Friday, January 8, 2010
Teaser rate home loans may spell trouble
Teaser rate home loans may spell trouble
The Hindu Business Line, January 8, 2010, Page 1
Fixed for now, the floating rate segment could upset your calculations.
Our Bureau, Mumbai
There is a possibility that the recent home loan schemes offering fixed-cum-floating rates could lead to a ‘payment shock' for borrowers.
These ‘teaser' home loans have a fixed interest rate for one-two years after which the rates jump to a higher level, said Mr Dipesh Patel, Senior Director, Structured Finance, Fitch Ratings.
If interest rates were to rise sharply, there is a possibility that borrowers' ability to repay will get affected.
An increase of 100 basis points in interest rates (prime lending rates), which translates into an average increase of 600-800 bps in monthly repayments, can be absorbed. But if rates were to increase by more than 100 bps, borrowers could find it difficult to pay, said Mr Patel at the launch of the ‘Indian RMBS (Residential Mortgage-Backed Securities) Performance Report' by Fitch on Thursday.
According to the report, the delinquency rate for residential mortgage-backed securities was low throughout 2009 mainly because of high borrower equity, low instalment-to-income ratio, and payment revisions granted by lenders.
The higher the borrower equity, the lower the delinquency, as there is greater willingness on the part of the borrower to service the debt.
A lower instalment-to-income ratio also indicates a higher ability to repay and, therefore, lower delinquency.
But in the case of teaser loans, where interest rates are significantly low for a defined initial period, the instalment-to-income ratio may increase significantly after the initial period, the Fitch report said.
The rating agency also launched the Fitch Indian Residential Mortgage Delinquency Index which tracks residential mortgage loans within the RMBS transactions publicly rated by Fitch and which are overdue by more than 90 days.
The index will enable investors to judge how the RMBS will perform. It will also be useful to mortgage lenders who can use the index to benchmark and compare the performance of their own mortgage portfolios, Mr Patel said.
The Hindu Business Line, January 8, 2010, Page 1
Fixed for now, the floating rate segment could upset your calculations.
Our Bureau, Mumbai
There is a possibility that the recent home loan schemes offering fixed-cum-floating rates could lead to a ‘payment shock' for borrowers.
These ‘teaser' home loans have a fixed interest rate for one-two years after which the rates jump to a higher level, said Mr Dipesh Patel, Senior Director, Structured Finance, Fitch Ratings.
If interest rates were to rise sharply, there is a possibility that borrowers' ability to repay will get affected.
An increase of 100 basis points in interest rates (prime lending rates), which translates into an average increase of 600-800 bps in monthly repayments, can be absorbed. But if rates were to increase by more than 100 bps, borrowers could find it difficult to pay, said Mr Patel at the launch of the ‘Indian RMBS (Residential Mortgage-Backed Securities) Performance Report' by Fitch on Thursday.
According to the report, the delinquency rate for residential mortgage-backed securities was low throughout 2009 mainly because of high borrower equity, low instalment-to-income ratio, and payment revisions granted by lenders.
The higher the borrower equity, the lower the delinquency, as there is greater willingness on the part of the borrower to service the debt.
A lower instalment-to-income ratio also indicates a higher ability to repay and, therefore, lower delinquency.
But in the case of teaser loans, where interest rates are significantly low for a defined initial period, the instalment-to-income ratio may increase significantly after the initial period, the Fitch report said.
The rating agency also launched the Fitch Indian Residential Mortgage Delinquency Index which tracks residential mortgage loans within the RMBS transactions publicly rated by Fitch and which are overdue by more than 90 days.
The index will enable investors to judge how the RMBS will perform. It will also be useful to mortgage lenders who can use the index to benchmark and compare the performance of their own mortgage portfolios, Mr Patel said.
Teaser home loan rates pose payment shocks
Teaser home loan rates pose payment shocks
Business Standard, January 8, 2010, Section II, Page 3
BS Reporter / Mumbai
The teaser home loan rate, the interest rate which is set artificially low for the initial period, could give a ‘payment shock’ to borrowers as the equated monthly installment (EMI) shot up on lenders charging regular interest rates, according to Fitch officials.
