Everyone forgot the risks

One common complaint I am hearing these days is that banks are not reducing the home loan rates even if there is sufficient liquidity in the market . People are complaining that banks have their cakes and are eating them too. A normal borrower like you and me are trapped by all these techniques applied by the banks .

My response is ' easy to blame the banks and everyone other than yourself'.

I have my reasons to believe in the above statement .

1. We all fell for hype. In the national dailies , in 2008 , there were a plenty of advertisement by real estate builder promising us heaven while bankers were eager to put the ladder on. Money was easy and hence rates were down . It was much easier to factor all the cost into our salary. There was not a single reason not to take a loan. Add to the cacophony , we had people whom we knew were profiting from the bubble of the real estate and it was hard imagining why we were not profiting

2. We all want to become rich before we die: That is a fair assumption . It is very difficult to every day go to office, listen to abusive boss and work for a paltry salary. So there must be some easy way. Now since there was so much hype around , we were fooled into thinking that it is our road to riches. According to one news item I read in 'financial express' , most of the rich become rich not because they are brilliant or master strategists but because they take excessive leverage. And if their business venture becomes successful, they are hailed in the eyes of the world. This story raises an interesting point that given similar circumstances, is it possible that cautious general public would also take excessive leverage to get rich even though there is no fallback when something goes wrong. In my observation , yes they can if they could. I have heard and read a number of stories where people have gone into excessive leverage to invest in stocks or real estate before they went bust.

3. We forgot about the risks : There are a plenty of risk when you make a business investment. Even a safe instrument called fixed deposit have strong risk from high inflation and busting of bank. If tomorrow the bank goes down a la Lehman , then it will take all our deposit with us . A risky investment is stock market , where it is not even possible to count the number of risks you can see . A real estate investment is considered a risk free investment as at least you have the land / flat / house with you even though the value goes down.

In my opinion that is the biggest mistake our Indian masses do . A real estate investment that is based on good location of the property can fetch handsome rewards. Other ways that real estate can work to our advantage is the fact that it is a commercial / residential development that provides us with a constant revenue stream in the form of a rent. There is some tax benefit that we derive out of our investment . However risks are plenty.

• There could be oversupply of the real estate leading to a drastic fall
• The whole area is now not considered suitable for investment
• The property taxes have made running businesses difficult
• The inflation is rising too fast and it is making maintenance and repair beyond reach and many .
• The loan rates have climbed too high mostly out of our reach.

I am not a real estate expert but all I can say is that even this asset class has its set of risks and the public either failed to see them or they were misled into believing that it is not risky at all.

4. We forgot to read the fine print : You assume that you are customer of the bank and the bank would follow generally good practice .You assume many things on bank's behalf. But on the other side, your bank is not assuming everything. They are making sure that they leave nothing to chance while the only risk they bear is when the price of property goes below the loan amount( they would squeeze you on that ) , floating rate gets higher ( they would squeeze you on this too), you default for a month ( be prepared for onslaught). Obviously , they have done their homework while you in your dreams have even not cared to read what they have written in the document that you are going to sign . In this case , all mistake is yours .

5. Our experiences fail to teach us : My bank raised the credit card rate of interest on the account of a flimsy reason that many customers of theirs are defaulting . It means that they penalized me for the fault of others . It never occurred to them that I have been paying my dues on time and there is absolutely no risk doing business with me .

But this experience taught me one thing "Bankers are not our friends, they do not like us , they do not love us ". They are here only because they need money to run their business and they deal with us because we help them make money. I reduced my credit card balance to zero, immediately dropped my plans of unnecessary expenditure and used cash for most of my transactions . This has helped me to use the facility provided ( a credit card ) without falling into the trap they want me to get into. I have my credit limit to 50,000 and never exceeds it even though it might mean giving up on things I desire badly.

