Credit-card debts may lead to plastic meltdown

Credit counsellors and financial analysts in the US and the UK are seeing evidence every day that credit card debts are increasing. Soaring fuel costs, rising food prices and climbing energy bills are all being kept at bay with credit cards. Shortfalls on mortgage repayments are also being made up with cash from credit cards. Many of these debt soaked consumers were already struggling to make their minimum monthly repayments.

More than $1 trillion is held on credit cards in America. In the UK, debts of more than pounds 50 billion have been run up on the plastic. Across the world, somewhere between $2-3 trillion is owed on credit cards.

Up to now, the credit crisis has passed by without plastic going into meltdown. Statistics have shown steady levels of arrears and suggested that many consumers have been successfully paying off part of their balances. Now there are increasing signs that this last breakwater, shoring up the economies of the western world, is about to crack under ever-increasing strains.

“Credit cards are definitely going to be one of the next big problems,’’ said Steve Nuttall, head of the financial-services research group at polling company YouGov. “Our research shows that everything started to fall off a cliff in about March or April and that should begin to show up in bad-debt charges by the end of the year.’’

The US Federal Reserve has also been warning credit-card lenders not to push their luck. The regulators are fearful that the economy could crack if consumers start being hit with higher fees and steep interest rate rises. The problem may be even sharper in Britain.

Analysts always say that “the markets get it right’’. Current market prices suggest that over 20% of the money owed on British credit cards is unlikely to be paid back. That would be almost three times higher than the previous record for bad credit-card debts, eclipsing the problems witnessed in the last housing crisis of the early 1990s.

“We are already hearing stories about people using their credit cards to keep up with their mortgage payments,’’ said Peter Crook, chief executive of Provident Financial, the doorto-door moneylender. “If that’s what’s happening, it’s a big red warning sign.’’ The recent Bank of England credit-conditions survey revealed that banks were surprised by the level of bad debts run up on their credit cards in the second quarter of the year. Demand for credit cards also increased as banks tightened their lending criteria across the board.

The UK’s debt-strapped consumers currently owe a staggering pounds 56 billion on credit cards. According to figures from Apacs, the payments network that supports the British banking system, this could climb to pounds 160 billion if those 31m cards are used to the max. The figure takes account of all the measures already taken by credit-card issuers to clamp down on borrowers by rejecting card applications and cutting credit limits.

YouGov’s research suggests that 15% of the British public is now behind on at least one bill of some kind or another. Of those in trouble, 38% say they are behind with utility bills or council tax, while 31% cite credit cards as their big problem.

Problems in credit-card debts have the potential to send a new wave of panic through global financial markets. Roughly $600 billion of debts run up on credit cards world over swill through the global financial system. Credit-card debts were packaged up and sold on by banks during the boom years, just like mortgages and car loans. THE SUNDAY TIMES

Bad Karma catching up with MNC and Private Banks

A news report today in leading newspapers in Mumbai talks about CitiBank planning to sell its swank headquarters in BKC.

It is a typical case of bad karma catching up with the bank.

For years, Citibank and similar foreign and private banks lobbied with the mandarins in the law making institutions to offer products and services whose cost was way prohibitive for the common man.

They set up honey traps by offering easy credit through credit cards, personal unsecured loans and other such instruments where the interest rates were portrayed to be unregulated by the central bank. They charged interest in the region of 35 to 85% all in the name of unsecured credit.

These bank employed bright kids fresh off the MBA mill to sell these products and services. These kids were offered heavy salaries and pushed into achieving sales targets for the bank’s dubious products. To recover the small loans issued to masses, these banks hired dubious agencies purely on commission basis thus transferring the cost of their entire operation on the poor borrower.

Stories of mental, physical and financial harassment abound. Bank managers and officials ruthlessly went around first distributing money and then recovering these small loans.

Small borrowers, people who borrow 40,000 to 50,000 rupees (1000 to 1250 US Dollar) could be easily browbeaten into submission. Armed with a central bank looking the other way and legislators not bothered about the rape of the common man, these banks systematically looted the common man. Many were driven to commit suicide, many marriages went bad and many people’s families were destroyed.

All this has created a lot of ill will amongst the people and it is now translating to these very same banks facing collapse for deeds done by the managers who were supposed to make the bank grow. The sub-prime crisis in United States and its fall out on the world financial system is having its echo here in India too. These banks are now left holding the baby.

Soon these bank managers who were getting fancy salaries and perks will be also laid off. Banks like CitiBank will have no option but to cut all the flab. With share prices of the bank falling to 16$ from a high of 65$, it has already seen an erosion of 75% of its value. There is more to come from where all this came from and boy am I happy!

It is the bank’s bad karma that is catching up with them.

Time to switch to 10 Hours a Day 4 Days a Week Work Pattern

With rising fuel prices many organziations world over are thinking of switching to a 10 hour per day and 4 days per week routine.

Maybe it is time for India to do that too.

By compressing the working hours into 4 days, organizations can completely cut off the consumption of petrol and diesel. Government offices can remain closed during the weekend starting from Friday.

By changing the working hours, the stress on the public transport system will get more evenly divided. With the banks and other commercial establishments like the Stock Exchanges working only partially anyway, their working days and hours need not change. Therefore you will have government staff reporting to work at 8 a.m. instead of 9 and leaving at 6 p.m. instead of 5.

It will require some changes in the way the public transport system works but I am sure it will be well worth the saving that will ensue. There will be other benefits too, like cleaner environment with their being less pollution, better utilization of available resources, community development due to more time being available with people etc.

But the saving will come only if the burden does not shift from the corporations and governments to the individual. In the end if the individual ends up consuming the same amount of petroleum resources then no purpose would have been served.

But it is definitely an option worth pondering.

Are you ready to shred some money?

In 1976 when my father quit the Indian Navy to join Britannia Sea Foods, his salary was 1200 per month.

We moved to Malad, a suburb of Mumbai and bought a flat for 39,000 having an carpet area of 450 square feet. This worked out to 85 rupees to a square foot. In terms of his salary it worked out to approximately 3 years of salary spent towards owning a house.

Out of this 1200 rupees, my mother saved 600 every month after meeting all expenses of sending three children to school. We never had a shortage of anything in the house.

As we grew, prices and salaries began to rise.

Today it is common to meet a fresh graduate who is earning 20,000 a month doing a call center job in Malad. Property prices are in the region of 6000 to 9000 rupees per square foot. If he was to buy a similar property that my father purchased he would have to shell out 44,21,250 ruppes for the same house. In terms of salary this would translate to 18 years of salary going towards purchasing the property. Thus if price parity was to be maintained the call center employee should be receiving a salary of 120000 or property prices should not have exceeded 7,20,000 in 2008. Neither of this is true.

Therefore it can be safely concluded that either the property prices are in a bubble or salaries are much below par. We all know at if a call center employee was to receive a salary of 1,20,000 per month, then the job would not have been outsourced to India in the first place.

In the above calculation I have taken a median price of 7500 and multiplied it with 590 square feet (adding 31% for super built up factor which builders charge for now a days).

Even if I consider that the call center employee was married and had an earning partner with an equal earning capacity, it would still take 9 years of their combined salary to pay for the same house.

Why has this happened?

It would be interesting to read this article on www.inflationinindia.com to find your answer.

And after that you should be ready to shred all the cash that you have because RBI is not going to do it for you!