Monday, April 30, 2012

My hundredth blog post

I don't know what it is with milestones and landmarks. On a continuous journey, we mark the milestones on the way, and celebrate every tenth, or fiftieth, or hundredth, as significant.  It just struck me that I have posted 99 blog entries so far, and the next blog post that I write would be the 100th. So what is significant about this? In one sense, nothing – the journey is continuous, and hopefully I should continue to write. However, reaching such milestones are a good opportunity look back at the past, bask in some self gratifying reflections, and take a brief respite to draw satisfaction from the fact that one has managed to reach thus far.


It also offers me an opportunity to thank my many readers who have been encouraging me all along with the comments and reactions to my posts, which basically proved that they were at least reading the stuff. In case you are wondering who are the people who thus prodded me along, since you never did (considering that you press the delete button as soon as you see my post), you will never know whether I am stating the truth or not. It is always de rigueur on reaching a milestone to say that the journey has been satisfying, the response encouraging, and the future very promising! 


The best milestones are those that are crossed,

In course of an absorbing journey,

Where the road offers its own reward,

And there is no need to count the miles!


If only all work were so simple,

That one does, without really doing,

Where the goals are some things that happen,

Not because one set out to reach them!


One prays that the next fork that comes,

Offers something that is alluring,

Let my instincts guide me in the turns,

For I know not where I am going!


There are of course, some of you who may write back and say that it is time for me to retire. To all such people, I have only one reply – I shall continue to write till I am offered a Rajya Sabha membership.  Till then, you can press the delete button!

Thursday, April 26, 2012

Interest rates on Retail Loans - a few random thoughts

It has been a while since the Reserve Bank of India introduced the concept of Base Rate. This was supposed to bring in transparency in a market where the determination of lending rates was opaque and arbitrary.  It looks like the Base Rate is not achieving much, and the banks are merrily continuing in their old ways, albeit in a new garb.


Previously every bank had its BPLR or "Base Prime Lending Rate" which was different for each category of loan. Say you were taking a housing loan from PNB, you would be offered the loan at, say, PNB Housing Loan BPLR (13%) less an arbitrarily fixed delta, say in this case 3%, making the floating rate 10% for you.  Other loans would have a different PLR, and a different delta. Ditto for every other bank, each of whom had their own Base Rates.


What happened when RBI raised the interest rates by increasing the Repo rate by 0.5%? The bank would promptly reset its housing loan BPLR to 13.5% and send all its housing loan customers a letter informing them about the reset interest rate based on the formula "BPLR plus delta".  In this case your rate would rise to 10.5% (BPLR of 13.5% less 3% which is fixed for your housing loan).   What happened to new customers? Ideally, the bank would have liked to raise the rate for new customers as well, but competition being fierce in the housing loan market, it would be unable to do so. So the new customer would be offered the housing at BPLR less a delta of 3.5%, which is to say, at 10%!


RBI would keep raising the interest rates, and you would keep getting letters from the bank. Most borrowers would not even read their letters, or if they did, ignore them, since the implications are too hard to contemplate. Since the EMI's would not go up, people would not feel the immediate pinch. However, what actually happens in such a case is that the tenure of the loan keeps inching up – I know of cases where the loan tenure went up from 15 years to 25 years! 


One fine day, you the borrower would realize that another bank is willing to take over the loan at 2.5% lower than what you are paying, and you would approach your bank for prepayment, willing even to pay the 2% prepayment charge that was a standard part of any housing loan. This was when your bank would wake up and offer to reduce the interest rate on your loan by a like amount. For the banks, this is of course a far better strategy than to offer across-the-board reductions as and when the rates fall.


RBI realized that the "BPLR" was not serving any purpose since most loans were being lent below BPLR, and that there was no transparency in changes effected to interest rates when benchmark rates were revised.  So in July 2010, the BPLR was replaced by the Base Rate. The Base Rate, which each bank fixes, is a rate determined taking into account its cost of funds and other factors like cost of operations, CRR and non-performing assets.  This was supposed to usher in an era of transparency, though as to how, no one really specified.


The recent reduction in Repo rate by 0.5%, coupled with the CRR reduction that was announced before that is a good time to test what is happening. Most banks have not reduced their Base Rate at all (which says a lot about "transmission of monetary policy"!). SBI, among the couple who did, reduced its rates, but not as expected, by resetting the Base Rate, nor by effecting an across the board reduction in the "deltas".  It has announced that it has cut the rates for auto loans and SME loans (loans given to small and medium enterprises).


