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Working capital management in a post-Covid world

Working capital is a crucial indicator of the financial health of any business. It refers to the amount of money required for the day-to-day operations of the company. 

Due to the prevalent economic uncertainty, companies have taken many steps to conserve finances and ensure liquidity. Other transactional issues have also made an impact on working capital use and availability. For instance, some companies have delayed payments to suppliers or are impacted by delayed customer payments. Unexpected expenses related to the pandemic disruptions have also made a dent in the working capital. 

As businesses move ahead, grappling with these issues, they must look objectively at the changing scenario and be ready to leverage working capital for their company effectively. 

What does Working capital management look like in a post-Covid world? 

Here are some pointers that will help businesses assess the changing dynamics of working capital:

Business cycle

Traditionally, the time difference between the revenues coming in and the expenses that need to be met pointed out the amount of working capital required. 

Today, there are disruptions in the supply chain. Constantly changing local regulations in response to containing the spread of the virus impact deliveries and supplies. This delay, in turn, impacts cash inflows and outflows. 

It may be a good idea to re-evaluate how working capital requirements have changed in response to the changing business cycles. Many companies find that electronic invoicing reduces their cash conversion cycle by streamlining processes. 

Post Covid – Tips on Effectively Managing Working Capital

Inventory management

Logistical issues regarding supply and availability, fluctuating customer demand, and plunging revenues make inventory management all the more challenging and crucial post-COVID. 

Several businesses might be holding on to stocks to meet the probable sudden surge in demand once the situation settles down. However, holding excessive inventory comes with cost implications of carrying supplies and insurance expenses. The result is that more working capital is blocked in inventory and deteriorates cash position. In comparison, understocking could lead to missed sale opportunities that can cost the businesses heavily in these times.

In these challenging times, companies must invest in robust forecasting processes that help optimize inventory management based on information available. It will require businesses to take heed of changing scenarios and closely monitor trends post-covid to maintain optimum stock levels. 

Additional Read: What should be your investment strategy in a post Covid world?

Extending support 

Small businesses are often more adversely affected in uncertain times. To ensure that the operations of supply chain partners are not disrupted, larger companies must make sure that outstanding payments are not impacted. The use of supply chain financing could help hone and streamline payables and receivables to a large extent while extending support to partners.

Reach out to Tata Capital trade finance experts to know more about structuring a supply chain finance solution that works for you and your ecosystem partners.

Forecasting 

It is essential to forecast your cash requirements in light of the new scenario. What are areas of your supply chain or revenue generation most impacted? What are the probable unplanned cash needs? What are the anticipated short-term and long-term fund requirements? 

Gain insight into the changing working capital requirements to optimize it efficiently. Remember, excess cash is unhelpful as it can help earn better returns when invested wisely, whereas a shortfall of working capital can impact a company’s operations. Neither holding excess working capital nor inadequate liquidity is good for business continuity and prosperity.

Seasonal Demand

Each business has specific needs. Does your business require higher working capital finance at particular times of the year? Does seasonality impact it? Has it been adversely affected by the pandemic, or has the pandemic created unprecedented demand, such as for pharma businesses or online learning services? 

Take time to gauge how the external circumstances impact present and near-future business requirements and plan ahead to ensure working capital availability. 

Additional line of credit

Sufficient working capital is vital for the business to grow and run smoothly. Depending on the market scenario and cash flow position, decide if a working capital loan would help. 

From Working Capital Demand Loans (WCDL) to Channel Financing, there are several opportunities to access working capital funds to supplement cash reserves. Our working capital experts can provide companies with proper guidance to choose the best form of financing to meet business requirements. 

Additional Read: Five ways working capital can work for your business

Conclusion

We live in a challenging new reality where businesses are grappling with uncertainty about the future and the burdens of the past. With disruptions in operations, demand fluctuations, and volatile markets, working capital needs have been impacted in many ways. Now is the time to get your cash flow in control as a strategic priority. 

Reach out to Tata Capital to know more about how we are supporting businesses through our innovative working capital offerings. 

Rethinking working capital strategies for FY21-22

It is an undisputed fact that cash is required to run day-to-day business affairs. Working capital is the amount of money a business possesses to meet operational expenditure. 

It is calculated as the excess of current assets over current liabilities. The working capital calculation is based on cash, assets that can be liquidated to cash like inventory or receivables, and expenses that will be due within a year.

