Paying higher EMI? Read this!

If you've bought a house in the last three years, chances are you took a floating interest home loan and since then have received letters from your bank hiking your interest rate every few months.
In fact, even after paying your equated monthly instalments for over two years, it may be that your loan tenure is longer than when you first took it. Confused? And, on top of all this your new neighbour, who bought his house in late 2007, pays a much lower interest rate-from the same bank, for a similar house. How can that be? Rising interest rates derail monthly budgets of most families. A study by rating agency Crisil, Mortgage Finance-A Safe Haven for Lenders, says: "The proportion of monthly income being paid out as home loan instalments has increased to more than 50 per cent currently for an average home buyer from around 42 per cent (as on 31 March 2006), despite a 20 per cent increase in monthly incomes".

The twists don't end here. From September 2007 onwards, many advertisements have been announcing lower interest home loans. But, as you will find when you read the small print, this cookie is only for new borrowers. The bone of contentionThe truth about floating rate loans is that there is no transparency in the calculation of interest rates. Also, while banks are quick to hike interest rates when their cost of funds go up, the same is not true when there is a reduction in loan costs. While the trend of offering lower rates to new customers is not a new one, it became more pronounced in the last three months of the previous calendar year. During the recent festive season (September-December 2007) almost all banks announced lower rates for home loans.

For example, Axis Bank, Bank of Baroda ,Canara Bank, HDFC and Allahabad Bank reduced their home loan rate by 50 basis points for this period, while IDBI Bank reduced it by 100 basis points. All these offers were valid till 31 December 2007. The banks are free to decide the applicable rate of interest, and have their own benchmarks that vary across players. What this means is that the retail customer doesn't know which benchmark his home loan rate is based on, how this benchmark was arrived at, when it will change or even by how much. Other than fuzzy benchmarks, another tool that banks use to telling effect is the reset clause present in the loan documents. This clause gives the bank arbitrary powers and is used without any warning, especially after the banks and housing finance companies (HFCs) have acquired new customers at lower interest rates. Behind the curtainsThe main reason behind offering lower rates to new customers is that the banks and HFCs are trying to maintain the high speed of loan offtake as was in the past few years. (see: Of High Interest). According to the Crisil study, the compounded annual growth rate in fresh loans was 33 per cent during the past three years. Banks increase the discount on their benchmark rate in order to offer sops to new borrowers.
This is the real reason why old customers keep servicing the loan at the same rate while new ones are offered lower rates. However, after a specified period, new customers are also brought at the same level of the old customers.

Experts feel that the industry will not be able to maintain the same high growth rate in fresh originations as before primarily due to high cost of residential units and, to some extent, because of the high cost of credit. Harsh Roongta, CEO, ApnaLoan.com, says, "It's wrong to have different criteria for the same set of people having same profiles. The ideal scenario is to have different benchmarks for different types of products, and not people." Taking noticeThe Banking Codes and Standards Board of India (BCSBI) also feels that as contracted rates of interest for existing customers at various points of time depend on the asset liability structure of the bank's portfolio (deposits, borrowings and capital form a bank's liabilities while all loans are its assets) there can't be multiple benchmarks and interest rates charged to customers. Rates can either be below or above the prime lending rate, or the PLR, (the benchmark rate to which interest rates of all other loans are linked) depending upon the risk assessment of the borrower or the bank's interest rate structure.
Interest rates are also affected by the repo rate (the rate at which the Reserve Bank of India [Get Quote] (RBI) borrows from the banks), the reverse repo rate (the returns that banks earn on excess funds parked with the RBI), increase in the cash reserve ratio (the portion of depositors' balances that banks must have on hand as cash) and an increase in risk weightage.

