Banks discourage customers from taking personal loans

In January this year the central bank imposed higher provisioning norms on personal loans due to this state-owned banks are discouraging retail customers from taking personal loans in spite of slowdown in loan growth and abundant liquidity.

There has been a growth in personal loans over the past few years, along with a rise in earnings of the organized workforce in a buoyant economy. But, once the Reserve Bank of India’s norms on provisioning kicked in, banks had to set aside 2% as standard provision on personal loans. According to this norm for each personal loan of Rs 100 which is treated as a standard loan, banks have to set aside Rs 2 as a provision. This is deducted from operating profit.

To discourage customers from seeking personal loans, banks have started to insert fresh clauses in loan documents which make it difficult for customers to avail of such loans. Some banks like Corporation Bank and Canara Bank have started asking customers to provide for an undertaking from their employers. “This is like seeking a guarantee from the employer which is not very easy to get,” pointed out a senior banker.

According to senior Canara Bank official, the bank is also insisting that the borrower should have a salary account with them in order to obtain personal loans without any collateral. “This is because we have noticed rising instances of loans without any security going bad. Thus, if the borrower has a salary account with us, the EMI is directly deducted from it which reduces the scope of default.”

Further to discourage personal loans, some banks are insisting on third-party guarantees in case the loan value is very high, besides seeking a guarantee from the borrower. For instance, Bank of India has decided not to increase its target on its personal loan portfolio. This means that fresh loans will be given only to the extent of repayment of the existing loans.

According to bankers, a substantial chunk of salary accounts, especially of private corporate, has been cornered by private banks. However, when it comes to locking in to loans, many employees prefer to access personal loans from PSU banks, mainly due to lower rates charged by them. While most PSU banks have pegged personal loans to the prime lending rate (12-14%) or a 100-200-basis point premium on big ticket loans, private and foreign banks charge as high as 16-21%.

With the upswing in property prices, banks are adopting a cautious approach to approving home loans. More and more banks are reluctant to approve home loans at a fixed rate. Banks like Canara Bank and Bank of India have stopped disbursing fixed rate loans while others such as State Bank of India, Punjab National Bank and Allahabad Bank have inserted a reset clause in their fixed rate loan documents.

Recently, the Bank of Baroda board also passed a resolution to insert a reset clause at the end of five years for their fixed rate home loans. Sources said Central Bank of India, too, is considering inserting a similar clause in its fixed rate home loans. The decision will be taken after the bank completes its IPO by the end of this month. The reset clause protects the lender from fluctuations in interest rates.

HDFC and Citigroup plan of cross-selling products canceled

The agreement signed between Housing Development Finance Corporation (HDFC) and Citigroup has been cancelsd. According to this agreement the two were to sell the mortgage lender’s loan products under the American bank’s India network.

In this working agreement the two has agreed for cross-selling each other’s products recently, which followed the increase of Citigroup venture in HDFC to 12.3 percent and also nominated its representatives in HDFC board. Citigroup officially describes its venture in HDFC as a financial investment.

According to banking sources Citigroup and HDFC are not going ahead with their plan as it would have created a conflict of interest between HDFC Bank and its promoter, HDFC. HDFC Bank has not launched its own home loan products and instead sells HDFC loans for a fee. HDFC holds around 23.32 per cent in the bank.
Citigroup, in response to an email query, said, “We will have to decline comment.”

HDFC did not reply to an email sent a week back.

In May, managing director of HDFC, Keki Mistry, said that the agreement between HDFC’s and Citigroup will be worked out in such a way that there would be no conflict of interest with HDFC bank.

HDFC recently while filing with the Securities and Exchange Commission with regard to its $700 million American depository receipts issue, recently released a statement that, “the bank may face potential conflicts of interest relating to our principal shareholder, HDFC Limited."

HDFC and Citigroup had plans to expand their cross-sell relationship beyond home loans, which were to be sold based on the mortgage lender’s risk criteria.

When HDFC decided to make a preferential allotment to private equity investor Carlyle Group, Citigroup sought a preferential allotment to itself to ensure the US financial services provider’s venture in HDFC remains at 12.3 per cent.

A Personal Loan without risk

When anybody thinks about taking a loan the first thing that comes in mind we have to guarantee something as security with the lender to get a loan and the interest rates. But there is a loan that comes in your hands without having to guarantee any property as security.

An unsecured personal loan, is one such loan that you can take without any big problem from lenders. You can utilize unsecured personal loan for any purpose including home renovations, buying a car, for wedding and holiday tour or for debt consolidation.

