Tag: loan

Planning for son’s education, own retirement

Personal Finance

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Nishant is 36 and works with an IT company in Pune. He has a 5-year-old son. Until now, he has focussed his energies on repaying the home loan, which he repaid completely 2 months back. Thus, he does not have many investments. In addition to this house, he has Rs ₹ 5 lakh in fixed deposits and ₹13 lakh in employees’ provident fund.

His net take-home monthly salary is ₹80,000. He can invest about ₹35,000 per month. Besides, his monthly contribution to EPF account, including employer contribution, is ₹11,500.

He wants to invest for his son’s higher education, for which he thinks he will need about ₹20 lakh (present cost) after 12 years. Besides, he wants to save for this retirement. He has not bought any insurance plan yet.

Buying insurance

Insurance is the first pillar of financial planning. In his case, getting insurance portfolio right is even more critical since he is the sole earning member in the family. There are three broad types of insurance plans that every earning member must buy: Life, Health and Accidental Disability Insurance.

While there are many ways to calculate life insurance cover requirement, a simple thumb rule is to buy a cover for 10-15 times the annual income. With his level of income, he can go for a life cover of ₹ 1.25-1.5 crore.

A term insurance plan is the best way to purchase a life insurance. This will cost him about ₹18,000-20,000 per annum. He can choose to pay annual premium in monthly installments too.

He has a health cover of ₹3 lakh from his employer. The coverage is clearly not sufficient for a family of three. He must buy a family floater health insurance plan of ₹10 lakh. That will cost him about ₹15,000 per annum.

He can buy accidental disability cover as a rider with a term plan or as a standalone plan. A rider with the term plan is cheaper because the scope of coverage is limited to total and permanent disability.

A standalone plan is more expensive, but it covers both partial and total permanent disability, temporary disability, and accidental death.

These insurance plans (life, health and accidental cover) will cost about ₹5,000 per month or Rs 60,000 per annum.

He has a fixed deposit of ₹5 lakh that can be considered towards medical and emergency fund.

Son’s education

For son’s education, he needs ₹20 lakh (present cost) in 12 years. At the inflation rate of 6 per cent per annum, the target nominal corpus will be ₹40 lakh in 12 years.

Assuming a return of 10 per cent on the portfolio over 12 years, he needs to invest ₹15,000 per month.

He can put this money into a hybrid fund or a multicap fund by way of SIP. He must gradually shift this money to debt as he moves closer to the goal.

For his retirement, he mentions that only 2/3rd of his current expenses will continue into retirement.

His current expense is ₹45,000 per month but that includes conveyance and school and tuition fee for his son.

His expected expenses during retirement will be ~ ₹30,000 per month (cost). Assuming a post retirement life of 30 years, inflation of 6 per cent per annum and that he can earn inflation matching returns during retirement, he needs to accumulate ₹4.3 crore in 24 years.

His current EPF corpus will grow to ₹80 lakh in 24 years . At assumed pre-retirement return of 10 per cent per annum, he needs to invest ₹32,000 per month.

He is already putting ₹11,500 per month by way of EPF. After accounting for regular expenses, insurance payments and investment for son’s education, he can invest an additional ₹15,000 per month (35,000 – 5,000 – 15,000).

His retirement portfolio is already debt heavy. He can split this amount between a largecap fund and a midcap fund, with heavier allocation to the former. He is investing less than he should. He must invest more when his cashflows permit. This should not be a problem since his best earning years are ahead of him.

He must understand all the goal calculations above are based on heavy assumptions about inflation and expected returns.

He must keep revisiting these assumptions and portfolio growth and make adjustments accordingly.

The writer is a SEBI-registered investment advisor and founder of personal financeplan.in

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Non-food credit growth of banks slackens to 5.9% in May

Banking & Finance

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Non-food credit growth of scheduled commercial banks (SCBs) slackened to 5.9 per cent in May 2021 compared to 6.1 per cent in May 2020 due to deceleration in credit growth to industry and services sector.

Per the Reserve Bank of India’s statement on sectoral deployment of bank credit for May 2021, credit to agriculture and allied activities continued to perform well, registering an accelerated growth of 10.3 per cent in May 2021 as compared to 5.2 per cent in May 2020.

Credit growth to industry decelerated to 0.8 per cent in May 2021 from 1.7 per cent in May 2020, the central bank said.

Size-wise, credit to medium industries registered a robust growth of 45.8 per cent in May 2021 as compared to a contraction of 5.3 per cent a year ago.

Credit growth to micro and small industries accelerated to 5 per cent in May 2021 as compared to a contraction of 3.4 per cent a year ago, while credit to large industries contracted by 1.7 per cent in May 2021 as compared to a growth of 2.8 per cent a year ago.

