The pandemic has been an eye opener in ways more than one. While it taught us to prioritise health and life over lifestyle, it has also begun to make us aware of crucial instruments, such as the Debt Management Plan. The unseen virus has severely impacted debtors and creditors equally — job loss, pay cuts, the moratorium, spike in healthcare costs, and more have become daily worries. Apart from seeking better healthcare facilities and infrastructure, these times call for the establishment of proper credit counselling agencies, with the NPA threatening to soar higher, where household debts have a substantial role as well.

Let’s look at some statistics for the individual household debt for a moment. In March 2020, CEIC stated that India's household debt accounted for 12.4% of our nominal GDP. It was substantial. But with lifestyle changes and growing focus on ‘careful spending’ on the essentials, this debt has reduced in the 12 months since March 2020 by Rs 1.5 trillion.

Can debt be managed?

Can CIBIL scores still be maintained?

We would say, YES. But there has to be a proper ‘How’ as well.

Let us start with enterprises. For small to medium enterprises, business needs to be glocalised and based on sustainable products, and business models need to focus on optimum utilisation of existing funds. The Government has come up with a lot of measures to help certain sectors that have been impacted due to Covid, and has extended the timeline of the Emergency Credit Line Guarantee Scheme (ECLGS) to June 30, as well as widened its scope to issue additional funding by up to 40 per cent of outstanding loans as against 20 per cent earlier. The Collateral-Free Loan Guarantee Scheme, announced as a part of the Atmanirbhar Bharat package, will now also cover borrowers with total credit outstanding up to Rs. 500 crores, with overdue for 60 days or less on February 29 as compared to 30 days overdue earlier.

For the household sector, things are still at a somewhat slow pace. With technology slowly entering the BFSI space, financial inclusion through properly channelled credit systems has yet to make its presence in the tier 2 and 3 cities. Banks and NBFCs are yet to fully embrace technology when it comes to recollection. Their systems need to be automated and debtors’ data need to be managed better. Householders also need to be better educated regarding the management of debt and maintaining their CIBIL scores. They need to be aware of all the terms and conditions, as well the repercussions.

There are many ways to get loans, the criteria of which are totally grounded on the size of the loan, which is the amount required by the borrower. However, today all banks verify the credit score of applicants of all the financial products of credit, namely, Personal Loans, Credit Cards, etc. Even though at times the individuals may have a low credit score, there are ways to improve the credit score.

Too much is, well, too much: Use credit prudently. Avoid taking on too much debt at one time. The number of loans you apply for, during a fixed time period should be minimal. Maintain a healthy credit mix: It is better to have a right combination of secured loans (such as Home Loan, Auto Loan) and unsecured loans (such as Personal Loan, Credit Cards) of a long and short tenor to build a good credit score. Too many unsecured loans may be viewed negatively.

Build up a good history gradually: Debt is, often, essential. But the idea is to take the right kind of debt, use it prudently and service it well.

You may opt for a longer tenor when you take a loan, to ensure that your EMI is low. You could also increase your credit limit. How to improve the credit score through this? This does not mean you are going to spend more money. The trick is to have a lot more credit and keep your utilisation low to leave a positive impact on your score.

Over time, you can build up a healthy score that can get you quick and competitive loans.

But here are two things that we would suggest. Since we deal with debtors who are on the verge of default(s), we would request these debtors to keep their banks or credit giving entities apprised with your financial situation. Hence, they need to be vigilant here. In case it becomes really difficult to make repayments to the amounts due to the financial institutions, it is advisable to opt for restructuring, where the EMI can be for longer tenure and with reduced amounts. Also, in the case of a default, borrowers can keep in touch with the lender to reach an amicable solution. These days it has become easier to resolve such disputes by opting for Online Dispute Resolution through independent online platforms and reach an amicable settlement through e-mediation.

The rising NPA, the lack of financial inclusiveness, and the present crisis, all can be defeated if only we aim to be more vigilant and aware of our actions and the results. We may not have active credit counselling agencies, but surviving behind closed doors and masks should mean learning more and drawing up personal debt management plans.

The author is Co-founder and COO, Credgenics.

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.