A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market. Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens.

Such individuals could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.

How does the process work

You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.

The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.

A prepayment penalty was earlier levied by the existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. However recently  NHBs and some banks like ICICI and SBI have waived this fee, but some banks could still charging a penalty. Do check with your bank and try to negotiate a waiver as the RBI and NHB mandate clearly are not in favour of penalty for prepayment in the case of a floating interest rate loan. Also, remember that you will also need to pay a processing fee to the new lender, which could also be negotiated and waived in this high interest rate regime.

This can range anywhere between 0.5% to 1% of the loan applied, most banks restrict this amount to Rs.5000.

Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.

The current interest rate climate however looks unfavourable for a switch unless you want to do it for other reasons. Starting this new year all major banks have increased their interest rates by 0.25% to 0.75%. More hikes are expected after the RBI monetary policy review slated for the end of January.

Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank  etc. and a loan will be approved only when conditions are met.

Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:

Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.

Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.

Service issues: Sometimes you might just be unhappy with your bank’s service and accessibility, which might prompt a change.

Things to watch out for:

-        It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.

-        In the recent past a loan transfer was the most sought after when teaser loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.

-         Get a statement from your current lender stating that property documents will be dispatched within a certain time frame to avoid hassles on this front.

-        Remember that a loan switch will not be possible if you have been irregular with your loan repayment with your current lender.

Buying a home is unlike buying any other item. First, this is possibly the most expensive purchase for us and secondly, the pricing structure includes many components thus making it complex to understand. Most of the time, home buyers take a loan to purchase a home and pay EMI for the next 10-20 years. Essentially buying a home can cost a major part of the savings for middle class.

Hence it is important to know what we are paying for. If home buyers are going to spend 30-60 lakhs within a few weeks on home search, selection, and purchase, they should know the pricing structure of their dream home. This will help them understand the cost structure better as well as set the right expectation on future investments. There are three types of cost that home buyers pay. Let’s look at them in detail.

Transaction Cost:

Transaction costs are components of total price that the buyer pays for the transfer of property from seller to his or her name. The components are duties, fees, and any other charges applicable in order to transfer the property. Transaction cost is the significant part of the total cost at almost 10% to 20%.

Transaction cost consists of two major components; statutory fee and professional fee. The statutory fee includes the following components

Ø  Stamp duty

Ø  Registration charges

Ø  Land conversion charges

Ø  Transfer & mutation charges, and

Ø  Others

The professional charges comprise of the following

Ø  Brokerage

Ø  Documentation preparation charges

Ø  Due diligence

Ø  Society transfer fees, and

Ø  Others

Finance Cost:

Finance cost is the cost incurred for obtaining finance from the Banks, HFCs or NBFCs. Finance cost includes the following:

Ø  Processing fee to the financial institutions

Ø  Documentation fee

Essentially finance cost includes all the costs that buyers incur for the purpose of getting a loan to buy the house. If the buyer is buying a house with upfront cash payment from his savings, finance cost will be zero. This is a very small part of the total cost usually not exceeding 1%.

Cost of property:

The last but most important cost component is the cost of property. This includes the following:

Ø  Cost of land

Ø  Cost of construction of home

Ø  Any other development charges that have occurred in developing and maintaining the property

Cost of property is the largest cost comprising 80%-90% of the total cost.

Important points

The same cost structure is applicable to rural and urban areas. The proportion of various costs may vary to some extent depending on population of the area but largely remain the same.

Transaction and financing costs depend on the age of the properties that the home buyer is going to acquire. Typically relatively new properties incur high transaction and financing cost than older properties.

Transaction costs can differ in few cases. Since it is usually higher in new properties, many banks have in-house brokers who can assist potential home buyers in locating their home. These in-house brokers are relatively cheaper. However, home buyers must check the credentials of the broker.

Finance cost varies widely across banks and lenders. Though the proportion of finance charges are much less than that of transaction costs and cost of property, buyers should check this too with different banks. Even if you are able to save only a few thousands, you are still better off.

Transaction through brokers or property developers can be a little expensive than transaction through banks or housing finance companies. The reason is simple. The brokers will charge his or her fee too.

Each cost component has several components under them. Home buyers should check each of the components and the amount of charges against them. They should not assume that the property builder has been charging the market rate.

Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc.

An accurate understanding of one’s financial well being is of utmost importance at every stage of life. So, whether you are a student, fresher into the job market or a veteran - assessment of personal financial health is important in order to make good financial decisions. For example, purchasing a car, purchasing a home, taking a student loan, liquidating an investment or making a risky investment  – all these decisions can be made only if you know your financial status well.

