[ecis2016.org] After Axis Bank introduced its ‘Shubh Aarambh Scheme’ of home loans, where the borrower would get credit of 12 EMIs, ICICI Bank has come out with a 1% cash-back EMI scheme. We compare both the schemes, to ascertain which is better
Salient features of both schemes
Axis Bank’s ‘Shubh Aarambh Scheme’, which offers credit of 12 EMIs, is available only on home loans to residents, whereas, ICICI Bank’s cash-back scheme is available to residents, as well as non-residents and that too, for home loans, as well as loan against property.
Under the ‘Shubh Aarambh Scheme’, the minimum tenure of the loan that a home buyer has to opt for, is 20 years. However, there is no such stipulation, regarding the minimum loan tenure, in the one per cent cash-back scheme offered by ICICI. The Axis Bank schemes offers credit of four EMIs at the end of four, eight and 12 years, respectively, whereas, the ICICI scheme offers cash-back at one per cent of the EMI for the entire tenure of the loan, where the first credit of cash-back of 36 per cent for the first 36 months, will happen at the end of the payment of 36 EMIs.
It is necessary for you to pay your EMI through your ICICI Bank account, to be eligible under this scheme. This is a type of cross-selling by ICICI Bank, aimed at increasing its current account and savings bank account deposits (called CASA, in banking terminology).
The benefit of EMIs credits under Axis Bank’s scheme, shall be available till the end of the 12th year of the loan tenure and not beyond that, whereas, the cash-back under ICICI Bank’s scheme, shall be available for the full tenure. So, the Shubh Aarambh Scheme of Axis Bank looks better, as a majority of home loan borrowers prepay their home loan, before completion of the tenure. Moreover, the benefits under the Axis Bank scheme accrue earlier.
However, the Shubh Aarambh scheme has stringent qualifying norms. You need have to have good conduct with the bank, to be eligible for the EMI waivers. In case any of your home loan instalments have remained outstanding for more than 90 days, you will be disqualified from the scheme. You will also be disqualified, if more than three of your EMIs have remained outstanding for less than 90 days but were overdue for more than 30 days. So, in case you were unable to pay one EMI for 95 days, you immediately get disqualified from this scheme. No such conditions are prescribed, for availing of the cash-back under ICICI’s loan scheme, as long as you have paid all your outstanding EMIs.
[ecis2016.org] Axis Bank’s EMI waiver scheme: An analysis
There are no restrictions on partial prepayment of the loan under both the schemes. For the Axis Bank scheme, as the first credit happens after four years, your loan should have remained live for the first four years. In case of the ICICI Bank scheme, the first credit of cash-back will happen after 36 months. So, your loan should have remained live for a minimum of three years.
For prepayments made later on, the benefits would depend on the amount of the EMI paid or running, at the time of qualifying for the scheme.
Which scheme is better?
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Since the credit of EMIs, as well as cash-back, will happen in future at different dates, it is logical that the schemes are compared on the basis of the present value of the benefits accruing in future, under both schemes. In order to compute the net present value of the scheme, I have discounted the value of cash-backs over the next 30 years, for a home loan of Rs 30 lakhs at 8.35 per cent, on a yearly rests basis. The present value of such cash-back comes to Rs 29,500, approximating towards one per cent of the principal value of the loan. Likewise, the present value of the credit of 12 EMIs, under Axis Bank’s Shubh Aarambh scheme, have also been discounted at the applicable home loan rate of 8.35 per cent for the four EMIs accruing at the end of four, eight and 12 years, respectively. The present value of the 12 EMIs available under the Axis home scheme, discounted at the same rate of 8.35 per cent, comes to Rs 1.50 lakhs.
Since no benefit would accrue under the Axis Bank scheme after 12 years and in order to bring parity between both schemes, I have also computed the present value of cash-back for an ICICI loan for 12 years, which comes to Rs 19,820 against the benefit of Rs 1.50 lakhs in the case of the Shubh Aarambh scheme. So, looking at the wide difference in the present value of the benefits available under both the schemes, Axis Bank’s Shubh Aarambh scores over ICICI Bank’s cash-back scheme. However, in case you want to avail of a loan against property or are a non-resident, you should take the loan from ICICI Bank, as the EMI refund under Axis Bank’s scheme is available on home loans to residents only.
The primary purpose of ICICI Bank’s scheme, is to entice borrowers to take loans from it and cross-sell its savings and current accounts. However, the purpose of Axis Bank’s scheme, is to promote its home loans and to ensure timely servicing of it by the borrower.
(The author is a taxation and home finance expert, with 30 years’ experience)
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