Module 1: Fundamentals of Personal Finance 6 hrs

 Financial planning: Need vs Want, Income and Expenditure

 Budgeting and Financial Goals: Stabilising, Saving, Spending and Investing
 Banking and transactions: Types of bank accounts, Digital banking (NEFT, RTGS,
IMPS, UPI), Credit & Debit cards
 Time Value of Money and Inflation
o Simple and compound interest rate
o Rule of 72, Rule of 70, Rule of 50-30-20, Rule of 10-5-3, 3X Emergency Rule
 Planning and Debt Management: Interest rate, Tenure, Penalty, Cs in loan sanction
o Personal, Vehicle and Education loan
o Rule of 40% EMI
Financial Planning:

Financial Planning is a process of planning and managing your money (current finances) to
meet your life goals. You would need to plan and manage your current income (the money you
earn today) and your future income (money you can expect to earn in future) according to your
life cycle needs.

Having your own money in your hand every month does not guarantee you the lifestyle you
deserve throughout your life. Circumstances and needs always keep changing. Today’s sound
financial situation does not guarantee an equally sound future. And hence, no or improper
financial planning can be disastrous. A loss of income, even temporary, can eat into your
savings or can lead to debt. An uninsured loss can wipe out your accumulated wealth.
Insufficient savings can force a reduced lifestyle during retirement. Frequent or unplanned
borrowings can leave negative money i.e. debts for future. Also, poor tax planning can result
in paying higher taxes than what you are liable to pay. All this, combined with changes in your
life cycle needs and/or external economic changes can make you and your future generations
financially vulnerable.

Need vs Wants

The first step in managing money successfully is being able to differentiate between Needs and
Wants. Needs are a must have whereas Wants are good to have. Wants can be postponed and
acquired later. When we learn to identify our Wants and inculcate the habit of postponing those
wants, we should be able to achieve most of our financial goals.

Prioritisation Urgent Not Urgent

1. Urgent and Important
Important
Action: Need to do now
1. Urgent and Important
Not Important
Action: Do it if cash flow allows
2. Important but Not Important
Action: Plan to do it later
1. Urgent and Important
Action: Ignore

Class Activity:
Mr. and Mrs. Bhat have following family demands to meet: Discuss the demand and prioritize
them on the basis of importance and urgency and recommend necessary action.
1. Purchase a shawl as it is winter for Mr.Bhat’s mother as a present on her birthday
2. Elder son Sahil is demanding a Cycle to commute
3. Younger son Rohan is demanding a latest Video game
4. Gift for the marriage of a common friend and Mr.Bhat is planning to buy a gold gift
5. The couple also wants their house to be decorated by an interior decorator

Demand Urgent Important Action

Shawl for mother Yes Yes Buy
Sahil's Cycle No Yes Plan for later
Rohan's Videogame No No Don’t buy
Marriage Gift Yes No Buy a less expensive gift which cash flow permits
House decoration No No Ignore
Income and Expenditure

What you earn and how much you spend determine how much money you have on hand after
meeting your needs (and some wants). This balance is an important indicator of your financial
position.
Income: Money earned from various sources like salary, business profits etc
Expenditure: Money spent on various items which includes essential and non-essential items.
Savings are the surplus of income over expenditure.
A healthy positive balance every month indicates a trend towards a good financial position and
a zero or negative balance most of the months corresponds to a weak financial trend.

Assets and Liabilities

The amount of assets (items of value you hold) is a precise indicator of your current and future
financial position. Assets tend to add to your income.
Ex: investments in gold, silver, deposits, stocks, mutual funds, art/antique, land etc.
Items that you own and have economic value are your assets and items which you owe to others
or have borrowed from others are your liabilities. For example, if you save and then invest in
a fixed deposit, it is your asset. On the other hand, if you borrow funds/take a loan from a bank
or any individual, it is your liability.
More assets and less liabilities help you strenghten your financial position.

Class Activity:
The information furnished below is of Mr.Pawar, calculate his net-worth by identifying the
following into assets or liabilities.