There are several options for companies to access working capital finance based on their unique needs. However, keeping in mind the disruption caused by the pandemic, the strategies for accessing and employing working capital needs to evolve to meet current market conditions. 

Here are some ways you need to rethink your working capital strategies for FY21-22:

Clarity on employment of working capital

The underlying purpose behind any working capital management efforts is to ensure that the business functions smoothly without disruptions. In addition, apt management of working capital ensures optimum utilization of funds available. 

To have an effective strategy, entrepreneurs must begin by understanding the current working capital position and factors that might impede future availability or demand additional funds. 

For instance, if the business anticipates another lockdown and a dip in the revenue, it needs to conserve cash in the short term for exigencies. Early payments through supply chain financing could help improve liquidity by accessing cash trapped within receivables to mitigate the short-term cash flow requirement. In comparison, if the business expects a gross increase in demand for certain products, it could access Purchase Order financing to employ funds towards increased manufacturing or procurement expenses. 

Here, entrepreneurs need to be clear about how the current scenario will impact their working capital position. Having clarity about the most critical areas where working capital needs to be employed in the present context will help plan better.

Think collective and collaborative

Any working capital management strategy must work well for all stakeholders involved. Gone are the days of self-centered businesses. In times of crisis, companies need to support and help each other, and working capital management is no different.

Strategies that create a win-win for everyone in the supply chain work well in the long term. Moreover, they strengthen the supply chain and the business ecosystem. Ensure prompt payments to your suppliers and reasonable credit terms to your customers. If your working capital position is already challenging, tie up with financiers like Tata Capital to structure supply chain solutions that provide breathing room for all parties involved. 

Larger corporations can leverage the strength of their balance sheet and make cost-effective financing available to their suppliers. This access to funds also helps improve supplier’s financial health and enables them to offer better pricing to their customers. This financial year, make sure your financing strategies are collaborative and extend as much support as possible to your supply chain partners. 

Additional Read: Five ways working capital can work for your business

Working Capital Management Strategies for FY21-22

Leverage technology 

Technology has been a great enabler in democratizing access to finance. Evaluate how technology can be leveraged effectively to improve cash position and optimize working capital. 

Partner with digitally savvy financiers that can support ease in onboarding and transacting. Whether it is applying for a loan, accessing the range of loan options, onboarding, or the entire disbursal process and repayment, technology can make things simple and effective while saving time and money. 

The advantages of online financing easily spill over to increased efficiency, higher productivity, and speed in business dealings. Tata Capital’s innovative web and app-based digital platforms facilitate an intuitive and user-friendly customer experience. 

Additional Read: How digitization has transformed financial services

Know your options 

When it comes to working capital solutions, there is no one-size-fits-all policy. Explore the various working capital solutions available and choose the most suitable offering that fulfills your unique requirements. 

Conclusion

Working capital management is all about maintaining a balance between cash, trade receivables, trade payables, operational expenses, and inventory. Make sure to deep dive to know which part of your working capital management needs reinforcement and identify working capital financing accordingly. This planning might sound tedious but can help businesses operate efficiently. 

Get in touch with Tata Capital to know more about how you can bridge your working capital gap.

Revitalize your financial health by efficiently managing your working capital

Regardless of the company’s size, working capital is identified as an appropriate indicator to assess the company’s financial health and overall well-being.

Working capital of a business is a very straightforward calculation of subtracting Current Liabilities from Current Assets but has several implications. Current Assets include cash, cash equivalents, advances, and accounts receivables, whereas Current Liabilities include short-term debts, accounts payable, and obligations due in a year. Substantial working capital reserves are a reflection of operational and financial stability that demonstrates tremendous growth potential. 

Given the economic uncertainties resulting from the global outbreak of coronavirus, businesses are grappling with an acute financial crunch to keep their operations going. To survive to tell the tale, companies need to focus on optimizing their working capital to maintain adequate liquidity that meets short-term commitments. 

Here are the ways to manage working capital efficiently in 2021: 

Inventory Management

Effective Inventory management is an essential factor to manage the working capital efficiently. Bulk orders will pile up stocks, adding pressure to the overburdened cash reserves of the company. Additionally, excess inventory comes with inventory handling costs and insurance costs. 

On the other hand, the insufficient stock will lead to missed sales opportunities and impact revenue, further dampening cashflows and customer relations.

