Query corner: Loans

Our expert guides you in matters relating to banking & finance.

Operating bank lockers of ailing parents
My parents had a locker in Bank of India for more than 30 years. We shifted to another city around 12 years ago and my parents did not access the locker during the period because of ill health. My mother passed away recently and my father has serious health problems. Since I am their only child, can you please advise me on how to get legal permission to operate the account.
S Segal

Since we do not know whether there was a nomination for the locker, you can refer to the Reserve Bank of India (RBI) guidelines. RBI states that when both or all the joint locker hirer(s) die and where there is nomination, access to the locker may be given to the nominee(s). In such cases, a death certificate and identification proof of the nominee(s) are the only documents that are required. In case where there is no nominee/s, access to the locker may be given jointly to the legal heirs of all the deceased hirers (or the executor/administrator if appointed). In such cases, only a death certificate and proof of legal representation need to be submitted to the banker. You may approach your banker and he will certainly help you to resolve the issue.

No interest on closure of HUF PPF account
The State Bank of India’s (SBI) Parliament Street branch in New Delhi has refused to pay interest on a public provident fund (PPF) account opened on behalf of a Hindu undivided family (HUF) after a recent government circular quoted RBI’s directive that PPF HUF accounts cannot be further extended from May 13, 2005. I have a PPF account which was extended in 2004 up to March 31, 2009. SBI has credited interest on March 31, 2010 for the FY10. It has informed me that it will deduct the interest amount after the maturity period while making the payment on closing the account. Can SBI refuse to pay any interest after expiry of the maturity period even though a huge amount is lying in my PPF HUF account?
Harish Chander Sahni

While you are aware about the notification dated May 13, 2005, it is also necessary to know what has transpired thereafter. In terms of Notification RBI/2004-05/480Ref.No.CO.DT.15.02.001/H-9844-9866/2004-05 dated 25-05-2005, it was clarified that existing accounts opened in accordance with the rules in operation prior to the amendments dated May 13, 2005 shall continue till maturity and deposits/withdrawals in/from these accounts shall be allowed to be made in accordance with the said rules. However, any extension of existing accounts shall be subject to the amendments dated May 13, 2005. Since no further extension can be granted, it is further clarified that accounts should be closed and the deposits refunded without any interest to the depositors. In view of this, the stand taken by SBI is correct.

Credit card fraud by bank’s reresentative
I had applied for a credit card of an MNC bank at a fair organised by my company. To my shock, the bank executive, who collected the form, fabricated all the important details and used the card to spend over `5 lakh. The card is in my name, but all the details like address and cell number were fabricated. I came to know of the fraud when the bank contacted me for the payment dues. I lodged a complaint with the bank. More than 10 days have passed, but the bank has only contacted me once for casual enquiry. I’m worried. What should I do?
Michael

This is a fraud committed by the representative of the credit card issuer. You should immediately lodge an FIR, giving the details so that the investigation will throw light and find out if others have suffered in a similar fashion. Write to the bank’s nodal officer enclosing a copy of the FIR and specifically, stating that you have neither received nor acknowledged receipt of card. The credit card issuer may have indicated the utilisation of card at certain shops/cash withdrawals at ATMs etc. After checking the details, file a dispute form. Also, ask the bank to block the card/cancel it forthwith. You may have to wait for some time before the issue gets resolved. If at all it gets resolved soon, you need to check the CIBIL report to find out that your name does not appear as a defaulter. If it does, then you need to take up the matter again for a clean report.

