What is Sub Prime Lending

Meaning -

As the word "Sub" itself suggests -"less than ideal".

The term "subprime" refers to the credit status of the borrower, which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history.

Why the risk -

Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants.

Sub Prime Borrowers -

The sub prime borrowers have a weak credit history which includes - charge offs, payment delinquencies, bankruptcies, low debt to income ratio, etc.

Why the crises -

Subprime lending refers to the practice of offering loans to people who do not qualify for the normal loans. When it comes to approving a loan, banks take into account the repaying capacity of the borrower and his credit history. If a person is not credit worthy or is a defaulter elsewhere, he cannot be given a normal "prime loan". So as to target such persons, banks came up with a novel idea of "sub prime lending".

Here the risk is more for the bank. So to set off the higher risk, banks commanding a higher risk premium and hence the interest rate is also higher. As a result of higher interest rates, banks could earn more money then what they would have normally got if they had gone for "prime lending".

The subprime lending crisis began with a series of defaults by borrowers who were offered loans at higher interest rates because of their lower repayment capacity. First of all, the borrowers who were offered subprime mortgages had a poor credit history and then the higher interest rates charged only increased the burden on these borrowers and made it tougher for them to honour their mortgages, even if they had the intention to do so. This caused a series of defaults which is now commonly known as the subprime mortgage lending crisis.

Types -

Subprime mortgages and Sub Prime Credit Cards

Essay Sarbanes Oxley Act

Sarbanes-Oxley Act of 2002 is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox.

The act is called as Sarbanes-Oxley Act after sponsors Senator Paul Sarbanes and Representative Michael G. Oxley.

Reason behind the enactment -

Number of major corporate and accounting scandals which rocked the United States prompted the House to enact the law.The confidence of general public in the United States' securities market was shaken after the Enron, Peregrine System, Tyco Adelphia, Worldcom scandals. Not only these scandals cost the public billions of dollars but also negatively affected their faith in the United States Security Market.

Scope -

The legislation establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. It does not apply to privately held companies.

The Act -

The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.

The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

However, there is a heated debate on whether the benefits are comparable to the cost incurred in the implementation of the Act. Some feel that the legislation is necessary and will definitely help restoring public confidence in nation's capital market, will help control the corporate accouting and strengthen the accounting creditibility of public accounting firms and others.

The Detractors contend that SOX was an unnecessary and costly government intrusion into corporate management that places U.S. corporations at a competitive disadvantage vis-a-vis foreign firms.

The effect of SOX on non-US companies -

It is being argued that with a legislation like Sarbanes Oxley, business will shift from US to other countries where there is lesser interference by Authority.

SOX's effect on Non US cross listed Companies will be different depending on where such companies come from. If a company comes from a well regulated country, SOX will unnecessarily increase cost as such companies already comply with strict norms in their home country.

But Companies from not so well regulated countries will benefit as such companies will have to comply with requirements under the act and in turn which will enhance their creditibility and rating due to compliance of the act. But one must keep in mind that it is going to be too expensive for all companies to comply with the provisions of SOX.

Impact of SOX on the corporate IT department

The five areas and their impacts for the IT Department are as follows:

Risk Assessment - Before the necessary controls are implemented, IT management must assess and understand the areas of risk affecting the completeness and validity of the financial reports. They must examine how the company's systems are being used and the current level and accuracy of existing documentation.

Control Environment - environment factors include the integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the board of directors.

Control Activities - Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties. In an IT environment, control activities typically include IT general controls -- such as controls over program changes, access to programs, computer operations -- and application controls.

Monitoring - Auditing processes and schedules should be developed to address the high-risk areas within the IT organization. IT personnel should perform frequent internal audits. In addition, personnel from outside the IT organization should perform audits on a schedule that is appropriate to the level of risk. Management should clearly understand and be held responsible for the outcome of these audits.

Information and Communication - Without timely, accurate information, it will be difficult for IT management to proactively identify and address areas of risk. They will be unable to react to issues as they occur. IT management must demonstrate to company management an understanding of what needs to be done to comply with Sarbanes-Oxley and how to get there.

The Act

This article has been written from inputs gathered from different sources available on the Internet and in Print Media.

What is a Future Contract?

Let us start with Futures -

What is a futures contract?

Futures contract means an agreement to buy or sell the underlying security on a future date. Such agreements are legally binding in nature.