It’s essential to keep a tight check on the demand and sales and determine the re-order levels to avoid additional costs on physical storage, insurance, or wastage of perishable products. Periodic inventory checks help monitor the possibility of understocking or overstocking and to take preventive measures.

You can also reduce the inventory cost by utilizing the Just-in-Time technique, wherein you can order as and when required and reduce the carrying cost of the inventory.

Pay suppliers on time

Counterintuitive as this may sound, it is crucial to ensure timely payment to suppliers in these times. Small businesses across industries are impacted, which means your supplier is facing the brunt of this crisis, as much, if not more. 

Timely supplier payments in good and bad times can help build stronger relationships based on trust and mutual respect. Companies making timely payments to vendors can develop long-lasting relationships and place themselves in a better position to negotiate better pricing, comfortable payment terms, and improved support in the end. 

While delaying supplier payments might give you some breathing room in current times, it is not a good practice over time as suppliers might lose trust and choose to sell to other customers with better payment terms. 

If you do not have surplus working capital to support this, reach out to financiers like Tata Capital that offer supply chain financing solutions. Supply Chain Financing can be structured to help you and your suppliers optimize working capital. 

Additional Read: Five ways working capital can work for your business

Manage Debtors effectively

Timely inflows of cash will help optimize working capital. It is vital to reassess your contracts and credit terms with debtors to identify that the receivables collection period is not beyond the prescribed norm. Extended collection periods will negatively impact the company’s cash flows. 

Keep an appropriate check on the credit terms and implement effective control procedures to avoid bad debts.

Upgrade receivables management

There is a dire need to fasten the billing and collection process. Companies should reassess the invoicing process and rule out the inefficacies of the existing system, which may include manual processing, lost invoices, and a high volume of invoices or errors to manage.

Automating receivables management with the right technology solution to send invoices electronically, speed up the billing and collection turnaround can eventually shorten the cash conversion cycle.

Additional Read: How much Working Capital does a Small Business Need?

The Current ratio Formula - Current Assets over Current Liabilities

Keep your current ratio in check

It is imperative to maintain a good current ratio. The current ratio is nothing but Current Assets over Current Liabilities. This ratio should not be overlooked because it determines whether your business has enough short-term assets to pay off the short-term debts.

A current ratio of 1.0 or less than that indicates that your working capital reserves are stretched and overburdened. This situation could arise from delayed payments from customers or unexpected expenses increasing current liabilities.

A current ratio of 2.0 or higher indicates that you are not making effective use of your resources. In this scenario, you should look for new investment opportunities and reinvest surplus cash reserves to earn better returns.

Conclusion

As economic uncertainty continues in 2021, businesses must look for new ways to optimize working capital and ensure business continuity. By focusing on inventory, payables, and receivables management, organizations will be better positioned to secure adequate cash flows and manage short-term commitments in the months ahead. If you need additional funds to supplement your working capital reserves, reach out to Tata Capital to know the best-suited working capital financing solutions for your business.

Is invoice discounting beneficial for small businesses?

Small and Medium Enterprises (SMEs) constitute a significant chunk of the Indian business ecosystem. They contribute to 40% of India’s exports and 45% of its manufacturing output. As growing businesses in an unstable pandemic-impacted environment, it is natural that the need for liquidity and timely access to working capital is magnified for SMEs.

One of the easiest ways to access cash in such times is to liquidate receivables and unlock cash trapped within the supply chain. Invoice Discounting is an efficient way for a business to finance its short-term needs at competitive borrowing terms.

Here is how invoice discounting works

The lender accesses details of invoices for goods or services sold to corporate buyers. Based on the corporate’s confirmation, the lender offers to pay sellers early against select invoices in return for a nominal discounting fee. The sellers receive payment in advance, which they can use to buy raw materials, pay wages, suppliers, utility bills, and reinvest in the business. And, the advance is settled when the corporate buyer pays lenders at the end of the mutually agreed credit period.

Additional Read: What you need to Know about Invoice Discounting

Here are some ways invoice discounting can help small businesses, especially in the post-covid economy: 

1. Collateral free infusion of finance

Small businesses can access invoice discounting without needing to provide collateral. The underlying instrument for financing is the unpaid approved invoice, and the lenders base this advance on the buyer’s creditworthiness. 

As a collateral-free solution for cash, invoice discounting can help protect the assets of a business from a debt trap. Moreover, it helps businesses access capital without impacting the balance sheet.

