SBI’s FlexiPay Home Loan Basically Looks Like a Marketing Gimmick

In yesterday’s column I discussed
why the State Bank of India(SBI) has launched the FlexiPay home loan. This home loan allows a borrower to borrow up to 120% of what he would have been able to do in the normal scheme of things.

Further, the borrower has the option to pay only interest on the home loan for the first three to five years. The EMI, which will lead to the principal being repaid as well, kicks in only after that.

The question to ask here is, how much will this benefit the borrower. Or is this just a marketing gimmick which the country’s largest bank has come up with in order to issue more home loans. It is clear that SBI wants to give out more home loans, given that they have a very low default rate in comparison to the other kinds of home loans that the bank gives out.

Let’s try and understand whether FlexiPay home loan is a marketing gimmick or does it ‘really’ benefit the borrower. Let’s take the example of a borrower, who in the normal scheme of things, is eligible to take on a loan of Rs 40 lakh. While this number may seem very low to those who live in metropolitan cities, the average home loan given out by HDFC, the largest housing finance company in the country, is around Rs 23.6 lakh. So a home loan amount of Rs 40 lakh is pretty decent by that comparison.

Getting back to the example. Let’s say a borrower is eligible to take on a loan of Rs 40 lakh. In the case of FlexiPay home loan, he will be eligible for a loan of up to Rs 48 lakh (1.2 times Rs 40 lakh). The interest that SBI charges on its home loan is 9.55% (It’s 9.5% for women).

The interest only option of the FlexiPay home loan allows the borrower just to pay interest on the home loan for the first three to five years. As the SBI press release on FlexiPay home loan points out: “Further, to lower the impact of such additional loan amount on monthly repayments in the form of EMIs, the customers availing Home Loan under ‘SBI FlexiPay Home Loan Scheme’ will also be offered the option of paying only interest during the moratorium (pre-EMI) period of 3 to 5 years, and thereafter, pay moderated EMIs.”

The idea, as SBI puts it, is to give the borrower the option to pay a lower amount every month during the initial years. But is this amount really low? Let’s do some maths to understand this point. I had done this in yesterday’s column as well, but on reading it later, I found that the point did not come out as strongly as it should have.

Let’s say the borrower opts for an interest only option for the first five years. He has taken a loan of Rs 48 lakh, as is allowed under the FlexiPay home loan. An interest of 9.55% would amount to a total payment of Rs 4,58,400 during the course of the year.

This means a monthly payment of Rs 38,200 to service the interest on the loan. If the borrower had taken on a normal home loan, he would have got a home loan of Rs 40 lakh. The maximum tenure of an SBI home loan is 30 years. Hence, the EMI on a Rs 40 lakh, 30-year home loan, at an interest rate of 9.55%, would work out to Rs 33,780. This is lower than the monthly payment of Rs 38,200 that needs to be paid as interest on a Rs 48 lakh home loan, if the borrower opts for the interest only option for the first five years.

So there is clearly no moderation in the payment as SBI claims. And that is primarily because the interest to be paid on the FlexiPay home loan is the same as a normal home loan. If the interest were to be lower, then the interest payment would have been lower as well and the moderation claim would have been true to a certain extent. But in that case the bank would have been taking on more risk as well.

Now let’s flip the situation. If the borrower were paying an EMI of Rs 38,200, what is the loan amount he would be able to service. The maximum tenure of an SBI home loan is 30 years. Hence, paying an EMI of Rs 38,200, for a tenure of 30 years, at an interest of 9.55%, the borrower would be able to service a home loan of Rs 45.23 lakh. The EMI for this loan works to around Rs 38,197.

The loan amount of Rs 45.23 lakh is around 5.8% lower than the loan amount of Rs 48 lakh. Hence, is it worth paying only an interest of Rs 38,200 per month for a Rs 48 lakh home loan, when for the same EMI one could get a loan of Rs 45.23 lakh. And that is the question that any borrower should be asking himself.

SBI will not give the borrower a loan of Rs 45.23 lakh under a normal home loan scheme, given the borrower is eligible only for a loan amounting to Rs 40 lakh. But the bank is willing to give a loan of up to Rs 48 lakh under the FlexiPay home loan scheme.

Hence, the borrower should take this opportunity of taking on a higher loan amount of Rs 45.23 lakh, if the need be, under the FlexiPay home loan scheme. But at the same time ensure that he does not opt for the interest only option but repay an EMI. Why do I say that? If the borrower takes on a loan of Rs 48 lakh and opts for the interest only option, he has to pay an interest of Rs 38,200 per month.

Over a period of five years this amounts to Rs 22.92 lakh, close to half the loan he has borrowed. Further, at the end of five years, not a single paisa of the loan amount has been repaid and he has to start repaying the loan. The borrower will have to repay the loan over a period of the next 25 years. For this, he needs to pay an EMI of Rs 42,104 per month, which is 10.2% more.

Now what would have happened if the borrower had opted to pay an EMI of Rs 38,200 per month on a home loan of Rs 45.23 lakh, and repaid it over thirty years. At the end of five years, he would have repaid around Rs 2.03 lakh of the loan already. In the interest only option, not a single paisa would have repaid. Also, it is worth pointing out here that the difference between a loan of Rs 45.23 lakh and Rs 48 lakh is not huge. Further, when a borrower pays an EMI, the principal amount of the EMI is allowed as a deduction under Section 80C of the Income Tax Act. And this deduction will not be available if interest only option is chosen.