Credit growth to the services sector decelerated to 1.9 per cent in May 2021 from 10.3 per cent in May 2020, mainly due to deceleration in credit growth to NBFCs, transport operators and commercial real estate, RBI said.

However, credit to the trade segment continued to perform well, registering accelerated growth of 12.4 per cent in May 2021 as compared to 7.7 per cent a year ago.

The central bank said personal loans registered an accelerated growth of 12.4 per cent in May 2021 as compared to 10.6 per cent a year ago, primarily due to accelerated growth in vehicle loans and credit card outstanding.

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ICICI Bank launches cardless EMI facility

Banking & Finance

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Private sector lender ICICI Bank has introduced an instant cardless EMI facility for online purchases on e-commerce platforms. The facility is available to the bank’s pre-approved customers across 2,500 e-commerce brands.

“Customers can convert the transactions up to ₹5 lakh into easy monthly installments by entering their registered mobile number, PAN and OTP at the check-out section of the e-commerce website or app,” said ICICI Bank in a statement on Monday.

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Kerala government seeks moratorium on repayment of loans, BFSI News, ET BFSI

Banking & Finance

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The Kerala government has approached the Centre to put in place a moratorium on repayment of loans till December 31 in order to provide relief to individuals in the unorganised sector, MSMEs, agriculture and others adversely affected by COVID-19 pandemic and the subsequent lockdown.

Kerala has sought a moratorium of loans without accrual of interest and penal interest during the moratorium period.

Kerala Finance Minister K N Balagopal, in a letter to Union Finance Minister Nirmala Sitharaman, said the impact of the second wave induced lockdown has adversely affected the economic and social well-being of all sectors of the society.

“…it is felt that the burden of repayment of the loans taken by individuals, especially those in the unorganised sector, MSMEs and agriculturalists is particularly onerous at this time, and these sections need some relief by way of moratorium on the repayment of loans at least till December 31, 2021,” Balagopal said in a letter dated June 16.

He said the state government has taken all steps to ameliorate the hardships faced by the people, especially the vulnerable sections.

“I request your kind intervention to put in place a moratorium on repayment of loans at least till December 31, 2021 without accrual of interest and penal interest during the moratorium period,” he said in the letter.

The Finance Minister pointed out that the economy of Kerala has been under considerable stress since 2018 due to successive natural disasters including the massive floods which lashed the state wreaking havoc in most of the districts.

The outbreak of COVID-19 in early 2020 further exacerbated the stress on the economy, he added.



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SBI launches collateral-free “Kavach Personal Loan”

Banking & Finance

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State Bank of India (SBI) has launched collateral-free “Kavach Personal Loan” to enable its customers to meet medical expenses of self and family members for Covid treatment.

Under this scheme, customers can avail loans up to ₹5 lakhs at an effective interest rate of 8.5 per cent per annum for 60 months, which is inclusive of three months moratorium, India’s largest bank said in a statement.

The loan will also cover reimbursement of Covid related medical expenses already incurred.

Dinesh Khara, Chairman, SBI said, “We believe this new scheme will offer much-needed financial assistance to the people to manage Covid treatment-related expenses without any hassle.”

Khara observed that with this strategic loan scheme, the bank’s aim is to provide access to monetary assistance – especially in this difficult situation for all those who unfortunately got affected by Covid.

The bank said this loan product will also be part of the Covid loan book being created by banks as per the Reserve Bank of India’s Covid relief measures.

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Bank of Maharashtra tops PSU banks in terms of loan, deposit growth

Banking & Finance

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State-owned Bank of Maharashtra (BoM) has emerged as the top performer among public sector lenders in terms of loan and deposit growth during financial year 2020-21.

The lender recorded 13.45 per cent increase in gross advances at ₹1.07 lakh crore in 2020-21, as per the published data of BoM.

It was followed by Punjab & Sind Bank which posted 8.39 per cent growth in advances with aggregate loans at ₹67,811 crore at the end of March 2021.

When it came to deposit mobilisation, BoM with nearly 16 per cent growth was ahead of even the country’s largest lender State Bank of India, which recorded 13.56 per cent rise.

However, in absolute terms SBI’s deposit base was 21 times higher at ₹36.81 lakh crore as against ₹1.74 lakh crore of BoM.

Current Account Savings Account (CASA) for BoM saw 24.47 per cent rise, the highest among the public sector lenders, during the year.

As a result, CASA was 54 per cent or ₹93,945 crore of the total liability of the bank.

