PFM-India-Chapter-3

Chapter 3: Credit/ Debt Management You will learn various types of debt products available in India, their features, their alternatives and how to avail them The basic meaning of debt is a sum of money that is owed or due. When a person borrows some money from another with the intent of returning it at a later date with or without any compensation for the interim period of having borrowed these monies, such a borrowed sum is called Debt. Debt can be of various forms: 1. Secured Debt – Secured debts are those for which the borrower puts up some asset as surety or collateral for the loan. A secured debt instrument simply means that in the event of default the lender can use the asset to repay the funds it has advanced the borrower. Common types of secured debt a. Mortgages b. Auto loans c. In both secured loans which mentioned above being financed becomes the collateral for the financing. With a car loan, if the borrower fails to make timely payments, the loan issuer eventually acquires ownership of the vehicle. When an individual or business takes out a mortgage, the property in question is used to back the repayment terms; in fact, the lending institution maintains equity (financial interest) in the property until the mortgage is paid in full. Lenders often require the asset to be maintained or insured under certain specifications to maintain its value. For example, a home mortgage (home loan ) lender often requires the borrower to take out home insurance. By protecting the property, the policy secures the asset's worth for the lender. For the same reason, a lender who issues an auto loan requires certain insurance coverage so that if the vehicle is involved in a crash, the bank can still recover most, if not all, of the outstanding loan balance. 2. Unsecured Debt – Unsecured Debts are loans that don’t require collateral to be approved for the loan. The lender will check the client’s creditworthiness and consider a few other factors, such as income, savings and debt, to see if he qualifies qualify. CFP Level 1 - Module 1 - Personal Financial Management - India Page 1

Because the lender is taking on more risk when the loan isn’t backed by collateral, they may charge higher interest rates and require good or excellent credit. Also, credit score and debt-to-income requirements are usually stricter for these types of loans, and they are only made available to the most credible borrowers. As per explanation given above we can conclude that following factors mentioned below are considered by financier before giving loan: a. Credit worthiness b. Income statement c. Debt to income ratio Example of unsecured loans d. Personal loan e. Credit card debt f. Education loan g. Marriage loan 3. Productive – The productive debt is expected to create assets which will yield income sufficient to pay the loan amount and interest which accrues on loan. Or we can say productive loans can be used by persons to generate income and to create or sustain self-employment. They can use to create employment for others and to provide goods and services for the public. Examples of productive loans are Home loan> generally people take home loan to generate rental income and tax benefit. Apart from these real estate appreciations benefit is there. Agriculture Loan Business Development Loans Unproductive Debt – This debt is opposite to Productive Debt. The unproductive debt never creates assets. It is used to spend for personal reasons. Reasons can be like medical emergency, holiday tour, marriage purposes, consumer durable etc. Generally rate of interest of this debt is quite high. If we consider credit card, through which we can spend money movies, eatables, apparels etc. this does not create any income. CFP Level 1 - Module 1 - Personal Financial Management - India Page 2

Revolving debt – A revolving debt does not have a fixed payment amount every month and fixed loan amount. The charges are based on the actual balance of the loan. The same is true for the computation of the interest rate; it is dependent on the total outstanding balance of the loan. It usually refers to any money you owe from an account that allows you to borrow against a credit line. Revolving debt often comes with a variable interest rate. And while you have to pay back whatever you borrow, you don’t have to pay a fixed amount every month according to a schedule. Revolving credit accounts don’t have specific loan terms. That means you can borrow money as often as you need it. The borrower can withdraw from his account as per limit mentioned whenever he requires. He is allowed to repay as much as he wants to pay. 6. Mortgage Debt – A mortgage loan is a type of secured loan where you can avail funds by providing your asset as collateral to the lender. This is a popular form of financing as it helps the borrower avail a high loan amount and prolonged repayment tenor. A mortgage is usually a loan sanctioned against an immovable asset like a house or a commercial property. The lender keeps the asset as collateral until the borrower repays the total loan amount. Mortgage loans are of 3 types:  Home loans  Commercial property loans  Loans against properties A home loan or a commercial property loan can be availed only to purchase a home or a commercial space respectively. On the other hand, a loan against property has no end-use restrictions. It can be used to fund overseas education, a wedding, a home renovation, etc. CIBIL Score and Purpose CIBIL is India’s first Credit Information Company. CIBIL used to refer to the Credit Information Bureau (India) Limited. In 2000, it partnered with US- based Trans Union and the company is now called Trans Union CIBIL Ltd. CIBIL is the oldest credit information company in India, and functions based on a license granted by the RBI. It adheres to the Credit Information Act of 2005 and records the repayment of loans and credit cards by both individuals and companies. CFP Level 1 - Module 1 - Personal Financial Management - India Page 3

Major Credit Reporting Agencies in India There are six major credit reporting agencies in India that are registered under the Security and Exchange Board of India (SEBI):  Trans Union Credit Information Bureau (India) Limited or CIBIL  Equifax  Credit Rating Information Services of India Limited (CRISIL)  ICRA, which was formally known as the Investment Information and Credit Rating Agency of India Limited  Experian  CRIF High Mark  Each of these credit reporting bureaus is perfect in every way and it is really difficult to judge which one is the best. However, most of the financial institutions and individuals prefer and think CIBIL as the most prominent out of the available six. CIBIL score: The CIBIL score is a 3-digit numeric summary of your credit history, derived by using details found in the 'Accounts' and 'Enquiries' sections of your CIBIL report, including (but not restricted to) your loan accounts or credit cards, and their payment status, as well as outstanding amounts' days past due. The score reflects your credit worthiness, based on your borrowing and repayment history, as shared by lenders. A CIBIL score is generally a number between 300 and 900 depicting the credit worthiness and trustworthiness of a borrower of repaying the loan and interest payments in time. Generally CIBIL score up to range of 550 is considered bad score and score 750 above is good for availing loan. Before going to take loan you should confirm your CIBIL score from their website or paisa bazar. The purpose of a CIBIL score report is to showcase to the querying institution the past track record of payments of the borrower, instances of delayed or missed payments, write-offs, loans taken as a proportion of one’s income, reliance on unsecured loans such as credit card debt/personal loans etc. This helps the lending institution a better insight of the borrowing customer and determine whether and how much loan should be approved to him for his required purpose. Types of Loans to Finance Varied Goals There are several types of loans one can borrow for various requirements during one’s life stages. Every loan has a different purpose, differing tenure, different eligibility (as in who can borrow that type of loan) and repayment methodologies. CFP Level 1 - Module 1 - Personal Financial Management - India Page 4

