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The Dangers of Easy Credit: Why Financial Wellness Knowledge is Essential
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Recently, I met a friend who described the story of his close relative.
In a remote village in Tamil Nadu, my friend’s relative was hospitalized due to anemia, which is a sudden reduction in blood hemoglobin levels. Doctors diagnosed that a high level of constant stress was the reason for the situation. Family members also acknowledged that the patient had been under serious pressure for about a year. The reason: he had seven loans and had no active source of income to pay back the loans. Lenders were coming to his doorstep almost every day to collect the pending EMIs (monthly loan installments). This led to feelings of social inferiority and created severe stress for him.
But how did it happen that this person was able to take out seven loans while he was not working at all?
The Modus Operandi of Debt Traps
There is a microfinance company, ‘X,’ that has set up groups of 1 to 10 women in every village to disburse a lump sum amount. The women act as agents of the company, providing loans to villagers who request them. The responsibility for collecting the EMIs from the villagers lies with these women. The company has appointed a collection agent who travels to each village to meet with the women and collect monthly EMIs. The company provides salaries and incentives to these women for managing loan disbursement and collection. The better the collections, the higher the incentives. Because they are women, the psychology works in their favor, making collections easier without resorting to force, often referred to as ‘bouncers.’
When villagers approach the women’s group to apply for a loan, they submit KYC (Know Your Customer) documents. An agent from the company ‘X’ collects these documents and hands over the loan amount in cash to the women, who then give the money to the borrower. The borrower and the company’s agent do not meet face to face; their sole point of contact is the women’s group. The loan is completely unsecured—no guarantees or proof of income are required. Getting the loan is as easy as counting 1-2-3. Easy peasy, lemon squeezy!
Monthly EMIs on the unsecured loan must be paid to the women, mostly in cash. The agent collects the money every week. If the borrower fails to pay, the local women’s group visits the borrower’s home and won’t leave without collecting the money. If they fail to collect the EMIs, the agent will collect from them. Therefore, these women must collect EMIs at any cost, often using tactics such as insults and emotional appeals. Sometimes, they pressure the borrower’s close relatives to repay the EMIs.
If the borrower repays the initial loan amount, he or she becomes eligible for a larger unsecured loan. Since the borrower has no source of income, how will the initial loan be repaid? Suppose a person took a loan of ₹50,000 and needs more money. What will he or she do?
Here is a playbook that is now commonly practiced and destroying financial wellness of the people. The borrower approaches company ‘Y’ and gets a new unsecured loan of ₹50,000 using the same earlier process. No guarantee required. They repay the first loan and then become eligible for a larger loan from company ‘X.’ So, they apply for a new loan of ₹100,000 from company ‘X’ and easily get it also. The total loan amount for person A is now ₹150,000 (₹100,000 from ‘X’ and ₹50,000 from ‘Y’).
This cyclical loan process continues until 7 to 10 loans are taken, all of which are unsecured. Everyone wants bigger loans. Nowadays, lavish weddings are trending everywhere in the country. People borrow money against property papers to secure loans ranging from ₹500,000 to ₹2,000,000 and spend extravagantly on weddings.
What do people do with small loans? Some buy cars, some purchase expensive phones, some enter stock market trading, and others engage in online betting games.
The number of people participating in F&O trading has exploded at an annual rate of 40% over the past two years. Easy access to online platforms, quick execution, low brokerage and margin requirements, and smaller lot sizes have drawn people from all social groups, especially from lower-income groups (76% of traders come from income groups below ₹5 lakhs annually), into trading without understanding the associated risks. We are witnessing a Robinhood moment in F&O trading right now. At some point, this juggernaut will have to stop, though it’s difficult to predict when. One thing is certain: many more will face losses before sanity returns to the markets.
Online games like 1xbet, Parimatch, Stake, online rummy, Teen Patti, Ludo, online poker, and Minecraft have become popular due to easy access to high-speed internet, affordable smartphones, and easy credit. These online games are a sure path to addiction and loss. Some games are so rigged that a person initially wins, becomes addicted to winning, and then starts losing slowly. In the epic Mahabharata, Shakuni lost a gambling game to Yudhisthir in Indraprastha, which created a false sense of self-confidence in Yudhisthir, making him believe he was a better gambler than Shakuni. This false win encouraged him to play against Shakuni a second time, only to realize he had been tricked. By the time he realized this, he had lost everything: both his financial wellness and his mental wellness.
The same story is unfolding on a larger scale, across the country, resembling a typical copybook example. Not to be surprised, unsecured credit, including credit cards and personal loans, grew fourfold from ₹4.26 lakh crore in March 2017 to ₹16.68 lakh crore in March 2024 (according to RBI data).
The sad part is that the majority of personal loans, where either no source of income exists or the income is insufficient to support a family, are not being repaid. People in villages lack access to the basics of financial wellness and do not have financial advisors to guide them in sound budgeting and getting out of debt. They often start selling one item or another to pay back the EMIs. If a person has nothing left to sell, the mental pressure begins to build. This is the reality for many people in rural areas.
6 Important Lessons For Financial Wellness
- Don’t buy things you don’t need; otherwise, you will have to sell what you do need. Before making a purchase, ask yourself, ‘Do I really need it?’ If the answer is ‘No,’ then don’t buy it.
- Try to pay for your clothes, food, etc., in cash rather than with a credit card. When you use credit cards, you may be tempted to stretch your purchasing power. Paying in cash forces you to be more selective in your buying.
- Avoid holding multiple credit cards. One credit card is sufficient for emergencies. If you have multiple credit card debts, plan to pay them off. You can do this on your own or use an online credit card payoff calculator to create a plan to free yourself from debt.
- Always try to save before you spend. Saving and investing in the right assets will ensure a smoother financial wellness journey.
- Be truthful with yourself. Prepare your own budget and stick to it. If necessary, use an online 50-30-20 rule budget calculator to create a sound budget plan and follow it diligently.
- Work on improving your skills to increase your earning potential. Earn more, save more, and invest more—these are three simple steps for a better financial wellness. Remember, financial wellness is the mother of your overall wellness – physical, mental, and spiritual.
If you or someone you know is already in a debt trap, follow a step-by-step approach to financial wellness or talk to a trusted financial advisor soon.
For more articles on financial wellness, visit our Next Gen Personal Finance page and subscribe to our newsletter. If you have any suggestions regarding the article ‘The Dangers of Easy Credit: Why Financial Wellness Knowledge is Essential’ please send them to contact@lifespectrum360.com.
Data Sources: Reserve Bank of India.
Additional resources for financial wellness
You Gain Control of Money, Else Money Will Control You
Break the Paycheck-to-Paycheck Cycle, Get Out of Debt and Live the Life You Want
What the Rich Teach Their Kids
About Money
Disclaimer: This article is the personal opinion of the author. The information in the article is generic and not tailored to specific situations of individuals. Therefore, the article is for informational purposes only and not intended to be personal financial advice or any kind of recommendation. Readers should understand that there is an inherent risk involved with financial decisions and should consult financial advisors for help with any investment advice. Neither the author nor Lifespectrum360.com is liable for the decisions readers make.
Birendra Sahu
Birendra is a seasoned finance professional with over two decades of expertise in the financial industry. He has experience in several multinational banks in both operations and technology. His areas of expertise are Investment Banking, Asset and Wealth Management, Treasury and Risk Management.
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