Item Amount Asset Liability

Savings bank account balance 55,000
Shares of listed companies 1,00,000
Car 7,25,000
House 35,00,000
Furniture 15,000
Air Conditioner 12,000
Microwave 10,500
Laptop 22,000
Gold Jewellery 80,000
Life Insurance Premium 15,000
Car Loan Outstanding 3,50,000
Home Loan Outstanding 13,00,000
Money lend to a Friend 30,000
Payment to be made to Maid 2000
Total Assets
Total Liabilities

Net Worth = Total Assets – Total Liabilities

Net Worth of Mr. Pawar is Rs. ___________

Budgeting and Financial Goals

You may now appreciate that your financial position is determined not from your income alone.
It constituted from income, expenses, assets and liabilities. How you manage these four
together will decide your financial health.

Budgeting is the art of balancing income and expenses to ensure that expenses are always less
than income. Making and following plan to put your money to optimum use. A plan that would
enable you to reduce liabilities, to spend wisely, to save and to invest and add to your income.
1. Stabilizing
a. Emergency Fund
b. Insurance
2. Saving
a. Savings Account (Start Now! Save First! Save Regularly!)
3. Spending
a. Envelop Budgeting (Spend on Needs First! Wants Later! Waste Never!)
4. Investing

Record Keeping: Timely recording of expenses and meticulous keeping of important

documents and records; bills, receipts, tax documents, statement of savings, investment and
credit cards, warranty/guarantee cards.

Saving: Building reserves to be able to face financial emergencies and invest and build assets.

Financial Goals

Have you ever wondered why many of our goals are delayed or worse not fulfilled? Well,
simply because we are wishful about our goals and we have no definite PLAN to achieve these
cherished goals.

Lifegoals could be higher education, vacationing in island, planning for retirement, saving for
se0marriage, buying a house, children’s education etc. The starting point to achieve any goal
is to have a Plan for it. Our lifegoals also be SMART goals.

SMART Incorrect Approach Right Approach

I need to pay my college fees in a year’s I will have to save Rs.50,000 to pay my
Specific
time college fees
In the next six months, I will return Rs.3000
Measurable I will pay off my debts to my friends to my two friends for lending me their
money
I will save Rs.2000 each month by cutting
Achievable I will save money
down on eating out and partying
If I save regularly, need not borrow more
money, I can pay off my debts by next year
Realistic If I save money I will be rich
and will have enough savings till I begin to
earn
I will save Rs.3000 every month to buy a
Time-Bound I will buy a scooter sometime in the future
scooter in next 2 years
Right time to Start Financial Planning
The moment you get to know about financial planning or realize that you need to have a plan,
is the right moment to start financial planning. The earlier this moment arrives, the better it is.

Allocation guidelines:

Spending -------------------- 50% of income

Saving towards goals -------------------- 20% of income
Stabilising finances -------------------- 20% of income
Investing -------------------- 10% of income

Banking and transactions

Life’s needs keep changing, with growing age and changing life stage. It is best to be aware
and prepared for these changes – in your needs and your income. Saving is one such way that
allows you to face such changes with little financial impact. Savings mean the funds that you
keep aside in safe custody (like banks).

The Saving Mantra: Start Now! Save First! Save Regularly!

If you do not have a savings account, open one NOW!

Visit a branch of private bank, state bank, cooperative bank or post office, whatever is
closer and convenient.

What you may need for opening a savings account?

1. Fill up an account opening form and attach a passport size photograph
2. Provide proof of identification/residence
3. A minimum deposit amount (student’s zero balance account)

What you may get to operate your savings account with?

1. An account number --- that is unique to you.
2. A cheque book (withdrawal slips) on request
3. An ATM/Debit card with a PIN (Personal Identification Number – password)
4. A User ID and password for internet banking

How do I transact or deposit in Bank?

Saving Account, Current Account, Recurring Deposit, Fixed Deposit.

