PFC Tax Free Bonds

After NHAI, it is now Power Finance Corporation Limited (PFC) which has come out with similar tax free bonds where the interest earned on the bonds are tax exempt for the entire tenure of the bond.

The rates offered on the bonds are same as one available on the NHAI Bonds, i.e. 8.2% for the bond tenure of 10 years and 8.3% for the tenure of 15 years.  These bonds are also secured and carry a similar rating by credit agencies.

The issue size is Rs. 1000 crores with an option to retain an oversubscription upto Rs. 4033 crores.  The issue has opened on December 30, 2011 and shall close on January 16, 2012.  However, as in NHAI, PFC has a right to close the issue earlier than the schedule date based on the response received.

The minimum application size in PFC is Rs. 10,000.  Thus the retail investors who felt Rs. 50,000 minimum subscription amount a tad too high in NHAI, can go for PFC Bond Issue.

While the investor categories remain the same as in NHAI, the allocation of the issue is slightly different between the 3 categories.  Moreover, for all the categories of investors (including retail investors), the allotment is on first come first serve basis.  In NHAI, for retail investors, the allotment was proportionate.

Categories	Investors	Issue Size
Category 1	Qualified Institutional Investors	50% of the Issue Size
Category 2	HNIs (Retail investors applying for amount > Rs. 5 Lakhs)	25% of the Issue Size
Category 3	Retail Investors applying for amount ≤ Rs. 5 Lakhs	25% of the Issue Size

Thus those who have missed the NHAI bus and want to hop in PFC Tax Free Bonds should do it at the earliest.  But remember they are tax free bonds and not tax savings bonds !!

Happy New Year 2012

Source: helalhero & hTC G2 (Flickr)

Wishing all the readers of the blog a very Happy New Year 2012!!

Brushing aside all the negatives, and gloom & doom of year 2011, lets hope the coming leap year be a much more positive and exciting year to live in. :)

NHAI Bonds: Rs. 20,000 tax deduction?!?!?

NHAI bonds are in limelight since the time they have announced the issue and the rate of 8.20% p.a. and 8.30% p.a. for 10 years and 15 years respectively.  Today various newspapers have quoted that the HNI and Qualified Institutional Investors (QIIs) portion has already been oversubscribed.  Business Standard states that retail portion (those investing less than or equal to Rs. 5 Lakhs) is subscribed by 1/3^rd including green shoe option by end of Day 1.  Thus it can be seen that the response to the issue is overwhelming.

However, in all these buzz and excitement, retail investors are mis-sold to invest in these bonds.  Last week I got following sms from my dedicated relationship manager of one of the largest private bank in India with whom I have savings account relationship:

“NHAI Infra Bonds collection begins from 28^th December.  Kindly inform all your friends and colleagues who have missed an opportunity to invest in IDFC and L&T Bonds and save tax of Rs. 20,000.  Regards XYZ”

Now this is blatant mis-selling.  These bonds are different from those offered by IDFC or L&T and are not eligible for Rs. 20,000 benefit under Section 80CCF of the Income Tax Act.

Only the interest income earned on these bonds is tax free.  There is no separate tax benefits associated with these bonds.

When I replied back to her stating that her sms is factually incorrect, she responded back saying that this is what has been communicated to us by our seniors.!!!!  I told her to recheck with her seniors and rectify the misleading communication, which she agreed to do and confirmed the error later.

All the best to all who makes their investments based on advice of such relationship managers!!!

About NHAI Bonds in brief:

These bonds are issued by National Highways Authority of India (NHAI), which is an autonomous body under the Ministry of Road Transport & Highways, Government of India.  The bonds are secured and are available for tenure of 10 and 15 years.  Rate of interest for 10 years is 8.20% p.a. and for 15 years is 8.30% p.a. 

Interest is payable annually and is not cumulative.  Interest income is not taxable in the hands on the investor. 

The bonds shall be listed on both NSE and BSE and can be sold any time subsequent to the listing.  However any gain made by selling the bonds shall be taxable as per the applicable capital gain tax rates for bonds.  There is no call or put option available.

