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Title : 5 home loan innovations to help achieve Housing for All by 2022
Home loan portfolio has the lowest delinquencies and this can be a win-win situation for both the lender and borrower if it can be achieved by innovative strategies but in a transparent way President Pranab Mukherjee, in his address to the Joint Session of Parliament on 9 June 2014 had announced, “by the time the Nation completes 75 years of its Independence, every family will have a pucca house with water connection, toilet facilities, 24x7 electricity supply and access.” As a follow up of this commitment, the Central Government recently announced the National Mission for Urban Housing called ‘Housing for All by 2022’ which is a bold attempt not only to galvanise the housing market but also to improve the life of people living in urban areas of the country. In the wake of this, the Ministry of Housing and Urban Poverty Alleviation has published the guidelines, which elaborately propose a series of measures for implementation over the next seven years. This includes credit-linked subsidy scheme to the eligible urban poor, comprising of economically weaker section (EWS) and low income group (LIG) to be routed through banks and housing finance companies in the country. This whole exercise entails enormous amount of funding of homebuyers through home loans by banks and housing finance companies (HFCs) that have an onerous responsibility to ensure that home loans are tweaked according to needs of the borrowers and make them attractive enough to borrow from banks. Unfortunately there is very little innovation in home loans at present, though couple of years back, a few banks had introduced what were called as teaser home loans, which did not last long. What are teaser loans? It was all started in 2009-10 when banks found that the best way to expand credit was to attract people to avail home loans as they found that this was the safest way to increase their retail loan portfolio, since the delinquency was lowest in housing loans. A few banks, led by State Bank of India (SBI) offered home loans to new borrowers at a much lower rate of interest on fixed interest rate basis for first two years, where after the loan would be converted into floating rate at the then existing higher interest rate. These home loans not only attracted a lot of interest amongst home buyers, but it also generated criticism from competitors who considered it as a ploy to attract innocent home buyers who were not informed of the consequences of interest rate movements. HFCs came out strongly against these schemes by describing them as a gimmick and identified them as teaser loans. The Reserve Bank of India (RBI), then felt that such teaser loans were riskier and the probability of default was higher due to the ignorance of borrowers of the implications of higher interest rates charged after the initial period of say two or three years. RBI, therefore, imposed an additional provisioning requirement of 2% over and above the normal provisioning on such loans, which made those loans unattractive for the banks who withdrew the schemes in 2011. If not teaser loans, home loans definitely need innovation! RBI’s views at that time were guided by the sub-prime crisis that led to the collapse of Lehman Brothers of US and the global meltdown that followed. That made RBI a bit cautious and did not view this innovation favourably. Today, there is a need to encourage retail lending as banks are cautious to lend to large projects due to the mounting non-performing assets (NPAs) in their balance sheet, which is causing pressure on their profitability. And that is why SBI has again sought the views of the RBI on this issue, and hopefully, the central bank might allow banks to reintroduce this innovative scheme with appropriate checks to safeguard the interest of the borrowers, as there is always scope for new ideas even in a mundane banking business. Whether the teaser loans are re-introduced or not, there is certainly a need to encourage banks to come out with innovations in home loans in the context of Government of India launching a very ambitious programme of “Housing for All by 2022”. As per the present estimate, India will need an additional 11 crore housing units by 2022, which means a huge responsibility is cast on banks and HFCs to finance these large number of houses during the next seven years. What are the innovations feasible and desirable? 1. Credit score to decide the interest rate on the loan: Banks today first ascertain from the credit information bureaus, the credit history and score of the potential borrower to assess risk/s involved in lending. If they find that the credit history and score are up to the mark, the application for a loan is considered favourably because it indicates promptness in meeting commitments, which is considered as a good risk for lending. While banks vie with each other in attracting such high quality borrowers, they hardly give the benefit of lower rates of interest to such borrowers, and treat them at par with other borrowers so far as interest rate is concerned. There is a need to introduce variation in interest rates depending on the credit history/score of the applicant to encourage credit discipline in borrowers, as it will ultimately benefit the lending institution, which stands to gain by prompt repayment of their loans. Banks should, therefore, follow the principle of good credit history and higher the credit score, lower the interest rate, which is not uniformly applied today. 2. Link the interest rate to Loan to Value Ratio (LTV) RBI has stipulated certain margin to be retained by the bank while lending on the security of the house to be mortgaged for the housing loan. This is called the Loan to Value ratio (LTV). The following is the present guideline in force: For example, if a homebuyer mortgages a property worth Rs30 lakh, he can get a maximum loan of Rs24 lakhs retaining a margin of 20% on the loan. But if he seeks a loan of only Rs20 lakh after investing his own savings of Rs10 lakh, which is his equity, the margin on the loan come to 33.33%, which is much higher than the 20% stipulated as per the rules. This provides an additional margin of safety to the bank and, therefore, there is a need to offer lower rate of interest to the borrower to compensate for the higher margin of safety provided by him by investing his own money. Lower the Loan to Value Ratio, lower the interest rate should be the guiding principle for all home loans. 