Now back to general public. I feel that everyone had one or the other kind of experience with the banks. But that did not deter people from taking huge loans . The higher the loan , the higher the risk of default . A bank is where you keep money so that it does not get stolen while you may take a loan based on your capacity and risk appetite. I do not think a bank is useful to me more than that.

Now if you are trapped in such a scene, how would you come out of it .

1. If you are over leveraged, try to reduce the debt either by borrowing from friends and family . Remember , they understand you better than any other smiling bank salesman
2. Cut on your credit card expenses because they take a lot of money to repay
3. Do not fall for marketing gimmicks of the banks and industry. One of my way to avoid my mind getting fooled by the marketing is to add one line 'Now give me your money' after every advertisement . That would be a reality check.
4. Do not buy a thing if you don't have to buy it . Do not buy if everyone says it is good . If everyone knows about it then probably it is already overpriced
5. Learn to read between the lines especially in agreements . If you are not sure take help from someone who knows about it .
6. Don't let your emotions run through . Look for the risks , hidden agendas, ambiguous lines. Ask if you don't understand.
7. In Hindi we say 'Bhag kar kahi nahin jaa raha hain ' . You cannot turn everything into a winning opportunity. There are some lost calls too . Just wait and think before you decide to act.
7. Last but not the least . Avoid taking loan at all cost . Try building assets instead for e.g. . stocks which appreciate with time . They would provide you more stability that leverage.

I hope all these make sense to the public and people become more conscious before they take a decision.

Work is not worship

Every house needs a maid , sometimes two or three. One to cook , another to wash and other to sweep and clean. My house too has a maid who comes daily to wash utensils and then clean the house. She is very hard working and has absolutely no problem in cleaning the house . And surprise of all, she comes bang on time almost always. I was puzzled by this behaviour and asked my wife how come that none of the maid come on time , she does. To this my wife replied that she is the garbage collector of the building and collects garbage from household before disposing it to municipality trucks. Since everyone knows her job, no one allows her to wash utensils.

It made me think. What makes India a still tragically backward country. One of the prime reasons is that we don't worship work . If we do , it is either studies or dancing or singing or something selective that we presume is good work. Rarely have we time to praise a security guard , a cook or a house maid. For us they are supposed to be doing that because that is menial work, not fit for middle class. A person who takes up a job we don't find up to our standards , becomes a second class person in our eyes. Hence we try to suck maximum work out of them , making them work long hours with very less pay. For us they are condemned to do such kind of work .

If the maid that comes to house does not take the garbage from all houses in the building , our neat and clean looking building will turn into a garbage house in one week . Thanks to all those who work hard, toiling day and night making sure that we remain safe and clean . And most of the people do not even have a time to smile at them . Rather they would scoff at them . Whenever , I go for a walk in compound , people observe that many guards and support personnel raise their hands to greet me. They are surprised. I feel elated at that moment as I feel that I have given respect to their work which they did once for me . I might have just said thanks but it is a big gesture to them .

We have a tendency to look down upon people who are below our status either in caste , religion, wealth or occupation . This is perfectly fine but there is a problem with this . Since we look down on people , we are also looked down by the people who feel they are superior. One perfect example could be your boss who looks to us and say that we are cheap labourers. Another is politicians who feel that people of this country do not deserve any kind of life , security or social well being . They are just vote pigs . You can see a number of such examples here .

There is no way we can improve our country and our well being , if we treat fellow citizens who work in not so dignified professions with contempt. There is no way we can expect security and well being from government when inside we understand that we are exploiting our own country men. There is no safe haven from terrorist who attack the country, as countless number of people who do menial jobs are referred as ordinary people. There is no safety from dacoits bandits and criminals if we cannot sympathize with a blind person who is trying to cross a crowded road.

We have to accept the differences and reward the work and virtues . India's salvation lies only in the fact that she starts giving due recognition to its army personnel, police , housewives, professionals, cooks , maids and gardeners. All are parts of the system but system will break down if one part does not function well.

