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Borrow to build assets

Lenders will want a higher down payment. The impact of credit rating will see private banks offer a differential interest rate to borrowers based on their credit history and score.

Amitoj Sethi

The basics of lending remain the same, it’s only the environment that changes the way that the loans are perceived. The first principle of borrowing is to understand what the loan is for. When you buy a home, you’re creating an asset that has huge potential for capital appreciation. It also has the capacity to generate steady returns in the form of rent and offers tax breaks on home loan interest payments. This is a compelling case for borrowing to create an asset, if done within the borrower’s means. The same loan taken for a car or a holiday does not create assets and should be taken only if it helps you to generate income in any manner.

The days of easy credit availability are disappearing and the euphoria regarding loans and top-ups will vanish till the current scenario changes. Getting a loan is likely to be tough in 2009. As banks and lenders are distancing themselves from offering loans because of their own liquidity pressures, new borrowers will find the going hard. Also, loan provisioning will become stringent and lenders will want a higher down payment from the borrower as a safety measure.

The impact of credit rating might make the borrowers seek loans from private banks, which will offer a differential interest rate based on the borrower’s credit history and score. Banks will share more details on borrowers through Cibil, making it difficult for defaulters to get loans from other lenders. The possibility of more credit bureaus is a possibility in 2009, which will make the lending business more vibrant and offer innovative options.

On the service front, there will be more intermediaries who will facilitate bridging the link between borrowers and lenders. This will also mean a certain level of diligence and a credit check of prospects before the bank actually steps in.

The regulator is likely to push for more activity on investor education and more debt counselling centres will emerge, making it possible for those who find it difficult to repay, to consolidate and reschedule their loans. Loan products will come with more explanations on how they work. A prudent person should take a loan, service it comfortably and then go on to take the next one, building assets along the way. That’s how you harness the power of borrowed funds.

— Amitoj Sethi, Director, deal4loans.com