Friday, October 2, 2009

“Dud cheques to recover loans, not goons (The Economic Times)” plus 2 more

“Dud cheques to recover loans, not goons (The Economic Times)” plus 2 more

Dud cheques to recover loans, not goons (The Economic Times)

Posted: 02 Oct 2009 03:20 PM PDT

MUMBAI: What if RBI asks banks to stop sending goons to your house to recover dues when you default on loans? Lenders have found a way to send policemen for the same, using an Act that was first introduced during the Raj in 1881.

Banks have found a way to project you as an offender by bouncing cheques, which you gave them unsuspectingly when you borrowed.

Banks, which take blank cheques at the time of disbursing loans, fill them for the entire loan amount and deposit for collection when a borrower defaults on monthly payments, resulting in a cheque bounce. They are now saying when you can't even pay a part of the loan, pay it in full.

Sounds absurd. But the idea is not to get all the money back at once, but to use the Act as a threat to come for a settlement, rather than drag on in civil law suits. Section 138 of the Negotiable Instruments Act, which deals with dishonour of cheques, provides for two-years imprisonment, or a penalty twice the cheque amount. Also, the fact that one could appeal only after depositing 100% of the amount is seen as a deterrent.

"If borrowers miss their EMI payments, banks fill in the EMI amount — at times the full loan amount — and create a record for dishonour of cheques so that action can be taken against the defaulting customers," said VN Kulkarni of the Bank of India-backed Abhay Credit Counselling Centre. "We have seen a sharp increase in such cases in the past 2-3 months." There is no data on how many such cases are in courts.

The rising number of reports of physical assault and harassment by recovery agents of banks prompted former RBI governor YV Reddy to crack the whip on banks on November 13, 2007.

"In view of the rise in the number of litigations against banks for engaging recovery agents in the recent past, it is felt that the adverse publicity could result in serious reputation risk for the banking sector as a whole," Mr Reddy had then said, adding the central bank "would consider imposing a temporary ban or even a permanent ban in case of persistent abusive practices."

But that left banks also helpless in case of wilful defaulters and the economic slowdown compounded the problems for lenders.

"Cases filed under Section 138 have increased in the past two years, as they have been found to be both effective and conforming to the legal requirements," Amit Seth, partner at law firm Seth Associates.

"The banks are in a position to initiate proceedings under Section 138 that places considerable pressure on such defaulters to return the loan amount on time." However, some bankers believe that the fancy for Section 138 is not because of RBI, but the downturn.

"The number of such cases has gone up mainly due to the rise in delinquencies, and not the guidelines on use of recovery agents' services," said Kamlesh Rao, executive vice-president — personal finance and mortgage, Kotak Mahindra Bank. The Negotiable Instruments Act may be a good instrument to threaten a defaulter, but has pitfalls. The bank may not get the money back, but could end up sending someone to prison for two years, leaving both losers.

"Whether the accused is sentenced to imprisonment or ordered to pay a fine is at the court's discretion," said Shafaq Uraizee-Sapre, senior associate with law firm Nishith Desai Associates. "Therefore, there is no assurance that banks will recover their dues under Section 138 proceedings."



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Disaster loans available for Station fire victims (La Cañada Valley Sun)

Posted: 02 Oct 2009 01:12 PM PDT

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Personal loan vs credit card debt (The Star)

Posted: 02 Oct 2009 04:51 PM PDT


Why its not always cost efficient to use personal loan to clear credit card debt

THE subject matter has become a common scenario among credit card debtors. Taking a personal loan to settle credit card sales method has also been adopted by banks in pushing their personal loan product. But is that wise? Key question is the total sum paid to settle the personal loan actually less than the sum which would otherwise be paid to settle the credit card debts?

For that, a few factors need to considered. Firstly, the tenor; while credit cards have an indefinite tenor with a minimum of 5% of outstanding balance to be paid, a personal loan offers a range of between 1-7 years for repayment. This sounds better. Secondly, and more importantly, what is the actual annual interest rate of the personal loan (which differs from the nominal fixed rate quoted for personal loan) as compared to the annual interest rate of the credit card, which is about 18%?

The nominal fixed interest rate that are usually quoted for personal loans (which ranges from 7.5% to 12%) is not an apple to apple comparison to the 18% annual interest rate charged for credit card debts. So, youre dead wrong if you assume that a 12% nominal fixed interest rate for personal loan is better than a 18% per annum credit card interest rate.

To get a better understanding of the two types of interest rates, lets look at their difference. Nominal fixed interest rate is similar to a hire purchase interest rate, whereby a fixed rate is charged against principal, and levied over the period of the payment. There is no consideration given towards the reducing principal balance as the repayments take place. Whereas, the credit card annual interest rate is a reducing balance interest charge, therefore interest is charged monthly on the reduced principal balance. This is similar to a housing loan interest calculation.

Let us now look at some examples of interest calculations whereby we derive the similar annual interest rate for the personal loan so that we can compare apple to apple with the credit card annual interest rate. The following assumptions have been adopted:

* Personal loan sum: RM10,000

* Repayment period: 3 years on 36 equal monthly instalments

* Nominal fixed interest rates (NFIR): 8%, 9%, 10%, 11% and 12%

For the different NFIRs, I have come up with a schedule (Table 1) to show the monthly and annual interest rates for the personal loan.What Table 1 shows is that for a given NFIR, there is a substantially higher annual interest rate. The 18% annual interest rate for credit cards sits between the 10% and 11% NFIRs. With some banks now reducing the credit card annual interest rates to 16%, the equivalent for personal loan sits between the 8% and 9% NFIR.

Let us now try different tenors for the loan repayment compared to the fixed 3 years and see the difference in the annual interest rates as per Table 2.

Therefore, annual interest rates are lower with longer tenors, but do bear in mind that longer tenors will entail bigger absolute sum being payable.

Another issue that is equally important but which is usually disregarded by borrowers is the fact that the personal loan is not paid net, but comes after deducting the cost of processing and handling fees. The fee usually comprises a fixed and a percentage rate. Going back again to our RM10,000 personal loan, let us assume that we only get paid RM9,650 after deducting RM350 for fees, how does this affect the annual interest rate? Refer to Table 3.

You will note that the annual interest rate has increased about 2.6% with the introduction of loan processing fees.

Now, let us go back to our main question if I have a credit card debt that carries an annual interest rate of 18%, do I take a lower NFIR rate personal loan to settle it? The answer is ONLY if the personal loan offers a NFIR of lower than 8.53% (recomputed to 2 decimals based on assumptions in Table 3)

Having said that, for anyone considering converting credit card debts, the better option would be to do a transfer balance, whereby another bank undertakes to settle the credit card balance on your behalf and sets up a reducing balance loan account, albeit certain conditions of course.

Be an informed borrower; ask your banker for annualised interest rates or effective interest rates of any loan product. If the banker uses bombastic words, try making reference to hire purchase and home loans, whereby you understand how these interest mechanisms work.

> Raymond Roy Tiruchelvam is former senior manager, economics and investment analysis, from an oil and gas company.



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Posted by Rakhma at 5:59 PM

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