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.

Most read articles in last one year on Bachhat

For the benefit of its readers, listed below are the most read articles on Bachhat in last one year.  For those who have subscribed to the blog recently or those who have not explored this blog, these articles will help you give a flavor of topics posted on this blog and about things expected to come in future.

1.    Best time to invest in Fixed Maturity Plan is approaching – Are you ready to take its advantage. 

2.    Birla Sun Life Foresight Plan: Costs increases as the Guarantees increases

3.    Mediclaim:  Things to keep in mind before buying health insurance

4.    Infra Bonds – Is the advertised yield really true? (This was the post which created the buzz about this blog and started attracting readers.  DNA started publishing blog’s articles from this post.)

5.    Update on post 1 above which discusses impact of Direct Taxes Code on FMPs.

6.    Should life insurance be taken from the company charging the lowest premium?

7.    L&T Infrastructure Bonds – How does it compare with IDFC Bonds

8.    New Pension System – A good investment alternative but requires more clarity on performance

9.    Time to purchase mediclaim policy from private insurance companies?

10.  Is Insurance Agent filling your proposal form?

Happy Reading!!

Bachhat turns One…. Thank you readers

Credit: woodleywonderworks

Dear Readers,

Today, 6^th September 2011, Bachhat completes one year of its existence!!

My sincere thanks to all the readers, subscribers and friends for their support and encouragement. 

Over the last one year, Bachhat has tried to simplify personal finance for its readers and shall continue to pursue the same.  Topics ranged from how to invest in mutual funds to which life insurance company to select.  Bachhat has also analysed latest regulations in personal finance space and its impact on you.  After 62 posts on personal finance in last one year, this blog now boost 88 regular subscribers via email and RSS feeds. 

Bachhat endeavors to carry articles of interest to its readers.  Earlier this year, Bachhat introduced a dedicated page on interest rates offered by banks on fixed deposits.  This page is updated biweekly and continues to generate reader’s interest.

I would also like to thank DNA newspaper for publishing articles from this blog in its DNA Money section.

Things I would like to achieve over the next one year:

1.    I would like to be more frequent in blogging.  To speak of numbers, by end of next year, I would like the total number of posts to reach at least 150.  That’s little less than two posts per week.

2.    I would like to cover more topics in personal finance space.  Right now the blog articles are more tilted towards mutual funds and insurance space.  The focus on these topics shall continue, but other personal finance topics shall gather prominence too.

3.    Few more dedicated pages on the blog similar to page on fixed deposit’s interest rates.

4.    Though the site is able to attract readers, their participation rate (via comments, suggestions and sharing on social networking sites) is not encouraging.  I would like to post more relevant articles to increase readers' participation.
5.    Increasing viewership of the blog from current 87 subscribers to 500 in next one year.

6.    Shift out of Blogger to a dedicated website.

Thanks once again for your continued patronage.

 

Do keep commenting on the articles and let me know your suggestions to make this blog more informative and useful. 

Vishal Shah

ICICI Fixed cum Floating Rate Home Loans: How does it fare with other bank’s home loan offerings?

Last month, ICICI bank announced fixed cum floating rate home loan.  The interest rate on such loans remains fixed for one year or two years depending on the option chosen by the borrower and thereafter it shall be floating and linked to ICICI’s base rate.  Before we go into intricacies of this product, let us revisit some basics about fixed and floating rate loans.

Fixed vs. floating rate loans

In fixed rate home loans, the interest rate is fixed at the time of disbursement of the home loan and remains the same for the entire tenure of the loan.  In case of floating rate home loans, the interest rate is linked to the base rate of the bank and changes whenever the base rate is revised.  For eg:  If at the time of disbursement of loan, base rate of a bank is 9% and the floating rate home loan is priced at base rate + 100 basis points (100 basis points = 1 percent), then the interest rate for the loan shall be 10% p.a. (9% + 1%).  Later after three months, if the base rate gets revised to 9.50%, then the interest rate shall increase to 10.5% p.a. (9.50% + 1%). 

Fixed rate home loans are beneficial to the borrowers when the interest rates are projected to increase in the future.  Floating rate home loans are beneficial for the borrowers when the interest rates have peaked / nearing the peak and are projected to fall in the future.  For banks, it makes sense to disburse floating rate loans when interest rates are expected to rise and fixed rates loans when interest rates are expected to fall.  The table below depicts under which interest rate scenarios fixed and floating rate loans are beneficial to borrowers and banks.

Type of Loans	Borrowers	Banks
Fixed Rate Loans	Rates expected to rise	Rates expected to fall
Floating Rate Loans	Rates expected to fall	Rates expected to rise

As can be seen, the benefits to borrowers and banks are exactly opposite.  On the above backdrop, let us evaluate ICICI’s latest fixed cum floating rate loan offering.