According to the announced quarterly numbers, Central Bank of India achieved second spot by recording 11.46 per cent growth in CASA at ₹1.61 lakh crore.

Total business of BoM increased 14.98 per cent to ₹2.81 lakh crore.

For the full year 2020-21, BoM’s standalone net profit jumped nearly 42 per cent to ₹550.25 crore. In the previous year, the profit was ₹388.58 crore.

The bank’s asset quality improved significantly as the gross bad loans or gross Non-Performing Assets (NPAs) dipped to 7.23 per cent of gross advances by the end of March 2021 as against 12.81 per cent by the same period of 2020.

In absolute terms, gross bad loans stood at ₹7,779.68 crore at the end of March 2021, lower than ₹12,152.15 crore recorded in the year-ago period.

Net NPAs came down to 2.48 per cent (₹2,544.32 crore) from 4.77 per cent (₹4,145.38 crore).

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Bounce rates of auto debit transactions rise in April

Banking & Finance

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In a worrying repetition of last year’s Covid-19 led economic distress, bounce rates for recurring transactions were elevated in April.

Data captured by the National Payments Corporation of India from its National Automated Clearing House (NACH) platform, too reveal that the number of unsuccessful auto debit requests in the month of April had once again begun to climb up after remaining low in March.

According to NPCI’s data, of the total of 8.54 crore auto debit transactions on the NACH platform in April, 5.63 crore were successful while 2.9 crore were returned. This reflects a return or bounce rate of 34.05 per cent in April compared to 32.76 per cent in March.

The rate of unsuccessful transactions in April is however, still lower than previous months like February and January when it was at a little over 36 per cent and the peak of 45.4 per cent in June 2020.

Banks watchful

The issue was also flagged by HDFC Bank in its fourth quarter analyst call when the management noted that bounce rates had begun to rise in April, which could be an indication of rising systemic stress.

Other banks too are remaining watchful about repayments and the Reserve Bank of India’s Restructuring 2.0 framework is expected to help small borrowers tide over the current uncertainty.

“Collection efficiency in April has been lower and the impact has been felt in SME and MSME segment and not so much in the salaried segment. Chances are the month of May would see a similar trend. However, this time around, there have not been any salary cuts or job losses so far in the organised sector,” noted Gaurav Gupta, CEO, MyLoanCare.in.

Analysts are hopeful that with limited lockdowns, the economic distress will not be as much as last year

“We estimate that the severely affected States account for about 48 per cent of retail credit and about 56 per cent of overall credit. Again, self-employed categories will bear the biggest brunt of localised lockdowns,” said a report by Emkay Global Financial Services.

Self-employed category

It expects that within retail assets, which constitutes about 31 per cent of overall credit, the self-employed category accounts for nearly a third – though the impact will largely be restricted to business loan, loan against property and MFI portfolio.

A recent SBI Ecowrap report also noted that NPCI-NACH debit return per cent reached a peak in June 2020 and has been on a declining trend since then. The per cent return (value terms) has declined to 27.5 per cent in March 2021 from the peak of 38.1 per cent in June 2020. Even the volume percentage declined to 32.8 per cent from 45.4 per cent during the same period.

“With various restrictions at State and district level imposed during April, it is yet to be seen whether it affects the recurring payments going forward,” it however said.

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Loan restructuring: FIDC seeks clarity from RBI on relief measures

Banking & Finance

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The Finance Industry Development Council (FIDC) has written to Reserve Bank of India Governor Shaktikanta Das seeking more clarity and highlighting residual issues in the NBFC sector after the announcement of relief measures for loan restructuring on May 5.

“To clarify or permit restructuring of such MSME accounts, which had been restructured under Restructuring Framework 1.0 and increasing the period of moratorium and/or extending the residual tenor up to a total of two years for MSMEs, along the same lines as the support provided to individuals and small businesses,” said the representation by FIDC, which is the representative body of assets and loan financing companies.

It has also sought inclusion of hybrid use of tractors under the definition of small businesses, thereby allowing restructuring of such mixed-use tractor (equipment) loans.

Moratorium

FIDC has asked for allowing moratorium up to an additional three years, taking both Resolution Framework 1.0 and 2.0 together, for long tenure loans (loans with a residual tenure of at least five years), over and above the period of two years.

“For loans with residual tenure of up to five years: increase the overall moratorium period by additional one year, that is overall cap of three years,” said FIDC, adding that for loans with residual tenure between five years and 10 years, the overall moratorium period should be increased by an additional two years to an overall cap of four years.

Similarly, for loans with residual tenure of over 10 years, the overall moratorium period should be increased by an additional three years to an overall cap of five years.

