LoanRaja Blog- Personal Finance Guide

From the days of having 2-3 jobs on hand, ITES employees are facing the challenge of chasing non-existent jobs. Get wise with your life management in tough times

A couple of generations back, the biggest worry of your career was landing a job. And then, one was more or less assured of security for the next thirty-five years or so until retirement. Today, your stability depends not just on you, but your company’s financial health and practices, the state of the economy as a whole, and the state of finance of the company’s customers and the economy of their home countries. To drive home the point is the latest Nortel development.
An announcement made half way across the world can shake up our markets, and for some, shake up careers and personal lives too. The dust has hardly started to settle down on the Satyam storm, and we already have something new to think about – the Nortel bankruptcy filing. Nortel has filed for bankruptcy, chapter 11 — meaning that it has asked for credit protection from the US Government to settle dues while it restructures itself, a little like our BIFR (Bureau for Industrial and Financial Reconstruction).
Indian IT stocks promptly fell between 2-5 percent in reaction to this news, mainly because Nortel has been one of the large outsourcers of IT to India. In fact, it was also one of the first companies to start outsourcing to India and practically every outsourcer is a vendor to Nortel.
Other than Sasken, which depended on Nortel for ten percent of its revenues, companies have said that their exposure was too little to make any significant financial impact. But that is in percentage terms. In absolute terms, 0.5 percent of $ 2 billion (Infy revenues) is around $ 20 million, while Wipro’s annual revenues from Nortel is around $ 25 million. Even if Nortel pays off all its outstanding dues, future business is likely to be much lower. Sasken had around 300 people on Nortel projects and if one assumes that the others too had anywhere between 250-400 people, then it is that many jobs lost for the Indian IT industry.
There is nervousness across companies about more nasty surprises, given current economic conditions.
Suddenly, the IT industry is not as coveted as it used to be, as the downsides to the industry are being unfolded practically every week. Youngsters have been reported to be declaring that it was far better to join the good old stable government sector, rather than live with the uncertainty. A friend said that her brother-in-law in the US routinely checks his mail on Sunday evening to make sure that he had a job to go to on Monday morning!
However, the uncertainty is not going to go away and we simply we have to learn to live with. A few golden rules to keep in mind:
Do not give in to panic: Assess your situation. If you see your company floundering or fear for your job, start looking around before you are forced to. Remember also that some things are completely unexpected, like the Satyam fiasco. These are beyond your control and not worth worrying about.
Prioritize your financial needs: In happier days, you might have bought a car, refurnished your home and upgraded your television set all at once. Focus on the most important need and work downwards.
Gather as much information as you can about all available options: There are enough websites, newspaper articles, and consultants offering financial advice. Look at various options and choose the one that suits you best.
Spend wisely: As long as you spend only that which you know you can afford, you are safe.
Invest for the future: This period of economic slowdown is only temporary. Invest wisely for the future, whether it is in a house, a car, education, or stocks and mutual funds.

Last week, the Government said that liquidity crunch was the biggest problem facing the country today. The RBI also acknowledged that the global crisis is hitting India far deeper than was expected. Little wonder then that a flurry of announcements have been made, all aimed at easing the liquidity crunch and increasing credit flow.

The current credit crisis itself happened because lending rules became tighter and interest rates were hiked as Government attempted to stem inflation (caused largely by the increase in the global price of crude). Credit is the backbone on which trade functions and the lack of credit (coupled with the decrease in demand) has led to the drop in industrial production.

Now that crude prices have fallen and inflation is down to 8.98 percent, the RBI has seriously turned to the issue of increasing credit flow and reviving the economy. The RBI announced CRR cuts twice this month; cut repo rates by 2 percentage points and in its latest set of announcements it has increased the ceiling on NRE (Non resident expatriable) deposits in a bid to attract funds from abroad.

Targeting revival of the real estate sector, NBFCs and capital markets specifically, it has tried to increase the flow of credit to these areas. The risk weightage attached to the real estate sector has been brought down and provisioning requirements on residential housing loans, commercial real estate and loans and advances qualifying as capital market exposures have been reduced.

Liquidity measures in place; now it is turn of credit flow

The real estate sector and the SSI sector are particular concerns for the government, as they are both highly labour dependent and any slowdown in these two areas will be followed by large scale unemployment. To infuse funds into these areas, the RBI has come out with a Rs 2000 crore package to finance SSIs through SIDBI, and a Rs 1000 crore package to NHB. Housing finance companies registered with NHB have been allowed to raise short term foreign currency.

NBFCs and mutual funds can now avail of a special repo rate up to March 2009.
The RBI has also announced a longer period of concessional pre-shipment credit for exporters of 270 days, compared to the earlier 180 days. But it is debatable how far this will help because the real problem for exporters has been the drop in demand.

