Phishing in Paypall

Thank you for taking the time to write to us with your concerns. I am
happy to assist you further.

At PayPal, we care about the security of your account. Therefore, we
would like to offer you a number of Security Tips.

The tips will help you protect yourself against various types of
Internet fraud, such as 'spoofing' and 'phishing': the act of collecting
personal and financial information through fake emails, websites and
phone calls.

Using this sensitive information, the perpetrators will try to commit
identity theft, credit card fraud and various other illegal activities.
So please read the tips below, for your own sake, and in the interest of
all PayPal users.

Emails - Make sure they are sent from PayPal

1. Always check the greeting. We will never address you with Dear
PayPal User or Dear PayPal Member. Instead, we will address you by your
first and last name, or the business name associated with your PayPal
account - except in some automatic responses.

2. Look for strange links. When you're asked to click on a link in
an e-mail that looks like it's from PayPal, be extremely cautious.

3. Does the e-mail ask you to enter sensitive information? If it
does, it's not from us. PayPal will never ask to you enter:

· Bank account numbers
· Credit and debit card numbers
· Drivers license number
· Email addresses
· Your full name

4. Check for attachments. PayPal will never send an attachment or
software update to install on your computer.

5. Take your time, don't be rushed. Spoof emails can contain a
threat: You must take action, and do it now. If you feel undue pressure,
don't respond. Simply log in to your account, and check your Resolution
Center.

Website pages - make sure that they are hosted by PayPal

1. Check the URL when you log in. When you use the PayPal service,
make sure that the URL at the top of the browser is

https://www.paypal.com/. This means the website is secure. If you see a
different URL, close your browser - even if it contains the word PayPal.

2. Look for the lock. The lock symbol that appears in the bottom
right hand corner of your browser means it is a secure site.

Passwords - keep it on PayPal

1. Last but not least, create a unique password for your
PayPal-account. Don't use this password on any other site and don't
share it with anyone else.

2. Change your password every month.

If you think you have received a fraudulent email, forward the entire
email, including the header information to spoof@paypal.com and then
delete the email from your mailbox.

Click the "Security Center" link on any PayPal webpage for additional
tips and tools for staying safe online.

We appreciate your patience and understanding regarding this matter, and
wish you continued success on PayPal.

Sincerely,
Robert
PayPal Resolution Services
PayPal, an eBay Company

To Fix Or To Float?

When applying for a home loan, opting for interest rates is a cause of dilemma. Should one opt for 'floating' or 'fixed' rates of interest?

Interest rates have been fluctuating since the last 6 years, so much so that the consumer is not sure of the future.

In March 2000, the interest rates on home loans were about 14%; which started falling quite steeply. By the last quarter of 2003, the interest rate (floating) on home loans fell to 7%. Again the loan interest waves have splashed to a high of around 10.00% (floating rate of interest) in January 2007. This hike is dramatic; considering that it is a jump of 3.50% since the historic low of 7% reached in 2003.

This uncertainty makes the question a million dollar one. What should a home loan consumer do? Should he go in for a floating rate home loan? This could mean a home loan at a cheaper rate with an inherent risk of being hit by a huge increase in interest rates in the future. Or, should the consumer seek the safety of a fixed rate home loan. This effectively means that he could be paying a huge premium today?

While the interest rates are a deciding factor in taking a property loan, we must remember that this is not a one-time decision.

Be a vigilant consumer even if you have opted for a fixed rate if interest. As a matter of practice, assess how the markets have moved in a six-month period and consider the costs and benefits of changing your decision.

A well informed consumer makes better choices. So, let's try and get to the nuances of the interest rates options.

A true-blue 'fixed' interest rate is one which remains fixed during the entire tenure of the loan. It should be such that the bank does not have the power to change the rate under any circumstances. Very few banks offer actual true-blue fixed interest rates.

Unlike the 'fixed' interest rates on the home loans; floating rates will be changed by the bank. As a consumer, it makes sense to opt for 'transparent floating' interests on housing loans. This essentially means that the interest rates should move downward when general interest rates register a fall and move up when the general interest rates move up.

To check whether the bank offers a 'transparent floating interest rate on home loans; request for its record of benchmark rates in 2002 and 2003. This data will help you gauge whether the bank has actually passed on the benefit of reduced rates to its existing consumers at the time when the lending rates had fallen rather dramatically.

Apnaloan.com strongly recommends the option of 'transparent floating interest rates on home loans. Our choice is based on certain criterion:

These loans are at least 2% cheaper than a comparative tenure fixed rate housing loan.

There is safety in numbers. Over 90% of the home loan consumers opt for floating rate loans. This is a potent and large community which the politicians can ill afford to ignore (witness the imbroglio when the PSU banks tried to raise their home loan rates) and hence a dramatic increase in rates in a short time is very unlikely.
If you go in for a transparent floating rate home loan, you also get the benefit of reducing interest rates as (not if) and when the interest rate cycle turns and commences on its downward journey. Even if the interest rates rise, in the interim as long as they do not rise above the 1.00% differential; you are still a net gainer.

Apnaloan.com advises you to go in for a transparent floating rate loan unless, you want to play it completely safe and are willing to pay the premium (in terms of high interest rates) for such safety. In any case, signing a fixed rate loan; that is not a real fixed rate loan makes no sense, whatsoever.

So, float; but with transparent rates.

How to avoid mistakes while taking a home loan

Act in haste, repent at leisure. This adage might as well apply to a home loan seeker just as much as to a bridegroom. Here are 7 golden rules which will ensure that you do not repent in future.

Rule 1: Never choose a lender till the property is identified.

Speak to your bank about home finance only after you have identified the property you want to buy. While most banks will provide finance for ready-to-move-in properties, some banks do not readily finance a property which is being self-constructed or a property under construction. Also, if the property is very old or is being developed by a relatively unknown builder, the bank might have an issue with providing a property loan. Take a sanction for the loan only after identifying the property. Banks are known to reserve the best deals for immediate disbursement cases.

Rule 2: Get clarity about the loan amount you are eligible for.

Banks have different ways to calculate loan eligibility. If loan eligibility based on your income is likely to be an issue, then talk to several banks to find out which bank can give you the maximum amount. It may so happen that based on your own income, as well as your spouse's, you are still not eligible to get the amount of loan that you require. Then you must seek a bank that allows you to club the incomes of your other close relatives (parents, siblings, children etc.) to increase your loan eligibility. Some banks may agree to club the incomes of two siblings for the purpose of calculating the loan eligibility.

Rule 3: Remember to have own funds to the tune of 10-15% of the house cost.