The Monopolies and Restrictive Trade Practices Commission (MRTPC) has taken notice of banks offering lower rates to new customers while hiking them for old customers. Based on media reports and complaints it received from existing home loan customers, it is looking into how banks can arrive at two different rates even when there is only one benchmark rate for each bank. Also under the scanner is the manner in which banks arrive at the rate that is charged to the borrowers. The commission directed its investigating wing in late November to probe these issues and submit its report within 60 days. If banks are found guilty, we will recommend transparency in operations," said a senior official at MRTPC. The report is expected soon.Finance minister P. Chidambaram, too, recently said that he hoped banks would cut lending and deposit rates by 50 basis points to spur investment.What should I do? In between all these different rates, how do you take care of your loan? Foreclosure. If the effective rate of interest of your loan (after accounting for the tax break on the basis of tax slab) is less than the return on investment that you can generate -- eight per cent in case you go for PPF -- it is better to invest. The cut-off rate of home loan interest comes to 11.5 per cent: at interest rates higher than this, it makes sense to repay the loan, at lower rates.Pre-payment. Those of us who cannot prepay the whole loan immediately can consider making a lump sum part pre-payment. This will bring down the principal amount and in turn the EMI or the tenure. Depending on what your concern is-paying a higher EMI or having a longer tenure-you can ask the bank to recalculate your loan. "One should be cautious that the increase in the loan tenure does not extend the loan beyond the earning years. Usually, an average Indian is debt averse and will tend to come back earlier and make a part prepayment of the loan. So, the institution may not be required to extend the term," says Keki Mistry, vice chairman and managing director, HDFC. However, you should evaluate long-term financial commitments before taking any decision. "If you have multiple loans, such as a housing loan, vehicle loan and a personal loan, then evaluate all these loans as well and prepay the loan based on its effective cost," says Mistry. Home loans are typically longer in duration than other loans but have the advantage of associated tax benefits, which reduces the effective interest on the loan. Looking ahead, banking experts do not foresee a significant reduction of interest rates in the first half of the year, but suggest the possibility of a downward revision after that. If the MRTPC report also prohibits banks from discriminating against existing borrowers by then, there would be some reason for cheer.

Airlines eye their aircraft orders as income stream

Cashing in on a sharp increase in global aircraft prices, Indian domestic carriers hope to earn around $100 million (Rs 400 crore) in 2008 by either hawking their delivery slots with aircraft manufacturers or by entering sale and leaseback deals with leasing companies.
The income earned from such activities is crucial for the domestic airline industry, which had accumulated losses of over Rs 2,200 crore in 2007. These losses are expected to rise to Rs 2,800 crore in 2008.
With capacity growth outstripping demand, many leading low-cost carriers in particular are cutting aircraft delivery schedules to consolidate growth plans and reduce mounting losses.
In 2007, the available seats per km were 51 billion against a demand for 35 billion.
For instance, the largest low-cost carrier Air Deccan has decided to take delivery of half the 16 aircraft (eight Airbuses and eight ATRs) slated for 2008.
It expects to earn $30 million by selling delivery slots to other carriers and leasing companies.
Air Deccan took delivery of 20 aircraft in 2005 and 10 in 2007.
"Since only 2 per cent of Indians travel by air, there is a large market potential. But infrastructure constraints, chiefly driven by the lack of competition between airports, are becoming key constraints for growth," said G R Gopinath, executive chairman of Air Deccan, which will shortly merge with UB group's Kingfisher Airlines.
Delhi-headquartered Spicejet is expected to earn Rs 160 crore as premium for a sale and leaseback deal with a leasing company.
When the company signed its aircraft deal with Boeing in 2004, the cost of an aircraft was around $26 million against a current list price of $60 million.
A SpiceJet spokesperson declined to comment on the issue.
Mumbai-based low-cost carrier GoAir is also opting for a sale and leaseback option for the seven aircraft due for delivery this year. It is expected to earn Rs 80 crore to Rs 150 crore this year from this alone.
Larger airlines may follow suit. Kingfisher Airlines, which is on an expansion spree especially as it enters international skies, said that it is not averse selling slots in 2009 if it gets a good price.
"We cannot comment on details of deliveries, but if we get a good price for our slots then why not (sell them)?" said Hitesh Patel, executive vice-president, Kingfisher.
Most low-cost carriers opted for long-term bulk orders with aircraft manufacturers to cope with their hectic growth projections.
IndiGo, for instance, ordered 100 aircraft with Airbus. Airlines are required to pay 10 per cent of the cost upfront on these orders.
In return manufacturers gave them large discounts on the shelf price. With high demand for aircraft globally, prices have gone up 40 per cent, providing a useful arbitrage opportunity.
Sale and leaseback deals, however, typically involve higher rentals than the prevailing market rate which may put pressure on airline costs in the future.
"It's a risky business, but at the moment everyone is playing the valuation game rather than looking at future costs," said a senior industry executive.
Also, aircraft prices might not go up because manufacturers have accelerated production schedules -- for instance, Airbus has increased its daily output -- which will reduce the shortage and, therefore, the premiums.