A certain amount of money was deposited jointly for fixed deposit (FD) in UBI on May 7, 2007 with the instruction that the maturity amount will be payable on a ‘either or survivor’ basis. The FD matured on May 7, 2010 and the original fixed deposit receipt or certificate is in possession of the second depositor. On maturity, the second depositor instructed the officer-in-charge to credit the entire maturity amount to his savings account of the same branch of the bank. The officer rejected the request saying that the amount could not be credited to the second depositor’s account and that it would only go to first depositor’s savings account. Please suggest a legal or administrative remedy.
Kousik Adhikari

Unless there’s a dispute and/or there is a court order restraining the bank to pay money to the second depositor, the bank cannot withhold payment to the second depositor. A fixed deposit in the joint names of two persons is nothing but a joint account which, as the name itself suggests, is repayable on the expiration of the agreed period. An ‘either or survivor’ clause in such an account means that the amount payable by the bank on maturity of the fixed deposit may be paid to either of the account holders by the bank. Kindly bring this aspect to the notice of the bank. If the branch authorities are not acting upon the instructions of the second depositor, take up the matter with bank’s nodal officer.

30 Sep, 2010, 05.26AM IST, VN Kulkarni

Rent & invest your way to a new house

Now is the time to buy the house. This ancient pearl of wisdom, it seems, is fast losing currency these days among home buyers in big cities. With property prices almost hitting stratospheric levels and interest rate showing signs of inching upwards, manqy potential buyers have given up plans to buy a home immediately. Most of them are also a bit wary of huge EMIs that could consume more than half of their income. And, it’s not because they don’t want to compromise on their lifestyle. The scary spectacle of job losses during the economic downturn has made many people look at their monthly outgo towards repaying various debts they have accumulated over the years.

Ramesh Iyer, a marketing executive, was all set to buy a house a year ago, just before his marriage. His idea was to buy a flat close to his parents and brother in Andheri, a western suburb in Mumbai. However, when he started looking for a flat, he found that the prices were much higher than he had imagined. His brother bought a flat in the same vicinity five years ago for `30 lakh, but now the price for a similar house was more than twice the amount. That is when he decided to abandon the idea of buying a flat. “I wasn’t comfortable with the idea of a huge EMI.

Even after including my wife’s income, we would be just scraping through our monthly budget. I wasn’t prepared to live like that in the first few years of my marriage,” he says. He rented a house in the same locality for `15,000. He plans to invest as much as he can for the next five years and build a large corpus for the down payment which, he believes, will bring down the to a comfortable level.

Rajesh Sharma, an HRD professional, prefers to stay on rent for a totally different reason. He has been staying in and around the city centre in Mumbai for the past seven years. He says he just can’t think of moving to any suburb. “I always get this free gyan that I should move to the suburbs and start saving money for a house. Everyone points out the futility of paying around `30,000 per month, but I tell them I don’t mind it,” he says. He says he knows he can’t afford to buy a place in South Mumbai. “It would cost at least a crore. I can’t imagine ever having that kind of money, but I can afford to pay the rent. As long as I can do that, I will stay here.”

In fact, many people are quietly abandoning their plans to buy a place of their liking because of similar reasons. Even financial advisors are advising people not to rush with their house-buying plan if it stretches their finances beyond a point. Especially after the economic downturn and job losses, advisors are asking their clients to be mindful about the liabilities they want to take. “It is true that people are not ready to buy houses at the current prices.

If you look at the sales figures in large cities, you will realise that there is very little buying happening,” says D Sundararajan, investment consultant, Trendy Investments, a private wealth management firm in Mumbai. “It is true that earlier everyone was encouraged to buy a house immediately because of sentimental reasons and the tax advantage. But these days the idea does not work because of very high property prices,” he adds.

Financial experts also say that most individuals find it difficult to take care of huge EMIs because they already have several other EMIs — car, LCD, home theatre and so on — to service every month. “Earlier, most people would have a maximum of two EMIs for a house and car. These days it is not the case. Some of my clients have many EMIs for various tenures. They also run up huge credit card bills every month... mostly, our first effort is to clean up the debt before getting into savings and investment advice,” says a wealth manager, who declined to be named.

