Financial asset management

Vital Skill Required for Financial Success

Vital Skill Required for Financial Success

As discussed in The Wealthy’s “Secret” Knowledge series of articles, true wealth building is really only the result of applying some fundamental wealth building knowledge and skill sets in your life…and then taking the necessary actions to achieve financial stability and even Financial Freedom.

One of the skill sets discussed in The Wealthy’s “Secret” Knowledge series was the concept of asset development for building wealth. From all of my own personal research into wealth building principles, I personally feel that the skill of asset development is probably one of the most important (if not the most important) skill we can learn…as we work towards achieving Financial Success.

So just what is an asset?

The basic definition of an asset is…something that is created that will provide a steady stream of residual income…that in essence, will not require lots of personal time to maintain once the it has been developed.

Some people confuse an asset with their personal possessions. Many individuals believe that items such as personal homes and cars qualify as assets…but in reality, these personal possessions still take money out of the owner’s pocket every month…even if they are completely paid for!

Assets can take many forms. From businesses, paper investments, real estate investments, royalty’s from inventions, software, music, and books…to virtually anything the mind can conceive that might be of value to someone else.

Creativity is a vital element in asset development

One of the most important aspects of asset development is the ability to use our minds in a creative manner…that will allow us to come up with a creative solution to a specific problem or need.

As stated earlier, our minds are probably one of our most important tools for creating something of value. Most of the world’s greatest inventions and contributions have been the result of creative thought from one or more individuals.

In truth, the better you are at creatively solving problems…the more opportunities you’ll have for creating wealth and financial success. You can learn more about developing your creativity by exploring the subject at: http://www.abundantlifeplan.com/developingcreativemind.htm

Try to develop assets that match you natural talents…for optimum success

As stated earlier, assets can take many forms…it really comes down to applying your own innate talents to develop something that others will want to use. (and are willing to pay for its value)

Ideally, if you can create an asset using your own natural talents…the whole asset development process will not even feel like work. Imagine achieving financial independence…without it even feeling like work!

While utilizing our “natural” talents is not an absolute requirement in asset development, it will definitely make the process a whole lot easier. Many individuals have in fact built great wealth using the skills and labors of others, but even these individuals used their “natural” talents for organizing resources to achieve financial success.

Even though the asset development process should ideally be “fun work”…it’s still very important to remember that there is “work” involved in the process

It’s important to note that a “get rich quick” mentality will not help when trying to develop an asset. In fact, most asset development requires a lot of up-front work and action…before any kind of profit will be seen.

Whatever it is you are trying to develop…it will most likely result in a lot of time and effort devoted to something with basically no initial financial return. Most new business ventures work this way…including most other forms of asset development. There is no “free ride”…so to speak.

In truth, if the asset you’re developing is a good match for your talents…you will find the process is just as rewarding as the final financial benefits that will result from your efforts.

The world is waiting for your special contribution…and ready to reward you for it too!

Fortunately, if you do learn the valuable knowledge and skills associated with asset development …you can become a virtual “money making machine” with endless financial possibilities. As I stated at the beginning, I truly feel that learning how to build assets is probably one of the most important wealth building skills you can develop. (if not the most important)

So get out there and develop the next great thing! The world is waiting for your own important contribution…and is more than willing to pay you for the wonderful value it creates!

Financial Statements: Wealth Starts With Your Personal Financial Statements

Financial Statements: Wealth Starts With Your Personal Financial Statements

Financial Statements Introduction:

Financial statements generally take the form of records of the financial performance of a business. They provide information about the profitability and general financial health of the organisation. A company’s financial records usually consist of:

* Income Statement
* Balance Sheet
* Cash Flow Statement

An income statement, also called a Profit and Loss Statement, shows how a company’s sales or revenue translate into profit (net income) over a specific period (normally one year). It’s a record of how much a company has earned, what expenses it has paid and the resulting profit or loss.

A balance sheet, also known as a statement of financial position, is a summary of what an entity is worth at a particular point in time. It summarizes what a business owns (its assets), what it owes (its liabilities) and its net worth (its equity or capital). While the income statement is a summary over a period of time (usually a year), the balance sheet is a summary at just one point in time. The balance sheet is a “snapshot” of a company’s health

A cash flow statement is a summary of a company’s ingoing and outgoing money over a specific period (normally one year). It is such a valuable report because it shows the cashflow strength of a business unlike the income statement which contain non-cash items.

The Importance of Financial Statements:

Financial statements are crucial instruments used by a company’s management and investors for analysis and decision-making. They pore over the numbers and create every ratio imaginable in an effort to create the most accurate financial story possible. Without financial statements knowledgeable management and investment simply wouldn’t be possible.

The Importance of Personal Financial Statements:

Everybody knows that company’s product financial reports, but it is not as widely known that you can produce your own personal financial statements. Your own income statement and balance sheet which tells you your own financial performance, just like a company’s financial statements.

Company management know that it would be impossible to run a company without financial reports giving them information about their financial strength, productivity, goal setting and so on. Is it any less logical that you need your own personal financial reports to know how well you are performing financially, just like a company’s management?

Your financial statement will tell you your financial strength. They will tell you whether you fall into the poor, middle class or wealthy class. Current statements can be compared to prior statements to create a trend, a story, over time. You can also use your financial statements for scenario analysis, such as looking at he impact of an investment on your financial position or the impact of interest rates rising.

Your Personal Income Statement:

Income statements following the following structure: Income – expenses – taxes = net income (also called net profit).

Rather than simply listing your incomes and expenses by item it is useful to categorise them in a way that will help you know whether you have the income and expense profile of a poor, middle class or wealthy person. The Internal Revenue Service (IRS) in the U.S. classifies all income and loss items into three categories: active, passive and portfolio.

In brief, active income is income from your salary, wages, fees, commissions, and sole proprietorship business.

Passive income is income that’s received, usually regularly, by an individual who doesn’t materially participate such as rental from real estate, royalties from patents and license agreements, and businesses you own.

Portfolio income is investment income from paper investments such as stocks, bonds, mutual funds in the form of interest received or dividends or capital gains (or losses) from their sale.

Similarly, expenses that are associated with your active income are active expenses, and so forth for your passive and portfolio expenses against your passive and portfolio income. Your active income is generally not tax deductible while your passive and portfolio expenses are tax deductible. Thus we refer to active income as bad expenses and passive and portfolio expenses as good expenses.

Income Statement:

Income (Realised)

- Active
- Passive
- Portfolio

Expenses
Deductible expenses

- Passive
- Portfolio

Non-deductible expenses
Net Income

Your Personal Balance Sheets:
Balance sheets follow the following structure: Assets = Liabilities + Equity or Equity (or net worth) = Assets – Liabilities.

Just like your personal income statement it is useful to categorise your personal balance sheet in a way that will help you know if you have the assets and debt profile of the poor, middle class or wealthy person. Assets and liabilities can be split into good and bad assets or liabilities.

Good assets are investments. In short, they put money in your bank account. Good liabilities refer to debt that is used to buy good assets, which makes the debt expense (interest payments) tax deductible.

Bad assets refer to anything else. They take money out of your bank account. They cost you money to own them. Bad liabilities, is debt that is used to buy bad assets, which makes the debt expense not tax deductible.

Just like your personal income statement, your good assets and good liabilities can be categorised as passive or portfolio based. There is no active assets or liabilities because the income is from your wage and thus there is no asset or liability.

Balance Sheet:

Assets
Good assets

- Passive
- Portfolio

Bad assets

Liabilities
Good assets

- Passive
- Portfolio

Bad assets
Net Worth

Poor, middle class and wealthy:

The makeup of your income, expenses, assets and liabilities and how they interact tells a story-your financial story. By filling in your financial statement, you can tell which class you’re in and a great deal about where you are on your wealth journey.

The poor, middle class and wealthy each have a different story, a different financial makeup, which is reflected in their financial statements. Each class’s financial statement is unique. You won’t have a poor- or middle class-looking financial statement and be wealthy.

To become wealthy, you need to understand your financial statement and create a plan to change it so that it looks like that of a wealthy person.

The poor earn only limited active income and no passive or portfolio income. They have little or no good assets or bad assets.