If the house costs Rs 5 lakh, the bank expects you to pay at least Rs .50,000 to Rs.75,000 from your own sources, while the remaining Rs 4,25,000 -- Rs 4,50,000 is provided as loan subject to your income based eligibility. If the value of the house goes down in future, your down payment ensures that the bank's interest is protected by ensuring that outstanding loan amount is less than the realizable value of the property. Once you decide on your dream property, the bank will get the cost of the property evaluated by its own personnel. Surprisingly, this evaluation can throw up a price different (in most cases lower) from the actual price you are paying for the property. In such cases, you will need to shell out the difference between the actual price and the bank's valuation as additional down payment. So again, it makes sense to ask the bank to value the property (on payment of a small fee), especially if it is an old resale property. The small fee will be worth the while to avoid future hassles.     

Rule 4: Go window-shopping, then bargain and then, bargain some more.

You should shortlist four or five banks and get the shortlisted banks to compete for your loan. The cost of your loan depends a lot on your ability to negotiate. Remember that all terms and conditions of a housing loan are negotiable. Interest rates offered by banks take your income and repayment profile into consideration, apart from, of course, your negotiation skills. Apart from interest rates, also check various charges like processing fees, pre-payment charges, legal fees, valuation fees and other hidden costs. Take all these factors into account before choosing your bank.

Rule 5: Be prepared to lose your processing fee.

Your lender will charge you a fee to get the loan proposal on roll. This fee is called the 'processing fee'. This fee varies from bank to bank, but is usually around 0.50% to 1.00% of the total housing loan amount. Paying the fee doesn't mean that you will get the loan, but this is the fee to get the lender to even 'take a look' at your application. No matter what the bank representative informs you; the processing fee is 'NON-REFUNDABLE'. Don't trust any verbal promises about not encashing the cheque if the sanction is not done or is not as per the promised terms. Get all such promises in writing. This means that if your loan application is rejected or is sanctioned for a lower amount or at a higher rate than promised, you cannot claim the processing fee back.

Rule 6: Fixed or floating, there is no substitute for vigilance.

Even when opting for 'fixed interest ', remember that in some cases, it may remain fixed only for a certain period of time, as the bank may have the right to arbitrarily change even the so called 'fixed rate'. So, probe further and read the fine print before you sign on anything. Like a majority of consumers, if you have signed a floating rate loan, check whether the rates of your chosen lender had floated down in the years when interest rates were dropping like a stone. To know whether your lender offers 'transparent floating rates', ask for and check the bank's floating rate records from 2002-2003, when interest rates were going down. This is a fair indicator of what you can expect as (not if) and when the interest rates start moving down and the time comes for the bank to pass on the benefit to you.

Rule 7: Let your family inherit the house, not the home loan

Man knows little of what fate has in store for him. When you take a home loan, it is on the basis and assumption of continuing income. We run into all kinds of risks in our daily life. Accidents and health issues like heart attacks, stroke, paralysis, kidney failure and other physically crippling ailments can cause loss of income or in some cases, even your life. Housing loans are a fairly long-term liability. This is why when you take a home loan, it is advisable to take a life insurance and critical illness policy. Life insurance policies provide monetary benefit in case of an unfortunate incident like death and ensure that your family members inherit your home not your home loan. Critical illness policy will take care of the home loan liability if your income gets interrupted due to unforeseen, unavoidable circumstances which such conditions may create. That will be one less thing for you to worry about while you are anyway under severe stress. Best of all, most banks will be happy to finance the one-time premium payable for both policies, enabling you to get this protection at a small addition to your regular premium.

Housing price refuses to come down as builders hold the price line

Despite falling housing sales, builders are continuing to hold their price line without effecting the much anticipated downward correction. This is despite various attempts by the Reserve Bank of India in the last one year to cool real estate prices by raising housing loan interest rates. RBI measures, though, had the positive effect of putting a stop to further rise in real estate prices.

The situation is developing into a tug of war between builders and home buyers. The banks, a crucial player in the housing industry through home loans, have been urging builders to reduce housing price. Leading spokesmen of home loan industry - HDFC Chairman Deepak Parekh and ICICI Bank Chief Executive KV Kamat - have at many times in the past few months indirectly hinted that housing price should correct itself by 10 to 20 per cent.

However, builders say housing prices are going to remain the same. They say rising input costs and high land price does not allow them to reduce housing price. Sunil Mantri, Chairman, Mantri Builders says, "In case of residential properties, there are two prices to be taken into account, the price of the land and the price of the flat. I expect land prices to remain firm because of the land availability factor. The increased cost of construction will add to the hike in housing price."

Both builders and banks agree that high cost of housing is deterring sales. While the banks say the builders should reduce housing price, builders put the onus on the banks saying it is the interest rate on home loans that is reducing housing sales. "Due to rising interest rates on housing finance, affordability will be a question for the buyers. Most banks are likely to bring down interest rates by up to 1 per cent in the next six months from now," says Mantri.

But interest rates are determined by other factors affecting the greater economy and banks' ability to bring down interest rates on housing loans is not a function of demand-supply of housing stock.

Builders are even hinting that housing price may rise by 10-15% by the end of the year. As Mohan Deshmukh, President, Maharashtra Chamber for Housing Industry (MCHI) says, "The demand-supply equation applies to the property prices. On the whole, property prices may increase by 5 to 10 per cent by the end of this year. There is a shortfall in supply of land for development. The government needs to repeal the Urban Land Ceiling & Regulation Act (ULCRA) and rationalize the stamp duty structure, which would help in opening up surplus land for development and give a boost to the housing sector."

Parnay Vakil, Chairman, Knight Frank, an international real estate consultancy operating in India, concurs that there may be a 5 to 10 per cent increase in housing price by the year end. But he expects it to be mainly restricted to prime areas of Mumbai.

Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj, another international real estate consultancy, says that the property prices have decreased in Delhi, NCR while property rates are on an increase in Kolkata, Chennai, Bangalore and Mumbai.

Speaking about Mumbai, "Let's take an example," says Puri. "In the past, there were 30 apartments available for sale to 100 buyers. Currently, there are 60 buyers for the same number of apartments. The estate rates can be expected to slide down if the number of buyers drops down to, say 20. On an average, if a builder got 100 inquiries in January 2007, the numbers have now come down to 60-70, especially in the Mumbai suburbs."

"In prime areas like South Mumbai, areas of Navi Mumbai, the property rates are likely to rise. Whereas, in suburbs, the property prices are likely to remain stable, or decrease marginally," says Puri.

Most industry experts are of opinion that the location of a property has a direct bearing on the estate rates. Ali Lokhandwala, Director, Lokhandwala Infrastructure says, "Prices in prime area, specially, South Mumbai have not peaked as yet. So, I expect a hike in the prices in these properties. But, in areas beyond Bandra, the property prices will remain stable."

