Mind Your Limit !!!

Every month on 25th I tend to skip a couple of hear beats. Watching the calender seems so painful. Its not the day I got married, rather its the day of receiving credit card statement. Like other days, even today the mailbox is full of job openings, some crap discounts, money making tips from experts who know how to make milions but somehow agree to remain middle class themselves and a mail or two from UK Lottery saying I just won 1.5 Million Pound in lucky draw. Between them a subject lines appears boldly 'Your Credit Card Statement for Period XYZ'. I sometime wonder why don't they append it with "Open With Care" warning. After all mostly it gives the card holder a shock no matter momentarily though.

The first thing that comes to my mind is finding occasions I've used my cards on and try to run a mental reply of occasions I've used my cards for. This is another area of problem since many times the business is booked of different names that one you used for. This reply exercise is short, what last is the painful feeling of paying dues which sometimes end up with feeling guilt.

Its not the guilt of spending money, rather its the guilt of spending money on completely avoidable and unnecessary stuff. The stuff I felt earlier was cool and necessary suddenly becomes expensive and inessential. But why didn't it appeared so earlier?  I don't earn millions that I can spend it casually. Then where did all this money came from? The answer is Credit Card also known as plastic money. Credit card is an invention to power people to buy things they were or thought they can afford to. As the name suggest Credit card is nothing else than a loan or debt taken for bank which one has to pay back with interest. Its single most important reason for invention is to make people spend more. With every swipe banks get their share. They earn a lot more in case a customer defaults on payment. In return they lure people with cash back, point redemption and other marketing techniques. 

What one needs to understand is that credit limit you see in Credit card is not physical, its a virtual money created by banks, money that you have not yet earned. There is virtually no limit on the amount of credit a bank can give. Now a days the banks just distribute cards for free with high credit limits. They know ones a customer get a card he will start spending. I recollect another such  incident which used the same strategy to gain customer base. At the time when mobiles used to cost thousands and call rates were 4-5 Rs per min, Reliance Communication introduced a scheme where mobile phones were sold for Rs 250 and call rates dropped to Re 1. What happened next is no more secret. A device considered luxury was now a necessity. People now needed mobile phones more than ever and since call rates were cheap they used phones more than ever and finally end up spending more than required.

The is a saying in Hindi "Pair utne failao jitni badi chadar ho", meaning one should spend well within his means. With plastic money in hand people forget that this is not theirs; they have to reply it one day. banks on other hand keep distributing card without carrying out proper background check. People incapable of payment default on cards and the outcome of this collective and chronic default leads to financial crisis. Economic crisis we saw in 2008 was result of reckless distribution of money. 

Its obvious to consider that if credit cards are so disastrous why shouldn't they be banned. That's because credit card is a financial tool to facilitate flow of money. We can now go on shopping and vacations without carrying loads of cash, which also decrease the chances of theft. Moreover it gives people an extended hand while buying goods which was earlier out of their reach. For example one can buy TV set and pay back in installments. Not forgetting cash back and other benefits. On regulatory point of view credit cards provide a traceability of money and hence avoids tax evasion. What one needs to remember is that credit card is a powerful and helpful financial tool which can be easily misused. Be wise in making decisions while shopping and consider the need of goods before hitting BUY button. A purchase through cards is a after all a  a loan taken from bank, the earlier you repay the better, because any delay in payment will be dealt with hefty fine and interest. 

Aamdani Atthanni Kharcha Rupaiya

Last week I was in Pune to meet some friends and celebrate my new job. On second day on trip my friend found me focused on market news. As true friends are he understood the matter and immediately cracked a joke on how much money have I lost in shares. After some good laugh he said “Everyone is talking about global slowdown, what is it? why don’t we see its effect on India? Is it an appropriate time to switch company?”. I soon realized that this same question is going through many people’s mind at my workplace too. People want to make a change but are reluctant as they are apprehensive about economic condition. Now I’m not an expert in this field nor have I done any formal studies on economics, but I still tried to explain the current scenario and try to clear some of his doubts.