Sundararajan also says that people are happy enjoying the tax breaks on rent. “If your house rent allowance is 50% of your basic salary, with some planning you can get tax benefit on your entire HRA amount,” he says. Then there is also the concept of ‘cheaper rent.’ Sure, rentals have gone up lately, but if you look at the figure in relation with the capital value of the property, it is still very negligible. “It’s hardly 4-5% of the capital value,” says Sundararajan.

That brings us to most people’s idea about “aggressively” investing the difference between the possible EMIs minus the rent and build a huge corpus to make a big enough down payment to bring down the EMIs to a reasonable level. (Some experts believe your EMI should never be more than 30% of the income, but these days people seem to be comfortable with even 50% and above) For example, Ramesh Iyer is planning to invest the difference between his EMI (had he bought a house) and the rent in a mutual fund scheme through a systematic investment plan. (see table) The exercise, he believes, will help him create a corpus in a few years, which he can use to make a down payment to bring down his EMI eventually. He is also hopeful that he can take advantage of a price correction sometime in future.

However, stock market pundits want investors to have realistic expectations from the stock market. “When we are speaking about higher returns, the choice is always the stock market. But the market is at a very high level. The upside from here can’t be very quick,” says a wealth manager with a bank. “Sure, the market can still touch a historical high, but one should proceed with caution.” Sundararajan says investors should aggressively save and then invest a part of it regularly in the stock market.

“One should not invest money in a large chunk at the current level. It should be systematic investment plans (SIP) in three or four different mutual fund schemes. You should also have different dates for the SIPs,” he says.

However, if you are postponing your plan to buy a house, you should be prepared for a few possible scenarios. The real estate market always defies logic — you can almost never predict the correction in prices, especially in Mumbai and Delhi. Also, there are chances that prices would have moved up when you are ready with your corpus for the down payment. “The idea of building a corpus and buying the property when there is a correction of 20-25%, which I think is highly possible, is sound. But the only problem is that nobody can predict the property market,” says Sundararajan.

17 Sep, 2010, 04.03AM IST,ET Bureau

Taking a home loan insurance can save dependents from the burden of debt

Buying a house is the high point in the life of an average Indian. However, seldom he or she realises that the most-coveted asset comes at a huge price and is a very large long-term liability in the account book.

If something happens to the borrower, especially if on the death of the breadwinner of the family, the dependents are left shouldering the burden of debt, in addition to grappling with the loss of the breadwinner’s income. A failure to repay the loan could mean having to deal with the threat of the bank repossessing the property, resulting in possible eviction — an eventuality one certainly wants to avoid.

Enter loan insurance covers, which are specifically designed to cover such risks. Home loan insurance, or mortgage covers, are similar to simple term plans, but unlike the latter, these policies offer a reducing sum assured; that is, the cover diminishes in congruence with the amount owed to the lending institution.

Generally, these are single premium policies with the lender funding the amount, which is to be repaid by the borrower as part of the equated monthly installments (EMI).

However, you need to bear in mind that while covering your liabilities is extremely critical, mortgage cover is by no means the only way of achieving this end. You can always look at a simple term plan with sum assured large enough to cover your liabilities and replace your income. Term insurance rates have been falling; also, the cover remains constant, unlike where the sum assured goes down along with the amount repayable. But in absolute terms, a home loan cover will be cheaper than term insurance.

Therefore, you need to take a call on the basis of your needs – if you already have say a Ulip or an endowment plan in place before taking the loan, you can choose to go with a mortgage cover; else, a term cover should do the job.

21 Sep, 2010, 04.12AM IST,ET Bureau

Stay alert on your home-loan hunt

The window-dressing is perfect. Over-zealous executives of property developers, as well as banks and housing finance companies (HFCs), are falling all over one another to vie for your attention in the biggest festive season of the year. Several banks have already decided to put off raising their base rates to avoid losing prospective buyers. However, shut out the cheerful chatter and make sure that you don’t get carried away by the promotional offers of getting the moon to your balcony. Take some time off and talk to your friends and gym buddies and you will soon get to know that many people fall prey to such promotional offers every year in search of an auspicious date. Here’s how you can avoid such misadventures.