Saving Account:
1. It can be opened by one person or jointly
2. Savings account can be opened by a minor (under 18) through his/her natural or legally
appointed guardian. Minors above the age of 10 years are allowed to open and operate
savings bank accounts independently, if they desire.
3. Nominal interest rate is paid on an account balance
4. Some accounts may require maintenance of minimum balance
5. Compared to other deposits, this will fetch low interest rate but highly liquid
6. Suitable to inculcate the habit of saving
Current Account:
1. Meant for business entities such as proprietorships, partnership firms, public and
private companies, trusts, association of persons etc
2. No restrictions on number and amount of deposits and withdrawals as long as the
account holder has funds in the bank
3. No interest is paid on the account balance

Recurring Deposit:
1. It is popularly known as RD
2. A certain fixed amount is accepted every month for a specified period and total amount
is repaid with interest at the end of the period.
3. Deposits can be opened for periods ranging from 6 months to 10 years
4. RDs are suitable for those who do not have a large amount of savings, but are ready to
save small amount every month
5. No withdrawals are allowed. However, the bank may allow the account to be closed
before the maturity period. Any default in payment within the month attracts a small
penalty.
6. Earns higher interest rate than saving bank account.

Fixed Deposit:
1. FDs are opened for a particular period, ranging from 7 days to 10 years
2. The interest rate depends on the amount and term of the deposit
3. Interest is usually paid as a lump-sum at the end of the term. However, there are also
options to receive interest at periodic intervals
4. Deposits can be withdrawn prematurely provided the account holder has opted for it.

Home Work:
Identify the rate of interest offered by any one public sector and one private sector bank.
Understand the changing rate of interest w.r.t type of account, tenure and amount.

Rate of Interest for General Public Rate of Interest for Senior Citizen
Saving Account
Recurring Deposit
Fixed Deposit

Demand Draft

Demand Draft or DD is a negotiable instrument issued by bank i.e. the instrument guarantees
a certain amount of payment mentioning the name of the payee. It cannot be transferred to
another person in any situation.

It can be compared to cheques but these hard to counterfeit and more secure. The drawer has
to pay before issuing a demand draft to the bank whereas cheque can be issued without ensuring
the sufficient funds in your bank account, therefore cheques can bounce but drafts assure a safe
and on-time payment.

Digital Banking

Living in this era, where all of us are knowingly or unknowingly making transactions almost
all the time, money transfer has been one of the most common and important things to do.
Using digital banking i.e electronic banking services for the execution of financial and banking
transactions through electronic devices are growing rapidly.
With the facilitation of services like UPI, online banking (transactions over website), mobile
banking (transactions over mobile phones), the old-school methods of physically transferring
money from one person’s bank account to the other’s through cheques, cash deposits at banks
etc have been completely eliminated.

Let’s look at some of the most common ways to transfer money.

IMPS: Immediate Payment Service

The transfer of fund is completed immediately. You can transfer money 24/7. It can be
done using internet banking or mobile banking. Depending on the bank, the transaction
charges may vary.

NEFT: National Electronic Funds Transfer

You can transfer funds from one bank branch to another bank branch that is
participating under the scheme. NEFT transactions take longer time compared to IMPS.

RTGS: Real Time Gross Settlement Method

It is mostly used for transactions of high value that requires immediate clearance.

Category NEFT RTGS IMPS

Min Transfer Value Rs.1 Rs.2lac Rs.1
Depends on customer
Max Transfer Value No Upper limit Rs.2lakh
segment
One-on-one One-on-one
Type of Settlement Batches
settlement settlement
Speed of Settlement 2 hours Immediately Immediately
Service Availability 24/7 24/7 24/7
Online/Offline Both Both Online

Internet Banking:
For the security purpose, Internet or Mobile banking require Login Password and OTP. Further,
for fund transfer internet banking requires Transaction Password and OTP.

How do I use it?

 Login to your internet banking/mobile banking
 Visit and click on ‘Fund Transfer’
 From the drop down menu, select NEFT/RTGS/IMPS
 Note that you need to Add Beneficiary to the list of beneficiaries by providing
beneficiary’s information like name, bank account number, IFSC*
 Click on confirm/add and authorize with OTP sent to your registered mobile number
 It will take 4 hours hours to add beneficiary
 Once the beneficiary is added to your account, you need to select the beneficiary details
from your list of beneficiaries.
 Enter the amount to be transferred, confirm and approve with transaction password and
OTP

Note: *IFSC (Indian Financial System Code) is 11-digit code written in an alphanumeric
format that helps in transferring funds online. The code can quickly identify where the funds
are coming from and where they are going. It helps in identifying the bank branches where
people have their bank accounts that participate in various online money transfer options like
NEFT, RTGS, IMPS, UPI.