Consumer Loans A Consumer Loan is a loan that banks offer to customers to buy household goods and appliances and even personal devices. These include television sets, air-conditioners, home theatre systems, refrigerators, laptops, mobile phones, cameras and even modular kitchens. With a Consumer Loan, you can buy the appliances or gadgets you need right away and pay over time. You can choose a tenure that works for you – 12, 24 or 36 months – and repay in pocket- friendly monthly instalments. The interest is calculated on reducing balance method and the rate is generally around 8.5%-11.5% p.a. the amount is payable in EMI (Equated Monthly Instalments) and the only security is the asset purchased. Some time flat rate of interest is also charged by lenders. It seems to be low but effectively it is very high when converted into reducing balance method. The loan repayment history and CIBIL score of the borrower becomes critical in granting the loan. Ex1. A person takes consumer loan of Rs.80000 for 3 years and rate of interest is 12% p.a. reducing monthly. Calculate EMI? Sol. Set – begin N = 3*12 I = 12 PV = 80000 P/Y = 12 C/Y = 12 PMT = solve = -2,657.14 Ex2. A person takes consumer loan of Rs.500000 for 3 years and flat rate of interest is 8% p.a. Calculate EMI? Sol. Interest for one year = 8% of 500000 = 40000 3 years interest = 40000*3 = 120000 = 500000+120000 = 620000 ( as it is flat rate of interest ) Total liability to repay = 620000/36 = 16666.67 EMI Personal Loans An increasing number of consumers are now taking personal loans for their purchases, especially the big-ticket ones. They are also converting their purchases into equated monthly instalments (EMIs). Personal loan is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc. Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it, the lender, in case of a default, cannot auction anything you own. The interest rates on personal loans are higher than CFP Level 1 - Module 1 - Personal Financial Management - India Page 5

those on home, car or gold loans because of the greater perceived risk when sanctioning them. It can be used for any personal financial need and the bank will not monitor its use. It can be utilised for renovating your home, marriage-related expenses, a family vacation, your child's education, purchasing latest electronic gadgets or home appliances, meeting unexpected medical expenses or any other emergencies. Eligibility criteria Although it varies from bank to bank, the general criteria include your age, occupation, income, capacity to repay the loan and place of residence. To avail of a personal loan, you must have a regular income source, whether you are a salaried individual, self-employed business person or a professional. An individual's eligibility is also affected by the company he is employed with, his credit history, etc. Maximum loan duration It can be 1 to 5 years or 12 to 60 months. Shorter or longer tenures may be allowed on a case by case basis, but it is rare. How much can one borrow? It usually depends on your income and varies based on whether you are salaried or self-employed. Usually, the banks restrict the loan amount such that your EMI isn't more than 40-50% of your monthly income. Any existing loans that are being serviced by the applicant are also considered when calculating the personal loan amount. For the self employed, the loan value is determined on the basis of the profit earned as per the most recent acknowledged profit/Loss statement, while taking into account any additional liabilities (such as current loans for business, etc.) that he might have. Rates Being unsecured loans, personal loans have a higher interest rate than those on secured 'home and car' loans. At present, many leading banks and NBFCs offer such loans at interest rates of as low as 11.49%. However, the rate applicable to a borrower is contingent on key factors, including credit score, income level, loan amount and tenure, previous relationship (savings account, loans or credit cards) with the lender, etc. CFP Level 1 - Module 1 - Personal Financial Management - India Page 6

Extra charge payable Yes. In addition to the interest payable on the principal amount, there is a non-refundable charge on applying for a personal loan. The lender charges processing fees, usually 1-2% of the loan principal, to take care of any paperwork that needs to be processed as part of the application process. The lender may waive this charge if you have a long-term association with him. Other charge is insurance premium. Banker insures the loan taker. Difference between reducing and flat interest rate As the name implies, in the former, the borrower pays interest only on the outstanding loan balance, i.e., the balance that remains outstanding after getting reduced by the principal repayment. In flat interest rate scenario, the borrower pays interest on the entire loan balance throughout the loan term. Thus, the interest payable does not decrease even as the borrower makes periodic EMI payments. Ex. Mr. Sharma has taken personal loan of Rs.10 lakhs for 2 years @ 11% p.a. reducing balance basis, how much is the EMI? Sol. CASIO FC 200V EXCEL Set – END =PMT(0.11/12,24,100000,0,0) =-46,607.84 N = 2*12 I = 11 PV = 1000000 P/Y = 12 C/Y = 12 PMT = solve = -46,607.84 Ex2. Moksh Gupta is planning to take personal loan of Rs.800000 for 3 years for the purpose of his business. If banks offers him flat rate of interest 10% p.a. How much EMI he will have to pay? Sol. Interest for one year = 10% of 800000 = 80000 3 years interest = 80000*3 = 240000 Total liability to repay = 800000+240000 = 1040000 ( as it is flat rate of interest ) EMI = 1040000/36 = 28888.89 Credit Card Debt A credit card is a thin rectangular plastic card issued by financial institutions, which lets you borrow funds from a pre-approved limit to pay for your purchases. The limit is decided by the institution issuing the card based on your credit score and history. Generally, higher the score and better the history, higher is the limit. The key difference between a credit card and debit card is that when you swipe a debit card, the money gets deducted from your bank account; whereas, in case of a credit card, the money is taken from your pre-approved limit. CFP Level 1 - Module 1 - Personal Financial Management - India Page 7

