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Why you should not buy BNPL/other fancy cards? - YouTube
Channel: unknown
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hi everyone welcome to today's video so
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on today's video let me take you to
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twitter university and teach you
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something really insightful really
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interesting that you will enjoy learning
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about
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this is a controversial video no doubt
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about that i will get a lot of flank
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even some unicorns will come after me so
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i really hope that you will support me
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in terms of making these rational
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arguments and i would love your support
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on this video also the point of this
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video is that you can learn a ton of
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things by reading and following good
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accounts on twitter so if you feel that
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my account is good please follow me
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similarly you can learn a lot through
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audio platforms and one of my favorite
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audio platforms is cuckoo fm who are the
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sponsors of this video i absolutely love
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learning a range of different topics
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from goku fm whenever i'm working out or
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just aimlessly walking i do listen to
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some books on goku fm and i will jot
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those down in the description box so
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let's get the video started and let me
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take you to my twitter account first and
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foremost and this is a post that i wrote
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today morning and it started gaining a
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lot of traction i got a lot of questions
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that akshat can you explain even further
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because this is such an important topic
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that we end up taking a lot of credit
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cards we end up taking a lot of buy now
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p later cards bnpl cards
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so are they good are they bad what are
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your viewpoints around it so this is an
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honest one-on-one conversation from that
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front
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usually what will happen is that if you
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go online if you google you just type
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out how to build credit history how to
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use credit cards you will only see good
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good things about these things why
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because there is a lot of incentive at
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play no one is going to tell you the
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other side or the dark side of these
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things so honestly i am putting out that
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point of view disclaimer is that this is
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not a personal attack on you if you are
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a credit card user or by now pay later
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type of card user this is not a personal
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attack on you i am genuinely putting out
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rational economic arguments very happy
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to hear counter arguments around that
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okay so let me take you through this
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thread this is a good learning thread so
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let us go through it together so point
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number one is that in india a lot of
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people are creating this request that in
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india the credit card penetration is
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only three percent four percent this is
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bad this that financial inclusion is not
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there no there is a reason why there is
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only three to four percent credit card
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rate in india
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india is a growing economy and it is a
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low income country unfortunately and our
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sovereign risk is very high what does
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these things mean right these are
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macroeconomic terms so let me just
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quickly spend a minute there explaining
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it so in simple word what it means is
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that see basically the cost of credit in
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india is relatively very very high
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compared to other parts of the world
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why is that because for example imagine
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this that if you you person watching
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this if you have to give a 100 rupee
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loan to the indian government vis-a-vis
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if you have to give 100 rupee loan to
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the u.s government and both the
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governments tell you that we will pay
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you exactly two percent rate of interest
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to which country will you lend please
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keep your patriotic sentiments aside the
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logical rational argument there is that
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you are most likely to lend to the us
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why because it's a safer country so to
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say it's more developed so the default
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rate of u.s is likely to be low compared
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to india so that's the same rational
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argument that you can make that for
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example when you go to hdfc bank to
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avail a bank loan
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then if you have a great credit history
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if you're reliable if you have good bank
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balance all that stuff and you are
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availing loans so you might get it at
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eight percent but if a poor person goes
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to a bank or a microfinance institute he
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or she takes a loan they might be
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getting it at 15 20 also i'm not kidding
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google right what micro finance loans in
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india so the point being that the poorer
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that a country is or the poorer a person
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is the cost of credit for them goes up
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but good thing in india is that our debt
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problem right now is very manageable
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because india has been very responsible
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we as a country have a saving habit so
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we say first spend later that is how our
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generations have been raised
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go speak with your parents speak with
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your grandparents they will all exactly
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tell you the thing that i'm telling you
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let's say first spend later this is how
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our entire country has been built and
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even at the government level the good
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thing that our governments i'm not
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talking about any specific government
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i'm talking about governments in general
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that have been in the past present all
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that stuff if we aggregate all that the
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government have acted responsibly in
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india in terms of showing financial
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prudence what does that mean for example
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during 2020 covered you might have seen
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that u.s went on to a rampage and it
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started printing note after note and it