“It is our earnest request that on the lines of MSMEs, the individuals and small businesses, who are impacted by Covid-19, should also be allowed upgrade even if they slipped into NPA category between April 1, and the date of implementation,” said FIDC, requesting that the RBI should issue an amendment or clarification on the matter.

Given the State-level lockdowns and restrictions in movement, FIDC has also suggested permitting digital delivery of documentation. “Customers be allowed to request and invoke restructuring through video, email, SMS or WhatsApp and restructuring documentation may be allowed to be signed digitally either via e-Sign or through click-wrap method,” it has said in the recommendation.

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Interest on interest: IBA sends representation to Finmin

Banking & Finance

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The Indian Banks’ Association (IBA) has sent a representation to the Finance Ministry to enhance the scope of its previous ex-gratia scheme to cover the refund/adjust the ‘interest-on-interest’ charged to the borrowers during the Covid-19 related moratorium period — March 1, 2020 to August 31, 2020.

As per the Supreme Court’s judgment (in the matter of Small Scale Industrial Manufacturers Association vs Union of India & Others and other connected matters) on March 23, 2021, all borrowers (including those having loan exposure of above ₹2 crore) will be eligible for waiver of interest on interest in respect of the pandemic-related loan moratorium.

Banking sources said the payment of the interest-on-interest component by banks will set a precedent. So, IBA has suggested that they should be compensated by the government.

The government had picked up the tab towards waiver of interest on interest for loans up to ₹2 crore, irrespective of whether moratorium was availed or not, following the top court’s order in October 2020. This cost the exchequer about ₹6,500 crore.

Clamour for moratorium

“There is an additional load on banks due to the interest-on-interest provision. Now the issue is not about the amount but of setting a precedent, especially when we are in the midst of the second-wave of Covid-19 pandemic and there is once again the growing clamour for loan moratorium. We are still waiting for some more clarification; maybe we will get some reversal benefit on the interest-on-interest provision,” said a bank executive, who did not wish to be named.

While, the Centre had earlier picked up the tab for waiver of interest on interest on loans up to ₹2 crore, this time around, lenders have to bear the cost.

Most banks and NBFCs have already made provisions for the interest-on-interest payment in the fourth quarter of 2020-21 but are likely to implement it this quarter after the completion of the statutory audit.

Ex-gratia payment under the October 2020 Scheme covered borrowers (micro, small and medium enterprise, education, housing, consumer durables, credit card dues, automobile, personal loans to professionals and consumption loans) having sanctioned limits and outstanding amount of up to ₹2 crore (aggregate of all facilities with lending institutions) as on February 29, 2020.

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Bank, NBFC loan collections drop up to 10% as Covid intensifies, BFSI News, ET BFSI

Banking & Finance

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April took a sudden turn for banks moving towards normalcy.

Bank, NBFC loan collections drop up to 10% as Covid intensifies

Bank and non-banking finance companies saw a drop in loan collections from the first fortnight of this month.

Collections dropped 5 per cent to 10 per cent as lockdowns hit businesses.

Banks are now going slow on disbursals too sensing troubled times ahead.

The worst affected have been the micro and small enterprises, micro-finance and the commercial vehicles (CV) segments where collection efficiencies dropped rapidly.

Weak business activity

As per a report by Emkay Global, the first fortnight of April 2021 has been weak in terms of business activity which is down by 20% across various segments due to lower working days and onset of an aggressive second wave of Covid-19 infections. This is expected to fall further with far stricter enforcement of localised lockdowns.

The collection efficiencies were improving from August-September onwards on a month-on-month basis across asset classes. However, a year back, the restrictions announced so far are lower in trajectory or intensity. So while there will be an impact on collections and delinquencies, the impact should be lower than what we saw in Q1 of last year.

Bank, NBFC loan collections drop up to 10% as Covid intensifies
Bank, NBFC loan collections drop up to 10% as Covid intensifies

But if there was a rise in the intensity of cases accompanied by containment measures and restrictions, it could further impact collections.

In the case of NBFCs, gold loan and home loan NBFCs will be least impacted whereas unsecured loans, MSME loans and wholesale loans will be more impacted given the vulnerability of the underlying borrower class.

The spread intensity and duration of the pandemic, how long the lockdown and curbs last and vaccine trajectory will decide the severity of hit to banks.

The customer cash flows

The salaried class includes a large segment of IT professionals whose salary levels and jobs have not been impacted, though their discretionary expenditure has come down.

However, a bulk of the salaried class is facing pay cuts and job losses while among the self-employed, those in the essential segment like agrochemicals, pharmaceuticals, have not seen much impact but others have faced a drop in cash flows.

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