Now, you can earn more from idle cash

The idle cash in your bank account will now have more value. This is because the Reserve Bank of India has freed the savings bank deposit rates, a move bankers say could fetch better returns for depositors as competition intensifies. "This pathbreaking regulation will enhance and protect the savings returns from the brunt of persistent inflation," says Rana Kapoor, managing director and CEO, YES Bank.

According to the RBI  the banks will have to offer a uniform interest rate on deposits of up to Rs 1 lakh. For savings deposits above this amount, the banks will be free to offer differential interest rates. Says Pawan Agarwal, director, Crisil Ratings: "This will result in increased competition among banks, and small- and medium-sized banks, which are trying to increase their retail deposit base, are likely to be the first movers in increasing the interest rates."

Experts believe that the average interest rate on savings accounts will increase by 50-100 basis points (100 bps equals 1 percentage point) from the current 4% over the medium term. Competition will increase markedly for savings deposits over Rs 1 lakh, especially in urban and metropolitan areas, which constitute around 60% of banks' savings deposits. "This will also induce the banks to offer innovative savings products to different customer segments," says Agarwal.

About 20-25% of the total bank deposits are parked in savings accounts. Till now, banks were mandated to offer 4% interest rate on such deposits. It was hiked last year after remaining unchanged at 3.5% per annum since March 2003. What most of us are unlikely to remember is that the savings bank rates were once fixed at as high as 6% too (see graphic).

Impact of deregulation
With banks free to decide the interest rates, these can swing both ways. However, experts say the rates are unlikely to go down much since savings deposits offer the cheapest source of funds for banks. They would not want to make them too low and risk losing the depositors.

One likely change could be in terms of product innovation linked to savings accounts and increase in user charges. For instance, in developed countries, such as Canada, Japan, Australia, New Zealand, the UK & US, where interest rates are deregulated, most savings bank accounts carry charges if the number of transactions exceeds the permissible level. Similarly, in response to the deregulation of savings deposit rates in Hong Kong in 2001, a number of banks launched new products, such as combined savings and checking accounts

According to the RBI, product innovations in India after deregulation may include a variety of operations, such as branches, Webbased channels and ATMs. The rates offered may differ based on the flexibility of operation of savings bank accounts and the degree of liquidity offered, such as notice period for withdrawal, number of deposits and/or withdrawals allowed per month, and percentage of amount that can be withdrawn in a month, among others.


Should you switch banks for better rates?

YES Bank  was the first to hike the interest rate offered on savings bank accounts by 2 percentage points to 6%. Today Kotak Mahindra Bank have increased the Interest rate to 5.5% on SB account for the account maintaining balance below 1 lacs and increased to 6% for the balance above 1 lacs  . Others might follow suit in the days to come. Should you switch banks to take advantage of higher rates? "One shouldn't consider savings bank interest rates at all as you should not keep a large amount of cash in your bank account in the first place," says financial planner Lovaii Navlakhi.

Most experts advise against the move unless a substantial sum is lying idle in your savings account. Even then, if you consider moving to another bank, make sure to check the fees and charges that come with the higher rates.

Most analysts believe that banks will offset higher costs by hiking fees and charges for various services. This can come in the form of higher lending rates for borrowers or transaction charges and increase in minimum balance requirement. The key is to gauge your usage pattern of banking services before making a decision. Do you frequently run out of cheque books or withdraw cash very often? If so, you need to check the charges that banks levy for such services.

The second factor is convenience. Savings deposits tend to be sticky for most of us since we use them for loan repayment, utility bill payments, even investments, such as monthly SIPs. If you have had a long relationship with your bank, changing your account can be cumbersome as it also means updating all other accounts and payments linked to your account. "There is also the benefit that comes from loyalty factor in the form of a free credit card or a faster loan sanction. One should not ignore this aspect when deciding whether to shift to another bank.


Source: ET

Relief for small-home buyers: Govt to give 1% interest subsidy on loans

It may be a case of too little too late. The government is moving to provide some relief to small home loan borrowers by providing a 1% interest subsidy for loans upto Rs 15 lakh, provided the cost of the property does not exceed Rs 25 lakh.

