What Is Debt?

Debt is something, usually money, borrowed by one party from another. Debt is used by
many corporations and individuals to make large purchases that they could not afford
under normal circumstances. A debt arrangement gives the borrowing party permission
to borrow money under the condition that it is to be paid back at a later date, usually
with interest.

Many of us know that setting financial goals and creating budgets can help us manage
our money. However, it’s also important to manage your debt.

Debt Management

 Debt management is a process of involving a designated third party assisting a

debtor with repayment of his/her debt.

Importance:

 to get your debt under control through financial planning and budgeting that
Helps the borrowers to manage the huge debts. You can use many strategies to
manage your debt, including the debt snowball method or working with a credit
counseling organization. In any of these cases, you will create a debt
management plan that fits in with your specific budget and financial situation

 This is to help you lower your current debt and move toward eliminating it
completely.

 Debt negotiation that involves working with creditors to reduce your principal
balance, to minimize finance charges and late fees, or to alter payment terms
such as interest rates, monthly payments or length of a loan.

 Debt consolidation — combining multiple debt balances into one new loan — is
likely to raise your credit scores over the long term if you use it to pay off debt.
But it's possible you'll see a decline in your credit scores at first. That can be OK,
as long as you make payments on time and don't rack up more debt.

 Debt elimination- which helps improve your credit score. Once your debt is paid,
you can focus fully on saving and other financial goals. Getting rid of debt can
remove an emotional and/or mental burden.

 Helps in enhancing personal financial stability- “Becoming financially stable

means being completely debt-free, being able to pay your monthly living
expenses with extra money left over. Financial stability is important as it reflects
a sound financial system, which in turn is important as it reinforces trust in the
 system and prevents phenomena such as a run on banks, which can destabilize
an economy.

 Helps the debtors to remove the pressure from creditors

What is a Debt Management Plan (DMP)?

 A Debt Management Plan (DMP) is a method used in various countries for

paying personal unsecured debt.

 This commonly refers to a personal finance process of individuals addressing

high consumer debt. This will let you make a single monthly payment that covers
all of your unsecured debts that are included in the plan. It's not a loan and it
won't allow you to pay less than you owe, but a debt repayment plan can simplify
the repayment process and shorten the time it takes you to get out of debt

 It relieves stress of payment by using effective tips that allows you to pay off your
debts at a rate you can afford

 Being able to borrow money to make important purchases can help dreams
come true, but, if payments on debts become more than you can manage, the
situation can become more like a nightmare.

 debt management plan is a One way out of this unpleasant scenario prepared
and implemented with the help of a consumer credit counselor.

PROS and CONS of DMP

PROS:

1. YOU ONLY NEED TO MAKE ONE MONTHLY PAYMENT

- With a debt management plan, you no longer need to worry about making
multiple payments each month. Instead, you only need to make one payment
to your credit counseling agency.
- The credit counseling agency will then make the payments to the creditors on
your behalf. This is especially useful if you have a lot of accounts or struggle
to keep track of due dates.
- With one monthly payment, you’ll no longer have to juggle a complex
payment calendar or the constant stress of late fees.
- As long as you make the payment to your credit counseling agency on time,
you can take it easy for the rest of the month.
 2. YOU MAY BE ABLE TO SECURE LOWER INTEREST RATES
- As part of your debt management plan, your credit counselor will try to
negotiate lower interest rates on your behalf.
- When it comes to credit card debt and other unsecured loans, high
interest rates can drastically increase your monthly payments. Luckily, the
reverse is true, too.
- Lower interest rates often mean lower monthly payments.
3. YOU SHOULD BE ABLE TO PAY OFF YOUR DEBT FASTER

- With negotiated terms and lower interest rates, most people with a debt
management plan pay their debts within three to five years.

- With a lower interest rate, you will be able to save money on payments
and more of your payment can be applied to the principal balance.

- As a result, you might be able to pay off your debt even faster.

4. YOU SHOULD SEE YOUR CREDIT SCORE INCREASE OVER TIME

- There's no guarantee that a DMP will improve your credit score, but on
average, DMP clients see their scores increase by 62 points after two
years. This is likely because a DMP makes it easier to stay consistent and
reduce your debt quickly, which are both important factors in your credit
score.

