Financial Blog

Make the most of this annual windfall

Make the most of this annual windfall Bonus payouts for the year have begun. We offer you a plan for making judicious use of this bonanza

Its finally the time of the year when your company will pay out the much-anticipated annual performance bonus. In sectors such as investment banking, consulting, information technology and financial services, the bonus amount can be considerable. A reasonable range, leaving out the extremities, would be 15-40 per cent of CTC (cost to company) in these high-paying sectors, says Rituparna Chakraborty, co-founder and senior vice-president, TeamLease Services. She adds that in other sectors where bonuses are lower, these would be from 15-25 per cent of CTC.

It is a fact that people tend to be less careful with a windfall like a bonus, viewed as found money, vis-agrave;-vis their salary, regarded as earned money and used with greater caution. We tell you how to prioritise and hence make judicious use of bonus money.

Pay off high-cost debt

The first step in your order of priority should be to pay off any high-cost debt you might have incurred. Credit card loans, where the interest rate on revolving credit can be as high as 36 per cent, should be paid first. Personal loans should come next. The interest cost on these unsecured loans is 13.5 per cent or higher. Loans taken to buy consumer goods also fall in the high-cost category. Next in your order of priority should be car and education loans.

Save for short-term goals

Several expenditures could arise in the latter part of the year for which you might need money at short notice. If your child is to be admitted to a school, you should set aside at least Rs 1-1.5 lakh. Many schools nowadays charge fee at half-yearly intervals, due to which each bill tends to be hefty. An unseen medical emergency also has the potential to burn a deep hole in your pocket. A part of your bonus money could go into building a health emergency fund. Home renovation or a family wedding are other short-term expenses for which you could make provision out of the bonus money.

Pay off top-up loan

Homebuyers take this loan to meet their liquidity needs, since the interest rate on these is lower than on personal loans. The rate of interest on top-up loans is one to two percentage points higher than on home loans. You also dont get any tax benefit on the interest repaid. Hence, it makes sense to pay off this loan before you prepay your home loan, says Arvind A Rao, financial planner and founder, Arvind Rao Associates.

Prepay home loan

Before you decide to prepay your home loan by using your bonus money, take a few factors into consideration. First, if you have taken a fixed-rate loan, there will be a prepayment penalty; those on floating rate loans will escape it. Second, consider where you stand in the tenure. If you are early, the larger part of your equated monthly instalments (EMI) goes into interest payment. At this stage, it makes sense to prepay your home loan. But, if you have only a few years to go, the larger part of your EMI goes into principal repayment. There is less to be gained from prepaying your home loan at this stage, says Prashant Gupta, co-founder, Third, consider the opportunity cost of prepaying your home loan. If investment opportunities are available that can give a higher rate of return than the interest cost on your home loan, you will be better off investing your bonus money than prepaying the home loan, adds Gupta.

A fourth factor is whether you have purchased the house for self-use or for renting. If the former, there is a limit of Rs 2 lakh on the tax deduction you can enjoy. If someone is paying an interest of Rs 5-6 lakh a year, his first target should be to bring the principal amount down to a level where the interest cost does not exceed Rs 2 lakh, says Rao. On the other hand, if the property has been purchased for renting, there is no upper limit on the tax deduction benefit you can claim. In that case, the loan repayment can be deferred. Only if you have no other pressing use for your bonus money should you go ahead and prepay the loan, adds Rao.

Remember that if you have the money, prepaying the loan is always a better option than keeping it, even if you get a tax benefit on it. After all, you get only a 30 per cent tax break on the interest repayment; the balance 70 per cent is still a cost for you.

Invest for mid- and long-term goals

If a part of the bonus money is still left, you could use it to invest for some long-term goals such as children#39;s education or marriage, and your own retirement. Direct your bonus money into goals where you are falling short of your target, either because you have invested less than you were supposed to or because returns from the market have been less than expected. Diversified equity funds are the best option for goals seven years or more away, balanced funds for goals that are five years away, and debt funds for shorter-term goals. Risk-averse investors may opt for tax-free bonds and fixed deposits.

