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PERSONAL DEBT
MANAGEMENT A STUDY
RELATED TO URBAN
HOUSEHOLDS DEBT
SERVICING BURDEN

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ABSTRACT
A loan may be borrowed to buy a home, buy a car, pay the fee for higher
education, pay off previous loan/s or may be to finance a wedding and so on.
Often there are individuals/ households who at times fail to meet the payment
deadlines on their debts and therefore have to bear the brunt of penalties imposed
on them by their respective lenders. The study was conducted with an aim to
fulfill the following objectives: to analyze the various factors due to which
individuals choose to be indebted, to analyze the various reasons due to which
borrowers default in repaying their debt, to find whether there exists any
difference between the estimated cost of borrowing and the actual cost paid by the
borrowers and to construct a model for borrowers that may help them in judging
their repaying capacity.
The design of the research is both exploratory and descriptive. For the
purpose of the research, home loans, vehicle loans, education loans, personal
loans and credit cards were taken into perusal. The study made use of information
collected from primary as well as secondary data sources. The researcher resorted
to a choice-based or convenient sampling approach for selecting the respondents
for this survey. For the purpose of primary data collection, a survey with the help
of self-administered questionnaires was conducted on the officials of 6 selected
commercial banks and 300 individuals who must have borrowed a loan/s from
banks for non-commercial purposes only. The data collected was analyzed using
the various statistical tools viz. tabulation, frequency and percentages, measures

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of central tendency and measures of dispersion. Chi-square test, ‘t’ test, one way
ANOVA and Spearman’s rho have been used to examine the various null
hypotheses framed in the study. It was found that the difference in the estimated
and actual cost was significant for home loan and education loan borrowers. The
most important reason for individuals to borrow home loan, vehicle loan and
personal loan is family size and requirements, for education loan it is
unaffordable course fee and for credit card, it is convenience of transaction. The
major cause of default for urban households is the loss of income for home loan,
ii
vehicle loan, personal loan and credit card, whereas for education loan it is
working at low salary/income.
KEY WORDS:
Debt Management, Urban Households, Credit, Banking, Default

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PersonalDebt Management: A Study Related to Urban Household’s Debt Servicing Burden
CHAPTER – I
INTRODUCTION
In the era of rising demands of individuals, it has almost become a fashion to finance the
requirements. Individuals differ in their preference of borrowing money because of the
differences in their reasons for borrowing, the amount of borrowing, quantum of
borrowing, source of borrowing and so on. Nonetheless, a detriment faced by individuals
in enjoying the benefits of financing the personal requirements is a cost which happens to
be in the nature of interest obligation required to be paid to the lender. There are different
reasons to accept the choice of becoming indebted. A loan may be borrowed to buy a
home, buy a car, pay the fee for higher education, pay off previous loan/s, loss of a job,
personal or family illness, overspending or may be to finance a wedding or so on.
This nature of human beings getting indebted to the lender for fulfillment of their
requirement is not new to the society and so is the case with associated defaults and its
consequences thereof. It is not even uncommon for the states and countries to borrow
from other states and countries respectively in times of need or deficit.
The history of credit dates back to the emergence of mankind. When a person
requires something materialistic, then he usually follows two available courses of action,

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one is ethical and the other is unethical. Unethical ways of procuring things deal with the
adoption of unfair methods like deceit, stealing, procuring through coercion, shoplifting
or robbery, to name a few. The ethical ways of fulfilling requirements include barter
system1
and acquiring or borrowing. Acquiring or borrowing includes monetary
transactions between buyer and seller or between borrower and lender respectively.
During the epoch of the past few decades, many options of credit had developed in the
society and also with the advent of retail banking, debt has taken different facets in the
modern era. Moreover, credit market today has picked up a pace that is much more
mature and transparent as compared to its counterpart in the past.
1 It is one of the oldest methods of exchange mainly followed before the evolution of money. In
this system, people exchanged goods or services for other goods or services without using a
medium of exchange, for example – an exchange of a loaf of bread for some jam.
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Today, even the government is encouraging people to take loans for certain
purposes. A tax concession on housing loans is one of the indicators of this fact. This is
so because even the government recognizes that credit extension is an integral link in the
transmission mechanism that relays changes in monetary policy to changes in the total
demand for goods and services and the rate of inflation. A change in interest rates by the
monetary authority effect the level of credit extended to households, and this would
ultimately influence aggregate demand. The availability of credit from reliable financial
institutions could help channel resources into their most productive uses and so increase
economic growth and prosperity. In addition, greater access to credit makes it easier for
business enterprises to initiate new capital formation projects, augment stock levels and
expand their activities. An increase in credit also plays an effective role in enticing
customers to buy now, instead of postponing their buying for the future. Huge demand
for products and services from customers pulls supply and thereby enhances production
of the business houses, which ultimately leads to augmentation in Gross Domestic
Product.
Enhanced lending on several fronts contributes a lot in the economic development
of the country. The GDP growth rate was at 4.30% in year 2003, rose to 8.3% in 2004
and was recorded at 6.2% in 2005, 8.4% in 2006, 9.2% in 2007, 9% in 2008, 7.4% in
2009, 7.4% in 2010, 8.2% in 2011, 4.5% in 2012 and 4.7% in 2013. The IMF has
projected India’s GDP to grow at 5.4% over 2014-15. GDP growth rate advanced faster
than expected 5.7% in the second quarter of 2014, up from a 4.6% expansion reported in
the first three quarters of the year. Among several significant reasons for boom in Indian
economy is easy availability of loans. The reasonable rate of interests at which these
loans are available is also cited as important contributors. These days, banks are giving
loan for and loan against any and everything.