3. Reward borrower for early payment of EMIs The banks have a policy of levying a penalty if equated monthly instalments (EMIs) are paid with delay even of a few days. But at the same time, banks do not reward the customers if EMIs are paid in advance of their due dates. Most of the banks do not even give the benefit of early payment of instalments by appropriate credit in calculation of interest on daily product basis like in savings account. If banks are generous enough to reward borrowers who pay in advance of the due dates, it will encourage them to pay the instalments in advance, which is beneficial to banks in the long run. 4. Home loans in the form of Overdrafts A few foreign banks do grant home loans in the form of overdraft accounts, which is a variation from the term loan system followed by most of the banks today. This system of granting loans through overdrafts gives considerable advantage to the borrower as interest is calculated on the net debit balance in the account on daily basis like in savings bank accounts. Besides, for the salaried class it helps in getting the benefit of interest at the home loan rate on surplus funds held in the account during the earlier part of the month, which otherwise would have remained in the savings bank account with a paltry interest of 4% per annum. Over the period of the entire loan, this savings in interest becomes substantial if the interest rate on the overdraft is comparable with the rate offered by banks in the traditional loan account. If the borrower is able to follow the rules of overdraft system, this is the better way to borrow even for long term, if the rate is competitive. Public sector banks (PSBs) too should give the benefit of loans in the form of overdraft to those who wish to borrow under this novel method and thus widen the choice for the homebuyers. 5. Mortgage Guaranteed Housing Loans Last week a new concept of mortgage guaranteed home loans has been introduced in association with the Indian Mortgage Guarantee Corp set up jointly with the National Housing Bank (NSB), Genworth Financial, International Finance Corp (IFC) and the Asian Development Bank (ADB). Mortgage Guarantee is a product which compensates lending institutions or housing finance companies for losses that may arise when a home owner defaults on a mortgage loan. This is a new concept just introduced in India and requires to be fine tuned to make them attractive enough to meet the needs of the discerning Indian home buyers. Banks can help to achieve the dream of every Indian household to own a home: Owning a home is the dream of every Indian family in our country irrespective of the economic conditions in which they live. With the thrust given by the Indian Government to ensure that every family will have a roof over its head by the 75th anniversary of country’s independence, here is an opportunity as well as a challenge for the banks and housing finance institutions to play their part well to achieve the objectives set before them. As is well known, home loan portfolio has the lowest delinquencies; this can be a win-win situation for both the parties to the loan if it can be achieved by innovative strategies but in a comprehensible and transparent way. Origin
Author : Money Life Posted Date : Wednesday, September 9, 2015
Title : How is Your CIBIL Score Calculated?
Today almost no loan or credit card application gets approved without checking the applicant's CIBIL report and CIBIL TransUnion Score. Ever wondered how a person's credit score is calculated? Here's a quick glimpse into what goes into the making of a person's CIBIL TransUnion Score: What is a CIBIL TransUnion score? CIBIL calculates an individual's credit score through advanced analytics and assigns a number between 300 and 900 to a borrower, based on his/her credit history. The closer your score to 900, the more confidence the credit institution will have in your ability to repay the loan and hence, the better the chances of your application getting approved. While each bank will have its own credit scoring cut-off based on the credit sanctioning policies, it has been observed that most banks are lending to consumers with a CIBIL TransUnion Score of 750 and above. How is the score calculated? While each credit information company has its own proprietary algorithm to calculate an individual's credit score, the most important elements of the score composition are centric around the loan payment behavior of the individual. Your CIBIL TransUnion Score is calculated based on the information in the "Accounts" and "Enquiry" section of your CIBIL Report. The score is calculated based on the following factors: Credit Utilization: How much credit is the consumer using? Defaulting/Delinquency: How many accounts are past due and by how many days? Trade Attributes: How old are this consumer's lines of credit? What type of credit does he have? Does the consumer have a good mix or balance of credit or is it all credit cards? Here is a breakup of the various factors that impact the CIBIL Transunion Score: 1. Past Performance: Individuals past performance on their debt obligations is the most important criterion and contributes approximately 30 per cent weightage to the score 2. Credit Type & Duration: Type of loan availed whether secured or unsecured loan, and the duration of credit history established contributes an additional 25 per cent to the score. 3. Credit Exposure: The total amount of credit exposure contributes another 25 per cent 4. Other factors: Other factors such as credit utilization, recent credit behavior contribute the remaining 20 per cent to the score. Your CIBIL Report and CIBIL TransUnion Score not only determine whether or not you qualify for a loan, but it may also have an impact on the terms and conditions on which you can avail the loan. The higher the credit score, the better your chances of availing the loan faster and on favorable terms. It is advisable to check your CIBIL Report and CIBIL TransUnion Score before applying for a loan. Timely payments of loan EMIs is most important for maintaining a good credit history and a healthy credit score. (Harshala Chandorkar, Senior Vice President - Consumer Services and Communication, CIBIL)
