introduction
It is time to think beyond equal monthly instalments in Post Office Monthly income scheme/Pension/ RD / Loan. EMI facility was not available at all in Financial institutions until late 80's / early 90's. Here is a new method to some protection to customers as well as the money lenders against inflation.
author's word
The author of this scheme Shri. B N Venkataraman had argued with Bank of Baroda loan officials in 1983 on a personal loan of Rs.25000/- to give facility on Equal Monthly Instalments giving full details of proposed repayment and calculation to show how the loan is repaid with interest. But they did not agree, and went on their usual method on diminishing Balance scheme only.
Now a days EMI is quite common and plenty of calculators are available on-line web as well as on a application softwares such as MS EXcel, Oracle Open Office Spread sheet, etc.
Similarly RD with equal instalment does not aim at increased saving on same account year by year to fight inflation, wheras purchasing capacity decreased on inflation.
Similar story is with fixed post office monthly income scheme / conventional pension schemes.
The suggested method is not increasing the interest percentage but increases only the pension/ RD/ Loan repayment.
inflation
The inflation rate is not less than 6% per annum on any item since the time known to the author. It is time to think of having return on investment with some degree of inflation protection.
click here to see the degree of inflation since 1957.
1957 is the time when naye paise was introduced in place of anna paise and the memory is green as we converted prices in annas to naye paise on each commodity.
- show inflation table
hide this ok inflation table
Annual inflation of commodities from
the experience of middle class
common man
from the memory lanecommodity 1957 2010 inflation
paPaddy 50.00 1200.00 6.18% Til oil 3.00 180.00 8.03% Soap 0.30 20.00 8.25% Gold (8gm soverin) 75.00 14780.00 10.48% Rural House rent 20.00 3500.00 10.24% Urban House rent 200.00 20000.00 9.08% One time a day monthly meal in Lunch home 20.00 900.00 7.45% Petrol/litre 0.90 55.00 8.07% clerical salary 30.00 12000.00 11.97% Officer salary 180.00 50000.00 11.20% Part time sevant maid 5.00 700.00 9.77% monthly veg budget 3.00 600.00 10.51% milk 0.18 32.00 10.27% Ghee 4.00 240.00 8.03% Enter your known commodity / yr / prices here
then move cursor away from that field to another column.PreYr CurYr See % for your eyes schemes
POST OFFICE MONTHLY INCOME SCHEME GIVES A FIXED RETURN OF 8% PER ANNUM AT Rs. 666.67 ON AN INVESTMENT OF Rs.1 LAC FOR A PERIOD OF 6 YEARS AND ON MATURITY ONE GETS 5% BONUS. THUS ONE GETS A RETURN OF 9.12%pa
This means one gets Rs. 666.67 666.67 666.67 666.67 666.67 666.67 each month of 6 years, whereas
In the suggested scheme one gets Rs. 581.26 616.14 653.11 692.30 733.84 777.87(last month Rs. 777.30 )
Maturity amount and bonus being the same. Many private players give 10%pa return on investment. with 10%pa on Rs.100000 deposit for 10 years,
one gets Rs. 833.33 833.33 833.33 833.33 833.33 833.33 833.33 833.33 833.33 833.33 every month of 10 years.In the suggested scheme one gets Rs. 662.99 702.77 744.94 789.64 837.02 887.24 940.47 996.90 1,056.71 1,120.11 (last month Rs.1119.91 ) every month of respective year.
Maturity amount and same bonus to be considered.
project description
This calculation will make the EMI (Equal monthly instalment) payment a passe
Here is a calculation that takes into account of inflation at 6% per year
The schemes are INFLATION PROTECTED PENSION SCHEME, INFLATION PROTECTED RECURRING DEPOSIT SCHEME, INFLATION PROTECTED EASY LOAN REPAYMENT SCHEME, AT A RETURN OF SAY 10% P.A. (U CAN SELECT OTHER RATES).
