Indiabulls Housing Finance head explains that increasing the EMI is better than extending the loan tenor
The corporate sector had hoped otherwise, but the Reserve Bank of India (RBI) today hiked key interest rates by a further 25 basis points. This will likely make home and automobile loans still more expensive and realtors believe that property prices will go up further. In this situation, Sachin Chaudhary, business head of Indiabulls Housing Finance, has advised borrowers not to go for fixed-rate loans or to extend loan tenors.
"In a high rate scenario, try and increase your EMI if your pocket allows. Do not go for fixed rate loans, because the rates are expected to soften," Mr Chaudhary said. He also argued that it was preferable to keep the tenor constant than to pay a fixed amount of EMI. In the latter case, the interest increases significantly by the time the loan is repaid. "Don't increase the loan tenor," he said.
The Indiabulls Housing Finance head also explained that in the case of a fixed tenor the effective rate is much lower, because deductions on home loans result in tax benefits. He demonstrated this through an example: When the tenor is fixed for 180 months, and if rates are hiked by 0.25% with each successive EMI payment, even though the EMI amount on every Rs1 lakh increases, the overall increase in rate of interest after six successive hikes is 9%. However, when the EMI is fixed and the tenor keeps on increasing by even one month, after six extensions, the interest rate is increased by 22%.
Mr Chaudhary advised that in the present situation, it was better to renegotiate the rate of interest rather than switch to another financial institution. He also said that prepayment was the best option, and a part prepayment could reduce the loan tenor up to 50%.
Most banks offer loans that have tenets of 'teaser loans', that is a fixed rate for the first few years and then at par with floating rate loans. Experts think that the interest rate hikes are nearing their peak, and a lock in for 3-5 years is not advisable. "In most cases, the fixed-floating hybrid loans favour the lender and not the buyer," said an analyst.
The RBI today announced a hike in interest rates, the 12th time it has increased rates since March 2010. Repo rate now stands at 8.25% and the reverse repo rate at 7.25%.
Indian Overseas Bank chairman and managing director M Narendra said, "I believe banks will wait till the month-end before taking a call on an interest rate hike." Bankers are of the opinion that the rate increase will be passed on to customers sooner than later.
Informed sources have revealed that close to half of the complaints upheld by ASCI (Advertising Standards Council of India)—and subsequently withdrawn or modified—originate from competitors within the industry
The corporate warfare between big brands is just intensifying as more and more companies are fighting it out for a bigger size of the pie-and trying to grab that elusive consumer. Now it appears that the war has reached a different level-instead of expensive and lengthy legal battles, Moneylife has found that companies are find it easier to have the advertisements of their rivals pulled out by approaching the Advertising Standards Council of India (ASCI).
In the period of one year (from April 2010-March 2011), 42 out of 82 complaints against advertisements—that were either modified or withdrawn by ASCI's Consumer Complaints Council (CCC)—were from rival companies.
For instance, a rival company of Hindustan Unilever (HUL) complained about the multinational giant's television commercial of New Rin, which claims to be the only powder in India "removing yellowness and bringing whiteness" to clothes. According to the complaint, the visual showing the comparison between New Rin and another detergent (not named in the ad) is false and misleading. CCC upheld the argument, found the claim misleading, resulting in discontinuation of the commercial.
Similarly there was a complaint against Dish TV claiming that "half the country loves Dish TV" from a player within the industry. The ad was discontinued, after CCC found it to be misleading.
Moneylife has in its possession the details of the complainants whose complaints have been upheld. However, the documents do not reveal the name of the complainant, but only specify if the complaint has emerged from a rival player within the industry.
According to a few industry experts, none of these companies wants to approach court when ASCI provide them with an "easy complaint platform".
From 1st September, ASCI had decided to proceed with a 'fast-track redressal' of complaints originating within the industry. Accordingly, such complaints will now be resolved by the Fast Track Complaints Council (FTCC) of ASCI within seven working days, from the earlier time of around five weeks taken to resolve complaints.
Avinash Mantri, founder, Purple Grape Production and advertising professor, told Moneylife, "Companies often come out with an ad claiming that their product's results are better, or just use satire to lampoon a competitor's ad. There is a lot of competition between brands. (After all), an ad is all about giving out a quick message to the consumer. Even if ASCI has decided to fast track complaints, by the time the decision is out, the consumer already gets the message."
In fact, there are a number of complaints within the industry against HUL's advertisement. When asked if companies are using ASCI to target competitors, the HUL's spokesperson told Moneylife, "ASCI has been a very effective industry platform to deal with advertising-related complaints in a time-bound manner. It is recognised by the government and the legal system as well. The proposed fast track system for dealing with intra-industry complaints will strengthen the platform further as it will reduce the time taken to resolve the complaints."