The issue size of Rs. 5000 crores with an additional Rs. 5000 crores as greenshoe option has been divided into 3 categories:

Categories	Investors	Issue Size
Category 1	Qualified Institutional Investors	40% of the Issue Size
Category 2	HNIs (Retail investors applying for amount > Rs. 5 Lakhs)	30% of the Issue Size
Category 3	Retail Investors applying for amount ≤ Rs. 5 Lakhs	30% of the Issue Size

Minimum investment is Rs. 50,000.  Allotment for Category 1 and Category 2 shall be on the first come first serve basis, whereas, allotment for Category 3 (Retail Investors) shall be on proportionate basis.

The issue opened yesterday (28^th December 2011) and closes on 11^th January 2012.  However NHAI has the right, based on response received, to close the issue before 11^th January 2012. 

Bounty for savers investing in PPF, NSC and Post Savings Deposit

Be ready to earn more on your PPF, NSC and other small savings deposit schemes from 1^st December 2011.  The interest rates on these investments have been overhauled and shall hence forth earn market linked returns.  The Government has decided to implement the recommendations made by Committee headed by Smt. Shyamala Gopinath, Deputy Governor of Reserve Bank of India in June 2011.  Bachhat had carried an article on the recommendations made by the Committee which can be read here.

           

Changes in Structure of Small Savings Schemes

There have been changes in the small savings schemes available for investors.  Kisan Vikas Patra will be discontinued from 1^st December 2011.  Further, the maturity of post office Monthly Income Scheme (MIS) and National Savings Certificate (NSC) is reduced from 6 years to 5 years.  Investors, willing to invest for longer tenure, shall have one more NSC instrument with a maturity period of 10 years.

As regards Public Provident Fund (PPF), the annual ceiling of contribution which currently is at Rs. 70,000 has been increased to Rs. 1,00,000 annually.   A taxpayer can now avail entire Section 80C benefit of Rs. 1,00,000 by just investing in PPF.  To discourage pre-mature withdrawals, interest rate on advances against PPF deposits is revised to 2% higher than the prevailing PPF interest rates.  Currently it is 1% higher than the PPF rates.

An investor shall be able to make pre-mature withdrawal from post office time deposits but shall earn rate of interest 1% less than the time deposit of comparable maturity.

Thus now the tenure available for investors are 1, 2, 3, 5, 10 and 15 years.

Revised Interest Rates from 1^st December 2011

The rate of interest on small savings schemes shall be aligned with Government Securities’ rates of similar maturity with a spread of 25 basis points (bps).  100 bps is equal to 1 percentage point.  The spread shall be 50 bps for 10 year National Savings Certificate and 100 bps for Senior Citizens Savings Scheme (SCSS).  These interest rates shall be reset every year before the beginning of the financial year based on the market rates at that point of time.  Further payment of 5% bonus on maturity of MIS has also been discontinued.

Based on the prevailing market rates, from 1^st December 2011 till 31^st March 2012, the rate of interest on various small savings schemes has been reset as follows:

Instrument	Current Rate (%)	New Rate (%)
Savings Deposits	3.50	4.00
1 Year Time Deposits	6.25	7.70
2 Year Time Deposits	6.50	7.80
3 Year Time Deposits	7.25	8.00
5 Year Time Deposits	7.50	8.30
5 Year Recurring Deposits	7.50	8.00
5 Year SCSS	9.00	9.00
5 Year MIS	8.00 (6 yr MIS)	8.20
5 Year NSC	8.00 (6 yr NSC)	8.40
10 Year NSC	New instrument	8.70
PPF	8.00	8.60

The above rates shall be reset on 1^st April 2012.  To avoid year-on-year volatility, the committee had suggested a cap of 100 bps so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the market rates fluctuate by higher margins.  Surprisingly, the notification is silent on this aspect.

As recommended by Committee, the commission earned by agents for garnering deposits has also been slashed.  The agent shall not earn any commission on PPF and SCSS.  The commission of 1% earned on all other schemes has also been reduced to 0.5%.  This is a welcome change and henceforth, the motivation of the agent to sell such schemes shall not be commission, but the suitability of the scheme to the investor.  This and similar changes which happened in mutual fund industry earlier, will encourage emergence of fee based financial service industry wherein agents charge customers directly for the services provided by them.