NPCI: National Payments Corporation of India, an umbrella organization for operating

retail payments and settlement systems in India, an initiative of Reserve Bank of India.
 The company is focused on bringing innovations in the retail payment systems through
the use of technology like
o RuPay (indigenously developed Payment system)
o AePS (Aadhar Enabled Payment System)
o IMPS (real time payment system)
o UPI (revolutionary product in payment system) etc.

UPI: Unified Payment Interface

It is an immediate real-time payment system that helps in instantly transferring the funds
between two bank accounts through a mobile platform.
Ex: GPay, PhonePe, Paytm etc

Debit and Credit Cards

Debit cards are issued by banks and are linked to bank account. Credit cards are generally
issued by banks and a couple of non-banks, but can also be issued by other approved entities.

The debit and credit cards are used to withdraw cash from an ATM, purchase of goods and
services at point of sale terminate or e-commerce (online purchase). While they are used
domestically, the international usage is also allowed if requested by the card holder. They can
be used for domestic funds transfer from one person to another subject to prescribed limits and
conditions.

Time Value of Money

Time value of money shows the value of money that you have now is not the same as it will be
in the future. Time is an influential factor when it comes to investments as well. The return on
your investment depends upon the time you enter and exit.

As time passes, you will realise that if 10 years back you could afford to purchase a full lunch
for a particular amount of money, then today you could afford to get only a portion of the lunch
in that amount of money. This means that the value of a five hundred rupee note would be
higher today than after five years.

Although the note is the same, you can do much more with the money if you have it now
because over a period, you can make the money grow by earning interest on the money. By
receiving Rs.500/- today, you can increase the future amount of your money by investing the
money and gaining interest or capital appreciation over a period of time.

Inflation and Investment

Inflation refers to gradual rise in prices of goods and services. Over a period of time, as the
cost of goods and services increases, the ability of a unit of money, say one rupee, to buy goods
and services keeps declining.
The purchasing power of money i.e. ability to buy anything, decreases. It is important take note
of inflation on your investment during financial planning. Inflation can reduce the value of
your investments.

How can you avoid adverse effect of Inflation?

Determine the real rate of return i.e. return you can expect after factoring the effects of inflation.
To reduce the risk of decrease in the value of money, you should invest the money available
to you today at a rate equal to or higher than the rate of inflation.

Simple Interest Rate

With simple interest rate, you can earn interest only on the principal amount that you initially
invested. It is quick and easy method to calculate interest on original principal amount with
same rate of interest rate for every time cycle.

Simple Interest = P x i x n
where P = Principal amount
n = Time period i.e. number of years
i = Rate of interest (% per annum)

Ms. Tisha has deposited Rs.1000 in the bank and the rate of interest is 5%. What would be the
simple interest be if the amount is deposited for one year? Similarly calculate the simple interest
if the amount is deposited for 2 years, 3 years and 10 years.

Year Principal Amount Rate of Interest Return Earned Maturity Value

1 1000 5% i.e. 0.05 (1000x0.05x1) = 50 1000+50 = 1050
2 1000 0.05 (1000x0.05x2) = 100 1000+100 = 1100
3 1000 0.05 (1000x0.05x3) = 150 1000+150 =1150
10 1000 0.05 (1000x0.05x10) = 500 1000+500 = 1500

Compound Interest Rate

Your investments can give you better rewards when savings/investments are compounded over
longer horizons. Compounding, in short, is earning interest on previously earned interest.

Ms. Isha has deposited Rs.1000 in the bank and the rate of interest is 5%. What would be the
compound interest be if the amount is deposited for one year? Similarly calculate the compound
interest if the amount is deposited for 2 years and 3 years.

