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.

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.

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.