Bachhat’s take

As mentioned in our earlier post, this shall have long term impact on the way individuals save.  For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings.  Reduction in agency commission will ensure that products are sold to investors on the basis of their merits. 

De-regulation of savings bank deposit interest rates and more

Reserve Bank of India (RBI) announced its second quarter review of Monetary Policy 2011-12 today.  As expected, the repo rate has been hiked by 25 basis points (100 basis points is one percentage) to 8.5%.  The reverse repo rate stands adjusted to 7.5% (spread of 100 basis points below the repo rate).   RBI has stated in its press release that “…momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures, indicate moderation.  This is consistent with the projection that inflation will decline beginning December 2011”.  Thus there are chances that this may be last in series of rate hikes and RBI may take a pause.

De-regulation of Interest Rates

RBI increased interest rates on savings bank deposit to 4% in May 2011.  To complete the process of deregulation of the rates, banks are now free to determine savings bank deposit interest rates, subject to the following two conditions:

1.    for deposits upto Rs. 1 lakh, uniform interest rates shall be offered by all banks.

2.    for deposits above Rs. 1 lakh,  banks are free to provide differential rates of interest.

The operational guidelines, to be released, shall specify how this shall work.  But banks shall not be allowed to discriminate between customers on interest rates for similar amount of deposit.  Thus each bank shall offer different interest rates, depending on the market conditions and interest rate scenarios, on savings bank deposit above Rs. 1 lakh.

Generally it is not advisable to keep substantial amount in savings account since one gets less interest on it.  However it is a positive move considering that traditionally we love to keep money in bank accounts and any increased in interest rates on such deposit is welcome.

Enhancement of Customer Service and no prepayment penalty

Damodaran Committee had made several recommendations for improving customer service in banks.  10 action points on which broad consensus have emerged has been decided to be implemented.  

Key points amongst the 10 actions points are:

1.   No pre-payment penalty for floating rate loans.  However fixed rate loans shall continue to have pre-payment penalty.

2.   Issue of TDS certificate and to dispatch it to account holder’s mailing address.

3.   One view of all bank accounts (savings, fixed deposits, loans, etc) with a bank.

Also Read: Future of banking experience in India 

Though RBI has increased interest rates, which can lead to increase in rates for home and other loans products, deregulation of savings deposit interest rates, abolition of prepayment penalty on floating rate loans and improvement in customer service are few positives from this monetary review announced a day before Diwali. 

Happy Diwali!!!

Latest interest rates on fixed deposits (17th October 2011)

Bachhat has updated the interest rates on fixed deposits offered by various banks.  The updated list (as of 17th October 2011) is available at the following link: http://goo.gl/bko0w

Interesting to note here is since the last rate hike by Reserve Bank of India, very few banks have raised their rates on fixed deposits.  Infact, in some cases, banks have reduced the rates they were offering on fixed deposits for certain tenure.

RBI's next monetary policy is on 25th October and depending on whether RBI goes for rate hike or take a pause, we need to see how the banks react.   

Bachhat  plans to do a post on how the banks react to the monetary policy along with its next update on interest rates which shall be due on 31st October 2011.

Latest Interest Rates on Fixed Deposits (Updated as of 27th September 2011)

Latest interest rates on fixed deposits have been updated at http://goo.gl/JaiFt.  The update is as of 27th September 2011.

Inspite of RBI raising policy rate since our last update of 12th September 2011, there has been not much change in interest rates offered by banks.  Only 5 out of 52  banks tracked by Bachhat have increased their fixed deposit rates between 12th September to 27th September.

This time banks have not raised their base rates also.  Have we reached the stage from where it will be difficult for banks to raise loan as well as fixed deposit rates?  Whether the fixed deposit rates have reached their peaked even though the real interest rate are still negative or negligible?  We shall keep track on these aspects in our subsequent posts.

Keep reading and do continue pouring your suggestions to improve this blog.

Health Insurance Portability from October 1: Fine Print

Insurance Regulatory and Development Authority (IRDA) had in February 2011 instructed insurance companies to provide health insurance portability from 1st of July 2011.  This was subseqeuntly deferred and now is all set to get implemented from 1st October 2011. 