Avoid Teasers: After floating, teaser is the new term that has entered the lexicon of home hunters. Banks hate to use the term ‘teaser rate’ and prefer to call such loans special schemes, but you have to be careful about these special offerings. These schemes, typically offer the fixed interest rate (slightly lower than the prevailing market rate) during the initial years, say, two or three years. The rate may get linked to market rates once the initial honeymoon period is over.

While the ‘special’ rates could indeed ensure huge savings on your equated monthly instalment (EMI) outgo in the first few years, be prepared to shell out more once the market-linked rates kick in later. Remember, a housing loan has a lengthy repayment period and if an increase in rates pushes up your to unmanageable levels, you could land yourself in a debt trap. The scoop: Don’t take long-term decisions merely on the basis of prevailing attractive interest rates.

Switch To The Base Rate: This one’s applicable to old, or existing, borrowers with floating rate loans who, for years, have been crying themselves hoarse about the step-motherly treatment meted out to them. In the past, there have been complaints that banks resist passing on the benefits of a benign interest rate regime to existing borrowers, but they don’t hesitate to lure new borrowers with lower rates. The banks, however, never hesitate from raising rates for the old borrowers when the interest rates in the system inch upwards.

As an antidote for these problems, the (RBI) came up with the mechanism aimed at bringing in more transparent loan pricing and consequently, a fair treatment to existing borrowers. Under the new regime, which replaced the benchmark prime lending rate (BPLR) system from July 1, banks are required to review their base rates at least once every quarter and ensure that any changes made are passed on to all classes of borrowers. Existing borrowers can choose to switch over to the base rate and the bank cannot levy any charges for facilitating the transfer.

While it remains to be seen if the new mechanism yields the desired results, many feel it is likely to fare better than the present system. “Some banks are yet to arrive at the rate linked to the base rate for existing borrowers or have not communicated with the branches in that regard. However, those borrowers who have a choice should certainly look at switching over to the base rate,” says VN Kulkarni, chief counsellor with the Bank of India-supported Abhay Credit Counselling Centre.

Don’t Borrow Beyond Means: This will perhaps rank as the most common mistake made by over-enthusiastic home seekers. Since a house is considered a prized asset, which is likely to be a once-in-a-lifetime purchase, many feel that overshooting the budget is justified. As a result, they tend to go for a three-BHK when their pocket permits only a two-BHK. Similarly, those constructing their house often stretch their budget to include luxury bathroom fittings, flooring or attractive false ceilings, which inflate the required loan amount. They often forget that once the EMI payments commence, the additional room or the plethora of amenities will turn out to be sources of uneasiness rather than providing any comfort to the home-owners.

Don’t Be Over-Optimistic: For a long time till disaster struck in 2008-09 in the form of global slowdown, employees in India had become accustomed to lucrative raises and bonuses every year. On the back of such hikes, many had signed up for housing loans, car loans and even personal loans; not to mention running huge credit card bills. Their optimism boomeranged when the job market tanked, leaving them with huge loans and little income to service them.

Rakesh Kataria (name changed) found himself caught in a similar situation last year. He was employed in the IT sector and had taken on a large home loan when the interest rates were low, assuming that his future increments would be capable of funding any increase in EMIs later. When the tide turned, the expected pay hike did not materialise, leaving him saddled with a huge debt. “Now, he has put in a request with his bank for extending the tenure, which is yet to be granted. The case demonstrates that it is always advisable to carefully assess your repayment capacity while applying for a loan. You should not make any assumptions, and determine your affordability on the basis of your current salary,” advises Kulkarni.

“This apart, those who buy a second home assume that the EMI payment will be funded by the rent it is expected to earn. If the house is an under-construction property and the work is not completed as per schedule, you could be in for serious trouble. If your house is not ready by the end of the moratorium period, you will have to start repaying the loan without the comfort of the rental income,” points out a senior official with an asset reconstruction company.