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Among those households who are reaping the benefits of easily available and
reasonably priced debt, there are individuals/households who at times fail to meet the
payment deadlines and therefore have to bear the brunt of penalties imposed on them by
their respective lenders. These penalties may range from an increase in the payment
charge to confiscation of the mortgaged asset, depending upon the terms and conditions
specified in the debt agreement. This brings to light the importance of taking rational
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decisions regarding exercising the option of seeking credit, amount of credit, sources of
credit and the maximum period for which the funds are to be borrowed. In addition, it
also highlights the significance of prudently managing debt, once the option of getting
indebted is exercised. Managing debt efficiently and effectively needs endeavors to
minimize the cost of borrowing and simultaneously to manage the risks involved in
borrowing.
1.1 PERSONAL DEBT MANAGEMENT
Prinsloo (2002) has defined debt (including household debt) as “an obligation or liability
arising from borrowing money or taking goods or services ‘on credit’, i.e. against an
obligation to pay later.” Usually a debt contract is an essential part of the debt agreement
between one person and another. A debt contract states the terms of borrowing, the
interest and redemption payments that the borrower must make along with the amount
and type of collateral the borrower need to provide. Households may, in practice, be
willing to enter into credit transactions for various reasons. The use of consumer debt is
mainly related to consumer’s eagerness to consume now rather than later. Households
surrender future consumption because they will use the income earned at a later stage to
settle debts and meet interest commitments. Consequently, they will have less money to
spend at that later stage, even if they do not further increase their commitments relative to
income growth.
The management of debt has several aspects which are being dealt in detail in the
following sections.

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1.2 HOUSEHOLD’S FINANCIAL MANAGEMENT
For households, financial management can be defined as planning, controlling the
financial resources individually and collectively as well at a family level. Financial
management of households is concerned with planning related to income, expenses,
savings and investments. In relation to financial matters, it is difficult to generate
resemblance among different households at similar income patterns owing to differences
in their aspirations, necessities, lifestyle and future planning of different members of the
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family and also due to the difference in their family structures. Though, it is a separate
issue that in this process some individuals/ households succeed while others fail.
Individuals need money to fulfill their basic requirements, to maintain or enhance
status, to maintain an adequate amount of liquidity, to cover for contingencies, to provide
comfort and security for self and family members and so on. Following functions of
personal financial management are applicable for households:
 Decision regarding income and its sources

 Decision regarding expenses

 Decision regarding savings

 Decision regarding investments and the different avenues available for investments

 Decision regarding borrowings and the sources of borrowing
Broadly, it deals with estimation of requirements for recurring as well as non-recurring
expenses, financing these requirements, savings and investments. This suggests the
utmost importance of cash management for households.
1.3 CASH MANAGEMENT OF HOUSEHOLDS
Money/ cash is the basic input required to keep life running on a smooth basis.
Households are concerned with managing of (i) cash inflows; (ii) cash outflows; and (iii)
cash balances to be held by them at all points of time depending upon their requirements,
which may vary from household to household and within households, from circumstances

