LoanRaja Blog- Personal Finance Guide

Satyam fiasco might have thrown fresh challenges for different segments of society. You can use them as tips to manage your uncertainty.

The current Satyam fiasco has a lesson for every individual. If you are an investor, now you know that you don’t have to go by the EPS and PE rations because they can turn meaningless; if you are an employee, the lessons you learn are a bit more challenging. You can’t take it for granted that you would be receiving salary every month, can’t expect your credit card limit to be unchanged because every card issuer can lower it overnight!

While it is still not officially out as to whether Satyam employees would be paid salary for the current month or not, it is a situation familiar for many employees in the last few months. chances are that many could land up in similar situation in the coming months if the current environment were to continue. Hence, if you are one of those who still have a cushy job with uninterrupted income flow, take time to plan for that emergency.

Here are some areas you need to focus on in the coming days:

Cash for sustenance: gone are the days where you could live with a zero balance in your account and wait for the salary to refurbish your bank account. In the days of pink slips, your bank account needs to look rosy and hence, keep cash to sustain yourself for at least a month. This in itself is not enough. You need to have liquidity which can sustain you for a minimum of six months or your investments should be accessible in the days of emergency. The options for liquidity could be from a number of investment products such as bank deposits, liquid funds or company deposits. Keeping money in savings account may look an easy option but other products let you earn a bit more income. For instance, a balance of Rs 1 lakh in an FD can get an interest income of around Rs 3,500 for six months whereas in an SB account, you may not even realise the additional income!

Keep your credit calls low: This is no time for splurging on shopping through borrowed funds and if you are one of those habitual card spenders with large outstanding on credit card, go slow on the same. A credit card loan is still expensive and paying an interest of 40-50% is an avoidable expenditure in the current environment. Hence, if you are in the habit of rolling over your credit card bills, make it your New Year resolution to discontinue the habit.

Take a medical insurance policy: Employers aren’t any more in generosity mood and instead, are looking for fresh avenues to cut costs. In the coming financial year, many perquisites and facilities are likely to get an axe and some employers have already indicated about discontinuing the medical facility. So, even if your employer provides medical cover, sign up for an insurance policy for your dependents as it can take care of any medical emergency. Since the premium paid on policy also provides tax benefit, the real cost of this insurance is much lower. More importantly, the policy can come in handy when you are in between jobs.

Also read: Satyam fiasco

Breaking news- Satyam chairman Ramalinga Raju resigns! Since the Satyam drama started to unfold; imagine the plight of Satyam employees who woke up one morning to realize that they may no longer have a job, may not get the next month’s salary, may not be able to pay off the loan on that apartment they have just bought, have no more access to credit on their cards, not to speak of losing assets in the form of shares and stock options that crashed practically overnight.

The other thing about the Satyam fiasco is that no one seemed to have seen it coming – not the employees, not the senior management (at least no one has said anything) and by the looks of it, neither the auditors.

It is of course possible that the new board can salvage the situation to a large extent, but the lesson to be learnt from this is the increasing uncertainty around us.

It is not just like news on general economic conditions and terror attacks, people can no longer be sure of the companies that they work for. How does one ensure or insure job security?

There is no answer to that one. The risk of something depends upon what stage an employee happens to be in his or her career. Going by news reports, there are thousands of Satyam CVs in the market today. They may continue to keep floating for a while because right now, none of the IT companies are hiring. Senior people at Satyam are at a disadvantage because one, they are likely to have held more Satyam shares and made more losses on them; and because there will always be a doubt about their involvement in the scam, but experience should help them land them something somewhere. The fresher’s at Satyam Services would be free of financial and personal commitments and can afford to wait for the right opportunity to come along. It is the middle management that will be the hardest hit, burdened by loans, and family commitments. Even when companies are downsizing, middle managers are at a risk of being fired first because they cost the company more than fresher’s.

The chain effect- A few years ago, a colleague told me a story to illustrate life in the US. Here’s a man who meets with an accident, is held up and can’t attend an important meeting because of which he loses his job. When the credit card company finds out that he has lost his job, they stop all credit to his account. His bank repossesses his home, his car and other possessions that he had bought on loan. One look at utter ruin, his wife decides to walk out on him and by the time he reaches home, his world has fallen apart.

In the US, the concept of insurance against job losses crops up every time there is a recession, though the product itself has not received very good reviews. Some of these are linked to mortgages and home loans, where loans can continue to be serviced even if the borrower loses his job. Then there is the unemployment dole.

In India, employees have to safeguard themselves against this possibility through private funds. In non-financial terms, personal integrity and goodwill can see people a long way through. Professional reputation is worth investing in and personal reputation even in business contexts is highly valued.

Also Read Impact of Satyam services

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.