Stay Away From Additional Loans: No one’s ever satisfied with a house boasting of basic amenities or lacklustre painting carried out by the builder. Once the home buying part is done, borrowers happily lap up top-up loans offered by several banks for the purpose. While they are cheaper than personal loans, you should opt for them only if you are capable of repaying it. Funding high-cost debt like personal loans and credit cards along with your home loan will prove to be an uphill task once the repayment begins.

The right time to buy a house, it is often said, is when you can afford it. You will do well to hold on to this view as a guiding principle while embarking on a house-hunting drive to ensure that one of the most cherished dreams of an average Indian – owning a house – remains a positive experience.

1 Oct, 2010, 01.54AM IST, Preeti Kulkarni,ET Bureau

Home, Auto, Corporate loans likely to be dearer from January

AHMEDABAD: Banks are likely to raise the interest rates for home, auto and corporate loans in first quarter next year, owing to possible high cost of deposits, a top banker said here today.

"The way system is moving the banks are expected to raise their Benchmark Prime Lending Rates (BPLR) in January or first quarter of next year," CMD Dena Bank D L Rawal told reporters.

As per the new lending system, the banks do not lend below the minimum or base as directed by the RBI.

"Any hike in BPLR will thereby get refracted in lending rates," Rawal said adding so the interest rates for home, auto and corporate loans in first quarter are expected to go up.

"Bulk deposits which were available at 6 per cent when there was excess liquidity in system, are now available at 8.20 or 8.25 per cent for one year period, they are expected to reach nine per cent mark by March next year," he said.

In the case of retail deposits rates the cost has gone up by 25 to 75 basis points depending on the tenure of deposits, he said.

in mid-September had raised short term lending (Repo) rate by 0.25 percentage points to 6 per cent and borrowing (Reverse Repo) rate by 0.50 percentage points to five per cent to tame inflation.

"Any decision taken by the RBI takes 2-3 months time for transmission," Rawal said.

"Bankers are expecting a good credit off take from October onwards, so there could be some liquidity concerns thereafter and they are expected to go in for mobilisation of deposits in subsequent months," Rawal said.

"So when banks go in for mobilisation of deposit in November and December deposit rates are expected to go up by another 25 to 50 basis points, thereby making cost of deposits still higher for the banks," he said.

The banks had hiked the deposit interest rates in August and September, and another round of hike in these rates is now eminent in November and December as bankers will try and attract more deposits.

In December the bankers as a routine exercise calculate the cost of deposits and there upon decide the future operational strategy.

As of now there are no liquidity problems in system, but as the credit off take increases in October, there could be some pressure in the months of November and December on this front, he said.

28 Sep, 2010, 10.47PM IST,PTI  ET

Double check before sharing a home loan

Call it the heady feeling of togetherness or the impact of real estate prices that can make you giddy. Either way, most young couples are increasingly opting for joint housing loans. “Real estate prices, especially in the metros, have gone through the roof. You cannot think of owning a house unless you dip into both the incomes,” says Suresh Sadagopan, principal financial planner, Ladder 7 Financial Advisories. Sure, a joint housing loan offers a number of advantages such as a bigger loan amount, higher and so on. However, a joint loan also comes with its own complications.

Spouses Should Be Co-Owners

Just taking a joint loan (co-borrower in banker’s parlance) won’t make you eligible for tax breaks. Both of you can avail tax benefits on the home loan only if you are the co-owners of the property. Housing finance companies (HFCs) insist that the co-owners of the house must be co-borrowers, but they do not insist on the opposite. Co-borrowers, who are also co-owners, are eligible for tax rebates in the proportion of their share in the loan. It means a couple has to consider their individual repayment capacity while deciding the share of the loan. So, a husband and wife can have equal ownership but if their share of the loan is in the ratio of 60:40, the tax benefits would be shared in that proportion.

