Sunday, November 24, 2013

Credit Growth and Debt Slaves in India

As we come closer to elections and protracted slowdown in banks, there are a lot of advertisements by banks regarding easy credit [personal loans, home loans and credit cards]. If you see carefully, most ads are focused on home loans. Why is there so much emphasis on home loans???

First, the realty sector is in shambles with excess inventory yet high prices fueled by black money. One must remember that projects in the realty sector get limbs by virtue of bank finance. So if the sales slow down, they are not in a position to repay banks. Banks have a vested interest to entice loans in this segment so that their repayment cycle comes back on track from the developer's side.

Second, a home is a priced possession for any human being. A person may delay purchase of a car but buying own home is a top priority. This ensures that the EMIs are paid on time thereby securing credit growth. Most important is that if one services a home loan exactly as per 15-20 year tenure, the interest component is actually larger than the principal availed by the owner and interest income is bread and butter for a bank. All said and done, the property is hypothecated with the bank till the loan principal is paid back.

So far, I have just mentioned the interests of the builders and banks to promote the home loan portfolio. Now comes pricing of homes that are astronomical by logical standards. India has a GDP per capita of about USD 10000 for urban population [about USD 3000 on a pan-country basis] So the spend on home loan EMIs is about 40% of per capita income i.e. one of the highest in the world. In developed economies, the GDP / Capita is about USD 45000 and the spend on home loan mortgages is about 10% to 15%. Thus, it is clearly evident that the home prices in India are obnoxious and since they are purchased on credit, a person will slog day in and day out to ensure that the home loan portfolio is serviced.

The government and the banks are very happy with this kind of scenario. As long as the sword of EMI is hanging on a person's head, s/he will not think about other things. S/he will be indifferent to misdeeds of the government and government policies as s/he has better things to worry about in personal life. This person also starts becoming less creative or rebellious at the workplace. The person wants the cushion of safety of a salary credit at the end of the month. It is this salary that will ensure that loans are serviced on time.

So the person does not question the government, does not question the corporation and leaves his/her independent views and creativity apart. What does all this lead the person to become? A slave albeit a debt slave. We are living in a democracy and hence it is not possible to chain human beings and make them direct slaves of the government and corporation. So what is the best way to control and make people slaves in the larger scheme of things? Make them debt slaves.

This is the sheer business that the government and corporates want to ensure in India. Keep the poor poor and ensure votebanks via subsidies and sops. Make the super-rich ultra-rich by keeping hopes and aspirations alive with the middle class population. And ensure that the middle class is reeling under EMIs for most part of their lives to service EMIs.

Bottom-line: Debt is modern slavery. There was a flop Hindi movie a few years ago but the message in that movie was great. An aged person says 'Pehle log zaroorat ke hisaab se karz lete the; ab karz ke hisab se zaroorat bana lete hain' Coming back to market perspectives that I usually comment upon; as investors, we try to shun away from corporations that have huge debts on their books. We like to invest in companies that are as debt free as possible. Does this not also apply to our personal lives?

I am not against availing loans. The salary levels and price levels for most of the essential goods and services in India mandate us from taking on loans to take possession of the same. I have availed loans myself at various points in life and am sure at some point of time in future, will have to avail loans again if need arises. The point Im trying to drive is that availing debt and taking possession of goods and services gives a momentary high. In the long run, it hurts our capabilities to think independently and be creative. It automatically ensures that we become systemic slaves [political system and banking system].

So one should be prudent whilst availing credit and one should be quickly servicing debt to ensure that one moves out of the debt spiral as soon as possible. We all like to talk about the Sovereign Debt issues in Europe, US etc but most of us forget that we are individual equivalents of Greece, Spain, Portugal etc that tend to borrow far too much failing to realize that we don't have the luxury as individuals to default on our loans. Default would simply mean losing our homes, cars etc. The Kingfishers and Saharas can go on forever doing what they want and yet retain a lavish lifestyle and avoid jails. The common man cannot. So think prudently when taking on credit and act wisely to clear off debts as soon as possible.

Otherwise, one will be slave forever to the system [this is what our leaders want us to be for their vested interests] And as long as debt slaves exist, systemic changes for the better will not be possible. We can say along with chai with our friends 'Iss desh ka kuch nahi hoga; sarkar bekaar hai' etc etc We need to be the change that we want to see. If charity begins at home, change begins with us on a personal level. Let us try to ensure that we get out of the debt spirals as soon as possible so that we can then think through things and catalyse the process of change India needs desperately.

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