Borrowers will find it hard to vanish - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Borrowers will find it hard to vanish 

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In this issue:
» Why a bad credit history will catch up
» Run away food price inflation
» Hoarders to face the government's ire
» China to let the Yuan appreciate?
» ...and more!!


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00:00
 
In their bid to grow, banks often get aggressive. Many of us have been approached for pre-approved loans, instant loans and the like. Given this indiscretion, it is rather amusing when the same banks start fretting about defaulters. To make matters worse, habitual defaulters escape recovery agents and often resurface to take a fresh round of loans. But a recent development could change that.

The Credit Information Bureau of India (CIBIL) now provides an information service that triggers email alerts whenever a defaulter resurfaces. CIBIL tracks the credit history of borrowers through their date of birth, PAN number etc.

In our view, this is a welcome development. Not only is it unethical to take money one has no intention of paying back, it burdens the financial system. It makes it difficult for genuine borrowers. But there is a catch. The system must allow a chance of being heard to those who mistakenly come up on the defaulters' list. As of now, a borrower seeking his credit history must go through a cumbersome process. An application and a demand draft of Rs 145 must be mailed to CIBIL. It will then mail the statement back to the borrowers address on record. This can be simplified. But we certainly are for taking steps to prevent willful defaulters. That will help investors in two ways. Lesser bad loans will translate to better borrowing rates for companies across the board. But more specifically, it will improve the financial health of banks, thereby making them better investments.

00:52  Chart of the day

Source: World Bank, Doing Business 2010

India continues to be notoriously bureaucratic. Not only does that harass the common man, it acts as a roadblock for business. As the chart of the day shows, it takes much longer to enforce a contract in India than most nations. Surely, it is not the complexity of business contracts which makes them so difficult to enforce. Rather it is the multiplicity of enforcing agencies, slow judicial process and just the bureaucratic mindset. In our view, the state simply takes on too much work. Rules are inherited from the colonial times and have been added with layers of even more rules. Clearly, the need is to reform the system.

01:24
 
Inflation has been high in India for sometime now. But the RBI had been wary of tinkering with its monetary policy as it did not want to thwart the GDP growth which has just started limping back to normalcy after the credit crisis. But the question of raising interest rates was always a matter of time. And it seems that that time may have arrived now.

True, the RBI had raised reserve requirements with banks. And it had delayed taking any call till its policy meeting again in April. But food inflation has just refused to go away. Food prices accelerated for the second straight week in late-March and have strengthened expectations of a hike in key policy rates. The food price index rose 17.7% in the 12 months to March 27, higher than an annual rise of 16.35% in the previous week. Therefore all eyes will be the RBI now. Given that India's growth has begun to pick up pace, the RBI would not want to wait too long before inflation becomes a major thorn on India's side.

02:04
 
Speaking of the inflation in food prices. In an indication that the government is finally seeing red, it is now contemplating taking a call on reintroducing harsh laws that will severely punish hoarders of food and commodities. Harsh provisions under the umbrella of Essential Commodities Act can be introduced to contain food prices. And it is becoming increasingly likely that the government may do so. More so because the Congress led government at the centre has now come under intense pressure from its rivals like the BJP and the Left parties which have been quick to blame the Congress for this state of affairs. However, what now remains to be seen is if inflation continues its upward trend unabated in the weeks to come. For, if this were to happen, the tightening in monetary policy may indeed happen at a faster clip than what most expect.

02:41
 
Not so long ago, the Indian aviation sector was surrounded by controversies. These controversies related to the measures airline companies took to control costs during difficult times. We are talking about the large scale layoffs that took place about a year ago. However, now it seems as if the fortunes of the industry have taken a turn for the better.

