In January this year the central bank imposed higher provisioning norms on personal loans due to this state-owned banks are discouraging retail customers from taking personal loans in spite of slowdown in loan growth and abundant liquidity.
There has been a growth in personal loans over the past few years, along with a rise in earnings of the organized workforce in a buoyant economy. But, once the Reserve Bank of India’s norms on provisioning kicked in, banks had to set aside 2% as standard provision on personal loans. According to this norm for each personal loan of Rs 100 which is treated as a standard loan, banks have to set aside Rs 2 as a provision. This is deducted from operating profit.
To discourage customers from seeking personal loans, banks have started to insert fresh clauses in loan documents which make it difficult for customers to avail of such loans. Some banks like Corporation Bank and Canara Bank have started asking customers to provide for an undertaking from their employers. “This is like seeking a guarantee from the employer which is not very easy to get,” pointed out a senior banker.
According to senior Canara Bank official, the bank is also insisting that the borrower should have a salary account with them in order to obtain personal loans without any collateral. “This is because we have noticed rising instances of loans without any security going bad. Thus, if the borrower has a salary account with us, the EMI is directly deducted from it which reduces the scope of default.”
Further to discourage personal loans, some banks are insisting on third-party guarantees in case the loan value is very high, besides seeking a guarantee from the borrower. For instance, Bank of India has decided not to increase its target on its personal loan portfolio. This means that fresh loans will be given only to the extent of repayment of the existing loans.
According to bankers, a substantial chunk of salary accounts, especially of private corporate, has been cornered by private banks. However, when it comes to locking in to loans, many employees prefer to access personal loans from PSU banks, mainly due to lower rates charged by them. While most PSU banks have pegged personal loans to the prime lending rate (12-14%) or a 100-200-basis point premium on big ticket loans, private and foreign banks charge as high as 16-21%.
With the upswing in property prices, banks are adopting a cautious approach to approving home loans. More and more banks are reluctant to approve home loans at a fixed rate. Banks like Canara Bank and Bank of India have stopped disbursing fixed rate loans while others such as State Bank of India, Punjab National Bank and Allahabad Bank have inserted a reset clause in their fixed rate loan documents.
Recently, the Bank of Baroda board also passed a resolution to insert a reset clause at the end of five years for their fixed rate home loans. Sources said Central Bank of India, too, is considering inserting a similar clause in its fixed rate home loans. The decision will be taken after the bank completes its IPO by the end of this month. The reset clause protects the lender from fluctuations in interest rates.
Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
Thursday, 26 September 2013
Saturday, 14 September 2013
The dangers of over leveraging on debt
This post is inspired by comments from my previous post on Recession Heroes Ep 5 - Resilience during tough times. Too many people have too much debts causing problems for them and their families when they lose their jobs. Housing debts are one of the major debts among young people in our current generation now. When buying a house, remember to plan ahead and do not over commit. A general guideline is not to use more than 30-35% of your monthly income to pay for housing loans. However, different people have different circumstances. You will know your situation yourself. Plan accordingly.
MAS has reported that statistics show rising household debts in Singapore is worrying. Measures have been put in place the past few months and is still ongoing currently.
National development minister Khaw Boon Wan has also spoke regarding the future spikes in interest rates.
MAS has reported that statistics show rising household debts in Singapore is worrying. Measures have been put in place the past few months and is still ongoing currently.
National development minister Khaw Boon Wan has also spoke regarding the future spikes in interest rates.
Mr Khaw said: "They assume two things. Property prices will keep going (up). Two, interest rates will keep on remaining low. Both are wrong and therefore one day, both will collapse on them. So, if you are over-committed, let's say you can only afford a 3-room flat, (but) you decide to buy five room flat. Yes, based on today's interest rates you can afford a five-room flat. But, when interest rates go up as it will, you will no longer be able to afford a five-room flat and what will happen, your bank will start calling you up to please top up or sell your flat and that's when trouble starts."
In addition, Mr Khaw said the high property prices will not last in the long run.
At the same time, he acknowledged he cannot be certain when and how much prices will come down.
He added: "Only when you can get enough buyers who can afford, will prices stay up, if not they will come down. Today because of low interest rates, this bubble is being pushed up and sustained longer than it should have. So, it will collapse in a matter of time and therefore do not think that prices will keep on going up."
~ Quoted from Channel News Asia
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Thursday, 5 September 2013
Market update - Substantial rise in treasury yields
Update of Treasury yields in the US
2yr Treasury Yields - 0.51%
10yr Treasury Yields - 2.98%
30yr Treasury Yields - 3.88%
What do these numbers means? A rise in yields implies a fall in bond prices. If you have investment in bonds, most likely you'll see a drop in your portfolio value. Short term yields have already more than doubled from 0.24 to. 0.51.