Banks or credit card issuing companies such as Visa, MasterCard, American express, Diners etc. issue co-branded credit cards giving their customers a host of benefits such as reward points, lounge access, priority passes, concierge services etc. but these surely do come at a cost. The user of a credit card is supposed to repay payments due on each of his swipes within 51 days of making the credit card purchase. Beyond this time period, the bank/credit card institution counts this payment as a loan and begins to charge interest on it at a hefty rate of 36% p.a. since this is not a traditional loan and the borrower has not purchased an asset with this credit card, the nature of these transactions could be similar to that of an unsecured personal loan which is of a short tenure. Sometimes you will have to pay 3% p.m. You will think same as 36% p.a. mentioned above. But it is 42.57% p.a. effective. The payment option of Minimum Amount Due to keep the card running merely keeps the card owner’s usage intact. The interest rate continues to be levied and payments continue to accrue despite paying the MAD. A default or late payment on the credit card can destroy one’s CIBIL score the most. Most people in India avoid using this plastic due to the challenge of maintaining the discipline to repay on time. Vehicle Loan Loans can be taken for different purposes. If anyone wants to purchase bike, car, bus, truck etc. can avail loan from banks or NPFCs, this loan is called Vehicle Loan. Generally loans are two types a. Secured loans b. Unsecured loans Vehicle loans are secured loans because when you purchase a car and take loan, you will find hp written in RC of your car. It means it is hypothecated to the banks. If you default in payment, the bank can sell the asset and recover their dues. Banks generally charge interest rate around 8.5%-11% p.a. on reducing balance bases or 6% flat rate of interest. But for two wheeler loans interest rate offered by dealers generally are in the form of flat rate of interest to temp the customer, and rate of interest is around 10% p.a. to 12% p.a. flat. This means 20% to 24% p.a. reducing monthly and the repayment period is around 4-5 years. The payments are due monthly in the form of EMI (Equated monthly instalments) Ex1. Mr. Gupta is planning to purchase a car which cost aroungd10 lacs, but he has to finance 80% of cost of car. He approached a commercial bank which offers him 7 years tenure and rate of interest 10% p.a. reducing balance basis. How much will be his monthly liability towards bank? CFP Level 1 - Module 1 - Personal Financial Management - India Page 8

Sol. Set – End EXCEL N = 7*12 = PMT(.10/12,84,800000,0,0) I = 10 PV = 800000 P/Y = 12 C/Y = 12 PMT = solve = -13281 Ex2. Mr. Rana is planning to purchase a scooter worth Rs.80000 in couple of days, he enquires the rate of interest which a dealer is charging 10% p.a. flat rate of interest for tenure 5 years. Dealer will finance 75% of the cost of scooter, how much Rana would be paying as EMI? Sol. Amount which is financed = 75% of 80000 = 60000 Interest for one year = 10% of 60000 = 6000 5 years interest = 6000*3 = 18000 Total liability to repay = 60000+18000 = 78000 ( as it is flat rate of interest ) EMI = 78000/60 = Rs.1300 Mortgage: Mortgage Loan Term loan is a loan with a repayment period of more than one year. It is usually taken by companies with longer investment or payback horizons, such as building of a new factory or purchase of new production equipment. Mortgage is basically a long-term loan, secured by collateral of some specified real estate property. The loan is normally amortized and the borrower is obligated to make periodic instalments to repay the loan. Failing which, the lender can enforce its rights to possess the mortgaged property. It means the property so mortgaged is sold and dues are recovered. Examples are home loans and loan against property. Long term debt financing is usually more risky to the financier as it involves longer payback periods and thus higher credit risks. Hence, long-term debt financiers would usually require the borrowing company to pledge some form of asset as collateral. Such assets can range from inventories to factories and properties. The amount of funds that the company is able to obtain through long term debt financing would depend greatly on the value of assets, which the company is able and willing to pledge. In reducing rate of interest loan but fixed rate of interest, the EMI remains the same during the tenure, as the time passes interest in each EMI will reduce and principal increase. Generally interest rate on mortgage loans is in between 8% to 13.5% p.a. and about 70-80% of the value of the property is provided as the loan CFP Level 1 - Module 1 - Personal Financial Management - India Page 9

Fixed Rate and Variable Rate Loans Fixed rate loan should typically mean the interest rate will remain fixed during the entire tenure of the loan. So, if you take a fixed rate loan for 15 years at 9% per annum, this will stay put through your 15 year loan period irrespective of whether interest rates rise or fall. For example: A housing loan of Rs.50 lakhs is to be taken for 20 years @ 12% p.a. fixed rate of interest, What would be EMI? CMPD EXCEL Set – End =Pmt(.12/12,240,5000000,0,0) N = 20*12 =-55054 I = 12 PV = 5000000 P/Y =12 C/Y =12 ( in loan cases we consider reducing as per repayment frequency) PMT = solve = -55054 On the other hand, as far as a variable or floating rate loan is concerned, the manner of its determination is very non-transparent. Variable interest rate loans set themselves up to a benchmark – most the base lending rate of the bank. As and when it keeps changing, the variable interest rate for that year will change. For example: Mr. Gupta has just taken housing loan of Rs.20 lacs for 25 years @ 11% p.a. interest rate is fixed for first 3 years but thereafter it changes as per floating rate of interest. Calculate the EMI? SOL. CMPD EXCEL Set – End =Pmt(.11/12,25*12,2000000,0,0) N = 25*12 =-19602.2 I = 11 PV = 2000000 P/Y =12 C/Y =12 ( in loan cases we consider reducing as per repayment frequency) PMT = solve = -19602.2 After 3 years, EMI will be changed as interest rate. The fixed rate loan if often more expensive than the variable interest but it ensures higher predictability to the borrower of his repayment schedule. MIBOR – Mumbai Interbank Offered Rate MIBOR stands for Mumbai Inter Bank Offered Rate. Like LIBOR, MIBOR is the benchmark for overnight interest rates BUT ONLY for the Indian Rupee (INR) at which banks can lend or borrow funds, in marketable size, from other banks in the Indian interbank money market. CFP Level 1 - Module 1 - Personal Financial Management - India Page 10

