4 ways to raise money to tide over temporary cashflow crisis

These 4 ways use already existing financial assets to raise cash without liquidating them

Kumar Shankar Roy Apr 13, 2020

Instant cashThe Covid-19 crisis is not just a health epidemic. It has also started hitting everyone financially. Salaries are being cut in many companies. The unemployment and job loss will also be huge as the crisis deepens. The  incomes are becoming uncertain. Failing EMI payments is a dark cloud looming on the horizon. Though this may derail the finance of many forever, this is also likely to be huge a cashflow crisis for not just companies but also for individuals. You must use your available resources to stay afloat. Being challenged in life is inevitable, but being defeated is optional. We examined what are the potential routes to raise cash in case your regular income gets thwarted.

RupeeIQ discusses 4 ways to raise money to tide over this temporary cashflow crisis. They use already existing financial assets that have a hidden value.

1. EPF withdrawal citing outbreak of pandemic COVID-19

Though Employees’ Provident Fund (EPF) is meant for building a retirement corpus, it is okay to withdraw money during emergencies. The EPFO has allowed EPF subscribers to withdraw upto 75% of EPF balance due to economic difficulties citing outbreak of pandemic Covid-19. The good news is you can file claims online. To file online claim, your Universal Account Number (UAN) should be activated, verified Aadhaar should be linked with UAN, and bank account with IFSC code should be seeded with UAN. Through this facility, you can withdraw upto 75% of PF balance (Employee share and Employer Share) or three months PF wages or the claimed amount by the member whichever is the least.

To file a claim, login to Member Interface of Unified Portal (https://unifiedportal-mem.epfindia.gov.in/memberinterface) with UAN and password. Go to Online Services section where you will find Claim (Form-31,19,10C & 10D). Enter Bank Account Number (as seeded against UAN) and verify. Last 4 digits are usually asked for bank account number for verification. Click on “Proceed For Online Claim”. Select PF Advance (Form 31) from the drop down menu. Select purpose as “Outbreak of pandemic (COVID-19)” from the drop down. Enter the amount required. Upload scanned copy of cheque (JPEG/PNG format) and enter your address. Click on “Get Aadhaar OTP”, enter the OTP received on Aadhaar linked mobile to submit claim.

The EPFO has promised to settle eligible claims and send the money to your bank account on a priority basis.

Also read: Why opting for 3-month loan moratorium is injurious to your financial health

This withdrawal route involves no physical interaction of any sort, which means you can use this even during the ongoing lockdown situation.

2. Loans against insurance policies

Life insurance policies are meant to provide insurance to subscribers against adverse events in one’s life. However, some life insurance policies can be used to get money to meet your urgent expenses.

In case of eligible LIC policies, you can get a loan of up to 90% of the surrender value of your policy as calculated at the time of availing a loan. Many NBFCs like Bajaj Finserv also provide funds for your financial emergencies if you pledge your insurance policy as a collateral. This ensures that you keep your insurance intact for emergencies, while also raising funds for immediate use. Loans against insurance policies are usually given against endowment policies, where premium has been paid for a minimum of three years. Policies like whole life policy, money-back policy, may also be used to get a loan.

Sometimes loan can also be taken against Unit-Linked Insurance Plan (ULIP) depending on your insurer. However, ULIPs used as loan collateral may fetch only 40% as loan money. Your life insurance policy acquires a surrender value if you have been paying your premiums on time for three years of buying the policy. The time period for acquiring a surrender value may differ from insurer to insurer. If your policy doesn’t have a surrender value, you cannot use the policy for loan taking.

The interest rate charged on loan against insurance policy depends on the interest rate applicable at the time of taking the policy. The rate will be cheaper than a personal loan since you are using insurance policy as a security. The borrower has to pay interest for a minimum of six months even if the loan has been cleared within the 6-month time frame. If the policyholder dies during the tenure of the policy loan, the insurance company or the lender will deduct the interest and outstanding loan amount from the amount of claim settlement. If the interest is not paid for a set period, like 30 days, after the due date, the insurance company or the lender can foreclose the policy and settle the loan amount against the proceeds.

Do note that banks, NBFCs and insurers may take up to seven days time to disburse the loan against insurance policy.

3. Loan against MFs, stocks/shares

Market-linked investments like mutual funds and stocks can be used as a collateral to take loans. Given that equity investments have grown in India, it is likely that some households will have direct exposure to mutual funds and stocks/shares. By using MFs and shares as a security, you don’t have to redeem them prematurely. You still will be entitled to dividends/bonus, even though you have used them as collateral. Minimum loan amount is usually Rs 50,000.