2. Removes loan-repayment burden

The very premise of invoice discounting is the liquidation of unpaid invoices. While loans are beneficial to the SME sector, business owners need additional income streams to service the loans, which may be hard to come by in the post-covid era.

However, with invoice discounting, the loan amounts are settled when the buyer repays the financier. Small businesses are merely taking an advance on what’s already due to them instead of taking a new loan, which eases the repayment burden on stretched cash flows. 

3. Easy disbursal

One of the logistical advantages is linked to invoice discounting is the ease of disbursal.

At Tata Capital, we ensure quick onboarding that is end-to-end digital and hassle-free to support small businesses. Our easy-to-use digital interface and tie-ups with leading corporates in India help ensure fast onboarding and convenient disbursement. Customers can also transact at ease using the platform provided, making the entire process transparent and seamless. 

Additional Read: What is Invoice Discounting? How can it help your business in 2021?

Benefits of Invoice Discounting for small businesses

4. Improved cash flows

Since the discounting charges are nominal, small businesses can access 85-95% of the invoice amount in cash up front. The improved cash flows can be reinvested in the company to ensure day-to-day operations run uninterrupted. It helps strengthen the working capital position, which improves the ability of these businesses to borrow additional funds. 

Additionally, SMEs can take on more business with corporates offering invoice discounting, as they needn’t worry about liquidity issues regarding credit sales. This benefit helps companies increase their turnover by leveraging invoice discounting. 

5. Lower rates of borrowing

Invoice discounting is a unique offering wherein the advances are made to the seller, but the repayment onus lies with the buyer. Given this difference, lenders appraise such loans on the buyer’s creditworthiness, the strength of their balance sheet, and the trade relationship between the buyer and seller. This helps small businesses access financing at much lower rates of interest than their regular borrowings. 

Conclusion

Businesses find themselves in a unique situation as the world heals from the aftermath of the pandemic. While the demand and supply chains stand disrupted, there is also potential to recover, be more resilient, and grow from here. During such recovery, a quick infusion of finance would be a blessing in disguise for impacted businesses. Invoice discounting can help a business survive and propel towards higher growth when used and managed well. 

Get in touch with our experts to receive guidance on whether and how invoice discounting can help optimize your business operations. 

Why early payment is crucial for recovering small businesses?

The outbreak of Covid 19 and its aftermath have ushered innumerable challenges for the majority of small businesses. Nationwide lockdowns and disruptions in operations and supply chain management impede the revenue-generating capacity of companies across industries.

We all know cash flows are the fuel for any business. But the global crisis has strained the cash flows of small businesses, and the uncertainty continues in 2021 as the pandemic prolongs. Alternative means to improve liquidity, such as supply chain finance and invoice discounting, are gaining importance and adoption to overcome this cash crunch. 

Adequate access to working capital can help in reviving the financial health, minimize disruption and develop financial resilience for both buyers and sellers across the supply chain.

Supply Chain Finance is a financing solution offering early access to funds to the seller while extending credit terms to the buyer. It is a win-win solution as it helps both parties of the supply chain operate optimally without strain on capital or resources.

Early payments against invoices for which the goods or services have already been rendered can help small businesses optimize cash flows and stay afloat.

Here’s how early payments can benefit small businesses:

Helps meet operational expenses.

No cash means no business. Early payments help stabilize operations and eventually fuel growth. 

Sufficient access to working capital can empower businesses to make timely payments to suppliers, procure raw materials to service new orders, pay wages on time, or meet utility and other operational expenses without stress.  

Benefits of Early payments for small businesses

Helps set up business for growth. 

With the availability of substantial funds to keep its operations running, businesses are placed in a comfortable position to exploit newer opportunities. As long as companies are in survival mode, growth is not an option. With access to adequate working capital, businesses with steady operations can focus on expansion. 

At Tata Capital, we offer seamless invoice discounting solutions to small businesses at competitive rates of interest. Reach out to our representatives to know more about how we can help companies meet their working capital needs.

Additional Read: What is Invoice Discounting? How can it help your business in 2021?

Helps maintain improved supplier relationships.

All businesses, big or small, rely on their supply chain ecosystem for continued sustenance. In times of crisis, it might seem easy to delay payments of suppliers and other stakeholders in the short term. However, businesses with foresight would know that this is not a sustainable practice in the long run. 

Access to additional working capital funds through early payments can help businesses struggling financially to have an adequate buffer to pay their suppliers on time. Prompt supplier payments in challenging economic scenarios help build trust and confidence, and strengthens the buyer and seller relationship. 