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started taking so much debt but india
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did not do such a thing or india could
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not rather do such a thing because rbi
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gets very worried about increasing debt
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in the country why relates to the
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previous point that the cost of capital
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in india is high sovereign risk is high
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the rate at which the u.s can increase
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its debt india can't increase its debt
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at that same rate so we have to be a
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responsible debt oriented nation we
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can't really nearly take debts the word
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of the day today is willingly so let me
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know what does that mean so rbi gets
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worried with any type of bad debt that
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is happening in the economy now bad debt
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can happen at multiple levels for
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example the government can introduce bad
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debt by printing money excessively and
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taking a bunch of really bad actions so
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rbi gets worried because of government
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debt similarly rbi gets worried about
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individual debt also for example there
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are only a handful of institutions in
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india that can issue credit cards now
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what are credit cards at the end of the
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day credit cards is an instrument
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through which people like you and me
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small retail people we end up taking
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secured or unsecured loans mostly
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unsecured loans let me very quickly give
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you the context of what unsecured loan
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is versus secured loans now secured
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loans means something like in which a
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collateral is kept if you take a home
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loan then your home becomes a collateral
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so in case you are not able to pay your
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emi that's a secured loan in a way
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because the government can sell off your
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house and recover its money so that
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secured it on the flip side majority of
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the credit card works on unsecured loans
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unsecured loan simply means that there
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is nothing backing it up if you decide
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not to pay your credit card bills yes it
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will hurt your credit history but the
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bank can't do much beyond a point they
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will keep on harassing you all that
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stuff that's separate but even that they
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can do it up to a certain point so the
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point that i want to drive home through
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this conversation is very simple and
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this is the first key takeaway that this
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unsecured debt is very very dangerous in
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a country like india now if you take a
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look at this flowchart what happens is
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that this credit card facilitates
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something called as unsecured loans and
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this unsecured credit card loans are
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given either through banks or nbfcs now
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very very important and let us
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understand this point through an example
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if you take something like hdfc bank
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vis-a-vis if you take any nbfc i will
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not name it so pick any nbfc who do you
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think is doing a good job in giving out
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useful loans and loans that will not
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result in defaults the answer please
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comment and i'm sure that all of you
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will say hdfc bank because their loan
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book is solid they verify customers they
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give out loans only to people who are in
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jobs who have the ability to repay so
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all good good things so if something
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like hdfc bank is issuing a credit card
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it still makes sense because the default
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of that credit card loan is likely to be
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low
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on the flip side if you take a look at
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nbfcs
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now nbfcs might end up giving loan to
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more risky people down this funnel so
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here the risk is high because if you are
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giving loans to people who can't service
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the loan then it becomes a problem and
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this is the reason why that there are
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only two nvfc's sbi cards and bank of
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baruda cards that get to issue credit
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cards in india
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this is the theory behind it and let me
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wrap up this part of conversation by
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telling you the story of subprime prices
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exactly this thing played out in the u.s
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when in 2008. why did the subprime
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prices take place subprime prices took
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place in the u.s for the simple fact
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that the banks there got hold of people
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who had no paying capacity they ended up
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giving them loans that you know what
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even if you don't have a job no problem
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take loans and buy a house because the
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housing prices will forever keep on
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going up but those people started
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defaulting in mass numbers now as a
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result if thousands and thousands of
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people started defaulting on their home
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loans the housing prices crashed and
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even that collateralized or secured loan
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became a huge problem that impacted the
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entire world now this brings us to the
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next part of the story which is around
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the bnpl cards or fancy credit cards now
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what is the operating mechanics of bnpl
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cards the operating mechanics of bnpl
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cards is very simple they partner with
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nbfcs and in many cases highly risky
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nbfcs they give out loans to whom to
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students to young people all that stuff
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now is that good is that bad let us have
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a very quick discussion on that at a
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macro level so first and foremost if you
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have understood the story so far you
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will clearly realize that the debt is
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being taken by risky customers why risky
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because they are giving out to young
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people who have no prior history of work
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who have no means of earning as of now
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and they are being given loans for
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example if you go and ask anyone from
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these bnpl companies that to whom are
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they giving out loans they will say that
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we are giving out fancy cards to people