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to circumstances. The management of cash is also important for households because it is
difficult to predict cash flows accurately, particularly the inflows, and there are no perfect
coincidence between the inflows and outflows of cash. At times of cash deficit,
individuals either use past accumulated savings, sell off their assets, including gold, real
estate and other precious items or else borrow from financial institutions, friends,
relatives or from other sources.
There are certain households who, despite having adequate funds with them
borrow from external sources to satisfy their requirements. The reason for this can be
explained in rational terms when the debt obligation is planned prudently considering the
benefit/s. For example: when an individual, went to a shopping mall and like an apparel,
but does not have either sufficient amount of cash to purchase it or else does not want to
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spend the cash on it, may resort making payment for the apparel through credit card. A
rational individual always tries to hold an optimum level of cash. Individual’s need to
hold cash may attribute to three motives viz. transaction motive (to conduct its ordinary
expenses), precautionary motive (to meet contingencies, if any) and speculative motive
(to invest in profit making opportunities as and when they arise).
Many individuals out of their habit and prudence prepare a cash budget1
. Though
there may not be a fixed format for preparing a budget by households and the individuals
may follow different styles of preparing a cash budget, its importance remains the same
even with varying styles and customization. Preparing a budget is a good habit but
everybody does not prepare it, may be because of lack of interest or because of illiteracy.
An example of a household budget is shown in appendix 1.
By making use of cash budget or otherwise, when a household forecast a huge
requirement of money or deficit of cash, he looks for various sources for arranging
money including borrowing from banks.
1.4 HOUSEHOLD’S DEBT
Households differ in their borrowing requirements, capacity of borrowing and their
attitude towards borrowing. In India, there is abundance of households who never look
forward towards availing credit. Such people hold it as a principle to always try to adjust
in whatever they have. On the other side, plenty of Indian population believes borrowing
to be a wonderful option. The irrational households incur unplanned expenses and then
borrow money to pay for their purchases made on credit basis. However, a sudden
expense on medical bills does not necessarily make a person irrational for his expenses.

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The demand for credit comes into the picture because of the large set of reasons that
depends to a large extent on the circumstances of an individual. Debt/ credit from banks
can be borrowed in the form of home loan, vehicle loan, education loan, personal loan,
through credit cards and so on.
1 A budget is a predetermined detailed plan of action developed as a guide to current incomes and
expenses. It also serves as a measure of estimation of the level of future cash inflows and
outflows. Cash budget is a forecast of estimated cash receipts and disbursements for a specified
period of time. It can be prepared for any time period. It ensures that cash is available in time for
carrying out household activities related to money and for meeting financial obligations, if any.
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Households planning to buy a new home or renovating or extending the existing house
may borrow home loan.1
Similarly acquisition of a vehicle may bring in the requirement
of borrowing vehicle loan2
. Education related requirements can be financed through
borrowing education loan3
. Personal loan scheme is meant for personal requirements of
customers and their family members to meet cost of marriage, medical treatment,
education expenses of children and so on. Personal loans are characterized by a large
number of applicants whose desired loan size is not large enough to warrant individual
assessment. The banks make credit card4
facilities available to consumers, offering a
convenient method of making purchases and deferring the payment of the purchase price.
Household debt has increased dramatically in the last few years. Between 1994-95
and 2000-01, annual household borrowings rose from Rs. 24,771 crore to Rs. 31,778
crore, up 28.3%. But between 2001-02 and 2007-08, household borrowings rose from Rs.
51,727 crore to Rs. 1,73,136 crore, up 234.7%.
Clearly, household debt has increased dramatically in the last decade, owing to
the discovery of retail banking. Between 1994-95 and 2007-08, annual household
borrowings grew by Rs. 1, 48,365 crore.
Financial liabilities of Indian households have gone up sharply from Rs. 31,779
crore in FY01 to Rs. 2.74 lakh crore in FY12. The decade saw two major trends leading
to a sharp rise in consumption expenditure. Home loans have now become popular with
no stigma attached any more. The age bar of people opting for home loans has come

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1
Home ownership is one of the primary ways that households can build wealth. Individuals going
the way of home loans for acquiring a property or for construction purposes enter into a contract
of the mortgage loan. In this kind of arrangement, the financial institutions, however, are given
security that usually happens to be a lien on the title to the house until the loan is paid in full. In
case the borrower defaults on the loan, the bank sends him notices of reminders and in the event
of non-payment would have the legal right to repossess the house and sell it so as to recover the
amount of loan given.
2
This category includes the loan borrowed for the purpose of purchasing a two-wheeler or four-
wheeler. A loan taken out to purchase a new or used vehicle may be secured by the vehicle. The
duration of the loan period is considerably shorter that generally corresponds to the useful life of
the vehicle.
3
In conditions of paucity of funds, it becomes extremely difficult for the people to grab the share
of higher and quality education for their wards. The boom in the banking sector has led to the
release of a large amount of funds for education loan. Various nationalized banks are offering
education loans under varying schemes.
4 Debit balances on credit card accounts are usually payable within one calendar month after the
cardholders receive their accounts, but “budget” facilities are also provided to postpone the
payment over longer periods. The outstanding debit balances at the end of each calendar month,
and not the total credit available, are taken into account in calculating the total consumer credit.
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down from those in the mid forties to early thirties. Moreover the very young have got
addicted to credit and spending that leaves them very little to save.
300000 282606 278319
274165
250000
188181
203448
200000 183750
163598
150000
120069
Amount (in Cr.)
100000 60274
5172
7
50000 31779
0
*Source: RBI1