The proposal, which is expected to be approved by the Union Cabinet on Tuesday, is aimed at providing some cheer to households saddled with high inflation and rising EMIs (equated monthly installments).

The move, announced in the budget, is being operationalised now to give a message that the government is trying to address concerns of households at the time of  Diwali when low sentiments are affecting spending. The scheme is an improvement of the existing facility where the benefit of interest subsidy is available to loans upto Rs 10 lakh, provided the cost of the property is Rs 20 lakh.

But celebrations could be short-lived as the Reserve Bank of India has Increased the Key policy rates by 25 basis points (100 basis points equal one percentage point) Now. Taking cues from RBI, lenders are expected to hike rates further to aggravate homebuyers' woes.

For a loan of Rs 15 lakh, with 20-year tenure, a 25 basis point increase in interest rates will translate into EMI rising by Rs 375, and the annual impact will be to the tune of Rs 4,500. A 1% interest subvention will translate into a saving of Rs 1,500 a year.

"For the people at the lower rung, there will be some benefit since the impact of a hike by RBI may be partially negated," said a public sector bank chief.

Also, the benefit is expected to be offered only on new loans. In any case, the number of beneficiaries will not be significant in big cities given that there are few properties available with a price tag of less than Rs 25 lakh

Government officials themselves acknowledged that this is not a big deal.

They, however, pointed out that the finance ministry has asked banks to ensure that as far as possible, lenders should not increase the EMI but instead try to extend the tenure. Public sector players have started implementing the government directive.

Already, interest rates have increased by around 250 basis points over the last 18 months as RBI has raised key policy rates 12 times to tame inflation. There is, however, growing concern that the government has been unable to initiate moves to improve supplies and take fiscal measures to check price rise, resulting in inflation remaining in the 8-11% range for the past 21 months.

HIGHLIGHTS: Few gainers

* Benefit available only on properties with a price tag of upto Rs 25 lakh

* Eligibility capped at loan amount of Rs 15 lakh

* 1% interest subsidy will result in saving of Rs 1,500 a year. But a 25 bps increase in rates will push up EMIs by Rs 4,500 annually

* Benefit only available for new home loans


Source: ET

7 things you need to consider while porting insurance policy

You can now officially bid goodbye to the days when you had to continue with your health insurance plan for the sake of accumulated benefits and time-bound coverage. With the new portability regulation in place, if you experience a gap between what is promised and what is delivered by your insurance company in terms of service or benefits, you can choose to move out and opt for a similar plan with any other insurer of your choice, while protecting the accumulated benefits of the existing health insurance policy.

The change is expected to bring in minimum service requirements amongst all insurance players, which, in turn, will have a positive impact on customer service. New benchmarks in terms of service standards and delivery mechanisms for the insurance players are expected to come into existence . While portability may seem like an ideal choice for all those who are looking for a superior level of service and benefits, many factors must be considered before one takes the decision to port.

Here are a few facets that should be kept in mind while making the choice to switch an insurer.

Regular features

Does your health insurance policy cover both hospitalisation and day-care procedures and without any sub-limits ? If not, look around and find one that offers all these benefits.

Do remember that all the policies are different and are governed by their underwriting principles. Hence, you should choose the one you deem fit.

Age limit for renewal

Does your current policy have an age limit for renewal? If there is a cut-off age, then look for an insurer who offers life-long renewal.

This is crucial to ensure health insurance coverage when you need it the most, as during old age, health deteriorates.

Claims-led rise in premium

Does your insurance company load your future premiums in case you make a claim in the current year? You can search for insurance companies that do not place additional loading on premiums for claimed years.

Room rent limits, co-payments and sub-limits on treatments

Some insurance companies have daily limits on hospital room rents, while others offer sub-limits.

You can choose to port to an insurance company that does not make any restrictions on the type of room customers choose.