According to Mantri, "In areas like the Vasai-Virar belt, Kalyan, Dombivali, there is an over-supply of land, so real estate prices in these areas may not rise in the next few months. But, in areas which have a good location, say in terms of connectivity, and in prime areas, the estate rates will rise."

So, in a scenario where affordability is a concern, how do builders attract buyers? Apart from depending on providence for a drop in interest rates, they are trying to add value to their offerings without bringing down the home price. Builders are offering to pay stamp-duty or re-imbursement on the same and amenities like modular kitchen and free parking space. "We are offering freebies like world class amenities and parking space and stamp duty waiver," says Lokhandwala.

Is it a good time to invest in a house?

The earlier rush to invest in property has slowed down. Even the builders are looking for buyers who are looking for a home to live in than speculative investments. "This is a good time to invest, as any other time because the property prices are likely to remain stable. It also depends on the location of the area of investment. Prime properties and areas like Navi Mumbai offer good investment opportunities. Investment from speculation point of view is not recommended due to high interest rates," says Mantri.

"Investment in property is a good decision if it is meant for self-occupancy by the buyer," says Harsh Roongta, chief executive of online loan advisory Apnaloan.com. Invest based on need and not on speculations - that is what most industry people feel, though some say people who can afford to take risk can invest in specific localities.

 

Financial Inclusion: No Frills Bank Accounts to Bring Masses into Banking Net

Opening a bank account may not be a big deal for most of us. But for a large part of the population living on low incomes, getting one was rather difficult. Whether it's your maid servant, the sweeper in your building, the vegetable vendor from whom you buy vegetables, or a construction worker -- a bank account was simply out of reach earlier.

While not many banks may be willing to lend money to this section of people because of the risks involved, the RBI is, now, pushing banks to make it easier for them to open accounts. It has suggested that banks open 'no-frills' accounts, with the simplification of 'know your customer' norms.

Reserve Bank of India (RBI) had, in its Annual Policy Statement 2005-2006, urged banks to review their existing practices to make banking accessible to disadvantaged sections of the population. Some banks, notably public sector banks, have responded and have started offering such accounts to bring low-income customers to the banking net.

What's kept the doors to the formal banking system closed to these sections so far has been their inability to provide the documents required to open a bank account. While some of them may have ration cards, most are usually unable to provide any of the other documents needed.

The result is that these people have to resort to the informal sector (like chit funds) to park their meagre savings, and to borrow money. In Maharashtra, a popular avenue is the "Beesi", in which about 20 people pool in a fixed amount every month and lend it out to anyone from the group who is in need. The borrower then has to return the amount in monthly instalments, as his/ her contribution to the pool.

This system has disadvantages for both the borrower and the lender. Since the risk levels are high, the borrower has to shell out a high rate of interest, much higher than on a personal loan offered by a bank. And members of the pool (the lenders) take a direct hit if the borrower does not return the money. In the case of a bank, the risk of default is borne by the bank, and not by depositors. Besides, neither lenders nor borrowers have the protection of government regulations and guidelines.

So what the disadvantaged sections of the population need is assistance to get an entry into the formal financial sector and reap its benefits (called financial inclusion in bankerspeak). In its Annual Policy Statement 2005-2006, the Reserve Bank of India (RBI) urged banks to review their existing practices to align them with the objective of financial inclusion.

No-Frills Accounts

The RBI has asked banks to make a basic banking 'no-frills' account available for low-income individuals, with either zero or low minimum balances and charges.

The nature and number of transactions in such accounts would be limited, the details of which would be made known to customers in advance in a transparent manner. The RBI has also urged all banks to give extensive publicity to such 'no frills' accounts to enable financial inclusion.

Simplification of 'Know Your Customer' Norms

The RBI has also eased the 'know your customer' (KYC) norms to keep the procedural hassles involved in opening a bank account to the minimum. This is to enable those belonging to low-income groups to open bank accounts without documents of identity and proof of residence.

In such cases, banks can take the individual's introduction from an existing account holder on whom the full KYC procedure has been completed and has had satisfactory transactions with the bank for at least six months. The photograph and address of the prospective account holder need to be certified by the person who introduces him/her.

These simplified KYC norms are applicable for those who intend to keep balances not exceeding Rs 50,000 in all their accounts taken together. The total credit in all the accounts taken together should not exceed Rs 1 lakh in a year.

Who's Offering No-frills Accounts

State-owned banks have responded quickly to RBI's suggestions, and a few private and foreign banks have followed suit. The State Bank of India is offering a 'no-frills' account to anyone whose monthly income is Rs 5,000 or less. Account-holders need to make an initial deposit of Rs 50, and can maintain zero balances thereafter. The maximum amount one can hold in this account is Rs 10,000. The bank also offers free ATM-cum-debit card and cheque facility with this account.

Allahabad Bank and UCO Bank have also launched 'no-frills' accounts that require a minimum balance of Rs 5. UCO Bank requires a minimum initial balance of Rs 250 if the individual requires cheque books and ATM facilities.

Foreign banks too have jumped on to the bandwagon, though with a few frills. Deutsche Bank's 'no-frills' account, for instance, needs a minimum balance of Rs 500. But the account-holder gets free quarterly consolidated account statements, free personalised payable-at-par cheque books, and 3.5% interest per annum.

A start has been made, but financial inclusion has miles to go before it succeeds in bringing much of the population into the fold of the basic banking system.

What Financial Inclusion Is All About

• Low-income groups do not have access to the formal banking systems, as they usually do not have the documents needed to open a bank account.

·         Therefore, they rely on the informal sector (chit funds, beesi, etc) for their savings and loan requirements.

·         The aim of financial inclusion, which the RBI is promoting, is to get the vast low-income population into the fold of the basic banking system through no-frills accounts

·         No-frills bank accounts are of a restricted nature and put a limit on the number of transactions.

·         The individual who wants to open a bank account needs to be certified by an existing account holder on whom all the know-your-customer norms have been completed.

Why is financial inclusion important?

A vast segment of India's population exists on the margins of India's financial systems. Whilst the per-capita savings of this class may not be very high their sheer number means that taken together their savings are of a considerable amount. If their entry in the formal financial sector is made easier these savings can be channelised for the formal economy. Also savings cum risk products that are their primary need can be structured for them once they are part of the formal banking system.

 

Want to get married? Pay your bills on time

A silent revolution is taking place in our lives and most people are still unaware of it.

Our bill payment habits are being tracked and the entire results are already available online at the click of button. The organisation that does this tracking is called a credit bureau.

So what are credit bureaus? How do they get information on our bill payment habits? What do they do with this information?