With the overall economy doing well, the aviation industry has seen a substantial turn in operations. This factor, coupled with buildup in capacities (more airplanes) will bring smile to the faces of the wannabe pilots and cabin crew members. A leading business daily has reported that the airlines sector is seeing big-time hiring in recent times. This is across the sector's segments - pilots, cabin crew as well as ground staff. It is also believed that international carriers, especially from south-east Asia and the Middle East are looking at recruiting people from India. But before investors get carried away about the turnaround story, they would do well to recollect the difficult economics of the aviation industry. Any negative development in crude prices, price wars and duty structure could once again send the carriers on a tailspin.

03:32
 
The breakneck growth seen by the Indian telecom sector over the past few years has indeed been breathtaking. A new chapter to this story will be added soon. The much awaited auction for 3G mobile services has begun today. It is set to add Rs 350 to Rs500 bn to the government cash registers. We worry about the level of penetration that this service can see in the coming years. If one were to go by global experience, the usage of 3G has been much lower than expected. Only a few countries like Japan, Korea, Germany and Italy have seen decent growth in 3G over the years. Even in the US, 3G usage has only seen a recent surge and that too owing to the spread of Apple's iPhone. In our view, with India being a market where 'affordability' is a primary concern for users, a huge success of 3G (as compared to 2G) is doubtful. We certainly hope that Indian telecom players don't go overboard with their bids and end up losing money for themselves and their investors.

04:16
 
You cannot have your cake and eat it too. It seems the reality of this phrase is finally dawning upon the Chinese leadership. The country no doubt wants to remain the export engine of the world. But it cannot do so by keeping its currency perennially undervalued. Especially at a time when an acute slowdown has gripped the global economy and developed countries are losing jobs by the millions. Thus, enter currency revaluation. As per a leading daily, a joint view is emerging in Beijing for letting the Yuan appreciate and also make it more flexible at the same time. This is no doubt music to the ears of exporters from other countries. As this will now make their goods more competitive as compared to the Chinese. India too stands to benefit from such a trend as its exporters were losing their edge in the past few months due to rupee appreciation. The revaluation will thus ensure a more level playing field. However, as the daily points out, the currency manipulation could just be a part of the problem. China may try to work around this by further incentivising its domestic industry. And this is what its competitors should guard against.

04:41
 
Meanwhile, the Indian stock markets are having a good day at the office today. The major indices have managed to comfortably hold on to their gains till the time of writing. The BSE Sensex was trading higher by about 235 points aided by buying activity amongst consumer durables, banking and energy stocks. Stocks from the pharma and realty sectors are seeing the least gains currently. The other key Asian markets closed on a positive note today.

04:56  Today's investing mantra
"It's easy to claim to be a long-term investor in stocks, but it takes considerable courage to hold on when Wall Street is hosting a 20% off sale, prices are headed lower, and background noise is unpleasant." - Peter Lynch
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10 Responses to "Borrowers will find it hard to vanish"

Raj Kumar

Nov 9, 2013

My loan was rejected. Credit Sudhaar was my choice. Initially they were slow. But their counsellors were able to handle all my queries. I will give Credit Sudhaar a positive review

Like 

Thitherwards

Feb 24, 2013

CIBIL Reported Someone Else's Credit Card In My Credit Report!!

What an irresponsible organization it is & how lethargic their services are, seriously and how lethargic are their services. They have reported someone else's credit card default in my report, due to which I had to go through a lot of pain, loan application denials and very much of a loss by taking loans elsewhere with higher interest rates.

The details are provided here, with email exchanges between CIBIL and I.

blog[.]thitherwards[.]com[/]cibilp/]

Please go through this and share it with all public, however & wherever possible.