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69982
Figure 1.1 Financial Liabilities of Indian Households (in Rs.)
There were 92,660 branches of banks under RBI on December’ 2011 with a credit growth
recorded at 16.11% for the quarter. The rise in household’s debt gives rise to the debt
management problem.
1.5 THE DEBT MANAGEMENT PROBLEM
Debt burden is the cost of servicing debt. For consumers, it is the cost of interest
payments on debt. The debt burden will be higher for credit cards and loans with high
interest. Bank loan officers use DSCR in determining debt servicing ability of the
borrowers. Debt Service Coverage Ratio also known as debt coverage ratio is the ratio of
cash available for debt servicing to interest, principal and lease payments. The household
DSR is the ratio of total required household debt payments to total disposable income.
The lower the ratio, better is considered the ability of a household to repay.
Dealing with money issues can sometimes be off-putting. If an individual is not
aware of the working and the pros and cons associated with credit or mortgage, then he
may land up losing out financially or getting himself deep in debt. The choice of getting
1 http://wealthymatters.com/?s=household+debt+in+india
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indebted should rest on a rational decision based on the accurate and adequate
information. However, this is not always the case. Though the percentage is less, but still
there are people who fail to plan their expenses and debt. A person shopping through
credit cards and having a flair for shopping may find him unable to meet credit card bills
later on. However, a rational person may also use his credit card beyond his repaying
capacity because of some urgency. If a person spends more than he earns and then use
borrowing as a means to fill the gap, then more of his future income will be utilized in
repaying debts. This will leave him with lesser amount to meet his monthly expenses
(including EMIs) and he might be forced to borrow again, adding the debt burden further
on his income. In case this system is continued by him, then he may find himself in a debt
trap and in no time, he might start defaulting on his loan repayment.
Default essentially means a debtor has not paid a debt which he or she is required
to have paid. Default can be of two types: debt service default and technical default. Debt
service default occurs when the borrower has not made a scheduled payment of interest
or principal. Technical default occurs when an affirmative or a negative covenant is
violated. As far as banks are concerned, an asset is treated as non-performing asset only
when a scheduled payment remains overdue for a period of more than 90 days. However,
the credit rating agencies recognize default even if there is a default of one rupee or a
delay of one day in servicing the scheduled debt obligations. The ‘one day one rupee’
default criterion is in line with Basel regulations, which derive credit risk weights and
probability of default from globally accepted practices. These practices have been
universally accepted and are consistent. Default definitions across markets follow the
‘single rupee, single day’ norm, which means that a borrower will be classified as a
defaulter even if he misses a term loan payment by a single rupee or a single day. Over
time, the definitions of default have evolved to become stringent because of the need to
identify early warning signals of financial stress.

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On defaults side, most of the Rs. 19,062 crore, fresh non-performing assets added
to gross NPAs of 33 banks in 2005-06 were on account of defaults on retail loans. The
retail loans boom started in 2002-03 and peaked in 2005-06, when banks disbursed a total
of about Rs. 1, 86,700 crore of loans for the purchase of homes, cars, commercial
vehicles, consumer durables and two-wheelers and also for personal loan purposes.
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India’s top two commercial banks, State Bank of India (SBI) and ICICI Bank booked a
big jump in bad loans during the financial year ended March, 2008, with the banking
sector in general reported an unusually high number of defaults in the retail segment.
Bank non-performing loans to total gross loans are the value of non-performing
loans divided by the total value of the loan portfolio (including non-performing loans
before the deduction of specific loan-loss provision). The table below shows the bank’s
NPL to total gross loans for India for the period 2009 to 2013:
Table 1.1: Bank NPL to Total Gross Loans (in %)
Year 2009 2010 2011 2012 2013
NPL 2.2 2.4 2.7 3.4 3.8
Source: World Bank Data1
The number of new loans becoming non-performing was close to 3 times the loans
recovered and upgraded at the largest state banks at end-March, 2014. This data suggests
that there is a strong requirement for individuals to be rational about their borrowings.
There are a few things related to debt that need to be checked by an individual before
borrowing, viz. requirement of debt, choice of borrowing/ credit, sources of credit with
their respective advantages and disadvantages, repaying capacity, contingencies and cost
of borrowing.

