Leveraging Lives for fulfillment- Role of debt in a common man’s life

Its aptly said that the role of financial institutions is re-distribution of wealth from surplus sectors of economy to deficit sectors. Over the last decade or so the ease of getting a loan whether for a vehicle, a house or a personal loan (proceeds being invested on higher volatile assets in expectation of future returns) have transformed the life of a common man in India.

I define Common Man as an individual possessing any of the 2 attributes:
Attribute 1- Is ignorant or superficially educated on financial planning or aspects of a rational financial decision-making;
Attribute 2- Employed with income not exceeding Rs 2 lakh per month

Any individual possessing both the above attributes is an ICU patient as per me.

I have experienced several instances where greed has won over rationality, even for the well-educated. One such instance is taking a long-term debt to acquire a fixed asset like a flat or a plot of land, in expectation of exponential increase in value of the property in a short span of time (within 5 years). Plan is to make enough capital gain to repay the loan pre-maturely and still have enough profit to invest somewhere again.

While credit department of bank may rate as eligible for disbursement of loan, the common man not have the repaying capacity considering lavish lifestyle where most of his monthly expenses may be taken care by credit card companies.

In this gamble common man fails to realize the critical trade-off between risk and return. He has borrowed a long-term loan, repaying capacity of which is contingent on:
a) his job,
b) enough salary growth that takes care of his increased living expenses over the next 20 years, and
c) saves enough if he hopes to live beyond his working life.

Job assumed to be secure is the underlying asset and loan is the derivative. During a downturn there is always a possibility of losing the job or no increase in salary. Further, the upside expected in the investment either turns to be a flop or extended by few years (for the optimistic).

God save him!

This situation is similar to what major financial institutions have fallen prey to……LEVERAGING OF LIVES FOR FULFILLMENT….