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Before going for a loan, look at the fine print

Source : BUSINESS_STANDARD
Last Updated: Sun, Feb 03, 2013 20:10 hrs
A man walks past a bank advertisement for four wheeler vehicle loans in Mumbai

Looking for a loan? You don't have to look too far. Faced with slackening credit demand from the corporate sector, banks are pushing retail loans. Calls offering upgrades of credit cards, pre-approved loans and unsolicited cheques one can deposit in his/her account and treat these as a personal loan are doing the rounds again.

Since the Diwali season, banks started reducing interest rates and waiving or lowering processing fees on secured products such as home loans. With the latest cut in interest rates, State Bank of India (SBI) continues to offer the lowest rate on home loans. Now, the interest on an SBI home loan of up to Rs 30 lakh is 9.95 per cent; for loans of more than Rs 30 lakh, it is 10.1 per cent.

ICICI Bank and Axis Bank also have innovative offers on home loans. ICICI Bank offers one per cent cash back on every equated monthly instalment (EMI) for the entire tenure of the loan. Axis Bank has the Happy Ending Home Loan' scheme, which waives the last 12 EMIs, provided the initial loan period is 20 years and the borrower has made repayments for at least 15 years.

Citibank has introduced a referral programme for customers in India, through which a customer is eligible for cash rewards if he can convince a friend, associate or family member to take a housing loan from the bank.

Many banks have also extended discounts announced during the Diwali season. Some also have innovative offers on unsecured products such as credit cards and personal loans. HDFC Bank, for instance, offers a personal loan approval in two minutes in case the application is online and the loan amount is less than Rs 7.5 lakh. Earlier, the bank also had an interest-free payment holiday offer for select credit card members. Under this offer, if the cardholder used the card for three billing cycles, he didn't have to make any payment on retail spends due on his card during the period. Also, no late payment was charged on retail spends during this period. However, the offer was valid only for international credit card holders and those with a good repayment record. And, there were restrictions on retail spends. Cash withdrawals, EMIs and other payments were not part of the offer. Its impact was clearly visible in the bank's results for the quarter ended December, when its credit card portfolio grew 16.3 per cent and personal loans increased six per cent, compared to the previous quarter.

Jairam Sridharan, senior vice-president and head (consumer lending and payments), Axis Bank, says banks have been focusing on the retail segment, especially in the last two years. "The period when banks were recovering from problems in 2009, coupled with the fact that corporate loans weren't growing, led to banks focusing on the retail segment. It happened gradually," he says. The bank saw 45 per cent growth in retail assets in the December quarter.

As part of its retail bouquet, Axis Bank is offering personal loans at special rates for government employees and defence personnel. The bank is also offering special rates on personal loans for internal savings bank customers, based on their account balance, account activity, instances of cheque bounces, the period for which the customer has been with the bank, etc. Sridharan says, "Cycles like these have lasted two to three years - till consolidation or de-growth. As long as corporate credit is slow and retail demand is good, it will continue. But it is also possible corporate side problems such as job losses or income stagnation may creep in and these may affect retail demand."

Small banks, too, have been quick to jump on the retail bandwagon. Federal Bank, which recorded 25 per cent growth in its retail segment in the December quarter, is focusing on small and medium enterprises and the retail segment, even as it cuts corporate exposure, both in loans and deposits, says D Sampath, head (retail). The bank has been growing its gold loan and automobile loan portfolios. After the repo rate cut by the Reserve Bank of India, it was one of the first to cut rates on automobile loans. The bank is offering automobile loans at a flat 10.45 per cent (earlier it offered these at 11.2-11.7 per cent, depending on the tenure). It has also reduced the turnaround time for approval of automobile loans. "This retail focus will continue till recovery is seen in other sectors," he says.

Federal Bank also offers pre-approved loans for existing clients, based on their relationship with the bank. Another innovative product is a housewarming' loan for home loan customers. The interest on this loan, essentially an unsecured personal one, is 12.45 per cent. This is two per cent higher than the interest on home loans but lower than the standard personal loan rate of 17 per cent.

Non-banking financial company Bajaj Finserv offers online approval of personal loans to premium salaried professionals. For loans of up to Rs 15 lakh, the company promises approval in five minutes and disbursal within 72 hours. The company's personal loan segment was growing at 20 per cent a year, said a note by Bajaj Finserv. In the case of personal loan offers that seem too good to be true, one must check if the rate being quoted is on a monthly reducing balance or a fixed balance, says Aadhil Shetty of Bankbaazar.com. If it is on a fixed balance, the rate might be much higher in the long run. Borrowers must also ensure the processing fee is not too high for such products.

While interest rates have softened and are likely to fall further, one must always ensure the loan either adds to one's income or his/her asset. While earlier, banks reduced spreads in case of home loans and offered the lower rates only to new customers, this time, it is likely base rates, not spreads, would be reduced. It is better to wait for a month before committing to a loan, especially in case of fixed-rate loans such as automobile loans or personal loans.


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