The slowdown in my view can be attributed to two reasons. First the hand-off approach of Central banks and secondly a very basic human tendency of Desiring more than what he earns.

First of all we need to see what really went wrong. Well a simple answer to this is ‘Overspending’. Yes it is this particular attribute that has added to global woes. To start with we can take a simple example of bank giving home loans to customers. In order to get loan one needs to fulfill a set basic conditions proving that he/she can replay the loan amount. Also there is a limit on how much money a bank can lend while keeping reserve. Now US and many European countries in order to boost economy the Central banks kept on easing regulations on eligibility on borrowing. With old and much conservative approach of strict money borrowing removed a person can now borrow more money at less security. Plus the limit of credit a bank can give was increased and while maintaining lower reserve. With growing economy it was easy for investment bank to make money through various instruments like Derivatives, CDO, CDS and what not. People deposit there money in banks and some give it to investment institutions. These banks and investment institutions then lend this money to mortgage lenders. All was well till people kept on borrowing money and paid their dues. The problem started when loan takers went default. Once default the mortgage company took hold of house and kept it on sale. With time more people went on declaring default and more houses when on sale. Gradually the supply was more than demand and prices started falling. People soon realized that the house they are owning is much less worth and even they defaulted. Now mortgage lenders have too many houses with much lesser value and thus cannot reply the investment institutes who in-turn defaults on banks. Just like house of cards this cascading effect lead to fall of many elephant sized banks and thus complete economy. In this process everyone except few lost all their hard earned money and hence was declared recession.

Now is India shielded from recession. The answer will be a big NO. India is not isolated from world economy but we are much less affected by recession fears than others because of few very basic rules of human desired and spending tendency. This bring us to next point  of spending habits where I think the actual difference lies between Indian and western economies. Though moving towards liberal policies we are still conservative when compared to our western counterparts. Moreover the general tendency of an average Indian is to save money for future rather than spending it today for some luxury. An Indian will think twice before spending a penny over devices meant for comfort and an average American will spend all his bonus enjoying a Hawaii vacation or riding home a new car. Buying a house in India is big and once in a lifetime decision which might seems a bit grim to an American who keeps on changing roofs rather regularly in his lifetime. But this very trait of saving saved India from complete collapse. There is another pillar for India’s survival and that would be its huge population. Due to huge population mostly falling in young 25-35 year category provides a big market for companies. This young and big populations provides a huge market for companies to sell their product. Now as I said earlier Indians are very conservative in spending money, they look value for money and hence most of the time end up buying domestic products. This keeps domestic companies shielded from global meltdown to a certain extent as they depend on domestic consumption.

Now to answer third question about securing jobs is not easy, as the service sector in India is mostly dependent on western countries. The high riding IT companies are driven by project outsources by western banks and other biggies like CISCO, Adobe, Boeing, GE, JP Morgan Chase to name a few. These companies still provide most of the revenue for Indian IT companies and the latter ones depends less on domestic projects. Hence any bad news for global economy sends shock waves through Indian service sector. The western corporations try to cut cost by dropping new projects and there by reducing headcounts. But at the same time they have to shift more work to offshore and hence open new opportunities. So more or less situation was pretty stable. It is now that Obama is taking populist measures to stop moving work to offshore and create jobs locally. This seems to be a more of publicity effort for next elections and I guess this wont be an effective way to improve condition. The crusaders of globalization and free trade are not resorting to protectionism. This in my view will slow the growth rather than heal their economy.

As of now the situation seems to be stable and with worlds eyes focused on Greece and Eurozone everyone hopes that they come out with best solution. As far as India is concerned, though going through a bad phase I’m overall optimistic about Indian economy and hope that we will able survive in tough times. Till then one can look for better opportunities in market and grow as time permits.