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1.6 COST OF BORROWING
Cost of borrowing can be defined as the total charge for entering in a debt obligation and
involves interest payments and other financing fees. In a more technical way, borrowing
costs refer to the expense of taking loan like interest payments incurred from a loan (or
any other kind of borrowing) including processing and other charges. The total interest
cost of any loan always holds a direct relationship with its interest rate. The higher the
rate of interest, higher will be the cost of borrowing and vice-versa. Apart from monetary
costs, there are certain non-monetary costs in the form of detriments and lost
opportunities. However, the type and extent of such costs depend on the circumstances of
each case.
1 http://data.worldbank.org/indicator/FB.AST.NPER.ZS/countries
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1.7 COST AND RISK DILEMMA
Specifically, in the case of mortgage loans, all clauses are in lender’s favour and very few
are in the favour of borrowers. Apart from incurring a cost on exercising the option of
borrowing, it also involves risk. The biggest risk associated with borrowing is, the
borrower commits his/ her future earnings to today’s consumption. Future being
uncertain, poses risk of inability of a household to meet the debt obligations as and when
due. It is due to this uncertainty, lenders demand a high rate of interest on loans for
longer durations. Default in repayment attracts penalty in the form of additional charges,
loss of credibility and in case of mortgage loans, non-payment may often lead to loss of
ownership of the mortgaged asset. If we look at the interest rates, then floating interest
rate is generally less costly for it reduces the risk of the lender as the lender can increase
the rate of interest on his funds when the market interest rate increases. However, a
floating rate of interest increases the risk of the borrower as the rate of interest can be
increased.
1.8 COSTS VS. PROBABLE BENEFITS
A loan, if borrowed prudently can result in fruitful accomplishment of the purpose for
which it has been borrowed. However, before borrowing one needs to compare the
benefits with the associated costs and risks and the available options. Home loan, vehicle
loan results in the acquisition or construction or improvement in assets. Education loan
aids financially in attaining a higher degree/s. Personal loan meets individual’s
requirements and so does the credit cards. Some people use their debts prudently to
invest. For example, if the cost of debt is 8% and they are able to invest it at, say 9%,

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then in this deal they earn 1% of the amount borrowed and invested. However, investing
out of borrowed funds has their own risks involved.
1.9 INTRODUCTION TO BANKING SECTOR
The modern banking system came into an effective force in the early 19th century. Before
that the financial system was mainly dominated by the indigenous bankers and until
1860, they used to finance trade. They also used to act as bankers to the company
government, collect revenue on behalf of the government, manage the transfer of funds
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from one centre to another. Some of them had the monopoly in the role of mint-masters
and money changers. However, in the later years, direct contact of these indigenous
bankers with the government as financiers declined. During the period of the second half
of the 18th century, in addition to their business, agency houses used to perform banking
business as an adjunct. With the establishment of three Presidency Banks, namely the
Bank of Bengal (1806), Bank of Bombay (1840), and the Bank of Madras (1846) during
the early part of the nineteenth century, the foundation of modern banking was laid. Till
the beginning of the last century, the slow rate of growth of the banking business was due
to (a) a high rate of failure of banks; (b) stagnant economic conditions during the period;
(c) a decline in prices; and (d) the passing of the Currency Act, 1861 which took away the
power of banks to issue notes. The banking system rapidly progressed during the first
half of the last century. The three Presidency Banks were amalgamated in 1921 to form
the Imperial Bank of India. Reserve Bank of India was established in 1935. Around 1950,
the banking system in India comprised Reserve Bank of India, Imperial Bank of India,
cooperative banks, exchange banks and Indian joint-stock banks.
The Indian Banking Industry is governed by the Banking Regulation Act of India,
1949. After the creation of the RBI, banks were divided into scheduled and non-
scheduled banks. Scheduled banks comprise of commercial banks and co-operative
banks. In terms of ownership, commercial banks can be further grouped into nationalized
banks, State Bank of India and its group of banks, regional rural banks and the private
sector banks including domestic as well as foreign banks. Rural group includes all centres
with a population of less than 10,000. Semi-urban group includes centres with a
population of 10,000 and above but less than 1 lakh. Urban group centres with a
population of 1 lakh and above but less than 10 lakh. Metropolitan group includes centres
with a population of 10 lakh and more.

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Banks in India have traditionally offered mass banking products that included the
most common deposit products like Savings Bank, Current Account, Term deposit
Account and lending products like Cash Credit and Term Loans.
In view of several developments in the 1990s, the entire banking product structure
has undergone a major change. As part of the economic reforms, banking industry has
been deregulated and made competitive. IT revolution and exposure to global trends has
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turned the financial market into a buyer's market. Banks are also changing with time and
are trying to become one-stop financial supermarkets.
A few foreign & private sector banks have already introduced customized
banking products like Investment Advisory Services, SGL II accounts, Photo-Credit
Cards, Cash Management services, Investment products and Tax Advisory services. A
few banks have gone into market mutual fund schemes. The Credit Policy of RBI
announced on 27.4.2000 has further facilitated the entry of banks in this sector. Banks
also offer advisory services termed as 'private banking' - to "high relationship - value"
clients.
New distribution channels are being used; more & more banks are outsourcing
services. Home banking has already become common. Products like debit cards, flexi
deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle
loans have been introduced by a number of banks. Corporates are also deriving benefit
from the increased variety of products and competition among the banks.
Public Sector Banks like SBI have also started focusing on this area. SBI has
opened up several new branches called Personal Banking Branches (PBB). The PBBs
will also market SBI's entire spectrum of loan products: housing loans, car loans,
personal loans, consumer durable loans, education loans, loans against share, financing
against gold.
Appendix 1.2 and 1.3 give details of the branches of scheduled commercial banks
(including public sector banks and nationalized banks) and scheduled commercial private
sector banks respectively as on March 2013 in rural, semi-urban, urban and metropolitan