India joins $1 trillion club officially

Strong indications of a slowdown in 2007-8 emerged from the government's advance estimates that put gross domestic product (GDP) growth at 8.7 per cent, raising concern over whether the Indian economy could sustain growth at over 9 per cent in 2008-09.
The estimate, the first in a sequence of five national income estimates put out by the Central Statistical Organisation (CSO) over two years after the first data are released, suggests that high interest rates have impacted manufacturing and construction, dampening overall growth (see table).
However, the CSO's growth estimate is still higher than the Reserve Bank of India's [Get Quote] forecast of 8.5 per cent GDP growth for 2007-08 but lower than Finance Minister P Chidambaram's prediction of 9 per cent. The Planning Commission has targeted an average GDP growth rate of 9 per cent during the 11th Plan (2007-12).
Describing the GDP numbers as lower than expected, the finance minister nevertheless said he is "disappointed but not despondent". "I am reasonably confident that the figures may be revised and economy will grow at close to 9 per cent," he added.
Agriculture is expected to grow at 2.6 per cent in 2007-08, while the industry and services sectors, which together account for over three-quarters of GDP, are projected to grow at 8.6 and 10.6 per cent, respectively.
"The pace of economic growth is in line with growth in potential output. We have estimated that the economy's potential growth rate is between 8 and 8.5 per cent and it will continue to grow in that range", said Joshua Felman, the International Monetary Fund's senior resident representative in India.
The lower estimate for agriculture, however, has caught analysts by surprise. "Slower agricultural growth will affect prices of food products," said Dharmakirti Joshi, principal economist, Crisil.
"There is a possibility of the agriculture growth estimate being revised upwards, if one were to go by the recent estimates of the Prime Minister's Economic Advisory Council (EAC)," said Abheek Barua, chief economist, HDFC Bank [Get Quote].
The EAC had revised upwards the 2007-08 agriculture growth forecast to 3.6 per cent against the earlier forecast of 2.5 per cent.
HDFC's Barua added that the key question is whether the slowdown in GDP growth will sharpen in 2008-09. "We expect growth to be around 8.3 per cent in 2008-09," he said.
The advance estimates for national income also said that gross fixed capital formation (GFCF) is expected to be 34.6 per cent of GDP in 2007-08, higher than the 32.5 per cent of GDP in 2006-07.
"There was a huge increase in demand last year. Now, industry is expanding capacity. The very high investment numbers in the current year are proof of that," IMF's Felman said.
India joins $1trn club officially
Based on Thursday's advance estimate for 2007-08 gross domestic product (GDP) at current prices at Rs 42,83,040 crore (Rs 42.83040 trillion), India can now claim membership of the select list of economies that have an annual national income of over $1 trillion.
The development is basically a factor of the over 12 per cent appreciation of the Indian rupee against the US dollar between April and December 2007.
Although the dollar slipped below Rs 40 many months ago, economists explained that in order to calculate the dollar equivalent figure of national income for India (which only reports such data in its own currency), the average annual exchange rate has to be used.
With the average exchange rate against the US dollar standing at Rs 40.269 this year (April 2007-February 2008), India's 2007-08 GDP is estimated at $1.06 trillion for the current fiscal.

