Mr. R who was a small entrepreneur lived in a posh suburb of Mumbai. He was always cash-starved like many other small entrepreneurs. He enjoyed bank limit for his working capital needs. His appetite for growth was far more than the bank’s lending parameters.
However, since the last couple of years, his cash crunch problem was eased with the accessibility of many non-banking lenders lending aggressively.
He took loans from many NBFCs; some secured loans and some unsecured. Since the money was available easily, he gave more credit to the buyers to increase his sales. His sales recovery period gradually increased from 60 days to 120 days. He was happy with his business growth. His interest cost was recovered by extra profits he would charge for extended credit period.
Today Mr. R is bankrupt. His house is taken over by the secured lenders. He had to close his business. He is staying in a rented house in the extended suburb of Mumbai. His wife is doing tuition and managing their monthly expenses.
The reason: Excess unsustainable borrowings.
“Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-haves.” Earl Wilson
Yes, we live in dangerous times. Today, there are many lenders in the market. They all are chasing borrowers. From credit card limits to white goods on EMI, personal loans to loan for any purpose, every type of loan is easier to get now than what it used to be a few years ago. To add to the gravity, there is a whole bunch of new Fintech companies further easing the borrowing process and options.
Debt can kill farmers and excess debt can kill any flourishing business. The entire banking system is struggling with mammoth NPAs. Banks will survive, but individual borrowers won’t.
Excess debt is dangerous, whether the borrower is an entrepreneur or a salaried employee. All your wealth creation dreams could be ruined by indiscreet borrowings.
“Interest on debts grows without rain.” Yiddish Proverb
Borrower Beware: Manage your debt risk
There are some basic rules to manage the borrowing. These are;
- Never borrow.
- Can borrow for appreciating assets like property (Not all properties are appreciating).
- Can borrow for business; do not give personal assets for security.
- If you give personal assets as security for business borrowing, do not borrow in excess beyond, banking norms. Banking norms are framed for the safety of the banks but it is equally safe for the borrowers. You can manipulate your cashflow on paper, you can’t manipulate actual cashflow. (Don’t forget to read point number 7 below)
- Borrowing for non-appreciating assets and expense are dangerous. Refrain.
- Even excess unsecured loans could hamper your cash flow. This could cause a default on your secured loans.
The most important precaution:
- Keep your loan insurance cover minimum up to the amount of all personal loans. This also includes loans where personal assets are mortgaged. This way, in case of sudden demise of the earning member, insurance should be able to take care of the repayment obligations. This could be a great help to the surviving family members. This is an important risk one must manage.
Remember these rules to remain a comfortable borrower.
It’s always tempting to borrow when we are in dire need of cash. Refrain from reckless borrowing. A good CIBIL record could be one of the aspects one needs to keep in mind, but more important is personal casualty loan default could unleash on the borrowers.
“This would be a much better world if more married couples were as deeply in love as they are in debt.” Earl Wilson
Share your personal experience with the borrowing. Your experience could be a cause to help others.