This also means that interest rates are rising. Those with floating rate loan packages will feel the effect of higher interest rates. If you have substantial loans like housing and car loans, do take note of the impact.
The good news is a rise in interest rates usually signify a economic recovery. Money is flowing out of bonds(which is considered a safer asset) into equities and other more risky assets.
Dry bulk shippers have bottomed out from its low and have risen substantially the past one month. Baltic dry index (BDI) is also rising indicating an increase in shipping freight rates. Will Singapore shipping stocks start to recover as well? This will need to be monitored further.
Reits and property stocks will be negatively impacted by the rise in interest rates. Reits generally have high debt to service ratios which means they borrow a substantial amount of money. Higher interest rates will impact a reit's profit.
There may be an adverse effect as some Singaporeans are overleveraged on debt. Some with debts of more than 60% of their income. Will there be more loan defaulters and bankruptcy? That we'll not be sure and need to see how the situation develops.
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Monday, 29 July 2013
The history of 9.5% Post Office Savings Bank (POSB) interest rates and the effects of inflation
The current interest rate is so low in Singapore. Currently, most banks pay 0.05% on bank deposit accounts. You've heard it! Its a tiny 0.05%. That means if you save $100000 in the bank, the interest you receive at the end of the year is only $50!! What can $50 buy you in Singapore? The most a decent family meal and that's it.
Why is the interest rate so low now? I've found out a very interesting history of the savings deposit rates offered by POSB which was known as Post Office Savings Bank in the past. The highest interest ever recorded was 9.5% on 1 August, 1981. I am not old enough to have experienced the history of interest rates in Singapore so i asked my parents and also searched on it in the internet.
My parents told me in those days, they had an average of 5-6% interest from the savings they put in the bank. Every year, they had hundreds or thousands of dollars in interest from the banks. My mum even said my grandpa always used the interest earned from savings in the bank to give red packets to us. We had very generous red packets from my grandpa on every Chinese new year at that time. That was in the late 1980s and early 1990s.
What happened to those days where we see high savings account interest in Singapore?
Below shows the Deposit interest rates in Singapore:
We can see that interest rates has fallen over the years. Let's look at the history of interest rates in Singapore learning from POSB.
History of POSB interest rates
Here are the interesting facts i found out:
In 1965, interest rates was at 3%
In 1968, interest rates was revised upwards from 3% to 4%
In 1974, POSB was transferred to become part of the Ministry of Finance and Credit POSB Pte Ltd was established in the same year to provide custom-tailored loans relating to HDB housing ownership. POSB also raise the interest rate to 4.5% p.a. for deposit on 1st Jan, 5% in July and 8% in August.
On 1 September 1978, POSB introduced a 2-tier interest rate with a 5.25% p.a. for the first $100,000 deposit and 3.5% for the subsequent amount.
In 1980, it introduced the Passcard, and set-up the Principal Branch. On 1 May 1980, POSB revised the 2-tier interest rate upwards with a 7% p.a. for the first $100,000 deposit and 5% for the subsequent amount.
In 1981, its first Cash-On-Line ATM opened at the Newton Branch. On 1 July 1981, POSB revised the 2-tier interest rate upwards with a 9% p.a. for the first $100,000 deposit and 6.5% for the subsequent amount.
I remembered my dad had a very old POSB cash-on-line atm card but i just couldn't find any pictures on it. It was grey in colour and had a card holder also. Maybe some of you would remember that.
On 1 Auguest 1981, the interest rates on the first $100,000 was revised upwards to 9.5%. This was a historical moment as it was the highest interest rate every recorded.
The Post Office Savings Bank (POSB) was officially renamed as POSBank in March 1990. The word “Savings Bank” was dropped. On 1 June 1990, POSB adjusted the 2-tier interest rate upwards with a 4% p.a. for the first $100,000 deposit and 3% for the subsequent amount.
You would have realised that POSB has been paying higher interest rates on smaller amounts up to $100,000 and lower interest rates on subsequent amounts. This changed on 1 March 1998 due to the asian financial crisis. Commercial banks interest rates rose and this caused POSB to lose some of its bigger depositors. This prompted POSB to give higher interest rates of 4.125% to amounts above $100,000 and lower of 3.75% to amounts below $100,000
POSBank was fully acquired by DBS Bank on 16 November 1998. Witnessing the event were Finance Minister Dr. Richard Hu and DBS Bank Chairman Mr. S. Dhanabalan. This event marks the end of Savings Bank concept and welcome the new era of low interest loans in Singapore.