CONS

1. YOU ARE REQUIRED TO CLOSE YOUR CREDIT CARD ACCOUNTS

- Any credit card that is included in your debt management plan must be
closed. This ensures that you are not taking on more debt while you pay
back your current balance.

2. It also ensures that you are using the lower interest rate and debt management
plan perks from for their intended purpose.

- Even if you have a credit card that isn’t included in your DMP, you’re
advised against using it, except in case of emergency.

- The creditors involved in your DMP can monitor your spending. If they
notice new debt, they might ask you to close the account.
 3. YOU MUST MAKE CONSISTENT PAYMENTS TO KEEP THE BENEFITS

- In order to keep the benefits of your debt management plan—lower

interest rate, smaller monthly payments and more—you must make
consistent monthly payments.

- If you don’t, you might lose the benefits. Debt management plans work
best for people who are committed to financial change and plan to uphold
their end of the agreement.

4. NOT ALL CREDITORS PARTICIPATE

- Even though most creditors participate in debt management plans, some

don’t. Although your credit counseling agency will negotiate on your behalf
to secure the best terms, the conditions and benefits are ultimately
determined by the creditor.

- Although it is rare, one or more of your creditors might refuse to participate

and if that happens, a debt management plan might not be the best
option.

PUBLIC DEBT MANAGEMENT

 Public debt is the total amount, including total liabilities, borrowed by the
government to meet its development budget.

 Debt incurred by government in mobilizing savings of the people in the form of

loans which are to be repaid at a future dare with interest

 In simple words, Public Debt can be defined as the amount of debt taken by
government from internal as well as external sources to meet out its deficit.
Government needs to borrow when current revenue falls short of public
expenditure.

 It is an important measure of bridging the financing gaps of the government.

Prudent utilization of public debt leads to higher economic growth and adds to
capacity to service and repay external and domestic debt. It also helps the
government to accomplish its social and developmental goals.

Importance:

1. Sovereign debt management is the process of establishing and executing a strategy

for managing the government's debt in order to raise the required amount of funding,
achieve its risk and cost objectives, and to meet any other sovereign debt management
goals the government may have set, such as developing and maintaining an efficient
market for government securities.

2. In a broader macroeconomic context for public policy, governments should seek to

ensure that both the level and rate of growth in their public debt is fundamentally
sustainable, and can be serviced under a wide range of circumstances while meeting
cost and risk objectives. Debt managers should ensure that the fiscal authorities are
aware of the impact of government financing requirements and debt levels on borrowing
costs.

Examples of indicators that address the issue of debt sustainability include the
public sector debt service ratio, and ratios of public debt to GDP and to tax
revenue.

3. Sound debt structures help governments reduce their exposure to interest rate,
currency and other risks. Many governments seek to support these structures by
establishing, where feasible, portfolio benchmarks related to the desired currency
composition, duration, and maturity structure of the debt to guide the future composition
of the portfolio.

4. If macroeconomic policy settings are poor, sound sovereign debt management may
not by itself prevent any crisis. Sound debt management policies reduce susceptibility to
contagion and financial risk by playing a catalytic role for broader financial market
development and financial deepening. Experience supports the argument, for example,
that developed domestic debt markets can substitute for bank financing (and vice versa)
when this source dries up, helping economies to weather financial shocks.

OBJECTIVES

 The main objective of public debt management is to ensure that the

government's financing needs and its payment obligations are met at the lowest
possible cost over the medium to long run, consistent with a prudent degree of
risk. It encompasses the main financial obligations over which the central
government exercises control.

 Minimizing borrowing costs when you need to.

 Keep risks at an acceptable level that a society and community consider.

 Support the development of domestic markets which the main place where
issuance activity takes place, more firms have gained access to equity and
 corporate bond financing. Domestic capital markets have the advantage that they
attract more and smaller firms than international markets.

 It must serve the economic policy of the govt to ensure strong economic growth,
there are two main ways that the federal government may respond to economic
activity: fiscal policy and monetary policy.