In this loan you are not at all required to furnish any of your property to the lender as collateral in taking unsecured personal loan. This makes borrowing any amount a fully risk free affair for the borrower. This loan is especially useful for tenants or non-homeowners.

Unsecured personal loans are solely approved on the lender’s faith in the borrower’s capacity to repay and intention of timely clearing the installments. So you are required to show your income and employment documents to the lender.

Smaller amount ranging from ₤5000 to ₤25000 is usually approved as unsecured personal loans. The paying back period is 5 to 15 years.

But the interest rate matters a lot in loans. And unsecured personal loans carry very high rate of interest. If your credit history is good then you may get the loan at lower rate. But the people with low credit score, the loan rate goes even high. Before applying for the loan check your credit score.

The people with bad credit are also eligible for unsecured personal loans only if the lender is satisfied about their loan repaying capacity. So take an assuring repayment plan for the loan approval.

It is better to study the market first, take rate quotes of lenders so that you know the prevailing interest rate for your circumstances.

For fast processing and approval of the loan preferably apply to an online lender for the loan.

Watch on end use of loans

Some banks are of view that the corporate credit is finding its way to stock market, due to this some banks have clamped down on general purpose loans to corporates. On other loans banks are insisting that payments on behalf of the corporates be made directly.

Central bank fears corporate credit is finding its way to the bourses. Some public sector banks, concerned that the money lent to corporates could find its way into the stock market, are asking branches to follow stricter due diligence in lending to corporates.

The benchmark Bombay Stock Exchange (BSE) Sensex has already marked 13 record highs in 16 trading sessions. The Sensex ended at a new peak of over 15,732 points today. Foreign institutional investors have been net buyers in July.

According to a senior public sector bank executive, “whatever is happening in the stock markets has highlighted the need for monitoring the end use more diligently now. The end use of funds is of prime concern to us. We do not want our money to find its way into the stock market.”

Some banks are looking to avoid making fresh disbursements where it is not possible to ascertain the end use of funds. These banks are looking to cut down on loans advanced for general purpose.

“We are trying to avoid or reduce giving general purpose loans. We are giving loans where it is possible to verify the end use of funds. We are sensitizing branches and zones on how to monitor the end use,” said A D Parulkar, executive director, Bank of India.
Borrowers are required to state the purpose for which they are taking the loan and also submit an auditor’s certificate at the time of availing of credit.

“However, a mere declaration by borrower or submitting a chartered accountant’s certificate is not enough. We are also looking at direct remittance or payments on behalf of corporates,” said the senior executive.

Where banks lend as a part of a consortium, the lead bank is asked to monitor the end use of the funds. Last month, the practice of banks providing short-term, unsecured loans to corporates at low interest rates had come under the Reserve Bank of India (RBI) scanner.

The RBI had asked banks to furnish information on short-term, unsecured loans disbursed at rates below the prime lending rates (PLRs) after realising that such low-cost lending was replacing working capital loans.

The RBI was concerned that some banks, driven by their zest to increase portfolio sizes, had extended short-term loans without adequate due diligence on the end use.
The central bank is also worried that lax monitoring and absence of collaterals could lead to a decline in the asset quality during tough times.

Loans but at what Price?

Now days the changes are occurring so fast, the way of thinking and living have changed. Every one is trying hard to keep themselves up to mark in this race. To help people banks/NBFCs are providing loans so that people can fulfill their wishes. But the lucrative offers in these loans make people end up in heavy debts.

At the time of giving loan banks check all the income related documents attached with the application. The banks do explain terms and conditions and the interest rates the loan carries with it. But these unsecured loans in many cases may be of a small ticket size, but, they carry high interest rates and also other charges in the event of default. In many cases, lending organizations are taking advantage of the unregulated interest rate regime and vulnerability of their customers and subjecting them to the torture of recovery agents.

Many times customers end up repaying the outstanding, which consists of little principal but high amounts of financial charges/fees and other charges. In select cases, interest rate can be as high as 48% per annum and in case of default and non-payment, when other fees with service tax are added, this can easily cross more than 100% per annum. In case the borrower wants to pre-pay the loan, there is a pre-payment charge. So a situation is created through a loan agreement or card holder agreement, the ramification of which is never explained to the borrower by the DSA/DMA.

There had been a case in which the Supreme Court of India in criminal appeal No 267 of 2007 on February 26, a case involving a leading bank has come out with a lot of important observations. One point made is that — for the lender — it is not a mere question of lending the money that matters, but also the consequence thereafter. Thus, there is an element of social responsibility. Secondly, recovery of loans or seizure of vehicles can be done only through legal means. Thirdly, strictures ought to be imposed on erring banks to curb their high-handed activities and make them answerable to the general public. Finally, the apex court has said that banking procedures should be people-friendly and at the same time, strict in its enforcement and educative enough to guide the public of the benefits of prudent banking and the lender should be transparent in their transactions with the borrowers.

