Moca Fintech Solutions

DEBT OPTIMIZATION STRATEGIES

Since the advent of globalization, financial crisis in the market due to internal as well as external reasons has become more frequent. This has called for a prudential debt portfolio for individuals as well as for corporates. Hence the business houses and individuals started adopting strategies to optimize their debts as a part of better management of the portfolio.

Debt optimization (also called “Debt recycling”) is a financial strategy that helps create wealth over time and helps to improve an individual’s or company’s debt structure. In order to create a healthy portfolio of debt it is significant to understand the overall debt profile of the individual from various sources and organize the same to understand and prioritise the payments. There are many ingredients to structure an optimized debt portfolio. The most significant among them are as follows:

A good Customer – Banker Relationship

Choosing the right bank is very important. Selecting and entering into a relationship with a bank which understands your needs and which also recogonize the same, is critical for one’s way forward. For this, an understanding of the Bank’s lending profile and whether the same is suitable for the credit requirements of the customer also needs to be ensured.

A Good Credit Score

Maintaining a good credit score is the sine-qua-non for getting credit from the Bank. Every bank will be happy to serve a customer on any viable project which has a reasonably good credit score.

Good Cashflows

Ultimately, for any bank, the most important part is the hassle-free repayments. Hence banks will be happy to extend credit to projects which has a shorter fruition lag and good cash flows sufficient enough to take care of the repayments.

Track Record & Prospects

Individuals and companies which maintain a good track record of repayments and have a good potential for further growth will be attractive to any lender. Hence for any business for its growth maintenance of a good track record is essential.

The following are the strategies that can help any individual or business to optimize their debt structure:
 Using all surplus incomes to reduce the nontaxable “bad debt”.
 Creating or increasing the investment debt (tax-deductible “good debt”) .
 Using this borrowed money to build an investment portfolio.
 The key ingredients in this are borrowing money to invest and budgeting.
 A cash-rich company should use the surplus funds to reduce the loan thereby increasing the equity.
 Convert your non-tax deductible debt into a tax-deductible asset portfolio.
 Prepare a budget and monitor your expenses.
 Pay off your high-interest debts first.
 Reduce the number of credit cards.
 Consolidate your debts when favourable interest rates are available.
 Pay the smallest debt as fast as possible.
 Make minimum payments on your debts based on the sanction terms set by the Bank.
 Any extra funds are available to be paid to the next largest debt.
 Maintain a sound Debt to the Capital ratio (a financial leverage ratio similar to the D/E ratio,it compares a company’s total debts to its total capital which is composed of debt financing and equity).
The above is a general list of steps that can be taken by an individual or a business entity to optimize its debts in order to have a healthy debt portfolio which will help to mitigate any risk arising out of an unexpected financial crisis in the market and the consequent impact on the cash flows of the borrower.
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Credit Dr.M.Rajagopalan Nair MA,PGDPM,BGL,CAIIB,PhD