 In time of emergences, it should provide sufficient funds to meet the requirement

of economy reduce fear, anxiety, and losses that accompany disasters

Debt managers, fiscal policy advisors, and central bankers should share an
understanding of the objectives of debt management, fiscal, and monetary policies
given the interdependencies between their different policy instruments. Debt managers
should convey to fiscal authorities their views on the costs and risks associated with
government financing requirements and debt levels.

Where the level of financial development allows, there should be a separation of debt
management and monetary policy objectives and accountabilities.

Debt management, fiscal, and monetary authorities should share information on the
government's current and future liquidity needs.

PRINCIPLES

Debt management should be guided by the following principles:

 The interest cost of debt-servicing should be minimized as far as possible;

 The need of the investors of different nature should be satisfied;

 The objectives of economic stability and growth should be achieved such as

stable prices and stable and sustainable growth. It also creates the right
environment for job creation and a balance of payment

 There should be minimization of the need to enter the market in a situation of

inconveniency.

ELEMENTS

1. Refunding:

- Refunding of debt implies the issue of new bonds and securities by the
government in order to repay the matured loans.

- In the refunding process, usually short-term securities are replaced by

issuing long-term securities. Under this method the money burden of
 public debt is not relinquished but it is accumulated owing to the
postponement of debt redemption.

2. Conversion:

- Conversion of public debt implies changing the existing loans, before

maturity, into new loans at an advantage in servicing charges. In fact, the
process of conversion consists generally, in converting or altering a public
debt from a higher to a lower rate of interest.

- A government might have borrowed at a time when the rate of interest

was high. Now, when the rate of interest falls, it may convert the old loans
into new ones at a lower rate, in order to minimise the burden. Thus, the
obvious advantage of such conversion is that it reduces the burden of
interest on the taxpayers. Furthermore, lower interest rates on public loans
would mean a less unequal distribution of income.

- The success of conversion, however, depends upon:

(a) The creditworthiness of the government,

(b) The maintenance of adequate stock of securities,

(c) The efficiency in managing the public debt.

- Furthermore, for a successful conversion, the government will have to

offer new low-interest bearing bonds at a discount rate and which will have
to be redeemed at full value, causing thereby a capital appreciation (which
may be even free of income-tax).

- Dalton, as such, opines that debt conversion does not really relax the debt
burden. Because, a reduction in interest rate reduces the ability of bond-
holders to pay taxes which may cause a reduction in public revenue,
thereby reducing the government’s capacity to redeem loans.

3. Surplus budgets:

- Quite often, surplus budgets (i.e., by spending less than the public revenue
obtained) may be utilised for clearing off public debts. But in recent years due to
ever-increasing public expenditures, surplus budget is a rare phenomenon.

- budget surplus refers to a situation that has revenue higher than expenditure.
Income is greater than the expenditure in the same time frame, such as the fiscal
year or financial quarter. The federal government will be in a surplus budget if the
tax revenues total exceeds the amount of government spending.
4. Sinking fund:

- A sinking fund is a fund created by the government and gradually accumulated

every year by setting aside a part of current public revenue in such a way that it
would be sufficient to pay off the funded debt at the time of maturity. Perhaps,
this is the most systematic and best method of redemption.

- It is money you set aside for a specific upcoming expense. Unlike a general
savings account or emergency fund, a sinking fund has a clear purpose attached
to it—whether it's to save for a vacation, down payment on a home, or a big-
ticket splurge.

5. Terminable annuities:

- This method of debt redemption is similar to that of the sinking fund. Under this
method, the fiscal authorities clear off a part of the public debt every year by
issuing terminable annuities to the bond-holders which mature annually. Thus, it
is the method of redeeming debts in installments. By this method, the burden of
debt goes on diminishing annually and by the time of maturity it is fully paid off.

6. Additional Taxation:

- The simplest measure of debt redemption is to impose new taxes and get the
required revenue to repay the loan principal as well as the interest.

- This method causes redistribution of income by transferring the resources from

tax-payers to the hands of bond-holders. It may also impose a burden on the
future generation if new taxes are levied to repay the long-term debts.

