Human life is God-given. Yet, all the time the human being is consumed with working beyond destiny. From decoding genes to encoding software, curing disease to extending lifespan and from stepping into space to exploring in the oceans human motivation accepts nothing as beyond change and seeks to improve everything. In all the human saga over centuries, there is one manmade creation called money that sets the limits for change. Money (or riches) has ensured that some are born rich and some are born poor. While hard and smart work helps some of the poor to become rich and indolence and negligence make some of the rich become poor, the cycle of born rich or poor continues unabated, and poverty tends to be more universal than richness. If human life is God-given, richness and poverty are also God-given. The passion that educated humans display to change the destiny, somehow, skirts the issue of making poor rich, or even better still eliminating poverty altogether. It is left to the political institutions and public governance mechanisms to use money to reduce, if not eliminate, poverty.
As important as money has been the vehicle created by the human race to channel money, namely the institution called bank. Banking has emerged as the most important vehicle to help people save their money through deposits and help them set up and run their avocations through advances. In developing economies banking has been the most important means to spur entrepreneurship, support economic growth and enable distributive justice to an extent. The former Prime Minister of India, Late Indira Gandhi nationalized several banks in the 1970s so that the Government could have a say on the flow of funds in the economy; in fact, nationalization of banks has been the most populist stroke of socialism of any government in India. The current Prime Minister of India, Narendra Modi has initiated Prime Minister’s Jan-Dhan Scheme to enable millions of underprivileged people open banking accounts with free insurance underlines, once again, the importance of banking in the economic affairs of India.
All said and done, however, the fundamental principle of banking, ie., advancing against security has not changed irrespective of ownership. Lending against crops (crop loans), houses (housing loans), vehicles (automobile loans), gold (gold loans), industrial fixed and movable assets (term and working capital loans) are all against mortgage of property, current or future. While relatively affluent sections of the society with assured earning potential may be able to provide security for advances and pay back the loans with interest, those who need funding most would be the ones who have no means at all of earning to pay. It is a rather sad Catch 22 situation for such people; without funding the underprivileged cannot even survive let alone establish their commercial activities, and without security banks cannot lend except at risk of massive write-offs.
Looking from a different perspective, however, the difference between lending against (future) security (for new businesses at least) and lending against (future) crops (for rain dependent agriculture at least) is only a difference in paper. Concept and presentation savvy business leaders can reduce their exciting dreams to impressive written plans while tradition-steeped farmers cannot express anything except their thumb impressions. Even greater vulnerability stalks hapless poor individuals seeking funds for education, non-earning jobless and those affected by sickness. Some questions of equity emerge. For example, is it justified to assume that those who do not earn presently cannot ever earn? Is it justifiable that loans should only be granted against property and certainly not for those in poverty? Conventional thinking cannot provide just answers to these questions even as those who need funding the most would continue to be denied access to funds due to certain behavioral assumptions on the needy.
Theory X and Y of the Indigent
Douglas McGregor, the thought leader in organizational behavior enunciated Theory X and Theory Y on the negative and positive assumptions, respectively, on workers’ behavior in organizations. In order to transform the banking approaches towards the indigent population, similar Theory X and Theory Y are called for.
Theory X of lending against security has the following five assumptions: (i) dependent population develops a vested interest in perpetual dependence, (ii) less educated are more likely to fail commercially, (iii) financial banking has no scope for emotional connect, (iv) funding without security is subsidy without recourse, and (v) poverty alleviation is governmental responsibility and never a commercial sensitivity. All the five Theory X assumptions are misplaced. Firstly, as demonstrated by millions of indigent households helped by micro-financing corporations in India and the rest of the world, with a little financial support indigent population could become financially independent. Secondly, education and skill are independent; skilled artisans may even better the ones versed in letters and generate wealth if financially supported. Thirdly, financing which provides livelihood has emotionalism embedded in it; the smile of the banker matters to the borrower’s heart as much as the banker’s cheque matters to the borrower’s head. Fourthly, security on paper is less important than faith on spirit; all successfully funded entrepreneurs have succeeded on spirit than on security. Fifthly, poverty alleviation is not the sole responsibility of either governments or businesses; it is a total social responsibility.
In contrast, Theory Y of lending against property has the following five positive assumptions: (i) the pride of financial independence drives away the expediency of external dependence, (ii) craftsmanship can overcome any shortfalls in intelligence and education, (iii) emotive and empathetic lending is the most effective lending, (iv) relationship is the best security ever, and (v) people can do more than any government can in poverty alleviation. If Theory X is rejected and Theory Y is embraced, banking transformation would be ushered in, with the premise that those who need funding and who can offer no security are, in fact, in greater need of funding. There are three distinct segments of population that need Theory Y funding: those steeped in poverty, those rendered helpless by sickness and those seeking education. The statistics on these three segments in India are so compelling that there is an impregnable case for ensuring succor to these segments of population on an urgent footing.
