The new year promises a lot of action in the interest rate space and the first half of 2011 will see rate hikes is the expert prediction. For a person looking for a loan, the rising rates are only a part of the problem. And the terms on which you will get the loan may not necessarily get any easier either. So if you want to sidestep the rate barrier when buying a house and want the loan on slightly easier terms, you may want to look at cooperative banks.
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Unlike commercial banks that enter a business for the sole purpose of making a profit, cooperative banks look to make profits but also strive to provide additional benefits to the members of the cooperative association. Hence, they offer slightly better rates than commercial banks. Moreover, the terms and conditions they offer are more flexible compared with commercial banks.
Here is how to approach a cooperative bank and why it makes sense to do so.
Types of a cooperative bank
“Generally there are two types of cooperative banks—the scheduled and the non-scheduled. Though the Reserve Bank of India regulates both the types, it’s better to go for a relationship with scheduled cooperative banks compared with non-scheduled,” says Yashwant Aangne, a Mumbai-based certified financial planner. Scheduled cooperative banks have more stringent norms and are better for the customers in terms of safety and other parameters, he adds.
A few examples of established scheduled urban cooperative banks are Saraswat Co-operative Bank Ltd, Kapol Co-operative Bank Ltd and Shamrao Vithal Co-operative Bank Ltd. Many cooperative banks are specific to a community or faith. For instance, Zoroastrian Co-operative Bank Ltd. Here we focus on scheduled urban cooperative banks (SUCBs) or state cooperative banks.
How to get a loan
Unlike in a regular commercial bank, where you need to make an application for a loan along with your documents, there is an added step that you need to take in SUCBs.
To begin with, you need to buy a few shares of the bank from which you plan to take a loan. Says a senior officer from Saraswat Co-operative Bank Ltd, who did not want to be named, “To avail a loan from a SUCB, you have to be a member of the bank, for which you need to have shares of the bank.”
Usually, it is required that you buy shares worth at least 2.5% of the loan amount or a maximum of Rs 25,000. This is applicable for big-ticket loans such as a home loan. For smaller loans, such as a personal loan, you can buy shares worth Rs 100.
Buying shares is easy. When you give the required funds, the bank gives you a share certificate. You also earn a dividend on these shares. Once you repay the entire amount of loan, the shares can be sold back to the bank, usually at the same price. Remember that you cannot sell these shares to anyone else.
The rest of the procedure is almost the same as that in commercial banks.
If you are looking for an education loan, going to an SUCB could give you a better deal.
Better terms: Harshad Khanolkar, 23, a student from Mumbai, says, “I plan to go for higher studies and will be taking a loan from a cooperative bank since I hear they take care of 100% of the expenses.”
Most SUCBs fund 100% of the expenses, including fees, living expenses, laptops, laboratory equipment or other education-linked expenses. On the other hand, most commercial banks ask the student to shoulder a part of the fee burden. In fact, some SUCBs don’t even ask for margin money. Usually, commercial banks ask you to shell out around 15% of the loan amount as margin money.
Moreover, while most commercial banks may not grant a loan before your visa arrives, with SUCBs that’s not the case. Says Khanolkar, “Cooperative banks give loans even before the student gets the visas. Once I show the availability of funds, I think it will be easier to get my visa.”
Low cost of loan: Most commercial banks have an interest rate of 9.5-15% per annum compared with 8.5-13% by cooperative banks. Then there are other discounts on offer. Most SUCBs have special discounts for women or if for those who have secured admission for medical courses or in premium institutes for engineering and management courses.
While many SUCBs may not charge processing or prepayment fee on your loan, some may charge around 1%, which is again lower than what most commercial banks ask for.
If you are looking for a small personal loan, an SUCB will work for you. Commercial banks give loans up to Rs 15 lakh; with SUCBs, the most you can get is Rs 2 lakh.
Low cost of loan: In a commercial bank, the processing fee for a personal loan could be as high as 3%, in an SUCB, it could be nil. Since SUCBs are also driven by the purpose of benefiting their members, you can negotiate for a total waiver of fees. At the most, you will need to buy shares worth Rs 100.
Taking a personal loan from an SUCB is slightly cheaper than that in its commercial counterparts. For instance, commercial banks charge interest rates of 14-22%, while SUCBs charge between 14% and 18%.
Easy to get: Of course, even SUCBs check your credit report before giving you a loan, especially an unsecured loan such as a personal loan, but they are not as stringent as commercial banks. And if you’ve been a member of an SUCB for sometime, it just gets easier to negotiate for a slightly lower rate of interest.
Just like a personal loan, if you are looking for a large amount in housing loan, an SUCB may disappoint you. The maximum housing loan they offer is Rs 50 lakh.
Just like commercial banks, they too offer fixed as well as floating rates of interest. The interest rates with SUCBs are slightly lower than a commercial bank, around 100 basis points (bps) less for fixed rate loans and 25-50 bps less for floating rate loans. The processing fees is a lot lower compared with a commercial bank. The best part is that most SUCBs do not charge a prepayment penalty for home loans.
Even for other loans, overall there are better terms and conditions and lower cost of the loan in cooperative banks compared with commercial banks. So if you plan to borrow anytime soon, do check whether your local cooperative bank meets your needs.