Banks ask borrowers to wrap their personal loans, overdraft services

The banking sector, reeling under a rise in non-performing assets (NPAs) from the corporate sector, is seeking to hedge loans to individual borrowers. Increasingly, borrowers are being asked to buy insurance policies to cover their loans. “Covers with personal loans and overdraft facilities have gained traction in recent times. Both public and private sector banks are aggressively pushing these products to retail customers,” said a senior State Bank of India (SBI) official. According to Reserve Bank of India data, outstanding personal loan, without housing, consumer durables, credit cards, etc, stood at Rs 12,817 crore at the end of December.
Insurance industry players say at present, almost 30 % of personal loan borrowers are buying insurance covers. And, that is increasing at a fast clip. In comparison, the penetration in case of home loans is up to 90 %, mostly for loans between Rs 10 lakh and Rs 1 crore and around 75-80 % for an average education loan of Rs 4 lakh and above.
 Since personal loans are for a period of three-five years, the premium is not very high. Also, if the borrower purchases a group insurance policy, the premium is even cheaper.
“At a small cost, both banks and borrowers are assured of peace of mind,” said a public sector bank head.
The premium for a 35-38-year old is Rs 350-400 per lakh annually, if one takes the group insurance route. A single-premium policy for five years will cost Rs 1,500-2,000.
Says A S Narayanan, chief distribution officer at Bajaj Allianz Life Insurance, “Group mortgage covers are fast gaining ground. A lot of people are buying covers for personal and overdraft to avoid burdening their families in the event of their death.”
Group mortgage covers are mostly single-premium covers, especially for personal loans, as these are short-duration loans as opposed to housing loans. There are various options, such as a single-premium reducing cover, a single-premium level cover, and regular-premium reducing and level covers.
Reducing covers, as the name implies, decrease as the outstanding loan amount (principal borrowed) decreases over the loan tenure.
This results in a lower premium as the loan amount decreases. On the other hand, a level cover stays stagnant even if the loan amount decreases. “Some of these policies also have a money-back proposition where the buyer gets back a certain sum at the end of five years,” said a senior SBI official.
According to bankers, borrowers are being sold the covers under the proposition of ‘no headache to families, in case of an untimely death or even unemployment’.
“Borrowers are showing interest because if there is a default due to death, the family will not be pestered or will not be burdened with a loan,” said the retail head of a private sector bank.
Some banks have even made it mandatory to purchase a cover with a personal loan. In the case of some, the premium is included as part of the loan fee. However, a senior SBI official says since the central bank does not allow linking an insurance product with any loan, banks have to take a consent order from the customer before selling such bundled products.

Use credit cards elegantly

A characteristic free credit period in India is 45-51 days. If you pay off the dues within this period, the interest is saved. If in case you are unable to pay off the entire amount within the due date, a common practice is rolling over the dues after paying the minimum amount. This could be expensive as you would have to pay an interest of about 3 % per month and the new purchases made will not get any interest-free period until the dues are completely settled. So, here’s a quick look over the other schemes offered by card companies to clear off credit card bills.
Balance transfer
If you opt for Balance Transfer, you can transfer the outstanding balance from one card to another, and thereby extend the repayment period.
Process
A balance transfer can take place between any two banks. The process takes 7-10 working days with a processing fee, and a maximum of 2 % will be levied.
Low interest rates or sometimes zero interest rates are available for balance transfers.
Points to be taken care of
Check for hidden charges or if the bank charges a transfer fee in addition to the processing fee.
The low interest rates the banks offer on balance transfers may be for an introductory period and once this period is over, it may return to the normal rates.
It is important to note that the credit limit of the card on which your new due is, will be reduced proportionately. Also remember that the balance transfer amount will be limited to a maximum 80 % of your credit limit.
EMIs on credit card loans
If you are having a problem in paying the entire credit card bill at one go, a good option is to convert it into EMIs. This facility is similar to a personal loan. But here, unlike personal loan there is no paper work and no waiting for approvals either.
Another advantage here is that you need to pay a lower interest rate of about 1.5 to 2 % whereas the normal credit card rollover interest rate is higher than 3 %. Also, while this scheme is running, one still gets the interest-free period on new purchases.

