Investing Money

Car Loans prepayment charge/ penalty - Banks fleecing customers

2009-08-14T22:32:00.000-07:00

Private banks have occupied the space of old proverbial mahajans/baniyas (I am one too though only by caste :) ), whereby they do anything possible to fleece the customer and increase their ROI. Prepayment penalty is one such thing.

There shall never be a mention of Prepayment charge/ penalty even once at the time of giving a loan. However, most car loans are typically closed at end of 2-3 years in today's enviroment as people change their cars more frequently now. At this time you realise that there was a blank in your loan agreement talking about prepayment charge/ penalty which they did not show you but it got filled sometime after you got the loan and they put this prepayment charge/ penalty as 4-5% (5% nowadays with private banks).

I worked with a Private Bank at the time of taking my car loan and upon asking, I was told that prepayment charge/ penalty was zero for bank employees. However, I did not figure out what'd happen if I left the services of the bank and to my utter surprise, when I went for prepayment I was charged 4% as at that point I was not an employee of that Bank anymore.

As such banks are right in charging a prepayment charge/ penalty to take care of fluctutations in liquidity but very often this factor is accounted for in the pricing of the loan itself. A prepayment charge/ penalty is just additional income and given private banks' hold on the market they were able to charge this. Besides, it started with a 2% amount years ago and some smart managers were able to convince top management to hike it to a level where they'd loose brand equity of the bank for short term ROI increase and career appreciations.

Today, when SBI is all out to gain market share by offering low rates, these private banks would soon be seen rolling back prices as well as prepayment charge/ penalty to make themselves look more attractive than SBI. However, by that time, millions of customers wouod have been duped by this charge.

I plan to take this (high prepayment charge/ penalty) issue to banking ombudsmen one day and would look for support from people who feel that this is a right thing to do. Till such time I advise you to start negotiating with multiple banks for your loan in order to get rid of this clause plus favaourable rates as well. Good Luck.

Where is the bailout package for employees?

2008-12-25T10:05:00.000-08:00

Governments have rushed into saving complacent and greedy Investment Banks and Housing Giants who were trying to make merry on wide spreads on sub-prime credits. However, nowhere have we seen measures being taken to save employees being sacked from these as well as other directly or indirectly affected organisations. Targets are usually the newest employees on board who had no or the littlemost role to play in there failures. Is it not the job of the government to protect them by ways of passing extraordinary legislations which shall make these organisations pay dearly before sacking them?

Make severance pay Tax free!

2008-12-16T18:28:00.000-08:00

We are already seeing lay-offs in India which is quite a new phenomenon for India Shining and there shall be many more in next months if economic downturn or the US recession continues to plague us. All these lay-offs come with severance money to employees facing lay-off, which range from 15 days to 3 months. I think severance money should not be treated the same way as notice pay which is paid to employee when fired for non-performance. Severance is paid when organisation has decided to lay-off people when it decides to take actions which were not foreseen earlier and people being laid-off may not be responsible for it. Hence, government should immediately intervene and bring in standards for deciding severance whereby employees in probation should also be entitled to an equal or higher severance pay than permanent employees as they are less likely to find jobs given their inexperience.

Also, the govt should introduce tax incentives to people facing lay-off as last thing, not only on their severance money but also maybe a tax credit/refund for tax paid in earlier years because in current scenario when everyone if firing/laying-off, majority of these people are less likely to land a job anytime soon and people would definitely like to see a portion of their money coming back which hey paid to government in their good times.

To sum-up, people being laid-off need the help of the govt as the employers are mostly going to be ruthless in paying severance and govt has made good hay in past few years from these employees and it is its time to pay back.

Home Loan rates cut! Will Home prices come down too?

2008-12-11T08:31:00.000-08:00

I commented on my other blog "Economics for common man" on 15th October about a possible cut in home loan rates. The same is not happening in the way I predicted but is happening in somewhat unexpected way i.e. through Indian Banking Association (IBA) decision to act on RBI's action to cut risk weightages on home loans (below 20 lakhs only) and subvention (read subsidy to banks) on loans below Rs 5 lakhs (Read in ET here and Rupee Times here) . Welcome move but what remains to be seen is that how'd this happen. Deposits rates are still hovering ~ 10-11% with most of the banks which will create a good arbitrage opportunity for next few months for people sitting on cash.