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areas. The table also shows the number of on-site and off-site ATMs of the specified
banks.
1.10 RESEARCH PROBLEM
Inflation coupled with massive changes in lifestyles, concept of nuclear families, demand
for luxuries, call for status, vast set of unfulfilled requirements and availability of
numerous options have evolved the pace of loan markets. However, the increasing trend
has forced many people to borrow. It has often been seen that many households or
individuals choose to be indebted to meet their current requirements or to build assets for
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the future. But in case of dearth of income or may be a higher ratio of unexpected
expenses over income, people are succumbed to face embarrassment of delay in payment
or at times even non-payment. At this stage, it is also important to know that the financial
institutions follow a stringent procedure and also conduct field enquiries before
sanctioning and disbursing loan to an applicant yet the cases of default persist. This
suggests that either there is a loophole in the system of sanctioning a loan to the borrower
or the applicants over emphasizes their repaying capacity without any justification for the
same. This may have the tendency to further increase the rate of defaults and frauds.
Therefore, it is imperative to identify how the urban households decide whether to
borrow or not and how they manage their debt once it is opted for.
1.11 RATIONALE OF THE STUDY
The purpose of the study is to make individuals aware with the knowledge that can act
like a guideline for them in effectively and efficiently managing their debt obligations.
With the use of the study, it would become easy for individuals to estimate the maximum
amount they can borrow and the actual cost at which it would be comfortable for them to
honour their debts.
The study will not only prove fruitful for individuals as borrowers or prospective
borrowers, but will be equally helpful to the financial institutions. The study will disclose
vital information to the lenders about borrowers, their set of requirements, their viewpoint

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on the lending policies, problems encountered by them in meeting their obligations, i.e.
the reasons for defaults, etc. Accordingly, the study will guide lenders in formulating a
strategy to handle the backdrops of lending in any of the category of loans.
Grant of credit by lenders and its efficient usage by individuals in constructing
their assets suggests wealth formation in the country which signals towards economic
development. Though indirectly, but the study will also prove to be constructive in the
process of economic development.
13

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CONCLUSIONS AND SUGGESTIONS
This chapter consists of a short summary of results found in the thesis. The chapter also
includes suggestions for individuals and bankers. Suggestions on possible further work
related to the work done in the research also form a part of this chapter.
7.1 KEY CONCLUSIONS
1) The results of the research suggested that there are no significant differences in the
level of awareness of the home loan borrowers of the various banks. For all other
categories of debt considered under study, the difference in the level of awareness of the
loan borrowers of the various banks was found to be significant. Except for credit cards,
public sector banks accounts for the maximum awareness among its loan borrowers as
compared to the private sector lending banks.
2) Among the public sector banks, the leading bank for the purpose with maximum
informative home loan, vehicle loan and personal loan borrowers is State Bank of India
whereas, for education loan Bank of Baroda takes the lead. In case of private sector
banks, minimum awareness is passed on to borrowers by HDFC Bank. Among the
private sector banks, the leading bank for the purpose with maximum informative credit
card users is Axis bank.
3) It was found that the difference in the level of satisfaction of the loan borrowers of the
various banks is significant for all categories of credit. Except for credit card, public
sector banks accounts for the maximum satisfaction among its loan borrowers as

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compared to the private sector lending banks.
4) Among the public sector banks, the leading bank for the purpose with maximum
satisfaction to borrowers is State Bank of India for home loan and education loan,
Personal Debt Management: A Study Related to Urban Household’s Debt Servicing Burden
136
5) The least satisfying banks among private sector banks are HDFC for all categories of
loan and Axis bank for education loan. The least satisfying bank among public sector
banks for credit card users is State Bank of India.
6) In this study, with the use of one-way ANOVA, it was revealed that there were
significant differences in the mean satisfaction of home loan and education loan
borrowers related to cost. The maximum difference was found in the responses of home
loan borrowers of HDFC bank. For education loan, lowest difference was found in State
Bank of India and highest in HDFC Bank. The results of the credit card showed that the
mean difference in the costs for the private sector banks is not significantly different from
the public sector banks.
7) In this study, the researcher has investigated various reasons and their extent that
influence urban households to borrow home loan, vehicle loan, education loan, personal
loan and make use of credit cards. It was found that the most important reason for
individuals to borrow home loan, vehicle loan and personal loan is family size and
requirements, accounting nearly 31%, 35% and 30% respectively in influencing the urban
household to borrow. Whereas, the most important reason for urban households to
borrow education loan is unaffordable course fee and it accounts for nearly 42%

