Central Bank of India waives pre-payment charges on housing loans

With this waiver, there will be no pre-payment penalty on all floating rate housing loans of the bank for both new as well as existing borrowers, Central Bank of India chairman and managing director MV Tanksale said

New Delhi: Central Bank of India has decided to waive pre-payment penalties on floating rate housing loans with immediate effect, reports PTI.

“In deference to Reserve Bank of India’s (RBI) suggestions, the bank has decided to waive penalty on pre payment of all floating rate housing loans irrespective of the source of funds of the borrowers,” Central Bank of India said in a statement.

With this waiver, there will be no pre-payment penalty on all floating rate housing loans of the bank for both new as well as existing borrowers, Central Bank of India chairman and managing director MV Tanksale said.

The Mumbai-based state-owned lender had already waived pre-payment penalty on foreclosures where the borrowers were making payments from their own sources.

Last month, State Bank of India and ICICI Bank decided to abolish pre payment penalty.

Housing finance companies has already been barred from charging foreclosure charges.

In October, sector regulator National Housing Bank (NHB) directed all the housing finance companies to desist from imposing a pre-payment penalty on home loan borrowers.

The levy of charge on borrowers for pre-closure of housing loans by housing finance companies has been considered further by the NHB in the light of subsequent developments and it has been decided that hereafter, housing finance companies should not charge a pre-payment levy or a penalty on pre-closure of housing loans, the regulator had said in a notification.

In addition, the NHB has also directed all the housing finance companies to have a uniform and not differential rates of interest for old and new borrowers that have the same credit or risk profile.

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What went wrong with Eurozone countries

 This desire to punish rather than co-operate ensures that the ongoing crisis continues and continues to get worse. Credit remains tight, capital flight from the Eurozone is becoming a real problem and Standard and Poor’s will most likely downgrade several member states

Like most investors I spent most of last week addicted to news about the crisis in the Eurozone. I have assiduously followed the progress of the European summit together with the market reaction. After extensive emersion in every newspaper, magazine, radio program and television show my conclusion is that I have totally wasted a week. Little if anything was accomplished. The reason is quite simple. The Europeans are trying to solve the wrong problem. What they should do is to learn from US history. They didn’t and it will cost them and everyone else.

The most recent agreement is based on the idea that fiscal malfeasance is the origin of the crisis. The thesis goes something like this. Wicked spendthrift governments mostly in Europe’s periphery borrowed a lot of money and blew it on social programs. Now they can’t pay the money back.

To solve this problem the summit decreed penitence. All Eurozone countries would be forced to adopt budgetary discipline through a “fiscal compact”. They would also pass ‘golden rules’ to ensure balanced budgets. If the rules were broken, they would be punished with automatic penalties. They also added a few Euros to the bailout fund, but much of the fund depends on leverage and anyway it wasn’t enough.

This approach was politically acceptable but has some definite problems. The first is that a recession is the wrong time to adopt an austerity package. Austerity creates a vicious circle of economic decline. It reduces domestic demand which raises unemployment and lowers revenues from taxes. This in turn creates larger deficits which lessens confidence in banks and shaky sovereign debt. Besides it isn’t the problem.

Before the crisis Spain, Estonia and Ireland had much better control of their deficits than Germany, Austria or France. They were in fact running a surplus. As a result of their fiscal discipline Estonia, Ireland and Spain has much better control of their public debt than Germany and France. Although Greece and Italy’s public debt is over 100% of their GDP (gross domestic product), Spain’s debt is only slightly more that Germany or Austria’s. Estonia and Finland have surpluses.

The real problem was competitiveness. The Eurozone countries that got into trouble, Estonia, Portugal, Greece, Spain, Ireland and Italy were all running substantial trade deficits. Estonia’s current account deficit was over 10% of GDP. So when the crisis hit in 2008 and private financing of the external imbalance dried up, the countries were in deep trouble.

Estonia is sort of the poster child for the problems of the lack of competitiveness and what to do about it. Estonia is a tiny country and its banking system is owned by foreign firms, mostly from Sweden. During a construction boom, Estonia’s growth was at double digits. After the crash it fell by 14%. The result was pain. Unemployment rocketed to 18%.

One tried and tested way to increase competitiveness is to devalue your currency. The Chinese are especially good at keeping the yuan low in order to insure their competitiveness. But since Estonia like Italy and Greece is a member of the Eurozone, this option was not available. Instead they went through an internal devaluation, which included slashing 9% of GDP from their budget and big cuts in nominal wages. The medicine worked. Estonia now has surpluses and its growth rate at 8.5% is the highest in Europe.

But Estonia had something else that was very important. It had a regulatory framework that encouraged business and was fairly clean. On the Doing Business Index and Corruption Index it scores slightly below Germany. In contrast Italy’s business climate is worse than Mongolia’s and Greece is worse than Yemen. As to corruption both countries are worse than Rwanda.

One thing that the Eurozone could do would be to create a form of joint liability like Eurobonds. These could be adopted with a credible sanction. Any country that spent too much couldn’t use them.