An individual’s financial health is computed by means of his personal net worth. In simple terms, personal net worth is the net asset value of an individual. Personal net worth is calculated as follows:

[Total Assets] less [Total Liabilities]

One must assess his / her net personal worth on a regular basis. This is because corrective measures can be taken in time if the net personal worth starts declining. It is much easier to recover at early stages than once you find yourself in deep financial crisis. Your net personal worth will also give you an idea about how financial institutions perceive you as a borrower.  For example, Deepak, an IT consultant with a software company wants to purchase a car. He has set his eyes on the Toyota Corolla. The car dealer informs him that the on road price of the car will come to Rs.11.25 L.  If he takes a car loan, he will have to pay a monthly EMI of Rs. 15,000 towards repayment of the car loan and pay an amount of Rs. 1.0 L as down payment. Deepak’s monthly salary is Rs.0.9L and the EMI as well as the down payment seems easily affordable. However, Deepak should assess whether he can afford to buy this car at present by considering all his liabilities and assets. His personal net worth should give him a fair idea of his current financial status and whether he can afford to buy the car.

Computation of Deepak’s personal net worth

Assuming that Deepak’s monthly outflow towards EMIs of outstanding loans is Rs. 35,000/- and looking at his personal net worth, a corolla is a viable option. This is because he has a positive net worth of Rs.18.73 L. Further he is able to make payments of EMIs with ease considering his current income and should also be able to pay the EMI on the new car loan.

Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc. For example, if Deepak has to bear the expenses of his sister’s wedding which costs him approximately Rs. 9 L and he has to sell off some of his investment to meet the wedding expenses, his personal net worth will look different. Further, if the market value of assets declines, his personal net worth will also take a hit. Let us take a look:

Deepak’s Personal Net worth is he has to bear his sister’s wedding expenses and the economy takes a down turn:

Clearly, in the above situation, Deepak should not purchase a car at present and should concentrate on improving his personal net worth.

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

We discuss here what you need to know about computing taxes on the rental income for a house and the capital gains from the possible sale of a house is taken up for discussion in this article.

A. Tax on Rental Income from a property

When you own two houses and let out one of them for rent, you receive an income for which you need to pay tax. In such a scenario, the taxable income from the total rent income received by you for that particular financial year will be computed in your tax returns.

How your rental income is computed

For rented out properties the gross rent needs to be the greater of the three values below:

a. Municipal valuation of the property – The rental value fixed by the corporation based on your locality and property value.

b. Actual rent received during the financial year – The rent received by you from your tenant for that particular financial year.

c. Fair rent – The rent of a similar property in the same or similar locality.

From this gross rent, the property tax is deducted to arrive at the net annual value of the rental income.

Deductions possible from the net annual value of the rental income:

1. 30% of the net annual value for repair, maintenance and rent collection expenses for the property

2. Interest paid towards any type of home loan on this particular property.

3. Any property insurance premium you have paid for the financial year.

Here is a simple example:

Actual rent received from property - Rs. 15,000 x 12 = 1.8 L

Less: Municipal Tax/Property Tax paid by you – Rs. 5,000

Balance: i.e. Net Annual Value -Rs. 1.75 L

Less:
(1) 30% of the net annual value – Rs. 52,500
(2) Interest paid on a renovation loan for the house – Rs. 30,000

= Taxable rent income = Rs. 92,500

The taxable rent income will be included by your auditor under income from other sources, along with other such incomes as well as your salary income and deductions you are eligible for, to calculate your final tax outgo.

B. Capital gains tax on selling a property

Let us also quickly consider what happens if you decide to sell your property.

Any profit that you receive by selling any asset at a price higher than at which it was acquired by you is classified as capital gain and clubbed under income from other sources.

Short term and long term capital gains

If you sell your house within 3 years from the date of purchase you will incur a short term capital gain or loss which is included under other sources of income.

In case you sell your house beyond three years then it is considered as a long term capital gain/loss.

Exemptions from capital gains tax

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.

For example, if you had purchased a house for Rs 5 L and then sold it for 9 L, the capital gain would be Rs 4 L. However, for the sake of income tax calculation a number called indexation number is used which is a percentage of the gain that is assumed as value addition due to inflation.

Thus if indexation is 20% then only Rs. 3 L (Rs  9L – 20% of 5 L + 5 L = Rs 3L) would be taken as capital gain. A capital gain is usually charged @20% in most cases where the calculation is based on indexation.