Health insurance portability will help policyholders to change their insurer without losing any credit or benefit for the period of cover with the existing insurer.  This helps the most in cases of pre-existing diseases since for every new policy; pre-existing diseases are excluded from the health insurance cover for a certain period from the date of commencement of the policy.  With portability in place, the policyholder will get the benefit of the period served under existing insurance policy when he changes the insurer. 

Read more about health insurance portability here

How portability works? 

The final guidelines issued by IRDA states that in case a policyholder wants to change the insurer, he has to apply to the new insurer 45 days before his policy with the existing insurer is due for renewal.  Otherwise, the insurer has a right to reject the offer for portability.  This ensures that the new insurer has reasonable time to verify history of claims which shall be available on common database to all insurers.  This database shall contain two years history of any claims made by the policyholders. 

On receipt of application for portability, the new insurer shall furnish the Portability Form along with Proposal Form and other relevant product literature.  The policyholder has to fill in all the forms and submit the same to the new insurer. 

Within 7 days of receipt of the completed portability and proposal form, the new insurer, if required, can ask to existing insurer additional information about the policyholder in the prescribed format.  The existing insurer is bound to provide such data within 7 days of receipt of such request. 

Based on the information received, the new insurer shall decide to issue health cover to the policyholder.  In case, the new insurer does not communicate its decision within 15 days, then it is assumed that the application has been accepted and later on it cannot reject such application. 

Where on the date of renewal of existing insurance policy, the outcome of acceptance of portability is still pending with the new insurer:

1.     if requested by policyholder, the existing policy shall be allowed to be extended for a short period (atleast one month) by accepting pro-rata premium for such period,       

2.     the existing policy shall not be cancelled until such time a confirmed policy from new insurer is received or if otherwise instructed by the policyholder,

3.     the date of commencement of risk of the policy issued by new issuer shall match the date of expiry of the short period in such cases and

4.     in case, for any reason, the policyholder subsequently chooses to continue the cover under existing insurer, it shall be allowed to continue by charging a regular premium and without imposing any new conditions.

Thus it can be seen that ample safeguards are provided in the guidelines to ensure that the policyholder has adequate options and is not without cover at any point of time while the portability is in progress. 

Treatment of Pre-existing Diseases 

It is important to understand how the pre-existing diseases shall be treated after the portability to the new insurer.  The waiting period to be served for allowing pre-existing diseases to be covered with new insurer shall be calculated after including the number of years of insurance cover with existing insurer.

For eg:  In the health insurance policy of the new insurer, if the pre-existing diseases have waiting period of 3 years and the policyholder has completed two years of insurance cover with existing insurer, he has to wait for additional one year to ensure the pre-existing disease is cover.   The guidelines ensure that such additional waiting period is explained by the new insurer to the policyholder. 

Treatment of No Claim Bonus 

In case a policyholder does not make any claim in a particular year, he is entitled to no claim bonus at the time of renewal.  This no claim bonus can be either by way of reduction of next year’s premium or by increase in the amount of sum assured.  In case of portability, policyholder has the option to club cumulative bonus acquired under previous policy with the sum assured and treat such higher amount as revised sum assured.  However in such cases, it shall lead to high premium charges. 

For eg:  Assume a policyholder having health insurance policy of Rs. 1,00,000.  He has also earned cumulative bonus of Rs. 25,000 over the years.  Now if he decides to change the insurer and opts to club the cumulative bonus of Rs. 25,000 with Rs. 1,00,000, Rs. 1,25,000 shall be treated as revised sum assured and premium shall be based on such higher revised sum assured. 

There is one more thing to be aware of in such cases.  Suppose the new insurer provides the health insurance cover for Rs 50,000 and in multiples thereof.  Then in our above example the sum assured shall automatically stand increase to Rs. 1,50,000, since the insurer cannot provide cover for Rs. 1,25,000.  The premium one pays shall be based on cover of Rs. 1,50,000.  However portability benefits shall be available only up to Rs. 1,25,000 and not on the entire cover of Rs. 1,50,000. 