The success of this method was proved over 200 years ago in the United States. In 1790 the recently created country had a massive war debt of $54 million or about $4 trillion in today’s money. The problem was that the debt was very unequal. Some states like New York were deeply in debt, while others like Virginia were almost debt-free. One of the country’s “founding fathers”, Alexander Hamilton had an idea. The new United States federal government would assume all the debt and create joint liability of US bonds.

Mr Hamilton’s plan was an incredible success, but sadly no such solution was agreed to by the European summit. This desire to punish rather than co-operate ensures that the ongoing crisis continues and continues to get worse. Credit remains tight, capital flight from the Eurozone is becoming a real problem and Standard and Poor’s will most likely downgrade several member states. So don’t expect a happy New Year anywhere.  

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).

 

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What is said at conferences is very different from what is implemented in practice

 It is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in microfinance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice

Good morning folks and as I was browsing through the Internet this Saturday, I came across a very interesting video on the web. It was a video clip of Ajay Verma, the then CEO of Sahayata Microfinance, speaking at the 2010 Microfinance India Summit at a session titled, ‘Risks in Microfinance: Current Environment and Mitigation Strategies’

Speaking at the 2010 Microfinance India Summit, Mr Verma touched on three themes: 

a) Managing multiple lending: He said that multiple lending can only be managed if organizations themselves drive their credit policy very hard. He said the key is to have a (good) credit policy, adhere to it and build systems to check that the credit policy is working. He also stated that the proposed industry efforts for a credit bureau will help reduce multiple lending. And he also argued that the high (annual) growth of 100%-300% can be better managed if multiple lending is managed as this will then taper down the growth

b) Have engagement at all levels: Here he stressed employee engagement through good training— where there would be emphasis of organizational core values and code of conduct— within the institution. He said that MFIs (microfinance institutions) must have a strong and solid agenda to engage with their employees as it is employees who can create engaged customers. He also said that customer engagement must be absolutely transparent and they must be given complete information on products, charges, fees, etc. His cautioned that it would not be enough to merely provide information to customers but rather more importantly to ensure that they understand various facts clearly. For this, he said that engagement through financial literacy would be necessary so that low-income clients are educated on the dangers of debt trap and the need to invest borrowed money in income generation ventures. He further stressed for open engagement with the local authorities, stakeholders and funders so that information can flow transparently to them

c) Focus on product innovation: He said that 99% of the industry is on a single product and he said that a life-cycle approach must be used to have product innovation. He argued for starting with basic loan and as client income grows, he suggested that MFIs look at education loans, housing loans, etc

The MFIN website (http://www.mfinindia.org/mfin-leadership) still lists Mr Verma as one of its board members and introduces him as follows: 

“Ajay Verma | CEO & MD of Sahayata

Ajay Verma is the managing director and chief executive officer of Sahayata microfinance institution. As a former banking professional with extensive experience in risk management, start-up and product management, he brings into Sahayata 18 years of experience from banks across the world, where he was the head of risk for consumer and SME banking. Ajay Verma has worked outside the country for over nine years with companies like GE Capital.”

Sahayata is also listed as a partner with Atomtech (http://www.atomtech.in/partners.html) where Mr Verma’s following statement is given: 

“Sahayata supports livelihood initiatives of women entrepreneurs— they have consistently shown a good credit record and have repaid their loans on time. We seek to work towards the upliftment of underprivileged women; strengthening the social fabric by providing women with financial independence and nurturing their entrepreneurial spirit and self-reliance. In our journey, we are happy to be associated with the dedicated and intellectually gifted team at Atom Technologies; and look forward to optimally utilising their customised mobile solutions for microfinance to the benefit of our customers by providing them with a best-in-class service experience.”

Well, all is fine with the above statements including the high sounding concepts and strategies espoused at the 2010 Microfinance India Summit (November 2010) by the then MD and CEO of Sahayata Microfinance. What makes the above video very interesting to view is the fact that, barely, within a year (around November 2011) of his making the speech at the Microfinance India Summit, charges of serious misreporting and mismanagement had surfaced with regard to Sahayata Microfinance—which had until then been the darling of so many investors, lenders and stakeholders. 

And as Business Standard, 18 November 2011 noted, “Sahayata Microfinance Pvt Ltd has suspended the brass, including its chief executive, on charges of mismanagement. …The board questioned chief executive, chief financial officer and other senior managers on charges of serious misreporting and mismanagement. ... While chief executive was suspended with immediate effect, the CFO and head of operations were stripped of their duties immediately. They were subsequently suspended.” 

The icing on the cake is the fact that Sahayata had also won several awards and recognitions (national and international) for its good governance, innovative practices and the like and readers may want to read a previous Moneylife article that sheds light on this and other aspects with regard to Sahayata Microfinance going astray (Award winning Sahayata Microfinance is the latest to go astray)

Ok folks, the larger point I want to make is that it is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in micro-finance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice of with regard to Indian microfinance. And therein lies the pathway to overcome the present impasse and I sincerely hope that the Indian micro-finance industry recognizes this basic fact and devises appropriate strategies to overcome this serious gap between policy and implementation. And what better place than the on-going 2011 Microfinance India Summit to be a natural starting platform for this introspection with integrity… 

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments)

 

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