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 Indians
in the US are not immune to the debt trap. They are also susceptible
to the vagaries of downturns, like their American compatriots, writes
Mohan Babu
In
recent times it has become extremely hard to get away from news
and views on Enron. Of course, there is also a renewed interest
in news on accounting, finance and debt in the corporate world.
Experts have been analysing the Enron case from different angles,
and have been looking at the impact on the broader aspects of our
life, finance and society. The recent Enron crash has led many companies
to take a hard look at the way in which they manage their debts
and finances. The financial system is becoming more transparent
with companies declaring more details. Investor jitters about corporate
debts and finances are also starting to abate, although the significance
of debts in corporate and personal worlds will continue to grow.
The
recent spate of corporate bankruptcies and questions about corporate
debts are also leading people to revisit their personal finances.
Like companies, even individuals in America are treading on thin
ice when it comes to debts and finances.
Historically,
Americans have been pampered by access to easy credit and do not
shy away from taking on new loans and mortgages. Many working-class
Americans literally live from paycheque-to-paycheque, balancing
their finances such that the next paycheque they draw goes right
to service their loans, leaving very little disposable income. Right
from the time they go to college, they start applying for credit
cards and college loans. After graduating, they start acquiring
other necessities of life like cars and other white goods. At some
point, they decide to buy a house, which in turn locks-up a good
part of the disposable income. Added to this is the contribution
towards retirement planning (401 K, etc) that individuals make,
leaving hardly any liquid disposable income in their hands. The
philosophy of debt (and life in general), is to live for the present
and not worry about the future.
While
planning on new debts, loans and large purchases, most people try
to forecast their future income and plan for the best-case/worst-case
scenarios. However, the temptation to buy the latest model car,
computer or DVD is generally too much, especially when sellers advertise
“zero percent” loans. Also, it is hard to predict downturns
and loss of jobs, especially when one is working in a “hot”
sector like technology and things are really looking up. The swinging
nineties brought in a sense of “irrational exuberance”
and a false sense of security.
When
the dirt hits the fan...
When
the economy is doing well, as was the case in the nineties, everyone
seemed to be happy. Creditors are happy to lend more to people and
individuals are pleased to be consuming products without paying
for them. No one worries about tomorrow, as long as they can make
their “minimum” monthly payments. People continue to spend,
oblivious to the fact that credit cards, mortgages, personal loans,
car loans and second mortgages can easily add up to a substantial
amount. In a growing economy, people have jobs, get raises and can
afford to pay their loans and even take on more debts to pay old
debts. It is when the economy goes south that all hell breaks loose.
It can be especially painful when people lose their jobs and are
unable to make payments. Almost similar to the situation being faced
by companies which are unable to “service their debts”
when their revenues are dropping during the current market slowdown.
The
figures on personal debt in America are staggering. As per one estimate,
the total household credit market debt is over 6,000 billion dollars,
and the household debt as multiple of personal saving is over 45.5
percent. What this means is for every dollar an average person saves,
he already has over 45 dollars in debt. Over 70 percent of Americans
are living paycheque-to-paycheque. As per the administrative office
of US Courts, in 2001 alone, over 1.4 million people declared bankruptcies!
Even
Indians in the US are not immune to the debt trap. Credit cards
are de rigueur. Most of us take car loans without batting an eyelid.
Those with more stable jobs also buy houses instead of renting them.
And like American compatriots, even we are susceptible to the vagaries
of downturns.
Is
borrowing bad?
It
is not my intent to say that borrowing or debt is bad per se, actually
some debt can be good. Most economists agree that the cycle of borrowing
and repaying loans is what keeps the wheels of economy moving. Borrowing
moderately can also help individuals maintain a higher standard
of living, and consume goods that they otherwise couldn’t acquire
immediately. This in turn helps manufacturers and sellers, leading
to a ripple effect in the economy. It is only when the borrowing
starts getting reckless, without any consideration for one’s
ability to repay, that things get out of hand.
Until
recently, Indians (in India) were quite averse to borrowing to pay
for anything, firmly believing in the power of savings. For instance
a person would save all his life before he considered buying a house,
instead content to paying for the house from his retirement funds.
All their lives, people were content to rent a house or apartment.
Even buying white goods like TVs or scooters involved a lot of planning
and deliberation. However, this trend is being reversed with the
younger professionals having no qualms about borrowing money to
pay for the snazzy new Maruti or a flat.
A
slowing American economy, combined with crashing of large giants
like Enron has lead to a greater scrutiny on debts and the ability
to pay what is owed. After a period of hyper-growth, the economy
is entering a phase of moderate, sustainable growth and even individuals
are realising that they should not bite more than they can chew.
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