Institute For The Future

Personal Risk Management, India, Kolkata

Smarjit Mitra is a practicing Chartered Accountant, based in Kolkata India. He has his own practice that serves the Eastern market in India, including the North-Eastern states. He has had his practice for the last 16 years, and he is well known in financial circles. He is often a guest expert on financial matters on TV programs. His firm specializes in micro-credit rating  of individuals. Financial institutions to determine the credit worthiness of individuals use the services. He says that he conducts a “lifestyle audit” of individuals.

“If you want an automobile loan, the bank refers the file to us so we have a rating module. We rate individuals on the stability of residence, asset ownership, income, perceived income from lifestyle (black money).” As he told us that in India real net worth of individuals cannot be deciphered from paper documents as people might have hidden income or what is called black money. To decipher people’s income, he has a team that assesses a person’s income by looking around the house to see what kind of gadgets are in the house, how many cars, membership of club, how many children and which schools do they go to. Keeping all these factors in mind, they come up with a maximum installment that an individual can afford. They also provide information to cibil – a financial website that has a list of black-listed individuals. Financial institutions use this website also to make loan decisions.

Mr Mitra believes that the biggest financial risk that individuals are facing in India is foreclosure of auto and other loans that people have taken to buy consumer electronic items.  In India a loan is declared a non-performing asset only after monthly installment have not been serviced for six months. As a result of the current financial turmoil  loans are being declared as a non-performing after two months of default on payments.  

His company started a separate service for counseling people who are defaulting on loan payments.  He thinks that many people are facing huge financial hurdles as debt to income ratio is very large. He said that data shows that  95 percent of electronic durables and cars were bought on loans. People’s salaries are on the decline because compensation package have been tailored for cost to productivity. Due to the declining economy productivity of firms is falling as a result the wages are declining too, making it harder for people to be able to afford their monthly payments.

However, in India financial institutions cannot repossess homes if individuals default on loan payments.  There is more than one ruling by the Indian Supreme Court that blocks repossession of homes. If it happens there will be extensive political and media backlash.

Another financial risk that he mentioned was the falling interest rate on fixed deposits. Many Indians, especially retired folks, live off income that is incurred on fixed deposits in banks. Interest rate for fixed deposits have fallen by almost one percent every month in the last few months. This is happening to counter the trend of falling inflation rate. As a result income from fixed deposits has shrunk.

There are several factors that are contributing to a gloomy economic climate in India. The price of retail assets depreciated for the first time in the history of Indian retail market. In the last, three and a half months  there has been a decline of 30-35% in property prices. Many people used to use their land as collateral for getting loans, but they are unable to do it due to the decline in prices. As a result there is less financial liquidity. There are many distress real estate sales happening across the country. People who have money are snapping properties at unbelievable prices.

Mutual funds have taken a worst hit in India. There has been an erosion of capital around 40-45%. The shock has reached the middle class. There is a wide rush to withdraw money even if it is on loss. People are spending on gold. It has been more resilient. But overall there is a lack of confidence in the market.

Restructuring of loan is becoming more common. Most individuals don’t understand loans properly, and many are trying to get their loans refinanced.  They are looking for legal advice. His practice has been involved in filing legal suits against financial institutions that have hired local hoodlums to threaten people who have defaulted on their loans. He has helped individuals reach a compromise with financial institutions like only pay the principal and not interest on the loan.

He believes that Indian investors will come out more mature from the following experience. “Everyone thought they would become rich fast. Today they know it is not easy. Sensex is rational. It does not always go up.” People took too much risk by investing in mutual funds and the stock market. They have finally realized that these are risky investments, and are edging towards safer bets like fixed deposits.