Another interesting thing is that new homes in that range i.e. below Rs 20 lakhs are just not available in cities like Mumbai and Delhi and therefore this benefit shall only be for home loans for people in Tier-II and smaller cities like Jaipur, Chandigarh etc.

It'd also be worthwhile to note that ICICI Bank recently declared that it will reduce interest rates on new home loans below Rs 20 lakhs to 11.5% from 13% (hiked just 1 month ago, read here on Domain-B and here on ET ). This is making existing home loan borrowers suffer like anything (read comments below these articles). I think it is simply making people more aware of guiles of private sector banks who in order to maintain short term shareholder returns compromise on millions of customer relationships who shall never deal nor recommend them to anyone in future.

Now, the ultimate question. Will new home prices drop any further? Well, the answer is yes for the ultra expensive ones where no bank would be cofortable lending till buyers fork out a huge margin but home prices of new homes under Rs 20 lakhs will only rise and Builders would like to capitalise on this opportunity by jacking up prices of inferior new homes in that bracket in Tier-II and smaller cities and making their sales force guile people into buying loans at very attractive "new home loan rates". There may be some good offers too but chances of that seem slim. Therefore, one needs to be very careful in wake of these facts while making a new home purchase decision especially in sub Rs 20 lakh category. In the high-end homes, people'll continue to have bargaining power with realty companies who'd like to take out money from expensive and luxury homes, probably drop some projects and come out with smaller and smaller new homes

HDFC Bank Fraud

2008-11-14T21:41:00.000-08:00

While it is important to invest money in right assets, it would do equally better to stay away from some seemingly harmless but actually money depleting instruments like a savings account with HDFC Bank. I hold an HDFC Bank savings account (5k min balance) since last 8 years paying only Rs 100/- per year as Debit card charges (though there is no logic for charging for a single card every year but I live with it as I need that account as well as the card). Last month I opened another account with HDFC in a suburban area when discussing with that branch with min balance of 2.5k. The guy was good and helped me with account opening. However, today I found out (online) that they charged me 500/- for issuing Debit card!!! Now that is equal to float (in banking parlance, money that bank earns from your money lying in a savings account) on a annual 5000/- balance. And the guy never told me about such a high charge. Usually debit cards are free for first year and any deviation from such a policy should be highlighted upfront as beinng told by RBI time and again.

I am highlighting it here and on other forums such as Instablogs, Indianpad etc for benefit of all people who want to open a new savings account with any bank. I request you to please ask upfront about any kind of charges to be levied on that account. As for me, I am heading to write a mail to RBI as well as Banking ombudsman, because I do not want to waste time talking to bank guys only to hear that "I should have asked for schedule of charges".

Buy Low, Sell High!!! Sounds familiar?

2008-10-14T04:52:00.000-07:00

Ofcourse, this is the BASICest law of investing, making money and splurginng it on gadgets of your choice be it a sports car, luxury villa or that LV bag. Since the beginning of current Bull Run with Maruti's IPO in 2003, we've undergone 5 painful corrections (Iodex or Move?), BIG corrections and I daresay most retail investors ran for cover thinkinng FIIs would never return to Indian Holy Exchanges. BUT BACK THEY CAME and COME THOU SHALT AGAIN and here's why:

1. You can invest your money in either Risk-free or Risky assets depending on your risk appetite.

2. Since Risk-free assets promises lower and fixed returns, people with higher risk profile run towards risky assets.

3. Equities is a class of Risky asset as you invest in capabilities of an organisation to provide higher returns on activities being undertaken by them.

4. There lies the catch: How do you know people governing risk-free assets would make risk-free investments, as typically there are only three categories of Riskfree assets: Government or Govt Enterprises' securites, Bank FDs or Corporate FDs. With the recent credit crisis, last two have lost their credibility upto some extent though not totally.

5. So those believing in "Don't put all eggs in one basket" continue to invest in multiple asset classes including equities.

6. Therefore, there is a good chance that money would again flow into equities marketrs as people would like to invest some of their money with people who they believe can generate good returns.

Inevitably, its now a matter of "when" and not "why" equity markets will rise. Equities are at all times low and may even test further lows. However, one should remember that good companies continune to attract investor fervour and shall soon see all time highs with their performance speaking for themselves. So, if you believe in some stories, then buy them now and maybe save some dough to buy later -whether it happens at a lower or higher price will only add that 'kick' .

Wish you happy investing, and do let me know whether you agree to my ideas or not, and share other thoughts that you may have on the same.

