The smart borrower…

As a smart borrower make sure you are taking the loan for the right reasons. Don’t borrow just because the interest rate is attractive or you can claim tax benefits. Here are a few basic rules to keep in mind:

Take on an EMI only if you can afford it: A smart borrower will never bite off more than he can chew. Typically different types of loan EMIs should not be more than a proportion of your monthly income. Your total monthly EMI should never go above 50% of your monthly income. Don’t take into account your future income. Times are bad, and the 10% increment you may have based your projections on could actually be only 6% or even flat, if your industry goes into a tailspin.

Type of Loan Maximum proportion of monthly income (%)
Home Loan 40
Car Loan 15
Personal Loans 10
All Loans 50

Keep the tenure as short as possible: The longer the tenure, the bigger is the interest burden on the borrower. If you take a loan at 9.75% for 10 years, the interest outgo will be 57% of the principal amount. This figure jumps to 91% if the tenure is 15 years and shoots up to 128% for a 20-year loan. In 25 years, the interest outgo is 167% of the principal. Borrowers are tempted to go for long term loans because the EMI is lower and they enjoy tax benefits on the loan. But this is a misconceived strategy because they end up paying a huge interest on the loan.

Take a simple term plan for big ticket loans like home loans: Banks usually try to push customers to buy a reducing cover term plan that covers the outstanding amount. However, a regular term plan is a better option because it continues even after the loan is repaid or if the borrower switches to another lender. Also, insurance policies linked to a loan are typically single premium plans. Regular payment plans are the best way to insure yourself.

Retirement corpus vs child’s education: Don’t dip into your retirement corpus to fund your child’s education. Education loans are easily available and bright students also get scholarships. But nobody is going to give you a loan for your retirement needs. Taking an education loan will not only keep your retirement kitty safe, but also inculcate a sense of fiscal responsibility in the child, who has to repay it. What’s more, education loans also offer tax breaks so the effective cost of the loan comes down.

Increase the EMI gradually to reduce loan tenure: This is the best way to repay say a 25 year loan in 10 years. For example:

Hike EMI by 10% every year Loan ends is in 10 years 2 months
Hike EMI by 5% every year Loan ends in 13 years 3 months
Pay one extra EMI every year Loan ends in 19 years 3 months
If EMI remains constant Loan ends in 25 years

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Save taxes with a Home Loan…

Owning your own house is every man’s dream. It is a necessity & nothing beats it if you can also save some taxes in the process. Buyers can claim income tax deduction on both the principal repayment & the interest payment under different sections of the IT Act.

Tax Deduction on home loan Interest: (Section 24): The EMI of a home loan is divided into 2 parts, interest payment & principal repayment; Home buyers can claim a deduction of up to Rs.2 lakhs on the interest payment component if the owner or his family members resides in the house property.

Tax Deduction on principal repayment: (Section 80C): Home buyers can claim deduction on principal repayment for up to Rs.1.5 lakhs. One thing to keep in mind is that that property should not be sold within 5 years of possession or else the deductions claimed earlier will be reversed in the year of sale.

Tax Deduction for Stamp Duty & Registration charges: (Section 80C): Home buyers can also claim deduction for stamp duty & registration charges within the overall limit of Rs.1.5 lakhs. These can be claimed only in the year in which the expenses are paid.

Tax Deduction for 1st time home buyers: (Section 80EE): This section was recently added to the income tax act providing 1st time home buyers tax benefit upto Rs.50000. The cost of the home loan should be less than Rs.50 lakhs.

With home loan interest rates at near all-time lows and numerous benefits being offered by developers this can be a good time to invest in a new home for you.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

