Small Loans, Big Money

Today if you want to go on that dream vacation or buy your wife a diamond ring on her birthday, you don't have to wait till your savings add up. Banks are more than willing to fund almost any conceivable expense.

Having financed cars and homes for several years, these modern-day "business-savvy money-lenders", are now beginning to realise the value of financing even small domestic needs. The rider of course is that money is parted with only after the bank is convinced about your ability to repay; and at finance charges that average close to 18 per cent.

One enthusiastic manager of a bank in south Delhi says he would finance any credit-worthy consumer, even if he has to go beyond the purview of the bank's schemes. And a pointer to the fact that there is big money in small loans is the State Bank of India (SBI) which has set aside a whopping Rs 1,000 crore for consumer finance this year, the same target as that for housing loans.

 

In this race to get a slice of the fast growing consumer finance pie no bank worth its name wishes to be left behind. HDFC Bank started its personal loan scheme this January; ICICI Bank having test-launched its schemes in Mumbai in January is introducing it in Delhi shortly; Citibank set it afloat just a few months ago while the American Express offering came earlier this month. All foreign banks are on the hard-sell route, their officers will come right up to your doorstep with loan offers. Nationalised banks, which offer more cost-effective deals, are yet to get savvy when it comes to marketing their products.

While nationalised banks offer only consumer loans for specific products, foreign banks and multinational finance companies also give clean cash loans.

The Punjab National Bank (PNB) scheme, for example, gives a loan against the consumer durable dealer's quotation for the product to be bought. Furniture and household goods are included here.

In the case of a clean cash loan, you are free to use the money for anything provided you have satisfied the bank about your credentials.

Both nationalised and foreign banks ask for proof of residence and identity, last few months' salary slips and the bank statements. One does not need to maintain an account with the financing bank, in most cases, though a few nationalised banks insist on this stipulation.

Canara Bank and Bank of Baroda are two cases in point The former satisfies itself only after tracking the applicant's account for 6 months. The last income tax return filed, latest form 16 from the employer and verification of signature from the bank where the salary is credited are some of the other formalities one might have to fulfill. In the case of HDFC, for example, one also needs to have been in employment for a continuous stretch of two years.

Canara Bank recently modified its personal loan scheme with a package called Canbudget wherein loans up to Rs 1 lakh are offered to the employees of their corporate clients with no questions asked and no security or guarantees sought. The bank also broadened its medicaid scheme for pensioners only weeks ago to include within its ambit loans for any personal use and by raising the loan limit to Rs 40,000.

Just about anybody can avail a loan from the nationalised banks _ government employees, those employed with the private sector, police and the defence forces, professionals and the self-employed. In fact, the scheme has recently been extended to include even those engaged in agriculture.

Foreign banks and private finance companies, however, as a general rule give out loans to the salaried employees of only those companies they have shortlisted after ascertaining the financial health of these companies. Citibank, for example, entertains only the employees of profit-making companies with an annual turnover exceeding Rs 100 crore.

These banks also have a stringent income eligibility criterion that one must satisfy _ upwards of Rs 8,000 per month or thereabouts. The requirement is a little easy in the case of nationalised banks _ Rs 3,000-Rs 7,500. In case of a larger loan where the bank has not been sufficiently satisfied about a customer's credit-worthiness, nationalised banks might ask one to furnish a `third-party' guarantee; security is normally the hypothecation of the articles bought. Finance companies and foreign banks don't have any such conditions.

The amount that can be borrowed is invariably linked to income. Standard Chartered offers up to 11 times one's take-home salary, Citibank up to 8 times and ANZ Grindlays about 16 times. HDFC Bank has yet another yardstick by which it decides on the loan amount _ it should not entail repayment of an equated monthly installment (EMI) that is more than 40 per cent of one's income. The nationalised banks normally extend credit anywhere between Rs 10,000 and Rs 2 lakh, (in cases up to 12 times the net monthly income) under the personal loan scheme. Most nationalised banks offer finance up to 75-80 per cent of the invoice value. Foreign banks, since they give a cash loan, can finance any product completely.

So while there might be many finance options for various purposes the bottomline is the interest charge. One should note whether interest is being charged at a flat rate or on a diminishing monthly balance. The best deal, from this viewpoint, is undoubtedly what nationalised banks offer, they charge interest anywhere between 15 and 17 per cent. What makes it cost-effective is that it is levied on a diminishing balance. In contrast, multinational companies like Avco charge as little as 7.9 per cent but being a flat rate it works out to be lot more expensive. Citibank, for example, charges a flat rate of 12 per cent which translates into 21 per cent on diminishing balance. The rate of both HDFC and Grindlays Bank works out to 21 per cent while that of Stanchart, ICICI and finance company Countrywide is in the 22-24 per cent category.

Jagjot Singh, an executive with Parasrampuria Synthetics Ltd, came away disappointed from Countrywide where he had applied for a loan of Rs 17,000 to buy a 29 inch colour TV. This was because, besides having to pay interest at a flat rate, he was also asked to cough up a few installments up front. Avco, also has similar rules. For example, for a loan of Rs 50,000 repayable over a year, Avco asks for three EMIs amounting to Rs 13,611 in advance. So, in effect, one is getting credit of just three-fourths the amount sought even though paying interest for the whole sum. It is in this light that the much-touted zero-interest schemes have to be seen. First, one has to shell out almost half of the loan amount up front and the zero per cent interest is then valid only on the remaining principle.

For the pensioners, however, the rate of interest is higher roughly by about one per cent, than what is charged from those who are still employed. Also pensioners have to repay loans within 24 months.

The repayment of regular consumer loans can be stretched up to five years, if taken from a nationalised bank. But most others offer loans for only three years. Repayment is mostly through EMIs, for which post-dated cheques have to be submitted to the bank. In some cases loan installments can be debited from your bank account.

While the money may be there for the asking, you still have to pay a price for it.

The Price you have to pay

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Bank Loan Period

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EMI (1 yr)m EMI (2 yr) EMI (3 yr)

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PNB 4,520 2,435 1,740

Canara Bank 4,550 2,462 1,772

SBI 4,515 2,425 1,735

Countrywide 4,777 2,694 2,000

ANZ Grindlays 4,656 2,570 1,884

HDFC Bank 4,656 2,570 1,884

Standard Chartered 4,704 2,619 NA

Citibank 4,657 2,570 1,890

Avco 4,537 2,495 1,801

(3 EMIs (5 EMIs (7 EMIs

in advance) in advance) in advance)

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* above figures are applicable for a loan of Rs 50,000

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