Swati CA

Swati_CA column in The Hindu Business Line

Saturday, December 29, 2007

Debt-trap and beyond...

It’s the same moth and candle story. For those of you who are unaware of what we are speaking of, moths have an unexplained attraction for light. Due to their nocturnal nature, most often the only light source that moths come across are candles. They die shortly afterwards; for, they are too late to rescue themselves from the searing heat. This somewhat explains Ramu’s story. He is a 38-year-old division head at my company. After passing out with a diploma in engineering, Ramu got an MBA and soon was in august company. It’s hard to be judgmental on people you know, at least professionally, is it not?

Maybe the lifestyle, societal demands or his own weakness got the better of him. “I don’t know Swati, how I landed myself in this mess…there are sixteen credit cards that have reached their credit limit, one car loan, one house loan, a stash of money that I need to payback to my relatives,” gasped Ramu as he broke down.

Like most people, I was about to leave when my boss asked me to wait for an email that he expected to contain some critical information. At around eight, I gave up my wait and was heading for the exit, when I saw Ramu sitting in the corner, with sore eyes.



  • At 8:49 PM, Blogger Swati CA said…


    How often you judge a buy from the need perspective?

    * House hold appliances and furnishing requirements are mostly need based and are done to our economic status only.
    * Not much importance is given to fancy-wares, jewels and fancy wardrobes.
    * Strictly Value based buying on eatables and dine-outs. These have imparted reasonable disciplines on our grown-up wards as well.
    * I sincerely share my experiences (I have made it a habit) with a reasonable circle of friends who belong to the younger generation only.

    Does debt really help you gain something in short span?

    * If short span is read as 3 to 6 months, the answer is YES.
    * Very concerned and conservative borrowing definitely bears disciplined results.
    * Small prints in any legal documents are more important than the bold lines which depict borrowers name and borrowed sum only.

    How best to tackle the debt trap?

    * Like your Ramu, the trapped one has to interact with right listener/advisor.
    * Beyond a certain stage, a strong counselor is a must, preferably a family member/morale booster.
    * Debt-addict is harsher to bear than a drug-addict.

    Discussions and Suggestions on the above topic-Debt-trap.

    My parents (an ordinary railway employee and a house-wife) used to borrow at the beginning of every academic year for paying school fees for seven of us, (dating back by 40 years ) The debt was promptly repaid by drawing from ppf at the end of each year. This cycle lasted during most of our school days. I have never ever seen my parents spending even a rupee for anything other than schooling expenditures household exp.

    * It is an old story, but more of morals and disciplines and all of us (I mean my brothers and sisters) are reasonably aware of what debt is and how judiciously we can handle them.

    Today’s Gen “Y” lacks financial knowledge. Financial disciplines and implications are not taught as a curriculum in school days. It shall be kept as a compulsory paper for all Graduation and Eng. Students. India will soon produce millions of NPA; I mean intellectual/human assets turning to a poor performance when soaked in a debt-mess/trap,

    Any thing from a “Cell phone” to “Equity Share” are not BOUGHT at will any more……..All items and services are SOLD to us (it is an irony, when you have more to chose from, things are forced and sold upon us- a result of sheer lack of financial knowledge)

    The SELLERS and the ones with vested interest (of real-estate as a bigger example) make the Gen Y to believe that they will not find a place to live if they miss-out the current chance. (Buying space at astronomical cost betting more than 50% of their gross income for next 20 years)

    First of all there is a Gross Ignorance on Fact fronts, which one needs to take care of. While we know how to earn using our full thrust, How to Spend has become a real nightmare and this weakness is taken to the full advantage by those who have their ways of collecting their best (right from the insurance agent to an ordinary door to door sales man)

    Either we lack financial knowledge or no time to think and choose or we have more plastic money leading to an extravaganza all over.

    Everyone is forced to leverage their future potential without leaving any margins even for the inflations down the years.

    Once we start to express the pain, it is already too late to fix.

    Nobody can help once things go beyond repair, the possibility of willing to share it becomes extremely difficult.

    * Present demand paints a bright picture for the macro-economy, which doesn’t make any sense for individuals forced towards a debt-trap

    Peers and Society:

    When it comes to spending, the case narrows down to individuals, their background and economic strata.