Credit bureaus are independent companies which collect the bill payment records of all the customers of various lending organisations like banks, credit card companies, housing finance companies as well as consumers of telecom companies (or consumers of any services which involve credit and/or periodic payments) and even keep track of any bankruptcy proceedings or alimony payments ordered by the courts.

All these records are stored in a common database and individual-wise files are prepared based on some common identifier between all records. Normally, there is an overriding common identifier (such as social security number in the US) but in India, the common identifier is still a permutation and combination of various numbers and data such as income tax returns, PAN No., passport no., Voter's ID No., name and date of birth, phone number, etc.

Whenever any authorized organisation (currently only banks are allowed to access these records from the bureau) asks for the records of a specific individual the possible matched records are provided.

Click here for a sample credit report. As you can see from it, the bank will be able to see all your past borrowings and the track record in terms of original loan amount, loan amount outstanding now, amounts due and paid (on time or after a delay) and the amount overdue in respect of each loan that you might have taken. The report lists all the addresses that you have provided to each of the earlier lenders.

This information is very valuable for the bank as it is able to obtain your existing debt and repayment history at the click of a button. It is also good for you (if you are among the 90% plus population who pay their bills on time) since you will be able to get a quick decision on your loan request and get a good interest rate as well.

Currently, the only functioning credit bureau (Credit Information Bureau of India Limited or CIBIL) is being run as a joint venture between the banks without any statutory backing. The Parliament has already passed a law in 2005 (called Credit Information Companies (Regulation) Act, 2005) and the rules required to make the Act effective are currently in the process of being finalised by RBI and are expected soon.

Once the Act takes effect, telecom companies, insurance companies etc will also be able to access your repayment track record. In fact, the credit Bureau will also be required to provide you with a copy of your own credit report. After some time, we may see rules that will allow the credit bureaus to collect information on bill payment habits from any service provider (Telecom companies, Insurance companies, landlords, professional services, etc.).

Most credit bureaus are likely to categorize your credit (as A, B, C or D much like credit rating agencies do for corporate borrowers) depending on the period for which you have had a credit history, your repayment track record, absence of any adverse judgments, period over which the repayments have to be made, etc. This will enable you to get more favorable terms if your repayment track record is good.

Thus, the objective third party credit information available from credit bureaus will enable the people with good repayment track records to stop subsidising the consumers with no or bad credit track record, who will have to pay a higher price for their past sins.

So what does all this have to do with your marriage?

Like in advanced economies, the influence of an effectively functioning credit bureau pervades all aspects of your life. Want to take a house on rent? The landlord will want to check out your credit report to judge whether you pay your bills on time. Want a job involving sensitive or valuable information?

The employer will want to check your credit report. In fact, the day will soon come when prospective in-laws would want to check out your credit report to check on whether your lifestyle is being fuelled by your income or by loans as also whether you pay your bills on time. Needless to add that some fancy explanations will be required if you are a habitual late payer of bills.

So remember to pay your telephone bill on time if you want to get married after a few years.

Yeh Sub-Prime Shub-Prime Kya Hai

You know a word has entered into the popular lexicon when they leave the preserves of blue chip investment banking offices and become the stuff that people in the Mumbai local train discuss. Suddenly news and television headlines are screaming "sub-prime" at us and everything from inflation downwards is blamed on this phenomenon.

So what is the sub-prime mortgage issue about, and what exactly happened in the US? Will India ever face a similar situation?

What is a sub-prime mortgage?

A sub-prime mortgage is a loan offered by a lender to a borrower with a poor credit history (meaning he has defaulted on his financial commitments in the past) against the security of his house property. Such borrowers are called sub-prime borrowers. Since the risk of default is high, these loans are offered at relatively higher interest rates compared to loans offered to people with an impeccable repayment track record. However these sub-prime mortgage loans are relatively much cheaper than completely unsecured loans to the same profile of borrowers.

What was the US sub-prime crisis all about?

The US real estate industry witnessed a boom between 2001 and 2005, with property prices soaring to historic highs due to low property loan interest rates and other factors. Some of the weaker borrowers, who were either on the verge of defaulting on their financial commitments or had already done so, owned house properties whose values had risen dramatically on paper. So lenders looking at increasing their margins were quick to spot an opportunity and lent money to such borrowers on the basis of this increase in the paper value of their homes and these loans were either used to repay the old loans or for other expenses. All was fine till the housing party crashed.

The US property bubble collapsed, and interest rates began to rise. The rising rates led to a spate of defaults by borrowers, as a result of which several US sub-prime mortgage companies had to declare bankruptcy.

The result was that the shares of lenders dealing in sub-prime mortgages took a tumble. That's not all. The effect spread to the entire financial markets because these lenders had raised monies on the basis of such loans and were now not able to pay them back. And the ripple turned into a wave, affecting a wide section of the markets, and then spread overseas.

The sub-prime situation in India

The US sub-prime crisis had a short-term impact on the Indian stock market and on credit instruments with overseas investments. Collateral damage in India was extremely limited, as Indian entities do not own structured finance instruments. But could such a crisis emerge in India?

In India, the market is more non-prime rather than sub-prime. Borrowers falling in this category may have never defaulted, but have low incomes or may not have proof of such incomes (like a small shopkeeper, who may not be able to show his income on paper). These people may have borrowed earlier, but from local moneylenders and not banks or formal institutions.

These non-prime borrowers in India belong to the economically weaker sections of society, with monthly incomes of around Rs 5,000- Rs. 10,000. They may pay interest rates as high as 45-50% on loans up to Rs 50,000, the reason being that default rates are always higher for such unsecured loans. In fact, there are lenders in the unorganized sector who may charge interest rates as high as 4000% per annum!

But despite the mind-boggling interest rates, non-prime borrowers still prefer their local moneylender to a bank.

Why? Let's understand with the help of an example. A vegetable vendor borrows Rs 90 from a local lender in the morning and returns Rs 100 to him in the evening - which works out to an interest rate of 4000% per annum. The advantage for the vendor here is that he has continuous access to cash flows. A bank does not usually lend for such short periods as a day, which may not suit the vendor's needs.

There's another psychological reason. When a vegetable vendor borrows Rs 90 and repays Rs 100 at the end of the day, he feels he pays only Rs 10, instead of 4000% per annum. A longer-term loan with an interest rate of 40-50% from a bank may feel too much for him. Even a daily loan at an interest rate of 4,000% from a local lender may seem preferable!

And when it comes to repaying the loan, the vegetable vendor will repay the local lender, because he knows that if he doesn't, he won't get money the next morning to buy vegetables. His access to continuous cash flow will come to a halt. Also, the local lender may use muscle power to get his money back.