A business can gain from the uninterrupted supply of raw materials, improved pricing and other terms, and priceless goodwill by ensuring timely payments. Maintaining good supplier relationships is vital to the stability of business operations and for continued growth.

Helps maintain improved employee relationships.

A solid employer-employee relationship lays the foundation of any successful business. Timely payment of wages and salary enhances productivity and boosts employee morale. Employees remain motivated and focus on working efficiently to achieve the organizational goals and objectives. 

Undoubtedly, employees are an invaluable asset to an organization, and it is essential to keep them motivated and invested in the shared goals.  

Helps reduce the cost of borrowing.

Early payment through supply chain finance also gives a financial benefit of reducing the cost of financing. A good credit rating of the buyer can enable businesses to source capital from financial institutions at a lower cost. Besides lower costs of funding, companies can access loans with no recourse and minimum collateral requirements.

Additional Read: Steps to Apply for a Channel Finance Online

Conclusion 

The last year has been difficult for all businesses, especially small and medium enterprises. As the economies look towards recovering from the consequences of the pandemic, companies must focus on having adequate access to working capital to aid in faster recovery. 

During such unprecedented times, having access to multiple lines of credit, including early payments, can help businesses make sure funds are accessible when needed the most.  

At Tata Capital, we have partnerships across large buyers in the country so that you can avail timely access to capital for your business. If we are not associated with your leading buyer yet, get in touch with our representatives to explore setting up supply chain finance options for your trade relationships. 

Choosing the right working capital solution

Successful SMEs know how to employ working capital to benefit their business. Access to finance at the right time helps profitably meet the current demand while also enabling future-proofing the company. 

When the short-term financial needs of SMEs are taken care of, there is a ripple effect across the supply chain ecosystem. But, how can businesses access this finance on time every time? And amongst the gamut of options available to them, which one is best suited for their needs? 

The wide bouquet of working capital offerings

With the plethora of working capital loans on offer, a business owner may be overwhelmed and often unsure of what would work best for their unique requirements. 

Let us first understand the wide variety of offerings available:

The most obvious option is to have an overdraft account for meeting day-to-day expenses. Another option is a working capital demand loan that allows businesses to use funds to meet any short-term general expenditures. 

An entrepreneur can also get easy access to finance based on turnover as per the GST returns. Tata Capital’s GST Loan and GST Bridge Loan are two products that small businesses can avail. The GST loan aims to address the general working capital requirement of the MSMEs. In comparison, the GST Bridge Loan considers GST paid for unsold inventory and supports incremental working capital finance needs.

If businesses have strong trade relationships, supply chain financing can be an excellent option to extend credit on supplier payments, discount invoices, or benefit from early payments. 

Additional Read: Planning to avail a working capital loan? It just may be the best thing for your business

The benefits of Supply Chain Financing 

Small and medium enterprises in India have been actively using Supply Chain Finance to finance their short-term credit needs. Supply Chain Financing could be available as Channel finance, Invoice Discounting, or Purchase Order Funding. 

Channel Financing or inventory financing helps procure inventory without investing capital upfront and extending payment terms for businesses to pay after liquidating the purchased stock. 

Invoice financing helps businesses discount their bills with leading corporate customers and access early payments instead of waiting until the end of the credit period. Purchase Order Finance is pre-shipment financing available for companies to access working capital to fulfill a purchase order from a large corporate. 

Supply chain financing solutions are based on the underlying trade relationship between buyers and sellers and can offer an additional line of credit for small businesses. Given that they rely on the strength of the buyer’s balance sheet, the terms of borrowing are competitive in terms of rate of interest, repayment tenures, and collateral requirement.

However, they come with a pre-determined end-use of funds – that is, to finance trade between the buyer and seller. So, these funds cannot be utilized for general working capital needs.

Effective Working Capital Management

Choosing the right working capital offering

Make sure to consider the following factors before choosing the right working capital offering: 

  1. Purpose: Is the purpose of borrowing to meet general operational expenses or specific end-use of financing inventory? 
  2. Timing: Do you need to access funds pre- or post-shipment? Do you need selective access to meet interim requirements like GST obligations or a steady line of credit that meets continuous operational expenditure? 
  3. Security: Do you have assets to hypothecate to take general-purpose working capital loans, or are you looking for unsecured supply chain financing alternatives? 
  4. Tenure: How long do you need to access the funds? Would a rotational limit with on-demand access all year-round help? Or do you need project-based funding like Purchase Order financing for a specific trade transaction? 
  5. Cost: What would be the cost-effective means to meet your financing requirements?