    It is true, the gap between the top 10% of the earners and the rest of the crowd has widened really too broad, whereas the invitation to subscribe/buy has narrowed the gaps between “could and could not afford” categories with the courtesy of Media advertisers, Jumbo Sales campaign and Bundled offers. (Campaigns like “The whole world is changing, won’t you?” really makes Gen Y crazy.)

    Most important fact is that we end buying liabilities, absolutely no re-sale value for anything you buy other than the house (where also we incur only losses, in case of distress sale call)

    * Understand yourself.
    * Plan your financials for next 5 yrs (short term) and 20 years (for long term).
    * Dreams are better than loosing sleep.
    * Choose a good financial mentor/councilor from your own circle.

    We have to believe the Eternal/Golden words of Gandhiji

    * There is enough for every ones NEED but not GREED.

    Krishnamoorthy, Mangalore

  • At 8:52 PM, Blogger Swati CA said…


    Hi! I read your piece "Debt-trap and beyond..." I found it extremely interesting and relevant in today's time.

    By profession I am practicing Financial Planner and Wealth Manager. Apart from my practice I also write regular columns for (1) Times Of India (2) Business Standard (3) moneycontrol.com (4) Divya Bhaskar. Apart from these columns I also write randomly for other publications and do shows on Personal Finance on Aawaz - CNBC. I have authored a book "Essential Guide To Carefree Retirement" which has been published by Business World.

    I have been meeting lots of youngsters and young couple who have negative networth i.e. more liabilities than assets. This is happening because they are borrowing to not to create asset like home etc. but to spend on life style related products and services. There are several clients I have now who are in very high income group and have negative networth.

    Negative networth is more observed in youngsters, couples who are earning more than Rs 10.00 lac+ per annum. They are the perfect target audience for life style related service and products who lure them to spend now pay later.

    Another problem is that with higher salaries and disposal income newer generation is struggling to manage it surplus disposable income. While people are making more money they do not know how to manage more money. I have always said that "Making money and managing money has no correlation." Since these couples are first generation individuals/couples who have large disposal income in their family - their parent did not have such large incomes - they do not know how to mange it, resulting into wasteful splurging.

    Personally I have been talking to various individuals in media to continuously keep talking/writing about debt-trap. I strongly feel that if we do not do this, soon we will have broken marriages, depression, hyper tension and white collar crimes. I am worried that "western wealth" will bring "western life style, diseases and social issues."

    Hoping to get your views and continuing discussion on subject...

    Gaurav Mashruwala, Mumbai

  • At 8:54 PM, Blogger Swati CA said…


    Debt trap prevention is better. Anyhow, once trapped what to do to come out of the mess?

    I like to give the following suggestions:-

    1. Asses the present value of the marketable personal assets, excluding the essential items required for daily use. Be prepared to sell the belongings such as, vehicles, house / flat, costly electronic gadgets, costly cell phone etc etc.

    2. Meet the Bank Manager and request him for one time settlement. Make a special request to waive the heavily loaded charges in the account and to recalculate the liability at a fixed rate of interest

    3. Request the Bank to accept a downpayment and to convert the balance amount to a loan account with a repayment holiday of 3 to 6 months and to fix reasonable repayment period with EMI.

    4. If the Bank is agreeable for any one of the above proposals he can decide depending on the asset value and his intention to dispose off the items and the resources he is having to meet the EMI.

    Most of the members having liability in the credit card do not go and meet the bank managers to find out an amicable settlement. Delaying tactics unnecessarily increases the liability.

    S Mahadevan, Nagercoil

  • At 8:57 PM, Blogger Swati CA said…


    We are living a materialistic world. That is why people are interested in what you own, rather than what you earn. Of course everybody is afflicted with peer pressure. It leads us to spend beyond our means. If you analyse, you will realise that most of your purchases are not need-based. No doubt debt really helps us to gain in a short span.

    Too much attraction for credit cards reveals this. I don’t say credit cards are bad. If you use it discretely, it will be beneficial. I am using credit cards successfully for the last ten years without getting into the debt trap. Nobody can stop you falling into a debt trap than yourself.