At present, most of the commercial banks and some housing finance companies are giving home loans for up to three years at low fixed rate. Later, lenders would begin to charge regular rates. If these rates go up quickly at higher level, depending on the interest rate cycle, it is possible that borrowers may have to pay much large EMIs. Some borrowers, unable to absorb the sharp rise in payment obligation, could fail to pay up EMI on time.
It is important that borrowers understand that they may have to pay more after the end of the teaser period, Dipesh Patel, senior director, structured finance with Fitch said.
Meanwhile rating agency on Thursday said the performance of Indian residential mortgage backed securities (securitized paper) remained stable throughout 2009 due to low level of defaults and high amortization.
Fitch Indian Residential Mortgage (FIRM) delinquency index ranged between 0.90 per cent and 1.07 per cent, highlighting the low level of delinquencies forth 33 months beginning January 2007 till September 2009.
The new index will track 90+ days past due delinquencies of residential mortgage loans in securitized pool rated by Fitch. It conducted analysis on 25,800 loans with initial outstanding amount of Rs 2,000 crore.
The low delinquency trends in these transactions can be attributed to factors such as high borrower equity, low installment-to-income ratio and revision of loan payment schedules, it said.
In transactions under surveillance, the original loan-to-value (OLTV) ratio of loans was between 54 per cent and 76 per cent.
“The sizeable borrower’s equity of 30 per cent not only increases the borrower’s willingness to pay, but also provides the originator with a cushion against any potential correction in real estate prices”, agency said.
Lenders responded to the rising interest rates by providing mortgage loan borrowers with various revised payment schedules in accordance with transaction documentation. The options included first, lump sum prepayments: the borrower pays a one-off lump sum. Second, increase in loan tenure with unchanged EMI. And third, increase in EMI, with no significant increase in the tenure.
The average cumulative collection efficiency across the transactions has been stable over the last few years, in the range of 98.7 per cent to 99.3 per cent.
There is a seasonal pattern in collection efficiency, the highest being exhibited in March, which coincides with the financial year end in India. This may be associated with the enhanced collection efforts on the part of the originator during this period.
Fitch has observed that prepayment rates show a seasonal as well as a long-term trend. March to June of each year shows the highest prepayment rate.
Realtors seek uniform tax on rental income
Realtors seek uniform tax on rental income
The Financial Express, Jan 8, 2010, Page 3
fe Bureaus, New Delhi
Ahead of Budget 2010-11, real estate companies on Thursday urged the finance minister for lower and uniform taxation on rental income received by property owners to help the growth of realty sector in the country.
In their pre-Budget recommendations to the ministry, the real estate firms have suggested that income from property rentals should be taxed at a flat rate of 10%, depreciation allowance of 50% should be allowed on investment made by employers in employee housing which should be 100% in case housing is in the area of less than 500 sq ft.
NAREDCO, a Delhi-based real estate trade body suggested that existing debt of developers be restructured till March 2011 as the real estate companies are still reeling under the liquidity constraints and cash flow problems.
Developers also urged finace minister Pranab Mukherjee for allowing access to external commercial borrowing (ECBs) in all areas of real estate. Currently, only integrated townships are allowed to raise ECBs and the realty sector has been placed on negative list of the RBI for raising this mode of debt.
It was also suggested that Real Estate Mutual Fund (REMF) / Real Estate Investment Trust (REIT) should be encouraged, all governmental clearance for projects should be executed faster, conversion to limited liability partnership (LLP) should be easier and beneficial, and issues relating to double taxation under minimum alternative tax resolved.
States question 12% GST rate
States question 12% GST rate
Business Standard, January 8, 2010, Page 1
BS Reporter / New Delhi
New date for introduction of tax likely today.
