Why borrow with caution now

A stock market trader in Chennai recently died by suicide. In a report published in this paper, a preliminary investigation discussed a R10-lakh loan for investing in the stock market. If you search online for statistics on debt-related suicides in your city, you will find an alarming increase in reports. 

In another development, the Reserve Bank of India has asked Bajaj Finance, a non-banking finance company, to stop offering loans under two digital lending products. At the same time, RBI has asked banks and non-banks to set aside more capital for personal and other retail loans like those involving credit cards. That would limit banks’ ability to lend more money to you for personal loans or credit cards.

Over the past few months, the RBI has issued several warnings about instant lending through digital transactions. According to the RBI data, retail loans account for over a third of non-food credit given by banks of close to R151 lakh crore. It was only a quarter of that five years ago.  The fast pace of growth in retail loans could lead to loan defaults if borrowers cannot repay. Over the past month, share prices have already reacted. Bajaj Finance and SBI Cards have slumped close to 10% in just a month. During the same period, the NSE Nifty remained flat. That shows investors were already concerned about the situation. 

Technology is a significant enabler for loans. Banks have a lot of information about you now than ever before. They can assess the risk of lending to you based on your income and ability to repay. However, with competitive pressure, banks are offering attractive consumer loans for expenditure on the tap of the mobile phone. Ahead of the festive season, there is usually a surge in consumer loans. The Chennai-based stock market trader situation is worse than credit cards. You cannot borrow money and invest in the stock market. That is the most dangerous game to play. 

When share prices rally, they do so based on future expectations. They may continue to rally. However, it is tough to predict the return you get since share prices move up and down in cycles. Your loan comes with a fixed charge, and you have no option but to repay that loan. The stock market situation does not matter. 

The RBI action also points to your borrowing habits. In personal finance, we have a few sets of identities. Businesses classify you as a customer or an investor. You need to balance your identity as both a customer and an investor. It is the business of banks and non-banks to offer you attractive loans. The onus is on you to determine the right path. 

When to borrow
There is nothing wrong with borrowing money to meet your objectives. However, when you determine your objectives, you should ensure that you clearly see your assets and liabilities. If you are taking a home loan, gold, fixed deposit or a car loan, you are borrowing against an asset. These are secured loans and carry the lowest possible interest rate. 

Your unsecured loans are usually used for expenses. If you borrow when you do not have money, you could create a debt trap if you do not pay back on time. The best way out is to get a professional finance advisor. When you look at your financial position on assets and liabilities, you will know how you need to behave financially. If the situation demands cutting back on your lifestyle spending, you should. The other way is to make your assets work and generate additional income. 

You can borrow if you are confident about repaying it through your future income. You know the asset you could lose if you do not repay. However, borrowing for expenditure is a risky proposition. If you have adequate assets to take care of that liability, you should spend and pursue happiness. However, if you are spending upfront for a marriage or foreign travel, you need to carefully assess your borrowing. You may not get a sound sleep if your pursuit of happiness involves other people’s money. 
 

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