Cover Story: The Credit Cripples [Pg.2]

The Indian executive has been dealt a crippling blow to the solar plexus: one moment he was standing tall, today he doesn't know what hit him. The confidence, credibility, and self-esteem that comes from a job has all come to naught in one swift blow. And it's that realisation-that the future is uncertain and the end could be near-that explains the uneasiness prevailing in India Inc. Take, for instance, Sameer Shah, 24, an executive at beleaguered finance portal sharekhan.com. He took a loan of Rs 6.5 lakh to buy a house a month ago. Today, he's awaiting the results of the restructuring that is under way at the portal, and which has already claimed a chunk of the top team. ''It's the first time in my life that I took a loan, and I can tell you that I'm not very comfortable,'' says Shah.

That's bad news for companies. If credit-weary consumers turn purchase-paranoid, things will take a turn for the worse. Focussed on servicing their existing debts, consumers are unlikely to avail more credit, and demand for houses, cars, consumer durables, and a clutch of other product- and service-offerings could dip. Credit, today, doesn't even figure in the lexicon of Saumi Mitra Chowdhary, 28, a technical editor at NIIT. Chowdhary has an outstanding of over Rs 45,000 on her two credit cards (Standard Chartered and Citibank) and today regrets having gone on shopping binges. Above that, she has taken a car loan of Rs 1,30,000 and a personal loan worth Rs 60,000. Her predicament is exacerbated by the fact her company-NIIT Ltd-saw profits dip by 93 per cent in the quarter ending June 30, 2001, as opposed to the same period last year. What's worse, the fear of losing her job looms large over her. ''Job security is the biggest issue before me today,'' says Chowdhary.

But all is not lost, yet. Then there are those diehard optimists. Perhaps it's easier to be positive if you're a couple, but Rohit (36) and Sonia Wadhwa (33) have an outstanding of around Rs 50,000 on their cards at any given point of time. What's more, they are paying installments for two houses (total loan: Rs 20 lakh) and have a Rs 3 lakh car loan. The Wadhwas use their cards for every possible purchase-filling petrol, mobile-phone bills, groceries. But Rohit, who has a business of selling conferencing products, doesn't feel that they are living on the edge. ''Our outstanding on the card and other loan EMIs usually never exceed 50 per cent of our salaries,'' he says. The slowdown sometimes does worry him. ''But it is temporary. I'm confident that it will be over soon,'' he adds.

Also hoping for a recovery-by October-is Ranaraj Gupta, Director, Access India Associates, a headhunting firm. He's taken a Rs 15 lakh home loan, and an outstanding of Rs 30,000 on his three credit cards. Whilst that doesn't worry him, what probably does is that his revenues have dipped by 30 per cent since April.

Clearly, you have your options: either be an optimist and believe that things just have to get better. But even if the gloom does show signs of lifting, the credit trapdoor will always be open as the buy-now-pay-later trend gathers steam. Remember too, that unlike in the West, there's no social security net in this neck of the woods. In the days to come, there'll be many more Arakals and Gouds around you. Make sure you don't become one of them.

SIDESTEPPPING
THE CREDIT TRAP

So you haven't yet been sucked into the credit vortex yet? Great, but that doesn't make you immune to the vagaries of a groaning economy, companies that may never see tomorrow, and promoters who love making statements like ''people are our best assets'', but who grope for the job axe at the first signs of shrinking margins and stagnant sales. Let's face it: Those ''What, me worry?'' days are long gone. The ditty these days isn't ''Don't Worry, Be Happy'', but ''Worry, and You Might Just be Happy''. Here's how.

Rule No.1: SPEND LESS, POSTPONE THE LUXURIES

You don't need a finance wizard-or Business Today for that matter-to tell you to rein in on your spending. If you were eating out thrice a week earlier, bring that down to two. Go easy on the cell phone, and remember that land lines exist too. Avoid revolving the credit on your cards whenever you can. It may keep your credit card company's cash registers ringing, but it isn't doing your kitty much good.

Consider: you buy Rs 30,000 worth of stuff on your card, and the card company allows you to pay just 5 per cent of that amount at the end of the month. Cool? Not really, because the rest of the amount is carried forward along with your fresh spending in the following month, and charged an interest of 36 per cent per annum-which we can assure can't be very kind on your pocket.

Rule No.2: DON'T WORRY TOO MUCH ABOUT IMAGE

Don't worry too much about image and social pressure -you may feel like replacing your car or computer, but try holding on for another six-eight months. If you need to buy a house, go ahead: it's an investment. But don't stretch yourself. You would fancy a largish home with many bedrooms, a terrace, or even a penthouse-who wouldn't-but be realistic, and go strictly by your budget. Take a cue from Anindya Chakraborty, an executive with Birla Technologies, who bought a one bedroom apartment in Andheri, a midscale Mumbai suburb, for Rs 13 lakh. ''Ideally I would have liked a larger house, worth up to Rs 50 lakh. But because of the uncertainty around, I settled for a smaller one,'' says Chakraborty.

If size doesn't matter in such bad times, neither should location. Milan Patil, an Assistant General Manager with the Hathway group, would have, in better times, plumped for a home closer to the heart of Mumbai. Instead, he settled for a distant suburb, some 50 km off Mumbai's financial district. Says Patil, who was with one of the Hathway companies four-and-a-half years ago, and who rejioned the group six months ago: ''I have immense confidence in the company, but I suppose it's the sentiment around me that made me cautious.'' Patil has also been prudent in restricting his monthly installments to 23 per cent of his and his wife's combined salaries (they took the loan together). Chakraborty too, played it safe, by restricting his monthly exposure to just 8.6 per cent of his salary. ''I was eligible for more than three times that figure, but I decided not to,'' he says.

Naresh Malkani, CEO of Indiaproperties.com, feels that once over 25 per cent of your monthly income is going into payback, there could be trouble. ''Below 25 per cent is okay; even if you lose your job and get another one at 80 per cent of your previous salary, you wouldn't end up overleveraging yourself,'' explains Malkani.

If you had taken a home loan some years back, chances are that the interest being paid by you could be 250-300 basis points higher than today's rates. So what do you do? You refinance your loan-that's a service many housing finance firms are providing. For instance, if you took a Rs 20 lakh home loan five years ago, the interest rate then was some 16 per cent. Today, at 12.5 per cent, your EMI would be lower by Rs 4,000 and by the time you finish off paying back, you would have saved close to Rs 5 lakh.

Also, look around to see who is offering the best rates. There are 10 players today slugging it out in the home loans market, and each is trying to woo the customer with competitive rates. Rajeev Warrier, CFO of rediff.com, had taken a home loan a year ago from a foreign bank. Last month, he switched to another foreign bank, Citibank, which offered him a better deal.

Rule No.3: BE NICE TO YOUR PARENTS

If you're wondering what that has got to do with avoiding the credit trap, consider this. Three years ago, the age profile of the average home loan applicant was 38-plus. Today it's fallen to 26. So what does a 26-year-old who has lost his job do when he's at risk of defaulting? ''He has his parents. They will bail him out,'' says Malkani. That's because most parents in India today are underleveraged, as they preferred to save, rather than borrow to buy houses. So, for the current generation, their parents could well come to their rescue. The next generation may not be so lucky.