The middle class earn primarily active income, and little in the way of passive or portfolio income. They have little in the way of good assets and loads of bad assets and thus have little good debt and loads of bad debt.

In contrast the wealthy earn primarily passive and portfolio income and little in the way if active income. They have loads of good assets which provide the passive and portfolio income and few bad assets (compared to their wealth). The wealthy have loads of good debt (at least while they’re accumulating their wealth) and little or no bad debt (compared to their wealth).

So what does your personal financial statement looks like? The poor, middle class, the wealthy or a combination?

Financial Status of Rural People

Financial Status of Rural People

WHO ARE TRIBALS?

The word “tribal” or Adivasi brings to our mind a picture of half-naked men and women, with arrows and spears in their hands, feathers in their heads, and speaking an unintelligible language, their lives often combined with myths of savagery and cannibalism. However, any person having visited a tribal village will be surprised and thrilled to see a community living close to nature, peace-loving, equitable and with advanced cultural/social forms. Our knowledge about the tribals is very limited, leading us to believe many myths at the cost of their dignity. Even when majority of the communities in the world kept changing their life-styles, competed with each other and developed materialistic instincts to keep pace with the “progress” of the world, there were communities still living in line with their traditional values, customs and beliefs. The exploitative mindset of the mainstream society made these communities recede often into forests and high-altitude mountains, where they could continue to live in peace with Nature and their unpolluted surroundings. As the so-called civilized communities of the mainstream society neither could comprehend the values and ideals of these communities nor had the patience to understand their lifestyles, the mainstream world branded them variously as natives, uncivilized people, Aboriginals, Adivasis, Tribals, Indigenous people etc. In India, we mostly refer them as Adivasis/Girijans. In spite of the merciless treatment by the “civilized” men and the socio-economic perils faced by these communities all over the world, the tribals continue to live in the continents of Africa,Asia, North and South America and Australia.

The Imperial Gazetteer of India, 1911, defines a tribe as a “collection of families bearing a common name, speaking a common dialect, occupying or professing to occupy a common territory and is not usually endogamous though originally it might have been

so”. Another definition of a tribe by D.N. Majumdar is that “a tribe is a collection of families or group of families bearing a common name, members of which occupy the same territory, speak the same language and observe certain taboos regarding marriage,

profession or occupation and have developed a well-assessed system of reciprocity and

mutuality of obligations”.

Can the rural tribes manage their saving? Can the rural tribes aware about the schemes?

These are questions that have engaged the attention of people trying to design microfinance products for the tribes. In the past the tribes were always addressed from the supply side through “schematic finance”, now we have reached a stage where we need patience to understand the financial status, financial flows, savings and their attributes in terms of security ,liquidity and risk-return relationship preferred by the rural tribes. It is known that not only the well to do, but also the tribes have patterns in income and expenditure and have evolved products that take care of these ups and downs in financial flows. The objective of the study was to understand the financial flows of the rural tribes so that a better design of savings and loan products in the microfinance sector can be planned.To fill up the gaps between inflows and outflows, the poor need intermediaries in the form of institutions that help them manage the flows. In all

most all villages the private moneylender performs this gap filling function .The debate between private money lenders and tribes are the common issues in the local economy.

. The moneylender provides access to credit, and there are arguments that the image of the moneylender is unnecessarily tarnished in the literature( Chamala and Sharma, 2003) There are counter arguments on whether this fits with the development intervention to be undertaken [Chavan 2003]. There are arguments that because of traditional relationships of trust, it is almost impossible to replace the moneylender, but possible to redefine the relationship by providing an atmosphere for formal competition [Sriram 2002].There researchers focus on general poor but this paper concentrated on poor tribes.

It is important to understand the roles of each of the players providing finance for the tribes and how they manage money.The most commonly used measure of poverty is based on income or consumption levels. People are considered BPL if their consumption

or income level falls below a minimum needed to meet the basic needs and wants. This level is defined as the “poverty line”. This definition differ from place to place and time to time.. Each country uses a definition appropriate to its level of development, societal norms and values In our country, Planning Commission estimates the proportion and number of poor separately for rural and urban sectors at the national and state levels based on the recommendations of committee members.. The committee members had defined the poverty line as the cost of an all-India average consumption basket at which the calorie norms are met [GoI 2002]. The norms were 2,400 calories per capita per day

for rural areas and 2,100 calories for urban areas. These calorie norms were expressed in monetary terms as Rs 49.09 and Rs 56.64 per capita per month for rural and urban areas, respectively at 1973-74 prices. These figures were updated again with the consumer price indices (CPI) in 1994-95. The updated numbers are Rs 228 and Rs 305 per capita per month, for rural and urban areas, respectively [Pradhan and Subramanian 2001; G1993)..

India has the largest concentration of tribal population in the world. The tribal are the children of nature and their lifestyle is conditioned by the eco-system. India due to its diverse ecosystems has a wide variety of tribal population. Tribes people constitute 8.14% of the total population of the country, numbering 84.51 million (2001 Census). There are 697 tribes notified by the Central Government under Article 342 of the Indian Constitution with certain tribes being notified in more than one State. More than half the Scheduled Tribe population is concentrated in the States of Madhya Pradesh, Chattisgarh, Maharashtra, Orissa, Jharkhand and Gujarat whereas in Haryana, Punjab, Delhi, Pondicherry and Chandigarh no community has been notified as a Scheduled Tribe.

As per 2001 census there were 3.21 lakhs Scheduled Tribes in Kerala State The Tribal population in Kerala State is 2 of the total population in the State. The literacy

status of STs was 57.22in 1991 as against the general literacy rate of 89.81. Major

portion of the STs are seen in the districts Wayanad, Idukky and Palakkad. The poverty

ratio of the ST families estimated as on 31..03..1 998 was 35.89. This was 48.47as

per the State Survey in 1992. Nearly 23of the tribal families are living within forest

areas. There are 35 tribal communities in the State. Among them Paniyar (nearly 20) forms the majority. The Paniya and Adiya communities in Wayanad District are very

backward and most of them landless agricultural labourers. There are 5 Primitive tribal

groups (PTGs) viz., Kattunaikan, Cholanaikan, Koragas, Kadar and Kurumbas. These

398 Groups are the most vulnerable communities among the tribals and are all below poverty Line. They constitute 5of the total tribal population in the State. As per the survey conducted in 1996-97 the population of PTGs was 16678 consisting of 4406 families. . They belong to 35 distinct communities including the primitive tribal groups such as Cholanaikan, Kattunaikans, Kurumbas, Kadars and Koragas. They constitute nearly 4.8% of the Scheduled Tribe population. There are 69,444 ST households in the State while in 1981 it was only 52,421. The present number of ST households is estimated around 84,000. The Scheduled Tribe Population is even more unevenly distributed in the Districts. Among the Districts Wayanad has the highest tribal Population nearly 36of the Tribal Population. Idukky and Palakkad account for another 26. The lowest representation of tribal population is in Alappuzha District

This paper try to understand and map the financial flows of the tribes and how do they manage their money available to them? The paper is organised into five sections. Section II looks at the literature. Section III has the geographical setting, methodology, sample size, design and administration of the questionnaire. Section IV contains findings of the study. We conclude with Section V – discussing the issues that need to be addressed at a larger scale and also how this study can be taken forward, while identifying the limitations of the current study.

