Banks depositing more funds in MFs due to lower loan off take

Although banks are reducing the interest rates on loans but the loan demand has to yet to pick up. Therefore banks are investing their surplus funds in mutual funds (MFs).

With loan demand yet to pick up, banks are parking a chunk of their surplus funds with mutual funds (MF). For the first fortnight of the current fiscal (FY10), banks have invested over Rs 40,000 crore in MF schemes thus the amount is over and above the Rs 80,000 crore they have invested into government bonds.

As per the latest figures given out by the Reserve Bank of (RBI), between March and April 10 commercial banks have collectively invested Rs 40,423 crore in various MF schemes, stimulating their total exposure to MFs to Rs 85,557 crore. The combined investment in government paper and other approved securities stands out to be Rs 82,074 crore. In comparison to this banks have lent only Rs 1429 crore in the fortnight.

Arvind Chari, fixed income portfolio manager of Quantum Mutual informed, “Banks cannot keep all their money in RBI’s daily money market operations since returns here are less than their cost of funds”. Banks make 3.25% through RBI’s liquidity window. He added, “Liquid funds that are fetching returns of 5-5.5% and short-term income plans delivering about 6% are a good alternative”.

Banks are compulsorily required to invest 24% of the deposits they raise in a fortnight in government and other qualified bonds. These investments are known as statutory liquidity ratio (SLR) investments. By April 10, banks had invested 7% extra (31% of deposits) in government bonds.

Of the non-compulsory investments, mutual funds appear to be the apparent choice for most banks.

Ashok Khajuria, head of treasury at IDBI Bank pointed out, “A bank may not have headroom to buy debt of another bank because of RBI regulations”. He added, “Mutual funds offer an easy and reasonably safe way to invest in such debt”. He explained that the rating agencies keep check on the MF investments which gives further comfort.

Majority of the banks have an internal policy for investing in MFs that place down in which fund houses the bank can invest and how much.

Bankers are of view that most of the investments are going into liquid schemes as these offers an instant exit with no penalty. Liquid funds make their profits by investing in treasury bills and bank CDs, in addition to lending in the CBLO market.

In October the interest rates were very high, thus the liquid funds delivered almost 9-10% returns. But, with RBI cutting rates in the past few months, their average annual returns have reduced to almost half of that figure.

Companies deposit with higher rates a tool for investors

Banks are reducing their deposit rates in view of cutting down their lending rates. On the other hand companies are offering attractive interest rates on their deposits thus it is becoming a good investing option for the people.

Some of the big companies are offering around 12% rate of interest for a one-year deposit and 12.5% for a three-year term. While small time financial advisory companies are claiming that they are getting many queries on these deposits these days. On the other hand seasoned investment advisors, are advising investors to be careful, as they might be taking unnecessary risk to get higher returns from these deposits.

"We are getting a lot of queries about fixed deposits (FDs), including company deposits. Our clients are interested in assured returns, as they have lost money in equity mutual funds," says an official with an investment advisory firm. "But not many people are coming forward to make investments as they are not sure about the safety of their capital. They have heard old stories about company duping their parents or relatives," he adds.

That is exactly the point Kartik Jhaveri, director, Transcend Consulting, makes. "Companies are coming out with deposit programme, but it is not as if they have crowded the market with their offerings and people are jumping to make investments. As far as we are concerned, we are very clear that the safety of capital is the most important thing you should consider while opting for an FD. We don't compromise on that," he says.

According to Amar Pandit, certified financial planer, My Financial Advisor, "We are not comfortable with some company FDs. There is the question of corporate governance and quality of balance sheet. That is why these companies are offering a little more interest than the bank deposits". "In fact, they are compensating with a higher interest rate for the higher risk you are taking."

Then what advice they give to their clients? After all, even they might be interested in earning some extra interest? Amar Pandit explains, "We don't look at company FDs if they are not from trusted brands like Tata or HDFC. We tell our clients they are better off earning 10-10.5% in a safer place than taking extra risk for 12%". "We are also slightly sceptical of the real estate sector because of the corporate governance and transparency issues. We have even stayed away from fixed maturity plans which invested in the real estate papers."

Transcend's Jhaveri is also of view that investors should always go for highly-rated issues with good derivation to ensure their money is in safe hands, minimizing risks.

