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.

Apply for car loan today! If you are looking for a fresh car for your portico, you can’t get luckier. Falling petrol prices, lower interest rates and struggling auto companies will make your life easy even in this recession.

Around fifteen years ago, I first started noticing that the number of cars was growing, while the number of two wheelers was reducing. This was a trend (at least in Bangalore), that continued till about a few months back. Somehow, it seemed as if the number of two wheelers was increasing and the number of cars was coming down.

This, let me hasten to add, is a purely personal observation, and in no way backed by in depth research or painstaking market surveys.

Again based purely on conjecture and conversation with friends and relatives, this could well have been a response to the increased fuel prices and the decreased job security as more people parked their cars in their garages and began to blow the dust off their scooters and motorbikes again.
Now, hard facts tell me that car sales have indeed dropped this year. And so have car prices.
So, is this a good time to buy a car?

This year, there have been so many twists in the auto industry that the answer to that is going to be a long winded one.

On the face of it, yes, it does seem like a good idea. Car companies have been announcing price cuts, interest rates are lower and fuel prices have dropped.

But scratch a little deeper and it is interesting to see why we have this situation at all.
The simplest one first. Fuel prices have been cut a little, a small nod in acknowledgement of the crash in global crude prices. The Government is obviously giving some breathing space for oil companies to recover losses before it (hopefully) announces more cuts.

The price cuts have been driven by a combination of reasons. In October and November 2008, car sales showed a sharp fall, as both individuals and companies put off buying decisions following high interest rates and lack of credit from financing companies, and the general economic condition. Saddled with huge inventories, car manufacturers have announced discounts to get rid of their stock.
Moreover, it is the end of the year, when car manufacturers in India usually drop prices. This is to avoid being stuck with the previous year’s stock, going by the date of manufacture.

Interest rates too are lower, thanks to the various monetary measures taken by the Government. Car makers have also promised to pass on the 4 percent reduction in Cenvat announced by the Government for all manufacturing industries.

So the cars are ready and the buyers are ready, but according to reports, it is the car finance companies, which are acting spoil sports.

As in the housing industry, only demand can drive production and only easily available low cost financing can drive demand. And only higher demand can help the industry out of its rut.
Because, right now, the auto industry has been shutting down factories, bringing down number of shifts and cutting back on production. This situation of excess capacity is likely to last all of next year too.

However, prices will begin to rise if there is no off-take. This, despite the fact that input costs, specially cost of steel, have come down. Companies may not be able to sustain lower prices if the demand continues to be depressed, as they will have to bear the costs of idle capacity.
But new model launches are still on the anvil. Both Maruti and M&M are expected to make some announcements soon. With Tata’s Nano gearing to hit the roads in 2009, you will have a lot more to choose from in future. However, if you are on the look-out for a new car, this is a perfect time. For the first time, you don’t have to worry much on the fuel front with global crude prices sliding downwards on a regular basis.

Lenders are often wary of lending to someone who is self-employed, particularly if they are new to it and cannot provide proof of steady income. Personal loans can help a self-employed person to exploit the opportunities even when required finances are not available. In today’s highly competitive personal loan market, banks and financial institutions now encourage self-employed individuals to avail themselves of personal loans. Those eligible are self-employed professionals like doctors, chartered accountants, engineers, MBA consultants, architects, company secretaries. Other self-employed individuals eligible for personal loan are sole proprietors, partners and directors engaged in the business of manufacturing, trading or services.

No uniformity

Generally lenders are more stringent on determining the eligibility and income criteria of a first time self-employed loan seeker. Sales agents will be doing a thorough background check verify the customer’s credentials and repayment capacity. The documentation and processing of application also may be different from that of a salaried individual. The cut-off level of income for being eligible for a personal loan and the maximum loan available for self employed professionals is also different from that of salaried applicants. It may be easier for an existing customer of the bank to get a personal loan as creditworthiness in such cases means a lot to the lender. Some banks have different loan schemes available for different professions.

For example, many banks have special schemes for doctors such as Axis Bank which has a scheme for self-employed doctors who have a MBBS or BDS or higher qualification. Self-employed doctors between the ages of 24 and 65 are eligible for a maximum loan amount of Rs.20 lakh. They need a minimum experience of two years in the profession and annual income must be not less than Rs.2.4 lakh. The same bank has a different eligibility criterion for other self-employed professionals. Maximum loan available for other self employed professionals will be Rs.10 lakh with a minimum annual income requirement of Rs.1 Lakh and three years of continuous work experience.

Documents

The documents banks require from self employed loan applicants are also different. Along with a passport size photograph customer has to submit proof of identity, address and professional qualification. Pan card/ passport copy/ ration card/ Voter ID are accepted. If you are self-employed, you will have to produce a certified balance-sheet and profit and loss account of the past two/three years along with other mandatory documents, such as partnership deed. Bank statements for the previous six months also have to be furnished. Proof of continuity of current profession (IT Returns / Certificate of business continuity issued by the bank) and Proof of office (Lease deed / Utility bill / Municipal Tax receipt / title deed) are the other requirements.

Since profits of self -employed people are irregular in nature it will have an impact on the repaying ability of the borrower. This is the reason many self-employed individuals like traders or mechanics approach NBFCs to meet their requirements for urgent cash even though it is costlier. A personal loan from a bank won’t be suited to small traders who need a short term loan for two-three months as banks offer a minimum loan tenure of 12 months. An NBFC on the other hand will meet his demand as the company provides more flexibility in eligibility and repayment terms. NBFCs who often come to the rescue of customers ignored by banks are keen to get new customers and build up a pool of tested clientele.

Comparative rates

Following is an example of how a public sector bank and an NBFC treat the same amount of personal loan with the same tenure. The amount of personal loan is Rs.25,000 with a two-year tenure:

Note: These rates may have changed, please check current rates at the time of applying

SBI Saral Personal Loan:
Interest rate : 14.5%
EMI : Rs.1,206
Processing fee : 1-2%
Prepayment fee : Nil after 6 months
Total interest : Rs.3,950.

Citi Financials Personal Loan::
Interest rate : 22 %
EMI : Rs.1,297
Processing fee : 2%
Prepayment fee : 4%
Total interest : Rs.6,127.