HISTORY: MIBOR was launched on June 15, 1998 as “Overnight” rate by Committee for the Development of the Debt Market. Later on, MIBOR started making “Offer” and dealing for 14-days maturity beginning from November 10, 1998. Further, one month and three months maturities were also added to MIBOR on December 1, 1998. In addition to these maturities, w.e.f. June 6, 2008, the offers for the three days’ maturity rates were also commenced on every business Friday (i.e. from Friday to Monday) in collaboration with Fixed Income Money Market and Derivative Association of India (FIMMDA). CALCULATIONS: MIBOR used to be calculated daily by the National Stock Exchange of India Limited (NSEIL) by the calculated average of the “Offer” of the lending rates with weighted calculations of the quantum of surplus funds available with the lender banks for lending to the first-class borrowers. Since June 22, 2015 FIMMDA joined the NSEIL for calculating the MIBOR and MIBOR was given the name of “FIMMDA-NSE MIBID/MIBOR”. MIBID stands for Mumbai Inter-bank Bid Rate. “Offer” Rates are obtained on every business day from “30 Offer Makers” comprising of Public Sector Banks, Private Sector Banks, Foreign Banks and the Approved Money Market Dealers and calculated weighted average of the polled rates are displayed on the NSEIL website. It must be noted that MIBOR rates are the “Polled Rates” and not the actual dealing rates. SIGNIFCANCE: MIBOR is used by different Indian banks either for interbank lending of the surplus funds or for interbank borrowing for meeting their short term liquidity requirements. MIBOR has been in use as a reference/benchmark rate by the financial institutions for deciding interest rates for the different financial instruments like Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits, Loans of different maturities and mortgages, etc. MIBOR is also the benchmark for the Call Money Market Rates. But the volumes of MIBOR are quite meagre as compared with the volumes of LIBOR. MCLR- Marginal Cost of Funds Based Lending Rate  The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016  The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at. MCLR is a tenor-linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan.  MCLR is closely linked to the actual deposit rates and is calculated based on four components: o the marginal cost of funds o negative carry on account of cash reserve ratio o operating costs and o tenor premium. CFP Level 1 - Module 1 - Personal Financial Management - India Page 11

Explanation: For a bank or a lending institution, the capital which is used to lend to its borrowers can come from deposits from customers, owner’s capital, preference share issues, perpetual bond issues and so on. Since there is a fixed liability to the bank for the interest payment due on these loans, there is an average cost of funds that the bank calculates to determine the minimum opportunity cost of its funds. Add to the cost of raising the actual funds, there are other factors such as loan Tenor, the operating costs of the bank and the Negative interest rate carried on the Cash reserve Ratio that it has to maintain with the RBI. Since the bank cannot utilize the CRR-oriented funds to lend, the interest foregone on this sum is also recovered from the rest of the corpus.  The Reserve Bank of India introduced the MCLR methodology for fixing interest rates from 1 April 2016. It replaced the base rate structure, which had been in place since July 2010.  Under the MCLR regime, banks are free to offer all categories of loans on fixed or floating interest rates. The actual lending rates for loans of different categories and tenors are determined by adding the components of spread to MCLR. Therefore, the bank cannot lend at a rate lower than MCLR of a particular maturity, for all loans linked to that benchmark.  Fixed-rate loans with tenors of up to three years are also priced according to MCLR. Banks review and publish MCLR of different maturities, every month. Certain loan rates, like that of fixed-rate loans with tenors above three years and special loan schemes offered by the government, are not linked to MCLR. Loan against Property (LAP) or Loan against Securities (LAS) In the real estate and housing finance market today, we regularly come across the term “Loan against Property”. Loan against property is nothing but a loan which you avail by keeping your commercial/residential property as collateral. Another name for Loan against property is a secured loan. The security in this kind of loan is the property owned by the person applying for the loan. The value of your property decides the amount of potential loan you will be sanctioned. Generally you can take loan 50%-80% of its market value against property Tenure of this loan generally 5 to 20 years and interest rate in between the range of 9% -12% p.a. The payments can be made in lump sums periodically or via EMIs. In case of a default, the lender has a right to auction/sell the assets and recover his dues. The remainder is given to the borrower.  The types of Property against which LAP can be availed:  Self-owned residential property  Self-owned and self-occupied residential property  Self-owned but rented residential property  Self-owned piece of land  Self-owned commercial property  Self-owned but rented commercial property CFP Level 1 - Module 1 - Personal Financial Management - India Page 12

 People generally today avail loan against a property for numerous reasons. It could be anything from a foreign trip, big wedding, education of your children, or simply to expand your business. Loan against securities – Loan against securities is a loan where one pledge one’s shares, mutual funds or life insurance policies as collateral to the bank against your loan amount. Loan against Securities are typically offered as an overdraft facility in your account after you have deposited your securities. You can draw money from the account, and you pay interest only on the loan amount you use and for the period you use it. For example, you are offered a loan against shares of Rs 2 lakhs. Let’s say, you draw Rs 50,000 and deposit the amount back in your account in one month. In this case, you are liable to pay interest only for one month on Rs 50,000. Overdraft facility Generally loan against securities and avail overdraft facility against the pledging of following securities:  Equity shares*: Up to 50% of the value of demat shares  Mutual Fund units*: Up to 50% of the NAV (Net Asset Value) for Equity MF & upto 80% for Debt MF  Mutual Funds: NABARD's Bhavishya Nirman Bonds  Life Insurance Policies issued by Life Insurance Companies  National Savings Certificate (NSC)  Kisan Vikas Patra(KVP)  Gold Deposit Certificates (GDC) Gold Loan Gold Loan is a loan wherein generally gold jewellery is provided as collateral security. Gold Loans are offered by nationalized banks, private banks, and other financial institutions at affordable interest rates. Compared to other loans which may stipulate some fix terms and conditions for end- use of funds, Gold Loans provide flexibility to the customers to use the funds for any purposes like education, medical urgency, wedding, etc. This loan can be sanctioned promptly by lending institution without looking at CIBIL Interest rate is charged by the lending institution generally 12 to 15% p.a. and tenure from 1 to 3 years. This loan can be taken for any purpose like medical emergency, child education, child marriage, world tour, business expansion, down payment for the purchase of vehicle and purchasing a property. CFP Level 1 - Module 1 - Personal Financial Management - India Page 13

BENEFITS OF GOLD LOAN: Faster processing: – As the gold loans are backed by physical gold, the bankers are generally more than happy to give loan. Lending against gold is safe for the banks as they have the option to sell the gold in case one default, therefore banks generally disburse the loan in few hours. This is because the processing time is less. Option to pay interest only: – Gold loans have a unique feature where the borrower has the option of paying just the interest part and the principal amount can be paid at the time of the closing of the loan. Lower interest rate: – As these are secured loans banks charge a lower interest rate compared to unsecured loan such as personal loan. The interest rates are generally in the range of 12 to 14%. No processing fees: – Many NBFCs and banks don’t charge processing fees as these loans are given instantly in lieu of gold which is held as collateral with the lender. Low or no foreclosure charges: – Some of the lenders don’t charge any prepayment charges while some of the banks do charge a prepayment penalty of 1%. No-income proof required: – Generally lenders don’t ask for income proof as the loan is secured against the gold to keep with the bank. The credit score is not required – Unlike most loans, gold loan approval does not depend on your credit score. In case of other loans, the loan amount is given on the basis of the repayment capacity and credit history of the borrower but in the gold loan, the loan amount is decided on the market value of gold. CFP Level 1 - Module 1 - Personal Financial Management - India Page 14

