LoanRaja Blog- Personal Finance Guide

Tips for building loan portfolio and portfolio management- irrespective of the economic situation or income levels, loans have become an integral part of our lives. Here are some tips for building your loan portfolio.

This New Year build you loan portfolio by bringing renewed hope for fresh plans on all fronts, whether it is to become to be a proud owner of a house, a car or to take a personal loan to meet some other expense. Here, we present some options for your different loans with different strategies suitable for your loan portfolio management.

Why loan portfolio management is important? On the general economic outlook, the Government of India’s Mid Term Review has been comforting. Inflation is down to 7 percent (Dec 2008) and is expected to fall further to 4-5 percent by March 2009. A GDP growth of 7 percent has been predicted. One thing to be kept in mind to build your loan portfolio is that banks have started to slash Prime Lending Rates. However, there is still a need for great caution while taking loans and precautions need to be taken for portfolio management.

Portfolio Management is important considering today’s scenario. In the home segment, buying a house right now looks attractive – if you are looking in the sub Rs 20 lakh range. It is not just public sector banks, housing finance companies and private banks have also slashed rates for this segment. Property prices are falling on the back of last year’s oversupply situation and one can expect new affordable home projects to be launched. Due to this loan portfolio or portfolio management for those in the higher range, it would be advisable to wait for interest rates to fall further, as a result of the monetary measures announced by the Government. However it may take up to six months for any effect of these measures to be felt.

One thing is certain, this year a floating interest rate will be more popular than a fixed one, going by the southward trend in interest rates. As a corollary to falling inflation and the Government’s fiscal measures, one may expect interest rates to go down further -– at least in the next six months — in which case it makes sense to opt for a rate structure that will keep changing with changes in rates. Moreover, it is good to remember that even the “fixed rates” are not always fixed, and the fine print allows the bank to increase rates.

The best argument for buying a car this year is the falling prices of cars. Car manufacturers have announced price cuts, following the cut in Cenvat. Auto loans, like all other loans are set to become cheaper. Unlike home loans, car loans are not flexible to interest rate changes and hence, the rate continues to be same during the tenure of loans. Hence, if you can postpone your buying, you would be better off. Cautious advisers would hold on for some more time, in expectation of further price cuts, considering that auto companies have an inventory build up. For now, consumers can drive as hard a bargain as they wish.

How does loan portfolio management help in personal loans?– the loans that you take to finance a holiday, a wedding, a refrigerator, a medical emergency or to pay off credit card bills – is best avoided. At one time, personal loans were disbursed freely for the asking, part of the reason for a high rate of defaulters. From around September last year, banks practically stopped giving out personal loans and adopting more stringent criteria for lending. Interest rates on personal loans too are higher and banks have shown no signs of cutting rates on them yet. Since personal loan rates too don’t offer the advantage of any fall in future rate for existing borrowers, don’t rush for a personal loan at this juncture.

Overall, the mood is still cautious. Bankers are waiting for real estate and car prices to drop before they can see any increase in retail credit off take.

So now you know why it is worth the wait before you leap in the market. It is best to understand your loan portfolio and manage it wisely for a better future.

2009- This New Year Invest Wisely!

As an investor, you would be tempted to pick your stocks in the current downtrend. This year, you need not rush as markets are unlikely to stage a recovery for good part of the year.

Come New Year, it’s time to wear the thinking cap for investments. One of the good things about the current New Year is that expectations are at the bottom and hence, investors are happy to protect their capital than bracing up for high returns. While investors are being warned about the current downtrend and a prolonged bearish mood for equity and other markets, the message for the common man is, go slow on investments.

The outlook for 2009 depends on the following factors: India going or not going for a war with Pakistan; Easing of the cost of funds for industries by mid-year; the outcome of elections in May; Plans by companies for nuclear energy production using Indo-US civil nuclear deal; continuation of oil prices at current level.

As you would have noticed, the year 2009 has the potential of facing different kinds of risks and as a result, we should not expect great surprises or multi-baggers in 2009.

In a nutshell, we can zero in on the best investment strategy in the following way. If there is war, it is better to focus on sectors such as Telecom, Hospitals, Engineering and IT companies in the Geo Spacial Technology. If there is no war, it is better to focus on Telcos. In all scenarios, we can focus on pharma and healthcare companies, Office automation equipment, and Personal care sectors.
Irrespective of the choice of sector, this is not an year where you can pick your stock and stay invested for long. On the other hand, review of portfolio is a necessity and in fact, take a good look at your portfolio at regular intervals. The first such review should be made after the General Elections which could be around May-June.