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contribution in influencing an urban household to borrow. In case of credit cards, the
most important reason for individuals to use a credit card is convenience of transaction
followed by the ease and safety in carrying credit cards as compared to cash. On an
average, convenience of transaction accounts for nearly 33% contribution in influencing
an urban household to use credit card/s.
8) The researcher has also investigated the reasons and extent of the contribution of
various reasons in defaults in the repayment of the borrowed loan or credit card bill. The
findings of the study suggested that the major cause of default for urban households is
loss of income for home loan, vehicle loan, personal loan and credit card accounting for
41.49%, 40.17%, 29.14% and 35.5% respectively in the overall defaults for the respective
category of loan. Whereas for an education loan, the major cause of default in repayment
of loan is found to be ‘working at low salary/income’ accounting at 24% in overall
education loan default.
137
9) By using the chi-square test, it was proved that for urban households, an option to be
indebted is positively correlated to future planning and status.
10) By using independent samples test (t-test) for all chosen categories of debt, it was
proved that there is no difference between men and women in their perceived default.
11) By applying Spearman’s rho for all the 5 categories of loan/ debt, it has been proved
that the frequency of default relates to monthly family income but at a very low level.
12) The model developed during the study will aid people in deciding the right course of

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action while they think of borrowing any of the specified categories of loan/s or making a
use of credit card.
7.2 BANKER’S VIEW POINT
1) As per the officials of Axis bank, HDFC and SBI, borrowers are totally aware of their
borrowing requirements, whereas the officials of ICICI and BOB are less confident of
their borrower’s awareness and PNB feels their borrower’sawareness as neutral.
2) Axis and HDFC strongly agree to their borrower’s awarenessof their repaying
ability, ICICI and SBI agree to the fact, whereas PNB disagrees about its borrower’s
awareness on this point.
3) Except for BOB and PNB who agree to their borrower’s awareness on their purpose
of borrowing, all other banks strongly agree to it.
4) Except ICICI, all other chosen banks either strongly agree or agree to their borrower’s
awareness on processing charges whereby ICICI disagree to its borrower’s awareness.
5) Similarly, HDFC disagrees to its borrower’s awareness on the rate of interest for their
loan. Rest all banks either agree or strongly agree on their borrower’sawareness.
6) PNB considers its borrower’s awareness on the various pros and cons of borrowing to
be neutral, whereas ICICI, BOB and SBI agree and Axis bank and HDFC strongly agree
to their borrower’s awareness.
7) Axis bank and SBI strongly agree to their borrower’s awareness on penalties incurred
on defaults by them, whereas PNB and BOB considers the level of awareness to be
neutral and ICICI and HDFC, the two private sector banking giants consider their
borrowers level of awareness on penalties as low.

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138
8) Except for PNB who consider its borrower’s awareness on pre-closure chargesto be
low, other banks are either extremely confident or simply confident of their borrower’s
awareness.
9) SBI, ICICI and Axis bank vouch to provide adequate information on all loans to their
applicants. BOB also provides complete information to its borrowers at the time of
applying home loan, vehicle loan, education loan and personal loan. For credit cards, the
bankers from BOB are sure of providing adequate information, but to a lesser extent as
compared to their other loans. PNB officials strongly agree to the fact that they give
adequate and material information to their applicants for home loan, vehicle loan and
personal loan. However, they simply agree to the same fact for their education loan and
are neutral when it comes to credit cards. ICICI equally agrees for all the chosen
categories of credit.
10) SBI and BOB do not hide any sort of charges on all its credit categories, whereas the
officials of HDFC are a little less confident for their debt categories. PNB disagrees that
they hide any charges from applicants for vehicle loan, education loan and personal loan,
is neutral for home loan and agree that they do not inform certain hidden charges to the
applicants for credit cards. ICICI agree to the charges for its personal loan and credit
card, is neutral for vehicle loan and education loan and disagrees with the charges for its
home loan. Axis bank’s officials agree that they do not inform certain hidden charges to
the applicants of vehicle loan and credit card, disagree for their education loan and

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personal loan and strongly disagree for their home loan.
11) Except Axis bank, all other chosen banks maintain a strong transparency with their
customers for lending rates and other formalities related to their debt. Axis bank,
however, disagrees to such transparency between the bank and its borrowers.
12) SBI and HDFC never escalate cost for any of its loan categories without informing
the clause to the borrower at the time of lending. BOB and ICICI disagree to such
escalation. PNB disagrees to such escalation for three of its credit categories, viz. home
loan, vehicle loan and credit card, whereas the officials of the bank have chosen to be
neutral to their education and personal loan. Axis bank’s opinion is neutral to such
escalation for home loan, education loan and personal loan. However, the officials of this
139
bank agree that the bank sometimes increase the cost without informing the clause to the
borrowers at the time of lending vehicle loans and issuing credit cards.
13) As per banker’s opinion, unfavourable circumstances of home loan borrowersare the
major cause of default by them, followed by borrower’s unwillingness to pay and flaw in
lending policy.
14) Borrower’s unwillingness to pay is the major reason for default by them in honoring
their debt towards vehicle loan, followed by unfavourable circumstances and flaw in
lending policy.
15) Borrower’s unwillingness is the main reason of default in repayment of personal loan.
Unfavourable circumstances of borrowers and flaw in lending policy also contribute to