Cashless or reimbursement

What is your mode of payment and collection of medical expenses currently? Do you have to pay first and then submit bills or are you able to avail of cashless facilities?

With age, ailments and concerns also rise. You may choose to opt for a cashless policy that will free your mind of payments, at the time of a medical emergency

Increasing coverage without restriction

In addition to life-long renewal, does your current policy allow for an increase in coverage with progressing age? With medical inflation rising consistently, your current medical cover may be insufficient in the future, when you are likely to require a higher cover.

Your plan should allow an increase in cover without any new conditions or restrictions.

Network of hospitals, doctors

Have you faced problems in getting cashless claims or too much time was taken to close on a decision? In case it's a yes, then review your current insurance company's network and compare it with other insurers who have larger and widespread coverage.

At the time of emergency, it is important to rush to the nearest hospital, rather than looking for a hospital which is covered by your insurer.

So if you have made up your mind to change your insurer, the first step should be to fill up and submit the proposal form of the insurer of your choice, along with the standardised portability form. On receiving a request for portability, the incumbent insurer will underwrite as per their guidelines and will inform you on the final decision within a stipulated time frame.

It is advisable to start the process at least 45 days before your premium is due in order to take an informed decision and hedge the risk of a break in coverage at any point in time.

And a final piece of advice: Do not choose to port to a lower premium cover, as you may lose your benefits and features previously enjoyed!


Source: ET

Inflation at 9.72% in September, RBI unlikely to pause rate hikes

Headline inflation for September is near double-digit levels, even though there are signs that high interest rates have perceptibly dampened demand. Hopes that the Reserve Bank of India will pause its rate hikes could be dashed. Wholesale prices rose 9.72% in September, almost unchanged from 9.78% in August, data released on Friday showed.

Central banks in a number of countries have cut rates to prop up demand, but despite rising pressure from industry and subtle hints from the finance ministry, the RBI has maintained it will not pause till it sees a conclusive evidence that inflation is cooling off. Stock markets and bond yields did not react to the inflation numbers, as a rate increase appears to have been built into expectations.

The RBI will review its monetary policy on October 25. "If inflation goes up, interest rates will go up anywhere in the world," RBI Deputy Governor KC Chakrabarty said at a Ficci event after the inflation data was released. Chairman of the PM's Economic Advisory Council, C Rangarajan, also did not think the inflation numbers justified a change in monetary stance. "For the monetary policy stance to change, inflation has to come down and show signs of definite decline. But that kind of an indication has not come...," he said.

However, some economists saw a ray of hope as the sharp upwardly monthly revisions in data had come off and the momentum in core inflation was also waning. "Today's inflation print strengthens a case for an end of rate tightening cycle," said Shubhada Rao, Yuvika Oberoi and Vivek Kumar of Yes Bank in a note. Those opposed to further rise in interest rates argue that inflation had become structural, driven by supply bottlenecks, and rise in demand because of increase in real incomes, making monetary tools ineffective.

"The ineffectiveness of rising interest rates for controlling inflation and weakening monetary policy transmission can be attributed to the supply bottlenecks coupled with the drift in policies to guide supply chains," said Arun Singh, senior economist, Dun & Bradstreet . A falling rupee has also added to the pressure by making imported goods and inputs expensive. "There is no comfort from data as yet...It will be tough going forward," said DK Joshi of Crisil.
Source:ET

Home loan borrowers to pay 15% more in EMIs

Increase in equated monthly installments (EMIs) due to rising interest rates and reset of teaser loans will put additional annual burden of about Rs 6,000 crore on home loan borrowers. According to a report by Crisil, higher EMIs and slowdown in economic growth would also increase bad loans for lenders.

In view of the persistently high inflation, RBI has hiked key policy rates 12 times in the past 18 months, leading to higher interest burden for home loan borrowers. The reference floating rate for the industry has increased by 200-250 bps during this period, which translates into an average increase of 15% in EMIs.

Although banks and housing finance companies have reset their benchmark rates, the increase has not yet affected customers who have opted for teaser loan schemes, which were launched in early 2009 to stimulate dwindling home demand . For a teaser scheme customer, the rates are fixed for the initial 2-3 years, and subsequently get linked to the prevailing market rates.

