DEBT MANAGEMENT

External indebtedness has been a major problem among developing countries borrowing large without their commensurate capacity to repay loans. External borrowing does help achieve faster rate of growth through bridging the investment-saving gap or importexport gap, but if the terms are hard, the burden of servicing will be larger, and if the borrowed funds are not used effectively, enough savings will not be generated to a level to repay the debt. Indebtedness will then attain unmanageable proportions that may adversely affect the process of growth. A few countries have quickened the pace of economic development with the help of foreign borrowings and there are a number of others where growing indebtedness has posed a serious problem. The dual gap approach is of the view that it is not the existence of the investment-saving gap alone that compels a country to borrow from abroad. There is also an import-export gap or foreign exchange gap that needs to be bridged to activate the process of development. The foreign exchange gap exists because the development outlay normally embraces a foreign exchange component and the export earnings are not sufficient to finance those imports. This approach

stresses the role of foreign borrowings in bridging the larger of two gaps and thereby allowing the warranted rate of investment. If the growth rate is faster, that will ease the repayment of external debt as well as meeting of the resource gap and the process of development will be self sustaining.

DEFINITIONS OF DEBT MANAGEMENT

y

A Debt Management Plan (DMP) is a repayment scheme which helps make unsecured debt repayments more affordable.

Normally a 3rd party (Debt Management Company) negotiates with your unsecured creditors to reduce your monthly payments to an affordable level. Debt management, by the standard financial definition, involves a designated third party assisting a debtor with repayment of his or her debt. Many companies specializing in credit counseling offer debt management plans to help people with heavy debt and damaged credit get their financial situation under control. A simpler definition of debt management could be the routine practice of spending less than one earns. However, for all intents and purposes, debt management is a structured repayment plan set up by a

designated third party, either as a result of a court order or as a result of personal initiation. ABOUT DEBT MANAGEMENT Many have achieved success with assistance from the debt management services industry. There is a variety of components within to take advantage of on an individual basis or as part of a comprehensive program.

DEBT MANAGEMENT PROVIDES STABILITY IN UNCERTAIN TIMES

Considering the times we live in, it isn't a stretch to contemplate the remarkable speed in which things are moving. Concerning the digital age, advances and upgrades have become an integrated part of the structure of our day-to-day existence. The same is true of the debt management industry. Choices within are infinite. There are programs addressing both credit issues and debt issues--or both. debt management is a fairly new industry.

Variations Within About Debt Management

Many debt management programs work on the foundations of awareness, reduction, negotiation, consolidation and/or settlement. Certainly, a debt management program that offers educational initiatives as part of the comprehensive package is working toward greater goals than just debt elimination. By focusing on

preventative educational awareness and advice, the company is sending out a powerful message. Indeed, debt counseling can be helpful in more ways than one. You will be able to address spending and payment patterns that led to your descent into credit card debt and learn to adopt more constructive alternatives for a brighter financial future. Because no two debt management programs are the same, there will be variations in policy and procedure of each company. Some industry experts will work for you by negotiating with your creditors and lenders to reduce your balance amounts and/or interest rate(s). This is a process called debt consolidation. The way this works is all your balances are bundled into a once-monthly, convenient payment for a predetermined timeframe until the debt is paid off. Ordinarily, these types of companies will require you to deactivate your accounts. Others will work to help you fully realize a system for credit management. In these types of programs, you're typically allowed to selectively keep your accounts open. Still, other systems may require your taking out a loan to pay creditors with and then pay the debt management company back after the fact. You can even find student loan debt management through a debt management company to lock in a much lower fixed interest rate on your student loans and cut your monthly payment down by nearly 50%. INTERNATIONAL DEBT TERMINOLOGY

DEBT FORGIVENESS: It occurs when the lender writes off a part or the entire of the principal and the accrued interest on an outstanding plan. DEBT PROVISIONING: It means putting funds into reserves by lending banks to cushion themselves against default of loans. DEBT RESHEDULING: it occurs when the repayment of principal along with the interest payment due on outstanding loans are postponed to a future date. the borrower gets sometime to breathe. DEBT SERVICE RATIO: It is the sum of amortization and interest payments as percentage of export. DEFAULT: It occurs when the borrower fails to service debt. MORATORIUM: It occurs when the borrower refuses to service debt till a fresh agreement with the lender. It is different from default in the sense that the borrower has the intention to service debt where as in the case of default,it does not intended to service debt. OFFICIAL DEVELOPMENT ASSISTANCE (ODA) :It is the loan extended by government at a very low interest rate and with a very long maturity. It is a soft form of loan where the grant elements is greater.

PARIS CLUB :It is an organization of official lenders. PUBLIC AND PUBLICITY GUARANTEED DEBT: Public debt is owned by the government. Publically granted Debt is relaqted to loans extended to private sector enterprises but guaranteed by the government that country in view of greater risks involved .

