CA Maneet Pal Pasricha
09810774806
With the growing fiscal opportunities available in mounting India, financial needs of people are staring up to leverage these opportunities. To satisfy financial needs people are in constant search of easy money. To satisfy peoples appetite banks come with various innovative credit/ loan schemes. One of the lately becoming popular schemes in the list is “Loan against future rent receivables” or in banking tongue it is commonly known as “Rent securitization or Rent discounting scheme”. Rent securitization concept has been developed considering the growth potential in the real estate in India.
Many public and private banks like Vijaya Bank, Syndicate Bank, Corporation Bank, HDFC, ICICI etc have started rent discounting schemes to fund property owner’s needs.
In this paper, I would be discussing the subject on following margins:
• Meaning
• Pre-requisite
• Benefits
• Financial feasibility
• Tax impact
• Summarizing the profit of case study
• Conclusion
Meaning
Today many banks have scheme of “Rent securitization” in there credit portfolio. But the question arises what is it and how it can help you. In simple prose it means providing credit/ loan against the rent which is yet to be received. To exemplify, if you are owner of commercial properties anywhere in Delhi/ NCR or any metro city and is receiving assured rent against the same, then on the basis of these assured future rent receivables banks can provide you the attractive loan deals. In such credit facilities rent received every month is used as EMI towards the loan sanctioned. So virtually there is no cash outflow against interest or the principle amount of the loan as the same is adjusted with rent receivables.
One of the perfect examples for rent securitization is opening of banks next to your resident. You might have never studied the economics behinds opening of banks next to your locality, you might have never thought why would anyone shift his house and give the same on rent to banks/ MNC/ PSU. This concept paper will help you get all the answer of all these questions.
Pre-requisite
It becomes easier to avail such credit facilities if your premise is rented to any commercial bank, PSU or any multi national company, because in such cases it is easier for banks to vouch following pre-requisite:
• The space has been let out to organisation holding value in market
• Building has been constructed in accordance to the plan approved by the authorities concerned;
• There is a firm lease agreement between the borrower and the tenant;
• The borrower and the tenant both are credit worthy;
• Provide assignment of future receivable rents along with a guarantee from third party; and
• Rent agreement should not contain any clause which allows a downward revision in the rentals during the period covered by the loan banks.
In such cases, the loan amount should not go beyond the net future rent receivable of the property minus margin money (which may range from 20% to 25% of the future rent of the unexpired rent period).
Benefits
Such credit facility can be of great of help to meet any of your urgent requirements or it can even be a good fiscal decision to grow your wealth. Some of the key profits which can be derived from such credit schemes are:
1) Such facility provide an easy loan option to the borrower;
2) If such option is used wisely, it can help you create new asset;
3) It can help you meet the working capital requirement for your business;
4) These loan options are good substitute of personal loan. As your property is used by the bank as security against which you are given the loan, the interest rates on these loans tend to be lower than the rates for personal loans, helping you save more on total loan cost.
5) It can help you meet urgent financial requirements, like any medical emergency or children's education.
6) Banks generally have minimum and maximum loan limits which generally ranges between Rs.1 lac and Rs.1000 lacs respectively.
Financial viability of credit facility
If you have the rented commercial property and you are not completely depended on its rent for your bread and butter, then rent securitization scheme can be good financial decision for you to take. This scheme helps you to securitize assured future rent receivable and receive the lump sum amount from bank. This amount can be used for any viable investment proposal or to meet any other requirement. This credit facility is less costly than other facilities like personal loan. On an average, the rate of interest on personal loan ranges from 18-23% and the rate of interest on such loan facility is approximately around 15%, it straight away saves your pocket by 3-8%.
In addition to the above, such facility help you get the lump sum amount without any additional cash outflow from pocket. This is because your rental amount is adjusted to loan amount. In this way without shedding any additional amount you can enjoy the benefits of credit.
To illustrate lets assess the following facts:
Suppose Mr. A is living in South Delhi on approved commercial road and the same commercial property has been rented out to MNC for its operations at the rental value of Rs. 2, 00,000 per month for the period of 5 years (ignoring the clause of yearly increase in rent if any).
Now Mr. A can leverage these assured future rent receivables and can avail benefit of credit/ loan facility provided he is not dependent on rent amount for his bread and butter. For the contract of 5 years with MNC, Mr. A is to receive the rent amounting to Rs. 10,764,000/- (net of tax).
On this assured future rent receivable bank can provide him with loan which he can use for above mentioned benefits. Bank can provide him with the loan approximating Rs. 70 lacs to 80 lac (depending upon on bank’s credit/ loan policy).
Tax impact
Do the tax benefits of debt affect financing decisions? How much do they add value? Studies indicate that tax benefits are one of the factors that affect financing preference. There are certain tax benefits for the resident Indians based on the principal and interest component of a loan under the Income Tax Act, 1961.
The tax benefit of debt is the tax savings that result from deducting interest from taxable income. By deducting interest from his income, person can reduces its tax liability to great extent.
In the scheme of rent securitization, banks enter into three party agreements. Three parties to the agreement are namely tenant, landlord and bank. Future rent receivables are received directly by bank from tenant and such rent are adjusted against interest and principle amount of loan given to landlord.
In Income tax act profit and loss account is prepared on accrual basis. Accordingly in the scheme of rent securitization, rent to be received during the year is considered as Income, the interest component of EMI is considered expenses and the remaining component of EMI towards i.e. loan amount repayment is considered as capital outflow and is deducted from the loan amount in the books of landlord.
On the basis of above tax provisions, If Mr. A avails the above loan option of 70 lac then he can save his tax
cost by approximately 12-13 % by taking the benefit of deduction of interest cost.
Summarizing the profit of case study
Let us point out the broad benefits achieved by Mr. A in given case study:
1. By securitization of future rent receivables, he can get a loan of Rs. 70-80 lacs;
2. Interest cost of rent securitization is less than personal cost, thereby save the interest cost of approximately 3-8 %;
3. If used this money to buy another asset (say land) then he can have the benefits from capital appreciation of that asset; and
4. Can save his tax cost by 12-13%.
Conclusion
I would like to bring to a close that, it is one the few loan schemes in which it is a win-win state for both the parties (i.e. bankers and landlord). Any person having such commercial property and is not dependent on it for bread and butter then he should certainly analysis the rent securitization scheme and leverage it for his benefits.