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defaults.
16) Credit card user’s unwillingness to pay is the main cause of default by them in the
repayment of credit card bills. Unfavourable circumstances of credit card users, flaw in
bank’s lending policy and recession/ loss of earning of the credit card user also
contributes to the default.
7.3 SUGGESTIONS
Since the study involves two sets of population, one being the banker and second being
the urban households, the suggestions will help the bankers as well as the individual
borrowers. On the basis of the findings of the study, the following recommendations are
made for bankers:
1) Banks should strictly follow the policy of transparency in dealing with loan borrowers
or credit card users.
2) Any escalation in the cost of the loan should be informed to borrowers in advance and
the escalation clause should be explained to the applicants at the time of applying for a
loan or credit card.
3) Information like the pros and cons of borrowing, rate of interest, processing charges,
pre-closure charges, etc. should be clearly explained to the borrowers beforedisbursing
their loan.
4) Consequences of default should be informed to applicants at the time of applying loan
or at the time of disbursement of their loan.
140

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5) Enquiries about the borrower’s financial well-being and other information should be
conducted at intermittent intervals, specifically for credit card users.
The following recommendations are made for urban households:
1) Borrowers should insert a scope for contingencies while making a decision of getting
indebted.
2) Finance plan should be carefully made either by self or with the help of an advisor.
3) Usage of credit cards should be restricted to credit card holder only so as to ensure
that the credit card bills do not exceed the user’s ability to pay.
4) The pros and cons of borrowing or using a credit card should be thoroughly evaluated
before accepting the decision of getting indebted.
5) Sufficient information related to the debt and the lender should be collected before
applying for a loan or credit card.
6) Possibilities and consequences of default should be rationally analyzed before
actually implementing the decision to borrow or to use a credit card.
7.4 CONTRIBUTION
This study considerably contributes to the individuals and banks in matters related to debt
and repayment. These contributions are as follows:
1. The development of a conceptual model that has explained the various factors
responsible for borrowing loans and defaults. With this clarity of reasons, it becomes
easy for the individuals to decide their course of action.
2. An empirical support for the framed hypothesis that can facilitate bankers in
designing their marketing strategies for attracting retail borrowers and can also aid in the

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formulation of strategies to deal with issues related to defaults.
3. As the results of the study can be generalized to the urban areas of the country, it has
the potential to facilitate bankers in formulating strategies related to credit department not
only for a particular area but collectively for all the urban retail borrowers.
4. With the information on the level of awareness and level of satisfaction of borrowers
related to the different categories of credit, it has the power to influence the banking
141
sector to identify their weak areas and take necessary corrective steps to improve their
system and position.
5. A model specifically designed for individuals that can act as a guiding tool in their
decision to borrow.
6. A clear explanation of the concepts, gaps in previous literature and construction of a
model for debt management can be used as a base for further study on debt management
issues of households.
7.5 SOME POSSIBLE AREAS FOR FUTURE RESEARCH
In this research study, an effort has been made to cover the issues of urban households in
a broad way related to the various categories of debt. There are a wide variety of
borrowing options available in the organized as well as unorganized markets. Debt has
become a necessity for many. The issue at hand is not only important for individuals, but
is equally important for bankers and various government bodies as well. Borrowings and
defaults have the potential to massively contribute in the development process of the

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nation. The present study has thrown sufficient light on the present scenario of urban
household borrowers and bankers in regardsto credit and various aspects related to it. As
the study is of its own kind and not much in depth research has been done on these issues,
the study has laid down a path for future researchers to take the study ahead by exploring
the various issues which the researcher has left due to the presence of various constraints.
The possible areas where future research can be conducted by researchersare briefly
listed below:
1) Further research can be conducted on some wider topics whereby a researcher can
take up both the formal and informal means of credit.
2) Research can also be undertaken with a large number of banks covering the entire
range of credits offered by them.
3) An in-depth research individually on each of the categories of credit can also be
thought of by future researchers.
4) The present study is confined to assignment of one category of loan to one person.
However, future researchers can conduct a similar study considering the multiple debts
on a single household.
142
5) The present study is limited to the areas of Delhi and Faridabad. However, a full
fledged research can be conducted covering all the urban areas of the country.
6) The study has stressed on urban population only, whereas a further research on rural
as well urban households or the comparison of rural and urban borrowers can also be

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considered.
7) A study can also be conducted on the impact of borrowing and default on individual
households, may be in financial or personal terms.

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