Monday, July 12, 2010

Lending, Borrowing, Then and Now

Lending and Borrowing has been going on since history of mankind. It used to be Lender’s game earlier. In other words one who has capital always had upper hand in loan transactions and not the one who receive loan. In early days, on some very good reference + convincing business plan + some conditions (Interest rate 20%, timeline 1 Year) lender would lend money to Borrower say (10000 Rs). Borrower then uses that capital, adds his hard work, talent and performs business activity (Say starting a small workshop). With combination of capital and hard work he earns money say (15000 Rupees) and become successful. Now he has enough money that he can return principal + interest (12000 Rs after year 1). Money that he saves after returning what he owes to lender becomes his capital (3000 Rupees).
At end of day borrower used to be very much thankful to lender. In a country like India that young entrepreneur who received loan in his early days; would talk about lender and one who gave reference as “They are like god for me. They are the one who trusted me when I had nothing in my hand”. As time passed both lender and borrower became comfortable to transact with bank (Which I would define as big-brother between lender and borrower who reduce risks on both sides). But even while approaching bank, borrower had to provide viable project plan that would get questioned + guarantor who is responsible to pay loan back if lender fail to do so...................

Gone all those old days and somewhere in 2004-5 time, while working in office, I got call on office phone saying, “Sir you have got loan approval of 50000 Rs. No guarantor required. Interest rate only 7%. Should I send pay order to home or office address?”. First time when I received this call I was about to fall down from my chair. Quickly enough I told them “I am not interested in any Loan at moment”.  But conversation did not stop there. Some boy / girl in their early 20s advised me in polite tone that “Sir you keep the money it will be useful for you, you can invest in equities, also let me know if you are interested in Home Loan our bank has very attractive interest rates on Home Loan”. Somehow I used to politely refuse those people but also a thought used to touch my mind “Should I have taken it?”
So something had changed dramatically. From time when borrower used to convince lender on viability of his plan to a time when bank (representing lender here) is busy convincing new and new borrowers who have never applied for loan. The concept of taking capital adding hard work and becoming successful had gone. New concept was take capital (loan), buy shares / home / land / anything; it will raise in value automatically you will get success -- no hard work required. Many people called it “Golden Era” but I never believed so. Time that allow people to succeed without hard work cannot be golden era on other hand it undermine hard working people and set a wrong message that just by buying and selling something everyone can be prosperous.
Back then we were not smart enough to understand what is “easy monitory policy” and how central banks can inflate all these bubbles. Now when we have learned some of this, I am amazed to see efforts by governments to go back to “that kind of era” via simulation. One of the key parameter that made lending as borrower’s game was “Interest Rate”. In next articles we will see how interest rate can inflate bubbles and crash those.


  1. बॅंकाकडून कर्जावर होणा-या व्याजआकारणीच्या रचनेबाबत फेरविचार होण्याची गरज आहे. कर्जाची परतफेड करताना सुरुवातीच्या हप्त्यांमध्ये व्याजाचा भाग खूपच मोठा आणि मूळ मुदलाचा भाग अगदी लहान असतो. परतफेडीच्या मुदतीअखेरपर्यंत हप्ते भरायचे असल्यास यामुळे काहीच फरक पडत नाही. कारण मुदतपूर्तीच्या वेळी एकूण व्याज व मूळ कर्ज ही रक्कम टरलेल्या समीकरणाप्रमाणे येते.

    परंतु मुदतीपूर्वी परतफेड करायची असल्यास ग्राहकाचे प्रचंड नुकसान होते. व्याजाचा मोठा हिस्सा सुरुवातीलाच कापला जात असल्यामुळे पाच पाच वर्षे हप्ते भरुनही मूळ कर्ज फारसे फिटलेलेच नसते. शिवाय मुदतपूर्व परतफेडीबद्दल दंड आकारला जातो तो निराळाच. म्हणजे मुदतीपूर्वी कर्ज फेडणा-याला व्याजदर कैक पटीने जास्त पडतो.

    आर्थिक अडचण असते म्हणूनच व्यक्ती कर्ज घ्यायला जाते. तिच्या क्षमतेनुसार कर्जाची रक्कम व परतफेडीची मुदत ठरवली जाते. सुदैवाने जर या मुदतीपूर्वीच अडचण दूर झाली तर ताबडतोब कर्ज फेडण्याची योग्य तरतूद असायलाच हवी. सध्याच्या रचनेनुसार हा प्रकार भलताच महागात पडतो.

    पहील्या हप्त्यापासूनच मुद्दल व व्याज यांचा समतोल राखला गेला पाहिजे. म्हणजे वॅंकेला ठरलेले व्याज मिळत राहीलच आणि ग्राहकालाही झळ बसणार नाही. ग्राहकाने अचानकपणे सर्व कर्ज फेडून टाकल्यास बॅंकेचे व्यावसायिक गणित चुकू शकते हे मान्य आहे. त्यामुळे मुदतपूर्व परतफेडीबद्दल दंड आकारणे पूर्णपणे समर्थनीय आहे. फक्त हा दंड वाजवी असावा एवढीच अपेक्षा!

    तसेच कर्जफेडीच्या किमान मुदतीची अट घालावी. ग्राहकाकडून एक वर्ष, तीन वर्षे, पाच वर्षे कर्ज चालू ठेवण्याची हमी घ्यावी. हमीनुसार व्याजदरांचे पर्याय द्यावेत. म्हणजे वॅंकेला आर्थिक फायदाही होईल आणि व्यावसायिक नियोजन करणेही सोपे जाईल. ग्राहकालाही आपल्या आर्थिक स्थितीप्रमाणे निर्णय घेण्याचे स्वातंत्र्य मिळेल.

    -सागर विद्वांस (
    My blog-

  2. Thanks Sagar for your comments. Let me explain his point first, What he is saying here is, say if you take Loan for 20 Years, after first Ten years Ideally one should have paid of 20 Lakhs, However in Reality Only 3.15 Lakhs is covered !!!!!!

    Sagar's Point is very correct and it gives huge advantage for Banks while it makes it very difficult for customers to get out of Debt quickly. Another disadvantage here is if Rate of interest goes High, Which is what going to happen sooner or later, customer has to pay that on Remaining "Principal" which is obviously Huge amount. Thanks Sagar again for Comment.

  3. Amaresh Ashok GangalJuly 25, 2010 at 5:58 PM

    In Above Comment I forget to mention Principal assumed as 40 Lakhs.

  4. Nice blog. I have something similarly promoting Free Market Economics.

    Good Luck