EPF withdrawal for home purchase – Avoid if possible

The Employees’ Provident Fund Organization (EPFO) recently relaxed its norms to allow subscribers to withdraw up to 90% of the total accumulated corpus for purchase of a home. But we must remember that EPF is long-term savings for retirement and it is not advisable to dig into the retirement funds unless and until there is a dire need of it. Currently SBI offers home loans at 8.5% to 8.65% (50-65 bps above 1 year MCLR of 8.00%) which is similar/marginally lower than the 8.65% offered by EPFO. Refer link- MCLR vs Base Rate for your home loan. Thus EPF withdrawal for home purchase should be one of the last options availed.
Amongst different debt investment options, EPF offers one of the highest post tax returns on investments at 8.65% per annum. Currently this would be significantly higher than bank FDs and PPF amongst others. Thus it should be touched only when all other debt resources have been exhausted. In fact if it is the only resource left it should not be touched keeping in mind one’s retirement needs. Current MCLR rates home loan rates offered by banks would be similar to interest rates offered by EPF. Thus it would make sense to take a home loan rather than dig into your EPF fund. Equity funds are expected to give significantly higher returns of 14-16% but returns are not guaranteed.
EPF withdrawals or loans against the corpus have been fairly relaxed leading to EPF being used as just an accumulation tool rather a pension/retirement corpus. But one should keep in mind the different investment goals for different investment avenues and refrain to the extent possible from using their retirement kitty for life specific needs such as housing, children’s education and having a decent retirement corpus.
Creating a retirement corpus to the quantum of around 20-25 years of current annual expenses is critical to take care of the growing life expectancy and inflation. How much a person needs to save has already been discussed by me in a previous article- How much should one invest for a comfortable retirement today. Only the incremental surplus above the retirement corpus required should be used for other needs.
Under the new withdrawal norm, an EPF subscriber who is a member of a co-operative or housing society with at least 10 members can withdraw up to 90% from the fund for purchase of a dwelling house or flat or construction of a dwelling house and acquisition of site. The employee has to be a member of EPFO for at least three years and accumulation in the member’s PF account (or together with the spouse), including the interest, has to be more than Rs 20,000. The facility will be provided only once.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Unable to get a loan? Improve your Credit Score…

If you are planning to take a loan to purchase a house, a car or a high-priced consumer good one of the first things you should do is to check your credit score to know the chances of a loan being sanctioned or rejected by the lender.
Credit score reflects one’s creditworthiness which depends on various factors including your past history of loan default. The score is arrived at by credit bureaus on the basis of data made available by lending institutions every month. On an average, credit scores range from 300 to 900 though a majority of the loans are offered to people whose credit score is higher than 750.
The gradation is as follows:
Above 800 – Excellent
Between 750 and 800 – Good
Between 700 and 750- Fair
Between 650 and 700- Poor
But, what if your credit score is low leading to loan rejection? You need to take immediate steps to improve your score so that loan applications in future sail through. Some of them are:
1. Do not repeat past mistakes to ensure that you do not default again.
2. Make use of credit prudently: As long as the sum of your EMIs does not exceed 50% of your take home salary, most banks are open to giving you a loan though you must stick to a prudent limit of restricting all EMI and credit card payments to 30% of your take home salary.
3. Don’t display credit hunger: If you make use of credit cards, it’s best to curtail its usage up to 40% of the credit limit allowed on the card.
4. Get errors rectified: Low credit scores can, at times, be a result of errors in the records of lending institutions. A loan might have been paid off but its records might not have been updated in the lender’s books or you might have become a victim of identity fraud.
5. Pay your bills in full: It is best to pay your entire credit card, electricity & phone bill every time before the due date. If you cannot pay the entire amount for whatever reasons, try to pay as much as possible and not just the minimum amount.
6. Don’t close old accounts: Old loans and credit cards with good repayment history prove that you have been using a loan or credit card for a long time and are good at paying your EMIs on time.
7. Don’t randomly apply for fresh credit: Each time you apply for a loan or credit card, the bank raises a query for your credit history. Such frequent requests give the impression of being credit-hungry and can bring down your score.
8. Boost your card limit: A low credit limit on your card with high utilization does not present a very impressive picture. On the contrary, if you increase your credit limit and use a lower amount it would bolster your credit score.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Availing a personal loan for repaying outstanding credit card debt

Now a days credit cards are an essential part of our daily living. They allow quick access to emergency credit, provide an interest-free period of 20–55 days and also help improve our credit score if used properly. In addition they also offer benefits like cash back, reward points, air miles etc.
The problem starts when we start using credit cards to finance our lifestyle needs in an undisciplined manner. You start spending more than what you can afford and fail to repay your total dues on time. With your outstanding balance attracting interest rate of 22–48% p.a., it reaches a point where even the payment of ‘minimum amount due’ becomes difficult. You find yourself in what is known as the classic example of a ‘debt trap’ where the only solution is to avail a lower-cost loan option to repay your credit card debt. Of the various types of re-financing loans available, personal loan is one of the most convenient and relatively cheaper options. Some of the features are:
Low interest rates: Personal loans in India charge significantly lower interest rates than credit cards. While your credit card balance will attract an interest rate of 22–48% p.a., personal loan interest rates will vary between 12–16%. A lower interest rate not only reduces your overall payable interest cost, it also helps in faster debt repayment.
Consolidate several debts under one head: Managing outstanding balances of two or more credit cards can be a difficult task, especially as you fail to keep track of multiple due dates and outstanding balances. Taking a personal loan will allow you to pay off multiple credit card balances at one go and replace them under a single debt head. This will eliminate the hassle for remembering multiple due dates and making repayments of multiple dues.
Quick disbursal: Personal loans have one of the fastest disbursal procedures among all loan options. While some banks claim to disburse personal loans within 2 days, most personal loans are disbursed within a week if documentation and eligibility conditions are easily met.
Comfortable repayment options: Unlike credit cards where the entire outstanding dues have to be paid within the due date to avoid interest cost and penalties, personal loans allow you to spread your repayment over 1–5 years through monthly EMIs.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

