BoE: Banks' Govt Loans 'Repaid Rapidly'

The latest news by Bank of England (BOE) has stated that the banks in britain are repaying loans rapidly. The banks are in much stronger position then previous days.

According to the report, from the borrowed amount of £185bn, since the financial crises in 2007, UK banks has repaid near about £148bn. The loans were taken for a term of three years and are due for their final repayment in early next year.

The news is despite majority of the banks has failed to meet the target (Project Merlin) of helping small business for providing the SME loans to them.

The Bulletin shows that in last three months (February to May) the banks has repaid near about £54bn of government loans.

Santander UK, Lloyds Banking Group, Barclays, Royal Bank of Scotland and HSBC has made agreement with the Government to increase its loans to small and medium enterprises (SMEs) to a sum of nearby £76bn this financial year.

But the first quarter data reports for lending, presented a different picture. The banks were £2.2bn short on the SME target of £19bn in the first three months of the year.

FSA warns against pension loan schemes

In a recent news the Financial Services Authority (FSA) has raised a warning over the overcharging pension loan schemes offered by the different financial groups which access around 50% of the pension funds as cash.

This issue has been in notice due to the excessive promotion from companies offering loans against the pension funds.

The FSA has seen examples loans ads made to occupational pension schemes stating that people can take loans upto 50% of their pension funds.

The occupational schemes fall under the control of The Pension Regulator (TPR) and FSA said that the personal pension loans scheme falls under its regulations.

Generally the companies offering the personal pension loans take control of the pension funds and use them for the separate corporate bonds. The company then grant loans against those issued bonds and transfer half the amount as cash.

The FSA has recommended consumers to repay the full amount before retirement as because this will give them better future stability and a much more secured view for rest of your life. A joint team of different government agencies like FSA, TPR and HM Revenue and Customs (HMRC) will work together to gather more information on these kind of activities and find a way to bind it against law.

Sale on Loans- bigger is better

In the current business situation, due to rising competition and falling demand in debt market bank and financial institutes have started new ways to attract more people to apply for loans. The leading institutes mainly Barclays, Sainsbury’s finance and Nationwide Building Society has launched new loan @ 6.9%, 6.8% and 6.7% respectively. Some of the schemes are offered to the existing client base and/or for a limited time period.
For the first time loans are offered at lower than 7% rate. The rates lowered are mainly to aim customers struggling for payoff their previous debts. Financial institutes believe that the borrowing has been started to revive and the financial institutes are entering back in unsecured loans business. In past five years the average loans raised has fallen from 9.74% to 9%. But in April the loan has surged from a growth rate of 2.2% to 15.58%, highest ever jump in last five years.
The raise in loan is due to the institutions giving unsecured loan, rather than the conventional secured after the global crises. The sudden growth was attributed to the fact that creditors are aiming on loan rates for more advances, due to the huge competition in the financial market, and subsidizing these by charging higher rates to those borrowing lower amounts.

Europe’s First Covenant-Lite Loan

In UK the private equity are playing a major role in lending loans to firm who wants to make a buyout through the means of leverage ( also known as Leveraged buyout or LBO.) big industrist have announced and raised huge cash to be given to companies seeking LBO funds. But to the contrary the firms in UK are not in a mood to make new acquisitions and build assets. The latest reports published by standards and poor’s leverage commentary and data, it is shown that the loans raised is much higher than loans being applied for.

The fund managers are finding it tough to find firms seeking loan. They have started new measures to supply loans in the economic market. The interest rate offered on such loans is just 5% which is same as the interbank offer rate on a seven year payment terms. There is a surplus of fund available with the leveraging companies to drive in the economy but the fund seekers are very limited. At the moment it’s seen as the investments have been put on hold as an option by the country. The news is following that Apax has delayed its payment of 50 million pounds as the dividend, until the Trader Media’s leverage falls to less than five times.

The data from Cambridge, Massachusetts as per EPFR Global show that the Inflows of the funds specifically to loans and floating-rate debt has risen to $8.5 billion in this financial year, compared to $1.7 billion for the same duration in preceding year. Companies like Advent International Corp., EQT Partners AB, Bain Capital and few more has reduced interest on LBO loans.