Author : NDTV Profit Posted Date : Thursday, September 3, 2015
Title : Ten golden rules to follow when taking a loan
1. DON'T BORROW MORE THAN YOU CAN REPAY The first rule of smart borrowing is what the older generation has been telling us all the time: don't live beyond your means. Take a loan that you can easily repay. One thumb rule says that car EMIs should not exceed 15% while personal loan EMIs should not account for more than 10% of the net monthly income. "Your monthly outgo towards all your loans put together should not be more than 50% of your monthly income," says Rishi Mehra, founder, Can online loan portals offer you a better deal? With banks falling over each other to attract business, taking a loan appears as easy as ABC. But don't take a loan just because it is available. Make sure that your loan-to-income ratio is within acceptable limits. Hyderabad-based Phani Kumar has been repaying loans right from the time he started working. Ten golden rules to follow when taking a loan Ten golden rules to follow when taking a loan It started with two personal loans of Rs 5 lakh six years ago. At that time, he was paying an EMI of Rs 18,000 (or 40% of his take home). Despite stretched finances, Kumar took a car loan of Rs 5.74 lakh in 2012, adding another Rs 12,500 to his monthly outgo. Last year, he took a third personal loan of Rs 8 lakh to retire the other loans and another top-up loan of Rs 4 lakh to meet other expenses. Today, he pays an EMI of Rs 49,900, which is almost 72% of his net take-home pay. If your EMIs gobble up too much of your income, other critical financial goals, like saving for retirement or your kids' education, might get impacted. Retirement planning is often the first to be sacrificed in such situations. Even after six years of working, Kumar's net worth is in the negative. Make sure you don't commit this mistake. 2. KEEP TENURE AS SHORT AS POSSIBLE The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years. If you take a Rs 50 lakh loan for 25 years, you will pay Rs 83.5 lakh (or 167%) in interest alone. "Taking a loan is negative compounding. The longer the tenure, the higher is the compound interest that the bank earns from you," warns financial trainer P.V. Subramanyam. Ten golden rules to follow when taking a loan Sometimes, it may be necessary to go for a longer tenure. A young person with a low income won't be able to borrow enough if the tenure is 10 years. He will have to increase the tenure so that the EMI fits his pocket. For such borrowers, the best option is to increase the EMI amount every year in line with an increase in the income. Increasing the EMI amount can have a dramatic impact on the loan tenure. Assuming that the borrower's income will rise 8-10% every year, increasing the EMI in the same proportion should not be very difficult. If a person takes a loan of Rs 50 lakh at 10% for 20 years, his EMI will be Rs 48,251. If he increases the EMI every year by 5%, the loan gets paid off in less than 12 years. If he tightens the belt and increases the EMI by 10% every year, he would pay off the loan in just nine years and three months. 3. ENSURE TIMELY AND REGULAR REPAYMENT It pays to be disciplined, especially when it comes to repayment of dues. Whether it is a short-term debt like a credit card bill or a long-term loan for your house, make sure you don't miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life. Never miss a loan EMI, even if it means missing other investments for the time. In an emergency, prioritise your dues. You must take care never to miss your credit card payments because you will not only be slapped with a non-payment penalty but also be charged a hefty interest on the unpaid amount. Ten golden rules to follow when taking a loan If you don't have the money to pay the entire credit card bill, pay the minimum 5% and roll over the balance. But don't make a habit of this because at an interest rate of 24-36%, credit card debt is the costliest loan you will ever take. To avoid missing the due date every month, just give standing instructions to your bank to pay the minimum 5% amount whenever the bill is due. 4. DON'T BORROW TO SPLURGE OR INVEST This is also one of the basic rules of investing. Never use borrowed money to invest. Ultra-safe investments like fixed deposits and bonds won't be able to match the rate of interest you pay on the loan. And investments that offer higher returns, such as equities, are too volatile. If the markets decline, you will not only suffer losses but will be strapped with an EMI as well. There was a time when real estate was a very cost-effective investment. Housing loans were available for 7-8% and real estate prices were rising 15-20%. So it made a lot of sense to buy a property with a cheap loan. Now the tables have turned. Home loans now cost around 10% while property prices are rising by barely 4-5%. In some pockets they have even declined in the past 1-2 years. Ten golden rules to follow when taking a loan Similarly, avoid taking a loan for discretionary spending. You may be getting SMSs from your credit card company for a travel loan, but such wants are better fulfilled by saving up. "It's not a good idea to take a personal loan for buying luxury watches and high-end bags," says Vineet Jain, founder of If you must go on a holiday, throw a lavish party or indulge in some luxury shopping, start saving now. On the other hand, taking a loan for building an asset makes eminent sense. Mumbaibased Sandeep Yadav and his wife junked their plans to go on a foreign holiday and instead used the money for the downpayment of their house. This way they managed to bring down the overall loan requirement for the house. 