Literature Review

The Governments and Financial intermediaries play a key role for uplifting the tribes in our country.The state has intervened in this segment to address the issues

of inequity from time to time. It has not only created institutional mechanisms, but also has had targeted schemes that help the tribes for eradicating their poverty and economic upliftment. However, most of the efforts have been supply-driven and have looked at the credit and not the savings needs of the poor. The microfinance institutions (MFIs) have

Financial Status of Tribes A Study in Wayanad District

A village-level study conducted in Wayanad district of Kerala attempted to map the financial status of the tribes and the funds flow indicated that the overall asset-savings-income profile of the tribes was not alarming. However, most of the assets and savings are liquid, forcing the poor to borrow at high cost. The study reveals the failure of financial institutions to penetrate the savings and loan market. It also reconfirms earlier findings that health-related expenses are one of the major causes of indebtedness amongst the tribes

Still now reliable financial services are not widely available for offering of credit by MFIs is pigeonholed into the ‘grameen’ type with little flexibility and the self-help group

type with more flexibility, concluded by (Smita Parhi and M S Sriram 2006) and they addressed the issues of financial flow.The loan products available in the formal sector do not address the needs of the poor.Therefore, there is still a gap in the needs of the poor and the offerings [Fisher and Sriram 2002]. They need money in lumps and finding ways

to meet such requirements is a challenge. Savings is nothing but the choice of not consuming cash. This is a fundamental and unavoidable first step in money management. We should look at issues pertaining to savings and credit together, to understand

the needs of the poor [Rutherford 2002].There are some recent studies focusing on financial flows of the poor. The MicroSave-Africa has done a series of studies to

provide financial toolkits for bankers and others. These studies recognise the growing interest in introducing savings products in MFIs. The MicroSave and the consultative group to assist the poor (CGAP) collaborated to study the dynamics of institutional

change in transformation of a microcredit institution to a MFI [Wright, Christen and Martin 2000]. They studied Association for Social Advancement (ASA), which is an important model for microcredit institutions planning to introduce savings products.The ASA was a microcredit institution working only on credit delivery and recovery system based on grameen methodology. Rutherford (2000) argues that the best way to designa product is to ask people about their own preferences, because they are the best judges.

. Ruthven and Kumar (2002) argue that the success of the moneylenders, deposit collectors, pawnbrokers who reach people where others fail, is in providing lump sums instantly, with no security and also regular savings devices on a sufficiently small-scale basis. There are many tricks that the formal institutions need to learn from informal players if they want to widen their client base to reach the poor . On savings, Wright (1999) argues that in many instances the poor have “illiquidity preference” which is a

committed savings mechanism that prohibits them from withdrawing in response to trivial needs and allows them to escape from the demands of their relatives for loans or assistance. It was also found that poor give importance to security and liquidity

aspect of savings and do not look for significant returns.Rutherford (2002) did a one year study using financial diaries to understand the financial flows of 42 low-income Bangladeshi families. The study revealed that better managed MFIs were considered “reliable” among the formal and informal financial service providers The factors associated with becoming poor were quite different from the factors associated

with escaping poverty. Therefore, the programmes of the state needed to get an appropriate focus [Krishna 2003]. A study in,12 villages of Rajasthan found that diversification of income sources; irrigation and information on various opportunities were the key factors in overcoming the poverty trap. The social factors that pull them into the poverty trap were mostly not in their control. Even the programmes of state aimed

at poverty reduction were unable to neutralise the negative effects of these social factors. Many times assistance from the state was unable to trickle down to the grassroots. However, Krishna (2003) has argued that the state support through poverty reduction

schemes had a positive effect in making poverty more tolerable. A similar study in Gujarat showed a different picture. Gujarat being economically sound and more industrialised, it was expected a priori that poverty reduction would Rajasthan [Krishna et al 2003]. The authors argued that falling into poverty is not just the converse of escaping from poverty but more than that. It is evident that there is considerable interest amongst scholar in examining the financial flows of the poor. Our study is different from what we have reviewed. It focuses on regions recognized, as backward. The objective of our study is twofold.

1 To understand the financial flow of tribes through empirical analysis.

2 To study the saving habits and credit behaviours..

Methodology

A questionnaire was designed to capture data on various parameters. The design ensured that we use significant events in the last decade as time markers to gather financial data on how these events were managed. We also had asset purchase and sale as additional

markers. These helped us in associating the financial flows – savings, borrowings (both formal and informal) with the ups and downs of a family,and in triangulating the indebtedness data.

Sample selection: choice of the area and village: This study has its focus on families defined as tribal. All families under the “below poverty line (BPL)” category fell into our focus population. It is not our intention to debate the methodology adopted by the state in defining the tribal. As the idea of the study is to look at how tribal managetheir financial flows This is based on the presumption that the findings would be used

for developing financial products that would be offered to a continuum of clients from the very poor upwards. The artificial boundary of a poverty line is only helpful in drawing the sample. While we wanted to base the study in some of the most backward districts in India, the choice of Wayanad was made purposively. The selection of wayanad was driven not only by its general backwardness, but also the geographical backgrounds .

Wayanad formed November 1 1980 as the 12th district and most backward district in Kerala,it is 3.79% urbanized. Wayanad district stand first in the case of adivasi population(about 36%) among other district in the state.

Design of questionnaire: For collecting household data, a detailed questionnaire was designed, with a view to capture financial flows of families over a long horizon of time. The base data were the demographic and asset profile of a household. Other data were built around this to get the financial history of the household. We collected details of income, indebtedness and savings. We sought inputs from local resource persons to include questions/ asset in the checklists specific to the geographical region.

We collected information on the income flows, agricultural land, physical assets, saving habits, loan transactions and the details of the events that happened in the family in the last 10 years. Although the questionnaire was not divided into different stages, each question collected specific information. This collectively gave an idea of the financial flows of a family. In the first part we collected data on the general family details, including income, inward and outward remittances. The second part collected information on landholding and details of other physical assets, including dwelling and livestock details. In this process we captured the information on financial transactions while purchasing or selling assets, the mode of financing and the purpose of purchase. The third part focused on the physical assets, where we captured the information on mode of financing, purpose of purchase, and its value. If any asset has been sold, we found the amount realised from the sale. By seeking this information, we tried to understand the process of acquisition and sale of assets and the circumstances under which they are acquired or sold. In the fourth part, we captured savings and indebtedness details

of the family. We also asked the respondents to rank the sources with whom they had savings and loan transactions to get a feedback on their comfort levels, details on accessibility, costs, security and liquidity of the products they used. We also asked

them the amount of maximum savings and loans and the source where it has been parked or drawn in the last 10 years. This roughly gave us an idea of the reach of the financial institutions and at the same time told us about the extent of convenience and faith the poor placed on these sources. It helped us find which of the formal or informal source provided most acceptable product. Similar details were collected on indebtedness. In the last part we collected details of the events that occurred in the last 10 years – such as marriage of the children, health expenses and purchase of assets or funeral expenses. These event details capture the financial flows involved with birth, death, education, marriage and emergencies. This gave insights into how such events are financed and managed. The questions on which we had difficulty in getting data were about health-related problems and expenses. They were unwilling to talk about these issues. These details were collected in a circumspect manner. Data were not forthcoming on some sensitive issues as well. As this is a tribal area, there is a prevalence of bride price as against dowry in the plains In this area people had a small piece of land, productivity was

low and most of the produce was consumed. The levels of monetisation were also low. Imputing a value for self-consumption was therefore difficult. Using events as time markers were useful, but that gave us the data on financial flows at the event point. However, several respondents were unable to articulate their outstandings, due to low levels of awareness on aspects of repayment and the split between interest and principal.

The data was collected using men and women investigators. We found it was better to use women investigators for data collection. Using women helped us because: – Respondent-women available for a longer part of the day. Therefore, chances of drawing a blank or need to revisit the household were minimal. – Women had the time to patiently answer the questionnaire and were able to recall details more clearly than men, and responded

to women investigators well. – Women were not suspicious and did not have a tendency to hide. However, the downside of collecting data exclusively from women put a question on accuracy. Ideally this data should have been triangulated by a short interview of the men. But due to constraints of time, this could not be done.

Findings

1 Major sources of money transaction in the village are Village moneylenders,

Shop keepers; Family and relatives, Banks , Co-operatve Society and SHG

.

2 General household and employment: We used data from50 households from which we collected information. These 50households had total 226 individuals – an average of around five persons per household. The basic demographics are given in Table 2. Usually areas of poverty are associated with a high prevalence of child labour. Our pilot indicates that, of the 85 children (under the age of 15), 45 were perusing some vocation or the other, mainly in agriculture, procurement of minor forest produce (MFP) and

travelling to town to work in non-farm enterprises. Of the others above the age of 18, there were only six persons who claimed to be unemployed. Only 45 children of the total 85 under the age of 15 are studying. The other 40 children who were not in school might

have either been employed in some chore or the other, which the families chose not to reveal or were too young to start work. The levels of education were low (Table 3). Wayanad is listed under one of the most educationally backward districts in the country. There was nobody who had attained education beyond the primary level and about two-thirds of the people were illiterate. Most of the employment opportunities were seasonal in nature. Given this, there is an opportunity to introduce financial products that aid the smoothening of cash flows of these poor people. The details of the employment status are given in Table 4.