Many of these intra-industry complaints, at times have no basis. In the above mentioned period, ASCI did not act against 29 out of 80 intra-industry complaints. For instance, on the Eureka Forbes television commercial claiming that that its brand Aquaguard is a "paani ka doctor", there was a complaint against it from a player from the industry. The complaint stated that the ad was trying to mislead consumers on a health issue and was also trying to "equate itself with professional doctors", without giving any proof. However, ASCI did not uphold the complaint saying that "paani ka doctor", is a creative expression stating that Aquaguard is capable of recommending the appropriate technology for water treatment."
ASCI insists that it upholds complaints only if they are scientifically proved. Alan Collaco, general secretary, ASCI, told Moneylife, "In this competitive environment, companies are alert to the competitors' claims in ads. However, the Consumer Complaints Council as well as our robust complaints handling procedure ensures that no complaints are upheld unless they are scientifically proved."
The Reserve Bank of India continues with its monetary tightening measures to control high inflation, notwithstanding concerns over economic slowdown
The Reserve Bank of India (RBI) today hiked interest rates for the 12th time in 18 months and maintained that its monetary stance going forward will be influenced by the inflation trend.
The RBI announced a hike in the repo rate (its main policy rate at which it lends to banks) to 8.25%, even as its monetary tightening appears to have not yielded the results it is looking for so far. The reverse repo rate (at which banks park their funds with the RBI) has also been raised by an equivalent amount to 7.25%.
With this hike, the policy rate has been increased by a total 325 basis points in one and a half year. The hike in policy rates which will lead to higher lending rates, has already affected the housing and automobiles loans business as well as credit off-take by industry, which is seeing a slowdown in sales. This had prompted expectations that the central bank would take a pause.
But the central bank said it was too soon to ease its anti-inflationary bias. "A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said.
Headline inflation for August rose to 9.78%, its highest in more than a year, from 9.2% in the previous month. However, the effect of previous rate hikes is likely to be felt in the forthcoming quarters, economist say, which could lead to the central bank stepping back.
The news of the rate hike dragged the stock market down by more than one per cent. The benchmark indices, which were mostly positive this morning, dipped to just below Thursday's closing levels, but recovered afterwards in volatile trading.
The Nifty which opened this morning at 5,123, nearly 50 points up from yesterday, slipped just after noon to 5,068, just under its previous close, then climbed back up about one per cent in the next 30 minutes. It was similar with the Sensex and by the end of trading the benchmarks closed with small gains, as positive global cues helped the market absorb the effect of the rate hike.
Manufacturing slowed down to 3.3% in July, the lowest in 21 months and lower industrial output together with higher prices has cooled economic growth. GDP growth in the first quarter (April to June 2011) moderated to an 18-month low of 7.7%, against 8.8% in the corresponding period a year ago.
While inflation in India in largely driven by food and fuel prices, both seen to be beyond the scope of monetary policy, it has recently affected the core non-food manufacturing sector and remains way above the RBI's stated comfort zone of 4% to 4.5%. Only yesterday, oil companies announced a hike in petrol rates by more than Rs3, although the more important diesel prices were not touched.
Two-thirds of respondents in a poll on the Moneylife website, this week, said the RBI was justified in repeatedly increasing interest rates in the fight against inflation.
Corporate India reacted gloomily to the rate RBI's 12th rate hike. Dr Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce and Industry, said, "The RBI makes a reference to the worsening global growth, but surprisingly has still gone ahead with a rate hike citing a jump in August inflation rate. This increase has more to do with a lower base in the period a year ago. (August 2010 inflation data was the second lowest in the past 12 months and was at 8.9% as compared to an average 10.4% in April-July 2010.)"
He said that sequential growth in consumption is at a nine-quarter low and that for gross fixed capital formation is at its second lowest in six quarters. "This rate hike will only exacerbate the current fears of an impending slowdown," Mr Kumar warned.
Commenting on the impact of the rate hike, N Seshadri, executive director, Bank of India, said, "Capex is not happening, investment loans are not happening. The next couple of months will give some sort of indication, but we believe there will be a pause (in rate hikes). So, after that, people will start thinking about fresh investments and we may see growth back in last two quarters."
Indian Overseas Bank chairman and managing director M Narendra said banks would need to pass on the hike to customers, as the cost of funds has gone up. "I believe banks would wait till the month-end before taking a call on an interest rate hike," he said.
After the RBI's tough talk today, a Reuters poll of economists today found that more than half of the 12 respondents believed that the central bank would raise interest rates at least one more time this year. The next policy review is on 25 October 2011.