16 September, 2010

Responsible access to credit

There has been a sea change in the perception with regards to taking loans, these days. The market has opened up significantly in the last two decades. Home loans have been around for long. It is a secure loan and attracts the lowest interest. Vehicle loan too is a secure loan and is available at comparatively low rates. Many times, the car manufacturer themselves subsidise the loan, to sweeten the deal. The delinquency in the home segment is lower than vehicle segment due to the Indian consumers’ penchant for treating the home as a sacred investment and hence would not jeopardize that.

But, personal loan and credit card loans are different. They are both unsecured loans. What’s more, these days personal loans are available without collateral or guarantors and minimum documentation. With rising consumerism and aspirations, personal loans and credit card spends are increasingly the poison of choice. Add to that, cut throat competition, which pushes the lenders to dive deep into the city’s unseen folds and source customers. The cream has long gone. What is left now are the riskier ones who have now become “eligible” for loans. Apparently, people earning as low as Rs.3000/-pm, can now get a personal loan. By it’s very nature, people who have to take recourse to personal loans may not be financially very sound. Add to that the fact that there are no guarantors or collateral and the fact that the loans are being sourced increasingly from the lower middleclass to lower than that. Also, now recovery agents have been restrained and banks have to go through the legal redressal mechanisms, which is notoriously slow. The upshot – rising defaults.
Credit card debt is similar. It is very easy to get carried away by the plastic sliver in one’s hands. Since, one does not count out the money and just need to swipe, one does not realize the outgo. When it comes to payment, many times, there isn’t enough money to settle the outstanding in one shot. Hence, people go on revolving credit. That works for some time, till more goods have been bought and the revolving credit payable every month itself is a huge figure. Then defaults happen. Credit cards are also easy to come by. Customers are serenaded with offers of lifetime free credit cards and sugary sweet offers. Even here, the penetration has gone all the way down to those who may not be eligible for a credit card in the first place.

By stretching themselves and defaulting on loans, customers are doing untold damage to their credit worthiness – for everything is being captured today and is being reported in one’s credit history. Defaults damage one’s credibility, making loans in future difficult to get and/ or high cost. This could bar them from any access to capital, should they require it, anytime in future.

The previous generation can teach us a thing or two here… living within one’s means is something that today’s senior citizen’s vouch by. No holidays on EMI, fancy white goods on easy loans for them. While enjoying the good things in life, we all need to watch out and make sure we don’t cross the line. Once we are on the other side, we are damaged goods… forever condemned by these institutions who will not extend their line of credit. If that sounds like Armageddon, it is!

Published in The Economic Times of 16/09/2010

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