Banks prefer salaried class for personal loan

Before financial crisis taking personal loans from any bank was easy. But economic slowdown and increase in the NPA (non-performing asset) has forced banks to withdraw this segment of loan. However most of the banks has reserved it only for the salaried class customers those having accounts in the respective banks. Banks are not giving personal loans to the businessmen and self-employed professionals.

The reason banks give for stopping the personal loan is that the NPA in personal loan segment (personal loans, car loans, home loans) have doubled to around four per cent due to recession and large-scale retrenchments. In 2007 it was around 2%.

Conversing with the Tribune reporters, UCO Bank field general manager, Ripan Murgai said due to economic downturn the personal loan segment has been worst affected. He said, “As personal loan is an unsecured loan (where no collateral is required), a number of borrowers in Punjab and Haryana have become delinquent. The NPA level in housing and auto loans is also going up, but recovery here is better as house or car is a collateral security.”

He added, “In Haryana, the NPA in personal loan segment has gone up by over three per cent. Though the economic downturn is one of the main reasons for delinquency, the debt waiver announced for various sectors by the government has also created a bad credit culture, with people desisting from paying back their dues”.

In fear of losing their money banks initiated their stressed assets management cells. SBI country’s largest lender has added new recruitments in their recovery cell in order to speed up recoveries on personal loans, home loans and finance against immovable properties.

In addition to this many banks are working on restructuring their personal loan segments so at to certain that more accounts do not get offended.

Personal loan out standings high led to slowdown in lending

The last quarter has seen the credit crunch struck India. The Reserve Bank of India has provided the disaggregated credit data from it can be known how bad it was and to whom did the banks lend?

According to the data personal loans outstanding went up by Rs16,384 crore between 29 August and 19 December, for the two dates for which data have been provided. This means an increase of just 2.9% over the level on 29 August.

This is in contrast to the rise of Rs24,044 crore between 23 May and 29 August, therefore it is clear that distribution of personal loans has suffered a severe slowdown.

In the personal loans segment the out standings on account of housing loans increased by a mere Rs2,879 crore, or 1%.

The possible reason for this may be the rising non-performing assets in credit cards which must have spooked the banks, as credit card out standings rose just Rs303 crore over the period.

However education loans, rose by Rs2,965 crore over the period, a rise of 12.5%.

On the other hand real estate loans continued to increase, going up by Rs8,267 crore, or 12%.

Loans to non-banking financial companies rose by 11.7% over the period. However loans to the services sector, including real estate, increased by 4.5% over the period. Lending to industry was quite profitable showing a growth of 9.5%, or Rs86,251 crore. But a major portion of that—Rs17,221 crore—was on account of the increase in advances to the petroleum sector.

While the loan out standings to the infrastructure sector went up by Rs27,846 crore over the period, or a rise of 13.3% ,over the 29 August level.

And in spite of the clamor by industry, there were considerable increases in advances to textiles, construction, iron and steel.

Therefore in spite of the acuteness of a credit crunch over the last quarter, data advocates that much of the slowdown in credit was not in the industrial sector but in personal loans.

Hence loan outstanding to the priority sector fell slightly, signifying that lending to weaker sections has declined.

Thus, industry has been clamoring about a credit crunch not because banks are not giving loans but because the loan amount they are getting has not been enough to fill the gap caused by the drying up of other sources of funding.

Looking for options to overcome debts-Find out which is better bankruptcy or debt consolidation?

Most of us look for solutions to come out of debt. There are many options available, through which you can deal with your pay off your debts. Bankruptcy and debt consolidation are two such options. But, many of us land in a confused state of mind as to, which one should we go for? You must have always come across this question on your mind Which is better bankruptcy or debt consolidation? For this you need to understand your financial condition. Both have their pros and cons, so it will be better to understand these terms in broader sense to come up with a solution at hand.

What is Debt Consolidation?

Debt consolidation is a strategy used by debtors to manage their debts. It is a process through which you can consolidate your debts through one single payment. All you need to do is, take a debt consolidation loan to pay your unpaid bills, credit card bills and household bills. This enables you to pay one single lower payment on your individual debts. Once you clear off your unpaid bills, it helps in improving your credit ratings. In order to qualify for a debt consolidation loan, the lenders see that you should have the ability to make the new payments in time.

What is Bankruptcy?