Additional Read: Five ways working capital can work for your business

Conclusion

There is no one-size-fits-all policy here. Working Capital solutions need to be tailored to meet your unique business requirements. At Tata Capital, we help you choose the right fit! Our team leverages decades of experience to understand your specific business needs and offer you a solution that suits your requirements. 

Tata Capital’s end-to-end digital platform from onboarding to settlements facilities a user-friendly customer experience. Take control of your working capital management by talking to one of our advisors.

What Is Legal and Technical Verification in Home Loan Processing?

To evaluate the creditworthiness of the borrower, most financial institutions use a range of risk assessment tools. Such tools are crucial to the processing and approval of home loans. However, in some cases, loan applications are rejected due to various legal and technical aspects.

But, worry not! This article highlights all you need to know about technical and legal verifications of your property for getting your loan approved. Read on.

Legal verification of a property

For the lenders to process your loan application, your property should be free from legal disputes. Therefore, they send a team of experts to examine and evaluate the respective property documents, such as the no-objection certificates (NOCs), title deeds, and other ownership papers for legal home loanverification. A group of certified lawyers usually undertakes the inspection process.

If it is an under-construction house, you must present relevant documents, including commencement certificate, encumbrance certificate (EC), NOCs, and occupancy certificate. An EC certifies that the property is free of legal contests and pending dues. Besides, you also need a builder-buyer agreement and paperwork proving that the builder can legally initiate construction.

After examining the concerned documents, the legal team prepares and sends a report to your lender. The report states the issues with the property (if any).

Technical verification of a property

In the technical assessment, the lender sends a team of technical experts to evaluate the property’s physical health, building specifications, and market value. They also examine the cost of raw materials procured, labour costs, and other details regarding the construction.

During this process of home loan verification, the officials also check if the building adheres to all the construction norms.

Additional Read:  How to Get Home Loan in India – Get Detailed Information

Importance of verification

The legal and technical verification of property plays a vital role in the approval of home loan. The legal inspection ensures that your property isn’t caught up in any legal complexities. Besides, it also allows you to steer clear of any legally-disputed realty deal.

On the other hand, technical verification is the deciding factor when it comes to finalising your loan amount. Based on the technical assessment, the team sends a detailed report to your lender, which decides your property’s value. Typically, lenders offer home finance worth 75%-90% of the entire property value.

Additional Read: Want to Own a Home? Find Out How

Wrapping up

It is crucial to keep all the necessary documents ready before your lender initiates these verification and valuation processes. In the end, you can rest assured knowing that the property you will buy is both legally and technically sound. And if you are looking for a reliable housing finance provider- turn to India’s leading lender- Tata Capital!

Avail of home finance up to Rs. 5 crores on easy home loan eligibility terms and competitive interest rates. Enjoy minimal documentation requirements, flexible repayment plans, extended loan tenures, hassle-free processing, and swift loan approvals. Besides, calculate your EMIs and interest payable with our online Home loan EMI calculator in just a few clicks.

To know more, connect today!

What Is Credit Linked Subsidy Scheme? How Does It Work?

Let’s face it! Skyrocketing property prices in India often keep homes out of buyers’ reach. As a result, the affordable housing sector has risen in popularity these past years, providing economical housing options for house-hunters.

Add to it the introduction of the Pradhan Mantri Awas Yojana (PMAY) scheme, which seeks to make housing affordable to all and aims to build two million houses by the end of 2022. Among the various sub-schemes that PMAY features, the Credit Linked Subsidy Scheme offers subsidies not only to economically weaker sections (EWS) but to low-income groups (LIGs) and middle-income groups (MIGs) as well.

If you are wondering what is credit-linked subsidy scheme? Read on to find out.

What is the CLSS Scheme?

The CLSS or Credit Linked Subsidy Scheme is the only scheme under the PMAY (Urban) directly implemented by the central government. Under this scheme, the government provides a direct subsidy on housing loan interest rates to the various beneficiaries of this scheme.

Who are the beneficiaries of the scheme?