2008-09-29T10:16:00.000-07:00

Prices of GOLD ARE DIPPING,US$ V/S RUPEES
and a brief study

Luxury Villas, Flats, Homes - Should you buy now?

2008-09-28T11:00:00.000-07:00

Everyone is talking of an imminent correction in real estate market but when is it coming? And then, some people are expecting a bull rally in stock markets to begin by Diwali. If that happens then how can we see a correction in realty market? Will sentiments differ for the two?

My analysis is that markets are continuing to be cautious for some time now. Deep corrections from these levels are far-fetched thoughts. Another 20% correction in stock market from 13k levels even if it happens would happen because someone selling like crazy at such levels has actually gone crazy somewhere else (read: Land of the Subprime).

What I feel would be a good buy today is real estate. Liquidity has dried out. Buyers as well as sellers are few. Advantage is in the hands of the people with power to buy whether by cash or by power to borrow. And my bet would be on residential as it is easier to get it financed and easier to turn it into a money making asset as compared to commercial where there is a lot of skepticism. And then there are tax benefits too (follow this link for tax benefits).

Resale or Original booking? Well, lots of developers are willing to fund the interest portion as of now for any booking received as a result of no loans available to them in money markets. so, they arrange a home loan to you and are willing to fund the interest for two years (which is at 12-13% as compared to 20% plus being available to them through banks). Do bargain to avail of tax benefit on the same once you get the possession.

Resale: Well, whoever is willing to sell is surely not finding enough buyers and so you can easily get a cool bargain and then you get to stay in it immediately or you can put it on rent and reduce EMI burden.

So, whether stock market or real estate, choice is yours. All I can say is that timing is tight.

Is DDA flat sale really at a DISCOUNT?

2008-09-09T09:08:00.000-07:00

DDA has announced sale of approx 5000 flats to Delhites (TOI, Express India)- that too at a significant discount to market rates. DDA officials are quoted as saying that these are being sold at no profit. However, the process inherently is quite profitable (or should I say profiteering!) i.e. if DDA realises it.

Consider this: Flat prices average around 40 lakhs as range is from 7 lakhs to 77 lakhs. Response from public is overwhelming. People are expecting 200 times of form sales and 150 times of subscription. Approximately 10 lakhs form are going to be sold at a price of 100 bucks each. This amounts to Rs 10 crores itself or Rs 20,000 per flat. Quite a paltry amount and commendable too as it puts the form in pocket of all. Now, the real thing. Each applicant needs to submit 10% of flat amount as earnest money for a minimum of 3 months from September 16 i.e. the last date of submission. Considering 100 times subscription, and for a flat's average price of 40 lakhs, this amounts to Rs 4 crores per flat (10% earnest money). On this amount DDA stand to earn interest at close to 9% p.a. i.e. 2.25% for the 3 months which comes out to 9 lakhs. Whoa!!! Pls recheck. Yes, thats correct. And there is a chance that money would lie with DDA for at least another month and throw in average period of 20 days (half of 40 days between Aug 6 and Sept 16), this amounts to another 5 lakhs. So a neat profit of 14 lakhs awaits DDA i.e. a 35% return on the flat amount. I bet DLFs of the world would follow suit with such a practise.

And what about cost to applicant. If its own money, the guy stands to lose 1% of the amount calculated above per application i.e. 14,000 for a flat of 40 lakhs. Banks have come forward to finance 100% of amount which should come at around 12-14% and the cost for these applicants is 12/9*14,000 i.e. 19,000.

I think whether 14,000 or 19,000, the sale process amounts to a costly lottery ticket for applicant. If DDA really doesn't want to take the profit away then it could've simply asked for a Fixed Deposit or other security in the name of applicant which could've been pledged in its favour. But DDA has its experience since 60s and last sale in 2006 of 3000 flats elicited a response rate of 60x.

I hope my blog puts things in perspective and clears notion of people about DDA selling flats for no profit. Let the buyer beware. I find this akin to a lottery ticket and I'll try to figure out if that is allowed.

Business Standard: DDA, banks to earn Rs 475 cr from housing scheme charges : Talks about DDA ploying funds to Low Income Group Housing. My question is why make 99% people pay for something simply because they don't have choice.

India Housing: DDA Housing Scheme 2008

Rasoni, the Investment Guru: Bank loans for DDA Flats Registration amount

Real Estate Blog: 5020 DDA Flats Going, Will You Get Lucky?