7. Capital Levy:

- Capital levy is strongly recommended by Dalton as a method of debt redemption

with the least real burden on the society. Capital levy refers to a very heavy tax
on property and wealth. It is once- for-all tax on the capital assets and estates.

8. Surplus Balance of Payments:

- The redemption of external debt, however, is possible only through an

accumulation of foreign exchange reserves. This necessitates creation of a
favourable balance of payments by the debtor country by augmenting its exports
and curbing its imports, thereby improving the position of its trade balance
 - Thus, the debtor country has to concentrate on the expansion of its export sector
industries. Further, loans raised must be productively utilised, so that they may
become self-liquidating, posing no real burden on the economy.

- In underdeveloped countries like India, where external debt has increased

tremendously, it is necessary that its burden is reduced by changing the terms of
repayment or by rescheduling the debts.

- In fact, the best redemption policy is a that part of the public debt, internal as well
as external is redeemed every year so that there is no mounting of a total real
burden of debt upon the present generation or on posterity.

TYPES

1. Productive and unproductive Debt:

- When government borrows for development expenditure like on power projects,

establishing heavy industries. etc. so that it generates revenue then the debt is
productive.

- When government borrows for non-development uses, such as was finance, etc. the
debt becomes unproductive as it does not create any income in return. It is also called
dead weight debt which do not add to the productive capacity of the economy. The
interest on this type of debt must be obtained from other source of public income

2. Compulsory and Voluntary Debt:

- When government borrows from people by using coercive methods, loans so raised are
referred to as compulsory public debt. e.g. Tax,

- When government floats loans by issuing securities, the members of the public and
institutions like commercial banks may subscribe to them. e.g. Public Borrowings. The
rate of interest is normally higher than that of compulsory debt, in order to induce the
people to provide loans to the government. These loans are provided by the members
of the public on voluntary basis. It may be obtained in the form of market loans, bonds,
etc

3. Internal and External Debt:

- Public loans floated within the country, are called Internal Debt. Debt subscribed by
persons or institutions inside the country. Include individuals, banks, business firms,
and others. Instrument include market loans, bonds, treasury bills, ways and means
 advances, etc. Repayable only in domestic currency. Internal loan only involves transfer
of wealth within the borrowing community

- Public borrowings from other countries, are referred to as External Debt. External debt
permits import of real resources. It enables the country to consume more than it
produces. The sources of internal debts are RBI, commercial banks, etc. and of
external debts are loans from foreign government, IMF, World Bank etc.

4. Short Term, Medium term and Long term

- Short term: These are unfunded debts generally incurred for a short period of time. It
must be repaid within a year. Low rate of interest. It includes treasury bills which are
issued for a currency of 91 days

- Medium term: Maturity period of above one year and up to 5 years. Borrow for medium
term needs, development & non development activities. E.g. Different types of market
loans

- Long term: These are funded debts generally incurred for a long period of time.
Maturity period of 10 years & above. High rate of interest. Raised for developmental
programs and to meet other long term needs of public authorities.

5. Redeemable and Irredeemable Debt:

- Loans which the govt. promises to pay off at some future date are called redeemable
debts. Most of the debt is redeemable in nature. There is certain maturity period of the
debt. The government has to make arrangement to repay the principal & the interest
on the due date.

- Loans for which and all that the govt. does is to agree to pay interest regularly for the
bonds issued, are called irredeemable debts. Debts with no maturity period. Govt. may
pay interest regularly, but no repayment date of the principle amount is fixed.It is also a
perpetual debt. Usually government does not resort to such borrowings

6. Funded and Unfunded Debt:

- It is repayable after a long period of time. Funded debt has an obligation to pay fixed
sum of interest subject to an option to the government to repay the principal. It is
undertaken for meeting more permanent needs. Money is credited by the government
into this fund

- Unfunded debt: These are incurred to meet temporary needs of the government. The
rate of interest is very low. sIt has an obligation to pay at due date with interest.
METHODS OF FINANCING DEBT MANAGEMENT

1. Pay as you use finance

- When no debt is issued the savings in interest costs payable on outstanding debt
can be used to finance additional capital projects, reduce taxes

2. Pay as you go finance

- The practice of a government agency funding new projects with money it has on
hand from previous appropriations. That is, pay-as-you-go financing requires a
government to save to pay for a project for which it does not receive a specific
appropriation.

