Delhi-based Tarun tells us about the loans and its various ramifications, in the weekly column, exclusively in Different Truths.
That’s a refrain we often hear in motivational messages. This is what we are taught from childhood, to never lose hope. I remember the world cup final between India and Australia, which India lost badly. I was glued to the telly, hoping for a famous victory for the country. The commentators were discussing the prospects after the toss. One Australian commentator said India would lose. The Indian commentator disagreed. Then, the Aussie brought out one on one comparison, to make his counterpart see the reasoning. And admittedly, he made sense. I remembered him after India lost, and I had a bitter taste in the mouth. And that is when I realised that positivity always is not good. Maybe a tinge of realism is required after all.
Why am I writing this in an economic column? Because economics is the result of a lot of things that go on in our subconscious mind. I take the topic of loans and NPAs, (non-performing assets), which is a euphemism for bad debts.
Loans and NPAs are a raging topic in India today. The banks are saddled with staggering recoverables, and bankruptcies, debt traps, deleveraging, erosion of capital, are many of the common terms we can read in the newspapers about even the average business in India.
There are many explanations for this state of affairs. After all, the guy who took the loan must have wanted to do use it well. A person stakes one’s reputation when one takes a loan. There are willful defaulters, of course, those who intended fraud in the first place. But they are a minority. The majority do want to repay. Yet, something happens which forces their hand, and they are unable to repay even interest at times. What goes wrong? Is the economy to blame? Or some hand of destiny? Or are they simply incapable to increase business, or earning capacity?
That is where the positivity, or optimism, comes in. This emotion allows us to be hopeful about our future. This also allows us to take risks. And if it becomes unbridled optimism, this same optimism blinds us to the vulnerabilities and blind spots of strategy and tactics for taking those risks, and consequently, the loans.
Let me give an example. A gentleman I know had a thriving business. He naturally wanted to grow, and going by his past record, took up a big tender with a Navaratna PSU. He had to get finance for that, and his record made banks give him a finance to the tune of 1000 crore rupees. This was used to import machinery from overseas. And lo, there arose a dispute between him and the PSU, and the tender was revised and given to somebody else, as soon as the machinery landed. He went to the court to enforce the contract. Now, after 10 years of legal battle, he is still nowhere, his machines have rusted, the interest rate has piled up, his loan has been classified as NPA, and even his other businesses have folded up.
Look at the losses here. A bright guy lost his business, 1000 crore of foreign exchange was wasted, banks are going to lose money, a sticky court battle goes on. What a sheer waste this is!
Where did he go wrong? He had good intentions. He was optimistic. The mistake was being too optimistic. He could have foreseen legal and technical troubles if he had been a realist perhaps.
Our brain has three distinct parts: the forebrain, the midbrain, and the hindbrain. All have different functions. The forebrain controls higher cognitive and emotional functions, while midbrain and hindbrain control the various physical and conscious functions. The forebrain is the most evolved part of the brain, as the scientists have found after studying human and monkey brains. The forebrain allows us to think, plan, multi-task. It also is the seat of emotions. Research has revealed that macaques are similar as far as emotions are concerned to humans. However, they are not good enough when higher cognitive functions like thinking, analysing and multi-tasking are involved.
This indicates that emotions are much more ancient, and deep-rooted than planning, thinking and controlling etc.
All of this simply means that the sway of emotions is more powerful on a human being than that of reasoning. And that is when optimism, or for that matter pessimism, is so dangerous if they are not in balance. They will override all the carefully laid out plans. Which is why realism comes into play. A realistic person is more balanced than either an optimist or a pessimist.
People take loans to fulfill various requirements. These may be worldly, as well as, psychological requirements. A person may feel highly hopeful of something, and that’s why he will take a loan for that. Or he may be fearing something, and in his pessimism, takes a loan to escape that dreadful short-term situation. Both these are likely to become NPAs. Only a realistic loan would add value to the person, society, and nation as a whole.
Therefore, this column suggests that every loan seeker should be vetted for emotional strength, or EQ (emotional quotient) before he is granted loan by the bank. This would be a much better method to safeguard society against the modern day evil of Non-Performing Assets.
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