How to earn RISK-FREE return from LOAN?

What if your loan interest rate is less and FD rate high? Is it happening like this? I don’t think so. But I recently came to know about this, where your loan interest is less than your bank FD rate. Therefore an opportunity to earn RISK-FREE return from your LOAN!

Recently I went to my native and found that loan is available at 4%. So many are using this opportunity to earn the risk-free return from such loan. Let me share what is this 4% loan. Below are some features of this loan. I tried to explain the same in a graphical way.

• Loan disbursement again will depend on the value of your agricultural land and the value of gold you pledge to the bank.
• But the bank will not pledge your land as a collateral against this loan.
• You have to provide land records to show that you own an agricultural land.
• You have to pledge gold against this loan.
• All rural public sector banks offer this scheme.
• Every year, the Government declares the discount it give under this scheme like in 2009-10- 1%, 2010-11 -2%, 2011-12 -3%, 2012-13 -3%, 2013-14-3% and for 2014-15-3%.
• You have to repay the loan within a year. Otherwise, you will not be eligible for a 3 % discount on your loan.
• So the actual interest rate on your Rs.3, 00,000 will be JUST 4%!
• If you repay the loan within a year, then they give you the discount of 3%.
• In this scheme, banks lend you up to Rs.3, 00,000 at a marginal interest rate of 7%.
• This scheme was launched in 2006-07.
• Farmers are eligible to take this loan.
• This is nothing but “Interest Subvention Scheme”.

How many utilizing this scheme and earning a RISK-FREE return?

I searched more about the features of “Interest Subvention Scheme,” and found that there is no such guideline mentioned about for what purpose the issued loan amount MUST be used. In addition, there is a huge pressure from Govt to spread awareness and disburse this loan.

So whenever someone approaches banks for a gold loan, banks use to push this product. The borrower has to just submit agriculture land ownership. Banks will not pledge the land. However, they issue loan against the gold, which you pledge with the bank.

Using this eagerness of banks to issue such low-cost loan and sensing the risk-free return of around 4% to 5% over their loan, many obviously opt for such loans.

They get the loan amount of Rs.3, 00,000 at 4% and deposit the same either in the same bank or with some other bank at the rate of 7% to 8%. So the risk-free return of 3% to 5%. If you take a bit risk, then deposit the same in co-operative banks. Usually, co-operative banks offer higher interest rate than nationalized bank. So few opt to deposit their money in such co-operative banks.

The lending bank never asks whether the disbursed loan is utilized for agriculture purpose or not. So a great opportunity for the one who own agriculture land.

Whether the banks and borrower stick to one-year loan agreements? That also just in papers. They renew the loan once in a year before the completion of a year of an old loan. For this, the borrower has to submit the recent dated land ownership proof. That’s it…The loan will continue as usual for next one year. The borrower continues to enjoy the risk-free return.

By sharing this loophole in the system, I am not pointing to follow this method to earn. However, I am pointing on how our Government schemes work and where our hard-earned taxpayer’s money wasted. In addition, 4% to 5% on Rs.3, 00,000 is not a big amount (may be Rs.10, 000 to Rs.15, 000). However, this may be useful for your payment of term insurance of health insurance premium 🙂