According to the Crisil report , a large number of borrowers who are on teaser loans will get hit with a sudden jump in rates when the teaser rates reset to market rates. This shift is expected to take place from April 2012. "As of March 2011, teaser loans accounted for 25% of the housing loan portfolio of Rs 5,100 billion." the report said. The difference between the teaser rate and the reset rate is likely to be as high as 300-350 basis points (bps).

The report has highlighted that at the end of June 2011 quarter the asset quality of industry players like HDFC, LICHFL and DHFL has deteriorated by 10-40 bps on a quarteron-quarter basis. "We expect the NPA levels to go up by around 30 bps over the next 2 years to reach 1.9 per cent by March 2013," the report said. On the positive side, yields for financiers will improve in 2012-13 as teaser loans availed in 2009-10 get reset to market rates. "We expect yields for a teaser loan customer to increase by 300-350 bps once they are reset to market rates. This will have a net positive impact of around 30 bps on the net profit margins of housing finance players in 2012-13 ," Crisil said.

The impact of rising interest rates is best reflected on the EMI of a borrower with a 15-year home loan for Rs 15 lakh. With the current mortgage rates hovering around the 11%, the borrower's EMI would have risen by by 15% from Rs 14,771 to Rs 17,049. If rates were to go up to 13%, his EMI will rise to Rs 18,979.

Economists back rate hike

Economists who met RBI governor D Subbarao on Tuesday have suggested that central bank continue with its rate increases as inflation continues to be high.

The central bank had held meetings with bankers and corporates earlier this month in the run-up to its monetary policy review on October 25. Both bankers and corporates have asked the central bank to halt rate hikes. While bankers have pointed out to a moderation in demand, corporates have highlighted the industrial slowdown as the need for measures to revive the economy.

Corporates have told RBI that steep inflation is owing to international factors and rate hikes will do more harm than good to the Indian economy. The economists, however, opined that since inflation was not coming under control, the only instrument with RBI was to use interest rates to prevent prices from rising further.

Source: ET

It doesn't make sense to go for fixed rate home loans

Dual rate home loans are back - albeit with some minor difference. ICICI Bank set the ball rolling by launching home loans with the option of having a fixed rate for either the first year or the first two years. The fixed rate for one year is between 10.5% and 11.5%, depending on the loan amount, and for two years, it is 10.75% to 11.75%.

Last week, HDFC also unveiled products with fixed and floating rates - the plans offer fixed rates for the first three (10.75% to 11.75%) or five years (11.25% to 11.75%). LIC Housing Finance, too, has joined the game with its 'New Advantage 5' scheme. This product offers a fixed rate of interest for the first five years and on floating rate thereafter, with the interest rate being in the range of 11.15% to 11.65%.

These hybrid loan products come with a fixed rate for the first few years and then offer floating rates linked to the the bank's benchmark rate. However, they are different from the 'teaser rate' products that were launched by banks a few years ago. For one, the new hybrid loans have been launched at a time when interest rates, according to experts, have almost "peaked out". Secondly, unlike the teaser loans, the interest rates on the new loans are more or less in line with the prevailing market rates. Teaser loans typically offer artificially lower rates in the initial years of a loan.

Now, the big question: Do these products make sense?

"Some borrowers are comfortable with the concept of having a fixed commitment on their home loans. In fact, we have in the past seen borrowers going for pure fixed rates despite the rates being priced at least 100 bps higher," says Renu Sud Karnad, managing director, HDFC.

But, when interest rates are poised to fall, should you lock your loan at a higher rate? Does it make sense to pay extra for the comfort of having a fixed loan liability, that too, when you are not actually saving any money in the initial years, as the rates are mostly in line or higher (in some cases) than the current rates?

Not Teaser Products

For a loan to be classified as a "teaser rate" loan, the consumer has to pay interest rates - at least for a few months or years - that are lower than what he/she would otherwise pay on a normal loan for a similar purpose and duration.

