Photo: iStock
Photo: iStock

Two things you need to ask yourself as you walk into the 'loan mela'

  • 23% salaried millennials took short-term personal loans to refinance individual EMIs
  • Taking on loans for discretionary spending and repaying other loans can be a slippery slope

Finance minister Nirmala Sitharaman, in her a meeting with heads of public sector banks (PSBs) on Thursday, urged the banks to hold “loan melas" and shamiana meetings in 400 districts across the country. The loan melas, scheduled to start on 3 October, are aimed at boosting retail and NBFC lending. “In public view, the scheduled banks will now show that they are really indeed pushing liquidity through the NBFCs or directly to the customers," Sitharaman said in her address, adding that during these public meetings, banks have been asked to extend loans to five new customers for every one old customer who wants credit, and that customers looking to take home and vehicle loans should attend these meetings. While private banks had already been pushing for increased retail lending, this will bring PSBs into the same fold.

But while this push might be beneficial for the economy, retail borrowers need to ask themselves two important questions before they take the loan plunge.

Do you need it?

With the increase in availability and access, loans have become an easy alternative to spending out of pocket for many Indians. According to a recent report by CASHe, a digital lending company, in 2018, 23% salaried millennials took short-term personal loans to refinance individual EMIs and 14% borrowed to pay off their loans. But taking on loans for discretionary spending and repaying other loans can be a slippery slope.

“Borrowers need to question whether they really need the loan, and the whether they need what they intend to buy with the loan amount, whether it’s a gadget or a new home," said Lovaii Navlakhi, founder and CEO, International Money Matters, a Sebi registered investment advisory.

According to Navlakhi, the easy availability of loans can be detrimental to the financial well being of borrowers. “If loans were not so easily available, and you were going through a financially lean period, you might have been more inclined to settle for what you can afford, especially during a festive season. But an easy loan can tempt you to go ahead with the spending," he said.

Can you service it?

Quick and easy loans becoming available before the festive season can come as a relief, especially in light of the general slowdown and the resultant financial squeeze that many are facing. But taking a loan means you will have to repay it in time, and with the added burden of interest. In fact, the slowdown is even more reason to question if repaying the loan will become a burden.

“Borrowers have to examine the serviceability of the loan. They should ask themselves, if their income was to stop for two or three months, would they be able to service the loan?" he said.

Navlakhi also cautioned about the dangers of taking on loans for lifestyle expenses. “What typically happens is that you move to higher lifestyle, just because it is easily available, but then you want to scale down, but it becomes very difficult," he said.

Festive as it sounds, a "loan mela" can spell disaster for uninformed borrowers who take on loans simply because they are available. Take the time to figure out whether you need a loan at all, and if you do take one how well you would be able to service, it before you borrow.