Some of you might not qualify for a debt consolidation loan, and then you need to consider Bankruptcy as the last option. It is legal process and differs from traditional debt consolidation in many ways. It protects your assets from being taken off by lenders. It is Federal Bankruptcy Code and can of great relief from debt. Chapter 13 bankruptcy is a type of debt consolidation plan through a court of law. It allows you to structure all your outstanding debts into one single payment. All your possessions and assets are protected under this plan through court. It should only be adopted if there is no way out. The adverse effect is that it stays on your credit report up to10 years. All types of debt are not covered under bankruptcy. Some of which are government funded student loans, child support payments or alimony, certain housing cooperative fees, personal injury and damage caused by the debtor in an accident , fines and penalties owned to government agencies.

You should keep one thing in mind that neither of the two options offer everything. It depends on individual’s financial condition. So, it depends on you to decide which is better bankruptcy or debt consolidation? As it is an important decision, so it is advisable that you seek help from a professional financial advisor who can guide you to chose the right option according to your needs.

Know about interest rate being charged on personal loan

Most of us take personal loans but do not pay attention on interest rates being charged. There are some points regarding the interest rates such as what is period the lender charging the interest for and how the interest is being calculated?

The first question for what period is the lender charging the interest? Whether the interest is being charged is 2% monthly, 2% half yearly or 2% yearly. An interest of 2%, is compounded monthly works out to a yearly rate of almost 27%.

Then how the interest is being calculated? For instance a bank is offering a personal loan of Rs 50,000 at an interest of 12% p.a which is to be repaid over a period of 36 months. Therefore the EMI to repay the loan works out to Rs 1,890 p.m. Here the question arises how a bank can offer a loan at an interest rate of 12% per year, when the interest rate of home loans is similar.

The bank’s calculated EMI in the following manner — an EMI of Rs 1,890 p.m. means that for 3 years you will have to pay the bank Rs 68,040 (Rs 1,890 x 36). Of this the principal amount i.e. the loan you have taken is Rs 50,000. What remains is the interest. So an interest of Rs 18,040 (Rs 68,040 - Rs 50,000) will be paid over a period of 3 years.

Therefore the interest paid per year totals to Rs 6,013 (Rs 18,040/3). Thus an interest of Rs 6,013 p.a. on a loan amount of Rs 50,000 means an interest rate of around 12%. This way of expressing interest is known as the flat rate of interest. But this is not the correct way to calculate.

The actual interest should be 21.25%, which is 9% higher than what the bank makes it out to be.

Thus every time an when you pay EMI a certain part of the principal amount i.e. the actual loan that you had taken is repaid. Therefore, the interest at any point of time has to be calculated on the outstanding loan.

Thus this is the correct way of calculating interest and is known as the reducing balance method.

Interest rates on home, car and other personal loans set to fall

High spending consumers can now start planning for taking loans for various reasons as public sector banks and private banks too are going to reduce interest rates on loans therefore home, car and other personal loans are going to get cheaper.

Soon after the meeting with finance minister Mr P Chidambaram, public sector banks led by State Bank of India gave strong signals of cutting interest rates for home and car loans by at least 50 basis points. Earlier country’s largest lender, SBI, had promised to review its lending rates later this week.

In the meeting with Mr Chidambaram, the heads of public sector banks had discussed ways and means to protect the growth momentum from possible adverse effects of the current global financial meltdown.

After the attending the meeting, the heads of banks including UCO Bank and IDBI Bank announced reduction in benchmark Prime Lending Rates (PLR) by 50 basis points. Before the meeting SBI chairman Mr OP Bhatt had said, “Interest rate cut is on our agenda”.

Other banks who have announced reduction in PLR by 50 basis points include the country’s third largest lender, Punjab National Bank, and UCO Bank, IDBI Bank and Union Bank of India.

Interest rates on all loans given by a bank, fixed or floating are linked to the benchmark rate therefore cut down in PLR is of very important. Increase and decrease in interest rates on car, home or personal loans depend on the increase or decrease in PLR.

PNB was the first bank to announce a cut in lending rates and the Union Bank of India announced cut yesterday. Bank of India has also indicated that it would be deciding upon revising of interest rates very soon.

While the largest private sector lender, ICICI Bank, sources said it will be reviewing the lending rates after watching the impact of the liquidity injection steps taken by RBI last week. On Saturday RBI had cut the short-term lending rate by 50 basis points and the cash reserve ratio by 100 basis points.

The meeting was held between the FM and the chiefs of the banks after the Prime Minister and the industry leaders had met to seek appropriate measures to enhance liquidity and other steps to create an environment conducive for lowering of interest rates.