The empowered committee of state finance ministers has virtually trashed the Thirteenth Finance Commission taskforce’s Goods and Services Tax (GST) report. They question the methodology applied by the committee to arrive at the 12 per cent revenue neutral rate.
“The states have expressed reservations on the methodology and the approach of the taskforce. It (the rate suggested by the taskforce) does not tally with the estimates made by the government, the National Institute of Public Finance and Policy, and the states. We will like them to review the methodology,” said Committee Chairperson and West Bengal Finance Minister Asim Dasgupta. This brings out the divide between the tax experts and the political class on the GST structure.
Given the estimate of the base and the level of central taxes which are intended to be subsumed in GST, the taskforce headed by former finance ministry joint secretary Arbind Modi had suggested a single rate of five per cent for the central GST and seven per cent for states — totally 12 per cent — in its report last month.
The committee, which met today is likely to announce on Friday a new date for the rollout of the new tax regime. Dasgupta said there would be a discussion on the date for the introduction of GST at the empowered committee’s meeting on Friday. So far, Dasgupta has maintained that the states and the government are working towards introducing it on its scheduled date of April 1, 2010.
“Today we concentrated on what should be the revenue neutral rate for states. We are trying to reach a consensus. Tomorrow we will discuss the date for the tax rollout. We will meet Finance Minister Pranab Mukherjee to discuss the compensation requirement of the states,” Dasgupta added. He did not comment on whether GST would be delayed.
Meanwhile, state finance ministers that Business Standard spoke to said there were differences among the states on issues, including the revenue neutral rate, list of exemptions and the actual assessee base. “Many states have given their views on the rate. No decision has been taken,” said a state finance minister.
A finance ministry official said the empowered group had questioned the methodology of the taskforce, and not the rate so much, because the empowered committee itself was divided on the revenue neutral rate. It was not possible for the committee to challenge the rate because the tax base could not be decided without knowing the exemption list, he added.
Satya Poddar, tax partner, Ernst & Young, said the methodology used by the taskforce was robust as their revenue neutral rate was an average of five methods. “They have used the truncated database of two lakh corporate taxpayers, which does not include the unorganised sector. They have also spoken to Parthsarthy Shome, CSO, and other experts. So, it is the most reliable database. The taskforce has spent almost a year to ensure that its results are valid. The empowered committee has not yet developed a an alternative,” he added.
The taskforce exemption lists public services of Union, state and local governments, service transaction between employer and employee, unprocessed food items sold under the public distribution system, educational and health services provided by non-government schools, colleges and agencies.
GST bill likely in budget session, no pact on kickoff
GST bill likely in budget session, no pact on kickoff
The Economic Times, January 8, 2010, Page 9
Deepshikha Sikarwar, ET Bureau, NEW DELHI
The Government may introduce a legislation in the budget session of Parliament to make necessary constitutional amendments and facilitate the launch of the goods and services tax (GST) although the rollout of this comprehensive indirect tax reform from the scheduled date of April 1, 2010, seems unlikely.
"The legislation has been finalised and the attempt is to introduce it in the budget session," a government official privy to the development told ET. This will come up for discussion at a meeting of the empowered committee of state finance ministers and union finance minister Pranab Mukherjee on Friday which also will deliberate the new date for the launch of the tax.
The joint working group set up to formulate the constitutional changes has already finalised the draft of the legislation. The working group had representation from the union finance ministry, state governments and empowered committee of state finance ministers.
Constitutional amendments are required for a rollout of GST as states need to be empowered to levy and collect tax on services. At present, the power to levy this tax rests with the Centre. Similarly, the Centre needs the authority to levy and collect tax on trade and levy of GST on imports.
"Tomorrow (on Friday) we will discuss the new date for introduction and compensation formula to the states with the Union Finance Minister," empowered committee of state finance ministers chairman Asim Dasgupta told reporters after a meeting of the panel on Thursday.
States have to be compensated for any loss in revenue on account of the rollout of the tax. Nearly all the taxes levied by the states will be subsumed under the GST and some states could end up losing revenue under the sharing formula.
