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.
Banking (in)security
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.
PSI
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
2 comments:
nice
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