A better understanding of the tax rules can make your life easier and help you file your tax returns with clarity.

Decide what you really need by making a list before you venture out. And keep looking at that list while you wander around, so that you’re aware of what you really need, and what you like the look of. Make sure to be armed with only a limited amount of cash and ensure that you stay within your budget.

These days, whether you’re at home, or out in the city, you are constantly bombarded by messages to Buy! Buy! Buy! From phones, laptops and other electronic gadgets, to home appliances, branded clothing, and footwear, to airline tickets and dream holidays. Advertising has evolved so that the messaging is subtle, subliminal and extremely effective, so that the line between what you need to have and what is nice to have is often blurred. But let’s face it: consumerism has arrived, and in a big way, and there really is something to what is now labelled ‘retail therapy’. The question now is how to get the best out of all the shopping that’s out there and waiting for you!

A QUICK CHECKLIST

• Decide what you really need by making a list before you venture out. And keep looking at that list while you wander around, so that you’re aware of what you really need, and what you like the look of.
• Take a limited amount of cash.
• Stay within your budget.
• Leave credit cards at home.
• Do not remove the tags. Wait a week to think it over. Remove the tags once you’re sure you’ll enjoy your new item.
• Watch for sales. Try things on prior to a sale.
• Try shopping off the beaten path. You will be surprised at the bargains and finds that jump out at you.
• A heavy discount does not mean that you have to buy it.
• Take time to think things over to avoid impulse shopping.
• Ensure that you reach the shop at the right time. If not in the first week, then try checking out the shop in the first ten days of sale for sure. The first and last days are the worst to visit.

THE ONLINE VERSION

Using the internet to shop gives you access to the best prices and the best deals through a quick search in a matter of minutes. While it’s easy to shop around online yourself, price comparison sites can do it all for you. Simply type in what you want and they scour the market to bring you a list of retailers selling the product, along with the prices they charge. Do pay attention to product reviews because they can tell you if the product actually works. Another way to approach it is to Google the product along with the word ‘complaints’.

Tip: if you don’t check out, and leave the item in your shopping cart, the price might go down.

Make sure to double-check the total cost before you buy, especially if you’ve ordered something from outside the country. Shipping can sometimes work out to more than the price of the product itself.

Contrary to popular belief, never pay by check or money order when buying online. If something goes wrong, the seller has your money and you have to try to get it back. The safest way to pay is with a credit card.

SHOPAHOLICS, FIND A SOLUTION!

If however, you are a shopaholic, then you need to dig a little deeper and begin by examining your spending habits, and identifying your weaknesses.

• Look at your bank statements every six months or so, and evaluate your income and expenditure. Expenditure breaks down into fixed costs, such as mortgage repayments and bills, and whatever is left over and spent throughout the month. Work through the transactions and ask yourself if each one was necessary.
• Figure out where your hard-earned money’s going. It’s the little buys that add up, so if you can’t remember where you spent it, maintain a diary for a few weeks, and you’ll be shocked. You will also see a pattern to your spending, which, if you want to change, is really important to understand.
• Decide what you want and how much you intend to spend, and stick to that limit. When you plan to travel, always book in advance if you can, because long-haul flights and train tickets are significantly cheaper the earlier you book.
• Try not to use shopping as a pastime or entertainment. Ask yourself: Did I want this before I saw it? If the answer is no, walk away.
• Realise that buying something because it’s cheap does not mean you are getting a good deal, especially if you don’t really need it. A good test is to ask yourself if you would buy an item at its full price – this will give you an indication of whether you are getting a good deal on something you actually want.

So, start paying attention to where, how and why you spend and it’s likely that you will start feeling a bit more flush. Understand that price does not always mean quality; an unbranded item could give you the same level of quality as a known brand, if you shop smart. A happy mood spells a happy shopping experience.

One of the key aspects of creating a successful financial plan for a year is to establish a workable home budget that deals with your expenses, manages your debt and also builds your savings at the same time! A home budget can be defined as a plan that pre-determines your spending goals, spread over a certain period of time (in this instance, 1 year).

your income and cash flow

To chalk out a workable home budget, your income is the first thing that you need to consider. It must include all forms of income that is being received by you, like your pay cheque; interests and dividends that you earn from investments; tax refunds and gifts too. When you are calculating the “Cash Flow”, you however need to consider your expenses too – both anticipated expenses like food, conveyance, loan payments, taxes, supplies etc. as well as the unanticipated ones like medical bills and car repair costs. The incoming and outgoing money in your household is your cash flow. Good home budgeting can better your cash flow, i.e. will help you ensure more inflow and fewer outflows while reckless spending can do just the opposite! The bottom-line therefore should be to successfully manage and tackle the cash flow.