3 Income: Households had income from agricultural and non-agricultural sources. The income from non-agricultural sources was higher than from agriculture (Table 5). Continuous drought for the past years and non-availability of cultivable land might have driven them to seek income from non-agricultural activities Many persons from the village go to other city to work with non-farm enterprises. Connection with the city has played a major role in diversification of livelihood opportunities. The new income streams discovered out of diversification from the present job has pumped in extra cash to the regular cash flow . High debt had also forced them to come out of the village

and look for alternatives that fetch them regular cash flows. Sometimes the income is in kind. We captured this by converting the flows into monetary terms. For instance, grass and MFP collected, contributed significantly to the income flow of the household. These were monetised. In the upper end households where the income is more than Rs 4,000 per capita we found that more than one member of the family got regular work in city. Some of them also had land, adding to their flows. Although we did not find households abandoning agriculture, Table 6 shows that agriculture is not lucrative and finding wage

employment seems to be an alternative. The households falling in the lower income group, continued depending on agriculture, and were unable to move out of the poverty trap.

4 Assets : The assets owned by the families are given in Table 7. From the list we see that apart from utensils, cots and rudimentary farm implements, there is pretty little in the form of assets that the households had. The most significant asset in the households were silver ,gold ,handcrafts materials etc . It was found during the field visit that most of the assets listed were not usually sold. People in the village prefer to borrow in times of crisis at fairly high rates of interest, rather than liquidate any assets and if they need to sell their assets they would first sell livestock but would not touch the jewellery. All respondents had a dwelling unit of their own. Some of them had two dwelling units, but the families used both. None of the families had leased out land, while several families had leased in land.

5 Borrowings: The profile of borrowings is shown in Table 8. The maximum number of loan accounts was with moneylenders. However, the average size of a loan from moneylender was smaller than other sources. In all, borrowing from moneylender

and other informal sources accounted for almost 85 per cent of the number of loans and 80 per cent of the amounts borrowed. Borrowing from relatives and from commercial banks had a significantly high average loan size. There was no significant difference between the source from which Group I and Group II had borrowed.4 It appears that SHG was not an option for Group I households. The formal sector has been unable to reach this segment of the population. The reasons might pertain to transaction size and costs. Even the SHGs were working with the upper end of the poor families. When we compared loan amounts and borrower profiles, we found that the commercial banks have a bias towards making loans for productive assets (Table 9). The bank had given one

loan for social consumption5 out of five loans made. The health related expenses, contributed to higher expenditure. The borrower portfolio was diverse for the moneylender. The moneylender had extended loans for consumption, social consumption,

health expenses, buying assets, and also to meet charges for litigation. The moneylender loans for assets were mainly for the purchase of livestock. All SHG loans were for consumption. People borrowed mainly for consumption, social consumption and health-related expenses from the family sources. The community usually funded the social events in the village – the expectation was that the recipient would pitches in when there

was a similar event in others’ family. Therefore, the borrowings for marriage and funerals were usually from informal sources. Only one loan from the family sources was for buying assets. Tables 9 and 10 indicate that people borrowed from moneylenders for asset purchase. Borrowing from moneylenders for emergency purposes, is understandable, but the larger share in asset purchase indicates that there is scope for formal institutions to step in. We should also note that the most frequent purpose for borrowing is “health-related”.

6 Savings: Without the awareness and complex legal requirements of banks most of the savings in SHGs. There was one recurring deposit account. Savings in SHGs were on the weekly basis. Many members were irregular in their savings. Even this was irregular as there is no regular income flow in the household. So whenever there was a little money available with the women either by selling the MFP, vegetables or bamboo, they preferred to save in the safe earthen container inside the house but away from their husbands’ eyes. From the data on financing of asset purchase and financing of significant events, it was evident that these savings are very sparingly used for outflows. Sale of assets and jewellery was not seen at all in the sample households. Savings are perceived to be a different compartment that was to be used sparingly. An overall look at the income, savings and borrowings data indicates that the level of indebtedness is not alarming (the figure). In almost all cases the overall borrowing was less than their annual income, and far less than the total worth of the assets they had. In this sense no respondent suffered from a negative net-worth. However, what seemed to be very prevalent is stashing money away in pots, as there were no alternatives available for savings. Formal sources were accessed only by a handful of people and they also seemed to have multiple accounts. This problem was faced both in the borrowing and the savings departments. Table 11 shows the savings of the poor in institutions

CONCLUSIONS

Mapping the financial flow of the poor requires careful investigation of the income and expenditure patterns and the most important is the involvement of the people themselves. This paper illustrates the results of a study conducted in one village of Kerala which was under the influence of natural calamities and farmers problems for last years and has experienced some rainfall this year. But that area resolve some of the important problems by way of government programes and individual cooperation , particularly pertaining to wage employment and helped them diversify their livelihood sources. Although there are

various studies conducted to identify the factors that drag people into the poverty trap, the major findings of this study are that the overall asset-savings-income profile of the poor in this village give a comfort while compared to the indebtedness. However, most of the assets and savings are illiquid, forcing the poor to borrow at high cost and service such loans. The study indicates the failure of institutions to penetrate the savings and loan market. Even if we assume that the “emergency” needs would be met by the local sources, the institutions (including microfinance mechanisms like SHGs) were unable to

make inroads into financing non-emergency planned needs such as asset purchase and house construction. There is a need for an appropriately designed savings product – a major attribute of the product must be safety. Liquidity and return does not seem to

be a concern as most savings is in a “pot” stashed away. It is important to note that significant borrowings also come from relatives thereby reinforcing the social bonding in the community that we studied. This is also evidenced in the way marriages and other social events are financed. The poor seem to be smoothening their interest costs by resorting to informal, zero cost borrowings for certain purposes. This has an important

indication for us. There has been a very strong fungibility argument for pricing loans uniformly, by MFIs. This is seen both in the Grameen style and SHG type of organisations. One of the arguments is that this takes care of adverse usage of credit (the oft-cited example is subsidy based production credit being used for social consumption). However, the pattern of borrowing and the use to which the poor have put the funds in our sample indicate that if we can ensure the end use, there is a case for differential

pricing of loans. It also proves that informal structures ensure that even in consumption, this could be limited by social systems – the example being the non-availability of finance from the social system for second and subsequent marriages. The study re-confirms the findings of earlier studies – the most killing expense is health related. This leads the poor into further indebtedness. The borrowings for health expenses form one of

the most significant chunks of borrowing. We also noticed that there was no significant difference between the upper end of the poor and the lower end in having access to formal institutions both for savings and loans and in either case the dealings with these institutions were limited. A combination of factors like information about income opportunities, accessible and cheap healthcare facilities, credit on affordable terms and awareness about the unnecessary expenses on social functions would help

them in managing their money judiciously. Although we could gather valuable information but still there are certain things missing and the study does not capture like

the relation between the cost of borrowing with and without collateral – particularly with moneylenders, long-term flows and whether these households have been better-off as compared to a decade ago and the effect of diversification of income streams in dealing with

difficult situations – particularly considering that the sample area was affected by severe droughts in the past three years. A significant gap was also found in the lack of data collected on current expenditure.