NATURE AND MAGNITUDE OF EXTERNAL DEBT External indebtedness is primarily a problem of the developing countries. The developed countries have attained a stage where their own resources are capable of generating a sustained growth process over past one half of a century , external loans have been flowing to developing countries in order to bridge their resource gap. The huge flow with inappropriate terms in many cases and with its suboptimal use at the recipients end in some cases had led to the problem of external debt. The World Bank statistics show that at the end of 2005, the developing countries faced an external debt burden of $ 2742.378 billion, out of which the share of low-income countries was $ 379.239

billion. In 1980-1990, around 90 percent of the longterm external debt of the developing countries was public and publicly guaranteed debt. By 2007, the share of the public debt had fallen approximately to 52 percent. This change is partly due to growth in private external borrowing and partly due to large debt relief measures in relation to official debt. Besides this, there is also a shift in the composition of the lenders. MANAGEMENT AND OFFICIAL DEBT The problem of debt was forseen long ago and,with this in view, the paris club was setup in 1956.It look concrete shape in 1961 and since then, various types of negotiations have been taking place for implementing debt relief measures. Sometimes they are implemented separately, but often simultaneously. cancellation of an entire debt or a part of it brings maximum relief to the borrower. In case of refinancing, softer forms of loansor grants are extended to the borrowers through which costlier loans can be repaid. Again in case of rescheduling of debts repayment is postponed to a later date and the borrower gets time to generate income to repay debt. Between 1980 and 1988 rescheduling alone reduced the debt service payments of low income African countries by over US $10 billion.

In December 1991 the Toronto terms were revised and renamed enhanced Toronto terms .They were intended for the same group of countries but the role of cancellation of debt was enhanced: one- half of debt was to be written off and the other half was to be rescheduled to a 23-year maturity including a 6-year grace period and at market-related rates. Between December 1991 and December 1993 this benefit was availed by 16 countries. The Houston terms were adopted almost simultaneously with the Toronto terms, in September 1990.Their approach where ODA debts and non ODA debts were treated differently. Under the London Terms that were prevalent between December 1991 and December 1994 the net present value (NPV) of debt was to be reduced by 50 percent. MANAGEMENT OF NON-OFFICIAL DEBT Short-leash approach As far as non-official debt is concerned, in the early 1980s the international banks adopted a short-leash approach when they rescheduled and rolled over debt service due from debtors over a short period ranging from one abrupt cutback of lending and so the borrowing countries did not get loans for servicing of past loans and the debt problem turned grave.

Transition from inflation to disinflation Apart from the activities of the international banks it was the transition from inflation to disinflation that aggravated the problem of indebtedness. Funds were borrowed in the 1970s when inflation was high and real interest rate was low or in some cases, negative but during the 1980s when the industrialized countries adopted restrictive monetary policies, disinflation began to appear. In the absence of falling nominal interest rate the real interest rate began to shoot up. Emerging recession 1980s decade dawned with emerging recession among many by of the industrialized countries. In the face of recession the developing countries were struggling hard to augment their export. Simonsen explains that during 1974-80, the floating rate of interest on loans to net oilimporting developing countries had averaged 10.7 per cent, but the debt problem was not serious because exports of these countries had explained at 21.1 per cent. Deteriorating terms of trade The deteriorating terms of trade of the net oil importing developing countries during 1980-82 caused the debt crisis. In the first half of the 1970s there was a

commodity boom. The prices of many primary commodities in real terms rose which in turn lowered the cost of borrowing. The lower cost of borrowing motivated the developing countries to jack up expenditure and to borrow more but when the export prices fell during the 1980s, the borrowing countries suffered severely and found it difficult to repay external loans. Defective policy of the borrowing countries. The borrowed funds can be utilized in two ways: they can be spent and that cannot help the borrowing country to repay its debt, or they can be invested which leads to generation of income and saving and builds up the ability to repay the debt. However, as Dornbusch and Fischer point out, many Latin American countries adopted a defective policy and financed primarily consumption and government deficit rather than investment. Kharas and Levisohn find that in case of 12 out 26 countries, the level of consumption rose with an increase in borrowings in which case, external debt problem was bound to emerge. The reasons for fall in investment productivity in case of low-income and least developed countries were different. They were perhaps weak administrative and managerial capabilities. To quote a few instances,

World Bank funds were not used effectively in Nepal on account of administrative laxity. In Nigeria, the concerned personnel officials from the managing director to the lowest rank were found to see the organization as a legitimate source of additional private income. Defective policies were evident in improper foreign exchange rate management policy. Cuddington finds that during 1976-83, faulty policy of exchange rate management led in many Latin American countries to appreciation in the real exchange rate of their currency and to black market premia on foreign exchange. The overvalued exchange rate contributed to the debt crisis insofar as it lowered the export competitiveness and thereby affected the current account and also t ability to repay the debt. Structural economic rigidities too, manifested in especially in the low-income countries came in the way of policy changes designed to overcome indebtedness. These rigidities manifested in lack of economic diversification, a concentrated export base, high population grow lack of basic facilities and poor living conditions etc. They adversely affected the incentive to save and invest and to generate the income necessary for repaying debt.