Home budgeting tips

Manage your home budget by tracking all the income/expenses that have occurred in your household month on month to figure out the bigger picture for a whole year! This will help you understand your weekly, monthly and annual cash flow and provide you with a good understanding of how your money is spent and saved! You will notice an improvement in savings with the progress of each month, as the stringent tracking of expenses will help you take a disciplined approach to excessive spending!

Once you understand the patterns of your income and savings graph you will be able to forecast your expenditure for the upcoming year, set new goals with regard to repaying your debts, planning your investments and improving your savings! To secure your finances for the future it is important that you save a minimum of 5-10% of your income every year!

Your sample home budget checklist

Mortgage/Loan repayments

Groceries and supplies

Utilities

Children’s education

Insurance premiums

Car/ Gas maintenance bills

Communication expenses like phone bills, cell phone bills, internet and cable TV charges

Subscription charges

Medical expenses

Entertainment costs

The reason why ‘Entertainment’ finds a place right at the end is primarily because this needs to the first to be sacrificed in a month where an unplanned or emergency expense crops up!

Paying the bills (even if you are not working and everything is being paid for from your spouse’s money), must be a prerogative for both the partners. Remember that you can chalk out a workable home budget and better the prospects of your family’s financial planning only if you have a clear-cut idea of the financial dealings that you need to make every month.

Emergency fund

The most successful of budgets always includes a contingency fund or an emergency account, to meet the unexpected costs that may arise in a household due to unforeseen events like a job loss for instance! Anywhere between 2 and 6 months of average income must always stay intact in this account.

The concept of green homes is a trend that is here to stay and is slowly but surely catching up in India. In the modern version of living, cities, towns and even villages are witnessing an increased preference towards building homes and creating an environment that contributes to the preservation of the ecosystem.

As far as application of this thought process to modern homes is concerned, the primary motivating factor that seems to help in making some positive progress in this direction, is the fact that going green can give home owners the ability to save on living expenses. Everybody who has lived in big towns and cities knows that life here can get overwhelmingly tough. It is not just the struggle to bring food to the table but also the desire to live comfortably. This is the reason why today every home has an AC, a refrigerator and so on. People don’t want to compromise on comfort but at the same time they don’t want to end up paying hefty energy consumption bills!

Green homes help such home owners get the best of both worlds by helping them cut down significantly on living expenses. By adopting green practices and by exercising the green philosophy, home owners can actually build on their goal to save.

Both builders and buyers are more aware of the benefits of going green, than ever before! Home owners in particular are seeing results in the form of reduced monthly expenses. So, everyone who is part of the equation is reaping benefits and this is reassuring to green enthusiasts who are trying their best to promote and sustain their efforts to build a greener planet.

As far as durability of home and home interiors go, the concept seems to play a big role. Homes that are built from green materials as part of building and furnishings tend to last longer and create significant real estate value. For instance, windows and walls that are designed and built to sustain this concept, don’t let outside temperature alter the conditions inside. For instance, one of the green concepts includes circulating water pipes sandwiched between two walls running all around the house. This keeps the interiors cool thus negating or limiting the need for an air conditioner. Also, the AC and appliances like the refrigerator function on optimum mode and expend less energy due to the cool environment, which shows up as significant savings on the bill!

When does a house become a green home?

When great care and attention is taken to optimally utilise energy and other natural resources for the healthy functioning of a house hold a house can qualify as a green home!

In India a building is certified as green when it is rated by Leadership in Energy and Environment Design, India advocated by Indian Green Building Council and The Energy and Resource Institute Green Rating for Integrated Habitat Assessment. These systems have been created to award ratings based on the concept of design, construction and impact on the immediate environment. Accordingly a building can be certified with a gold, silver or platinum rating depending on how evolved it is on the green parameter.

Is going green more expensive?

Specially treated construction materials and innovative systems have to be painstakingly incorporated during the construction stages to help achieve the objective of optimal use of energy, managing waste, optimally utilising renewable resources like water. For instance green homes might use high performance glass among other innovations to keep the interiors cooler or LED lighting that is three times the cost of normal lighting might be used to create an energy-efficient environment. However take heart from the fact that even if initial costs seem high, you will start recovering it within a couple of years of usage due to the enormous amount of energy-saving and reduction. Remember that every green element need not be expensive, you can utilise a number of low-cost construction methods to enable significant energy-saving as well. An ideal green home should be a combination of various methods, both expensive and inexpensive!