“You have to get a break up of the share of the loan on a stamp paper at the beginning itself to avoid tax complications,” says Vaibhav Sankla, executive director, Adroit. The maximum tax deduction available for a single borrower is `1.5 lakh. This deduction will apply to each borrower, taking the total possible deduction to `3 lakh. (please see table). Each borrower has to provide a copy of the borrower certificate to claim tax relief. The co-borrowers should enter a simple agreement on a `100-stamp paper. This agreement should contain the details of the ownership along with that of the home loan availed by the borrowing couple. A couple will need two copies of the certificate from the HFC and each spouse can submit copies of the certificates along with a copy of the agreement signed between the two, say our tax experts. However, experts point out that there are no clear guidelines on this matter. So, it is possible for either of the borrower to miss out on the tax rebate. In such cases, they can claim it as a refund while filing tax returns.

Managing The EMI

A couple cannot issue two cheques for servicing the same EMI due in a month as the internal systems of an HFC do not accept two cheques. One option is to service the EMI from a joint account. The second option is to share the number of instalments. For example, eight cheques in a year could be issued from the husband’s account, while the wife could issue for the rest of the period. Another option is that one spouse pays off the instalments and seeks reimbursement from the partner. However, tax experts say that this process could get highly cumbersome — both for the borrowers and the HFC.

What If The Spouse Does Not Earn?

The question arises especially when one of the co-owners does not have any income. In such instances, the other co-owner should enter into an agreement with the spouse, stating that the entire repayment is met only by one borrower’s income. This will ensure that you have 100% beneficial home ownership and consequently you can enjoy all tax benefits applicable to a single borrower.

Be Ready For Setbacks

As you have seen the advantages of a joint loan, it is time to be prepared for the setbacks as well. Couples could actually land into a financial mess if there is a job loss, forced sabbatical or even a divorce. For example, job losses and pay cuts were common in 2009. So if you had taken a loan prior to 2009, and found yourself a similar situation, you would have been helpless. Such episodes have made people ponder over such extreme scenarios before shouldering the responsibility of huge housing loans. “Whenever a borrower takes a housing loan, the house is mortgaged with the bank/housing finance company (HFC). If the borrower is unable to foot the EMIs, the bank will take the possession of the house. This not only leads to financial loss but also has an emotional impact on the borrower. Hence, single borrowers should not stretch their housing loan EMIs beyond 40% and double borrowers beyond 50% of their take home salary, adds Mr Sadagopan. Secondly, if you are planning for a child you may want to factor in a possibility that your spouse may be unable to resume work due to health reasons. Such couples should not take a housing loan, where it’s imperative for the wife to contribute towards repayment. Either make a conscious call of delaying the purchase or just borrow on a single income.

Also, it’s very important to strike a personal and financial compatibility before a joint investment. If for some unforeseen reason, the couple decides to part ways, then the house and the joint loan could be a tricky situation. Many couples have settled disputes amicably and either of them have paid off the other one’s share and taken possession of the house. But if both of them want to own the house and are unable to resolve amicably, things could take a legal twist.

Finally, before deciding on the big purchase you also have to decide if this town is where you want to settle. For example, if you and your spouse put all you hard-worked earnings into a house in Mumbai and either of you have to relocate to Bangalore, it will just add to your expenses. “Both of them have to foot the EMIs as well as pay a rent in the new city. And if the transition is from a cheaper town to an expensive city, it leads to a tight cash flow situation,” Mr Sadagopan adds.

Does that mean you shouldn’t buy a house because of a possible transfer or relocation in future? You can always buy a house but as permitted by a single income. Secondly, if you are always on the move and uncertain on where you want to drop the anchor, invest in a house closer to either of your parents. They will be able to maintain the house or even take possession, if required. You can give the power of attorney to them which will enable them to carry out the required procedures in your absence.

(Article Published 30 Sep, 2010, 06.01AM IST, Vidyalaxmi,ET Bureau)