Mr. S. Dhanabalan, the Chairman of DBS Bank, declared that “POSBank cannot remain the way it is”. To start the ball rolling down hill, DBS announced on 18 November 1998 that POSBank Savings Account Balances, which is still tax-exempted, for the first $50,000 is at 2.25% p.a. down 0.5% and in excess of $50,000 at 2.25%. And swiftly on 10 December 1998 that POSBank Savings Account Balances for the first $50,000 adjusted downward to 1.5% p.a. and deposit in excess of $50,000 at 1.75%.
By year 2000, saving deposit interest rates dropped below 1% and has been even lower currently.
One good thing about the low interest rates on deposits was that loans interest rates also decreased significantly. Those who buy properties could borrow at a much lower rate which is also a cause of our sky-rocket housing prices currently as loans were very affordable.
Why we should invest?
At current low interest rates, our money becomes more and more worthless in the bank as inflation "eats" up a portion of our cash. Can we really feel the effects of inflation in our daily lives? If you ask the older generation, they would grumble about the higher prices today and compare the cheaper things they could buy back in the past. This is not their fault that they are complaining. They have live through the past and experienced things that we as younger people do not understand.
Let's look through at how much things cost in the past as compared to today. I found some interesting pictures on the internet. Pictures taken from remembersingapore.wordpress.com. Quite an interesting blog.
Bus tickets in Singapore. This one i remembered as i used to insert a transitlink card into the bus machine when i was in primary school and press a button for the correct fare and out comes a ticket like this. I guess this was much earlier than my time as its only 10cents per ticket. I remembered my student fare was 35cents at its cheapest for a non aircon bus. You should know how much prices are for public transport now.
Old movie tickets at $2.50 and $3 in 1985. Now? A weekday ticket at $7.50 and weekend ticket at $10.50. That's 3 times more expensive now.
HDB prices are the major increases. The current 4 room flat that i live in now cost $70,000 in the 1990s when my parents first bought it. Now it cost more than $300,000.
A bowl of fish ball noodle cost $2 in the 1990s. Now average cost around $3.
Will prices continue to rise? I'm sure it will unless our economy suffers a long recession and go into a deflationary mode. If this does happen, then we may lose our jobs too. We wouldn't want that to happen.
The purpose of me showing you the above price increase of different items is not to complain about the high cost of living but to bring to your attention that the same amount of money we have now will not buy us the same amount of things. In the 1960s and 1970s, people who have $1000 were considered those who are more well off. $1000 could buy you a lot of things and last you for months on food. Now, $1000 is nothing in our current economy. If we think that $100,000 is a lot for us now, it may be worth not much 10 years from now. With savings interest so low now, the need to invest become increasingly importantly. Or else, we will realise that our hard earned money saved is not enough for us to retire. Learn to invest and invest wisely.
Like my blog? Subscribe to receive updates of new posts by email.
Subscribe to SG Young Investment by Email
Read my below posts to find out more and get started in investing.
Related posts:
1. Investing basics - How do I start investing?
2. Investing Basics - Low Cost Index Fund investing (Passive Investing)
3. My views on the new POSB Invest-Saver
4. How to pick stocks (Part 1) - Economic Moats
Why is the interest rate so low now? I've found out a very interesting history of the savings deposit rates offered by POSB which was known as Post Office Savings Bank in the past. The highest interest ever recorded was 9.5% on 1 August, 1981. I am not old enough to have experienced the history of interest rates in Singapore so i asked my parents and also searched on it in the internet.
My parents told me in those days, they had an average of 5-6% interest from the savings they put in the bank. Every year, they had hundreds or thousands of dollars in interest from the banks. My mum even said my grandpa always used the interest earned from savings in the bank to give red packets to us. We had very generous red packets from my grandpa on every Chinese new year at that time. That was in the late 1980s and early 1990s.
What happened to those days where we see high savings account interest in Singapore?
Below shows the Deposit interest rates in Singapore:
History of POSB interest rates
Here are the interesting facts i found out:
In 1965, interest rates was at 3%
In 1968, interest rates was revised upwards from 3% to 4%
In 1974, POSB was transferred to become part of the Ministry of Finance and Credit POSB Pte Ltd was established in the same year to provide custom-tailored loans relating to HDB housing ownership. POSB also raise the interest rate to 4.5% p.a. for deposit on 1st Jan, 5% in July and 8% in August.
On 1 September 1978, POSB introduced a 2-tier interest rate with a 5.25% p.a. for the first $100,000 deposit and 3.5% for the subsequent amount.
In 1980, it introduced the Passcard, and set-up the Principal Branch. On 1 May 1980, POSB revised the 2-tier interest rate upwards with a 7% p.a. for the first $100,000 deposit and 5% for the subsequent amount.
