The game has changed for gold saving schemes

Workaround Some jewellers are circumventing the rules 

by reducing the tenure of their schemes

Rajalakshmi Nirmal :BL :29 june 2014

Jewellers are closing down schemes that accept money for over a year, thanks to the new Companies Act

Did you know that Tanishq, a national jewellery retailer, has stopped accepting fresh deposits under its gold savings scheme?

This is because the new Companies Act, notified recently, has laid down certain conditions for collection of public deposits by companies (other than banks and NBFCs). And unless jewellers satisfy these conditions, they cannot run deposit schemes.

Sandeep Kulhalli, Senior VP, Jewellery Retail and Marketing, Titan Company, said: “We have written to the CLB (Company Law Board) and the Commerce Ministry for clarifications of the rules and have thus temporarily stalled the scheme.”

However, jewellers running their stores as sole proprietorships or partnership firms can still run savings schemes without having to sweat over the new regulations.

New provisions

Only jewellers registered as private limited companies fall under the ambit of the Companies Act, says Ramesh Vaidyanathan, Managing Partner, Advaya Legal.

The Companies Rules, 2014, has brought deposits taken by jewellers under its regulatory ambit. Says Deep Roy, Associate Partner, Economic Laws Practice: “Deposits taken by jewellers were previously excluded under the definition of ‘deposits’ from the Companies (Acceptance of Deposit) Rules, 1975. As per the Companies (Acceptance of Deposits) Rules, 2014, an advance in lieu of supply of goods will not be a deposit only if it is appropriated and the goods supplied within 365 days.”

The rules further state that “any amounts received by a company, whether in the form of instalments or otherwise, from a person with a promise or offer to give returns, in cash or in kind and any additional amount contributed by the company (jeweller in this case), will also be considered as a deposit.”

Thus, all private limited jewellers who run gold saving schemes for durations of more than a year, fall under the new Companies Act.

The Act also holds that any company that raises money from the public for tenures of more than 365 days has to get rated for its repayment capacity from a credit rating agency and take deposit insurance. With most of the jewellers’ saving schemes running into 24 to 36 months and falling under the definition of ‘deposits’ under the new Companies Act, the reasons for jewellers discontinuing their saving schemes are clear. However, some jewellers have worked around the new rules. They have started 10+1 and 11+1 month schemes. Here, as the duration is less than a year, they manage to stay below the regulator’s radar.

Limits on returns

But even if jewellers do run schemes for durations of over 365 days, the returns they can offer are capped. Right now, the return on gold savings schemes of most jewellers is 15-17 per cent a year, (based on the present value of cash outflows and inflows at the end of the term for a 24-month savings scheme).

Now, the Companies Act says that no deposit scheme should offer a return that is higher than what is permitted for NBFCs. Currently, NBFCs are permitted to offer an interest rate of only 12.5 per cent a year. So, there will perhaps be a redrafting of such schemes by the jewellers.

Companies which do not meet the requirements of the law but have deposits running, need to return the deposits to the public before April 1, 2015, adds Ramesh Vaidyanathan. Otherwise, they will be penalised in accordance with the provisions of the Act.

Finally, some jewellers have recently launched gold deposit schemes that collect old gold and promise to return a higher grammage of gold after a few years.

Experts are divided in their views on whether these schemes are also governed by the new provisions. It’s still wait-and-watch on that one.

Now’s the time to prepay your loan

With the scrapping of pre-payment charges on term loans, foreclosing or porting your loans has become cheaper

Rajalashminirmal :BL: 15 June 2014

In April, the Reserve Bank of India directed banks not to charge customers for pre-closing term loans taken on a ‘floating rate’ basis. Until this order, banks charged a foreclosure penalty of 3-4 per cent of the outstanding loan amount.

Now, you might be looking for that catch in the fine print or you may simply be wary of switching your loan to a cheaper lender. Read on to clear some of those lingering doubts.

Who can close?

With the latest directive, foreclosure charges have been removed on all term loans, not just home loans. That includes vehicle loans, loans against property and personal loans.

Pre-payment penalty on loans has been removed without any condition on source of funds, says Harsh Roongta, Founder and CEO of apnapaisa.com. But take note.

It should be a loan to an individual on a floating rate and from a bank, he emphasises. So if you have taken a loan from a non-banking finance company (NBFC), you don’t benefit from the RBI order.

If it’s a floating rate loan from a bank, you can pre-close it with your own funds or even with funds arranged from another bank or a third party without being penalised.

Apart from closing out your loan with some surplus cash, you can port a loan to another bank that offers lower rates without suffering penalties.

Easier porting

Expectations are that the RBI may cut policy rates in the medium term. If such cuts are passed on by the banks, the interest rate for borrowers will start declining. Typically, banks are reluctant to pass on reduced interest rates to existing customers while new ones get the benefit immediately. So, if your banker doesn’t give you reduced interest rates, you can port to another bank whose rates are lower. However, note that at the bank to which you are switching, processing charges on the loan will still apply.

The could vary from anywhere between 1.8 per cent and 3 per cent, depending on the bank.

When you switch your loan, it is important to check if the rate you get is low enough to cover the processing charge and still leave you some saving in interest cost. Transferring a loan is not cumbersome, says Adhil Shetty, CEO of bankbazaar.com. You just have to file the home-loan transfer application online or at the bank’s branch and provide supporting documents. Then, both the banks exchange certain documents, at the end of which your loan will be transferred. An added advantage of pre-closing a loan is that it also improves your credit score.

With lenders looking at an individual’s CIBIL score before approving a loan, your pre-payment of loans can boost your score.

When to pre-close?

The other important question is when is the best time to pre-close your loan. This depends on two factors. One, if the surplus you have in hand will earn lower returns than what you pay as interest currently, you may be better off pre-closing the loan.

Let’s say you have two years left on your personal loan, for which you pay a 15 per cent interest rate. If the maximum, safe return you get on the money in hand is less than 15 per cent, you should pay off the loan.

This is because the amount you earn on investing that sum is less than what you will be paying on the loan.

Another factor that could influence the decision is which part of the loan tenure you are in.

Generally, it pays to pre-close the loan when you are in the early part of the payment cycle since the savings you make will be immense. Your savings won’t be much if you close the loan in the last stages.

This is because you would have serviced almost all your interest due on the loan and would be paying back only the principal in the final months.

For example, if you have taken a personal loan of ₹5 lakh for a tenure of five years at 16 per cent, the total amount payable by you will be ₹7,39,540.

Of this, ₹2,29,540 is toward interest and ₹10,000 toward the processing fee.

At the end of two years, if you decide to pre-close the loan, you would have to settle an amount of ₹3,45,849 with the bank.

This gives you a saving of over ₹91,000 from the amount initially due to the bank (₹6,47,666 vs ₹7,39,540).

 So, if you have some surplus cash at your disposal, don’t let it idle in your bank account. There are a lot of EMI calculators on the Internet that can do the math for you on the outstanding loan amount, so make use of these to take an informed decision.