Based on the annual household income, the following four categories can avail the CLSS scheme:

  • EWS or Economically Weaker Section: Households with annual income under Rs. 3 lakhs
  • LIG or Low Income Group: Households with annual income between Rs. 3 lakhs and Rs. 6 lakhs
  • MIG I or Middle Income Group I: Households with annual income between Rs. 6 lakhs and Rs. 12 lakhs
  • MIG II or Middle Income Group II: Households with annual income between Rs. 12 lakhs and Rs. 18 lakhs

How does CLSS work?

Pondering over how a credit-linked subsidy scheme works? We have you covered.

This scheme allows homebuyers to get interest rate concessions of 3-6.5% on the loan amount, depending on the category of the beneficiaries they fall under. This subsidy is calculated over the entire period of the loan and is capped at Rs. 2.67 lakhs.

The concession offered is directly deducted from your loan’s outstanding principal amount. As the principal amount reduces, so does the size of EMIs. To avail of the subsidy, all eligible borrowers must declare their income and submit the title of the property they wish to buy. Once your lender verifies the details, the subsidy is credited to your loan account, lowering your EMIs.

Credit Linked Subsidy Scheme for EWS/LIG

Beneficiaries of the Economically Weaker Section (EWS) and Low Income Group (LIG) seeking housing loans from Banks, Housing Finance Companies and other such institutions would be eligible for an interest subsidy at the rate of 6.5% for a tenure of 20 years or during the tenure of loan whichever is lower. They receive the direct subsidy, which is the key PMAY CLSS benefit.

The credit-linked subsidy scheme meant forthese groups will be available only for loan amounts upto Rs. 6 lakhs. But any additional loans beyond Rs. 6 lakhs will be at a nonsubsidized rate.

The credit-linked subsidy will also be applicable for housing loans taken for new construction and the addition of toilets, rooms etc. to existing homes.

The carpet area of houses being constructed under the CLSS should be upto 30 square metres and 60 square metres for EWS and LIG, respectively. While the beneficiary can build a house in a larger area, the subsidy would be limited to the first Rs. 6 lakh only.

Credit Linked Subsidy Scheme for MIG

In the MIG-I, an interest subsidy of 4% is provided for loan amounts up to Rs. 9 lakhs. On the other hand, in MIG-II, an interest subsidy of 3% is provided for a loan amount of Rs. 12 lakhs.

The interest subsidy is calculated at a rate of 9% NPV over the tenure which can be a maximum of 20 years. Housing loans above Rs. 9 lakh and Rs. 12 lakhs will be at non-subsidized rates.

CLSS for MIG I and MIG II supports a carpet area of 160 square meters and 200 square meters carpet area as per income eligibility

What are the eligibility criteria?

Here are the PMAY eligibility criteria that one must fulfil to enjoy the scheme’s benefits:

  • An applicant/household must not own a pucca house in any part of India, either in their name or any of their family member’s name
  • An applicant must not be registered under any central/state housing scheme
  • A female member of the family must be a co-owner of the property
  • The property must be located in one of the towns or adjacent areas listed in the 2011 census

Affordable housing with Tata Capital

Now that you know what is CLSS scheme you can enjoy its rewarding benefits and own your dream home with ease. If you are an eligible beneficiary, you can apply for home loan with Tata Capital. Along with the subsidised rate, you also get repayment flexibility, structured EMI plans, a seamless application process, and quick loan disbursals.

Contact us to know more!

What Is a Mortgage Loan? How Does It Work?

Living under one’s own roof is a dream come true for many Indians. For the bulk of Indian home buyers, getting a home loan is the final step towards buying a house.

If you’re contemplating homeownership and wondering how to get started, you’re in the right place. We’ll help you understand all the mortgage basics – from what is a mortgage loan to its workings and documentation requirements.

What does mortgage mean?

Before we dive in, let’s get some basic terminologies out of the way. First, what does ‘mortgage’ mean?

Simply put, a mortgage is a loan you can use to refinance or purchase a house. It’s also sometimes referred to as ‘mortgage loan.’ If you don’t have a substantial cash reserve for an upfront payment, a mortgage can help you fund your dream home.

How does mortgage finance work?

To understand how a mortgage works, you must know what collateral means. Collateral is any asset that you promise to a lender. Essentially, it offers lenders security in case a borrower defaults on their loan. Under such circumstances, lenders can liquidate the collateral to get their money back.

With a mortgage, you promise your home as collateral to the lender. The lender will hold your property until full repayment. Loan repayment is made through equated monthly instalments, or EMIs, the size of which depends on the loan amount, interest rate, and tenure. Mortgage tenures can go as high as 30 years.

