices of properties offered by us. Now it is up to banks to lower their interest rates on home loan so as to woo buyers".

President of Indore chapter of Credai, Vijay Mirchandani, said, "We do believe that interest rate on home loans will come down by 50 basis points next year. It's important, keeping in view the increasing demand for home loan among people hailing from communities like economically weaker section and lower income group."

Vice president of Credai in Bhopal, Manoj Singh Meek, said, "In case the interest rate on home loan comes down, then the demand for homes will increase for sure".

DGM of IDBI Bank, K L Subedar, said, "We are cautious while financing the real estate projects directly. Rather we want to extend home loans to the end-users". Elaborating it, he said unlike real estate developers, end-users rarely turn defaulters for a simple reason that they use the loan for getting home.

As per an estimate, average take-off of home loan in Indore alone was at Rs 1,000-1,200 crore per month. IDBI bank claims to having lowest interest rate on home loans at 10.25%. Though State Bank of India offers an interest rate of 10.10% upto Rs 30 lakh, its rate of interest goes as high as 10.40% beyond that amount. However, IDBI charges a flat interest rate of 10.25% on all amounts.

CMD of Indian Overseas Bank, M Narendra, said, "The real estate developers must ensure that they not only go for quality projects, but also the fact that they keep their price at a reasonable and competitive level. Above all, they must deliver their property to the buyers in time".

The average ticket size for home loans in Indore stands at Rs 10 lakh. CMD of Punjab National Bank, KR Kamath, told TOI, "that the interest rate on home loan was directly related to the level of inflation. So, one can see the fall in interest rate only in case the inflation comes down."

Home, auto and personal loans to cost more...

MUMBAI: Retail customers of home, auto and consumer loans should brace themselves for a rough ride ahead as signals emerging from the bond market point towards an increase in interest rates. And this rise could be sharp and quick.

The indications are derived from the benchmark 10-year yield on government securities (G-secs), which touched 9.27% per annum on Monday, a five-year high and the highest in the post-Lehman era. The 10-year benchmark rate is the highest risk-free rate that one can get in the country, and hence this is the benchmark rate for banks and other lenders for setting their onward lending rates for customers.

The current level is also close to the decade high rate of 9.60%, bond dealers said. The sharp rise is mainly because of the tough liquidity situation in the market triggered by various monetary tightening measures since July 15. At close the 10-year yield was at 9.22%, up 34 basis points (100 basis points = 1 percentage point) from its Friday close at 8.88%. Since May 24, benchmark yield has risen by 2.11 percentage points, and since August 1, by 1.06 percentage points to Monday's close at 9.22% per annum.

According to industry analysts and debt fund managers, the rise in rates would hurt those home customers who have gone for the floating rate plan, new auto and other consumer loan customers, besides all the large and small corporate borrowers. However, the silver lining for customers would be that along with higher borrowing rates, fixed deposit rates would also rise and one can invest during those high rates to earn better returns for several months.

In addition to the benchmark rate, yields on all other long term G-secs are either already above the 9.5% mark or very close to that level. Moreover RBI is not infusing liquidity through hopen market operations (OMOs), which is by buying G-secs from the market, pointed out a dealer with a local bond house.

"Local as well as global factors are contributing to this rise in rates in India," a top debt fund manager said. "On the local front, RBI's recent steps to curb liquidity to stem the weakness of the rupee has not had its intended impact and that is leading bond market players to assign high uncertainty premium to G-sec rates," the fund manager said.

Since July 15, RBI has tightened liquidity in the system, assuming that would force market players to buy less dollars in the forward market and hence would stem the weakness of the Indian currency. However, since July 15, the rupee has depreciated nearly 5.5%, indicating that the measures have failed. "On the global front, the fears of tapering off of by US Fed is also weakening emerging market currencies," the fund manager said.

Axis BankBSE -0.69 % on Monday raised its base rate by 25 bps to 10.25%. Earlier Andhra BankBSE -1.00 % and Karur Vysya BankBSE 0.16 % also raised its base rate by 25 basis points The country's largest private lender ICICI BankBSE 2.12 % hiked its deposit rates by 50 to 75 basis points. Canara BankBSE -0.30 % also hiked fixed deposit rates in some maturities.

Along with the rise in bond yields, the rate of inflation is also going up. On Wednesday, the wholesale price index (WPI) for July showed a jump to 5.79%, the fastest rate seen in the last five months and also higher than the RBI's comfort level of 5.5%. According to Bloomberg data, the last time the market saw 9% yield on a 10-year paper was in late August, 2008. Since then the benchmark rate has remained below the 9% level, and in between falling as low as 5.24% in early January 2009.

Fund managers believe that the government has to instill confidence among investors and that could bring in the much-needed stability in the bond market. Once that stability comes, investors would come back to invest which would lead to soften rates. "Yields are looking very attractive at this point of time. Once people see some stability on the currency front, we may see large follow up buying in bonds, including in G-secs," said Amit Tripathi, head of fixed income, Reliance Mutual Fund.

On Monday, there was spillover impact of the hardening of the rates in the auction for government papers also. In the auction for 28-day cash management bill (CMB) for Rs 11,000 crore, the cut-off yield was fixed at Rs 12.24% per annum. Compared to Monday's auction, the cut-off yield in the auction for 34-day CMB on August 13 was 11.94%.

Loan against FD, Gold loans popular alternatives to personal loans

When you are in the urgent need of cash, the easiest option seems to be taking a personal loan. But with the raging interest rates these days, it's not quite wise to get into the vicious cycle of debt. Banks also tend to look at your entire financial profile before accepting you for eligibility. What if you could have an option apart from personal loan in times of crisis?