The Centre and states are yet agree on the nitty-gritty of the tax structure owing to persistent differences on crucial areas such as turnover threshold limit at which the tax will apply. In fact, BJP-ruled states want implementation of the tax only from April 1, 2011. Most states are also against a mid-year launch as it could make the switchover to new regime difficult for traders.
The GST legislation will have to be approved by Parliament for Central GST law and also by the 32 states assemblies to facilitate state GST. "It is very difficult to roll the tax from April 1, 2010 in view of these practical difficulties," a state government official said. The GST, which will replace the major indirect taxes—excise duty, service tax, valueadded tax and other state taxes—with a single levy, will create a national common market at present fragmented because of multiple levies .
TAX VEX
Empowered committee of state fi nance ministers to deliberate on the new date for the launch of GST . The joint working group set up to formulate the constitutional changes has already fi nalised the draft.
Constitutional amendments required for GST rollout as states need to be empowered to levy and collect tax on services. At present, the power to levy this tax rests with the Centre. Similarly, the Centre needs the authority to levy and collect tax on trade and levy of GST on imports. GST legislation will have to be approved by Parliament for Central GST law and also by the 32 states assemblies to facilitate state GST
States have to be compensated for any loss in revenue. Nearly all the taxes levied by the states will be subsumed under the GST & some states could end up losing revenue under the sharing formula
The Centre and states are yet agree on the nittygritty of the tax structure. Most states are against a mid-year launch as it could make the switchover to new regime diffi cult for traders.
GST may push cos to rejig, shut units
GST may push cos to rejig, shut units
The Economic Times, January 8, 2010, Page 9
M V Ramsurya, ET Bureau, MUMBAI
Companies with distribution or manufacturing units located across the country to take advantage of the differential tax rates may have to close down some of their subsidiaries and alter business models to minimise initial impact on profitability under the proposed Goods and Services Act.
Most companies—mainly those in the fast moving consumer goods category and in traditional manufacturing sectors—had developed a model of countrywide distribution point system to gain on the different rates prevalent till now. However, with the eventual GST rollout where a uniform tax rate will be levied on both goods and services, such companies will lose out on the advantages of a dispersed presence and might also see an impact on their profitability, say people tracking the implementation of the new tax.
The government has proposed the GST in a bid to simplify indirect tax procedures, broaden the tax base by clubbing services into this uniform tax, and to also minimise the various exemptions earlier being claimed by companies. Firms typically had to work through a maze of multi-level taxes, including central excise, customs countervailing duty, special additional duty, state-level value added tax, central sales tax and service tax. Also, under current tax norms, some states have a zero VAT, while others have differing tax slabs.
"Firms operating in a zero duty (0% VAT) state will be hit if GST brings with it a new tax levy, which will affect sales of existing inventory," said Suresh Surana, chairman of Mumbai-based professional services firm RSM Astute, that is currently advising clients on measures to gear up for the eventual GST rollout. "GST being a major indirect reform, it will have a significant impact on cash flow, working capital and on profitability."
"There is also the need to change the organisation framework," says Vaibhav Manek, co-founder and internal business advisory partner at global accounting firm KNAV. "Entire systems have to be amended such as purchase orders and invoices and sales orders and invoices as well as the accounting systems also. Most companies are not geared for this."
The proposed GST could also likely impact composite contracts in fabrication projects or in construction works, where the prices have been fixed earlier. Cost assumptions in the contract are based on the tax projections and if these are likely to change, it would affect the project cost also, he said.
Food inflation eases to 18.2%
Food inflation eases to 18.2%
Business Standard, January 8, 2010, Page 6
BS Reporter / New Delhi
Food inflation eased slightly at 18.22 per cent for the week ended December 26 but there was little respite for the common man, as prices of pulses and cereals were still ruling high.
The food inflation rate, as measured by the Wholesale Price Index (WPI), was 19.85 per cent for the previous week. Food inflation had stood at 10 per cent during the corresponding period in 2008.