As a result, large banks find it difficult to penetrate the non-prime market, and may prefer to leave it to the smaller banks and NBFCs.

The percentage of defaults in this segment have now climbed to double digits for banks and NBFCs active in this market, and has become a major cause of concern. And they are finding that sending recovery agents to recover loans may be harmful for their reputations. In fact, recent reports suggest that ICICI Bank is likely to exit the non-prime personal loan business because of the high reputation risk the business poses.

In India, it is still difficult to get a loan even against a security (home, etc), if a prospective borrower has defaulted earlier. Owning immediately encashable security like jewellery or stocks might make it a little easier, but not much.

If borrowers lend indiscriminately, and lenders default in a big way, a crisis is certainly possible. But that looks unlikely for now in India.

Loan defaults What happens next?

In the recent years, especially in 2006 and 2007 there have been frequent revisions in interest rates on home loans, with the rates climbing only higher and higher.

While EMIs have almost doubled, loan tenure have extended almost 5 years to 25!

The borrower now is bearing an increased cost of being a "proud house-owner" - reeling under the impact of hiked rates. But proud.

In any such event, you might one day find it difficult to pay your home loan EMIs on time. Due to several reasons. For instance, the EMI has increased unexpectedly to an unsustainable high, which is a hard hit on your personal budget. Or worse, you've lost your job!

Lenders have their own interests to protect. You will have problems making your lender understand why you are not punctual in your EMI payments. But losing your cool is the last thing that will help. So,...how do you do this?

It is all-important to convince the bank on the reason (s) for the defaults. Concrete facts, rather than vague statements will give the bank a clearer picture. Which means avoiding statements such as "I can't pay the EMI due to some unforeseen circumstances."

Documents supporting the unfortunate event (s) that ultimately led to the EMI defaults will convince the bank a lot better than just your verbal accounts. Show a copy of your job termination letter or bank statements showing losses incurred in business.

Next, provide an estimate of the time period you may face the crisis. If the bank is assured that the loan can be recovered, it will definitely try to put forth a plan where both your interests are protected. All this accomplished without having to take extreme measures on the bank's part, such as sending recovery agents over or a distress sale of your home.

If it is a short-term crisis, the bank might agree to work out a deferred repayment plan in lieu of a fee or collateral security. Meanwhile, dig into your savings to keep afloat while you make alternative arrangements to meet your financial requirements.

If it turns out to be a long-term financial crisis and the savings are dipping drastically, the solution is to sell the house. You will need your lender's consent to sell. The bank will give a document stating its approval for the sale as well as facts relating to the loan. Based on the letter, you can negotiate with potential buyers. You can sell the property after pre-paying the loan and the loan foreclosure charges. Click here to learn how to do this.

This is a much better option than the bank-imposed distress sale. Remember, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act empowers the bank to take possession of the property that is mortgaged to them, to recover the loan outstanding from the borrower.

Having a rented roof over one's head is more bearable than seizure of one's property.

The whole situation is always very distressing. A little extra effort on your part may save you from this trouble: an insurance product to guard yourself against the risk of becoming a loan defaulter and losing your home. Banks these days offer insurance products bundled with the home loans.

comment on Union Budget 2008-09

At first glance, the finance minister appears to have done enough to enjoy the support of India's burgeoning urban middle class. The long awaited change in the IT slab with the kind of boldness last displayed in 1997, needs to be commended.

This will clearly lead to substantial tax relief for an income tax payer (tax savings can be as high as Rs. 45,000 per annum in some cases). The decrease in the general Cenvat (excise) rate should also lead to some price stabilisation across the board.

The clarifying amendment to the Income Tax Act on reverse mortgages will enable this very beneficial scheme for senior citizens to finally take off.

Health insurance is still some distance away from being a central political issue in India (unlike in the US). In spite of this, the increasing importance of the health sector is outlined in the various large outlays that includes very ambitious life and health insurance initiatives meant for the poorest of the poor. If properly implemented, this initiative could go a long way toward in reducing mortality rates among the poor and increasing health statistics. For the middle class, the incremental deduction of Rs. 15,000 toward the health insurance of one's parents is a welcome move.

Now for the flip side. The big Rs.60,000 crore giveaway (supposedly to benefit poor farmers) is the clear preparation for the 2009 elections. Whether it helps the ruling alliance to gain some votes remains to be seen but the impact on the lending system will clearly be bad.

This move is clearly an invitation to default on loans knowing that, come an election year, the government will bail them out. This acts as a huge dampener for honest borrowers who repay their loans in time; and rewards dishonesty.

It is also an invitation to borrowers to take more than ordinarily adventurous positions on agricultural projects knowing well that if they succeed, the gains will be theirs. If the project fails, the government is clearly there to bail them out.

When it is tax payer money that is being used to give away these sops we surely deserve a voice in this decision.

Referring to the proposed Higher Educational Refinance Corporation, the government had proposed to provide education loans at a lower cost during the 2007-2008 budget. The scheme was proposed to be fulfilled by the UPA during the 11th Five-Year Plan. However, this budget seems to throw no further light on these aspects. A fund of Rs 2,500 crore was to have been provided to the corporation during the 11th Five-Year Plan.

The budget presented today talks of an increase in scholarships and the number of universities that students can approach to pursue courses. Jawaharlal Navoday Vidyalaya is to be set in 20 new districts for SC/STs. Indian Institutes Scientific Research (IIScR) are to be set up in Bhopal and Tripura. Three more Indian Institutes of Technology (IIT) will be set up in Bihar, AP, and Rajasthan. It is also proposed that 16 Central universities and 6000 model high schools will be started in this current year.

The Blatant Display of Statutorily Regulated Babudom Sexism award goes to the insertion of Section10 (26AAA) offering exemption to Sikkim subjects on the income derived from sources in Sikkim or from dividend or interest on securities. This section specifies that the exemption will be withdrawn if a Sikkimese woman marries a non- Sikkimese subject. The reverse, should a Sikkimese man marry a non- Sikkimese woman, doesn't hold. It might be a lot to expect, but maybe, just maybe better sense will prevail and this provision will be dropped or amended to make it equally applicable to both men and women.

If only the huge giveaway of Rs. 60,000 crores had not been made, this would perhaps have been the budget dreams are made of...

 

Asset Bubble... good reading

Here's a very interesting anecdote that describes how an "asset bubble"builds up and what are its consequences.Read it even if it confuses you a bit...things will be clear as you reach the end.... ANCEDOTE -Once there was a little island country. The land of this country was thetiny island itself. The total money in circulation was 2 dollar as therewere only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. Band C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, A and C now eachown 1 dollar while B owned a piece of land that is worth 1 dollar. The net asset of the country = 3 dollar.