    Here I would like to give few suggestions for best financial management:
    1. Think twice before purchase anything. If it is really for your need go ahead. Otherwise postpone your decision and have enough time to discuss with your family members.
    2. Don’t take credit cards more than two and use them only in emergencies. Always keep in mind ‘what you save is more important than what you earn’.

    V Ramasamy, Noida

  • At 8:58 PM, Blogger Swati CA said…


    After a long gap I found you in the news paper with the above article.

    Where were U?

    O K I ca'nt believe some one with debt trap of Rs 1 crore.

    To keep up with the Jones is a old proverb.

    One should know how to live within the means.

    R T Shah

  • At 9:01 PM, Blogger Swati CA said…

    Only a miniscule percentage are in a position to handle debts correctly and without over extending themselves.

    Personal debts can be broadly classifed in to two :

    i) for developments, asset creation etc and,

    ii) for consumption purposes. Certain loans like housing loans create a return either directly or indirectly, while many other loans do not.

    The second category of loans have a damaging effect, on the domestic balance-sheet management, if not handled correctly, right at loan planning stage itself.

    With easy availability of credit and sweet talk by the DSAs, many an innocent persons are almost sitting ducks for the lenders.

    Apart lack of finance from the formal system, it is the informal system which is playing havoc in rural areas and with the poorer urban population.

    There is a need for financial planning before contracting any loan looking into both short-term and long-term requirements and repayment capabilities/capacities.

    The organised sector - like banks, NBFCs, should play a matured developmental role. They can not just take the pay-in slip and forget the broader picture of the family. There can be evolving discussions, before loans are sanctioned, more particularly with larger loans and loans which require repayments more than say 25% of the monthly income.

    There is a need for mass education of the fine prints of the loan documents also, like interest rates, variabilty thereof, penalties, recall and repossession clauses, etc.

    For the rural poor the informal sector is both a boon and a bane. The organised formal sector, with its 10 to 5 and about 75 days holidays culture and formalised systems and requirements , can not meet their requirements. Though there is some light light seen at the end of the tunnel with the incoming of MFIs and financial inclusion etc, still it is a long, long way to go.

    The NGOs can play an active role in the rural areas and try to stem the situation.


  • At 9:04 PM, Blogger Swati CA said…


    Majority of the buys cannot be justified from the need perspective as buy culture has become the order of the day.

    1. Companies vie with each other in the aggressive marketing of their products, otherwise it will affect their production cycle resulting in other socio economic problems.

    2. Consumers buy each and everything without any logic or reasoning in the of life style[ originally it was confined to big cities, gradually it has spread to mofussil areas too.

    3. Political parties after coming to power pump in lot money in the name of subsidies/free.

    4. Even now 30 to 35% of buys are from hard earned money/savings

    What is the solution?

    Don't worry. even now majority of our people are god fearing, GOD ALMIGHTY will take care the future.

    Ramalingam Ayyappa

  • At 9:06 PM, Blogger Swati CA said…


    With regard to debt-trap, I feel there are two pertinent issues that plague a human being.

    One: He constantly compares himself with others.
    Two: He is often overwhelmed by the drive for instant gratification.

    It's actually normal for a person to compare himself with others. But the problem occurs when he starts thinking about what object the other person possesses and what he doesn't. He develops an urge to possess it.

    If this urge is strong enough, he will find out ways and means (such as availing of a loan) to gratify this urge sooner than later.

    The solution to the first problem is to avoid comparing himself with others. Don't compare. But if that's hard not to do, then he should try this for a change: he should think about what he possesses but his counterpart doesn't. There's always something to feel bright about.

    For instance, a daily wage worker may be able to get enough sleep as compared to a stressed out management executive for whom sleep may even be a luxury!

    The solution to the second problem is to have foresight. The future may hold highly unexpected and unfavorable events just waiting to come crashing down.

    For instance, the arising inevitability of phenomena such as downsizing means that jobs will no longer be 100% secure. How then, can a person be sure of repaying a huge loan? A person who really cares for his family will make plans for such unfavorable circumstances, so as to reduce the impact of the fall.

    He will make a wise trade-off between instant gratification and saving for contingencies.

    Soni Achuthan, Haripad


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