Here is a sample of possible green elements that can be part of your house construction!

Solar heaters: These use solar panels to optimally make use of sun rays to heat the water collected in an insulated tank. Depending on the capacity of the tank and water usage, you can heat water if there is sufficient sunlight just twice a week for a week’s water supply!

Benefits: This directly reduces the consumption of electricity worth rupees 600- 800 a month and helps recover installation cost in the span of 3-5 years. The cost of installation can amount anywhere between 7,000-12,000 Indian rupees.

Photovoltaic Panels: These use the energy from the sun to store electricity! You can actually live off the grid without any power supply if you integrate these panels with your building structure and create sufficient back up.

Some low-cost construction methods that help keep interiors cool during summer:

Thick walls with cavity: Such walls use up less number of bricks and leave a cavity within the wall and help in keeping the interiors cool.

Another effective low-cost construction method involves usage of soil and cement instead of just bricks to ensure nearly 15-20% cost saving and a cooler home!

Filler slabs and pre-cast elements for roofing is yet another effective construction method utilised for building roofs, which also help in keeping the interiors cool and results in 25% cost saving!

Rain water harvesting is a key element in renewing a water resource and helps in reaping long-term rewards and significant cost savings! This is nothing but an effective way to collect rain water and utilise it. This can be added as a provision in already constructed homes or incorporated while construction happens.

Though the concept of green homes is still in its nascent stages, many real estate authorities and builders are utilising the concept to educate their customers and use the same as a promotional tool to up their sales!

The Akshaya Tritiya is supposed to be one of the most auspicious days to buy gold. According to Indian belief, this day is blessed by the goddess of wealth and investment on this day would grow throughout the year.  The jewelers and gold traders wait for this occasion to push up the sales.

In order to attract more buyers, the jewelers and banking institutions have come up with various schemes this year. One of the leading jewelers has come up with an offer of a free silver coin equal to half the weight of gold purchased i.e. if someone buys 100 grams gold, then he will get 50 grams of silver free. Another renowned jeweler is offering up to 50% discount on the making charge of jewelry. Similarly, banks are also offering attractive discounts on the gold coins if booked on or before Akshaya Tritiya.

There are many options available in the market, and it’s natural for the buyers to get confused. The buyers have a wide range of options to buy Gold on this Akshaya Tritiya. Before buying, it is necessary to understand whether one is purchasing for investment or as jewellery. Following are some of the most attractive gold investment options available in the Indian market:

a. Gold Jewelry
b. Gold Bar/coins
c. E-Gold investment
d. Exchange Traded Fund (ETF)

The details of all the four options are shown in the table below:

Finally

Now after analyzing all the data under the four options to invest in gold, it would be a better choice for a buyer to first analyse his/her need. If the buyer wants to invest for long term with less carrying cost and doesn’t want many tax obligations, then Gold ETF is the best choice. Even when the buyer wants to make jewelry in the future with the invested gold, it is best to invest in the electronic form of gold because later on when needed it can be easily liquidated, and proceedings can be used to make gold jewelry at the prevailing market price. If, however, the buyer immediately wants to use gold as jewelry, then obviously there is no point in buying gold in an electronic form. Usually during Akshaya Tritiya people try to invest in gold as a long term asset, so perhaps the best way to do this is to invest in the electronic form of gold.

Gold is one of the most influential financial instruments in the India. Banks, NBFCs and unorganized lenders are actively engaged in providing loans against gold value. The loan against value of gold has played a great role by providing liquidity for an idle asset kept in the lockers.

However, in its latest move, RBI has come up with a norm for NBFCs that does not allow them to offer a loan above 60% of the value of gold.

RBI grew uncomfortable with the high growth rate of gold loans for NBFCs. It has increased its inquiry of the gold loan portfolios, even for the banks. RBI wants interest rates and growth rates on gold loans to come down, especially for NBFCs considering concentration risk and the risk of a fall in gold prices.

Furthermore, RBI’s directive that a bank credit to NBFCs for giving loans against gold jewelry will not be treated as exposure to the agricultural sector would hinder companies to raise easy funds for gold financing.