Poverty, sickness and illiteracy (PSI) are three continuing scourges of India society. According to an expert panel headed by former RBI Governor and noted economist, Dr C Rangarajan, those who are unable to spend Rs 32 per day in rural areas and Rs 47 per day in towns and cities are considered living below the poverty line (BPL). Not many are convinced that this is a realistic indicator of poverty in India given the high prices and high inflation. Nevertheless, even by the above BPL definition, nearly 30 percent of India’s population of 1.2 billion (400 million) is estimated to be impoverished. No reliable statistics of people unable to afford quality healthcare are available. From one perspective, the entire BPL population of 400 million can be assumed to be unable to afford quality healthcare. Thanks to the government subsidized canteens, an idli (a South Indian breakfast item) can be had for one rupee but a strip of medicines cannot be had even at ten times the cost of an idli. The plight of population facing chronic sickness can only be imagined.
According to a report from the United Nations Educational, Scientific and Cultural Organization (UNESCO), India has the maximum share in global adult illiteracy at 37 percent (287 million). Taking all of illiteracy, the numbers would swell to 37 percent of India’s population (nearly 500 million). While, over the years, improvements have been made in alleviating poverty, providing healthcare and improving education, the combined picture of the painful PSI conundrum could be as high as half of India’s population of 1.2 billion (600 million). Providing succor to this huge indigent population needs a massive effort. Fortunately, a ray of light is seen to be dawning through the new Companies Act 2013 which mandates companies meeting certain business conditions to allocate 2 percent of their net profits to Corporate Social Responsibility (CSR). All banking companies and the big profitable corporations can play a very significant role in reaching financial inclusion to the large indigent sections of the Indian population.
LAPSE, a movement
This blog post advocates that the Indian banking mindset should shift dramatically from a mindset of ‘loans against property’ to one of ‘loans against poverty’. It also advocates lending based on spirit than on security. The suggested model is one of Loans against poverty, sickness and education (LAPSE). The model suggests that 2 percent of the net profits of all profit making companies should be dedicated to LAPSE model. Nearly 90 scheduled banks have an interest income of 10,000 billion. A simple 2 percent allocation of net profit will place Rs 200 billion, by no means a small sum, for the LAPSE model. These banks bear a net non-performing asset (NPA) ratio of nearly 2 percent. If all NPAs are converted into performing assets, another 2 percent, and therefore another Rs 200 million, would be available for the LAPSE model. Addition of non-banking finance corporations (NBFCs) and various other financial institutions as well as other non-banking and financial firms would add additional millions to the LAPSE model. From a different perspective 500 big corporations (ET 500) which have posted a net profit of Rs 4,200 billion in 2013-14 would provide a resource base of Rs 84 billion for the LAPSE model.
The combined impact of pooling together billions of Rupees (at 2 percent of net profits) for the LAPSE initiative, ie., Loans against Poverty, Sickness and Education could be dramatic and transformative. The author does not suggest this huge amount to be dissipated through individual loans whose beneficiaries would be difficult to identify, and engaging with whom for utilization and recovery would impose unviable transaction costs. The author suggests that this huge sum should be utilized on strengthening three critical institutional foundations. These are (i) micro-financing institutions and self-help groups to enable self-employment and alleviate poverty, (ii) service oriented hospitals and clinics to enable timely disease diagnosis and cure sicknesses for the poor and (iii) special schools, colleges and skill development institutes to provide formal broad-based education and instill or develop specific employable skills. The logic for channeling the support from the banks through such institutions of execution is that these types of institutional mechanisms are best positioned to achieve the set goals of poverty alleviation, sickness elimination and educational uplift.
NCSRC, a special vehicle
It would be appropriate for the Centre to establish a National CSR Corporation (NCSRC) to which all the LAPSE contributions can be made. An institutional framework such as NCSRC would ensure simplicity in LAPSE fund collection and its subsequent utilization. It would also enable professional analysis in association with recipient entities as to how the LAPSE institutions are operating. A central institutional framework will help accept recoveries wherever possible. As an added advantage, such a holding corporation would enable governments, Central and State, to add their own funding towards corpus and distributable funds. Moreover, it offers discretion to contributors, individuals and companies, to contribute greater funds without a worry on the additional efforts of deployment.
Eventually, like provident funds and pension funds, NCSRC could invest its funds in debt, bond and equity markets, in a risk-free and capital accretive mode, to be able to serve LAPSE objectives even better. Contributions to NCSRC could be made tax-incentivized. Once NCSRC is established, it can even create its own subsidiaries which are focused either on regions or on specific segments of LAPSE funding. With today’s information technology, any attempts to take double or multiple loans or evergreen loans can be identified. In the ultimate analysis, having created money as the force that rules human life, and banking as the institutional framework that grows the ruling force, the human being has the ultimate responsibility to help those who by birth or by circumstances are indigent, sick and illiterate, due to lack of financial wherewithal.
For a noble, 'must-execute' paradigm as discussed above of Loans against Poverty, Sickness and Education, the acronym LAPSE may appear to be paradoxical but ignoring the need for such a paradigm would certainly be a lapse against humanity.
Posted by Dr CB Rao on October 11, 2014