AAJ NAGAD KAL UDHAAR

After my morning golf round on a holiday, the local manager of the ICICI Bank, requested me to meet him to fill the form for a credit card. I have had an account with the bank for almost 16 years and I never asked for a card. Because inherently I have been brought up on the notion that debt is bad. And it has to do with my childhood.  We were a family of five brothers and sisters, brought up on a single income of a father who was a University Professor . All growing up and studying. Each one outgrowing our shoes, uniforms and clothes every year. We would use the hand me downs – books, shirts and shoes, wherever possible. In between there was trouble between two political factions in the University for Control and the matter went to court. In the 70s the Indian courts were no faster than they are today. They were slower. Hence, till the matter was subjudice,  University Grants Commission or UGC did not release any salaries. For three years, my father did not get a salary. He had no parents or in laws who could financially support him, so he gave tuitions and wrote books for Postgraduate English students. It was only later that I understood, that those books were Notes on the classics of English Literature which were in the syllabus. Most of the Indian students, especially in North India were unable to understand the archaic Shakespearean and Victorian English and therefore, needed to understand Emily Bronte’s Wuthering Heights or John Keats’ Poems with the help of those notes. So, he wrote them for quick money, except for one, which he wrote towards the latter part of his life as an Introductory Textbook of Linguistics and Phonetics and it has till date sold almost 100,000 copies since its first publication in 1977 and is a prescribed textbook for Masters in English/Linguistics in more than 15 Indian Universities. So, the income of books and tuitions ran the household for three years till the case was resolved and all employees got their arrears and salaries.

The lesson I am trying to draw out of this episode is that I understood the concept of consumer debt and other income early in life. We had to buy our monthly groceries from the neighbourhood grocer, who gave stuff on a monthly credit or “udhaar” to known customers. And I used to read in his shop, “Aaj Nagad, Kal Udhaar”. Literally translated as, “Pay cash today, take debt tomorrow”. Sometimes, the outstation cheque from the book publisher would get realized in 15-20 days because of the manual and inefficient public sector banking system of those times. There were no digital private banks those days. No NEFT and RTGS. And sometimes we would not be able to clear our monthly grocery bill at the end of the month. It would spill over to the next month. This was a primitive type of credit card system in small towns like Haridwar. Except that there was no usurious interest charged on delayed payments. And a small polite reminder from the grocer was all that one got. The polite reminder of the grocer once or twice in those three years stayed with me.

I have never ever been in anyone’s financial debt ever since then. I have never let anyone remind me of a payment due. I have preferred to build lesser number of assets but my credit rating today is so high that banks are willing to pre-sanction me home loans, auto loans and give all types of cards enticing me to borrow from them. What do I do?

I use the credit period to increase my income. In this internet dominated digital age, I would be a dinosaur if I did not use the net to get good deals especially on travel, which I love. So, I have credit cards which I use for purchases and use the 40 day credit period. Three days before  the due date, I pay all my credit card bills. The advantages I gain are: my money in my sweep savings account gives me 4-6% interest, my CIBIL rating is very high, I use my reward points to buy freebies and I get my discounted travel tickets.

Now, the lessons. The first financial lesson was that debt is bad. The second thing I learnt was credibility and good will. My father got credit because of his goodwill. An ounce of integrity is better than a ton of smartness. I learnt from my parents. The third thing I learnt was concept of Accounts Payable or Sundry Debtors , how it can be used to delay cash outflows. And last lesson was that one needs to always develop an additional source of income or other income and have a rainy day account.

Please do not take home a lesson that all credit is bad. Loans and credit are very good, if available at very cheap rates and the returns you can generate are higher than the cost of capital. I have taken only one loan ever, for a house. At 7% fixed rate on a monthly reducing balance. My rental income is equal to or higher than my EMI. So, I earn more than my cost of capital. I couldn’t get a better deal. The loan helped me to acquire an asset.

Where do most of us go wrong? In the greed to make more assets, we take too much debt and we are unable to pay the EMIs. Corporates also commit the same mistakes. Pick up the balance sheets of Suzlon, DLF, Unitech, Tata Steel, Kingfisher Airlines, SpiceJet, Jet Airways…….the list is very long. They expand taking loans and then are unable to earn those profits to pay the EMIs. The businesses go bust or use up all cash to pay for debt. You end up becoming like the nawabs and princes of India– asset rich but cash poor.

And that is why since I started writing for faujifinance, I only research companies with debt reducing balance sheets or zero debt balance sheets. I steer clear of aggressive growth companies. I followed them for 20 years, losing money more often than not. Let someone else be richer. If Mr Bhogal becomes richer, I  ain’t becoming poorer.

I have not made two or three houses by taking one loan after another. I may buy another house when interest rates are very low and I can generate higher returns on that money. I have put my earnings to earn more through dividends which are tax free and are hassle free. They keep increasing with time. Only caveat, they should be good businesses. And you should have the patience to stay the course. Some of my businesses give a 12-15%  tax free yield on my invested capital only from dividends.

And as far as credit cards are concerned, I beg to differ from my friend and muse. She likes to own as many cards as possible, if they are without fees. For me they are a hassle, if they are more than what I need. So, I may or may not yet accept the pre sanctioned ICICI Amex-Master Card offer. Leverage your credit to advantage or best policy is aaj nagad, kal udhaar.