3) C thought that since there is only one piece of land in the country andland is non produceable asset, its value must definitely go up. So, heborrowed 1 dollar from A and together with his own 1 dollar, he bought theland from B for 2 dollar. A has a loan to C of 1 dollar, so his net asset is 1 dollar. B sold his land and got 2 dollar, so his net asset is 2 dollar. C owned the piece of land worth 2 dollar but with his 1 dollar debt to A,his net asset is 1 dollar. The net asset of the country = 4 dollar.

4) A saw that the land he once owned has risen in value. He regrettedselling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollarfrom B and and acquired the land back from C for 3 dollar. The payment is by2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan toC. As a result, A now owned a piece of land that is worth 3 dollar. But sincehe owed B 2 dollar, his net asset is 1 dollar. B loaned 2 dollar to A. So his net asset is 2 dollar. C now has the 2 coins. His net asset is also 2 dollar. The net asset of the country = 5 dollar. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own theland. So he bought the land from A for 4 dollar. The payment is by borrowing2 dollar from C and cancellation of his 2 dollar loan to A. As a result, A has got his debt cleared and he got the 2 coins. His netasset is 2 dollar. B owned a piece of land that is worth 4 dollar but since he has a debt of 2dollar with C, his net Asset is 2 dollar. C loaned 2 dollar to B, so his net asset is 2 dollar. The net asset of the country = 6 dollar. Even though, the country has onlyone piece of land and 2 Dollar in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blowed. An evil thought came to C's mind. "Hey,what if the land price stop going up, how could B repay my loan. There isonly 2 dollar in circulation, I think after all the land that B owns isworth at most 1 dollar only." A also thought the same.

(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollarcoins, his net asset is 2 dollar. B owed C 2 dollar and the land he ownedwhich he thought worth 4 dollar is now 1 dollar. His net asset become -1dollar. C has a loan of 2 dollar to B. But it is a bad debt. Although his net assetis still 2 dollar, his Heart is palpitating. The net asset of the country = 3 dollar again. Who has stolen the 3 dollar from the country ? Of course, before the bubble burst B thought his land worth 4 dollar.Actually, right before the collapse, the net asset of the country was 6dollar in paper. his net asset is still 2 dollar, his heart is palpitating. The net asset of the country = 3 dollar again.

(9) B had no choice but to declare bankruptcy. C as to relinquish his 2dollar bad debt to B but in return he acquired the land which is worth 1dollar now. A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net assetis 0 dollar. ( B lost everything ) C got no choice but end up with a landworth only 1 dollar (C lost one dollar) The net asset of the country = 3dollar. ************ ****End of the story******* ********* ********* ** There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared. A few points worth noting -
(1) When a bubble is building up, the debt of individual in a country to oneanother is also building up.

(2) This story of the island is a close system whereby there is no othercountry and hence no foreign debt. The worth of the asset can only becalculated using the island's own currency. Hence, there is no net loss.

(3) An overdamped system is assumed when the bubble burst, meaning theland's value did not go down to below 1 dollar.

(4) When the bubble burst, the fellow with cash is the winner. The fellowshaving the land or extending loan to others are the loser. The asset couldshrink or in worst case, they go bankrupt.

(5) If there is another citizen D either holding a dollar or another pieceof land but refrain to take part in the game. At the end of the day, he willneither win nor lose. But he will see the value of his money or land go upand down like a see saw.

(6) When the bubble was in the growing phase, everybody made money.

(7) If you are smart and know that you are living in a growing bubble, it isworthwhile to borrow money (like A ) and take part in the game. But you mustknow when you should change everything back to cash.

(8) Instead of land, the above applies to stocks as well.

(9) The actual worth of land or stocks depend largely on psychology.

Seven Ways To Survive a Stock Market Correction!

Seven Ways To Survive a Stock Market Correction! (by Yogesh Chabria)

Global markets all have corrected lately. Irrespective of which market you are investing in, you would have been affected by the recent volatility. You could be an investor in America, India, China, Korea or anywhere else in the world- your situation would be pretty much the same. Many of you who are new investors might have entered panic mode, where you are unable to relax and have lots of stress and depression. I understand how it must be for somebody who just started investing in either stocks or mutual funds two months ago to see a notional loss of 30% or more now.

I remember the first time several years ago when I witnessed a stock market correction, my portfolio was down by over 50% and I too had entered panic mode. But thankfully after reading books on investing and listening to more experienced investors, I decided not to panic and hold my quality stocks. I am a much happier person today thanks to that decision.

Here are seven simple ways to survive a stock market correction as an investor:

1. Stop Listening To Analysts

Most analysts in the media instead of providing you with a solution will just confuse you. Somebody will say everything is doomed while others will say things are great in the long term. Forget listening to analysts- most of them won't be of any help. The reason people listen to analysts is because they are looking for peace and hope. Trust me you will get none of that by listening to somebody else. Peace and hope are all within you.

2. Stop Staring At Your Portfolio Every Thirty Minutes

Another mistake people make is that they get up every morning and wait for the markets to open. Once markets open they start staring at their stock prices. A fall makes you feel worse and small rise makes you feel a little better. This won't help either. Instead keep track of the fundamentals of your company every time the results are out. If your company is profitable and growing - be happy. If it isn't, find out if you need to exit. The stock price will catch up in the near future if business is growing. Do you stare at your money kept in a bank FD everyday? Most probably not. Use the same principle when you invest in stocks or mutual funds.

3. Be Patient

Many of you might not have a lot of cash to buy cheap now; however please be patient with whatever you have bought. Even the youngest billionaire on Earth today is 23 years old. It took him 23 years to be a billionaire and he didn't do it in few days or weeks. The youngest billionaire probably in history is 23-year-old Mark Zuckerberg - the founder of the social networking site-Facebook.

4. Speak To Actual Investors With Experience

Instead of interacting with analysts or your broker, speak with people who are actual investors and who have been in the market for longer periods of time than you. They will tell you how they have survived various stock market corrections and what has made them richer. Read and learn more about people who have actually created wealth and sustained it over a long period of time.

5. Stop Following Crazy Tips

Please for heaven's sake stop following 'hot' tips which promise to make you a millionaire in a matter of months. Maybe the 'hot' tip is only meant for billionaires who would end up as millionaires in case they do follow the tip. If it seems to good to be true, it is probably just a scam, which hopes to take money away from retail investors and put them in the hands of greedy manipulators. Similarly stop following rumours about how fundamentally strong companies are going to be shut down and go bankrupt in the next few months. Use your own head and trust yourself.

