Here’s Why Home Loans and Personal Loans Will Soon Get Cheaper   Oct 06, 2017

October 06, 2017
In this issue

Close Change %Change
S&P BSE Sensex* 31,814.22 530.50 1.70%
Re/US $ 65.14 0.37 0.56%
Gold Rs/10g 29,445 -255.00 -0.86%
57.10 -0.45 -0.78%
FD Rates (1-Yr) 5.0% - 7.0%
Weekly changes as on October 05, 2017
BSE Sensex value as on Octobe 06, 2017

Banks are unfair to their customers.

When interest rates go down; banks are quite reluctant to pass on the benefits to the customers.

But when it comes to passing on the interest rate hikes, the efficiency of banks jumps 50%. Many banks don’t have the mechanisms in place to price loans correctly. Their arbitrary and non-transparent practices have been causing a hindrance in the effective transmission of the monetary policy.

If you thought these are baseless and biased allegations, think again.

These are the primary findings of the RBI Committee headed by Dr Janak Raj.

On July 24, 2017, RBI appointed a committee under the chairmanship of Dr Janak Raj to study the various aspects of the Marginal Cost of Funds Based Lending Rate (MCLR) system. The perspective was to improve the monetary transmission and explore linking of the bank lending rates directly to market-determined benchmarks. The panel submitted its report on September 25, 2017.

According to the committee, this is the biggest hurdle for the swift monetary policy transmission:

“Even 15 months after the introduction of the MCLR regime, a sizable part of loans (around 30 per cent) is still at the base rate. The progress of migration of borrowers from the base rate system to the MCLR regime has been tardy.”

“The lower transmission from the policy rate to the base rate loan portfolio was mainly due to the reason that banks followed different methods to calculate the base rate. Banks, therefore, could be advised to re-calculate the base rate immediately by removing/readjusting arbitrary and entirely discretionary components added to the formula. It needs to be ensured that the calculation of the base rate is not compromised in any way. The methodology adopted by banks should be subject to a regular supervisory review.”

And what’s the solution?

According to the Committee: “Interest rate setting based on an internal benchmark is not transparent as banks find ways to work around. Second, the interest rate setting based on an internal benchmark such as MCLR is not in sync with the practices followed in the modern banking system. Third, for improving transmission and extending equal treatment to the existing and new borrowers, there is a need to make the liability side of banks’ balance sheet more responsive to policy rate changes. The Study Group feels that the liability side may not become adequately responsive to monetary policy impulses unless it is driven by the asset side.”
6 Steps to apply for a personal loan

Some specific recommendations to Banks are as follows:
  • Fees to borrowers for switching from the base-rate regime to MCLR regime should not be charged;
  • In each branch the comparison between lending rates calculated with different methodologies—base rate and MCLR should be displayed. The same information is to be made available on the website of every bank. Moreover, The Indian Banks’ Association (IBA), or any other equivalent industry body must display the compiled data for the whole industry to facilitate easy comparison;
  • To price loans appropriately, banks are expected to refer to external benchmark rates. The RBI, after considering the views of all stakeholders, will select one of these benchmarks— T-Bill rate, the CD rate, and the Reserve Bank’s policy repo rate;
  • Floating rate loans disbursed after April 1, 2018, should be benchmarked to one of the three external benchmarks selected by the Reserve Bank;
  • Review interest rates on floating rate loans quarterly;
  • Raise deposits, especially the bulk deposits, at a floating rate linked to the external benchmarks;
  • The spread fixed when sanctioning loans to all borrowers, including corporates, must remain fixed all through the term of the loan.
If RBI accepts these recommendations after consulting all stakeholders, borrowers will have a lot to cheer for:
  • The discrimination between corporate and individual borrowers in the same grade of risk will stop;
  • As the efficacy of the monetary policy transmission is expected to improve with the adoption of external benchmarks for loan pricing. As a result, the loans will become more transparent—for the time being cheaper—but not always.
Never borrow just because it’s a loan with a low rate of interest. You should keep in mind your financial goals before taking up any loan on your personal balance sheets. Excessive use of credit can be detrimental to your financial health. To discuss your financial concerns and goals see a Certified Financial Guardian in your vicinity.
personal loans

Advertising is meant to grab your attention.

So, a hyperbole in claims is understandable.