In 1981, its first Cash-On-Line ATM opened at the Newton Branch. On 1 July 1981, POSB revised the 2-tier interest rate upwards with a 9% p.a. for the first $100,000 deposit and 6.5% for the subsequent amount.
I remembered my dad had a very old POSB cash-on-line atm card but i just couldn't find any pictures on it. It was grey in colour and had a card holder also. Maybe some of you would remember that.
On 1 Auguest 1981, the interest rates on the first $100,000 was revised upwards to 9.5%. This was a historical moment as it was the highest interest rate every recorded.
The Post Office Savings Bank (POSB) was officially renamed as POSBank in March 1990. The word “Savings Bank” was dropped. On 1 June 1990, POSB adjusted the 2-tier interest rate upwards with a 4% p.a. for the first $100,000 deposit and 3% for the subsequent amount.
You would have realised that POSB has been paying higher interest rates on smaller amounts up to $100,000 and lower interest rates on subsequent amounts. This changed on 1 March 1998 due to the asian financial crisis. Commercial banks interest rates rose and this caused POSB to lose some of its bigger depositors. This prompted POSB to give higher interest rates of 4.125% to amounts above $100,000 and lower of 3.75% to amounts below $100,000
POSBank was fully acquired by DBS Bank on 16 November 1998. Witnessing the event were Finance Minister Dr. Richard Hu and DBS Bank Chairman Mr. S. Dhanabalan. This event marks the end of Savings Bank concept and welcome the new era of low interest loans in Singapore.
Mr. S. Dhanabalan, the Chairman of DBS Bank, declared that “POSBank cannot remain the way it is”. To start the ball rolling down hill, DBS announced on 18 November 1998 that POSBank Savings Account Balances, which is still tax-exempted, for the first $50,000 is at 2.25% p.a. down 0.5% and in excess of $50,000 at 2.25%. And swiftly on 10 December 1998 that POSBank Savings Account Balances for the first $50,000 adjusted downward to 1.5% p.a. and deposit in excess of $50,000 at 1.75%.
By year 2000, saving deposit interest rates dropped below 1% and has been even lower currently.
One good thing about the low interest rates on deposits was that loans interest rates also decreased significantly. Those who buy properties could borrow at a much lower rate which is also a cause of our sky-rocket housing prices currently as loans were very affordable.
Why we should invest?
At current low interest rates, our money becomes more and more worthless in the bank as inflation "eats" up a portion of our cash. Can we really feel the effects of inflation in our daily lives? If you ask the older generation, they would grumble about the higher prices today and compare the cheaper things they could buy back in the past. This is not their fault that they are complaining. They have live through the past and experienced things that we as younger people do not understand.
Let's look through at how much things cost in the past as compared to today. I found some interesting pictures on the internet. Pictures taken from remembersingapore.wordpress.com. Quite an interesting blog.
Bus tickets in Singapore. This one i remembered as i used to insert a transitlink card into the bus machine when i was in primary school and press a button for the correct fare and out comes a ticket like this. I guess this was much earlier than my time as its only 10cents per ticket. I remembered my student fare was 35cents at its cheapest for a non aircon bus. You should know how much prices are for public transport now.
Old movie tickets at $2.50 and $3 in 1985. Now? A weekday ticket at $7.50 and weekend ticket at $10.50. That's 3 times more expensive now.
HDB prices are the major increases. The current 4 room flat that i live in now cost $70,000 in the 1990s when my parents first bought it. Now it cost more than $300,000.
A bowl of fish ball noodle cost $2 in the 1990s. Now average cost around $3.
Will prices continue to rise? I'm sure it will unless our economy suffers a long recession and go into a deflationary mode. If this does happen, then we may lose our jobs too. We wouldn't want that to happen.
The purpose of me showing you the above price increase of different items is not to complain about the high cost of living but to bring to your attention that the same amount of money we have now will not buy us the same amount of things. In the 1960s and 1970s, people who have $1000 were considered those who are more well off. $1000 could buy you a lot of things and last you for months on food. Now, $1000 is nothing in our current economy. If we think that $100,000 is a lot for us now, it may be worth not much 10 years from now. With savings interest so low now, the need to invest become increasingly importantly. Or else, we will realise that our hard earned money saved is not enough for us to retire. Learn to invest and invest wisely.
Like my blog? Subscribe to receive updates of new posts by email.
Subscribe to SG Young Investment by Email
Read my below posts to find out more and get started in investing.
Related posts:
1. Investing basics - How do I start investing?
2. Investing Basics - Low Cost Index Fund investing (Passive Investing)
3. My views on the new POSB Invest-Saver
4. How to pick stocks (Part 1) - Economic Moats
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