Dealing with the debt trap

Debt and default are now an integral part of our daily lives. Every second person in the UAE is faced with the issue of balancing his income and expenditure, and at the same time looking for avenues to make extra bucks.

Published: Sat 14 Aug 2010, 10:07 PM

Last updated: Mon 6 Apr 2015, 1:35 PM

The boom of yesteryears has now boomeranged in the form of a crippling recession, which has burdened an overwhelming number of people with staggering bad debts. The study conducted by a UAE-based financial consultancy, ISDM, has just confirmed the impression held by all and sundry. It says that almost 85 per cent of UAE residents are in an unrelenting debt trap, with many of them facing an individual debt of around Dh 500,000. Yet, this revelation is unlikely to raise many eyebrows, as the modus operandi of banks during the boom years of 2005 to 2008 was to dole out as much money as possible, without resorting to any modicum of caution and calculation. It is a common observation that almost all of the residents at least had one credit card from each of the banks, in addition to personal loans, burdening them with unbearable and unimaginable repayment statistics. Few used this facility to roll their business finances, but many others opted for a lavish lifestyle, apparently oblivious of the crunch coming in the form of legal and monetary liabilities.

The credit cards and loans attraction is not limited to people of meager income earners. Rather it squarely encompasses people across-the-board. Though personal greed and lust for acquiring easy cash cannot be absolved on the part of individuals, the banks are equally liable to be blamed for widening the debt trap for obvious reasons.

Luring customers with attractive interest rates and a host of supplementary offers, including cash back and points-based fringe benefits, customers were inadvertently made to go insane. In this era of recession, when both banks and borrowers are in dire straits, merely penalising of clients will not help. The knee-jerk tendency of financial institutions to threaten the defaulting customers with legal actions only further complicates the issue. Rather than dealing with an incidental defaulter with a host of repayable options, banks seem to be obsessed with the idea of invoking the fine print on which the client had been made to sign mandatorily — without even giving him a chance to read it out. Such a weird approach had compelled a large number of financial crisis ridden people to go in hiding, with many preferring to sneak out of the country. The dud cheques phenomenon is only a reflection of the continuing financial woes.

This debt dilemma is in need of a considerate strategy. Banks can do well by luring the defaulters with easy repayments, and as an incentive cut back on their spiralling interest and other auxiliary charges. Efforts aimed at streamlining individuals’ bad debts and funnelling in more liquidity for businesses is the only way out to avoid a  crumbling collapse.