The Insolvency and Bankruptcy Code

There has been a lot of action relating to NPA resolution, a contentious issue for some time now the latest being the Insolvency and Bankruptcy Code (IBC), an Act which helps troubled corporates, partnership firms and individuals in debt to re-organise and opt for insolvency resolution in a time-bound manner to maximize value of its assets.
The IBC, passed by the Parliament on 11th May 2016, received Presidential assent on 28th May 2016 and was notified in the official gazette on the same day.
The IBC process

 

Application on defaultAny creditor(s) can apply for insolvency on corporates that default on debt or interest payment. These are referred to the National Company Law Tribunal (NCLT) on priority under the IBC.
Appointment of Insolvency Professional (IP) An IP is to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company along with the control and power from the company’s Board of Directors. IP shall have immunity from criminal prosecution and any other liability for anything done in good faith.
Moratorium period The IP gets 180 days (six months) to come up with a workable solution for the company to enable it to repay its loans. The period can be extended by another 90 days. No action can be taken against the company or its assets during these 270 days or the 9-month period. The key focus of the IP will be running the Company on going-concern basis. A resolution plan will have to be prepared and approved by the Committee of creditors.
Credit committeeA credit committee comprising creditors will be constituted. Related party will be excluded from the committee. Each creditor will vote according to voting share assigned. Any plan of resolution can be implemented only if 75% of creditors approve it.
LiquidationIf the company under the IP fails to come up with a solution within the 270 days, a liquidator will be appointed and all the assets will be liquidated to repay the debt. The company also goes into liquidation if 75% of the creditors do not come to a conclusion on likely resolution.


Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Shift from Base Rate to MCLR based home loan

Home loan rate for new borrowers after 1st April 2016, linked to 1 year MCLR have come down drastically in the last 1 year. But borrowers who are under the Base Rate (loan taken prior to 1st April 2016) regime having seen their interest rates fall by a significantly lower amount. They will benefit by switching to the MCLR regime.
While most banks charge a percentage of loan outstanding as switching fees, some charge a flat fee in addition to the applicable service tax. As a first step one should translate the flat fee including service tax to a percentage of outstanding loan amount, and compare the difference between MCLR rate and base rate. For example if the fees charged by the bank including service tax is Rs.7500 for an Rs.20 lakhs outstanding loan amount then it works out to 0.375%. Now if the base rate is higher than the MCLR by significantly more than 0.375% it is a straightforward case for a switch. Even if the switching fee is slightly higher than the difference, it still makes sense to switch as the fees is a one-time payment while the benefit from reduced rates will be spread over the entire outstanding loan repayment tenure. It is also possible that the difference may not be thereafter 1 year, so conservatively it is better to calculate with one year in mind only. Currently the difference between MCLR and base rate is anywhere between 100-120 bps for a 1 year MCLR for different banks while difference in home loan rate would be 50-70 bps as home loan rates are a mark up on MCLR.
If your bank is unwilling to reduce your rates or charging high switching fees, you may consider shifting to another lender offering better rates. Generally if customers threaten to shift the loan to another lender, the lender agrees to switch at a nominal fee.

One should note that MCLR & Base Rate are based on different calculations and the gap may decrease in the future. There could be a further drop in base rate in the near future. MCLR would also be more sensitive to rate movements announced by RBI and thus if there is a spurt in short term rates, the MCLR will move up at a faster pace than base rate, just the reverse of what is happening now. Banks generally follow 1 year MCLR for home loans, which means once set (say in May 2017), the MCLR will again be reset after 1 year (in May 2018). Thus even if there is an increase in MCLR after 3-4 months the home loan rate set will not be impacted. Thus as stated above we can safely calculate the difference on the one year difference in rates currently and shift our home loan from base rate to MCLR if calculations work favorably.

For insights on MCLR vs Base Rate refer to my older article. Link: MCLR vs Base Rate for your home loan

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’