But exaggerated claims shouldn’t be misleading, right?

Many Indians still have an inferiority complex for being dark-skinned. Multi-national companies know this. So, they make and promote products that claim to make people fair and handsome in weeks. Instead of trying to get them out of the cocoon of inferiority such claims support them. It’s actually a good way to fool the consumer.

Why blame only personal care companies?

Some yogi babas turned Lalas (traders) are trying to milk the holy cow as much as they can. Isn’t it bizarre to promote floor cleaner containing cow urine?

To connect emotionally with their potential customers, branding and advertisements, at time, cross the limits.

Food supplements are another grey area. The claim of “nutrition” is as artificial as the preservatives they use.

And what are the consequences?

Buyers fall prey to tall claims of brands and endorsements and buy products and subscribed to services with high hopes. When they feel cheated because of the inferiority of the products, there isn’t a strong redressal authority, and big companies often walk away scot-free.

Adulteration and product duplication have sprung up in a big way with the emergence of e-commerce.

While the consumers are turning modern and digital, the laws meant to protect them are three decades old—inadequate and outdated.

To read more about this story and Personal FN’s views over it, please click here.

Stricter rules are now making a dent in the gold sales.

A season which otherwise keeps jewellers extremely busy, is making things difficult for them this year.

Mr Nitin Khandelwal, Chairman, All India Gems & Jewellery Trade Federation (GJF) couldn’t hide his disappointment. He said, "Sales are down 50 per cent though we had expected some good demand this Navratri and Dussehra. As things stand today, we are not sure whether the trade will be able to make good business in the current festive season. The high-value gold sales are not happening."

Mr Joy Alukkas, Chairman of Joyalukkas, expressed similar views saying, “High-value sales are not happening. We are therefore focusing on small pendants, small earrings and other such items. The KYC norms will affect sales during Dhanteras, when Indians splurge on gold."

To read more about this story and Personal FN’s views over it, please click here.

At a time when the economy seems to be stuttering, stock market investors are betting big on future growth.
Unfortunately, much is needed to revive the Indian economy. Economic growth has systematically fallen from 7.9% for the quarter ended June 2016 to a multi-year low of 5.7% in April-June 2017. Yet, over the past year – The S&P BSE Sensex is up 12%,

The S&P BSE Mid Cap is a few percentage points higher at 16%, and

The S&P BSE Small Cap has risen a massive 24%!!

To read more and Personal FN’s views, please click here.

Does a mid-cap mutual fund scheme incur high risk or moderately high risk?

The answer to this subjective question depends on your perception of risk. While one can calculate the risk based on the volatility or standard deviation of returns, the level of risk (high, moderate or low) is often subjective/relative to different asset classes.

If you are a conservative investor, a mid-cap scheme will seem like a high-risk proposition compared to the lesser volatile debt schemes. Aggressive investors who may have commodities or other high-risk speculative asset classes in their portfolio, may term mid-cap schemes as moderately high-risk.

To read more and Personal FN’s views, please click here.

Employees’ Provident Fund Organisation (EPFO) has a mandate to invest upto 15% of your Employees’ Provident Fund (EPF) contributions in equity. The cumulative returns on the equity component for two consecutive years were 13.72% until May 2017. But, the trade unions have always opposed the idea of investing in equity. They feel, in the absence of any clear guidelines on the “selling strategies”, the profits may always remain notional; without offering a specific benefit to the subscribers. EPFO is in the process of finding a solution to this concern.

Since the equity investments are made through Exchange Traded Funds (ETFs), EPFO may start crediting units to individual accounts just as mutual funds do. This will help subscribers have a claim on the dividend too, which will shore up returns. Such a demarcation would make the equity investments of EPFO more transparent.
Investing In Mutual Funds Can Help You Achieve Your Financial Goals

How To Deal With The Biggest Risk Post-Retirement  

Yield Spread: A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from another. For example, if the five-year Treasury bond is at 5% and the 30-year Treasury bond is at 6%, the yield spread between the two debt instruments is 1%. If the 30-year bond is trading at 6%, then based on the historical yield spread, the five-year should be trading at around 1%, making it very attractive at its current yield of 5%.
(Source: Investopedia)

Quote: "Every once in a while, the market does something so stupid it takes your breath away”- Jim Cramer

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