Also read: Loan against securities offers credit on tap, and it’s cheap

In the case of loan against MFs, one avail loan against equity, hybrid and debt/FMP mutual funds by approaching any NBFC or bank. Some lenders also allow loans to be given against Exchange Traded Funds (ETF). Every lender has an approved list of schemes that can be used as collateral. You will need to pledge your mutual fund units as security for the debt. The loan will be given based on the market value of units in the folio and the tenure you choose. Interest rates are set by the financier and loan tenure. Loan against mutual funds are secured so the interest rate will be lower than that of an unsecured loan.

Many online portals sanction loans quickly if you hold units in the demat form. You cannot redeem the MF units pledged before you completely repay the loan. Equity-based mutual funds can fetch you close to 50% of the fund market value, while debt schemes can get you close to 80-85% of fund market value. Some lenders have a maximum and minimum cap on the loan amount. For instance, SBI offers maximum Rs 5 lakh loan for debt/FMP (Fixed Maturity Plan) while equity/hybrid MFs can fetch maximum Rs 20 lakh loan. If the borrower fails to repay the loan in the duration, the lender requests the mutual fund to redeem the units and send the cheque to the lender. Besides interest, do note you will be required to pay processing fees (usually a couple of thousand rupees or a percentage of loan), applicable taxes, review/renewal charges (yearly).

Loan against stocks/shares has been around for a longer time. Top banks like HDFC bank, ICICI Bank, StanChart, Kotak etc., NBFCs like Bajaj Finserv, Tata Capital, Fullerton etc., and brokers like HDFC Securities, Prabhudas Lilladher, ICICIdirect etc. offer these. Loans are given for upto 50% value of equity shares (held in demat form). Do, however, note that many lenders don’t allow the contribution of a single scrip to exceed a certain limit of the total portfolio value at any point of time during the tenure of the account. Loan against stocks works by way of pledging of shares. It is basically overdraft facility up to a value determined on the basis of the securities pledged by you. A current account facility will be opened and you can withdraw money as and when you require. Interest will be charged only on the amount withdrawn and for the time span utilised. Banks will usually give maximum loan of Rs 20 lakh. NBFCs, on the other hand, can give maximum loan amount of Rs 20 crore.

You can pledge your own stocks, or those of your blood relative (parents, spouse, children and siblings only) above 18 years of age. If you are pledging stocks that belong to anyone other than yourself, the security holder must be a signatory to the overdraft agreement as a co-applicant. Apart from interest and principal, you will be charged processing fees, annual maintenance charges, statutory fees etc. Interest rates are as per prevailing situation.

4. Loan against deposits, bonds, gold bonds and RBI bonds

Fixed deposits can be used to take loans. Small saving scheme offerings like NSC, KVP etc. can be used as collateral for loan. Sovereign gold bonds or SGBs, RBI bonds etc. are also eligible for loan taking. The exact nature of bonds that can be leveraged to get money depends on the lender’s internal policy. Minimum loan amount is usually Rs 25,000 and minimum loan tenure is six months.

Top PSU and private sector banks, as well as NBFCs, allow loans against bonds, deposits etc. The amount of loan can vary. Banks are known to give higher amounts of loans if the RDs, and FDs have originated from them. For instance, Axis Bank allows one to avail upto 85% value of Axis Bank FDs. Federal Bank allows you to avail loan up to 90% of the deposit amount. Citibank Bank allows limit of up to 90% of deposit value, subject to a minimum of Rs 1 lakh.

In case of bonds, lenders give loans against NABARD’s Bhavishya Nirman Bonds, Saving Bonds issued by RBI, tax-free bonds etc. If the bonds are transferable, tradeable, in demat form and cumulative in terms of interest earning, one can get upto 95% as loans. The repayment period is till due date of bond or maximum five years, whichever is earlier. Ideally, there will be no processing fees.

In case of loan against FDs, usually there is no penal interest or processing fee. In case overdraft facility is used of a lender like HDFC Bank, one pays interest only for the amount withdrawn; the applicable rate is only 2% above the fixed deposit rate for the period that the money is used.

Banks like SBI, Tamilnad Mercantile Bank etc. offer loans against sovereign gold bonds. Minimum loan amount per individual is Rs 20,000 to Rs 50,000 while maximum loan is Rs 20 lakh. The margin is 35% of market value of SGBs, which means you can get 65% of SGB value as debt, which can be taken either as overdraft or demand loan form. Interest servicing is monthly. Apart from interest and principal, you have to pay 0.5% of loan amount as processing fee.

So there are several ways to raise funds if you need them without really liquidating any of your investments or FDs. Tough times don’t last. This too shall pass.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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