Loan Portfolio Analysis & Management

 

Pandemic has changed the mind-set towards the loan and debt management. Currently every person of every age, either it’s a middle-aged person or Millennial every one has loans and they are struggling to pay off. The problem for the Millennial is more as they are new to these recessionary type trends where slowdown of the economy means loss of jobs and cut down of pay cuts. In the last 3 years, India has witnessed a revolution when it comes to the financing of consumer durable and personal loans which have grown in excess of 40 percent CAGR. Most of the loans are being offered through 100%  digital loans through websites, mobile applications, Point of Sale terminals, and payment gateways, fintech companies have been at the forefront of driving this surge.

Borrowing has become an integral part of our life. The easier it has become to get a loan the same it has become to spend. Today we don’t have to wait for paycheques to buy anything. We just get a consumer loan to buy the thing. Fulfillment of wish has become a matter of second. A loan is now part of our lifestyle. Credit cards and other EMI options are some of the best ways of having loans.  Millennial borrowing pattern is too unplanned and short term focussed where immediate hunger is being met.  Savings is an unknown word for the millennial and this creates the demand for Loan portfolio analysis.

The behavioral aspect of the Millennial and consumer loans is that high pay packages as compared to earlier times and easy access to loans. The time remains very happy as long as the paycheques come easily but things change when the down-fall happens.

 Loans are of various types- Business loan, consumer loan and medical emergency loan, and millennial loan. Among these loans, the consumer loan or the Millennial loan is the biggest threat if not managed properly. A cashless economy is a welcome step but as an individual, it is highly important to be careful. If the cashless weapon is not managed properly it can ruin the life of a family

 Cash flow management is not restricted to corporates. It is one of the most important tools for an individual or family to manage cash flow. Any high level of debt reduces the long-term growth prospect of one’s wealth. Cash flow identifies the areas of gaps and management of the same.

We find that most of the people are living their life from one pay-cheque to another pay-cheque. One should be cautious regarding the depth of loan one can afford. Often it is being found that a loan is being taken without calculating how much it will behave burden on the savings. This is a very important aspect of financial planning often ignored.

 The loan is nothing but foregoes of future savings for the sake of the fulfillment of unnecessary gratification. Yes, I term it as unnecessary since when we buy things with the loan we misuse the money accordingly. We don’t have any calculated budget while using the Credit Card or other EMI options.  The loan portfolio is the basket of all your loans on which you have accumulated while doing your favorite shopping.

 We find that Credit Card or any loan can be a great savior in times of medical emergency. Yes, when one is in a difficult phase and one needs immediate support of liquidity the same credit card or another loan format can be of great relief. But if your credit card or loan is not properly managed then the burden of loss is significant at the time of crisis.

 We need to analyze our loan portfolio just like the investment portfolio since the loan is a dilution of savings and loss of opportunity of investment. For investment we need savings and that savings will come when we spend properly. While calculating our spending habits EMI and credit card are also part of expenses.

 Many of us pay the minimum balance of the due amount of credit card but we forget that the interest on the outstanding amount is just accumulating. This is a significant threat as the huge amount goes out to pay these dues on alter date.

 Loan portfolio analysis needs the following things:

·         Analysis of the reason behind the Credit card EMI or loan

·         Do you need to have borrowed the living style of life?

·         To check if, any interest is getting accumulated due to non-payment or delayed payment of full dues.

·         Your EMI/credit card payments need to be monitored monthly since less monitored thing often leads to a mess.

 

·         Stop further loans or borrowed consumption patterns of living life. Disciplined in consumption and loan management is highly required.

·         When you have surplus money in hand make sure your 1st priority is paying the debt and not investments.

·         Reduce your card number to a maximum of two. This will help to control and monitor.

·         One of the key questions which we have received from many people is that what should be the percentage of my EMI or Loan of my monthly income.

·         Well your loan or EMI should not be more than 30%- 40% in any case including your real estate loan of your monthly income. Since one needs to have provision for a future emergency loan.

·         Any percentage more than this will spoil your ability to save and plan for your future. A higher percentage of loans to your monthly income forces you to forgo the opportunity of wealth creation.

·         Loan based consumption is just a temptation to get into the vicious cycle of loan trap.

·         One must remember that your well-planned loan portfolios and management decide your future loan potential.

·         One should be very careful about his payment due dates. They should not be missed at any point in time since that impacts your credit score.

·         While moving ahead with any EMI or loan based consumption think twice about taking the same.

·         A priority list of loans or EMI should be made to efficiently use the leverage.

·        Avoid doing investments based on borrowed capital. This will be a double burden not only on the savings but on the long term wealth creation.

 Conclusion:

We find that having a well-disciplined loan portfolio and management is an important part of financial planning. No wealth creation planning can be done without having proper loan planning. Every family member should make a cumulative loan portfolio to get the best result out of the same. This will help to improve the cash-flow for the whole family and take the appropriate decision about loan management. The net worth of a family increases when debt management is efficiently done. Financial planning is incomplete without proper debt management. One cannot grow wealth without having proper discipline in every aspect of financial management.