"The new schemes do not offer any concessional rates vis-a-vis the regular floating rate loans. In fact, in the longer fixed rate options, the borrower has to pay a premium over the applicable floating rate. This is, therefore, akin to the 'fixed rate' loans being offered by a limited number of PSU (public sector) banks, who also offer fixed rates initially before charging floating rates," 

Have the rates peaked?

That is one question you should be asking because you would gain from these loans only if the interest rates are to move up from the current levels. "It is very difficult to predict the movement of interest rates. For the past six months, many, including experts, have been talking about interest rates having reached their peak. But, the rates have, in fact, gone up by 125 basis points (100 basis points=1%)," .

It is indeed a tricky call. However, most experts believe the rates won't go up much from the current levels.

"There is virtual consensus that rates are near their peaks. If we believe in that line of thought, then clients should not opt for such loans. However, consensus can be wrong at times. Hence, I think borrowers should choose a loan based on their own psychological outlook (ie, if they have a preference for fixed rates or floating rates) and their ability to service the loan," 

Should you go for these loans?

"Such schemes were attractive in the past when prevailing interest rates were high, because they offered the prospect of lower rates during the first couple of years of the loan. They also offered another comfort factor - certainty in terms of EMIs for the initial period when the rates are fixed. Now that the ground situation has undergone a change, these products would not make sense," 

Secondly, the rates for these schemes are equal to or higher than the prevailing market floating rates.

"It is not clear if the proposed regulation that pre-payment charges cannot be levied on floating rate loans will be applicable to these part-fixed and part-floating rate loans. So, all in all, it is better to ignore these schemes and concentrate on getting a good floating rate scheme," 

However, if you are looking for a longer tenure home loans and don't mind paying a tad higher as premium just for the fixed component, then you can consider these loan products.

"I would suggest that if one is taking a 10-year plus loan, locking into such rates for three years could be okay as a large part of the loan will still be floating. However, I would not suggest it for relatively short-term loans (three to five years),"

Source: ET

Indian companies credit downgrades rising, says rating agency Crisil

Indian companies are seeing acclerated pace of credit downgrades while upgrades are slowing, as pressure on profitability mounts and demand moderates, rating agency Crisil said on Tuesday.

Crisil's downgrade rate has gone up to 3.1 percent in April-Sept. 2011, compared to 2.9 percent in the second-half of the last fiscal year. The upgrade rate has fallen to 4.6 percent from 6.3 percent in the same period.

Crisil rates about 7,500 companies and Rating Action Ratio, its guage of relative frequency of upgrades and downgrades, has fallen to 1.03 from 1.1 and may fall further.

"We are expecting further downward pressure (on rating action ratio), primarily driven by demand moderation," Roopa Kudva, managing director of Crisil said, adding 10 of the top 20 industries in terms of loans outstanding are showing clear signs of slowdown in growth.

Crisil upgraded the ratings of 313 companies and downgraded 207 companies in April-Sept. compared to 675 upgrades and 269 downgrades in 2010/11.

Demand has been significantly dented in consumption-linked automobiles, real estate, textile and retail sectors, while sales growth has started faltering in investment demand-driven cement, capital goods and construction sectors, Crisil said.

It has projected a growth rate of 2-4 percent for passenger vehicles in 2011/12, significantly lower from an earlier forecast of 8-10 percent.

India's auto sector grew at a breckneck 30 percent in the previous fiscal but has lately faltered, registering a drop in sales in July and August.

Rate hikes by India's central bank - a dozen times since March 2010 - to tame a stubbornly high inflation has hurt consumer sentiment and dissuaded buyers from buying cars or properties on credit.

The rating agency said growth in export, which has remained buoyant so far, too may be dragged down by a slowdown in the United States and uncertainty in Europe.

Profitability will remain under pressure and high interest rates, wage and input costs would continue to reduce margins, it said.

Indian companies' second quarter margins would contract by 100 bps on slower volume growth, higher costs, Crisil said last week.

Source : ET