Group mediclaim policy to individual health policy 

Individuals who are covered under group mediclaim policy, such as one provided by the employer, shall have the right to migrate from such a group policy to an individual health policy with the same insurer.   One year after such migration, they can migrate to any other non-life insurers. 

Thus it can be seen that guidelines have tried to cover all possible scenarios and simultaneously tried to minimize trouble to the policyholder.  We need to wait and see how this is being implemented by the insurers and how much the policyholders are benefited.  But for policyholders who have bad experiences with their current health insurance provider, health insurance portability is a good option to avail of.

One should keep in mind that portability does not means the premium shall remain the same.  The premium applicable to the scheme of new insurer chosen by the policyholder shall be applicable.  Further the new insurer also has right ‘to load’ the premium based on the claim history of the policyholder. 

Do let us know your comments and views on health insurance portability below.

Latest Interest Rates on Fixed Deposits (Updated as of 12th September 2011)

Latest interest rates on fixed deposits have been updated at http://goo.gl/JaiFt.  The update is as of 12th September 2011.

Interesting thing to note is there has not been much change in interest rates offered by banks in last two weeks, however 4 out of 8 banks which have changed interest rates have reduced the rates on short tennure fixed deposits!! 

Is this the end of high interest rates being offered on Fixed Deposits and will they start reducing?  It will be interesting to track fixed deposit's rates in near term and see how it pans out.

Click here to view interest rates on fixed deposits offer by banks as of 12th September 2011.

HDFC's fixed cum floating rate home loans

Last week, Bachhat carried a post on ICICI’s newly launched fixed cum floating rate home loans and we also compared it with HDFC and SBI’s existing floating rate home loans.   

Read: ICICI’s Fixed cum Floating Rate Home Loans

Now earlier this week, HDFC has also introduced fixed cum floating rate home loan named “Fixed First”.  It is interesting to notice that many banks had discontinued fixed rate home loans when interest rates started to fall in 2008 and are now encouraging borrowers to take loans with fixed rates for certain tenure citing further rise in interest rates.

About HDFC’s Fixed First:

In HDFC’s Fixed First, the borrower has an option to choose the fixed rate tenure between 3 years or 5 years.  After the chosen period of 3 or 5 years, the loan shall be converted to regular floating rate home loan.  In ICICI’s offering, the option for fixed rate tenure was either 1 year or 2 years.  Thus in Fixed First, the rates shall remain constant for longer tenure as compared to ICICI’s offering. 

The table below gives comparison between HDFC’s and ICICI’s offering:

Loan Amount	HDFC		ICICI
	First 3 Years	First 5 Years	First 1 Year	First 2 Years
Up to Rs 25 Lakhs	10.75%	11.25%	10.50%	10.75%
> Rs. 25.01 Lakhs to Rs. 30 Lakhs	10.75%	11.25%	11.00%	11.25%
> Rs. 30 Lakhs to Rs. 75 Lakhs	11.25%	11.50%	11.00%	11.25%
> Rs. 75 Lakhs	11.75%	11.75%	11.50%	11.75%

Whether one should opt for fixed cum floating rate home loans at this point of time?

As Bachhat had noted in its earlier post on ICICI’s offering, in fixed rate loans, the benefits to borrowers and banks are exactly opposite.   It makes sense for banks to disburse more fixed rate loans when interest rates are at or are nearing peak and are projected to fall in the future.  However, borrowers benefit from fixed rate home loans if interest rates increases after they avail fixed rate loans.

Keeping this in mind, let us check the interest rate (Repo) movement since end of October 2005.

As can be seen from the interest rate chart above, we are almost nearing the peak rate in last six years.  Further, the last time the interest rates peaked, it did not last long and due to occurrence of various global events at that point of time, the rates began to fall.

From the above graph, we can deduce that interest rates are reaching their peak and may not remain high for elongated period and shall fall down.  Whether it shall happen immediately or after 6 months or 1 year is anybody’s guess.  However whatever may be the scenario, it does not makes much sense to tie oneself down to fixed interest rates for long period.

Whether shall you opt for fixed cum floating rate loans at this point of time?  Do let us know your views and suggestions in the comment section below.