List of Top 10 Banks/NBFCs offering Gold Loan in India S.NO Bank/NBFC Interest Rate Loan Amount Loan Tenure 1 Muthoot 12%-26% Rs 1500-No 7 days-12 months (normal Finance Limit schemes)/36 months (EMI based Scheme) 2 IIFL 9.24%-24% Min Rs.3000 3 months -11 months 3 HDFC Bank 11%-16% Rs.10,000 (In rural market) 3 months -24 months Rs.50,000 (Others) 4 ICICI Bank 11%-19.76% Rs10,000-Rs15 3 months-12 months lakh 5 Canara Bank Up to Rs. 5 Lakh:9.85% Rs.10,000-Rs.10 12 months (Borrower needs to Above Rs.5 lakh:9.95% lakh pay in lumpsum) 6 Axis Bank 14% (1 year MCLR+ Spread Rs.25,001-Rs.20 6 months-3 years over 1 year MCLR- lakh 8.15%+5.85%) 7 Manappuram 12-29% Rs 5,000-Rs.1.5 90 days-365 days Finance crore 8 Federal Bank 9.50% Rs 1000-Rs 150 NA lakh 9 Bank of Baroda Depends upon MCLR Up to Rs.25 12 months Lakh 10 SBI Bank 9.15% Rs 20,000-Rs 20 Max: 36 months Lakh Gold Monetization Scheme The Gold Monetisation Scheme is relatively new – it was introduced by the Central Government only in 2015-16. It allows people to earn interest on the idle gold lying in their homes. The objective is to simultaneously safeguard the gold held in Indian households as well as put it to productive use. The larger objective is to cut down the country’s gold imports by decreasing domestic demand. India, incidentally, is the second-largest consumer of gold after China. CFP Level 1 - Module 1 - Personal Financial Management - India Page 15

Features of the scheme: 1. Easy storage of gold: Gold Monetisation Scheme offers security to gold by not only storing it but also returning it to the customer in the form of money or physical gold when the plan attains maturity. 2. Utility for your gold: Depositing Gold in the Gold Monetisation Scheme will not only get you interest money, but you also have the option of encashing the gold at maturity. This way, you can take advantage of the appreciating value of gold. 3. Flexibility in quantity of deposit: The minimum deposit you can make in a gold monetisation scheme is 30 grams of any purity. There is no maximum limit. 4. Convenient tenures: There are 3 term deposit plans available under the Gold Monetisation Scheme: a. Short term: 1 to 3 years b. Medium term: 5 to 7 years c. Long term: 12 to 15 years. 5. Attractive interest rates: Customer can earn interest between 0.5% to 2.5% interest depending on the period of deposit. The interest rates currently being offered is as follows: a. Short-term rates (at SBI): 0.5% p.a. for 1 year, 0.55% for 2 years, 0.60% for 3 years. b. Medium-term rates: 2.25% p.a. for 5 to 7 years. c. Long-term rates: 2.5% p.a. for 12 to 15 years. 6. Withdrawal of the deposit: For short-term plans, you can specify at the time of deposit whether you want the returns to be made to you in the form of money or physical gold. If you choose to have your returns as physical gold, you get it as gold coins or bars in 995 fineness. You do not get your jewellery back in the same form as you put them in, because the banks are not storing your gold. Banks convert the gold you deposit into bullion or coins and either send it to Metals and Minerals Trading Corporation of India for minting India Gold Coins, or sell it to jewellers or other banks. 7. Verification of purity: Over 330 Collection and Purity Testing Centres have been approved across the country to evaluate and verify the purity of the gold being deposited. Once you open a gold monetisation scheme account in a bank, you will have to take your gold to the nearest government-approved collection centre, where the purity and quantity of your gold will be checked. The centre will take your gold and provide you a receipt for the gold quantity, which will be converted to a scheme certificate when deposited in the bank. 8. Tax benefits: when the person gets back the gold or the amount in lieu of gold and if there has been an increase in the price of the metal in the interim period then there would be no tax liability that arises for the individual. Moreover annual interest is also tax free. CFP Level 1 - Module 1 - Personal Financial Management - India Page 16

Reverse Mortgage With increased urbanization and prevalent nuclear family culture, many senior citizens are forced to fend for themselves. This situation has been aggravated by increase in the cost of living accompanied by longer life expectancy, thus making it very difficult for the senior citizens to make both the two ends meet. In order to help those senior citizens who own their house but don’t want to sell it, the Government of India introduced reverse mortgage a scheme in 2008. This scheme is exact ‘reverse’ of plain home loan scheme. In case of a home loan one takes a lump sum loan and repays it in instalments in future. Under the reverse mortgage scheme, you get instalments and the loan is repayable in lump sum in future. Here, the payment stream comes to the borrower for a fixed period of time in the form of monthly, quarterly or yearly payments. The maximum permissible monthly payments under this scheme cannot exceed Rs. 50,000 per month. You can even get lump sum payments under reverse mortgage loan however the total amount which you can get as lump sum which cannot be more than 50% of the total eligibility amount subject to a maximum of Rs.15 lakh. The one time lump sum loan can only be taken for the purpose of meeting medical expenses for yourself, your spouse or any dependent person. The money receivable under regular reverse mortgage scheme money so borrowed can only be used for the genuine needs of the owner like medical emergencies, day to-day expenses, repairs and renovation or repayment of loan taken for the same property. Pre-requisites for availing reverse mortgage: The reverse mortgage loan is available to any person who is owner of a residential house property and has completed 60 years of age. In case of a couple wishing to avail this scheme, one of the spouses should have completed 60 years of age and the other should be over 55 years of age, though it is not necessary that only a couple can avail this loan. Even a person who is single and a senior citizen, can avail loan under reverse mortgage scheme but the property should be owned by him/ her You need to mortgage your residential property which is being used by you as your own residence. So the property should be used by the person who is taking this loan as his primary residence. Moreover the property should be self-acquired, implying you cannot get a loan on inherited property or any property received by you as gift. Therefore under this scheme you cannot mortgage any other property like commercial property or other residential property which is let out though owned by you. Even in case of a property on which any loan has been taken cannot be used for taking this reverse mortgage until and unless entire loan has been repaid. CFP Level 1 - Module 1 - Personal Financial Management - India Page 17