What you should avoid

The worst thing you can do is spend your bonus money in advance, using your credit card. The anticipated bonus might not materialise or be lower than expected. Also avoid splurging the entire bonus on fun activities like a family holiday or buying consumer goods. Display moderation in this regard. Limit your spending on fun things and activities to 25-30 per cent of the total bonus received, says Ankur Kapur, financial planner at
How different sectors/segments have fared on bonus payouts this year

  • PE/VC firms: Average payouts 80-120%
  • Investment banking: Average payouts 80-100%
  • Consulting: Average payouts 40-50%. Higher bonuses this year
  • Banking (local): 15-30% is the potential, from which payouts have been in the range of 10-30%
  • Banking (captive, including analytics): 9-15%, lower than last year
  • FMCG and retail: 15-20% potential, from which most paid out. Higher than last year
  • Sales: About 15-25%. No major change over the previous year
  • Marketing: About 10-15% of. No major change over the previous year
  • Risk: 10-25%, depending on organisational and individual performance. Same as last year
  • Finance: 10-15%, with only the top performers getting more. Have come down a bit
Bonuses are based on CTC Source: Michael Page India, a specialist recruitment firm

Higher share of MSME and housing loans to push up total credit costs: Ujjivan management

Ujjivan Financial Services is coming up with an IPO aimed at reducing share of foreign investors to meet the RBI guidelines for small finance bank. In conversation with Sheetal Agarwal, Samit Ghosh- Managing Director and CEO, Ujjivan Financial Services and Sudha Suresh- CFO talk about the road ahead for the company. Edited Excerpts:

In recent years, share of individual loans has increased in your portfolio. What attracts you to this segment?
Sudha Suresh: There is a huge market opportunity in the individual micro SME space. The micro SME loans are typically between Rs 50,000 to Rs 10 lakhs some loans could also be between Rs 10 lakh to Rs 20 lakhs and is divided into secured and unsecured. Typically unsecured lending could be anywhere between Rs 50,000 to Rs 2 lakhs. Anything above Rs 2 lakhs will be a secured loan. So there is huge opportunity in this bandwidth.

Are your credit costs sustainable at current levels?
Samit Ghosh: The credit costs of group lending business is very low while those relating to individual loans for micro SMEs is definitely higher than group lending. To that extent our credit costs will go up. The standard asset provisioning for group lending is 1% even though our actual cost is much lower. Whereas for individual lending it is over 2%. With increase of Micro SME Housing loan share in overall business, the total credit costs may go up a little.

What are the challenges you see going forward?
Samit Ghosh: We have done a lot of research, we know what the customer wants. Access, service and a hassle free experience. To deliver that and be able to convert them from unorganised to organised would be a challenge. And there is no path laid out on the liability side. The whole retail liability strategy we have is an unchartered path. On the asset side again when we are moving into the missing middle it is an unchartered path. Building up that expertise and doing that business well I think those are the two major challenges and one has to prepare very hard for it.

How is the SFB transition progressing? When will it be operational?
Samit Ghosh: We really needed to supplement our existing technology which was already pretty advanced. We already have existing systems like group lending, collection software, data warehousing, amongst others. We had to just supplement couple of new systems. One is a core banking system for liabilities and second a relatively simple treasury system. So we are in the final stages of the transition. We are supposed to start by 7th of April 2017, as per SFB guidelines. But we are planning to start in the first quarter of 2017 when we will do a soft launch and complete our final launch by end of March 2017. 90% of management team is in place for the SFB. Largely its the same team as in Ujjivan. We did not have to do too much of new recruitment.

What is your strategy in scaling up the SFBs assets as well as deposits?
Samit Ghosh: On the loan side, our portfolio is predominantly into group lending. But about three years back we started lending to micro SME and home loans which form about 12% of our portfolio on a combined basis. We expect this portion of the portfolio to grow much higher in proportion to what we have today and form a major share in the business in the next 4-5 years. Our primary focus would be on the micro SME. We started with home improvement and then moved into micro housing segment. Very frankly probably we would have to go to a slightly higher segment for home loans and it would be largely in the semi-urban towns. What we found is that there is a tremendous demand for home improvement. Bulk of our housing portfolio is in that category.

