With the issue of Euro zone debt taking center stage again – with Greece in real and immediate danger of default –it looks an opportune time once again to take a rather philosophical view about debt or its mirror twin called credit.
This is an issue too important for us to get tired of discussing.
In modern living, it is almost impossible not to be dealing with debt. As the folks say, only the poorest do not have debt.
Debt is a fact of life and while humans walk on this earth, debt seems to follow him. In fact, debt seems to have acquired the same foreboding sense of inevitability as “death and taxes.”
In ancient times, people normally get imprisoned or sold to slavery for inability to pay debt. And even family members can be made security for loans or sort of pawned like jewelry to secure obligations.
As soon as the debtor defaults, slavery almost always follow. It looks so unthinkably brutal and uncivilized and so out of sync today with many a nation’s constitutional precept that “no person shall be imprisoned for debt”.
Well, we thought modern society has evolved and has outgrown from such primitive stages.
Not until recently, when we shockingly learn that a form of debt slavery is still being practiced by some credit card issuers in the Middle East.
Those who are unable to pay get imprisoned and even report for court hearings under shackles. We have chronicled this in a previous post entitled, “Be Investment Literate or Go to Jail – Tales of Modern Day Debt Slavery.”
There are elementary rules of credit granting and banks and other lending institutions have thick volumes of credit policy manuals to guide practically every conceivable credit situation.
Now, we may ask: Why, in Heaven’s name, is there so much incidence of debt default in many parts of the world?
One need not mention the subprime crisis which triggered the current dire straits of world banking industry.
One need not mention too, the specter of sovereign debt default which now stares the face of Greece and several Euro zone nations.
If you ask me about what the root cause of debt default is, I have an educated guess for an answer. This answer is culled from my long years of experience as a credit guy – a good portion of which is spent in handling distressed accounts.
Not that I liked handling distressed accounts but it just happened that as an expatriate relationship manager, I have had, oftentimes, been thrown the unfortunate task of handling distressed credits.
If there is one insight I learned in which I wanted to share, it is this: There is one denominator in bad credit or bad debt situation and that is Dishonesty.
Dishonesty on the part of the borrower, dishonesty on the part of the lender or dishonesty in both. This, I believe, is what causes debt default at its root.
This may sound too simplistic, but wherever there is bad credit, I have almost always seen dishonesty. And by bad credit, I mean a credit situation that can only be remedied by either a very substantial “haircut” or a total write-off.
Of course, there are cases where the cause is business miscalculation or misjudgment on the part of the borrower. But as far my experience is concerned, cases like this are few and usually capable of being corrected by aggressive remedial management.
The really bad ones are those in which there is willful material misrepresentation on the part of the borrower.
As it takes two to tango, the misrepresentation is usually buttressed by either connivance (which is dishonesty from the lending side) or inept evaluation by the recommending and/or approving officer of the bank/lender.
Sometimes the misrepresentations are so brazen you wonder how much grease money changed hands to the detriment of the lending entity.
In the ultimate analysis, the importance of the big C or Character cannot be overemphasized. Character on the part of the borrower still remains the number one factor for credit granting.
The age-old assumption or dictum that an honest man will not get a loan he cannot repay still remains valid.