Credit Card - A risky financial product (Use Wisely)

Social security, bank account, and credit card numbers aren’t just data. In the wrong hands they can wipe out someone’s life savings, wreck their credit and cause
financial ruin. I thought of writing this article as I was a part of Credit Card industry and learnt and heard from customers how their life has been destroyed or is currently in a mess just because they started using a credit card. In India, many people are still to understand or hear about this credit facility offered by financial institutions but this product if used wisely can be a blessing but if a little careless can really tax you out completely.

As of March 2016, the credit card penetration in India is 24.5 Million, huge number isn't it, but only a few percentage of this number will be transactors (cardholders who make full payment on their credit cards on or before the due date) and more than
80% will be revolvers (cardholders who make less than the full payment on their credit cards on or before the due date. Lets understand why is it risky.

What is so special about a credit card that people want to use it more?
Credit card provides credit facilities that you can swipe your card at any merchant who gives that option, buy the product, use the product but pay only after some time. What is this sometime? Well, sometime means after 50 days or 30 days or 20 days. Confused with the no. of days, let me explain.

Example: 

Ms. Hema purchased a washing machine from Samsung showroom on 25th October and made the full payment for the product by credit card of XYZ Bank. Her credit card billing date is 15th of every month and the due date given by the XYZ Bank is 25 days after the bill generation date. Lets work it out now.

Purchase date is 25th October.
Billing date is 15th of every month, so now she will be billed for it only on 15th November.
She gets the bill with a due date mentioned as 10th December {25 days from 15th November (bill generation date)}

In the above example if Ms. Hema pays the full money as per her bill before 10th December she is not charged a single penny extra. (Amazing right) - So here she got a credit period of 45 days to pay for her refrigerator. If she had purchased the same on 16th October which is 1 day after her billing date (remember her bill is 15th of every month) so she would have got credit period of 55 days. (Almost 2 months credit period to pay your product). 


Well, credit cards are useful in such regards, quick payment, EMI's available, offers provided by the bank as well as merchants for specific cardholders and lots more. Hence if your a smart user and shopper credit card would be a friend in need. But if you show a slight lag in your enthusiasm to be a smart shopper then you have dug your grave, many come out after a struggle but much more of them get sucked into the bottomless pit. As I told you before if you pay on time as demanded by the bank (full payment as per bill before due date) then you are safe and can sleep in peace, the problem begins when you pay less than the full amount. There is a concept of Minimum Payment which can be 5% or 10% of the full payment as per bill (varies with banks or institutions). Now, the bank gives you an option to pay a small amount to avoid hassle and you can continue using your card to the credit line given by the bank which is the Minimum Payment. Here is the catch for these companies, once you start paying the minimum payment they charge you with interest which is high (approx. 38% to 40% annually). So basically if you pay anything less than the full payment mentioned on the bill you will be charged interest for the whole amount as per the bill from the day of purchase (Interesting isn't it). Once you start having balance left to be paid from the previous bill you are tagged as a revolver and the interest accumulates until full payment is made on the card. What else can go wrong?

Late payments - High late payment fees (In India many banks have different penalty amount depending on the amount to be paid)

Overlimit Fees - Credit card comes with a certain credit limit assigned by the bank for use (For Eg. Rs. 100000, now if you exceed knowingly or unblinkingly and swipe your card and reach the limit of Rs. 105000 and if the transaction goes through you are likely to get charged with Overlimit fees)

Annual Fees - Many cards come with Annual Fees, while some are free of the annual charges (Depending on the facilities on the card, you might get charges anywhere from Rs.499 to Rs. 2999+ as annual fess)

Insurance charges - Credit cards are likely to have pre-allotted facility of Insurance cover on the card (Credit card protection, credit shield, purchase protection, travel insurance), you might not know about these charges as they are generally not mentioned by the sales representatives. This information will be mentioned on the credit card application form and in fine prints.

Returned Cheque Fee - If you make payment by cheque and if the same is returned for insufficient funds or any other reasons the credit card company will charge you a cheque returned fee.

Foreign Transaction Mark Up - If you swipe your home country credit card while travelling to any other country, you will be charged with a foreign transaction mark up charge (for eg. 3.50%) for every swipe along with the foreign exchange charges (Forex).

Card Replacement Fee - If your card is lost or stolen and you want to replace the card, card replacement fee will be charged.

Cash Withdrawal Charges - Credit card is good for purchases, however you also have an option to withdraw cash from any ATM using your credit card. If ever you withdraw cash from the Credit card your interest is calculated on a daily basis and only will stop once you clear the full payment on the card and make the card outstanding Rs. 0. (Recommend readers to never use you credit card for cash withdrawal)
           
There are few other charges depending on card to card and from company to company, like fuel surcharge fee, railway surcharge fee, duplicate bill charges, cash payment at branch fee and few others.