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to whom banks like hdfc and bunch of
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other good institutes are saying no to
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so for example if i am a student and if
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i am not getting a credit card from hdfc
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or kotec or icici bank i will go to a
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bnpl company and tell them that hey give
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me a credit card because i'm not getting
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credit cards here and of course they are
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going to give you a fancy card because
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they are making money from you and i
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will explain how they are making money
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from you but the point is that i am a
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risky customer and i can definitely
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default because i anyways do not have
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any major source of income and majority
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of the banks will not give me a loan
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therefore i am coming to these bnpl
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companies second key point that you need
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to understand is the debt is being
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issued by risky agencies and these are
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not sound banks like hdfc which will do
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a proper due diligence and all that
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stuff these debt giving agencies is also
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super risky so what ends up happening is
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that this creates a lot of risk within
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the system now the way any banking
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structure banking system nbfc system
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work is that they enter lend to each
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other inter lending means that hdfc will
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give loans to icici icic will give to
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kotec all that stuff same chain happens
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in nbfcs also therefore if some of the
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nbfcs default then the entire chain
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collapses and this is making the entire
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system very risky now you'll say akshat
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you have given like such negative
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commentary i feel very depressed but
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whenever i go and speak with these bnpl
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people they say that you know what take
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our card it will allow you to build
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credit history it will allow you to do
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this it will help you go to the moon all
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that stuff okay so let us understand the
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point about building credit history now
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in india there is something called a
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civil score now that civil score is
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generated from a range of different
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things but there are two key points that
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i would like to highlight
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that number one if you take loans very
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frequently it is a bad thing it will
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impact your score negatively think about
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it if you are in the constant habit of
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taking loan after loan after loan does
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that indicate to any loan giving agency
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that you're a good asset
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no right yes once in a while if you're
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taking loan it makes sense that you have
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taken loan for some specific purpose you
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have paid it off great awesome but if
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you get into that mad habit of taking
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loan after loan one after the next thing
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it does not reflect well on you from a
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credit history perspective this is a
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simple rational argument now the second
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concept is around the credit utilization
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now credit utilization simply means that
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let's say that you have a loan limit of
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taking 100 rupees you constantly take
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loans of 90 rupees sometimes you take 80
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rupees sometimes you take 99 rupees then
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you take 100 rupees you are utilizing
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almost 100 capacity of this now what
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happens in any type of bnpl apps is and
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go and download it right just literally
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open up your phone try to download any
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i'm not taking any names otherwise i'll
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get sued but go and open it they will
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have a permission tab right so they will
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ask you to sign some nda they will ask
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you to sign that hey give us access to
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your camera give us access to your
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contacts give us access to your messages
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all that stuff they will also say that
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we will track your data and we will help
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you increase your credit limit so what
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are you constantly doing you're
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constantly hitting this credit
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utilization limit and that impacts your
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civil score negatively now you'll say
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akshat what happens if my civil score is
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bad so what will happen is that you're a
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college student you're using all these
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fancy cards when you actually have to
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take education loan when you actually
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have to buy a house when you actually go
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to hdfc bank they will say no to you
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because you have built a very poor
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credit history because you did not
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understand this basic concept of credit
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utilization and frequent loan taking so
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in summary point number one from a
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macroeconomic viewpoint credit or debt
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should flow to people who actually have
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productive use of that debt and credit
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we should not be buying iphones and
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laptops on date that is madness now if
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you buy
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this word i'm not going to say it
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probably the video will get banned i
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don't know this is not called as
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building credit history in simple
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english it is called as being stupid
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yeah that is what it is so find better
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use of debt that is the simple concept
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here now comes the next and final point
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that in a high credit risk country like
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india
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mindless debt should be avoided this
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situation if it keeps on going up at the
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rate at which it is growing many nbfcs
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will default simply because of the fact
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that the loans that are being given out
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to people via these credit cards those
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are highly risky people and they will
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facilitate a mass default at some stage
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and that will be bad for our economy i
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hope you enjoyed the video and this
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twitter university class do follow me
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there and also check out goku fm i will
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see you tomorrow
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you
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