HSBC to rebuild retail loans book

HSBC Bank Plans to focus on credit cards and home loans this year.
After booking losses on its consumer banking business for three straight years, Hong Kong and Shanghai Banking Corporation (HSBC) looks to rebuild its retail loan book in 2010, aided by an improving credit environment.
The UK-based bank, the third-largest foreign lender in India by assets, plans to focus on credit cards and home loans, where lending was virtually at a standstill till the second half of 2009.
The bank is now disbursing home loans worth Rs 100-150 crore every month. “Our focus for 2010 is to expand our mortgages business profitably,” said Rajneesh Bahl, country head, personal financial services.
In 2009, the lender cut exposure to mortgages in India by 20 per cent to Rs 4,061 crore from Rs 5,115.2 crore at the end of 2008 to keep a lid on losses.
“There is no doubt the economy is looking up again and customer confidence is on the rise. As the market picks up, so does the demand for affordable housing; we believe the overall pie will get only bigger, which could result in an increased market share for all players,” Bahl said.
After months, the bank is expanding its credit card portfolio. And as a sign of growing confidence in the market, HSBC has started sourcing credit cards from the open market this week onwards, according to bank sources. During the consolidation phase, the bank will only service specific requests for credit cards and not solicit customers.
“We never stopped open-market sourcing. For some time now, we have opted to grow selectively. We continue to offer cards to customers with a good profile and track record,” said Bahl.
In a departure from its earlier policy, the bank introduced co-branded credit cards last year. “Earlier, our thinking was that the HSBC credit card brand is strong and we should not dilute its value by co-branding. However, seeing the success of co-branded credit cards, we decided to introduce our own cards,” said a senior executive at the bank.
Among foreign banks, HSBC was one of the hardest hit by the downturn, reporting a loss of $219 million (about Rs 1,007 crore) on its consumer banking portfolio in 2009.
Standard Chartered Bank, the second largest foreign lender in the country by assets, reported an operating profit of Rs 248.4 crore from its consumer banking division in 2009.
Citigroup’s non-banking finance company, Citi Financial, reported a loss of Rs 729 crore for the year ended March 31, 2009.
HSBC saw stress on its consumer banking book even before the onset of the economic downturn in India. It reported a retail banking loss of $70 million in 2007. The loss widened to $155 million and $219 million in 2008 and 2009, respectively.
In 2009, loan impairment charges on consumer banking at the global level rose 9 per cent to $649 million, mainly due to rising delinquencies in unsecured consumer lending businesses in India and Indonesia.
“The delinquencies in India began to moderate in the second half of 2009 as measures implemented by HSBC in the second half of 2008 to mitigate loan losses, including ceasing consumer finance loan origination and tightening lending criteria on other unsecured lending products, began to take effect,” HSBC had said in its 2009 Annual Report.

ICICI Bank cuts down unsecured loan offtake

The country’s largest private sector bank ICICI Bank said that it is pruning its portfolio of unsecured retail loans, including personal loans, small-ticket loans and credit cards.
“As far as credit growth is concerned, for the past three quarters, ICICI bank constantly letting unsecured retail portfolio to go down. ICICI are growing corporate finance book both on project finance and trade finance. ICICI bank are growing 20 per cent in the auto and housing sectors. It’s the other products such as personal loans, small-ticket loans and credit cards, which are coming down,” Chanda Kochhar, managing director and chief executive officer of ICICI Bank, said
Kochhar said there has been a pickup in credit during recent times. “A lot of investment activities have started to take place. Lots of projects have seen financial closure. They have started initial investment. Demand for credit will pick up in a big way in the next financial year. Deposits are picking up substantially, if you see quarter-on-quarter our CASA (current account savings account) deposits have show reasonable growth, both in terms of absolute volumes and in value,” she added.
In the recent past, the Indian banking system has witnessed a very low credit growth. As the economy recovers and investment activities coming back to normalcy, credit offtake is also like to witness gradual growth.
K V Kamath, chairman, ICICI Bank, concurred with Kochhar and said that RBI’s move will not impact interest rates during the coming nine months. “For the first nine months, I don’t think there is a real pressure on interest rates. There is still enough liquidity in the system. I think liquidity needs to come down to push up interest rates,” Kamath said.
Kochhar said there would not be any immediate impact on interest rates if the cash reserve ratio (CRR) is hiked by the Reserve Bank of India (RBI). "Interest rates are driven not just by policy announcements, but more by demand and supply of credit and liquidity,” she said.