Additional factors during the 1990s and Thereafter Some of the significant factors behind the external debt problem during the early and mid 1980s, continued into the 1990 and thereafter. There were some additional factors operating during this period. The first, was the USSR. The economy of most of the countries coming out of the USSR bondage was so weak that their trade with the rest of the developing world came to be at the lowest ebb. The export earnings of most of the developing borrowers from Eastern Europe declined and this eroded their repaying ability. The Gulf war led to rise in oil import bills of many developing borrowers. In the sequel, their ability to repay debt turned lower. The financial crisis in East Asia adversely affected the debt repaying capacity of not only the countries gripped by the crisis but also many others that were indirectly affected by the crisis. The turmoil in global fixed income markets in the summer of 1998, problems in high-yield markets following slowdown of 2001, and fall in debt flows in East Asia, Russian Federation and Latin America were some of the additional factors behind the continuance of international debt problem during 2000s. Moreover, the debt-relief measures on a wide scale were no less important in mitigating the external debt problem.

The Baker plan The success of debt management of 1983-84 was shortlived. In 1985 the mood began to swing once again to pessimism. James Baker drafted a medium-term plan in 1985 that was implemented subsequently. The baker plan called for banks to provide new lending of US $ 20 billion over a three-year period between 1986 and 1988 to 15 highly indebted countries. The plan expected the official creditors to extend an equal amount and this way symmetry was brought between the official and the private lenders. The plan suggested that the economic adjustment programmes be adopted by the debtor countries but it rejected the idea of aid cancellation because that would cut off the borrowers from the capital markets. Market- based menu approach Baker himself was happy with the outcome of his plan and so in 1987, he introduced an improved version of the plan, known as the market based menu approach. The plan sought to introduce instruments that could make the banks increasing exposure more attractive. Debt conversion programmes, relending rights, new money bonds etc. were some of the new features.

The Brady plan The Brady plan, named after Nicholas Brady, the US Secretary o, stressed voluntary debt reduction through increasing the role of official lenders and through forgiveness. Brady type deals involved the exchange of loans for agreed financial instruments followed by the deposit of collateral and the necessary payments in cash. Some of the countries were prompt in repayment of principal but defaulted on interest payment, while some others paid the interest and defaulted on principal repayment. The World Bank and the IMF were expected to provide funds for debt and debt service reduction at a higher level, that is between US $ 20.0 and $ 25.0 billion over a three year period from 1989 to 1991. Recently, during 2000s many countries have gone for rescheduling of loans and for debt swap and have managed their external debt burden.

CHALLENGES AHEAD
Efforts are one to ease the external indebtedness problem of the developing world. But there are some major problems coming in the way.

Secondly, a number of the low-income countries do not possess the required aid-absorptive capacity. Thirdly, aid fragmentation still remains high among developing countries. It means that donors either extend small-size loans for too many projects in a country or target many countries with limited. Fourthly, tying of aid to the purchases in the donors country, which is rampant among the donors, slashes the real value of aid. Fifthly, the quantum of aid flows has been volatile and unreliable undermining the very budget management in the recipient countries.

BEST DEBT MANEGMENT SERVICE PROVIDER

There are hundreds of debt management companies and bad credit cards companies that give you a chance improve your credit score. There is a lot of debt solutions information in internet, to help you find the exact service you want with the right company, Car Finance. A lot of companies offer Advanced Debt Management Services, which are set up in order to give you the best possible help to get rid of debts from loans as quickly as

possible, auto insurance quotes. With a number of online credit card companies emerging by the day, there is a considerable increase number of debtors too. Easy availability of credit card application forms online is one reason for this. Today, more customers than ever before are finding themselves in debt, affordable health insurance. Debt Management UK Harrington Brooks advice for people in the UK struggling with debt problems. Insurance Quotes Find the best rates on insurance products using our unique bidding LifeLock Organization Life Lock helps in several different community outreach programs. Debt consolidation Bad credit loans, personal loans and debt consolidation. scrap gold Cash for gold, sell scrap gold for money and sell gold for money Offset Mortgages Need advice about offset mortgages? Use Cherry Find.

Bankruptcy UK Bankruptcy Information UK | Free Advice& Help for Bankruptcy, Insolvency, Debt& IVA Problems. Debt Consolidation Advice on how debt consolidation can help solve debt problems. expert gold trading tips Online Gold trading at e Toro expert trading platform is commission and debt free Basic Bank Accounts Welcome to the home of the Basic Bank Account Debt Management Tips Credit counseling and debt management can help you prevent bankruptcy by lowering credit card debt payments. Site offers free debt consolidation quotes. Short term flexible loans Short term flexible loans are a great way to get your finances back on track

SUBMITTED BY: SYAM MOHAN VISHNU PRIYA.P.