Besides, you can repay the loan before the term is up. However, before you do so, check if the lender levies any pre-payment charges.

Additional Read: Things to Keep in Mind if You Are Buying a Resale/Old Property

Documents required to avail of mortgage

Although the documentation requirements can vary from lender to lender, here’s a list of documents required by Tata Capital:

  • Loan application form
  • Passport-size photographs
  • Identity proof: Driving license, Aadhar card, PAN card, Voter’s ID, or passport
  • Age proof: Aadhar card, PAN card, birth certificate, passport, driving license, 10th class mark sheet, or bank passbook
  • Residence Proof: Ration card, utility bills, LIC policy report, or passport
  • Income proof for salaried employees: Form 16, IT returns of past three years, payslip of last two months, certified letter from employer, and increment or promotion letter
  • Income proof for self-employed: ITR of last three years, balance sheet, proof of business address, business license details, profit and loss account statement
  • Property documents: NOC from society/builder, property tax receipts, registered sale deed, occupancy certificate, building plan, and cost of construction of the house
  • Details about any existing loans
  • Processing fee cheque

Additional Read: Check Your Eligibility and Documents Required for Home Loan

Over to you

Now that you know how mortgage loan works, you are ready to embark on a home buying quest. Let Tata Capital accompany you on this journey with our affordable home loan. Enjoy attractive interest rates, extended loan tenures, flexible repayment options, instant approvals, and swift disbursals.

So why wait? Check your home loan eligibility by visiting our website today!

What is a Loan to Value (LTV) Ratio and Its Importance in Determining Your Home Loan Eligibility?

If you are eyeing a residential property and contemplating how much home loan you will get on it, you are subconsciously assessing your LTV (Loan-to-Value) ratio. Not sure what we mean? The following section will make things clearer.

What is an LTV ratio?

The percentage of loan extended by the lender to the borrower against a fixed property value is the LTV ratio. Lenders typically assess the LTV ratio to determine the risk of lending a loan to a borrower.

The LTV full form is Loan to Value, and your LTV ratio will depend on the kind of financial stability you can show to the lender. Housing finance usually covers anywhere between 75% to 90% of the total property cost, while the borrower puts down the rest as a down payment.

So, if you are planning on financing a large portion of the property value with the help of housing finance, a higher LTV ratio will be ideal and vice versa.

Remember, a higher LTV means a bigger loan amount, favourable loan terms, and lower down payment. In contrast, a lower LTV indicates a smaller loan amount, with usually a higher down payment.

Additional Read: Best Tips to Plan Your Home Loan Down Payment

How do LTV ratios work when it comes to housing finance?

Multiple factors determine your housing finance eligibility. The most prominent ones are:

  • Stable income
  • High credit score
  • Previous and ongoing debts

Let’s look at each of them in detail and figure out where LTV fits in the picture.

  • The higher your income, the better your chances of getting a higher LTV ratio. Meaning, if you make enough money, lenders will be more willing to extend a bigger loan amount, thus boosting your LTV ratio.
  • If you have a high CIBIL score, ideally above 750, your chances of getting a loan at a higher LTV ratio also goes up. This doesn’t mean you have to take a large loan. It simply means you are eligible for one.
  • Lenders will calculate the value of your ongoing debt, if any, against the amount of money you earn to approve an LTV ratio.

Additional Read:  Some Factors That Impact Home Loan Interest Rates

Slabs and upper ceiling for Loan to Value ratio

The LTV ratio slabs and ceilings for housing finance fall under the purview of the Reserve Bank of India. As per the RBI guidelines:

  • A lending institution can only approve up to 90% LTV if the loan amount goes up to Rs. 30 lakhs.
  • If the total loan amount falls between Rs. 30 lakhs and Rs. 75 lakhs, the LTV ratio can go up to 80%.
  • For a loan amount higher than Rs. 75 lakhs, the LTV ratio cannot exceed 75%.

The bottom line

Now that you know the LTV meaning and its implications on housing finance, you can apply for home loan at Tata Capital to receive an ideal LTV ratio.

We are one of India’s most reliable lending institutions, offering attractive LTV ratios for home loans. Our housing finance options ensure that you get competitive home loan interest rates along with a speedy disbursal of funds and flexible repayment terms.

Click here on our website to check out your home loan eligibility criteria and apply today!