Specifications regarding the delivery, time and place of settlement, quantity, quality in case of commodities are decided beforehand in the contract itself. Futures can be settled by delivery of the underlying security - cash or asset as the case may be. E.g: In case of a commodity - by delivery of that commodity on which contract was made.

The date decided beforehand for settlement on which contract expires is called as "the expiry date of the contract".

Cash settlement means paying or receiving the difference between the price at which the contract was entered and the price of the underlying asset at the time of expiry of the contract.

As a result, a person may face profit or loss depending on the difference of price between period as mentioned above.

My upcoming posts -

With everyone talking about Hedge funds, Derivatives, Futures, Options, Sarbans Oxley Act, etc., I will be posting here a short article on them soon. Keep watching this space...

Persons exempt from payment of Profession Tax

Exemption from payment of Profession Tax –

Following classes of persons are exempted from payment of Profession Tax –

1. Members of the forces as defined in the Army Act, 1950 or the Air Force Act, 1950 and the Navy Act, 1957 including members of auxillary forces or reservists, serving in the state.
2. The badli workers in the textile industry.
3. Any person suffering from a permanent physical disability (including blindness)
4. Women exclusively engaged as agent under the Mahila Pradhan Kshetriya Bachat Yojna or Director of Small Savings.
5. Parents or guardian of any person who is suffering from mental retardation
6. Persons who have completed the age of 65 years (w.e.f. 1.4.1995)
7. Parents or guardians of a child suffering from a physical disability as specified in clause (C) w.e.f 1.10.1996

So, in case you are above 65 years of age, contact your Profession Tax office alongwith an application stating that you are above 65 years of age & carry a proof of your age- ex: Pan Card or Voter's ID card.

In the store- It is heard that 01/04/2008 onwards, Profession tax office will be handling Service tax as well!

Profession Tax Amnesty Date Extended

Last date for submission of application for Profession Tax Amnesty Scheme has been extended upto 30.11.2007.

Types of Mortgages in India

Type of Mortgages in India

Definitions -

Sec. 58 of the Transfer of Property Act, 1882 defines mortgage as -

A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.

Types of Mortgages -

1. Simple Mortgage
2. Mortgage by Conditional Sale
3. Usufructuary Mortgage
4. English Mortgage
5. Mortgage by deposit of title of deeds
6. Anomalous mortgage

1. Simple Mortgage -

In a Simple mortgage, the possession of the mortgaged property is not transferred from mortgagor to the mortgagee.

If the mortgagor fails to repay the loan, the mortgagee has the right to sell the property and recover the loan from the sale amount.

2. Mortgage by Conditional Sale -

Under such Mortgage, the mortgagor apparently sells the property to the mortgagee on certain conditions -

1.On failure to repay the mortgage money before a certain date the sale shall become absolute,or
2.On condition that on such repayment of mortgage money the sale shall become invalid,or
3.On condition that on such repayment the mortgagee shall retransfer the property.

In such case, the mortgagee is a "mortgagee by conditional sale".

3. Usufructuary Mortgage -

In a usufructuary Mortgage, the possession of the mortgaged property is transferred to the mortgagee. The mortgagee receives the income from the property (rent, profit, interest, etc) until the repayment of the loan. The title deeds remain with the owner.

4. English Mortgage -

In an English Mortgage -

1.The mortgagor binds himself to repay the borrowed money on a certain date.
2.The mortgagor transfers the property absolutely to the mortgagee.
3.But such transfer is subject to the condition that the mortgagee will retransfer the property on repayment before the agreed date.

5. Mortgage by deposit of title of deeds -
In such mortgage, the mortgagor delivers the title document of the property to the mortgagee with an intention to create a security thereon. Such mortgage is valid in towns of Kolkatta, Mumbai and any other town as the State Government may notify by publication in Official Gazatte

6. Anomalous mortgage -

Anomalous mortgage is a combination of different types of mortgages.


In the US, concept of Reverse Mortgage is fast catching up -

Meaning - A reverse mortgage loan is a loan where the lender pays the monthly installments to you instead of you making any payments to the lender. Hence the name reverse mortgage, as the payment stream is reversed. A Reverse mortgage enables senior citizens to convert their home equity into tax-free income. Reverse mortgages enable eligible homeowners to access the money they have built up as equity in their homes. They are primarily designed to strengthen seniors’ personal and financial independence by providing funds without a monthly payment burden during their lifetime in their home.