6. Understand Market Cycles

Every asset class has a cycle. Stock markets, mutual funds, real estate all move in cycles. Please realize that nothing can keep going up forever in a single direction. There will be phases when prices will come down and again move up. If you go back into history you will see several instances when stock prices came down, however over a period of time quality companies always reward investors. Understand market cycles, and don't become a slave to them.

7. Follow The Guru

Today the richest man on earth, Warren Buffett, is an investor who has created wealth because he has stayed away from what everybody else is doing and has simply invested in quality companies for the long term. He invested in Gillette, for the simple reason that he believed that men won't stop shaving. It makes sense to follow, as I call him, "The Guru" and think long term and remember people who create wealth do things that others don't.

I'm sure if you follow the simple techniques above you will be a much happier and a calmer investor. Investing is about controlling your emotions and being disciplined about what you do-

Seven Ways To Survive a Stock Market Correction!

Seven Ways To Survive a Stock Market Correction! (by Yogesh Chabria)

Global markets all have corrected lately. Irrespective of which market you are investing in, you would have been affected by the recent volatility. You could be an investor in America, India, China, Korea or anywhere else in the world- your situation would be pretty much the same. Many of you who are new investors might have entered panic mode, where you are unable to relax and have lots of stress and depression. I understand how it must be for somebody who just started investing in either stocks or mutual funds two months ago to see a notional loss of 30% or more now.

I remember the first time several years ago when I witnessed a stock market correction, my portfolio was down by over 50% and I too had entered panic mode. But thankfully after reading books on investing and listening to more experienced investors, I decided not to panic and hold my quality stocks. I am a much happier person today thanks to that decision.

Here are seven simple ways to survive a stock market correction as an investor:

1. Stop Listening To Analysts

Most analysts in the media instead of providing you with a solution will just confuse you. Somebody will say everything is doomed while others will say things are great in the long term. Forget listening to analysts- most of them won't be of any help. The reason people listen to analysts is because they are looking for peace and hope. Trust me you will get none of that by listening to somebody else. Peace and hope are all within you.

2. Stop Staring At Your Portfolio Every Thirty Minutes

Another mistake people make is that they get up every morning and wait for the markets to open. Once markets open they start staring at their stock prices. A fall makes you feel worse and small rise makes you feel a little better. This won't help either. Instead keep track of the fundamentals of your company every time the results are out. If your company is profitable and growing - be happy. If it isn't, find out if you need to exit. The stock price will catch up in the near future if business is growing. Do you stare at your money kept in a bank FD everyday? Most probably not. Use the same principle when you invest in stocks or mutual funds.

3. Be Patient

Many of you might not have a lot of cash to buy cheap now; however please be patient with whatever you have bought. Even the youngest billionaire on Earth today is 23 years old. It took him 23 years to be a billionaire and he didn't do it in few days or weeks. The youngest billionaire probably in history is 23-year-old Mark Zuckerberg - the founder of the social networking site-Facebook.

4. Speak To Actual Investors With Experience

Instead of interacting with analysts or your broker, speak with people who are actual investors and who have been in the market for longer periods of time than you. They will tell you how they have survived various stock market corrections and what has made them richer. Read and learn more about people who have actually created wealth and sustained it over a long period of time.

5. Stop Following Crazy Tips

Please for heaven's sake stop following 'hot' tips which promise to make you a millionaire in a matter of months. Maybe the 'hot' tip is only meant for billionaires who would end up as millionaires in case they do follow the tip. If it seems to good to be true, it is probably just a scam, which hopes to take money away from retail investors and put them in the hands of greedy manipulators. Similarly stop following rumours about how fundamentally strong companies are going to be shut down and go bankrupt in the next few months. Use your own head and trust yourself.

6. Understand Market Cycles

Every asset class has a cycle. Stock markets, mutual funds, real estate all move in cycles. Please realize that nothing can keep going up forever in a single direction. There will be phases when prices will come down and again move up. If you go back into history you will see several instances when stock prices came down, however over a period of time quality companies always reward investors. Understand market cycles, and don't become a slave to them.

7. Follow The Guru

Today the richest man on earth, Warren Buffett, is an investor who has created wealth because he has stayed away from what everybody else is doing and has simply invested in quality companies for the long term. He invested in Gillette, for the simple reason that he believed that men won't stop shaving. It makes sense to follow, as I call him, "The Guru" and think long term and remember people who create wealth do things that others don't.

I'm sure if you follow the simple techniques above you will be a much happier and a calmer investor. Investing is about controlling your emotions and being disciplined about what you do-

Wall Street Resumé

I really feel that it is about time that Wall Street and the Federal Reserve pack up finance and go and get a real job, in the real economy. They are clueless as regards finance, and have actually been the driving force in the destruction of Americas real economy, and therefore

YOUR REAL JOBS.

Does anybody want to give them a job? Here is their Resumé.

1950-1966

We got into a real rip roaring boom, times were good the Dow rose from about the 180 mark to 1000, good boom times. Unfortunately big problems laid directly ahead. But at least we had some morals back in those days.

1966-1982

This was a tough period, the market wanted to react after such a big boom. We got into the money printing game in the late 60,s to finance the Vietnam war. The problem was that we were running a big trade deficit with France who started to demand real Gold for the boatloads of Dollars we were sending them each month. In 1971 Nixon dumped the convertibility of the Dollar into Gold so we all became Keynesians overnight. Now the printing could go into overdrive, we kept printing but the problem was that Gold went crazy against the Dollar and inflation was north of 15%, but at least we avoided the stock market crashing. It did crash in real money terms but all the sheep need to see are some nominal gains or even sideways action it always keeps them happy. They never understand the true meaning of purchasing power losses, as the value of the Dollar shrinks. In the late 70,s things had got so bad with inflation that Paul “hitman” Volcker was called in, interest rates went to 20% and we wiped out the industrial heartland of America with that move, but at least we got inflation under control, and that pesky Gold came back into line. It was finally time to party hard again.

1982 – 2000

We partied hard, up, up and away, we got into that nasty October 1987 crash, but we had easy Al Greenspan at the helm, a real party animal is our Al, this guy never takes the punch bowl away, he always keeps it full. We got out of that crash by dropping interest rates and printing hard. We also set up a market intervention department so that we could keep all profits and avoid the losses.

The problem was that bubbles started appearing everywhere Al became like one of those Greek plate spinners, trying to keep all the plates spinning without crashing to the floor. He was good at it, he would talk about this and that and nobody would ever understand him, it was always about the party for Al. The biggest bubble was in real estate in the late 80,s, eventually it popped and we had the Savings and Loans crisis the boyz made out well with this scam, huge profits in the boom, and the dumb taxpayer picked up our tab in the bust, it was also “alleged” that plenty of the repossessed property also went AWOL off the Governments books at the HUD, just beautiful. Then in 1995 we started the tech boom, this was a gem the mother of all booms, we got dumb money to cough up billions of dollars for what were basically websites, these turkey businesses had no income and no assets but were valued at crazy money. Sweet times, but this bubble popped, it had too.