Tenure: Various banks have devised their own schemes within the framework of the scheme announced by the government. Broadly the tenure of such loan shall not be more than twenty years. This is the period during which the owner of the house will continue to receive the periodic payments. However in case the borrower outlives the tenure of the loan, the payment stream shall stop but he can still continue to stay in the house. Even after his death, his spouse can also continue to stay in the same house without having to worry about repayment of the loan. Rate of Interest: The rate of interest will vary from one lender to another. It is generally in between 9.5% - 11% p.a. The lenders are free to provide the loans under fixed or floating rate regime. Taxation aspect of reverse mortgage: As per the provisions of income Tax act, 1961, the act of mortgaging the property for the purpose of securing reverse mortgage is not treated as transfer affecting any tax liability. Moreover the money received by the owner of the property under reverse mortgage shall not be treated as income.. However it is important to note that as and when the property is disposed of, either by the bank or the borrower or its legal heirs, the normal provisions of capital gains will apply and the owner or his legal heirs shall be liable to pay capital gains tax as per the provisions applicable to general sale of property. However if the legal heirs decide not to sell the property but pay the outstanding dues fully, no tax implications will arise as redemption of the property does not amount to transfer. So from the above it becomes very clear that reverse mortgage is the golden walking stick in the hands of senior citizens in their old age and has come to rescue of such senior citizens who stay in their own house. Using the Right Credit to Finance Goals One can avail various kinds of loans which could vary in many ways for the borrower as well as the lender. One has to choose between the various types available to suit one’s own needs and debt servicing capabilities. Some criteria one should put some thought to before finalizing a loan – 1) Tenor required – long term or short term 2) Reason for the loan – consumption or creation of asset 3) Security available to be placed as collateral- if one has enough security to provide the lender for a pledge on a secured loan 4) Margin available to be placed for the difference between amount required and loan sanctioned 5) Credit scores maintained in the past 6) Rate of interest that one can comfortably service without compromising one’s dear-t-life expenses. CFP Level 1 - Module 1 - Personal Financial Management - India Page 18

7) Recourse available to the lender in case of a default and the suitability of this recourse to oneself and one’s family. 8) Loan eligibility in terms of one’s earnings and tax slabs 9) Fixed or floating rate depending upon the need for predictability of future outflows and also the current trend of the interest rates in the economy. 10) Foreclosure or prepayment charges and penalties to repay the loan earlier. Delayed payment charges in case of default or delay in repaying one’s obligations. Analysis of Debt and Financing Alternatives Loan Repayment Schedules A loan repayment schedule or an amortization schedule is a chart of all payments due to be made for the purpose of servicing the loan availed by the borrower. It gives an entire schedule of principal and interest repayments payable over the tenor of the loan in instalments due. Every instalment shows a fixed amount – within which the quantum of principal and interest keeps varying depending upon the time period. The earlier instalments factor in more interest and lesser principal component. But since over a period of time, the principal reduces, the interest on the reducing balance also comes down- thus increasing the proportion of the principal in the instalment. These schedules are typically available for consumer loans where the repayment is payable in instilments on fixed known dates. Example: Mr. Rana has taken a personal loan of Rs.1000000 on 1st April 2020 for 2 years @ 14% p.a. reducing monthly. He wants to know his EMI and amortization schedule also. EMI can be calculated by CMPD as well as excel Set – End EXCEL N = 2*12 =PMT(0.14/12,24,1000000,0,0) I = 14 =48012.88327 PV = 1000000 P/Y =12 C/Y =12 PMT = solve = 48012.88327 For amortization schedule we need to use Excel Principal 1000000 Interest 14% p.a. reducing monthly Tenure 24 months EMI ₹ 48012.88327 CFP Level 1 - Module 1 - Personal Financial Management - India Page 19