Is that All? Well the answer is NO. How else can you be trapped into paying an amount you never used on the credit card. Information theft, if in case you loose your card and someone else uses the same, unless you inform it to the authorities immediately that your card is being used and is not authorized by you, you might be forced to pay the amount on the card if you are not able to prove the claim. There is an investigation process, but if it does not turn in your favour you are liable to pay the charges on our bill and if you do not pay the same, you will be charged with the interest charges, late fees, overlimit in case card limit was exhausted etc.

How to be Safe?

1) Keep your mobile number updated where you will get messages of transactions done on your card. if ever you change your number inform the bank immediately.
2) Do not share your card pin with anyone and also do not write it on the back of your card.
3) Restaurants ensure you enter the PIN yourself and not give it to the attender or the cashier and always remember to take back the card.
4) In case you loose your wallet or card inform the banks immediately and get the card blocked and confirm the last transaction made on the card.
5) Online transactions should always be done on home network and not on public network.
6) Ensure you do not make purchases on unknown websites as your card details get stored and you might see your card balance getting drained and also ensure you check the website payment terms and conditions carefully as you might see same charges repeated monthly (auto subscription)
7) Always ensure you have enough credit balance available on your card by the end of the billing period as there is possibility you will go Overlimit once bank charges you with their charges (Annual fees, late payment fees, interest charges etc.) Even if you go overlimit due to bank charges, you will still be charged with overlimit fees.
8) Use your card only if you salary is good enough to pay the expense by the due date.
9) Always try and make full payments as per your bill atleast 2 days prior to the due date to avoid being late.
10) Read the application form carefully before signing and gain as much as information possible prior to signing up.
11) Always check your bill as soon as you receive it and if you see any charges which you are skeptical about call the customer care and gain information.
12) If your transaction is declined, ensure you keep the decline receipt atleast until the bill is generated to confirm the charges are not duplicated.
13) Do not take loans on your credit card balance, this might turn out to be risky at a later stage.
14) Credit card facilities and charges change from time to time, ensure you take the card knowing this fact.
15) Before using any facility or discount on the card ensure you call and confirm if the facility is still available or the offer is still running.
16) Do not hold more than one card at the time. (More limit, more temptation, more trouble)
17) USE YOUR CARD ONLY IF REQUIRED AND NOT OTHERWISE.


These are the basic points to remember if you are a credit card holder. Following these points can ensure you enjoy this financial product as lots of discounts and offers are given by merchants if you have a credit card.

Facebook Page on Laws and consumer rights

ps://www.facebook.com/JuLaCoAw/

MUTUAL FUNDS - (SYSTEMATIC INVESTMENT PLAN)

A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future. An approach that can help your money grows manifolds over a period of time.

A SIP is a flexible and easy investment plan for all individuals who wish to earn money through Capital Market Investment. If you invest in equity (stock market), you get allocated shares of a particular company at the market price at which the shares are being traded at a given point of time. Mutual Funds are allocated certain number of units based on the ongoing market rate which is called NAV (Net Asset Value) for the day. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme as decided by you. Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.


You might be wondering what is Rupee Cost Averaging

SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. The biggest advantage of SIP is that one need not time the market. Rather than timing the market, investing every month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance.

An investor can invest a pre-determined fixed amount in a scheme every month or quarterly, depending on his convenience through post-dated cheques or through ECS (auto-debit) facility. Investors need to fill up an Application form and SIP mandate form on which they need to indicate their choice for the SIP date (on which the amount will be invested). Subsequent SIPs will be auto-debited through a standing instruction given or post-dated cheques. The forms and cheques can be submitted to the office of the Mutual Fund / Investor Service Centre or nearest service centre of the Registrar & Transfer Agent. The amount is invested at the closing Net Asset Value (NAV) of the date of realisation of the cheque.

Power of Compounding (An example from The Times of India)

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.

Example

If you started investing Rs. 10000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.

However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 60th birthday - more than double the amount you would have received if you had started ten years later!




Other Benefits of Systematic Investment Plans

Disciplined Saving - Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.

Flexibility - While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.

Long-Term Gains - Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

Convenience - SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.

20:80 Real Estate Scheme

Every citizen in India is concerned with the rising Real Estate prices. Buying a home is just becoming a dream for a middle class income family. Property rates are shooting up every quarter in this lay off period. As a property buyer we not only pay for the property we planning to own but we also pay for the locality, the facilities around our vicinity, announced projects coming up near us and many more factors add up to our property price. Developers are trying their best to pull out cash from potential customers. Introduction of various property marketing schemes over the years has made many customers pay manifolds than they actually should have. Lets get introduced to a popular scheme that can make you count every single penny you own.  Mid-sized developers are betting their last buck on the 20:80 scheme to beat the slowdown in the real estate business. The scheme, also known as the ‘subvention scheme’, is emerging as a popular marketing tool, as the buyer has to pay only 20 per cent upfront, while the remaining 80 per cent is paid at the time of possession.