Here are some quick fixes as alternatives to personal loans - 

Loan against fixed deposits - This is the quickest possible loan because banks lend against their own fixed deposits. The repayments of this type of loan should be done within the fixed deposit tenure. The biggest advantage is there is minimal documentation required and loans are available over 80% of the fixed deposit value. Also, your fixed deposit continues to earn interest even during the tenure of the loan. However, you must discipline yourself to repay the loan every month like an EMI.

Gold loan - Initially started off as a popular source of finance in rural and semi-urban areas, gold loans have off late become extremely popular in metros as well. This type of loan provides immediate liquidity on the basis of one's jewellery without having to sell it away. Further, there are no processing charges and prepayment fees. The loan amount depends on the purity and weight of the gold that is given. Although this loan does not necessitate previous credit history, banks are going stringent on these after recent RBI regulations. Further, the interest is not cheap and is comparable with personal loans.

Loan against Property - You can borrow against your property and the loan amount is calculated on the basis of value of property and the borrower's capacity to repay. Refinancing the property is an option if the value of loan is to be increased or the property value has risen over a span of time. Failure in prompt repayment can result in loss of ownership, and hence absolute care must be taken, as a property is usually of higher value than any other form of security.

Loan against shares - Banks lend against the shares of specific companies which you hold. However, not all shares you hold qualify for such loans. Each bank has a different list of approved securities which qualify for such loans. The amount depends upon valuation of security and ability to repay and service the loan. Although you can receive money without liquidating your investments, the amount granted as a proportion of the security offered is much lower compared to other forms of loans. With present volatile stock markets, this may not come cheap as well.

Loans against Life Insurance policies - Loans that are granted on the basis of life insurance deals have lower rates of interest and easy options for repayment. Loan amount is dependent on the value of the policy. It can be repaid anytime during the term of the policy. In the event of an unpaid loan amount, interest will be deducted from the claim. This is a quick loan with minimal documentation.

Loan against Public Provident Fund (PPF) - Loans can be taken on the basis of PPF but with tenure only up to 2 years. If the first loan is repaid, the borrower is entitled for another loan if they are within 3 to 6 years of opening an account. The benefit of this loan is that you can borrow without breaking your PPF and also with minimum documents. You can take a look at the above mentioned options see which one might suit you best. If you are in urgent need of cash but for a short period of time, you might want to consider these alternatives. Evaluate your need and financial position before deciding on any kind of loan, as these will have direct implications of your financial plan.

Pointers to stay away from loan defaults...

Becoming a victim of circumstances or willfully being a loan defaulter whether of large sums or for a small amount, is not good for your credit reputation. Often loan defaultsoccur when you take on too many debts simultaneously and then find it difficult to manage!

Moreover, currently the savings is getting squeezed due to ever rising inflation. Incomes are not growing in proportion to the price rise, and interest rates are moving upwards rather than going down. This has resulted in rising NPAs and people are defaulting on their borrowings.

Contingencies can occur in a life cycle of loan and there may be times when you could fail to pay your EMIs. It could be a home loan, educational loan, or a car loan. However, skipping of debt one time and nonpayment of EMI on a regular basis have different connotations all together. Now, before understanding the procedures that can save you from loan defaults, one must understand the term "loan default".

Loan default can occur when a person fails to meet the repayment obligations. The problem occurs when the default period extends and the bank or financial institution (FIs) has to take possession of the belonging. If the default is for one or two payments, penalty is charged on the amount due and then the loan is resumed.

The principles of loan:

It is right that the situations changes dramatically, but always take a loan on the basis of your existing capacity and future outlook. It is important to remember that future is uncertain and there may be a circumstance when the rate of interest may rise but your already stretched position in a borrowing will not allow you to keep pace with the payments. Therefore, it is advised to take the loan on the basis of ease of payment.

Keep Saving:

Savings rate is adversely impacted by the repayment of loan, but try and save on regular basis. Budget your expenses and deposit whatever you save in a separate bank account. Don't withdraw money from that account unless extremely pressing situation occurs. This will help in taking care of the loan default. If you have lump sum of money pre pay your liability and ask the bank to restructure the monthly payments.

Talk to your lender:

Lender sets the term of the loan and can be a bit flexible in your favor if you have defaulted or on the verge of default. However, this is only possible had you been regular in your earlier debt payments.

Keep one advance EMI in Hand:

Keep one more EMI fund with you so that in case of any emergency you will have those funds to repay the amount. For example: If you had taken a home loan whose monthly installment was Rs 20000, try and keep an advance EMI in hand. This will mean you will have to keep Rs 40000 only for the purpose of your loan. Expenses should be curtailed once your account reaches Rs 40000. If that is not possible make a limit as per your convenience like Rs 35000. Even this will help you a lot at the due date.

Avoid Foreclosure Situation:

If the loan sum is small, try and finish it as early as possible. There are no prepayment penalties, but yes defaults are slapped with exorbitant penalties. If it is the property which you purchased for investment purposes, you can sell the same and avoid any foreclosure. Foreclosed property will come in the possession of the bank. Therefore, it is sensible to sell it and get the benefit of price appreciation. Immovable properties at good locations can be easily sold out.

Extend Loan Tenure and Decrease Loan Amount:

It totally depends on the understanding between the borrower and the lender. A person can reschedule his debt, if he finds that the current structure is troubling him. This is also known as debt rescheduling. Under such streamlining, the loan tenure is increased while loan value is decreased. This provides cushion to the person and avoids non-payment.

Switch Loan:

Interest rates play an important part in the payment condition. It is quite possible that the loan taken by you is at higher rate compared to the loan of some other banks. From a minor sum of money you can switch the loan with other bank and can get easing terms. New customers are always attracted to easy offers, so it is better to properly analyze the offer before opting for loan switch.

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