Loan repayment schedule- Month(end) Loan Amount EMI Interest Principal Loan Balance 1 1000000 ₹ -48,012.88 ₹ -11,666.67 ₹ -36,346.22 ₹ 9,63,653.78 2 1000000 ₹ -48,012.88 ₹ -11,242.63 ₹ -36,770.26 ₹ 9,26,883.53 3 1000000 ₹ -48,012.88 ₹ -10,813.64 ₹ -37,199.24 ₹ 8,89,684.29 4 1000000 ₹ -48,012.88 ₹ -10,379.65 ₹ -37,633.23 ₹ 8,52,051.05 5 1000000 ₹ -48,012.88 ₹ -9,940.60 ₹ -38,072.29 ₹ 8,13,978.76 6 1000000 ₹ -48,012.88 ₹ -9,496.42 ₹ -38,516.46 ₹ 7,75,462.30 7 1000000 ₹ -48,012.88 ₹ -9,047.06 ₹ -38,965.82 ₹ 7,36,496.48 8 1000000 ₹ -48,012.88 ₹ -8,592.46 ₹ -39,420.42 ₹ 6,97,076.05 9 1000000 ₹ -48,012.88 ₹ -8,132.55 ₹ -39,880.33 ₹ 6,57,195.72 10 1000000 ₹ -48,012.88 ₹ -7,667.28 ₹ -40,345.60 ₹ 6,16,850.12 11 1000000 ₹ -48,012.88 ₹ -7,196.58 ₹ -40,816.30 ₹ 5,76,033.83 12 1000000 ₹ -48,012.88 ₹ -6,720.39 ₹ -41,292.49 ₹ 5,34,741.34 13 1000000 ₹ -48,012.88 ₹ -6,238.65 ₹ -41,774.23 ₹ 4,92,967.10 14 1000000 ₹ -48,012.88 ₹ -5,751.28 ₹ -42,261.60 ₹ 4,50,705.50 15 1000000 ₹ -48,012.88 ₹ -5,258.23 ₹ -42,754.65 ₹ 4,07,950.85 16 1000000 ₹ -48,012.88 ₹ -4,759.43 ₹ -43,253.46 ₹ 3,64,697.39 17 1000000 ₹ -48,012.88 ₹ -4,254.80 ₹ -43,758.08 ₹ 3,20,939.31 18 1000000 ₹ -48,012.88 ₹ -3,744.29 ₹ -44,268.59 ₹ 2,76,670.72 19 1000000 ₹ -48,012.88 ₹ -3,227.83 ₹ -44,785.06 ₹ 2,31,885.66 20 1000000 ₹ -48,012.88 ₹ -2,705.33 ₹ -45,307.55 ₹ 1,86,578.11 21 1000000 ₹ -48,012.88 ₹ -2,176.74 ₹ -45,836.14 ₹ 1,40,741.97 22 1000000 ₹ -48,012.88 ₹ -1,641.99 ₹ -46,370.89 ₹ 94,371.08 23 1000000 ₹ -48,012.88 ₹ -1,101.00 ₹ -46,911.89 ₹ 47,459.19 24 1000000 ₹ -48,012.88 ₹ -47,459.19 ₹ -553.69 ₹ 0.00 Refinancing - Loan Restructuring, Present Value of Future Payments Refinancing is a process where the initially taken loan with one bank will be shifted to another bank for the reducing the cost. Refinancing is done by a credit-worthy borrower who wishes to change the terms of his loan to more favourable ones. It is often voluntarily initiated by the borrower who may want better terms on his loan – lower tenor, lower rate of interest, lower EMIs, better bank, higher loan to value for his asset, lower annual charges etc. Example: Mr. Gupta had taken housing loan from bank ABC on 1-6-2017 of Rs.50 lacs for 25 years @ 10% p.a. reducing monthly on floating rate basis. Today i.e. on 1st May 2020 he gets bank notice for increasing ROI to 11.5% p.a. effective on 1st June 2020. Mr. Gupta gets panic and decides to refinance with other bank DEF which offers 11% p.a. but it will charge 1% processing fees. Now he needs to decide whether he should refinance it or not. You being a Financial planner needs to help him. Sol. First we need to calculate EMI with ABC bank Page 20 CFP Level 1 - Module 1 - Personal Financial Management - India

CMPD EXCEL Set – End =pmt (0.10/12,300,5000000,0,0) N = 300 =-45435.03… I = 10 PV = 5000000 P/Y =12 C/Y = 12 PMT = solve = -45435.03… Now we need to calculate balance on 1-6-2020 EXCEL AMRT =PV(0.10,300-36, -45435.03728,0,0) PM1 = 1 =4842550.613 PM2 = 36 BAL = SOLVE = 4842550.613 On 1-6-2020 bank is going to hike rate of interest to 11.5% p.a. the new EMI which will be charged by old bank from 1-6-2020 CMPD EXCEL SET = END =PMT(.115/12,300-36, 4842550.613,0,0) N = 300-36 =-50477.49424 I = 11.5 PV = 4842550.613 P/Y =12 C/Y = 12 PMT = solve = -50477.49424 Now new bank DEF will refinance the amount 4842550.613 but will charge 1% of it as processing fees. Processing fees = 1% of 4842550.613 = 48425.506 We consider processing fees is not payable by Mr. Gupta as finance problem. New bank DEF will finance the processing fees as well. Total amount finance by bank DEF = 4842550.613 + 48425.506 = 4890976.119 Now DEF Bank will charge EMI i.e. EXCEL CMPD =PMT(0.11/12,300-36, 4890976.119,0,0) SET – END =-49263.05849 N = 300-36 I = 11 PV = 4890976.119 P/Y =12 C/Y = 12 PMT = solve = -49263.05849 Now Mr. Gupta can take decision to refinance or not. EMI is charged from 1-6-2020 by ABC bank = -50477.49424 DEF bank = -49263.05849 CFP Level 1 - Module 1 - Personal Financial Management - India Page 21

It is very clear from above calculation refinance is the best option with Mr. Gupta. Restructuring of Loans Normally, restructuring of loans takes place when a borrower approaches the bank for support in a condition where he is unable to repay the regular installments of loan due to cash-flow mismatch or other genuine financial issues. Here the borrower has to provide satisfactory documents in supporting his/ her financial ability to repay loan to be considered for restructuring. In case of regions affected by natural calamity like CORONA where repaying capacity of the borrower impaired due to loss of economic assets or loss of revenue, bank needs to approve restructuring of loans and make an effort in putting life back into the loan as well as relief to the borrower. Sometimes the lender and borrower to make the terms more amenable for the borrower and enable him to repay his obligations on time. Ways for restructuring of bank loans 1. Rescheduling the Loan Repayment The borrower can be offered to just restructure the loan repayment schedule to match the operational cash flows. There might be situations when the cash inflows may be lower in the earlier years but higher during the later years of the project. As such, rescheduling the loan repayment can help to tackle such genuine operational issues. 2. Reducing the Interest Rates It may so happen that the interest rate at which the loan had been taken is higher than what it ideally should be. The borrower may approach the bank to reduce the interest rates so that the loan continues to be in good standing. 3. Waiver of Overdue Interest The borrower may not have paid a couple of instalments due to genuine financial issues. As a result of such default, banks generally charge some delayed/overdue interest to compensate for such delay. But banks considering better and regular repayment history, they are inclined to waive such amounts to encourage the borrower to stay regular in repayment. Restructuring has an effect on one’s credit score since it is considered as a near default situation. Large corporations and even countries resort to debt restructuring in times of financial distress to avoid default. The lender in these cases often reduces or writes off some of his dues to enable the CFP Level 1 - Module 1 - Personal Financial Management - India Page 22

borrower to pay as much as he can without defaulting on the whole amount, thus sidestepping legal costs and avoiding bad debts. In these cases, the methods could be different – swapping debt for equity or assets, writing off some part of the loan amount altogether (called haircut), taking over the control of the business. Restructuring debt can be a win-win for both entities as the company avoids bankruptcy and the lenders typically receive more than what they would through a bankruptcy proceeding. Present Value of Future Payments Present value is the current value of a future sum of money or steam of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate and the higher the discount rate, the lower the present value of the future cash flows. The value of an amount of money received today versus an amount received a year is different, although in nominal terms it may be the same. The value of Rs. 100 if received today, is Rs. 100 but a year later, the opportunity cost or interest cost or inflation on this Rs. 100 which could have been received a year ago, dilutes the value of this Rs. 100 This is called the present value of future payments. The interest cost or opportunity cost is often called the cost of carry or the discounting rate. Future cash flows are divided by this discounting rate and the present value is arrived at. The higher the discount rate, the lower will be the present value. The formula can be represented as – PV = FV ------------------- (1+ r)^n PV- present value, FV- future value receivable, r- rate of interest or rate of discounting, n-number of years post which the payment is receivable For example, an investor wants to know the present value of his Rs.2 lakhs which he is going to receive after 5 years, considering rate of interest 10% p.a. Sol. PV = FV/(+ r)^n = 200000/1.10^5 = 124184.2646 CFP Level 1 - Module 1 - Personal Financial Management - India Page 23