Profile Of Wayanad District

District Wayanad

Area (in sq.km.) 2,131

Population 7,80,619

Males 3,91,273

Females 3,89,346

Sex ratio : Females/1000 995

Density of Population 366

Per Capita Income (in Rs) 34,123

Literacy rate 85.25%; Male 89.77%; Female 80.72%

Coastal line in km. Nil

Water bodied area in ha. 936

Forest area in ha. 78787

Assembly Constituencies 1. Kalpatta

2. North Wayanad

3. Sulthan Batheri

Taluks Head Quarters No. of Villages

Vaithiri Vaithiri 18

Sulthan Batheri Sulthan Batheri 15

Mananthavadi Mananthavadi 16

Live stock Population (2000 Census)

Cattle Buffaloes Goats Sheep Pigs

106393 5847 38188 110 3254

Monthly rainfall (m.m)

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Rainfall 7.4 9.1 21.5 96.3 186.3 694.1 1163.6 639.6 258.7 206.6 101.4 26.7

Profile of Noolpuzha Village

Geographical Area (Hec) 24297

Forest Area (Hec) 19287

Cropped Area(Hec) 3330

Irrigated Area (Hec) 200

Total Number of House hold 4627

Population 23151

Male 11806

Female 11345

SC / ST 9861

Hospitals 9

High Schools 3

Post Offices 8

Banks 4

Village Offices 1

Telegraph Offices 1

SHG

General 296

ST 111

Sources: Panchayat Schedule

LIST OF TABLES

Table 2: Distribution of Age across the Sample

Year Age

1-15 85

16-30 68

31-45 34

45 years and above 29

Total 226

Table 3: Level of Education across the Sample

Level Of Education No

Illiterate 126

Literate 48

Primary education 52

Total 226

Table 4: Distribution of the Sample according to Employment Status

Status Employment (Nos)

Unemployed 62

Student 16

Housewife 29

Agriculture 60

Non-farm enterprise (seasonal) 33

Non-farm enterprise (regular) 4

Service 8

Any other 14

Total 226

Table 5: Income Details for Different Occupations

Source of Income

Average Income Per

Person Employed

per Annum (Rs) Capita Income

of Households

per Annum (Rs)

Agriculture 1,329 752

Agricultural wage labour 10,800 2,700

Non-agri enterprises (seasonal) 10,621 2,392

Collecting MFP/grass

(primary employment) 950 480

Overall Income from non-agri sources – 519

Per capita income from all sources 6843

Table 6: Income Sources: Agriculture and Other

Per Capita

Sources From Agriculture

From Other

Total Income

Income of HHs (No of HHs) (No of HHs) (No of HHs)

0-2000 6 33 5

2000-4000 25 12 19

More than 4000 19 5 26

Table 7: Asset Details

Asset List

Number

Approximate Value

of the Asset ( Rs)

Physical assets

Clock 9 940

Scooter 01 7000

Cycle 01 2000

Watch 10 2210

Radio 05 2300

Cot 24 5100

Chairs 01 50

Elec connections

(number of bulb points) 15 3500

Utensils (approx value) 17900

Farm implements 52 11500

Pump 01 8000

Jewellery (silver) (approx value) 213600

Jewellery (gold) (approx value) 1500

-

Livestock

Cows 3733700

Bullocks 5566000

Goat/sheep 81 35650

Poultry 41 6720

Land (area in acres)

Own irrigated land 0.375 22000

Own rain-fed land 20.5 81000

Own non-cultivable land 11.7 232000

Leased rain-fed land 1.875 66000

Leased non-cultivable land 0.375 10000

Dwelling

Small 7

Medium 20

Large 01

Table 8: Borrowing Details from Different Sources

Details of the Monetary

Transactions Break-up of the

Client Base

Sources Loan

No Of

Accounts Ammount

(Rs) Ave Loan

Size (Rs) Group I

19 Hhs Group Ii

15 Hhs

Commercial banks

post office 05

(7.8) 49,000

(17.33) 9,800

02

03

Moneylenders

42

( 65.62) 134,100

(47.45) 3,193

18

24

SHG

04

(6.25) 2,700

(0.95) 675

00

04

Relatives

12

(18.75) 91,800

(32.48) 7,650

06

06

Any other

0 1

(1.56) 5,000

(1.79 ) 5,000

00

01

Total 64 2,82,600 4,415

38

26

.

* Group I = Per capita income less than Rs 4,000. Group II = Per capita

income more than Rs 4,000

Table 10: Significant Events and How They Were Financed

Event Detail Borrowings

No of Events

in the Past Years(Rs)

Ave Amt

savings

Spent

(Rs)

Used

(Rs)

Marriage of children

19

13,432

1,895

11,537

Health problems of family members 31 1,955

1,281 674

Construction of house 10 7,570 800 5,770

Purchase of agricultural land 07 3,457 428 2 428

Funeral expense 04 200 – 1,200

Other 18 989 906 3,083

.

References

1 . Bapuji M., ‘Tribal Development-Strategies An Overview’, The Indian Journal of

Administrative Science, Vol. III, Jan. -Dec. 1992.

.2 . Beteille, Andre, ‘The Definition of Tribe’, Seminar (14), 1960 in Romesh Thaper (Ed.)

Tribe and Religion in India, McMillan Company of India, Lucknow, 1977.

3 Danda, A.K., ‘Statutory Provisions Safeguarding Interests of Scheduled Tribes and

Scheduled Castes’, in L.P. Vidhyarthi (ed.) Tribal Development and Its Administration,

Concept, Pub. Delhi, 1981.

4 . Dhebar, U.N., Report of the ‘Scheduled Areas and Scheduled Tribes Commission’,

1961, Publication Div. Govt. Of India, Delhi.

5 . Elvin, V., ‘A New Deal for Tribal India, Government of India’, Manager Publication,

Delhi, 1963.

6 . Fernandez W. (ed.), ‘National Development and Tribal Deprivation’ Indian Social

Institute, Delhi, 1992.

.7 Government of India, ‘Ninth Five Year Plan (1997-2002)’, Vol. II.

.8. Government of India, ‘Seventh Five Year Plan (1985-90)’, Delhi.

9 Hasan, Amir, ‘Tribal Administration in India’, B.R. Publishing Corp. Delhi,1988.

.10 Hasan, Amir, ‘Land Reforms in Tribal Areas and Its Consequences’, In H.S. Saxena

(ed.), Perspectives on Tribal Development, Bharath Book Centre, Lucknow, 1998.

11 Hasan Amir, ‘Occupation Pattern on a Tarai Village’, The Eastern Anthropologist, Vol.

XXII 2, July –August 1969.

.12. Hasan, Nadeem, ‘Tribal India’, Palika Prakashan, Delhi 1999.

.13 Karmaker, K.G., ‘Rrural Credit & Shelf Help groups’, Sage Publications, Delhi, 1999.

.14 Mahapatra, L.K., ‘Tribal Development in India: Myth and Reality’. Vikas Publishing

House, Pvt. Ltd., 1994.

15. Mahapatra, L.K., ‘Development for whom? Deprivating the Dispossed Tribals’, Social

Action, 41:3, 1991.

16 Menon, P.S.K., ‘Tribal Development Policies, Plans and programmes’. Yojna, April

2002.

17 Mishra, S.N. and Singh B. (ed.) ‘Tribal Area Development Society for Study of

Regional Development’, New Delhi, 1983.

18 Mohanty, B.B., ‘Land Distribution Among Scheduled Castes and Tribes’, Economic &

Political Weekly, October 6, 2001.

19 Nair, M.K. Sukumar, ‘Tribal Economy in Transition: A Study in Meghalaya’, Inter-

India Pub. Delhi, 1987.

20 . NCW, ‘Report on Tribal Women and Employment’, National Commission for Women,

New Delhi, 1998.

21 . Ramje N. & Bhatnagar, A., ‘Empowerment of Tribals and Sustainable Development of

Non-Wood Forest Produce’. Yojana, April 2000.

22. Saxena, H.S., and Sen, Chandra, ‘Putting People Last: Tribal Displacement and

Rehabilitation’, Inter-India Publications, Delhi, 1999.

23 Singh, A.K., ‘Tribal Development Administration in India’, Bharath Book Centre,

Lucknow (In Press)

24 Chavan, Pallavi (2003): ‘Moneylender’s Positive Image: Regression in

Development Thought and Policy’, Economic and Political Weekly,

December 13, pp 5301-04.

25 Fisher, Thomas and M S Sriram (2002): Beyond Micro-Credit: Putting

Development Back into Micro-Finance, Sage-Vistaar, New Delhi.

26 Mutesasira, L (1999): ‘Savings and Needs in East Africa: An Infinite Variety’

in Potential Products and Product Development Services, MicroSave

Africa, Nairobi.