What these numbers tell us very clearly is that the FlexiPay home loan looks more like a marketing gimmick to lure in prospective home loan borrowers. The borrowers are better off opting for the EMI option rather than the interest only option.

The column originally appeared on the Vivek Kaul Diary on February 3, 2016


Will Narendra Modi 2.0 please stand-up?

One of the strong points in favour of Prime Minister Narendra Modi in the run-up to the Lok Sabha elections last year was his tenure as the chief minister of Gujarat. He was seen and projected as a no-nonsense guy who got things done. Also, unlike the Gandhi family led Congress party, Modi did not come with any baggage.

In fact, Modi, as chief-minister, handled many important portfolios himself. After he was elected as chief minister of Gujarat again in December 2012, Modi kept important portfolios like home, industry, information, ports, general administration, science and technology, climate change, Narmada and all policies, with himself.

Given this long list of portfolios, power in Gujarat was very centralized around the chief minister’s office. Further, Modi chose to operate through trusted bureaucrats. This allowed him to cut through the red-tape that is a part of every government and ensured that things happened at a fast pace. This further helped project Modi’s image as a doer.

A paragraph from William Easterly’s book The Tyranny of Experts best explains the situation Modi was in: “The leader may have unconstrained power [i.e. Modi as chief minister in this case], but his intentions concerning what to do with that power are presumed to be good. He…just needs expert advice to accomplish good things.”

This was a model that worked for Modi in Gujarat and he brought it to Delhi as well. The prime minister’s office like the chief minister’s office in Gujarat is a very strong one. There is nothing wrong with this.

The only trouble is that in order to implement the economic reforms that he had promised during the course of the run up to the Lok Sabha elections, Modi needs much more than just a strong Prime Minster’s office. He needs votes in the Rajya Sabha that he does not have. These economic reforms are necessary in order to create jobs for nearly 13 million Indians that are entering the workforce every year.

One theory that has been projected by experts and analysts is that the Bhartiya Janata Party (BJP) led National Democratic Alliance will set their weakness in the Rajya Sabha right by 2017. The logic being that by then the BJP would have won a sufficient number of state assembly elections. And it is members of state assemblies who elect Rajya Sabha members. This also explains why Narendra Modi is campaigning so hard in Bihar.

The trouble is that unlike the Lok Sabha members, all Rajya Sabha members are not elected at the same time. The members have staggered six years terms. Further, one-third of the members retire every two years.

Given this, it is unlikely that even by 2019, the BJP led NDA will have a majority in the Rajya Sabha. As Pradeep Kaushal wrote in The Indian Express earlier this year: “Between now and 2019, when the Modi government’s term ends, the NDA will just about cross the  100-seat mark in the House — and that’s in the best-case scenario. That will leave it well short of the halfway point in the Rajya Sabha, which has an optimum strength of 250.” The current strength of Rajya Sabha is 244 members.

Kaushal further wrote: “Taking best-case scenarios of the BJP getting a simple majority in Bihar, and doing well in the West Bengal and Uttar Pradesh Assembly polls, the party can reach only around 70 by the end of its tenure.”

Given this, all important economic legislation will continue to remain stuck. This includes land acquisition reforms, which the government seems to have given up on and the goods and services tax, which remains stuck.

In this scenario, what Narendra Modi needs to understand is that his lone-wolf act who gets things done, is no longer working. He needs to reach out to parties outside the NDA, if any economic reform has to be pushed through.

What needs to be pointed out here is that the Congress party has around 68 members in the Rajya Sabha. Further, as members retire, this number is going to come down in the years to come given that the Congress no longer rules as many state assemblies as it used to in the past. And this is a factor that both Modi and the BJP need to exploit. They can seek inspiration from Atal Bihari Vajpayee who successfully ran a coalition of more than twenty political parties.

Also, the excuse that the Congress party is not letting it do things, doesn’t really hold. It is behaving exactly in the way that BJP did when it was in opposition. Every government has to face the opposition and work around and along with it.

Further, Modi needs to stop coming up with big hairy audacious goals. As analysts Saurabh Mukherjea and Sumit Shekhar of Ambit Capital wrote in a recent research report titled Civil servants burn the midnight oil in Delhi amidst growing policy drift:To be fair to the NDA, most of its problems are typical of any

Indian Government which juggles with paucity of funds and scarcity of talent. Where the NDA is different is in its desire to constantly announce Big Hairy Audacious Goals – policymakers repeatedly tell us that most of the targets that the ministers announce to the media have little or no feasibility analysis to support them. The more seasoned policymakers say that these targets can create issues for the NDA as it gets further into its tenure and is held accountable for its targets.”

Modi and NDA have set enough Big Hairy Audacious Goals for this particular term, be it general goals like Make in India or Digital India or Skill India or specific ones like increasing the share of manufacturing in the economy or rural electrification or increasing coal production. Over and above this they made many electoral promises as well in the run up to the Lok Sabha elections.

Easterly in his book The Tyranny of Experts quotes the Nobel Prize winning economist Gunnar Myrdal. As Easterly writes quoting Myrdal: “The political leaders of…countries have to arouse ambitions among the masses” because “this is their means of acquiring power.” The leaders know that “the aspirations which they know they can arouse successfully are the cravings for…economic development.””

This is what Modi and the BJP did in their quest to win the last Lok Sabha elections. And now it is time they started working towards achieving these goals and aspirations and delivering economic development, because if they don’t, all the promises that they made in the run up to the last Lok Sabha elections, might just turn out to be a marketing gimmick.

And marketing gimmicks don’t work twice.

The column appeared on The Daily Reckoning on Sep 2, 2015