Some of the key points from the RBI’s latest guidelines for NBFCs include transparency in interest rates, due diligence in understanding the repayment capacity of the borrower, awareness of his existing debts, explicit loan agreement etc. Also, NBFCs that have gold loans of more than 50% of total financial assets have to maintain Tier -1 capital ratio of 12% from April 2014.

Why it is a setback for NBFCs?

RBI’s guideline is a setback for NBFCs because the new rules require greater capital adequacy for the financing companies and the thresh hold for the value of loan against gold is proposed to be at a lower value. This would mean that ornaments of the same value are expected to result in a lesser loan amount and that too at a slightly higher cost.

Let’s check out other aspects where NBFCs could be adversely affected. Earlier NBFCs used to provide up to 80% loan against the gold now it would be reduced to a mere 60% of the gold value. Gold loans from banks would now become more attractive than NBFCs until they are allowed to lend more on the value of pledged gold. The cost of funding for NBFCs would go up due to the RBI’s restriction to allow the NBFCs to finance its gold loan from the banks as an exposure to agricultural loan. NBFCs might have to reduce the interest rate to sustain hold in the gold loan market. Hence the current profit margin would come down significantly.

What’s in favor of NBFCs?

Though this regulation would hit hard on the revenue as well as bottom-line of the NBFCs there still some positive aspects to this move:

NBFCs would continue to enjoy the niche segment advantage due to its deep presence in the gold loan market. At present, NBFCs have a 32% share of the total gold loan market. The gold loan would still be cheaper than the personal loan, so the size of market is set to grow bigger in coming days. There are many untapped areas where NBFCs could have a better reach than the banks. The advantage of trouble free and quick loan processing by NBFCs would give them the edge over the banks. NBFCs can raise funds through market borrowings, i.e. commercial papers to lower the cost of the fund.

On gold loans

The RBI move would create a gap between bank and NBFC gold loan operations.  The banks are expected to make an aggressive take over on the gold loan segment in the absence of a strong NBFC presence. In the current scenario, RBI’s recent regulations have hit the top as well as bottom-line of the NBFCs. In India, gold buying is a regular process, and people are expected to continue its inclination towards gold in the future. The regulations may negatively affect the gold loan business in the short term for NBFCs but in the long term, the overall gold loan market is set to grow as long as the demand for gold is growing in the country, and NBFCs just need lay the foundation to pick up the pace again and devise ways to cater to their customer base in an innovative manner.

Exercising discipline is extremely important in every aspect of life. This cannot be more stressed in the case of managing your money. The manner in which you manage your expenses is the key to reduce liabilities and save more. According to a famous trading and investing legend- One must not spend time looking for the Holy Grail of investments or trading systems. It doesn’t exist. The Holy Grail is within you. It’s not the investment that’s going to determine success or failure rather it’s the discipline of the investor.

There are 2 friends Mr. X and Mr. Y both in their late 20s. Mr. X has a monthly income of Rs. 60,000, while Mr. Y has a salary of Rs 40,000 per month.  However, Mr. X’s job is more stressful and demanding; while Mr. Y has a comfortable job with low stress levels and better work life balance.

Mr. X lives a lavish life. He spends most of his salary; saves inconsistently. On the other hand Mr. Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

Pension - Rs 3,000; Child plans -  Rs 2,000; Mutual Funds -  Rs 4,000; Emergency fund -  Rs 1,000; Vacation fund -  Rs 1,000; PPF – Rs 2,000; Mediclaim-   Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y, his saving patterns, as visible below, would be able to save the day and give him the ability to meet the sudden expense.

One can never predict life. It’s difficult to anticipate bad times. Hence, it is essential to save for such rainy days. One should make it a habit to save, even if it’s a small amount.

Here are some steps which one can follow.

Track expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. This done over a period of time will help you identify areas where there is room to cut back on spending and save money. This will free up cash, which can be used to pay up existing debts or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances. Also, you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or as a contingency fund.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have a high rate of interest.  This includes the credit card payments which generally have higher interest costs.

Create discipline: You need to have discipline in the way you spend and control your expenditure. It is the key to save. A consistent plan of saving and investing helps attain one’s goal. With discipline and time one can reach goals.

Importance of saving: Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here’s what happens.

The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.

Invest: Start the wealth building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments. Also, do not put all the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. However, do remember your investment objectives before you subscribe to an investment plan.

Follow a systematic investment plan: Invest at regular times. By doing a SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, by saving regularly helped him meet the medical emergency with ease. By following these simples steps, you can make your money last longer!