5. TAKE INSURANCE WITH BIG-TICKET LOANS If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependents are unable to pay the EMI. A term insurance plan of Rs 50 lakh will not cost you too much. Typically, banks push a reducing cover term plan that offers insurance equal to the outstanding amount. However, a regular term plan is a better way to cover this liability. It can continue even after the loan is repaid or if you switch to another lender. Ten golden rules to follow when taking a loan Moreover, insurance policies that are linked to a loan are often single premium plans. These are not as cost effective as regular payment plans. If a lender forces you to buy an insurance plan that is linked to the loan, take up the matter with the banking ombudsmen and the insurance regulator. 6. KEEP SHOPPING FOR BETTER RATES A long-term mortgage should never be a sign-and-forget exercise. Keep your eyes and ears open about the new rules and changes in interest rates. The RBI is planning to change the base rate formula, which could change the way your bank calibrates its lending rates. Keep shopping around for the best rate and switch to a cheaper loan if possible. However, the difference should be at least 2 percentage points, otherwise the prepayment penalty on the old loan and processing charges of the new loan will eat into the gains from the switch. Ten golden rules to follow when taking a loan Also, switching will be more beneficial if done early in the loan tenure. Suppose you have a loan at 11.75% and are being offered a new rate of 9.9%. You can save up to 52 EMIs if the loan still has 18 years to go. But if the loan only has five more years to go, the new loan tenure will be only three EMIs shorter. The same applies to prepayment of loans. The earlier you do it, the bigger is the impact on the loan tenure. The RBI does not allow banks to levy a prepayment penalty on housing loans but they may levy a penalty on other loans. Some lenders do not charge a prepayment penalty if the amount paid does not exceed 25% of the outstanding amount at the beginning of the year. 7. UNDERSTAND THE FINE PRINT Loan documents don't make for light reading. Paragraph after paragraph of legalese printed in a small font can be a put off. Yet, read the terms and conditions carefully to avoid unpleasant surprises. Bengaluru-based Subhash Shetty applied for a personal loan of Rs 1 lakh but received a cheque of only Rs 91,800. The lender had deducted Rs 5,152 as an upfront interest charge and an annual insurance premium of Rs 3,047. Ten golden rules to follow when taking a loan Ten golden rules to follow when taking a loan Shetty had signed on the papers without going into the fine print. Some lenders are notorious for slipping in clauses that are loaded against the borrower. If you are unable to understand the legalese, get a financial advisor or chartered accountant to take a look at the agreement before you sign it. 8. SUBSTITUTE HIGH COST LOANS If you have too many loans running, it's a good idea to consolidate your debts under one omnibus low-cost loan. Make a list of all outstanding loans and identify the high cost ones that can be replaced with cheaper loans (see table). For instance, an unsecured personal loan that charges 18-20% can be replaced with a loan against life insurance policies. A loan against property can be used to repay all other outstanding loans. You could also consider other options like gold loans and loan against bank deposits. It is also a good idea to prepay costly loans as soon as possible. Divert windfall gains, such as annual performance bonus, tax refunds and maturity proceeds from life insurance policies towards repayment of these high-cost loans. Ten golden rules to follow when taking a loan Borrowers sometimes avoid ending loans because they offer tax benefits. If a house is self-occupied, up to Rs 2 lakh interest paid on a home loan can be claimed as a tax deduction. If the house is given out on rent, the entire interest paid can be claimed as deduction. In case of education loans, the entire interest paid on the loan is tax deductible for up to eight years. But this tax benefit alone should not be the reason to keep a loan running. True, the tax benefits bring down the effective cost of the loan. But you are still incurring an expense that can be avoided by ending the loan as soon as possible. Unless the money can earn you a better return than the effective cost of the loan, use it to prepay the outstanding sum. 9. DON'T NIX RETIREMENT BY AVOIDING LOANS Indians are emotional about certain financial goals, especially when these relate to children. Given a choice, no parent would want to burden their children with a loan, especially for the purpose of education. While securing your child's future is important, you need to also assess if it impacts your own future. Ten golden rules to follow when taking a loan Ten golden rules to follow when taking a loan Dipping into your retirement corpus to fund your child's education can be a risky proposition. Students have options like loans and scholarships to cover their education costs but there is no such arrangement to help you plan for your retirement needs. Your retirement is as important as your child's education, perhaps even more. Do not plan for your children in isolation. Let all your goals be a part of your expense planning, it will help you balance better. 10. KEEP SPOUSE, FAMILY IN LOOP ABOUT LOAN Before you take a loan, discuss it with your family. This is important because the repayment will impact the overall finances of the entire household. Make sure your spouse is aware of the loan and the reasons for taking it. Ten golden rules to follow when taking a loan Keeping a spouse in the dark on money matters not only increases stress in a marriage but also precludes your chances of finding a more cost effective solution. Maybe your wife (or husband) has some spare money which can help you avoid taking the loan altogether. Don't miss out on that opportunity by keeping your need under wraps.
