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.

Home loans have been the flavor of the week with best rates for home loans— the finale being delivered on Monday, the 15th of December; when public sector banks announced reduced rates for home loans. Is that good news? Or are there any catches to it? One quick look at the balance sheet for home loans, as it appears now.

On the plus side:

• Housing loans are down with immediate effect to 8.5 % for loans up to Rs.5 lakh and 9.25 % for loans up to Rs.20 lakh.

The package effect does not include the above Rs.20 lakh category, but given the CRR and repo rate cuts, bankers believe that prime lending rates for not only home loans but all loans will drop anyway.

• The home loan package is only for public sector banks. But the private and foreign banks – which offer loans in the 13- 17 % range — may follow suit, partly driven by the market and partly to get a share of the sub 20 lakh loan segment, which is known to be a segment of high recovery. There are already reports of private banks taking a re-look at their interest structures.

• Borrowers will have to pay less margin money on home loans (that is the amount they need to pay upfront) which has been brought down to 10-15 % from 20-25 %.

• EMIs are not likely to change for five years, going by the announcement made by the PSBs. After that period, borrowers may be given the option of going in for fixed or floating loans.

• No processing and pre-payment charges and free life insurance cover for borrowers

On the plus side, the cut in rates by PSBs may force the private and foreign banks to follow suit. Today, the private banks are in the 17% range. However, the PSB’s generally cater to the sub 20 lakh loans.

 Competition from the package will see housing finance companies review their interest rates.

On the minus side

• Home loans flavor is only for existing borrowers. After all, the intent behind the scheme is to stimulate the economy, particularly the cement and steel industry rather than benefit for individuals. Still if interest rates fall, it is only a matter of time. (Overall, a plus)

• Banks may take a hit on home loans margins, but it is not expected to be for long. They will make up from gains in treasury, say bankers.

• Can’t see anything else?

The stock market too has reacted with caution but positively. Stocks in the banking and finance, cement and construction, engineering and capital goods industry have all gone up.

If the sub Rs 20 lakh segment picks up, it is a positive trend. This segment is known for the high rate of recovery, so will it attract builders who were so far focused on the higher end of the market and the commercial sector?

The other thing to watch out for is that a lot of builders have lost money; homes going vacant, being sold at discounts and a continuing cash flow problem in the industry, this is the time when builders may cut corners, put quality at risk.

The sub 20 lakh homes would be impossible to find in metros, and very difficult in larger cities. Will this package see more homes moving to suburbs, or to smaller towns and villages? Any views?

Someone once observed that real estate prices can never fall. There is only so much land in the world to sell real estate, and being a scarce commodity in that sense, demand and therefore prices of land, can only go up.

Yes, there will be some ups and downs, but the land market will never crash. And in the long term, investment in real estate – land and property — can only be profitable.

However, like someone also said, in the long term, we are all dead anyway, and it is the short and medium term that affects us the most.

And in the short term, buying ability, construction prices and interest rates determine property prices to a large extent.

Right now, the Indian property market or Real Estate per se is seeing some interesting swings. For a while, it seemed as if prices would continue on an upward spiral, and a house/ flat for Rs 1crore became matter of fact.

And then, the RBI struck. Loans to housing became stringent, interest rates went up and home buyers found life tough.

Now, it is the turn of the developers to struggle. On the one hand our land prices are still high, and on the other the falling prices of homes, with home loans once again getting priority; which would mean there is still much scope as far as Real estate is concerned.

But buyers are still cautious and are refusing to bite. Buyers are skeptical to invest may it be in real estate or in any other investments. Banks too, have yet to start looking at home loans again, despite directions to do so from the Government of India. In an attempt to get the segment back on track, developer associations such as CREDAI and the National Real Estate Developers, Council (Naredco) have both urged members to cut prices on properties. Developers, who are strapped for cash, are dangling various freebies, incentives, and easy payment options.

So the obvious focus for real estate seems to be the middle and low-income group housing schemes. The high-end homes are already in oversupply. Even commercial property is lying vacant. The only serious house buyers are these looking for a roof over their heads, rather than those looking at real estate as an investment option.

One other area that is expected to gain popularity during a slowdown is the affordable or low cost housing segment – which includes homes between Rs 3-20 lakh. This is attractive to the buyers – because of the lower prices and attractive to developers, because their initial investment can be a little lower, a boon in times of a funds crunch like now.

Once demand picks up, the construction industry thereby real estate itself is expected to revive.

The next few months will see a correction in rentals – a trend that has already set in. Rents have gone down anywhere between 10-50 percent, depending on the location. In the meantime, there is a lot of vacancy – in high-end luxury apartments, as well as office space. Companies too are putting off real estate decisions, waiting for conditions to improve before making any new investments.

One point of view is that the slowdown has only been a means to bring about a correction in real estate, bringing it down to more realistic levels. Developers will continue to find it difficult to raise funds and prices are expected to fall by at least 10-15 percent over the next 6-9 months.

Investment in real estate remains a good proposition, as long as it is direct investment. Real estate equity funds have taken a beating. A lot of private equity finds from investment banks that they are not in good shape either, in the wake of the global financial crisis.