27 Rutherford, S et al (2002): ‘Innovative Approaches to Delivering Microfinance

Services: The Case of VSSU’, West Bengal, MicroSave Africa,

Nairobi.

Financial-Stability.com Free Homeowner Bailout Information

Financial-Stability.com Free Homeowner Bailout Information

Making Home Affordable Modification Program

This program will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to make their mortgage payments, while attempting to prevent the destructive impact of the housing crisis on families and communities. The program allocates billion to reducing mortgage payments for up to 4 Million homeowners. The program offers lenders a universal, clear and consistent guideline for loan modifications. To provide incentive to the lending community to follow these guidelines the U.S. government is paying the lenders: upfront incentive fees, performance success payments in addition to contributing funds towards the reduction of the borrower’s monthly payments. The program also provides borrowers up to ,000 per year of Pay-for-Performance reduction in their principal loan balance for up to 5 years.

See if you are among the 7 to 9 million homeowners who can benefit from the Financial Stability Program Guidelines. Visit www.Financial-Stability.com for more information.

Today, our nation faces a severe financial crisis. It is a crisis of confidence, of capital, of credit and of consumer and business demand. Rather than providing the credit that allows new ideas to flourish into new jobs, or families to afford homes and autos, we have seen banks and other sources of credit freeze up – contributing to and potentially accelerating what already threatens to be a serious recession. Our Financial Stability Plan will help ensure that businesses with good ideas have the credit to grow and expand, and working families can get the affordable loans they need to meet their economic needs and power an economic recovery.

To address the financial crisis, the Financial Stability plan is designed to attack our credit crisis on all fronts with our full arsenal of financial tools and the resources commensurate to the depth of the problem. To be successful, we must address the uncertainty, troubled assets and capital constraints of our financial institutions as well as the frozen secondary markets that have been the source of a significant portion of our lending for everything from small business loans to auto loans.

“We have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today — making it less likely that the more negative economy they fear will take place.” – Secretary Geithner, Wall Street Journal Op-Ed, 03/23/09

Financial Planning for Private School Fees

Financial Planning for Private School Fees

Financial Planning to afford your child’s Private School Fees

Being a parent and affording school fees isn’t always easy. A survery conducted in Australia in 2006 found that 55% of parents heavily underestimate the costs of educating their children. Over the past decade, the number of children attending private schools in Australia has risen by more than 25% – and with this is the increased cost of education. On average, the cost to privately educate a child through primary and secondary school is around 5,000 – that’s per child! – and the cost continues to rise. The Australian Bureau of Statistics (ABS) found that between 1982 and 2003, the cost of education increased on average by 7.3% per year (compared with an average increase in inflation of 4.4%). Based on the current Consumer Price Index (CPI), secondary education figures, a child born today will cost almost ,000 to send to a private school for Year 12 alone! To afford these expensive school fees you need to start thinking now about financial planning to help you.

Financial Planning for School Fees

You should think of the task of affording school fees just like any other investment. It’s a matter of balancing risk and return, and thinking about the time frame which you have to work with. When it comes to affording to educate your children you have to save for it, or make it through investing and wealth creation. The most powerful is a combination of both of these methods.

1. Saving for School Fees This strategy is all about finding the most efficient form of savings possible. This could mean a savings account, regular savings into a more aggressive investment, paying down your mortgage, or even reducing your credit card debts. It’s about financial discipline and efficiency. As an example, say you had a personal loan at 14% interest. For every dollat that you pay off this loan, not only are you 14% better off, but unlike the interest that you would be earning from a term deposit, you don’t have to pay tax on this.

Tips for saving for your child’s school tuition:

Know your financial position. Do a budget and a financial position analysis. Understanding where you’re at financially can help you take affirmative action to get your savings on track. Use our free Budget Calculator and Financial Position Calculator to see just how your finances stack up.
Effective savings strategy. Choose the right savings strategy for you and make sure that where your savings goes maximises your benefit as far as possible and within your comfort levels.
Efficient savings. When you’ve set up your savings strategy, make sure you’re efficient and save as best as you can.

2. Weath Creation to Afford School FeesMany people are tempted to jump straight into the wealth creation side before becoming experts in the savings but be warned, in the same way as a building needs strong foundations, your financial future requires you to have perfected the effective and efficient use of what you’ve got before making the transition to generating greater returns from these foundations. The options and possibilities are almost infinite when it comes to investing and generating returns for welath creation. For this reason, it’s important to understand what your capacity is both in a monetary sense as well as an emotional sense. Growth assets such as Australian and International shares and property may be the first port of call as these types of investments tend to generate the highest long-term investment returns. If you start early and have a longer time-frame to work with, you probably have the time to ride out the normal volatility waves which are common to these types of investments. If you don’t have the luxury of a lot of time to invest, you may have to be more cautious in your wealth creation strategy. One idea is to establish a savings plan through a flexible mortgage. This way parents can pay off the home loan as fast as possible and re-borrow funds at the beginning of each school year.

Tips to wealth creation for school fees

Investment time horizon or time frame. As with all investing, time is your biggest ally. Start thinking about your investment strategy as early as possible – preferably when your child is born.
Be aware of your investment risk personality. We’re all different. Some of us are comfortable taking bigger risks than others. This is also true when it comes to investing. Make sure you choose an investment strategy that you’re comfortable with. It has to pass the “sleep at night” test.

Saving and investing for your child’s education is something that needs and deserves careful thought and planning for success. A Financial Spectrum financial planner can help you identify the right strategy for your circumstances. Book now for your free first meeting with a financial planner in the Sydney CBD or give us a call on 1300 886 018.

Ranger Financial Services

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Researching the Significance of Intangible Assets of the Balance Sheet

Researching the Significance of Intangible Assets of the Balance Sheet

Intangible assets play a determining role when it comes to evaluation of the financial situation a company is facing. Starting 1980th, the proportion of intangible assets as part of a company’s market value has increased from 40% to 80% by the end of 1990th. In the global economy, intangible assets play an increasing important role, consequently, inability of financial statements to adequately report intangible assets on a company’s Balance Sheet results in a declining value of financial statements for users of financial information. This issue has been raised by many scholars in the recent trend of economy towards globalization and economic shift towards service industry. The present reporting principles fail to reveal the true financial situation of the company; consequently, the principles of prudent and objective information reporting are violated. This research aims to analyze the reasons for this violation as well as estimate the degree of violation of basic accounting principles by intangible assets reporting practice in different industries. The research also outlines the current practices adopted for intangible assets reporting.

Intangible assets refer to non-monetary identifiable assets of a company. The asset can be defined as a resource owned by an enterprise as a result of previous events that is controlled by the company and from which potential long-run benefits will be realized. Consequently, there are three critical points when it comes to speaking about intangible assets as identified by IAS 38.8: indentifiability, control, and economic benefits to be realized. Basically, intangible assets represent the gap between the book value and the market value of the company. While the book value consists of tangible assets, when a company is publicly traded, it is normally valued more then the book value. The resulting gap can be referred to as intangible assets owned by the company.

At the very basic level intangible assets are classified into identifiable and unidentifiable. An intangible asset is identifiable if it is separable or, in other words, can be resold, and arises from legal rights. Identifiable assets are further categorized by FASB into five major subcategories: marketing related (e.g. trademarks), customer related (e.g. customer rights), artistic related (e.g. copyrights), contract related (e.g. franchising), and technology related (e.g. patens and trade secrets). Thus, examples of identifiable assets include computer software, licenses, import quotas, customer and supplier relationship and can be acquired from various sources including self-creation or internal generation. Unidentifiable assets are represented by company’s’ reputation and include successful management techniques, talented workforce, etc. Unidentifiable intangible assets is what separates a company from its’ competitors in the market. Consequently, the key notion in reporting intangible assets is identifiability of an asset that is based on valuation of an asset under an assumption of an ability of stakeholders to separate an asset.

As previously stated, tangible assets are the major constitute of the book value of a company. Book value, in its turn, represents mainly a historic perspective on company’s value and ignores the notion of future performance. At the same time, intangible assets combined with tangible compromise the market value of the company that is based on company’s past performance, established reputation, trustworthiness, and a potential to realize profit in future.