In the second half of 2009, try infrastructure and housing companies as the prices will bottom out by mid-year. In metals, one can try steel and aluminium companies in the second half of the year as the input costs will settle at lower levels and new government would be coming out with infrastructure plans. The same logic also applies to capital goods sector but enter only after June.

So, the forecast for 2009 is very clear. A dull market is ahead and if you are thinking of any windfall opportunities, you can keep yourself miles away from the market throughout the year and take a long holiday from the market.

On valuations front, the P/Es (price-earning) of Sensex has come down to 11x. This is the lowest level of P/E post 2000. Some analysts feel that the current P/E level has even discounted the realities of coming three quarters. Though this level is considered by value investors as good entry opportunity, it is better to wait till good trend reversal is clearly visible. This may come in the fourth quarter of 2009 or may not come depending on the market situations at that time.

In IT sector, companies such as Infosys, Wipro and TCS are sitting on huge cash reserves. In recession, generally, companies with huge cash balances will plan well for future and get ready to encash the rebound in market whenever it happens. These companies will use these cash reserves to strategically buy companies abroad or for inorganic growth. They may also plan to diversify their product or service offerings.

Individual stocks to watch in 2009 are: RIL, RPL, Reliance Communications, Bharti, Idea, SBI, Rolta, HDFC Bank, Patni, Tech Mahindra, Jindal Steel and Power, IFCI, Hindustan Zinc, Sterlite Industries, BHEL. In addition to these companies, investors can also watch sugar and cement companies located in South India as they have locational advantages.

Interest rates more volatile? Rate cuts have become a regular affair but the consumer and banker is not enthused about borrowing or lending. Both need a bigger push from the government
In recent times, interest rates have turned more volatile than equity markets. Not surprising considering the fact that there is talk of a rate cut on a weekly basis. It is the expectation of these cuts which is keeping the Indian market swing in a wide range. If you look at some of the other global markets, the volatility in interest rates is not exciting for traders. Now, will we have a rate and if it comes through, will it get us out of the current slowdown which is all around us?

In fact, many have been complaining that life hasn’t changed in a big way after the recent rate cut which has pushed banks to cut down interest rate by 0.75%. The crib is that home loan rates are still in double digit and well above the comfort zone for many. As a result, borrowers are not exactly rushing to banks for buying property or cars.

If government is thinking of another cut in interest rate or stimulus package, it is due to the non responsive behaviour of the consumers. However, for the consumer, the problem is not merely on the rate front. In the case of property, developers are unwilling to press the price revision button having created land banks during real estate boom. As a result, you still find the property prices on the higher side as the developer is not ready to offer a discount of more than 15-25% in interest rate. In the case of cars, the story is entirely different.

So who need not worry about interest rates? Car manufacturers have been faced with the challenge of rising inventory and have begun to lower prices but the consumer is not ready to bring in a new car in a hurry. The reasons for lack of enthusiasm are plenty but top among them is the uncertain future. If the salaried is not sure if he will have the same pay cheque for the next one year, the uncertainty is of a different kind for the self-employed who account for a good chunk of car buying population at this time of the year. For these entrepreneurs, receivables are mounting and cash is turning out to be a rare commodity. With the economic recovery threatening to take more time to return to normalcy, the entrepreneurs are not in a hurry to invest on new wheels.

It is in this background one has to view the economic packages being unleashed by the government. In an election year, the government is keen on reviving the sentiment which has taken a huge beating. The uncertainty, liquidity crunch and the lack of enthusiasm among consumers to loosen their purse strings is not having the desired impact and hence, the Union government has been pushed to get more aggressive with its goodies. That’s why now you hear about income tax sops on home loans, higher investment limit for Section 80c and there is even talk of the government pushing builders to offer steeper discounts. Banks have already been told to get back to lending rather than focus on government securities. In the past few months, banks have resorted to increased scale of treasury operations. Not surprising considering that government securities have become the most profitable option for improving bottom line. The focus on treasury has been an easy option for banks in an era of falling interest rates. As you are aware, the yield from government securities goes up in inverse proportion to the prevailing interest rates and the sharp fall in the last few months has helped the yield to be in the range of over 15%. Unless there is pressure on them to get back to lending, banks may continue to rely on treasury profits for their good health. Only government has the wherewithal to push them.