Like 

Anonymous

Apr 11, 2010

Indian Bankers had traditionally been conservative lenders. And this approach had saved India from having any big bank going bankrupt in the recent economic meltdown. But things are changing. Many banks, to show impressive growth, have started advancing loans without using much discretion. I have heard (am not sure) that a very famous and fastly growing bank in India had in recent past outsourced the credit appraisal process, the soul of due diligence, that needs to be done before making an advance. That had resulted in having a sort of sub-prime crisis in India, though of very small magnitude and confined to small geographical location even before September 2008. One reason for this can be setting advances targets. I feel setting target for advances section in Banks is like setting targets for an Inspector to participate in, say, at least 8 encounters a year or having soldiers at border kill at-least 10 militants a year. Such targets and pressure, though good and help in improving efficiency can also become tough to helpless people who can be used to achieve the numbers and do not have a strong, organised spokesperson. In case of Banks, it will increase the % of NPAs and distressed assets. It was and will be depositorís and tax payerís money that will be at risk. May be RBI should take some stricter action on the Banks and the officers when there is a high increase in the numbers of quick mortality cases in Banks.

Like 

Vaibhav Kumar

Apr 11, 2010

Dear Mr. Surya Gautam.
What you have mentioned can be taken as an improvement that needs to incorporated to the way CIBIL works. It also points out few glaring mistakes that are present in the information CIBIL gives them.
I am a banker and I too do not find CIBIL report very dependable cause they are not updated frequently. Also not all the Banks are under obligation to inform CIBIL about their customers and their track record. As such the information leaves much to be desired.
However CIBIL does provide us basic and critical information about the Credit History of the loan applicant which was otherwise very difficult for us to track.
What you have faced with CIBIL is something you will face when interacting with most of the Govt. Organizations and departments.

Like 

K.D.Viswanaathan

Apr 9, 2010

There prevails an unhealthy competition among banks when it comes to the question of promoting their growth. To receive unexpected phone calls from banks offering handsome loans for various purposes on simple terms has become quite common these days. This helps unscrupulous elements to take undue advantage and,in turn, results in swelling the number of defaulters. It is good that with the advent of the Credit Information Bureau of India Limited which gives timely alerts when the defaulters, who initially vanish and then resurface for fresh loans, recurrence of the incidents of such cheatings has become less.

Inflationary trends invariably lead to increase in the number of hoarders. It is nothing but fishing in troubled waters. they have to be punished severely.

Like 

chandan sen

Apr 9, 2010

very good essential to update the knowledge and time tested article. wish a grand success for the marvelous article

Like 

Sudhir Apte

Apr 9, 2010

How food inflation can be controlled by increasing interest rates ? People dont borrow to buy their food requirements. If you want to punish the hoarders, best option is to reduce their credit limits as banks know for what purpose the money is being borrowed from them. Interest rates in India are already quite high compared to other countries. Food inflation many times is temporary and the long term solution is increasing the productivity of the farm sector.

Like 

Surya Gautam

Apr 9, 2010

---This is not a complaint, or whining about CIBIL, this is to provide an example of its NON RELIABILITY---

This CIBIL is nothing but a piece of monkeys trying to get peanuts. I guess anybody can face this situation, I have accounts in multiple cities in India, and I send the Demand Draft, my ID proof, address proof, all as Mentioned on their website and as per email communication with them. And they do not reply, I need to pursue for 25 days to get a reply, and what I get. A denial of MY Credit report, reason- The address do not match on their records, and I ask which address do you have then, as I may again be wrong if I provide a different city address again. They are not able to help, I do not understand, how come they do not have multiple addresses registered for an individual. Your work city, home city and education city are very much possible to be different.
This is not a public complain about the CIBIL and its horrendously stupid procedures and database management, but to show how things are in a pathetic state. On one hand, they show that THEY ARE MAKING THINGS AVAILABLE to individuals, and on the other hand, such nonsense procedures and Practically DUMB customer care.
In this scenario, if the banks want to DEPEND on the data from CIBIL, an individual is left with OUT information on this whole thing.

Like 

A.Chinnappan

Apr 9, 2010

SBI, Bhavani, TN respects Good Borrowers. SBI even write letters to the Good Borrowers and convene meetings also.

Like 

Raghu

Apr 9, 2010

It good that they get hold of defaulters, but banks rarely even think of those who pay their EMIs on time and close loans properly. For example private banks collect pre-closure charges even for home loans, is this proper ? isnt it time they reward those who are good borrowers !!

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