Interest subvention schemes are a modified form of financing home loans and have been part of residential real estate over the last few years. Under this scheme, a buyer of an ‘under construction’ piece of property is not required to pay monthly EMIs for a defined time-frame, or until he takes possession. The slowdown in sales has prompted developers to offer investor friendly 20:80 schemes (subvention). Such schemes help the developer to prop up sales without reducing the prices.

Subvention or 20:80 scheme is an innovative financial structuring which involves purchasing of under-construction property directly from the developer with financing from a bank/institution. Under this scheme, the property buyer has to pay only 20% of the cost of the property upfront and the balance payments are to be made in installments only after possession.

The subvention scheme is a variation of the normal home loan scheme, whereby, up to possession of the property, the EMI for the loan is paid by the developer instead of the buyer. For cash-strapped developers, the 20 per cent upfront payment gives them adequate liquidity. And there is pressure to execute the project quickly. The remaining 80 per cent is funded by the bank, which creates a bipartite escrow account that keeps disbursing the funds as the project progresses. Such schemes are popular in the Rs 25-65 lakh segment.

This is how a typical 20:80 scheme works:

• The developer approaches banks/financial institution with the project which he wants to offer under the 20:80 scheme and gets the same approved.

• The developer then bundles this scheme with the property and offers it to potential buyers.

• The buyer purchases the property by paying just 20% of the total cost.

• The buyer gets home loan approved for the balance 80% from the bank.

• A tripartite agreement is made between the buyer, developer and the bank.

• The bank disburses the home loan amount to the developer at agreed intervals on behalf of the buyer.

• The developer pays the EMI on home loan to the bank, instead of the buyer, till possession.

• After the possession, the buyer starts paying EMIs to the bank.
But is it all good when its a real estate deal ?????..... Lets understand. This scheme involves the builder factoring in the cost of pre-emi into their launch price. Say, a builder plans to launch a project at 10,000 p.sqft. They would launch the same at 11,000 p.sqft , with discounts(ranging from 500 psft to 1000 psft) offered to clients who don’t go ahead with the 20:80 scheme. This higher launch rate is basically factoring in the pre-emi that the builder will pay monthly to the bank on behalf of the customer. The bank basically charges a higher rate of interest, say 1.5% higher than the base rate for the scheme towards the customers. Builder can tie up with the bank for a period of 12, 24 or 36 months, depending on the time of possession. The customer has to pay the balance within the term period or possession, whichever is earlier (Most builders reveal this fact at a later stage), likewise the Builder will not get any other payment from the bank until the expiry of the term period or possession whichever is earlier.

In the scenario of delay in possession by the builder, there are basically two options:
1. The customer has the responsibility of paying the pre-emi to the bank until possession, if the term period stated by the builder expires & he has not given possession.

2. The builder makes the customer compulsorily sign an ADF option with the bank if he/she wants to opt for 80/20, thus enabling the builder to get the entire 100% irrespective of the possession of the building.


One of the objectives of this scheme was to facilitate people staying in rented houses to buy under-construction property by taking a home loan. They could move into their own houses once they were ready and start paying EMIs instead of rent.

However, they have become more popular with property investors who would like to take leveraged positions on the property and sale the same on getting the possession.

In the past, investors have made handsome gains using this scheme. For e.g. under this scheme, apartments in Malad West are offered say @10,000 p/sf. A 2 BHK apartment measuring 1,000 sq. ft. would cost one crore for which the buyer will have to pay 20 lakh only and no further payment till possession. The apartment is ready in three years by which time the rate is, say, 15,000 psf. The buyer now sells it for 1.50 crores thereby making a profit 50 lakh on initial investment of 20 lakh. This works out to whopping 2.5 times in three years.

Such schemes have worked well for the investors in the past since the property prices have been on the uptrend. However, if the property prices do not appreciate or start falling, the buyer will either have to exit at loss or hold on to the property and start paying the EMIs. Hence one should be cautious and invest in such a scheme only if one is in position to pay EMI post possession, just in case the market conditions are not conducive for exit.

Nowadays, most developers are using the 20:80 scheme in combination with the ADF (Advance Disbursement Facility). In case of normal home loan, disbursement is made by the bank to the developer in installments linked to construction. In case of ADF, a large part of the loan, say 80% to 90%, is disbursed in advance, ahead of construction. However, banks are very cautious in extending this facility to developers because of the potential for diversion of funds and usually only reputed developers with good track record are able to get this facility.

