He’s a CA trapped in a financial mess

To give more space to his family, Jain decided to add another floor to his house in Jaipur. Lack of funds led him to HDFC Bank’s doorstep. He took a floating rate home loan and got embroiled with rising interest rates. With the construction cost of the additional floor estimated at Rs 9 lakh, he took a loan of Rs 6.5 lakh in August 2005. At that time, the bank quoted him an interest rate of 8.75 per cent for a 20-year loan: an EMI of Rs 5,337.

 With a salary of Rs 30,000, Jain was comfortably placed then. But as rates started rising since 2006, Jain saw his bank revising his EMI subsequently. His EMI shot up significantly to Rs 6,800, a rise of Rs 1,500 or 27 per cent. It wasn’t just a rise in the EMI, but also the tenure that was tinkered. Instead of the original 20-year period, the bank increased the tenure to 28 years.

In August 2007, Jain received a mail from his bank asking him to prepay some amount of his loan so as to bring down the tenure of his home loan, which had gone up. Since then Jain has prepaid an amount of Rs 1 lakh against the principal outstanding. Fighting against the rising interest rates and inflation, Jain found it worth to partly prepay his loan by breaking his fixed deposit which was earning him lesser than his interest outgo on his home loan. He broke his fixed deposits of Rs 1 lakh to bring down his tenure and the EMI to Rs 5,300.

 Part of the problem, according to Jehangir Aziz, principal economic advisor in the Ministry of Finance, is the absence of a good repository of credit information. For instance, in the US, all mortgage rates are credit rating based. “In the absence of credit information, risk is not priced properly so that only current income provides a basis of negotiating with banks.” Organisations such as CIBIL, set up in 2000, that aim to provide credible credit information to loan providers, will bring about the crucial change and simultaneously help price loans differently to loan seekers based on their profile.

Jain feels sad about his decision to have gone for a floating rate home loan at a time when he was considering locking himself with a fixed rate home loan. He admits, “The banks representative, while offering me the home loan asked me to go for a floating rate home loan saying that the interest rates are bound to come down (which they did for some time) and won’t go above the current levels. I think if I would have taken a fixed rate loan I would have fared better.”

He had moved out of Jaipur in 2006 for better career options. Currently, he’s in living in a rented accommodation in Gurgaon with a family of three —wife (a homemaker) and a two-and-half-year-old kid. Says Jain, “My salary has risen from Rs 30,000 to Rs 38,000 during these two years, but once I adjust it for the inflation and the rise in my EMI component for the home loan, there is barely any increase in my salary. Thus my net position is where I stood two years ago.”

To make the ends meet, he has cut down on family outings. Also, for last few weeks instead of driving his car to office, Jain is riding his bike. “Nearly 25 per cent of my salary is going towards payment of rent. We spend nearly Rs 5,000 on fuel. With expenses mounting, my savings have almost gone nil,” says Jain, adding, “I also resort to my credit cards whenever I need.”

 Despite all this, Jain has managed to honour his monthly instalments and has never defaulted. Even with credit cards, he has never defaulted and uses them judiciously. With the absence of any credit rating mechanism in the country, why should people like Jain, who pay all their dues in time, suffer?

Tomorrow: Rising interest rates force Architect to sell her dream home.