This raises several questions.  How do we know that the rates are actually cut, given that the deltas could be different for different customers, and different again for new customers? Why has the rate not been cut for other loans? If rates could be arbitrarily reduced for some loans, in future they could of course be increased in the same fashion. What is the guarantee that old customers are not getting cheated the same way as in the past, i.e., by new customers getting lower deltas? As to the answers, it is quite obvious – the system is not really interested in transparency – the old game continues in spite of the change in nomenclature.


How is it in other countries? In the US, all consumer and retail loans are linked to the prime lending rate, and the corporate loans are linked to the London Interbank  Offered  rate (Libor). In the UK, the Bank of England's base rate is the benchmark for consumer and retail loans, while for commercial loans it is the Libor.  The Indian counterpart of Libor is the Mibor (Mumbai Interbank Offered Rate) which is an overnight rate – there are no three-month or six-month rates yet. Developing that, and making banks use those rates as benchmark rates for all loans, is a long way away!


If you have any loans, whether a housing loan or a personal loan which you had obtained a year or two back, just check what the newer customers have got.  If you find that they are getting cheaper rates, you can approach your bank to get your interest rates reduced. They may do it, or they may not; but if they do it, it will be only after a lot of effort on your part, something that will prevent you from trying it too often.


One good thing is that RBI has done away with prepayment charges on housing loans. This makes it easier to negotiate when it comes to housing loans, but for other loans where prepayment charges are usually to the order of 4%, even prepayment may not be a real option.


There was a brief period (in the years 2001, 2002) when interest rates had hit a low. Housing loans were available at 7.5-8%. Strangely fixed rate loans were also available at the same rate. A situation of low interest rates coupled with no fixed rate premium was brilliant for obtaining fixed rate loans. Those who obtained fixed rate loans or converted their existing loans to fixed rate loans, are the happiest lot!  Unfortunately, the situation today is that rates are quite high, and the fixed rate premium on housing loans is about 2%, making it a bad idea to take fixed rate loans. However, keep watching the market. It is possible that you could get a brief window where going in for fixed rate loans make sense. You can pay an additional charge and convert.


Currently, if you are in the market for loans, the best loan to take is a housing loan. The terms of repayment are good, and the interest rates are the lowest among retail loans. There is also another loan called "Loan against property" which has higher interest rates, and not-so-good prepayment terms, etc. but to me that looks the next best option, along with gold loans. When you are taking a loan you should also ask the bank about the option where a savings account with checkbook is linked to the loan account, and the interest that is charged is on the net balance (loan less  balance in "attached account"). This will enable you to in effect earn the same interest rates on your savings as that of the loan.


Do post your thoughts and comments…

Monday, April 23, 2012

Musings of a Corporate Voyeur

You must read this book.

Musings of a Corporate Voyeur, a new book to hit the stands written by Sriram Iyer (Alchemy Publishers) is a book I would highly recommend.


Sriram Iyer is a "working professional", "in service", like most of us. He has distilled his 25 years of experience of working in large corporates  across three countries, into a delightful book of eleven short stories. Though a work of fiction, anyone who has worked will relate to the situations and characters in the book – a finely etched sense of déjà vu pervaded with ironic humor permeates the entire book.  In penning the situations and the characters in the book, the author brings out the peculiarities and absurdities of work life with a cartoonist's eye for detail, a novelist's gift of understanding people, and the satirist's tool of exaggeration to bring out the absurdities inherent in life at work.


The stories in the book all revolve around situations in the office, challenges faced by its characters due to what could pass for routine expectations, including the demanding boss, powerful secretary, desirable co-worker, and the petty intrigues, jealousies and backbiting that could easily spin out of control in any office. The situations are a little exaggerated at times which helps bring out the irony even better, and the characters are people you will recognize from your own office. The humor is spiteful and the language strong at times, but it all serves to bring out the best and the worst in each character in the daily maelstrom of existence at work.


Sriram also happens to be a close friend of mine – I know him since my school days.  He has always been a keen observer of human nature, and possesses a delightful if irreverent sense of humor.


The book, priced at Rs. 195, is available at all leading bookstores, and online on Flipkart. Do visit and buy.