Social Lending in India

One thing that always baffles me that: Most banks charge about 15-27% on personal loans while they pay a minuscule 7-7.5%
These days, I am exploring the merits of creating a platform through which a person (esp. Indian citizens) can seek loan from their friends and family. This way the borrower can have access to cheaper credit, while the lender could either earn higher interest rate or get the satisfaction of helping a friend in need. (And being a friend indeed)
The features that I was seeking were:
1. Ability to connect to various social networking sites: Facebook, twitter, linkedin
2. Ability for an individual to bar certain individuals to know that they are in need of money.
3. Viral Marketing: A person can endorse his friend and spread the news of his requirement amongst his friend circle.
4. provision of anonymous lending (you can help your friend without him knowing that the money is from you)
5. Since charging interest might be awkward amongst friends, there would be a provision to donate interest to charity.
The first version of the website will be basically a forum where individuals can post their needs. They can subsequently contact each other and negotiate the terms and conditions of the loan. There would be no charge for such a service.
In the second version, we intend to add a few fee based services:
1. The borrowers would have a chance to get their documents verified, and deposit with us for safekeeping till the loan is not fully paid back. We are working with NSDL to incorporate hypothecation of shares and securities.
2. Lenders could use our bank accounts for transfer and collection of funds.
3. There would be a provision for an auction to determine the min. interest charged.
However I would really need your feedback (on [email protected]) about what features should/should not be there and how I can promote and popularize this initiative
Update: 11 Dec 2013: I have launched the beta version of the P2P crowd-funding website

education Personal Finance

How to prevent pre-payment penalty on home loans

Most home loans in India have a covenant that restricts the number of times a person can make a pre-payment (usually 4 times a year) and the minimum amount. Also some of the banks charge a prepayment penalty. However if you read the fine print, most banks are relatively more flexible when it comes to changing the EMI (Equated Monthly Installment) amount.
Using this loophole, one can minimize the pre-payment penalty/charges by calling the bank one month to increase the EMI and revert it back to the old levels next month. Chances are that you would be able to stretch a little and continue paying that higher EMI for a few extra months. Hence reducing your interest expenses.
When it comes to debt, don’t ignore any processing charges, penalties or fines. It might put you in a debt trap.
For example
A 1M (10Lakh) INR loan for 15 years period at 8.75% has an EMI of 9,800/-
If you prepay 1EMI (9,800 on the first day), it will save you from paying about 3.5 EMIs 15 years later which is a net saving on 24,500/- in interest expense alone.
Please note that this calculation assumes that you would continue to pay the same EMI even though now your loan outstanding is (10Lakhs – 9,800/-)


emerging im-balance (borrowing-savings)

Traditionally it is expected that the households should be net savers pumping money into the banking and govt. bonds. This money in-turn is used by banks to back successful enterprises creating wealth/employment and by the govt. to create infrastructure or a ground for further growth of the nation.

The peculiar trend is emerging in India nowadays.

With the growth of easy EMI, house/car/appliances/and even foreign vacation loans, the average Indian household has become a net borrower. They have huge credit card dues (that includes me too) and loans for almost every planned and unplanned assets they own.

Look at all the IT giants and growing companies. They have hardly borrowed anything from the banking system, instead are sitting on loads of cash/reserves which they are clueless about how to deploy. Most acquisitions and expansions which you hear about nowadays are funded by cash flow/internals.

Govt. of India borrows tons of funds from the market at very high interest rates. At last glance it was paying 9% (tax free) on PPF (which roughly translates to 11% when the banks give me only 5% on savings) to pay for the huge bureaucracy and the unviable PSU.