Financial Stability Bailout, Home Affordale Modification Program: Do You Qualify?

Financial Stability Bailout, Home Affordale Modification Program: Do You Qualify?

www.Financial-Stability.com

The eligibility limitation to Fannie/Freddie loans is only on the refinancing program (HARP), not the modification program. HAMP will apply to all mortgages originated before January 1, 2009. No loans originated after that date will be eligible. New borrowers will be accepted until December 31, 2012. Program payments will be made for up to five years after the date of entry into the HAMP. Monitoring, however, will continue for the life of the loan.

General Qualification Terms:

1. The home must be owner-occupied, single family 1 to 4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under current state law).
2. The home must be the primary residence (verified by tax return, credit report, and other documentation such as utility bills).
3. The home may not be investor-owned.
4. The home may not be vacant or condemned.
5. Borrowers in a current bankruptcy case are not automatically eliminated from consideration for HAMP.
6. Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving any legal rights.
7. First lien loans must have an unpaid principal balance (prior to capitalization of the arrears) equal to less than:
a. 1 Unit—9,750
b. 2 Units–4,200
c. 3 Units–,129,250
d. 4 Units–,403,400

Pending Foreclosures:

Any foreclosure action will be temporarily suspended during the trial HAMP period, or while borrowers are considered for alternative foreclosure prevention options. In the event that HAMP or the alternative foreclosure prevention options fail, the foreclosure action may be resumed.

Loan to Value Ratios (LTV):

For HAMP borrowers, there is no minimum or maximum Loan to Value (LTV) ratio for eligibility purposes. Borrowers, however, can only exercise one modification of their mortgage under HAMP. If the HAMP modification fails, then there are no additional HAMP options.

Debt to Income Ratios:

Front-End DTI is the ratio of the Principal, Interest, Taxes and Insurance Payments (PITIA) to the Monthly Gross Income. PITIA is defined under the program as principal, interest, taxes, insurance (including homeowners insurance and hazard and flood insurance) and homeowners association and condominium fees. Mortgage insurance premiums (PMI Insurance) are excluded from the PITIA calculation.

The Front-End DTI Target is 31%. The Standard Waterfall step that results in a Front-End DTI closest to 41%, without going below 31%, will satisfy the Front-End DTI Target. There is no restriction on reducing Front-End DTI below 31%, but any portion of the reduction below 31% will not be covered by the Payment Reduction Cost Share offered by the Treasury.

Home Valuations:

The Servicer may use, at its discretion, either one of the government sponsored enterprises’ (GSEs) automated valuation models (AVM)-provided that the AVM Renders a reliable confidence score-or a Broker Price Opinion to determine the Property Value for the DTI Test.

As an alternative, the servicer may rely on the AVM it uses internally provided that (I) the servicer is subject to supervision by a Federal regulatory agency, (ii) the servicer’s primary Federal regulatory agency has reviewed the model and/or its validation and (iii) the AVM renders a reliable confidence score.

If the GSE or servicer AVM is unable to render a value with a reliable confidence score, the servicer must obtain an assessment of the property value utilizing a property valuation method acceptable to the servicer’s Federal regulatory agency, e.g., in accordance with the Interagency Appraisal and Evaluation Guidelines (as though such guidelines apply to loan modifications, or a Broker Price Opinion (BPO).

In all cases the property valuation may not be more than 60 days old.

Verification of Income:

The borrower’s income will be verified by requiring a signed Form 4506-T (Request for Transcript of Tax Return) and obtaining the most recent tax return on file for each borrower on the note. For wage earners, the two most recent pay stubs for each wage earner on the note will also be required. For self-employed borrowers or for non-wage income borrowers, the borrower’s income will be verified by obtaining other third-party documents that provide reasonably reliable evidence of income. Borrowers must also represent and warrant that they do not have sufficient liquid assets to make their monthly mortgage payments.

Monthly Gross Income:

The borrower’s Monthly Gross Income (MGI) is the amount before any payroll deductions and includes wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances, other compensation for personal services, Social Security payments, including Social Security received by adults on behalf of minors or by minors intended for their own support, annuities, insurance policies, retirement funds, pensions, disability or death benefits, unemployment benefits, rental income and any other income.

Monthly Net Income (MNI) can be used for preliminary screening and qualifications. If used, the servicer will need to multiply net income by 1.25 to get an estimate of Monthly Gross Income (MGI).

Back-End DTI:

The Back-End DTI is the ratio of the borrowers’ total monthly debt payments (such as Front-End PITIA, any mortgage insurance premiums, payments on all installment debts, monthly payments on all junior liens or mortgages, alimony, car lease payments, aggregate negative net rental income from all investment properties owned, and monthly mortgage payments for second homes) to the borrower’s MGI. The servicer must validate each monthly installment payment, revolving debt and secondary mortgage debt by pulling a credit report for each borrower or a joint report for a married couple. The servicer must also consider information obtained from the borrower orally or in writing concerning incremental monthly obligations.

Borrowers who otherwise qualify for the modification under this program, but who would have a post-modification Back-End DTI greater than or equal to 55%, will be provided with a letter stating that they are required to work with a HUD-approved counselor and the modification will not take effect until they provide a signed statement indicating that they will obtain such counseling.

Reasonably Foreseeable/Imminent Default:

Every potentially eligible borrower who calls or writes in to their servicer in reference to a modification must be screened for a hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the mortgage payment that is likely to create a financial hardship (e.g., payment rate shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation.

If the servicer determines that that a non-defaulted borrower is facing a financial hardship is in Imminent Default and will be unable to make his or her mortgage payment in the immediate future, the servicer must apply the NPV Test.

The NPV Test:

A Standard NPV Test will be required for each loan that is in Imminent Default or is at least 60 days delinquent under the MBA delinquency calculation. This NPV Test will compare the net present value (NPV) of the cash flows expected from a modification to the net present value of cash flows expected in the absence of a modification. If the NPV of the modification scenario is greater, the NPV result is deemed positive.

The NPV Test applies to the Standard Waterfall only and does not require consideration of principal forgiveness. However, the servicer may choose to forgive principal if the servicer determines that principal forgiveness improves the likelihood of loan performance and the value of the modification. Required parameters for the NPV Test will be published in a few weeks.

If the NPV Test generates a positive result when applying the Standard Waterfall, the servicer is required to offer a HAMP to the borrower. If the NPV Test generates a negative result, modification is optional, unless prohibited by the service contracts. The monthly payment reduction incentive is available for any HAMP, whether or not NPV is positive, that meets the eligibility requirements and is performed according to the Waterfall described below.

If the NPV Test result is negative and a HAMP is not pursued, the lender/investor must seek other foreclosure prevention alternatives, including alternative modification programs, deed-in-lieu and short sale programs.

Loan Modification and Standard Waterfall:

Servicers will follow the Standard Waterfall described below to reduce the monthly payments to 31% Front-End DTI Target defined below. The initiative will reimburse lenders/investors for one half of the costs of reducing monthly mortgage payments from a level consistent with a 38% Front-End DTI Ratio (or less, if the unmodified DTI is less than 38%) down to a level consistent with a 31% Front-End DTI Ratio. This Payment Reduction Cost Share can last for up to five years from the HAMP modification effective date.

Principal Reduction Option:

There is no requirement to use principal reduction under HAMP: however, servicers may forgive principal to achieve the Front-End DTI Target.

Principal forgiveness can be used on a standalone basis or before any step in the Standards Waterfall process. If principal forgiveness is used, subsequent steps in the Standard Waterfall may not be skipped. If principal is forgiven and the rate is not reduced, the rate will be frozen at its existing level and treated as a modified rate for the purposes of the Interest Rate Cap.

In the event of principal forgiveness, the Repayment Reduction Cost Share continues to be based on the change in the borrower’s monthly payment from 38% to 31% Front-End DTI Ratio and is limited to five years.

Modification Terms:

Interest Rate Floor: THE IRF for modified loans is 2%.

