Tuesday, February 9, 2010

Living in Debt

Recently I ran into a friend whom I had not met in some years. It turned out that like many who have been affected by the economic downturn, he too has been hit and has been out of a job for a year or more now. Having exhausted all his savings, he was in a situation where his children’s school was telling him that they would drop their names from the school register if he didn’t pay up their fees on which he had been defaulting for some months. After exploring all possible alternatives, he approached a kabuliwallah, the dreaded traditional money lender of Afghan origins immortalized in Tagore’s short story of the same name and its subsequent movie version.

The kabuliwallah lent him money at the horrific interest rate of 80 percent per month and fully aware that his client was unemployed and possibly unable to return his money immediately, further added a stipulation that if my friend failed to pay the interest at least, he would further pay a penalty of 60 percent per month on the interest. This left the family, already in considerable difficulty, in dire financial straits. Of course, the situation of my friend was not of his own making ; he was not spending or living ostentatiously; he was simply unemployed for so long that his savings ran out, pushing him into a corner. But around me, I do see people who seem to have control over their spending, live beyond their means and eventually get into a debt trap.

While the debate between living frugally (as our parents usually did) or the times today , where we often live to spend will always be debatable, going into a debt and then staying there is a point where surely a line has been crossed. And while living off credit cards and personal loans itself is a nightmare, taking loans at incredible rates from unorganized but dreaded money lenders like the kabuliwallahs is perhaps an inevitable step towards doom. And yet money lenders are an integral part of the Indian horizon and according to S. Parasuraman of the Tata Institute of Social Sciences Moneylenders are now an inextricable part of the rural economy," So much so the bank has become secondary, or even redundant in rural India."

And then for a picture of urban India, just look at this: Outstanding loans on credit cards reached $6 billion at the end of 2008, up 85 percent from the previous year, according to CRISIL, a ratings agency. In New Delhi alone, already overburdened courts are dealing with 400,000 cases of bounced checks, mostly payments for credit card purchases, according to government figures.India currently has 30 million credit card holders, triple the number half a decade ago. In the past two years, the average credit card spending by an Indian has jumped about 30 percent, to Rs 2,400 per month ($48). Indians took on credit-card debt worth $14 billion in 2008, three times higher than just four years ago.

Although slowly counseling facilities like DISHA and Debt doctor and others like them are beginning to emerge to provide advice, counseling and even debt negotiation with the organized sector like banks and other financial institutions, just how deep is their reach? And just exactly how many people actually know about their existence? Few? And how many of the clients of these credit counseling services are those who have borrowed money from money lenders? Probably none. And considering that Self help groups and cooperative societies where interest rates are more affordable are the fourth and fifth preferred choices for sourcing loans according to the Invest India Savings and Income survey for June 2007, and have a share of 9 per cent and 6 per cent respectively in unorganized sector, the demon of debt is not likely to go away any time soon.

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