Finance is the lifeblood of business organization. It needs to meet the requirement

of the business concern. Each and every business concern must maintain adequate
amount of finance for their smooth running of the business concern and also maintain
the business carefully to achieve the goal of the business concern.

Government finance is important for the proper utilization of natural, manmade, and
human resources. For it, on the production and sales of less desirable goods, the
government imposes more taxes and provides subsidies or imposes taxes lightly on
more desirable goods.

Related studies on debt management

ACCRODING TO Zahariev, A. (2012). On his study entitled Debt management, it was said that,

 the analysis of the debt burden concerns mainly the distribution of the tax burden amongst
members of a generation or among generations. This makes the results of the analysis very
complex and contingent. Thus, according to Lerner's concept, the internal debt does not create a
burden for the future generations because it is simply a transfer of income within a given
generation. On the other hand, however, according to the model of overlapping generations,
deficit financing creates a real burden for the future generations.

 Governments, in their role of issuers of a variety of debt instruments and managers of

significant amounts of debt, should enter into certain agreements that would allow
government debt managers to perform their functions and routine tasks in the most
effective way. The institutional and organisational problems related to government debt
management, which must be resolved in one way or another, can be quite complex and
multidimensional. In practice the solutions to these problems vary from country to
country and depend largely on the traditions of the country in terms of managing the
public sector as a whole.

 This essentially new debt management concept is based on the principle of the
implementation of a unified approach to the management of the national wealth and in
particular the public sector. In this context, debt management is subject to the rules and
 mechanisms for management of national wealth. The actual management of the national
wealth should follow the classical recommendation that the government should be
responsible for its financial affairs "with the prudence of the individuals regarding their
own financial affairs". This is why we now speak not only of active "liability management"
but also of "asset management", i.e. management of the external financial assets of the
government.

GENERALIZATION

 Effective public debt management is the cornerstone of financial stability and

sustainable fiscal policy.

 The role of government in education suggests that the growth of governmental

responsibility in this area has been unbalanced. Government has appropriately
financed general education for citizenship, but in the process it has been led also
to administer most of the schools that provide such education. Yet, as we have
seen, the administration of schools is neither required by the financing of
education, nor justifiable in its own right in a predominantly free enterprise
society. Government has appropriately been concerned with widening the
opportunity of young men and women to get professional and technical training,
but it has sought to further this objective by the inappropriate means of
subsidizing such education, largely in the form of making it available free or at a
low price at governmentally operated schools.

 The lack of balance in governmental activity reflects primarily the failure to

separate sharply:

the question what activities it is appropriate for government to finance?

what activities it is appropriate for government to administer?- a distinction

that is important in other areas of government activity as well.

Because the financing of general education by government is widely accepted,

the provision of general education directly by governmental bodies has also been
accepted.

 Institutions that provide general education are especially well suited also to
provide some kinds of vocational and professional education, so the acceptance
of direct government provision of general education has led to the direct
provision of vocational education.

 For vocational education, the government, this time however the central
government, might likewise deal directly with the individual seeking such
education. If it did so, it would make funds available to him to finance his
 education, not as a subsidy but as “equity” capital. In return, he would obligate
himself to pay the state a specified fraction of his earnings above some
minimum, the fraction and minimum being determined to make the program self-
financing.

 An alternative, and a highly desirable one if it is feasible, is to stimulate private

arrangements directed toward the same end. The result of these measures
would be a sizable reduction in the direct activities of government, yet a great
widening in the educational opportunities open to our children. They would bring
a healthy increase in the variety of educational institutions available and in
competition among them. Private initiative and enterprise would quicken the pace
of progress in this area as it has in so many others. Government would serve its
proper function of improving the operation of the invisible hand without
substituting the dead hand of bureaucracy.

 It is really important to do financial management which ensures that the

administration and management team are able to manage the budget in a
better manner and make informed decisions related to the school budget.