Author : Economic Times Posted Date : Wednesday, September 16, 2015
Title : Cibil to detect duplicate death claims under the Pradhan Mantri Jeevan Jyoti Bima Yojana
KOLKATA: The Life Insurance Council has engaged Credit Information Bureau (India) Ltd or Cibil to detect duplication of death claims under the Prime Minister Narendra Modi's new social security scheme. Banks have sold a massive 2.5 crore policies under the Pradham Mantri Jeevan Jyoti Bima Yojana since May and have already received 44 death claims. V Manickam, secretary general of Life Insurance Council said. The scheme offers Rs 2 lakh assurance in the event of death for merely Rs 330 annual premium. According to industry experts, there is a possibility that several customers bought policies from many banks and therefore the need to check duplicate claims arises. "The ministry of finance directed us to find a partner to detect duplication of policies. We thought Cibil would be the right one," Manickam said. "Our mandate is to make a repository of the death claims," Cibil managing director Arun Thukral told ET. "As and when death claims happen, the data will start feeding in." Cibil has built a database of 40 crore bank customers, 2.3 crore commercial loans and one crore mortgage repository data. "Cibil is equipped to accessing insurance policy holders data and using them for the benefit of insurance companies," Cibil chairman MV Nair said. The lobby group for life insurance companies is also planning a bigger fraud monitoring framework for its members. "We are in the process of shortlisting a vendor who will build a database aiming to provide a fraud monitoring framework", Manickam said on the sidelines of Indian Chamber of Commerce event in Kolkata. A meeting is slated next week to finalise the terms of reference, he added. The mechanism would help insurance companies get details of customers and detect fraudulent claims.
Author : Economic Times Posted Date : Monday, August 31, 2015
Title : CIBIL to include Mobile Payment in its Credit Score Report
What is CIBIL? CIBIL is Credit Information Bureau of India Limited, which acts like a central repository of credit information in India. As many as 500 different banks and financial institutions are CIBIL’s clients and they report each of their customers (like me and you) actions to them. So if you take a credit card from HDFC Bank, then HDFC bank reports to CIBIL about it. If you enquire about car loan to ICICI Bank, even that enquiry is reported to CIBIL, if you can’t pay your EMI for home loan with SBI Bank for a particular month, that also gets reported to CIBIL. CIBIL to include Mobile Payment in its Credit Score Report Cibil issues a numerical score out of 900, which indicates a customer’s payments history of loans. This score is issued to banks that need to know financial history of a prospective borrower. Only the persons with good credit score can easily get Housing loan. And now if you default on your mobile bill and you may soon become ineligible for a home loan or a car loan. Non-payment of telephone bills will also rule out the possibilities of getting a new credit card or even another mobile number. CIBIL is trying to link the telecom utility payment history to the banking and financial records of customers and make it available as a Cibil record to banks and other financial institutions. And CIBIL is now looking at adding telecom bill payments of post-paid customers, landline users and broadband subscribers as a weightage in that Cibil score. Once the tie-ups with telcos are in place, Banks such as ICICI, HDFC, SBI and others may see an individual’s phone bill payment history to deny or approve a car, credit card or housing loan. The database can also be used by a telecom service provider when issuing a post-paid number to an individual. It will lower delinquencies and improve their quality of customers and helps the telcos in early identification of defaulter and fraudsters.
Author : Posted Date : Monday, August 31, 2015
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