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March 7, 2000

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How to get money without selling your assets

Larissa Fernand

If you are in dire need of money, there are ways and means of obtaining finance on your assets without you having to dispose them off. The catch is knowing which avenue to tap depending on the amount required, collateral needed and the period for which you require the funds. Of course, you can always run to a friend or a money lender in the neighbourhood who will rip you off and if you fail to make the payments probably send some hoodlums over. Another option would be to go to your jeweller and keep your jewellery as a collateral. But he too will charge you a hefty rate of interest. If you would prefer another option, here is a basic primer for you to go by.

  Time for which money is needed Amount of money required Annual cost of the loan
Mortgaging the home Long term Large 16% - 19.5%
Breaking a bank FD Long term Large Not applicable
Overdraft on bank FD Short term Small Depends on interest being earned
Loans against shares Long term Large 16.5% - 17.5%
Loan on PPF account Short/long term Small/large 1 %
Withdrawal on PPF account Long term Large Not applicable
Withdrawal on Provident Fund Specific cases Large Not applicable

Mortgaging your home
This one will require you to own a home in one of the metros. And the location should be looked upon favourably by the bank. Banks like Citibank and ANZ Grindlays or a housing finance players like HDFC offer this facility. Based on the value of the property, a loan is sanctioned. But only around 35 per cent to 50 per cent of the value of the property will be given as a loan. That too, they will send their own valuators to give a rate. Your word will not do. Some offer a loan on commercial and residential property, others stick to residential. The mandatory conditions: the title deed should be in your name, the property should not be disputed, the property should be fully paid up for and the bank should approve of it's location.

Utilising a fixed deposit
Sure, you can break your fixed deposit. And with banks marketing their deposits as 'cluster' deposits, you really don't have to break the entire amount, just the amount you require. The balance in the account will continue to earn the predesignated rate of interest.

The rules between banks vary. Some may keep Rs 10 or even just a rupee as one unit. Others may insist that you withdraw in multiples of 10 or 100. Though the Reserve Bank of India has done away with the mandatory levy of a penalty on breaking deposits, some banks still levy it.

You will earn interest only for the time the amount is deposited. So assume that you deposit Rs 1,00,000 for two years at an interest of 14 per cent per annum. After one year, you withdraw Rs 50,000. The Rs 50,000 withdrawn will not earn the 14 per cent but the one year rate which will be, say, 12 per cent. Though not mandatory, some banks may levy a penalty for broken deposits. If the bank wants to levy a penalty, then it could be one per cent bringing the rate of interest down to 11 per cent.

You should do the calculation and find out where you stand to gain. If you are taking the deposit for a short period of time, say a couple of months, then go for an overdraft. If it is for a longer period of time, then breaking the deposit will be wiser. Assume you have Rs 50,000 in a 24-month fixed deposit which earns you a 10 per cent rate of interest per annum. If you take an overdraft of Rs 20,000, then you will end up paying 12 per cent per annum to the bank. But the 12 per cent is only levied on the overdraft amount. The net cost to you will just be 2 per cent per annum since the entire deposit continues to earn the 10 per cent rate of interest.

PPF account
Sure you can take a loan on your PPF account but only from the second year onwards. The amount sanctioned will be up to 25 per cent of the balance to your credit at the end of the preceding financial year. Also, you cannot opt for another loan till the first is fully repaid. This loan is really cheap with the principal to be repaid within 36 months at an interest rate of 1 per cent per annum. Delay it beyond this period and the interest goes up to 6 per cent per annum.

A partial withdrawal is also permitted from the seventh year onwards. But take this only if you need the money for, say, purchasing a house, and you cannot replace the funds. Other small savings schemes like the post office recurring deposit, post office time deposits, post office monthly income scheme and National Savings Schemes offer premature withdrawal facilities. You can check them out to.

Provident fund
Another option would be to take a withdrawal from your provident fund. But this is not advisable since it is the money that is kept aside for your retirement. However, the Provident Fund Act itself guards against unnecessary withdrawals. They are permitted only if you require money for buying or constructing a home, repayment of a housing loan, payment of bills for illnesses, marriage and post matriculation education of children. As an employee, if you do not get your wages for a continuous period of two months or the factory and establishment where you were employed has been shut down for more than 15 days without providing for compensation to its employees, then you can touch your provident fund. Or if calamity hits in the form of a flood, earthquake or riot causing damage to your property, then you qualify.

Besides stipulating these conditions, it is necessary that you fulfill other criteria such as being a contributor for a certain number of years and the amount permitted to be withdrawn is also subject to certain limits.

Loans against shares
If you have a substantial amount of investments in the market, then you can make a trip to the bank with them. But this is done subject to strict criteria from the bank. They have a list of approved securities which they will lend against. Your portfolio should match with their approval list. Of course, it is not just equity that they go for. Mutual funds, Unit Trust of India schemes, National Savings Certificates (NSC), public sector bonds and non-convertible debentures are also considered. Then the bank will determine the market value of the shares, the face value of the public sector bonds and NSCs and the quoted repurchase price of units.

On valuing the portfolio on these parameters, you will be offered a loan which is a percentage of the total value. The limit here is that banks can give only 50 per cent of the value of the portfolio as a loan subject to a maximum of Rs 10,00,000. With dematerialized shares you get a better deal. The limit goes up to Rs 20,00,000 and the bank is permitted to give you 75 per cent of the value of the portfolio. The rate of interest is stiff though, 16.5 - 17.5 per cent per annum.

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