Why 10%? Because 10% PA interest is paid out many private players even on short term deposits.
Annuity also can be worked out based on these lines; You can view/print following at a click of mouse without any further selection.
Pension on Rs.100,000.00 deposit at 10% pa over 10 years
Recurring deposit at 10%pa over 10 years for a maturity of Rs.100,000.00
Loan repayment at 14%pa for a term of 10 years for a loan of Rs.100,000.00
Services on method of calculation
Free service will be available from the author for locals of Lucknow on MS excel/Open Office Org 3.2 for calculations for your specification of scheme years, percentage and amount.
The website services are also open to all. One can contact through the web site contact form provided. The reply will be made at the earliest on opening the web site at server side.
Objective:
- To give inflation protection to investors.
- To make a loan scheme more convenient than existing EMI method.
- To the small saving investors, make the convenience of paying less at start and more on later years in the same scheme, rather than opening another scheme.
- To make a scheme more attractive to general public than existing one.
Methodology:
The method of calculation is simple trial and error method. Firstly a start interest percentage is arrived at and initial pension or RD or repayment is calculated based on the EMI method. Trial calculation is made for the entire term with inflation protection. The final balance amount will not tally. Now reduce or increase the start percentage and recalculate for the term. Now also it will not fit in. Then try with lower or higher percentage. Thus the initial percentage is arrived at by trial and error method. At present for this 6% inflation provision there are about 18 iterations by binary search mehtod in finding the starting percentage, which is very small given the present day computer environment. The accuracy of initial percentage is taken up to 4 decimal places, say for example 7.9559%pa. The arriving of this start percentage is very crucial. Then the chart is prepared for the entire term with proper rounding off. The current software provides for 18 digit mantissa. !8 digit mantissa means that one can achieve rounding off to nearest paise on amounts involving million billions of rupees.
Strength:
After arriving at start percentage/ payment amount, a simple calculator is sufficient to maintain book of accounts. However the computer supported book maintenance is order of the day for voluminous number of accounts.
The proposed schemes are more investor friendly than EMI schemes. There is always increased return year by year whether there is inflation or deflation. Therefore in case of inflation, there is protection to investors. In case of loan repayment there is already provision of increased repayment because of increased outstanding loan. Therefore there is no need to increase prime lending rates as being done at present to curb inflation.
In case of deflation, the investor is not deprived of interest due to deflation. On the other hand due to increase in return, he will have more income during the deflation. In such a scenario, the government can tax the investor more or banks can increase prime lending rate which is very much contrary to the present system and should be welcome step.
Weakness:
The method of calculation arriving at the start percentage/payment amount is not simple algebraic formula. It is quite tedious with existing computer software. At least one has to spend about half an hour in arriving at start percentage/payment with spreadsheet software. The trial and error method of arriving at it is close the chest of the author.
However, this report being out and available free of cost and also downloadable from website by public without any password, should make others to develop the equivalent schemes without any hindrance in just matter of a few days.
Opportunities:
The first implementing company will have first move advantage. The present day inflation in India is of the order of two digits and hence there is scope for considering more than 6% inflation rate in MIS/ RD/ Loan in increasing pension/ deposit/ repayment accordingly. On getting popularity for this present 6% inflation provision, the author can provide calculator on website for other flexible percentages. However Government may put on restrictions not to provide for more than say 10%. on such calculations, so that over enthusiastic organizations will not give unrealistic higher projections to attract customers. In some insurance returns calculations, Regulation authorities have fixed such conditions to show sample calculations based on 6% return only. Hence they may put a brake on these sort of new calculations also.
Annuity and insurance schemes also can adopt these calculations. Annuity schemes are nothing but combination of RD and loan repayment schemes only. For insurance schemes, the premium, the death/maturity benefits can vary at 6% for every surviving year instead of present fixed values. After going through this report and on popularity of the scheme, software companies providing spreadsheet can give new function to generate start interest percentage/ payment amount given the necessary parameters, both mandatory and optional.