The provisions of The Usurious Loans Act 1918 read with The Punjab Relief of Indebtedness Act, 1934 indicates that any rate above 12.5% simple rate of interest per annum on unsecured loans can be considered as ‘usurious’ by the competent court.

Against the above back drop, the Reserve Bank of India in it’s Annual Policy Statement for 2007-08 made a mention of the complaints received by it and Banking Ombudsman offices and stated that in a deregulated interest rate regime, rates of interest beyond a certain level may be seen to be usurious and can neither be sustainable nor in conformity with banking prudence. Therefore, the banks are advised to lay down internal principles and procedures so that such usurious interest including processing and other charges are
not charged.

This was followed by a directive through a circular dated May 7 to all commercial banks inter alia stating that the total cost to the borrower, including interest and all other charges levied on a loan, should be justifiable having regard to the total cost incurred by the bank in extending the loan, which is sought to be defrayed and the extent of return that could be reasonably expected from the transaction. Besides they are required to put an appropriate ceiling on interest and other charges and suitably publicize it.

The banks are required to implement this circular by September 7. Similar directions have been issued to Regional Rural Banks (RRBs), urban banks and NBFCs and RNBCs by RBI. However, in case of NBFCs/RNBCs, RBI has advised that excessive interest rate can neither be sustainable nor be conforming to normal financial practice. Therefore, the board should lay down internal principles and procedures in determining the interest rate and processing and other charges.

The step taken by RBI is in the interest of the society and the banks/NBFCs. It is mandatory for the banks/NBFCs to implement the same. At the same time there is need to keep check whether all these institutions will voluntarily reduce the interest rates and other charges adequately in a fair and just manner keeping in mind the corporate social responsibility, as a good corporate citizen, as no ceiling has been prescribed by RBI.

There are certain regulatory measures which NBFCs and RNBCs have to take in consideration. NBFCs and RNBCs beyond a cut-off asset size may be asked to publish their balance sheets and profit and loss accounts in newspapers and put it in their websites so that the public at large become aware about the profit generated in their business. Also it may be considered to put in place a non-discretionary penalty on banks/NBFCs by prescribing the amount for any violation noticed and established in a transparent manner.

For credit cards, the banks may be advised to open service points/contact points where a card holder can walk in to obtain a duplicate bill, make payment towards his bill, surrender the card or report loss of card against proper receipt which will mitigate most of the after sales problems faced by the card holders.

The regulator is doing its duty now it is the borrower who has to show his understanding. The banks and NBFCs are commercial organizations; the borrower should borrow sensibly to avoid a debt trap.

Change in the payment protection insurance over the internet

People taking out personal loans online are set to save large amounts of cash because payment protection insurance will no longer be sold to them automatically.

That is according to independent payment protection insurance provider Paymentcare.co.uk.

The Financial Services Authority (FSA) announced publicly that major finance firms have agreed to change how they sell payment protection insurance over the internet.

Before payment protection was automatically included, using techniques such as a 'pre-ticked' box in the online deals offered by the personal loans providers.

With this decision taken by the personal loan providers, as a result customers have to actively choose to buy insurance.

Shane Craig, the managing director of Paymentcare said, "this is excellent news for consumers and yet another step in the right direction towards ensuring they receive the fair treatment they expect and deserve,"

"It’s also a very positive move for the image and reputation of the industry and will help to ensure that the people who really want protection will no longer be scared off."

Vernon Everitt, FSA director of retail themes, added: "We have made payment protection insurance a top priority and are pleased that firms have agreed to change the way they sell payment protection insurance over the internet.

"Naturally, many customers are focused on getting the loan itself, but it is just as important that they also think about whether or not they want to protect their loan repayments by taking out payment protection insurance cover.

"This change means that it will be up to the customer to actively choose to buy payment protection insurance rather than it being sold automatically."

HDFC Bank increases NRE deposit rates

HDFC Bank has increased interest rate on its (Non-resident Indian – external) NRE deposits, effective from July 1, 2007. Interest rate on NRE deposits for three to five years maturity will increase by 16 basis points to 5.45 per cent against 5.29 per cent earlier. Deposits of 2 to less than 3 year maturity, the increase is by 12 basis points to 5.43 per cent as against 5.31 per cent earlier.

The rate of interest for deposits maturing between one and two years is up by 3 basis points to 5.42 per cent as against 5.39 per cent earlier. The NRE rates were last revised by the bank on June 1, 2007.