Year Principal Amount Rate of Interest Return Earned Maturity Value

1 1000 5% i.e. 0.05 (1000x0.05x1) = 50 1000+50 = 1050
2 1050 0.05 (1050x0.05x1) = 52.5 1050+52.5 = 1102.5
3 1102.5 0.05 (1102.5x0.05x1) = 55.13 1102.5+55.13 =1157.6

Note:
 Principal + return from the first year collectively becomes the principal for the second
year
 Principal + return from the second year collectively becomes the principal for the third
year and so on.
The above can also be shown as below

1st year = 1000 + (1000*0.05)

= 1000 + 50
= 1050

2nd year = 1050 + (1050 * 0.05)

= 1050 + 52.5
= 1102.5

3rd year = 1102.5 + (1102.5*0.05)

= 1102.5 + 55.10
= 1157.60

If the deposit is made for longer period, the compound interest rate can directly be calculated
using the following formula:

Compound Interest = P (1 + i)n

where P = Principal amount
i = Interest rate
n = Number of years

Compound Interest = P (1 + i)n

=1000 (1+0.05) 3
= 1000 (1.1576)
= 1157 .60

Ms. Misha has deposited Rs.1000 in the bank and the rate of interest is 10%. If the interest rate
is compounded for five years, what would be the value of her deposit at the end of fifth year?

Solution:
Future Value of Rs.1000 for 5 years at 10%
Fn = 1000 (1+0.10)5
Fn = 1000 (1.1611)
Fn = Rs.1611

The table below shows you how a single investment of Rs.500 will grow at various interest
rate.

Interest Rate
Years
5% 10% 15% 20%
1 525 550 575 600
5 638 805 1006 1244
10 814 1297 2023 3096
15 1039 2089 4069 7704

Maturity Value Calculator

https://sbi.co.in/web/student-platform/maturity-value-calculator
Major Rules for Financial Discipline

1. Rule of 72 (Double Your Money)

2. Rule of 70 (Inflation Effect)
3. Rule of 50-30-20 (Allocation of Income to Expense)
4. Rule of 10-5-3 (Return Expectation)
5. Rule of 100 minus your age (Asset Allocation)
6. 3X Emergency Rule

The Magic Rule of 72 (Double Your Money)

The Rule of 72 is a quick formula used to estimate the number of years required to double the
invested money at a given annual rate of return.
72
T= 𝑅
where; T = Number of years/Time Period
R = Rate of interest

State Bank of India offered an interest rate of 8% on deposits. Mr.Patil has deposited Rs.3000
and wants to know when his money would double.
72
T= 8
T = 9 years

Proof:
Future Value of Rs.3000 for 9 years at 8%
= 3000 (1+0.08)9
= 3000 (1.999)
= Rs.5997 ~ Rs.6000

Mr.Patil’s deposit of Rs.3000 doubles to Rs.6000 in 9 years if the interest rate is 8%

Interest rate is the magical key:

If the interest rate is higher, the money grows to double in a short period. If the interest rate is
lower, it will take longer time for the money to double.

72
Rate of Interest Formula T = Years required to double your money
𝑅
72
10% T = 10 7.2 years
72
12% T = 12 6 years
72
20% T = 20 3.6 years

Alternatively, Rule of 72 can compute the annual rate of compound return from an investment
given number of years it will take to double the investment.
72
Years to Invest Formula R = Interest rate required to double your money
𝑇
72
6 R= 12%
6
72
9 R= 8%
9
72
4 R= 18%
4
Rule of 70 (Inflation Effect)
Divide 70 by current inflation rate to know how fast the value of your money/investment will
get reduced to half its present value.
70
Inflation rate of 7% will reduce the value of your money to half in 10 years.
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒

Rule of 50-30-20 (Budgeting your Income)

Allocation of your income to expenses: The in-hand Income (post-tax income) should be
divided and allocated in the following manner:
50% = Needs (Groceries, Rent, Paying bills, EMI etc)
30% = Wants (Entertainment, Seasonal shopping, Vacation etc)
20% = Savings and Investment (Equity, MFs, Debt, FD etc)

The minimum savings allocation must be 20%, you can also save more!

Rule of 10-5-3 (Return Expectation)

This rule tells you how different asset classes gives you different kind of returns. One should
have reasonable returns expectations from his investment.