How smart operators brought down the market

The stock market crash of January 21, when the benchmark indices dived to the maximum permissible limit of 10 per cent within minutes of opening, proved that it was not very difficult to manipulate the stock prices (however liquid they may be) and create a sense of panic among the stock investors.
"It was ridiculous to find the 30-share Sensex hitting the lower circuit even before the traders settled in their chairs for the day's trading," noted a seasoned dealer in a local brokerage house.
There was a sense of fear ahead of the opening bell, on account of a drastic fall in stock prices across US, Europe and Asia. Moreover, the Sensex had fallen by nearly 700 points in the previous session.
Manipulators, or smart operators, whichever way you look at them, punched in orders on the 30 Sensex stocks (and NSE too) at prices much below the previous day's closing.
The volumes were absolutely negligible, but the absence of buyers ensured that the market had a free fall.
Consider this: The trading volumes on Reliance Industries [Get Quote], in the first few minutes before the market shut down, were a mere 30,235 compared with the previous hour's (last hour of the previous day) turnover of 21 lakh shares.
It was the same with most of the other stocks on the dreaded day. Take the case of ABB, a very liquid counter. Its total shares on offer were a mere 50 on the crash day compared with the previous hour's 1,14,723 shares.
The prices punched in were 7.8 per cent lower than the previous day's close of Rs 1,272. "There were simply no buyers as stock prices were falling all across the globe," explained the dealer.
Bharti Airtel [Get Quote], a key Sensex constituent, saw trading of only 1,966 shares at Rs 724.50, down 11 per cent from the previous day's close of Rs 826.50.
The average traded quantity on the counter was 6.87 lakh shares in the last 20 sessions.
"Though our margining systems and mark-to-market systems are very good, regulators should find out who manipulated the market by creating panic during January and last October (when the issue of curbs on participatory notes arose) by bringing the level to the maximum allowed 10 per cent," said a dealer in a brokerage house, adding that this fear factor was used by smart traders during the crash.
Any crash triggers margin calls, which makes matters worse for the retail investors, who account for over 60 per cent of the derivatives turnover.
Narayan Ramachandran, managing director and country head of Morgan Stanley, said the problem was in the margining system and not a technical problem.
"I'm sure regulators must be looking at the current system, so that the pain is much lesser in the future," he said.

Jodhaa Akbar

This February, the Dhoom: 2 couple will appear on screen in a different avatar. This time as the greatest Mughal emperor and his Hindu wife in Ashutosh Gowarikar's epic Jodhaa Akbar.
Ash and Hrithik look stunning in the trailers, A R Rahman's music is wonderful, the battle scenes are supposed to be one of the authentic in the history of Hindi cinema, so Gowarikar, the man who made Lagaan and Swades, may have a winner when the film releases next fortnight, on February 15.
rediff.com presents the great Mughal love story.

Nepal police to lodge three cases against Kumar

Kathmandu (PTI): Nepalese police on Friday said they would lodge three cases against Dr Amit Kumar, the alleged mastermind of the illegal kidney transplant racket who was arrested from a jungle resort in the Himalayan country.
The first case against the tainted doctor would be for possession of illegal foreign currency as police recovered from him Euro 145,000, USD 18,900 and an Indian bank draft of Rs 936,000 when he was arrested on Thursday, Kathmandu SSP Upendra Kanta Aryal said at a crowded press conference.
The other two cases are related to the Red Corner Notice issued against him by the Interpol and illegal human organ transplants under the Nepalese Act 2055, police said, adding they were also investigating whether Kumar carried out any kidney transplants in Nepal.
Under the human organs transplant case, he can get a maximum sentence of five years or Rs 5 lakh as fine, or both, if convicted, police said, adding he faces up to four years in jail over the foreign currency possession.
He had arrived in Nepal in connection with a project to build a hospital, according to police. His accomplices in Nepal were identified as Ramesh Thapa, Bishnu Khatri, Giri Dai, Heera Pun, Baburam, Sher Bahadur and Pankaj Jha.

Self Propelled Water Glider Draws Power from the Water

This seagoing glider is a particularly interesting piece of equipment. It is described as a “green robot” for the reason that it is powered entirely by the temperature fluctuations occurring at different depths in the water that it is used in. This gives it a limitless power source and an incredible lifespan. According to U.S. based researchers involved in the program:
They said the glider had crisscrossed the 13,000-feet-(4,000-meter-)deep Virgin Islands Basin between St. Thomas and St. Croix more than 20 times since it was launched in December.And it could keep going on its own for another six months, the team at the Woods Hole Oceanographic Institution and Webb Research Corporation in Falmouth, Massachusetts, predicted.
Virtually limitless power, self propulsion, glider robots and it is not even April 1. It has all the properties of an outstanding host, except for the fact that it comes from a highly reputable source. This is a true engineering marvel and I hope it gets the recognition that it deserves.