Going by initial indications, these announcements will take time to translate into anything tangible for the common man. The markets, for one, have not reacted with much enthusiasm to any of these measures. Banks too are not expected to jump at the prospect of lending to the real estate sector as the cost of finance has gone up in the last one year.

Last year’s inflation control measures and attempt to bring down exposure to the real estate sector backfired. Rather than decrease exposure, banks simply raised the interest on deposits and continued to lend at higher rates. To bring down lending rates right now is not a very attractive proposition.

Banks did not react to the earlier set of measures to infuse liquidity in October by increasing lending; they bought government securities instead. So credit flow to the sector will happen only when the banks get over their reluctance to lend to housing sector once again.

In the longer term, banks will have to come back to the customers, interest rates will stabilize and people will begin to buy houses again. Even now, home loan companies assert that loan off-take among the middle and lower classes (who want to have a house to live in, opposed to buying a house as in investment) has not really come down.

The drop in inflation and the cut in crude oil prices have also not brought immediate cheer to the common man. The Consumer Price Index is not expected to drop any time soon. The crude oil price cut is expected to be passed on to the consumer only after oil companies have made good their losses.

We will have to wait for the banks to get over their concerns to begin lending and improve industrial confidence to finally see the effect of the measures.

Who doesn’t dream of owning a house? The middle class families are better positioned now than ever before to realize their dreams thanks to the mushrooming of housing finance companies and a liberalized loan regime. The long process of applying for a loan beginning with the property selection and bank selection is an arduous one. But runaway inflation and rising property prices have now landed the prospective borrowers in a fix. To make matters worse the interest rates on home loans are on an upswing. How does one choose a home loan most favourable to him?

Customers need to pay more attention to the property they are planning to buy and collect all relevant information on it. Before availing oneself of a housing loan the borrower has to make a long-term financial planning as the loan tenure may stretch 10-25 years.
All financial requirements including daily expenses, cost of education and wedding etc. in the short-term and long-term must be identified. Then make a realistic assessment on the surplus you can spare every month on loan repayment. Go only for a home loan from a lender with a good reputation. By approaching two or three banks or housing finance companies it can be ascertained who offers loan with the cheapest interest rate. Explore various fees and penalties that the lender charges.

Eligibility

Three vital factors decide the loan amount sanctioned by banks – borrower’s income, repayment history and the cost of the property. Banks lend up to 3.5-4 times the annual gross income as a home loan. Repayment capacity will be considered after assessing your income, age, qualifications, work experience, number of dependents, spouse’s income, stability of income and employment, assets, liabilities, etc. Larger the repayment capability, the higher will be the loan eligibility.

Documents

The borrower must submit the following documents along with loan application:

• Proof of age
• Proof of identity and residence - passport, PAN card, ration card, voter ID card etc
• Salary slip of last three months along with salary certificate.
• Proof of continuity in job for last two years or Form 16.
• Bank statement for last six months.
• Company profile for employees of a private limited company.
• Proof of business address in respect of businessmen/ industrialists
• Khata certificate.
• Latest property tax paid receipt.
• EC for last 13 years.
• Parent documents and all linked documents for 13 years.
• Sanctioned plan.
• Receipts towards payments already made.
• Sale agreement and title documents in favour of the seller (pre-owned home).
• Sale agreement or construction agreement with builder (new home).
• Total cost break-up on builder’s letterhead (new flat).

Charges

Banks charge 0.5% to 2% of the loan amount as processing and administrative fees, they may in some cases also charge a commitment fee. You need to pay this charge to the housing finance companies if the sanctioned loan amount is not availed of within a certain span of time. In case one wants to switch over from a floating rate to fixed rate or vice versa the borrower is also assessed a penalty. Such a penalty may also be levied in case the loan is repaid before the agreed term, which is 2-3 percent of the outstanding amount of loan.

Disbursal

The lender will disburse the loan only after the borrower puts in his share which is normally about 10-15 per cent of the total estimate. Most banks disburse the loan in stages after ascertaining the progress of construction in the case of new houses or flats. In the case of ready-built houses the bank will disburse the entire amount of the home loan on sanction.

Tenure & Repayment

A borrower has the option to choose a tenure of 5 to 25 years for his home loan depending on his paying capacity and age. Borrowers are often in a fix between choosing for a fixed or floating interest rate for their loan. For floating rate home loans a bank will either raise the EMI or extend the tenure of your loan to cover the higher amount due. In the case of fixed interest loans the Equated Monthly Installment (EMI) remains same unless there is a reset clause. While taking a loan, one must consider that interest rates fluctuate during the loan tenure and this fluctuation will impact the home loan EMI, whether one takes a loan at a fixed interest rate or floating interest rate. If the borrower is younger, banks are willing to give an extension on loan tenure but if the loan borrower is in 40s, the only option given is to increase the EMI.