Another point to be noted is that under the ADF, since the large part of the loan is disbursed upfront, the interest cost during the construction will be higher. Under normal circumstances, this should not impact the buyer since the developer is paying the EMI till possession.

While on the face of it 20:80 scheme looks very attractive, one has to scrutinise the terms in detail and study the fine print to see if there are any hidden costs involved.

The main USP of the 20:80 scheme is that you don’t have to pay any EMI (interest cost) till possession. One needs to see if the developer is bearing this cost in full or passing it on to the buyer by increasing the price of the property. Taking the example referred to earlier if the property rate in Malad West is 10,000 psf and the developer is selling at the same rate under the 20:80 scheme, then it would be beneficial to the buyer. But if is selling at a higher rate say 12,000 psf then he is passing on the interest cost to the buyer. Also if the developer is availing ADF, his interest cost would be higher in which case he should be willing to bear the same.

One of the biggest advantages of the 20:80 scheme is that it puts pressure on developer to complete the project on time since they have to pay EMI till possession. Any delay in completion would result in increased cost for them. Hence this reduces the execution risk to a large extent.

However some developers offer 20:80 schemes under which they agree to pay EMI only for a specified period of time say two years from the date of purchase instead of from the date of possession. In this case, the EMIs would start immediately after two years irrespective of whether the construction is completed or not.


Considering all this, it would be advisable to go for 20:80 scheme wherein the property is being offered at close to prevailing market price and the buyer has to start paying EMIs only after possession.

To conclude, a fair and transparent 20:80 scheme is favourable for all the players involved the property buyer, the property seller (developer) and the property financier (Banks/Institutions).

The property buyer is able to buy the property with limited cash outflow, the developer is able to increase his sales and the bank is able to lend more money thereby increasing its assets and profitability.

CHANGE

GOLDMAN SACHS - GNP PREDICTION 2050

Green Shoe Option - Working Mechanism

In my article 'Green Shoe Option - An IPO's Best Friend" discussed on 22nd November 2012, I introduced you to a price stabilization mechanism and its importance during and IPO. In today's article I will discuss with you on 'How Green Shoe Option Works'

Price Stabilization
This is how a greenshoe option works: 

The underwriter works like a dealer, finding buyers for the shares that their client is offering.
A price for the shares is determined by the sellers (company owners and directors) and the buyers (underwriters and clients). When the price is determined, the shares are ready to be publicly traded. The underwriter has to ensure that these shares do not trade below the offering price. If the underwriter finds there is a possibility of the shares trading below the offering price, they can exercise the greenshoe option.

In order to keep the price under control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company.

For example, if a company decides to publicly sell 1 million shares, the underwriters (or "stabilizers") can exercise their greenshoe option and sell 1.15 million shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand.

If the market price of the share exceeds the offering price that is originally set before trading, the underwriters could not buy back the shares without incurring a loss. This is where the greenshoe option is useful: it allows the underwriters to buy back the shares at the offering price, thus protecting them from the loss.

If a public offering trades below the offering price of the company, it is referred to as a "break issue". This can create the assumption that the stock being offered might be unreliable, which can push investors to either sell the shares they already bought or refrain from buying more. To stabilize share prices in this case, the underwriters exercise their option and buy back the shares at the offering price and return the shares to the lender (issuer).




Such an option which was first used by the company Green Shoe (because of which it was named as Green shoe Option) is used by many companies outside India during their IPO process but is not a big hit in India. Statistics speaks of itself when we read that from 2003 to 2011, 365 IPO's were introduced in India out of which only 18 companies opted for this option which is less than 5% of the total public offerings made till today. Some of the participants in this include the IT giant TCS and Deccan Chronicle Holdings Ltd. in the year 2004, Cairn India Ltd. in 2006, Idea Cellular Ltd. in 2007, Indiabulls Power Ltd. in 2009.

During various researches done on this particular topic, researchers have considered various reasons on why Indian companies may not opt for the price stabilization mechanism, some concerns which sounded valued to me are
1) The issues where GSO is opted may not indicate the correct share prices and it will deprive “Value Investor” from purchasing shares from other investors when the price falls.
2) The legal and regulatory compliances are burdensome, due to this, the issuer companies and merchant bankers are not ready to take additional responsibility.



A survey conducted by The Economic Times said that a typical response was “Unlike in the US, SEBI does not permit merchant bankers to make money in trading. They will have to buy the stock if the price falls below the offer price, but they are not allowed to sell even if the stock value goes up. We are required to stabilise the price around the offer price for which we get a fixed fee”


I believe awareness should be conducted among the companies, underwriters, merchant bankers and investors about the importance and benefits of having GSO included in an IPO process.
SEBI being the regulator of the primary and secondary market may make GSO a mandatory clause in order to benefit the Investors and build their confidence in participating in the Primary market.