10% Expected Rate of return from Long term Equity instruments (Shares of the companies)
5% Expected Rate of return from Debt instruments (Bonds, debentures, promissory notes etc)
3% Expected Rate of return from Saving Account

Equity may give you higher return but it is riskier as compared to other options, while debt
instruments will be comparatively safer with moderate returns. Savings account gives you
liquidity to meet immediate needs.

Rule of 100 minus your age (Asset Allocation)

You can subtract your age from 100 to find out, how much of your portfolio should be allocated
in equity stocks.
Suppose your age is 25yrs, then 100 – 25 = 75
So, 75% of your investment should be in Equity and 25% of investment in Debt securities i.e.
75:25 is your Equity Debt Ratio.

Suppose your age is 40yrs, then 100 – 40 = 60

So, 60% of your investment should be in Equity and 40% of investment in Debt Securities

Note:
1. Investment in Equity securities is highly risky.
2. Investment in Debt securities is less risky and returns are guaranteed.
3. You can take more risk at younger age (you have a lifetime to make it up) but as you
grow old, your investment should be in a safer avenues (guaranteed return).
The older you get, the less risk you can tolerate. Simply, one will not have the time to
lose and replenish the capital base.

3X Emergency Rule
Always put at least 3 times of your monthly income in Emergency fund to be prepared for
unforeseen expenses due to loss of employment, medical emergency etc. It is advisable to own
an emergency fund at least three times your current monthly income which is bare minimum.
Emergency fund can be in Savings account or any other easily liquidifiable asset.
Planning and Debt Management:
Borrowing is an act of taking money and paying it back over a period. In financial goals, in
case the savings are inadequate, one resorts to borrowing. Borrowing provides the flexibility
of repaying in small installments over a period of time.

Credit, Loans and Debt

Loan: A loan is an arrangement with a bank or other lending agency, where, you get a lumpsum
of money from the lending agency on a promise to pay it back with interest rate within a given
time.
Debt: By taking a loan, you create a debt. Debt is that which is owed. But many times, in
personal finance, the words ‘consumer loans’ and ‘debt’ are used interchangeably.
Credit: It is a lending agency’s belief or confidence in your repayment abilities and intent.
Based on this, a lending agency—be it a bank or any other, will decide whether to sanction you
a loan and how much.

Debt management is a way to get your debt under control through financial planning and
budgeting. The goal of a debt management plan is to use strategies to help you lower your
current debt and move toward eliminating it.

Positive Debt Cycle Vicious Debt Cycle

Borrow
Unplanned
Future
Borrowing
Income

See Better Increase in Dip in Wealth

Future Build Assets Future for
Income Outflow Repayment

Save Money Earn Return Difficulty in

Loss of Assets
and Invest on Assets Repayment

Timely Repay Build-up of

Interest & Interest
Debt (Debt)

Things to consider before taking loans

 Interest Rate: Interest is the fee paid to the lender on borrowed money. For loans, the
interest rate will tell you how much more than the original loan amount you will have
to pay back. In general, interest rates are fixed for a length of time.
 Loan tenure/Repayment pattern and Instalment amount: This will help you plan your
finances better and also to check whether you are borrowing as per your expected future
income or are going beyond it.
o The number of months/years you will take to repay the loan in full.
o What amount you would be required to pay at a time, and
o Whether you need to pay it on a monthly/quarterly/half-yearly/yearly basis.
  Other charges and Penalty: Banks and other lending institutions generally charge a
nominal one-time processing fee and a service tax.
o Foreclosure or pre-closure charges: It is the extra amount that lenders charge
you for closing the loan before the tenure is over. Many lenders have a lock-in
period, during which you can’t foreclose the loan.

Note: You may wish to resort to foreclosure to avail loans at lower interest rate
from some other bank. Foreclosure charges are generally applicable on your
outstanding loan amount and may be around 2-3%.