Inflation rates for most essential commodities continued to be in double digits. Cereals and pulses registered annual inflation rates of 13.91 per cent and 42.21 per cent, respectively. During the week, food prices fell by 1.01 per cent, primarily due to a week-on-week decline in the prices of pulses (0.24 per cent), vegetables (11.23 per cent) and potatoes (12.01 per cent).
“This is a very slight moderation and will be short-lived. It is primarily due to a decline in the prices of perishables. Shortages in rice and pulses will continue to be a problem. A lot depends on the rabi crop,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
With the wholesale food inflation staying high, analysts expect the Reserve Bank of India will increase the cash reserve ratio — the amount of funds banks have to park with it — by 25-50 basis points in its upcoming third quarter monetary review on January 29.
However, most maintain that policy rates like repo and reverse repo will remain untouched in the near term.
The annual inflation rate for primary articles, which include food and non-food articles, stood at 14.39 per cent for the week under consideration.
The fuel index rose by 0.4 per cent on higher prices of light diesel oil (5 per cent), naphtha (3 per cent) and furnace oil (2 per cent). The inflation rate for fuel products was 4.85 per cent during the week.
Business Standard, January 8, 2010, Page 6
BS Reporter / New Delhi
Food inflation eased slightly at 18.22 per cent for the week ended December 26 but there was little respite for the common man, as prices of pulses and cereals were still ruling high.
The food inflation rate, as measured by the Wholesale Price Index (WPI), was 19.85 per cent for the previous week. Food inflation had stood at 10 per cent during the corresponding period in 2008.
Inflation rates for most essential commodities continued to be in double digits. Cereals and pulses registered annual inflation rates of 13.91 per cent and 42.21 per cent, respectively. During the week, food prices fell by 1.01 per cent, primarily due to a week-on-week decline in the prices of pulses (0.24 per cent), vegetables (11.23 per cent) and potatoes (12.01 per cent).
“This is a very slight moderation and will be short-lived. It is primarily due to a decline in the prices of perishables. Shortages in rice and pulses will continue to be a problem. A lot depends on the rabi crop,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
With the wholesale food inflation staying high, analysts expect the Reserve Bank of India will increase the cash reserve ratio — the amount of funds banks have to park with it — by 25-50 basis points in its upcoming third quarter monetary review on January 29.
However, most maintain that policy rates like repo and reverse repo will remain untouched in the near term.
The annual inflation rate for primary articles, which include food and non-food articles, stood at 14.39 per cent for the week under consideration.
The fuel index rose by 0.4 per cent on higher prices of light diesel oil (5 per cent), naphtha (3 per cent) and furnace oil (2 per cent). The inflation rate for fuel products was 4.85 per cent during the week.
Raise tax sop on home loan interest payment
Raise tax sop on home loan interest payment
The Times of India, January 8, 2010, Page 21
NEW DELHI: The Budget 2010-11 should increase the tax exemption limit against the interest payment on home loan and rental income, said real estate compamies on Thursday.
As per the present provisions under the Income-tax Act, an individual gets a tax deduction of up to Rs 1.5 lakh against interest payment on home loan. The industry, in a pre-Budget meeting with FM Pranab Mukherjee, demanded that this limit must be increased to at least Rs 3 lakh to give a fillip to construction activities.
The industry also demanded for increasing the limit of Rs 1 lakh against the principal repayment on home loan to Rs 2 lakh and make this benefit a separate category, instead of current practice of making it a part of Section 80C, which is already overcrowded. The companies argued that this would encourage people to purchase houses.
They also demanded for incentives to promote rental housing. "In view of the housing shortage in the country and the objective 'Shelter for All' and in view of the fact that not all can afford ownership housing, we need to give a big boost to rental housing," the memorandum given by the companies said.
The delegation included Kumar gera of Gera Developer, Pradeep Jain of Parsvnath, Sushil Ansal of Ansal Group and Getambar Anand of ATS, among others.