On the deposit side, our focus would remain with the unbanked and under banked. We are not planning to move into middle class or affluent. So we expect that our existing borrowing customers will be able to provide 40% of our liabilities. But beyond that it would largely come from one or two economic segments higher than our current group lending segment. These are micro entrepreneurs and salaried lower middle class borrowers who actually right now save largely with the unorganised sector. Our target is to convert savings lying with the unorganised sector like chit funds, etc and bring them within the fold of the banking sector.

On CASA, the current account balances with banks actually comes from cash management services. Given the customer segment we are dealing with, we can offer some rudimentary cash management services for micro enterpreneurs, but we cannot expect too much on the current account front. Our focus will be largely on the savings account and fixed/term deposits. It will take 2-3 years to achieve atleast 20% CASA levels for the SFB.

Your return ratios will be compressed over the next few years as you transition and grow the SFB. How do you expect these to pan out in the longer run?
Sudha Suresh: We have excellent return ratios right now. As we transition into an SFB automatically there is an initial transformation and transition phase where we will incur a lot of costs. Also there are certain expectations RBI has from us in terms of returns. So we will be keeping both in mind. We should be comfortably looking at a steady state of returns which should also be ok with the regulators.

Samit Ghosh: First couple of years, we see moderate pressure on the return ratios because we will have incremental costs on one hand but on the other hand our borrowing costs will drop because the term borrowing which we do now is at a much higher cost than inter-bank and other things which we can do after becoming an SFB. We expect our cost of funds may drop by approximately two%. After two years, return ratios will be on track to current levels.

Your cost of funds have moved up in the past year. What is the reason?
Sudha Suresh: Typically there are huge borrowings at March ending. Whereas if you look at any other quarter we will just keep the funds that we require. We can close our quarterly balance sheet with as low as Rs25 crore or Rs 60 crore whereas March numbers will be Rs 400-Rs 600 crore. This creates an anamoly when you actually calculate the ratio it shows an increase in costs. However, our costs of borrowings have come down steadily and our average cost of borrowings is coming down further. Average cost of borrowings is 12% but we are able to borrow from banks at 10.5 to 11%. Average lending rate is 22%.

What will be the FII holding in Ujjivan post IPO?
Sudha Suresh: FII holding has reduced from 91% to 77% post pre-IPO placement and will fall further to 44-45% levels post the issue. After including ESOPs, the FII holding will fall well below 40%.

9 reasons why India's rising credit card debt should worry you

The rise in credit card outstandings in itself is not so much of a worry as much as two accompanying factors.

First, industrial creditor loans made to businesses or corporationsis not keeping pace and history shows that it usually comes ahead of personal credit growth. Moreover, debit card spends, which often keep pace suggesting increasing consumer spending propensity are actually declining.

The combination of these factors signal growing indebtedness amongst Indian consumers and borrowers, State Bank of Indias Chief Economic Advisor Dr Saumya Kanti Ghosh told me on my weekly Policy Watch show on Rajya Sabha TV this week.

Ghosh said they studied the relation between credit allocated to industry and personal loans over the last 10 years. This clearly showed that industry credit growth leads to personal credit growth and not the other way round, he said.

As of March, each year
Source: Ecowrap, State Bank of India

Here are nine reasons why this trend might be of concern, according to Ghosh and his team of economists.