2000- To Present day

After the Tech hangover we were all looking to easy Al to get the next party organized, this guy never disappoints we love Al, we were going back to our old friend real estate once again, crazy Al dropped interest rates to 1% and we gave away mortgages to anybody who was warm and breathing, and we were not actually checking out that criteria very carefully, if you know what I mean. Speculators, condo flippers, fraudsters you were all more than welcome to the party. Dumb money really believed that their “investment” would go up by 20% every year!!!!!. Problem was going into 2007 this party was well and truly over, and it had a real nasty hangover. Al got out, and now we have Ben he is a good lad, but nobody partied like Al. I guess the public is finally wising up to all our scams, so it is time for me to get out and get a real job. Also been a shock to see Northern Rock die from the credit overdose as well as Countrywide and now Bear Stearns, these boyz partied real hard but I never thought it would kill them. Sure the Fed is trying to get another crazy party started someplace, along with their Government lapdogs, we have all these schemes, and interventions but in essence it is the same old scam devalue the dollar and dump all the losses on the dumb taxpayer. I finally want to go straight, my conscience is bugging me, we have pulled so many scams and tricks, hurt so many decent people, its difficult to sleep at night. So I am looking for anything really, is anything left out there?

The history of Wall Street in a nutshell

They have destroyed the purchasing power of the Dollar through excess money printing.

This has led to massive and sustained inflation far higher than the farcical and lying statistics show.

This has then led to a massive off shoring and outsourcing of real business and real jobs to less inflated lands.

As the real economy moved largely offshore, Wall Street and the Government have defaulted to lies and manipulated statistics, together with blatant and repeated free market intervention to try and keep the illusion of prosperity going for a little while longer.

Just look at Henry Paulson last summer he stated that “The economy is now by far and away the strongest that I have seen, in all my years on Wall Street” Which is why the Fed which is not FEDERAL and certainly not a RESERVE, is administering daily infusions of cash for Wall Street to survive in this strong economy. Any old junk is accepted at face value as collateral. It must be great to be able to run a business whereby massive bonuses are generated at all times, and all losses are socialized, impossible to actually fail, and carry any consequences of failure.

The Fed is now organizing a very cosy, but sordid little takeover deal for JP Morgan, one of its own shareholders!! (No conflict of interest there then) which completely stitches up Bear Stearns shareholders, and it is all guaranteed by the Government, so completely risk free to JP Morgan.

Maybe I am wrong and we need to take the “experts” tips? like Henry Paulsons old firm Goldman Sachs who caused quite a flurry in the Gold market at the end of 2007 by stating that the hot trade for 2008 when Gold was trading at about $800 an ounce was to SHORT Gold !!!!! that beauty would have worked well with a bit of leverage, made your trading account look like Bear Stearns share price over the last few days.

Or take the advice of CNBC,s top market man the one and only Jim Cramer, who stated at the beginning of last week and I quote directly

“No,No,No Don’t move your money from Bear, that is being silly, don’t be silly, Bear Stearns is fine, Bear Stearns is not in trouble”.

A customer once asked me what is the City Of London really like. I replied that behind the flash glass facades and the fancy suits it is really like a casino on the outskirts of town, run by the mob, frequented by all the local hustlers and fraudsters, full of flea bitten prostitutes, where all the tables are bent and the cards marked. Wall Street is the other lower class establishment.

Wall Street in reality is the only place whereby a man can glide into town in his new Rolls Royce, to take financial advice from somebody who each night goes home on the subway. Nowhere on this planet does the old Latin saying CAVEAT EMPTOR = BUYER BEWARE apply more than on Wall Street.

 

Who did this ? Forex Loss by Me ? Not at All.

 

Here is latest news on Losses not yet booked by many listed companies and / or by many banks. Now, the losses have already been booked. It is worth to see that who is going to take the loss, the Innocent or the Culprit.

 

Forex Derivatives Contracts :

Companies that had entered into complex foreign exchange derivatives contracts with their banks and that had taken a hit are awaiting judgments on the cases they had filed against the banks in the high courts. Interest now centres around the suit filed by Sundaram Brake Linings Ltd (one of the affected companies), a ruling on which, the Madras High Court, according to sources in the know, is expected to deliver shortly.

At least three companies – Hexaware Technologies Ltd, Sundaram Multi Pap Ltd and Sundaram Brake Linings Ltd – have filed cases in the high courts, disowning the contracts and seeking the courts' direction not to pay the margin money that the banks had demanded of them. In the notes for the quarterly results ended December 31, 2007, Sundaram Brake Linings contended that the currencies involved and the volume of transactions clearly established that they were beyond the underlying exposure. In the case of Sundaram Multi Pap Ltd - the Company's counsel said that his client never went to the Bank for this. Further the Company was not having any banking dealing with this particular bank earlier to this transaction. The said bank opened a new branch next to its premises and Bank's senior staff visited the premises of the Company and offered above and did not disclose the full facts. Bank's contention is totally wrong and unlawful that when profit was coming, the Company was keeping silence and and it started giving losses, the company started blaming Bank.

Any hedging strategy should have been offered by the banks only to minimise the risk of underlying exports, it had further argued.

The company also said that it had been advised that such contracts were void from the beginning, apart from being in violation of prescribed regulations. The company said it had rejected a demand of Rs 1.76 crore received from one of the banks; had made no provision in the accounts besides returning the monies received from the banks under such transactions. A corporate consultant advising companies on hedging foreign exchange exposure explained the situation thus. When the rupee was consistently appreciating against the dollar in early 2007, with the prospect of a further appreciation in the future banks sold contracts that conferred on these companies the right to sell future dollar receivables (exports) at a hefty premium to the prevailing spot rate. Such a right would have required the companies to pay a fee to the banks. But the latter structured compensating contracts in currencies such as Swiss franc, Japanese yen and the euro against the dollar.

But the difference this time was that the companies were the risk takers (on adverse currency movements) and the banks were the ones that enjoyed protection. To compound matters, the fee that the company was entitled to receive from the bank was relatively small and hence had to take on an exposure that was at least a few times larger than the original cover for export receivables that they had obtained from banks.

It is not clear, the consultant added, if companies really understood the risks or even if they did were lulled into a false sense of security by the banks' assurance that the possibility was remote. But as it happened, the US sub-prime crisis put paid to any hopes that the adverse currency movements would not materialise and corporates betting against that eventuality ended up on the losing side.

 

Posted S K Kothari