And it all boils down to us as an individual to be sympathetic to fellow citizens irrespective of the caste , creed, sex , colour and all attributes. If you get acknowledgment that you treated someone well then it is quite probable that someone watching you may change his behaviour too. All things big start small, don't you agree. Thanks

Are you not a loser

People have a desire not be be left out. Instances abound that when someone creates sufficient hype and make sure that announce loudly enough ,money that someone has made or popularity someone has gained, the act becomes more popular. Due to the blind devotion that people have towards something that they constantly adore or admire, it is very easy to even make a mediocre thing , add some spice to that and then attach the object of devotion. Throw in a good amount of twist and turn and people are eager to throw away money for it.

There are a number of examples , where people have given in to the hype and the desire that they should not be one to left out .

Take for example, a typical bollywood movie which almost have the same story and same sequences with an added twist and turn. People goto watch these stories again and again and come out disappointed . They spend around Rs. 500 per movie including snacks . The reason people do this is that they dont want to be left out. People want to be ahead of friends , channels and critics. They mingle and decide based on the fact that since an actor/ director/ producer has acted/directed/produced a good last movie , it automatically implies that new movie would be a good one . The people make mental assumption of this fact because it is much harder to believe that people they admire cannot fail. The mental assumption is also strengthened by the fact that critics have given a thumbs up to the movie, TV channels are wasting thousands of hours to promote the act. They cant be wrong. Friends are talking about it . Thousands of people are talking about it, they cant be wrong. Hence the hype builds up till the movie falls flat and collections are down the next week . The people who have spent their hard earned money refused to believe that they have not taken the best decision. According to them , even bad entertainment is an entertainment and throwing money for watching the same thing again is not money lost.

You can hear the same bells in the real estate industry. Take the case of bollywood and apply it to real estate . The same story: house prices cannot fall, interest rates are lower, buy now. This is the only time in your life when you can purchase a house. Of course everyone cannot be wrong. Stories abound that people have made thousands of rupees selling property at inflated rates. People are buying their second or third property without even giving a thought to the risk . The bubble is huge . People are getting murdered because of property. Banks, media and newspapers are falling over themselves to give you that precious loan. And you are dying to take these loans because you cant believe so many people can be wrong.

Now comes the stock market. It is going up, going to 17k , 18k ,21 k woahh. There is no end in sight . Even with a slow pace one day it will achieve escape velocity and will blast to moon and we will all be billionaires and spent rest of our lives on beaches of Goa or in Las Vegas. Again why are you investing in stock market because everone says that it is the best place to make money. Everyone is offering you a SIP of Martini while you watch beautiful babes and think of your richness.

Bollywood has perfected the art of making a bubble. Do extreme publicity , make good music , forget story line . Show actors as shiny happy people who have all the fun while the common folks toil in misery and look to them as escape route of fantasy.

But then bubble bursts . The movie falls flat after strong collection in first week . If it was a good movie , people would watch it twice or thrice . Then why do movies go out of cinemas so fast. Its another ploy. To make sure that bubbles are created in so high intensity that only first week matters. Probably a lot lesser number of people will watch it by the time hype is gone.

In real estate , now flat prices are dropping like flies. Now companies are selling flats at cost price . There is not much talk of super luxurious flats , only affordable and low cost.

In sotck market , people do not invest now . Stocks are touching the lowest points and they are so cheap that even a can of Coke costs more than a stock but is anyone buying . No of course not as no one is buying. Again so many people cannot be wrong.


Now let us look at losers in the process . The loser is only you , the ordinary public , fooled thousands of time but refuse to listen. You have proved Abraham Linconlm's theory that you cannot fool all the people all the time . In real estate you paid a price for flat 4-5 times or more of actual value. In stock market , your SIPs are not fetching you any result and in bollywood , since it satisifies(I would say strengthen your prejudices) your senses, you keep watching low grade movies again and again .

Who are the smart people who are making money out of this? Any guess ? In the next blog, if you can tell your senses to hold on, I can reveal that.

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