They can develop and implement such function in just a matter of days if not a week.
Other software providers can give the function to return an object of array to give the payment details for the full term. Accounting Software developers can provide full working to the investment companies along with their standard software or a special software. They can develop such software in just a matter of weeks if not a month.
The calculation is based on trial and error method. In order to reduce burden on computer to give iterations working of full term, the period may be restricted to 99x12. Otherwise, even the fastest computer of the day will take few minutes or even hours if large/unrealistic values are given. 99x12 means that in case of periodicity in months, maximum value is for 99 years and in case of the same in days. It is 1188 days or approximately 40 months and the inflation protection will be for months and not years. With the existing spreadsheet calculation it may take about ½ hour to find initial percentage/amount for given parameters on a pre-planned worksheet and with new function to be provided by software giants, it may take just a few seconds.
Threats:
The calculator is available on the web site and can be accessed with an arrangement with the author. Being an unsecured normal web site, it is not impregnable for hackers. However, the author is ready to share the source code with Government of India free of cost, if desired by them. To overcome the threat, the author is ready to provide free guidance in developing functionality, in C++/core Java to any student/organisation at Lucknow.
Benefits (who will be benefited
Investor:
The benefit to the investor is by means of getting inflation protection. One gets in a sample case of 20 years pension scheme with 10% rate of interest and with 10% inflation protection the order of 4.7% return in the first year and over 28.6% in the twentieth year.
Investment company:
Investment company is benefited with increased holding amount, that is run balance of the principal and unpaid interest amounts. For example in the case mentioned in the previous paragraph, the investment company has accrual of Rs. 154184.75 in the thirteenth year which is more than 150% of the present method of equal instalment.
Investment company as a financier:
Even if, one assumes the investor is more benefited, the investment company becoes an investor when it comes to money lending/financing. It gets the increased return if income from the amount financed.
Borrower:
The borrower gets the convenience of low repayment as compared to equated monthly instalment of the presenet day situation. Of course, he sheds down more interest in the later years for this convenience. It is essential to note thet the borrower's income/repayment capacity increases because of inflation. The situation is very much identical to the situation when we changed from diminshing balance method to the present day EMI method.
Conclusion
The policy adopted in the proposed schemes is to hold part of interest accrued during initial periods and pay them with added interest in later periods.
On implementation of the inflation protected schemes (IPS) by powerful financial institutions and Government then there need not be periodical unsystematic increase in Government pension as at present. There may not be periodical increase in prime lending rates to curb inflation as there is already a provision in the new scheme to increase the repayment of loan. This can also lead to overall check on inflation because one will assume that people are entitled to get increased pension at 6% annual increase only.
EMI (Equal Monthly Instalment) method of calculation is convenient compared to erstwhile diminishing balance method. It took about a century for people to switch over to EMI after its invention.
IPS (Inflation Protected Schemes) are much more convenient compared to EMI method. It should not take such a long time to switch over to this new schemes given the present level of think tank and computing facility.
The investor/lender gains in terms of increased money value and borrower gets convenience.
The aim of full term calculations given in this report is to prove that there is gain to investors, which is a matter of convenience and there is no loss or gain in real terms to the borrower or lender. The increase in return of investment also provide increase in accrued balance/outstanding loan as compared to conventional methods, which proves the theory of no loss/no gain. The theory of no loss/ no gain is the same as that when we switched over from diminishing balance method to EMI method. Time has proved that EMI method is the matter of convenience and same will be for the Inflation Protected Schemes, presented in this report.
Graph Inflapro
Graphical representation of INFLAPRO scheme for term loan of Rs.100000, term of 20 years, Interest at 10% per annunm, Inflation rate of 10% per annum and freq of payment Annual is shown in the following graph with comparison to Diminishing balance and Eq.instalment plan.