  1. The overall divergence between deposit and credit growth has increased recently. While All Scheduled Commercial Banks (ASCB) deposit growth has hit a 53-year low of 9.9% in the last year, credit offtake (or money loaned) improved marginally (at 11.3% as on 18 Mar16).
  2. Most of the incremental lending growth has been to the personal loan segment, especially housing and also MUDRA (loans to micro small enterprises). But, within personal loans, it is the credit card loan segment that is rising rapidly.
  3. Moreover, household debt, as measured by credit outstanding per credit card in India, has been rising both in nominal and real terms (after being adjusted for wholesale price index, or WPI, inflation). In nominal terms, the outstanding per credit card stood at Rs 8,668 as of February 2016, a rise of 15.5% year-on-year.
  4. Further, the real outstanding has increased despite negative inflation over the last 17 months. This shows that with WPI inflation consistently undershooting projections, the real value of nominal debt/credit card outstanding has become higher than expected.
  5. Incidentally, on an annualised basis, the outstanding number adds up to over Rs 100,000 per annum, higher than the nominal per capita income of around Rs 70,000. This can be worrisome once again, particularly in pockets.
  6. The result does not change much even if we take consumer price inflation into account. Which means we could be seeing a build-up of financial risks that will make it difficult for households to manage their balance sheets.
  7. Debit card spending is declining. One way of acknowledging a more structural shift in consumer behaviour is to see if all modes of spending are rising. Evidently, thats not the case. Its only credit card spends that are rising.
  8. E-commerce transactions could be contributing to this phenomenon as could lower inflation. But eventually, the worry is that if you and I are buying beyond what we can afford to repay, then there is a problem.
  9. Back to industrial credit, if you look at the numbers closely, much of it is not fresh loans but refinancing of existing onesor, simply put, redistribution of the same pie. So parts of industrial credit are going into refinancing existing loans while consumers borrow afresh on credit cards.

Now, lets look at the flip side:

  1. Economic momentum is indeed improving. Consumers are spending more because they are feeling good about things, which includes a lower inflationary environment and more positive outlook for the future. This could be a structural shift (which means the economy is transforming).
  2. Strong supply push. As economist Dipankar Mitra pointed out, banks are once again targeting individual consumers aggressively. This is because (as we know) industrial credit is slow and, dont forget, there is a huge non performing asset (NPA) cloud still over Indias banking sector.
  3. The absolute numbers are still low. Before 2008, credit card outstandings were 5% of receivables, now they are just 3%. The only glitch is that even if receivables are low, higher interest can hurt those who have payments outstanding.

What is the way out?

Depends on where you sit. Mitra felt the market for consumer credit is still very large and unexplored, particularly in a country where consumer credit in its current form is only 20 years old.

Applying for job in SBI? Check you credit history

If you want to apply for a job at State Bank of India (SBI), any default on loans or credit card payment will render your ineligible.

SBI, which is in the process of recruiting Junior Associates (Customer Support Sales) and Junior Agricultural Associates in clerical cadre, has stipulated that candidates with poor credit record will not be eligible for jobs at the countrys largest lender.

According to an advertisement released recently by the public sector lender, candidates against whom there is or are adverse report regarding character and antecedents, moral turpitude are also not eligible to apply for the post.

SBI has advised aspirants to check their credit history with CIBIL before applying for posts in the bank.

Credit Information Bureau Ltd (CIBIL) collects and maintains records of an individuals payments pertaining to loans and credit cards.

Candidates with record of default in repayment of loans/ credit card dues and/or against whose name adverse report of CIBIL or other external agencies are available are not eligible to apply for the post, SBI said.

The move prompted some bank employee unions to request the banks to exempt students who have availed education loans from such rules.

The development comes against the backdrop of lenders, including SBI, facing flack for mounting bad loans, including the one related to Vijay Mallyas Kingfisher Airline to which the SBI-led consortium extended loans now amounting to Rs 9,000 crore.

While we are well aware of, and fully appreciate, the concern for the alarming proportion of NPA severely affecting the financial health of Banks, we think there would be a good number of candidates who have availed themselves of education loan from SBI or from any other Bank for acquiring requisite qualification/s necessary to become eligible to get hired by potential employers, including banks, Bank Employees Federation of India (BEFI) said in statement.

Such borrowers (those availing education loan) should not be equated and considered at par with wilful defaulters in the strict commercial sense of the term. It is very natural that this group of borrowers can start repaying their debts only when gainfully employed, it added.

Closing the doors of employment to them would not only put them to hardship but would also adversely affect the prospects of recovering the debts by the concerned lending institutions, it said.

BEFI requested the SBI to look into the matter and advice the authorities concerned to add an appropriate rider to ensure the applicants who have availed education loan are not pushed out of the range of consideration for recruitment in SBI or in any other Government lender.

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