The industry wanted that income from renting of residential properties be taxed at a flat 10% instead of the present norm of taxing at marginal rate of 30% (if the person falls in maximum slab).
Besides this, they also demanded that only 50% of the rental income should be taxed as against the present provision of 70%. For women and senior citizens, they demanded that entire rental income should be exempted from tax.
The Times of India, January 8, 2010, Page 21
NEW DELHI: The Budget 2010-11 should increase the tax exemption limit against the interest payment on home loan and rental income, said real estate compamies on Thursday.
As per the present provisions under the Income-tax Act, an individual gets a tax deduction of up to Rs 1.5 lakh against interest payment on home loan. The industry, in a pre-Budget meeting with FM Pranab Mukherjee, demanded that this limit must be increased to at least Rs 3 lakh to give a fillip to construction activities.
The industry also demanded for increasing the limit of Rs 1 lakh against the principal repayment on home loan to Rs 2 lakh and make this benefit a separate category, instead of current practice of making it a part of Section 80C, which is already overcrowded. The companies argued that this would encourage people to purchase houses.
They also demanded for incentives to promote rental housing. "In view of the housing shortage in the country and the objective 'Shelter for All' and in view of the fact that not all can afford ownership housing, we need to give a big boost to rental housing," the memorandum given by the companies said.
The delegation included Kumar gera of Gera Developer, Pradeep Jain of Parsvnath, Sushil Ansal of Ansal Group and Getambar Anand of ATS, among others.
The industry wanted that income from renting of residential properties be taxed at a flat 10% instead of the present norm of taxing at marginal rate of 30% (if the person falls in maximum slab).
Besides this, they also demanded that only 50% of the rental income should be taxed as against the present provision of 70%. For women and senior citizens, they demanded that entire rental income should be exempted from tax.
Home builders meet FM, want external borrowings allowed
Home builders meet FM, want external borrowings allowed
Hindustan Times, January 8, 2010, Page 27
Vivek Sinha, New Delhi
Real estate developers met finance minister Pranab Mukherjee on Thursday to press for incentives in the forthcoming budget to boost housing. Among their key demands was a plea to allow external commercial borrowings (ECBs) for home builders.
Rajeev Talwar, group executive director of the real estate major DLF and Pradeep Jain, president Credai (Confederation of Real Estate Developers Association of India) were among the industry leaders who met the FM.
Among the many demands realtors have asked for continuation of tax holiday under section 80IB(10) for projects approved between April and March 2008 and completed before March 31, 2012.
The industry wants a renewal of Sec 80 IB, which gives tax waivers to homes measuring less than 1,000 square feet in area. The concession was available before 2007.
Credai pressed for developers to access ECBs. At present ECBs are not allowed for housing development. “ECB in housing construction will be supplemental to the funds from banks and financial institutions and in the long term will reduce the cost of finance thereby reducing the price of houses in the country,” said the Credai’s charter of demands.
Hindustan Times, January 8, 2010, Page 27
Vivek Sinha, New Delhi
Real estate developers met finance minister Pranab Mukherjee on Thursday to press for incentives in the forthcoming budget to boost housing. Among their key demands was a plea to allow external commercial borrowings (ECBs) for home builders.
Rajeev Talwar, group executive director of the real estate major DLF and Pradeep Jain, president Credai (Confederation of Real Estate Developers Association of India) were among the industry leaders who met the FM.
Among the many demands realtors have asked for continuation of tax holiday under section 80IB(10) for projects approved between April and March 2008 and completed before March 31, 2012.
The industry wants a renewal of Sec 80 IB, which gives tax waivers to homes measuring less than 1,000 square feet in area. The concession was available before 2007.
Credai pressed for developers to access ECBs. At present ECBs are not allowed for housing development. “ECB in housing construction will be supplemental to the funds from banks and financial institutions and in the long term will reduce the cost of finance thereby reducing the price of houses in the country,” said the Credai’s charter of demands.
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