Bank loans to SME under EFG

After reaching to its peak in 2009 the SME loans have started to decline. It’s a continues 2nd fiscal year when a decline has been noted in the loan arrangements.
The quarter one of financial year 2011 has marked a decline of further 11% from previous quarter. The fall is notes as £103 million to just £ 92 million in this quarter. These loans were offered under the Enterprise Financial Guarantee (EFG) scheme, initiated by government to boost the SME sector in the country. The report for the slump was declared by the British Bank Aldermore.
The scheme was initiated to reduce the credit crunch in the economy.

Decline since 2009
The last peak was in the second quarter of 2009, since there is a continues fall in the lending. Lending under this scheme is just 36% of what was two years back and 49% as compared to last year.
This scheme was seen as a very powerful tool to overcome the credit crunch in the economy. But unfortunately it has failed to fulfil the aim for which it was started.

Government’s initiative for the scheme
Prime minister of United Kingdom has
The Prime Minister recently decided to re-emphasis on the scheme and will try to build trust between the big banks of the nation and the small business seeking investments. The scheme will be revamped keeping in mind the needs of the business and the banks. The thoughts have been on reducing the instalments lot so that it can encourage the small business enterprises to opt for the loans under this scheme.

Queries - Car Loans

Q - Can I get tax benefit on two wheeler loans?

A - There are no tax benefits on two wheeler loans unless you are using the two wheeler for the purpose of your business.

Q - Is a loan for the purchase of a commercial car entitled for tax rebate in form of depreciation or interest paid on account of the loan?

A - The interest payable on the car loan can be set off against the income from leasing the car.

Q - Does car loan taken from Public Sector Units like UBI, SBI etc allow part repayment which can be greater than the monthly EMIs, just to wind off the loan earlier?

A - The clause relating to pre-payment on a car loan will have to checked in the car loan agreement. It will normally attract pre-payment charges, but you will have to check the agreement to be sure.

Q - What is the best interest rate that one can get for a car loan? What can one expect even if the tenure is for 5 years, after 2 years or so we could give a bulk amount and reduce the EMI significantly for next 3 years. Is it possible with any bank?

A - Interest rates on new cars loans vary very widely depending on the car and the model since it is usual to club manufacturer discounts into the car loan rates. Though banks look at a minimum returns of around 12-13% for themselves (net of their sourcing charges), the actual cost to the consumer can be lower depending on the manufacturer and dealer discounts available. Shop around to get a deal at the lowest interest rates.

Q - Which loan should one go for for buying a car, personal or an auto loan? Which will be beneficial?

A - To buy a car, one must apply for an auto loan as it will be cheaper than a personal loan.

Q - What type of loans can be claimed for income tax deductions?

A - Home loans, personal loans and educational loans are eligible for tax deduction benefits. However, this is subject to certain conditions.

Education Loan Queries

Q - Is education loan tax free?

A - If it is for a course which is of a kind or similar to the one mentioned in section 80E, the interest paid is eligible for tax deduction benefits.

Q - What is amortization?

A - It is the process of knowing the break-down of the EMI(Equated Monthly Installments) into principal and interest components of a loan repayment. It also lets you know how much of your loan is outstanding and how much of your EMI is towards repayment.

Q - Something about study or education loan.

A - Any person can avail a loan for his/her studies both in India as well as abroad for up to Rs. 15 lakh. Banks offer loans up to Rs. 4 lakh without security. Providing collateral or security is mandatory for loans above Rs. 4 lakh. The loan covers the cost of travel, lodging, books, tuition fee etc.

Q - What is GPA?

A - GPA or "Grade Point Average" is a long-term indicator of a student's future performance. Generally, most master's courses require a minimum of GPAs of 3.0 or 3.3, and for the Ph.D. courses require minimum GPAs of 3.3 or 3.5.

Q - Can bank officials reject an application for education loan?

A - Banks can reject loan applications if doesn't meet their eligibility criteria. Taking a loan against property or securities like jewellery, life insurance policies with high surrender value, shares, mutual fund units etc can ensure that it doesn't get rejected.