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06 Aug

Opening a bank account becomes a cakewalk



Opening a bank account becomes a cakewalk

The first step one takes when entering the world of money is opening a bank account. When you bagged your first job, how would you receive your salary from your employer? You needed a bank account. In fact most corporates open savings accounts for their employees, wherein their salary is directly credited to their bank account. You want to open a bank account with the nearest branch. Here’s the good news. You no longer need to go through the mind-numbing procedure of opening an account any more. Earlier, trying to open an account would legitimately take 6-12 months off your life, if you add up the time wasted and the stress associated with it. In addition to this, you would have to practice writing your signature exactly the same way forever for the rest of your life, else your signature would not be considered valid and transactions would be rendered failed. But now with new government norms, opening an account is fairly simple and easy.

KYC process simplified further

The Reserve Bank of India (RBI) has revised the list of documents that can be used as proof of identity and address to open a bank account. Earlier, one had to submit separate proofs for identity and address for KYC, whereas now a single document with photograph and address of the applicant suffices. The following documents now serve as a proof of identity or address:

  • Utility bills that are not older than two months
  • Property or municipal tax receipts
  • Bank account or post office savings account statements
  • Pension or family pension payment orders for retired public sector employees
  • Documents issued by listed companies as well as Indian or foreign governments that acknowledge an official place of residence in India.

Small accounts

Instead of a full time service account you can open a small account. This can be done by simply submitting a self-attested photograph and by giving your thumb impression on the application in the presence of a bank employee. These accounts have restrictions in terms of loans (a maximum of Rs 1 lakh a year), withdrawals (not more than Rs 10,000 a month) and maximum balances (Rs 50,000 at any point of time), but they are beneficial to students and migrant workers. These accounts are operational only for a year. However, if the account holder provides proof that he/she has applied for a valid KYC document, the account can be extended for a further period of 12 months.

Relaxation for low-risk customers

A person without valid KYC documents but considered as ‘low-risk’ can open an account by submitting any of the following: identity card with applicant’s photograph issued by a central/state government department, statutory/ regulatory authority, public sector undertaking, scheduled commercial bank or public financial institution; or, a letter issued by a gazetted officer with an attested photograph.

A ‘low-risk ‘customer, who is unable to submit KYC documents can do so within six months from the date of opening the account.

No separate proof for current address

If you recently moved to a new city and did not have a valid address proof, opening a bank account was nearly impossible. This is no longer a problem. Customers are required to submit only one address proof (current or permanent) for opening a bank account. Migrant workers and transferred employees, who have shifted their place of stay, for work can hugely benefit from this.

A person categorised as ‘low-risk’ and not having valid KYC documents can open an account by submitting any of the following:

  • Identity card with applicant’s photograph issued by a central/state government department, statutory/regulatory authority, public sector undertaking, scheduled commercial bank or public financial institution;
  • A letter issued by a gazetted officer with an attested photograph.

The new rules have made the procedure of opening a bank account less onerous. Open your account today!


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06 Aug

In a fix to fix or float?



In a fix to fix or float?

Opting for a fixed rate loan or a floating rate loan is a dilemma faced by every home loan buyer. Fixed rate of interest loans are those on which the interest rate charged on the loan remains fixed for the loan’s entire term, irrespective of how interest rates change during the tenure of the loan. Floating interest rate loans or variable interest rate loans, are those loans where the interest rate varies with market conditions.  Such loans are tied to a base rate and a given interest rate. The floating rate varies as per the base rate.

Consider a scenario wherein you have been sanctioned a home loan at a fixed rate of 10% for a period of 10 years. Your EMIs throughout the period of the loan will remain the same. If you are sanctioned a loan on floating rate basis with a base rate of 10% and the interest rate to be paid by you is base rate+1.5%, you will have to pay 11.5% (10%+1.5%).  If the base rate is increased by the bank after six months to 10.5%, then your interest rate will increase to 12%. Similarly, in case base rate is reduced to say 9%, then interest rate will be 10.5%.

Who bears the risk of interest rate fluctuations?

In a fixed rate loan, the bank bears the risk of rates going up in the future, while in a floating rate loan the borrower bears the risk. To understand this better – you have taken a loan on a fixed rate basis at 10% for a period of 15 years. You have the opportunity to maintain similar EMIs throughout your loan tenure. This option is beneficial only if the interest rate at the macro level increases. For e.g. If banks start lending at 12% to new borrowers, loans will become costlier. But you will benefit since your loan was locked at 10%. On the contrary, if the interest rates were lowered to 9% you will have to pay a higher rate of interest compared to new borrowers.

For floating rate loans interest rates are reset in accordance with any significant changes in the key policy rates. Rates will reduce when the borrowing becomes cheaper and vice versa.

Loan facts

The longer the tenure of the fixed loan, the higher is the rate of interest charged. For e.g. a fixed loan with a tenure of three years will have a rate of interest of 10.25% but if the tenure of the loan is ten years the rate of interest will be higher, say 10.50%

At the beginning of the loan, the rate of interest charged on a fixed loan is higher than that charged on a floating loan. This is because if the interest rates go up extensively during the entire period of loan, banks bear the risk of losing.

A secured loan carries a lower rate of interest than an unsecured loan. This is because a secured loan is secured against some sort of collateral, which the lender will acquire if the loan is not paid back. The risk factor is accounted for by the collateral. But if there is a greater possibility that the loan will not be repaid the rate of interest will be higher.

Why causes interest rates to vary?

Interest rate levels are a factor of the demand and supply of credit: an increase in the demand for credit causes interest rates to rise, while a decrease in the demand for credit causes them to fall. On the contrary, an increase in the supply of credit causes interest rates to fall, whereas a decrease in the supply of credit causes them to rise.

The higher the inflation rate, the more likely it is for interest rates to rise. If inflation is uncontrollable due to global and domestic economic upheavals it becomes difficult for the central bank to bring down inflation and manage interest rates. Sourcing of funds become expensive for banks and they pass on the hike to the borrowers who have to bear the brunt of high interest rates.

The government also has a say of how interest rates are affected through its monetary policy.

Which is the best option?

Earlier the concept of floating rates was not in vogue, but with frequent monetary policy changes banks started to move away from fixed rate offerings to floating rates. This helped banks manage the volatility in their borrowing rates.

Due to dynamics of the financial world, movements in the interest rate cannot be predicted. You can talk to borrowers, bankers and other financial advisors to help you decide. But you will realize that everyone is elusive on the issue. It is imperative that you compare loan rates on various parameters and understand every nuance of interest rates in order to make your judgement and take the final call.

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