Varying Interest Rates Varying Interest Rates - Fixed EMI vs. Fixed Tenure Fixed EMI loans are where the instalment repayable every month called EMI (equated monthly instalment) is pre-determined. Let’s understand the whole concept with the help of example. Mr. Rohan takes a vehicle loan of Rs.5 lacs for 5 years @ 12% p.a. reducing monthly and rate of interest is fixed. It will not be changed during the entire tenure. For calculating the EMI we have two methods. CMPD EXCEL SET = END = PMT(.12/12,60,500000,0,0) N = 60 =-11122.22384 I = 12 PV = 500000 P/Y = 12 C/Y = 12 PMT = SOLVE = -11122.22384 This means Rohan will keep on paying Rs.11122.22384 every month for 5 years. He knows his liability. Accordingly he will plan his future investments and liability. But in case of floating rate of interest loan, interest rate generally revise at regular interval of time. Almost 10 years back when rate of interest hiked by banks for such types of loan, borrowers were not able to pay hiked EMIs. Considering loan was on floating rate basis in above example and banker reduces the rate of interest to 10% p.a after 2 years. Borrower has multiple options: 1. Keeping the EMI intact, resulting number of remaining payments (tenure) will reduce. The interest Rohan pays over the course of the loan comes down since the loan is being repaid faster and one also becomes debt-free sooner For explain in a better way we need to do it numerically: First we must calculate the outstanding loan after 2 years AMRT EXCEL PM1 = 1 =PV(0.12,36, -11122.22384,0,0) PM2 = 24 =334862.4104 BAL = SOLVE = 334862.4104 If we keep the EMI intact, balance tenure i.e. 36 months will be reduced to 34.8095 CFP Level 1 - Module 1 - Personal Financial Management - India Page 24

CMPD EXCEL SET = END =NPER(0.10/12,-11122.22384,334862.4104,0,0) N = SOLVE = 34.8095 =34.8095 I = 10 ( reduced roi ) PV = 334862.4104(balanced outstanding) P/Y = 12 C/Y = 12 PMT = -11122.22384 2. Keeping the tenure intact, his monthly payment i.e. amount of EMIs will reduces CMPD EXCEL SET = END = PMT(0.10/12,36,334862.4104,0,0) N = 36 =-10805.068 I = 10 ( reduced roi ) PV = 334862.4104(balanced outstanding) P/Y = 12 C/Y = 12 PMT =SOLVE=-10805.068 EMI will reduced to 10805.068 Option of Bullet Payments In banking and finance, a bullet loan is a loan where a payment of the entire principal of the loan and sometimes the principal and interest, is due at the end of the loan term. Likewise for bullet bond. In bullet loan one can choose to pay only the interest amount and bulk amount can be paid later at the time of the maturity of loan or as agreed by the financial institution. This arrangement is convenient to individuals who are expecting a huge cash flow in the form of bonuses or fixed returns in some months. It lowers your monthly financial burden. It is also sometimes known as EMI Free Loan The payment that is due at the end of the loan is referred to as the bullet payment or balloon payment. This is a high credit risk situation for the lender since he is dependent on that one single date when the borrower has to make his final payment. A default on this day will set off a chain of communication between the lender and borrower, legal procedures and invoking of the collateral/guarantee to settle the amount. These types of loans are common in business or collateral-based loans such as a home loan or a car loan or Gold Loan. A credit card repayment is one format of a Bullet payment. The interest rate on gold loans at state and central cooperative banks fall in the range of 11.75- 14.5% per annum. Let’s compare a bullet repayment loan versus one with a monthly schedule. Say, the gold loan is of 2 lakh for a tenor of one year with an interest rate of 14.5% per annum. CFP Level 1 - Module 1 - Personal Financial Management - India Page 25

With an EMI option, you will have to pay 18,005 monthly for 12 months (which comes to a total of 2,16,060). But if you were to take the bullet repayment option, your monthly interest would add up to 29,000 at the end of the 12 months, and 2 lakh to be paid as principal. Hire Purchase A hire purchase known as installment plan is an arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial installment (e.g. 40% of the total) and repays the balance of the price of the asset plus interest over a period of time. We can take an example to comprehend the concept more clearly. Mr. Sharma wants to purchase a car costing Rs.10 lacs. But he has now Rs.2 lacs. This means he can’t purchase or will have to wait till he accumulates Rs.10 lacs considering inflation zero. But the best solution to fulfil his dream of buying car now is going with hire purchase agreement. He can make 2lacs as down payment and Rs.8 lacs can be financed for 5 years. If rate of interest is charged 10% p.a. reducing monthly, he would be paying Rs.16998 monthly for 60 months. He will pay Rs.219880 as interest and principal Rs.8 lacs. After paying the last instalment he will become the owner of the car. Hire purchase allows customers with a cash shortage to make an expensive purchase otherwise they would have to delay or forgo. For example, in cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. If the buyer defaults in paying the installments, the owner may repossess the goods. It usually covers the common day finance agreements like purchase of consumer durables like Motor Vehicles, Computers, Household appliances like Televisions, Refrigerators etc. Banks, NBFCs, credit societies often co-finance these loans with the commodity retailer to enable sales and these agreements act as incentives to the buyer to purchase the commodity immediately rather than waiting for when he has the liquidity available. ********************************************************************************* CFP Level 1 - Module 1 - Personal Financial Management - India Page 26