Interest Rate Cap: The modified interest rate must remain in place for five years, after which time the interest rate will be gradually increased by 1% (100 basis points) per year or such lesser amount as may be needed until it reaches the IRC. The IRC for a modified loan is the lesser of the fully indexed and fully amortizing original contract rate or the Freddie Mac Primary Mortgage Market Survey rate for 30-year fixed rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that the modification document is prepared. If the modified rate exceeds the Freddie Mac Primary Mortgage Market Survey rate in effect on the date the modification document is prepared, the modified rate will be the new note rate for the remaining loan term.

Principal Forbearance: No interest will accrue on the forbearance amount. If the option to forbear principal is selected, the servicer shall forbear on collection the deferred portion of the Capitalized Balance until the earlier of the maturity of the modified loan, the sale of the property, or the pay-off or refinancing of the loan.

Redefaulting Loans: A loan will be considered to have redefaulted when the borrower reaches a 90-day delinquency status under the MBAS delinquency calculation. Redefaulting Loans will be terminated from the program, and no further payments of any kind will be made to the lender/investor, servicer, or borrower. Redefaulting Loans should be considered for other loss mitigation programs prior to being referred to foreclosure.

Trial Period Required. Successful completion of the Trial Modification Period and entry into program agreements between the Servicer and the Treasury’s financial agent are prerequisites for any payments to the lender/investor, servicer or borrower.

Modification is effective on the first calendar month following the successful completion of the Trial Period. Successful completion means that the borrower is current (under the MBA delinquency calculation) at the end of the Trial Period.

Borrowers in foreclosure restart states will be considered to have failed the Trial Period if they are not current at the time the foreclosure sale is scheduled.

No payments under the program to the lender/investor, servicer or borrower will be made during the Trial Period. No payments under the program to these parties will be made if the Trial Period is not completed successfully. NO payments under the program to these parties will be made unless and until the servicer has entered into the program agreements with the Treasury’s financial agent.

Length of Trial Period: The Trial Period will last for 90 days (three payments at modified terms) or longer if necessary to comply with investor contractual obligations in the Pooling and Servicing Agreements. The borrower must be current at the end of the Trial Period to obtain the HAMP modification.

Escrows: Servicers are required to escrow for modified borrowers’ real estate taxes and mortgage-related insurance payments immediately if they have the capability of processing these payments or are already using a third-party vendor for this purpose. Servicers who do not have this capacity must implement an escrow process within six months of the program agreement.

Counseling Requirements: For borrowers with a Back-End DTI of 55% or higher, the servicer must inform the borrower of the availability and advantages of counseling and provide a list of local HUD-approved counselors. The servicer must provide the borrower with a letter stating that counseling is a requirement of the modification terms. The letter may be required by counselors in order to begin counseling. The modification will not take effect until the borrower represents in writing that he or she will obtain counseling.

Assumable: If the solidified loan was assumable prior to modification, a HAMP modification cancels this feature.

Unpaid Late Fees: Unpaid late fees will be waived for the borrower. These include late fees prior to the start of the Trial Period and accrued during the Trial Period.

Credit Report: The servicer will cover the cost of the credit report.

Servicer Compensation: Upon modification following a successful Trial Period, and contingent on signing the program servicer agreement, the servicer will receive an incentive fee of ,000 for each eligible modification meeting HAMP guidelines. Servicers will also receive Pay for Success fees payable each 12 months for three years at ,000 per year. Servicers will not receive Pay for Success fees for Redefaulting Loans. For loans modified while still current under the MBA delinquency calculation, the Servicer will receive a Current Borrower One-Time Incentive of 0 following successful completion of the Trial Period. Lenders that service their own (portfolio) loans are eligible for these incentives. The term servicer means the party that is responsible for performing the modification activities. Similar incentives will be paid under the HARP Program.

Borrower Cash Contributions: The investor may not require the borrower to contribute cash for eligibility or execution of a Trial or Permanent modification.

Lender/Investor Compensation: Lenders/investors will be compensated only in the event that the Front-End DTI Target or a lower Front-End DTI is achieved. Lenders/investors will follow the Standard Waterfall specified above to reach a monthly payment that satisfies the Front-End DTI Target. As described above, Treasury will provide compensation based on one half of the dollar difference between the monthly payment for a 31% Front-End DTI Ratio and the lesser of (i) the monthly payment for a 38% Front-End DTI Ratio or (ii) the borrower’s current monthly payment. This compensation will be provided for up to five years or until the loan is paid off.

Upon a modification becoming effective following successful completion of the Trial Period by a borrower who was current prior to the start of the Trial Period, lenders/investors will be paid a ,500 Current Borrower One-Time Incentive, subject to certain de minimis constraints (discussed below). No monthly lender/investor payments will be made during the Trial Period. Monthly lender/investor payments will begin after the Trial Period is successfully completed, the servicer signs a service agreement with Treasury, and formal modification begins. No monthly lender/investor payments will be made if the Trial Period is not completed successfully.

Borrower Compensation: Borrowers will be eligible to accrue up to ,000 each year in Pay-for-Performance Success Payments for up to five years, a total of up to ,000 over five years, subject to certain de minimis constraints (discussed below). Accruals are based on on-time payment performance. The first annual principal balance reduction will be effective 12 months after entering the Trial Period as long as the borrower is not terminated from the program. In any given month, the borrower’s mortgage payment must be made on time, accounting for standard servicer grace periods, in order to accrue the monthly Pay for Performance Success Payment. The borrower will receive information on a monthly basis regarding the accrual of these payments.

The payment will be directed to the servicer, who will reduce the principal balance by the payment amount (but not by more than ,000 per year) for five years if the borrower continues in the program. Payments are to be applied directly and entirely to reduce the principal balance, and any applicable prepayment penalties on partial principal prepayment made by the government must be waived. The equivalent of three months of Pay-for-Performance Success Payments will be made upon successful completion of the Trial Period, contingent upon the servicer signing a service agreement with the Treasury.

Borrowers who are terminated from the program lose their right to outstanding accruals.

De Minimis Constraint: To qualify for servicer Pay for Success payments and borrower Pay for Performance Success Payments, the modification must reduce the monthly payment by a minimum of 6 %. The monthly payment is the PITIA payment, as used in defining DTI, with the loan fully indexed and fully amortized.

When paid, servicer annual Pay for Success payments and borrower Pay for Performance Success Payments will be the lesser of (i) ,000 or (ii) half the reduction in the borrower’s annualized monthly payment.

The de minimis constraint does not apply to the up-front Servicer Incentive Payment, the Payment Reduction Cost Share, or the Home Price Depreciation Reserve Payment.

Disclosure: When promoting or describing loan modifications, servicers should provide borrowers with information designed to help them understand the modification terms that are being offered and the modification process. Servicers also must provide borrowers with clear and understandable written information about the material terms, costs, and risks of the modified mortgage loan in a timely manner to enable borrowers to make informed decisions.

Fair Lending: Servicers’ modifications under this program must comply with the Equal Credit Opportunity Act and the Fair Housing Act, which prohibit discrimination on a prohibited basis in connection with mortgage transactions. Loan modification programs are subject to the fair lending laws, and servicers and lenders should ensure that they do not treat a borrower less favorably than other borrowers on grounds such as race, religion, national origin, sex, marital or familial status, age, handicap, or receipt of public assistance income in connection with any loan modification. These laws also prohibit redlining.

Consumer Inquiries and Complaints: Servicers should have procedures and systems in place to be able to respond to inquiries and complaints relating to loan modifications. Servicers should ensure that such inquiries and complaints are provided fair consideration, and timely and appropriate responses and resolution.

Home Price Depreciation Payments. To encourage lenders/investors to modify more mortgages, compensation will be provided to partially offset probable losses from home price declines. This will be structured as a simple cash payment on each modified loan while the loan remains active in the program.

Payments for Short Sales and Deeds-in-Lieu: Compensation will be provided to servicers and borrowers in order to facilitate short sales or deeds-in-lieu in those cases in which borrowers either fail the net present value (NPV) test (described above) or fail to qualify for, or default under, the modification program.

Second Line Elimination Payments: To reduce the borrower’s overall indebtedness and improve loan performance, additional incentives will be provided to extinguish junior liens on homes with first-lien loans that are modified under the program.