NEWS & ADVICE : CREDIT CARDS
Is the economy facing a debt trap?
By Ankit Sharma
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It seems that India is likely to face a debt trap. The economic boom has seen salaries rise and lifestyles change with people spending a lot on luxuries. Unfortunately, the economic prosperity has also seen a huge rise in personal debts. In this era where one is conscious about his ‘societal status', default rate on credit is also becoming common. Credit card default, home loan default and consumer credit tightening are now frequently heard terms in the market.

Although loans and credit cards make you richer temporarily, it brings with itself a huge burden that will lead us to a Debt Trap.

A crucial driving force of modern economies is the spending by individuals, companies and the government. Another feature is the borrowing to finance this spending. We live in an age of credit cards, corporate borrowing and government budgetary deficits. It is necessary to examine the limits to such borrowing and see whether there are risks of running into debt traps.

Debt trap is a situation where current account deficit increases leading to increases in net debt and interest repayments, which begin a cycle of further current account deficit increases.

Default rate

Without doubt, the delinquency level in the country is on a rise but the prime reason considered for this hike is the rising interest rates over the past. In fact, rates of interest for credit card holders are four times more than the interest rates on home loans. This may be a cause of high delinquency in the card segment in the recent times. The card users are first lured to spend money, which they cannot repay due to exorbitant rate of interest that leads them into a debt trap. Later they are encouraged to convert the outstanding into a loan. The banks do so to avoid an increase to their non-performing assets (NPA), which dents their balance sheets.

People in India are falling behind on paying their EMIs and credit card bills but the overall situation is still way behind from acquiring the status of constitutional and national crisis like it is elsewhere. In UK, the household debt is estimated to be about 109 % of its gross domestic product (GDP) and the consumer debt figure at the end of 2007 was noted to be approx GBP 1,345 billion. Individuals going financially out of order have almost doubled in UK over the past decade. A debt help agency says that in South East England, people on an average are indebted by an amount of 132 % of their incomes. This amount is close to GBP 41,000 in London which is a home to banks, brokers, insurers and legal and accounting firms. However, for the Indian market debt problems have not yet reached a very complicated stage.

Credit cards default is common in the current scenario and going bankrupt or falling behind to make a EMI is a normal thing to happen in a world where extending of credit by the banks and financial institutions is increasing day by day. In any economy where wide-spread use of consumer credit is the accepted norm for spurring demand, there will always be those who will fail to repay their funds.

Debt law

Whenever a debt problem arises, it is very easy for the financial authorities to call on the defaulters but there are no legal options available for the poor people who have turned insolvent. There is an immediate requirement for a detailed law that describes the rights of both the borrower as well as the lender in case of default. It should be designed in a manner that gives minimum pain to all the parties involved along with deleting the need of involving recovery agents to cover the debt.

Although there are ranges of government, commercial and voluntary debt help organizations to manage, recover, and help defaulting consumers and lenders but all of these options only provide temporary solutions to the problem. As soon as one faces trouble, there are options of consolidation of loans, or managed loans, essentially transferring the debt to another lender, may be at a different rate. But this is not a permanent solution and is taking the economy towards a fear of debt trap.


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