ICICI’s fixed cum floating rate home loan

In this offering, the interest rate is fixed for first one year or two years depending on the option chosen by the borrower.  The interest rate for one year fixed rate loan is 10.50% p.a. for loans till Rs. 25 lacs and increases by 50 basis points for loans between Rs. 25 lacs to Rs. 75 lacs and another 50 basis points for loans above Rs. 75 lacs.  In case of two years fixed rate loan, interest rates are 25 basis points higher than the corresponding one year fixed rate loan.  After the completion of the chosen tenure, the interest rate shifts to floating rate regime and are linked to ICICI’s base rate.

ICICI’s fixed cum floating rate home loan:  Interest rate chart

Loan Amount	Fixed Rate for first 12 months	Fixed Rate for first 24 months	Floating rate from second / third year onwards*
Up to Rs. 25 lacs	10.50%	10.75%	I-Base + 0.50% (10.50%)
> Rs. 25 lacs to Rs. 75 lacs	11.00%	11.25%	I-Base + 1.00% (11.00%)
> Rs. 75 lacs	11.50%	11.75%	I-Base + 1.50% (11.50%)

* Based on current ICICI Base Rate (I-Base) of 10.00%

Source: ICICI Bank’s website

Thus, the differentiation of this offering is only for one or two years.  After that it becomes like any other bank’s floating rate home loan.

Comparison with other bank’s fixed rate and floating rate home loans

This offering is attractively priced if we compare with fixed rate home loans of other banks.  For eg:  HDFC is offering fixed rate home loan @ 12.25% p.a for loan amount till Rs. 30 lacs.  However, to be fair, this rate is fixed for the entire tenure, whereas in ICICI’s case it is fixed only for initial one or two years.  Hence we need to compare this offering with other banks’ floating rate home loans and judge how beneficial it will be for the borrowers in various interest rate scenarios.

If we look at other banks' floating rate home loans, the rates are not much different.  In case of one year fixed rate option, the rates are 25 bps lower than SBI and HDFC’s floating rate home loans for loan amount till Rs. 25 lacs. However between Rs. 25 lacs to Rs. 30 lacs, the rates are 25 bps to 50 bps higher.  Thus the benefit of ICICI’s offering depends on (a) the loan amount and (b) interest rate outlook for the next one or two years (as the case may be) to judge this offering. 

Interest Rate Outlook

RBI has been on a rate hike spree since the start of 2010 and has increase rates by 11 times since March 2010.  Though the interest rates are high at present, experts are predicting another 25 bps to 50 bps rise in rates by RBI before it takes a pause.  Thus there is a possibility of a couple of more rate hikes in next one year.  Few may also argue that the rates have reached their peak and there shall not be any further rate hike.  However, all these guesses are like shooting in the dark and it all depends on the overall global market conditions, economy, inflation and liquidity at that point of time.

Loan Amount

Here is a chart depicting benefits in case of ICICI’s offering for home loan amount of Rs. 25 lacs, Rs. 30 lacs and Rs. 35 lacs for the period of 15 years as compared to floating rate home loans offered by SBI and HDFC.  The chart illustrates the benefits based on existing interest rates and also in case interest rates increases by 25 bps or 50 bps or falls by 25 bps or 50 bps at the middle of the fixed rate tenure of one year and two years.

Benefit of ICICI Fixed cum floating rate home loan vis-à-vis SBI / HDFC Floating Rate Home Loan

Loan Amount	Fixed Rate Tenure	Interest Rate Scenario
		No change	25 bps rise	50 bps rise	25 bps fall	50 bps fall
2,500,000	1 year	6,246	9,328	12,409	3,166	86
	2 years	0	6,064	12,130	(6,062)	(12,121)
3,000,000	1 year	(7,498)	(3,801)	(103)	(11,195)	(14,891)
	2 years	(29,966)	(22,689)	(15,409)	(37,240)	(44,511)
3,500,000	1 year	0	(4,316)	8,632	(4,315)	(8,629)
	2 years	(17,486)	(8,988)	(487)	(25,982)	(34,473)

Note: Based on SBI / HDFC Floating Rates: 10.75% for loan amount till Rs. 30 lacs and 11.00% for loan amount > Rs. 30 lacs to Rs. 75 lacs

Though it is difficult to point out a clear winner, it can be seen that ICICI offering is attractive for loan amount till Rs. 25 lacs in all interest rate scenarios illustrated for fixed rate tenure of one year.  Fall of interest by more than 50 bps within a year (low probability of happening) shall make ICICI offering expensive.  Similarly, in case interest rate rises, the ICICI offering of two year fixed rate tenure is beneficial. 

Since fixed rate charged by ICICI for loan amount greater than Rs. 25 lacs is higher than the corresponding floating rate charged by HDFC / SBI, ICICI offerings becomes expensive for those who opt for loans between Rs. 25 lacs and Rs. 30 lacs.  Again for loan amount greater than Rs. 30 lacs, it depends on interest rates movement, however, the benefit is not substantial.

Thus it can be seen that the benefits varies substantially based on the loan amount chosen and expected interest rate scenario. The benefit is greatest for loan denomination till Rs. 25 lacs and for one year fixed rate tenure  The benefit keeps on reducing as the loan denomination increases.

Bachhat advises its readers to consider the benefits based on the loan amount required across various interest rate scenarios and then choose the best product.