Types of Loans:
1. Personal Loan: It can be used for any purpose which is usually taken for marriage
expenses, vacation expenditure and emergencies like medical expenses etc. No
collateral security is required for this type of loan. The interest rate is higher on such
loans
2. Auto/Vehicle Loan: It is provided for the purpose of buying vehicles. The vehicle is
hypothecated to the bank and in case of default of the loan, the bank may take
possession of the vehicle.
Note: Hypothecation is a practice where you pledge an asset to a bank when
applying for a loan. The bank keeps the vehicle as a collateral or security until
you pay back the loan.
3. Home Loan: Housing loans are taken by people for a variety of house-related purposes
such as construction of a house, house renovation, extension of house, buying of
property or land etc.
4. Consumer Durable Loans: These are the loans which may be availed for purchasing
of consumer durables like television, refrigerator, washing machine, dishwasher etc.
5. Education Loan: Banks offer education loans to students who want to pursue higher
studies. Once the student completes his/her courses and starts earning, he/she can repay
the loan. Students should have an admission offer from an institution before applying
for education loan.
6. Agricultural Loan: To cater to the needs of farmers, banks offer loans to farmers to
buy seeds, insecticides, tractors and other equipment needed for agriculture.

List of documents required for obtaining Loans:

 Proof of Identity: Passport/Aadhar card/Driving license/Voters ID/PAN card (ANY
ONE).
 Proof of Residence: Aadhar Card/Leave and License Agreement/Utility Bill (not more
than 3 months old)/Passport (ANY ONE).
 Latest 3 months bank statement (where salary/income is credited)
 Salary slips for last 3 months
 2 passport size photographs
 Collateral proofs

Note: Collateral is a property or other asset that a borrower offers as a security to the lender in
exchange of availing the loan. If the borrower stops making the promised loan repayments, the
lender can seize the assets financed and the collateral to cover its losses.
Cs in Credit:
The banks generally follow a conservative approach for processing the loan request of the
borrowers and use the following five elements to understand the risk of potential default and
gauge the creditworthiness of borrowers.
 Capacity: The prospective lender will want to know exactly how you intend to and what
is your capacity to repay the loan. Lenders compare your income against recurring debts
and assess the borrower’s debt-to-income (DTI) ratio. Many lenders prefer an
applicant’s DTI to be around 35% or less before approving an application for new
financing.
 Character: Lender will form a subjective opinion as to whether or not you are
sufficiently trustworthy to repay the loan or generate a return on funds invested in your
company. Banks check the credit history and reputation for repaying debts. This
information appears on credit report/credit score.
 Capital: Capital is the money you personally have invested in the business and is an
indication of how much you have at risk, should the business fail. Borrowers who can
place a down payment on a home, for example, typically find it easier to receive a loan.
Down payment amount can also affect the rates and terms of a borrower’s loan. Larger
down payments may result in better interest rates and terms.
 Collateral: Banks insist on taking a security in addition to that is created out of loan
proceeds. Collateral is any personal asset that the borrower pledges in order to support
the loan. The collateral can be your house property, land, equipment, inventory, real
estate, accounts receivable, or any other item holding monetary value in the market.
 Conditions: Conditions can refer to how a borrower plans to use the money. Banks
analyse the intended purpose of availing the loan like will the money be used for
purchasing of house/vehicle or in case of business is it for working capital, additional
equipment or inventory etc.

Steps to Avoid Excess Debt

With today’s heightened cost of living, debts become a usual thing. A number of people apply
for personal loans, car loans, mortgage loans, and a whole lot of others. There seems to be a
loan for everything. Often, financial troubles begin as a result of too large debt.
 Set debt limits: Decide how much you can afford to be in debt. Then, make sure that
your total debt is below this amount.
 Shop carefully for debts: Always understand how much you will pay for your loan in
interest and look for the lowest interest rates and the most affordable debt you can find.
 Don’t give into temptation Companies may start sending you credit card offers and
your lenders may offer you additional credit products. Only take out a loan or credit
service when you really need to.
 Automatically have money go towards your bills: This can be a great way to ensure
that your bills get paid promptly.

Rule of 40% EMI

Never go beyond 40% of your income into EMIs.
By following this simple rule, you will ensure your liabilities don’t exceed your income and
that you are still comfortable in your position to repay the loans or debts along with the interest.
If you earn Rs.50,000 per month, your EMI should not be more than Rs.20,000pm.

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