In the novel The Moneychangers, Arthur Hailey expounds a universal and time-tested truth — it is the big borrowers who pay the lowest interest to banks and the small, the highest. What he said more than five decades ago should ring alarm bells and give a wakeup call to the banking regulator, Reserve Bank of India (RBI). What he left unsaid was that those left out by formal banks inevitably fall into the crushing arms of loan sharks.
The strongarm tactics of loan sharks are as legendary, as is their usury both in India and abroad. Yet they hold sway with people because of the instant gratification factor. A person in dire need of funds cannot wait to complete the paperwork that invariably and inevitably insisted upon by banks. He courts the here-and-now of the local moneylender despite knowing his viciousness and rapacity. His first choice for collateral is inevitably a family heirloom or wife’s jewellery. The much-fancied gold loans rank second in the pecking order of usury because unbeknownst to the common folks, stories of gold lost to gold loan companies by unsuspecting borrowers are legion.
Now loan sharks operating from the virtual world are tantalising wannabe borrowers with instant access to funds while practicing grotesque usury — 52% interest per annum and more; slightly more than on credit cards. Credit cards too pander to instant gratification instincts and dire needs but they come with limits and regulations, thanks to their formalisation within the banking sector and NBFC. Thus, loan sharks both online and offline score over everyone else in the game.
The government must be lauded for launching a frontal attack on dubious lending apps by asking Google Playstore not to allow downloads of such apps, except those approved by the RBI, and also for unleashing the Enforcement Directorate on dubious characters laundering their ill-gotten wealth through money-lending. The Reserve Bank of India (RBI) will tighten scrutiny of digital lending by approving apps that can be hosted on app stores. This follows new rules restricting digital credit delivery to entities regulated by the RBI or those permitted by law. The crackdown on digital usury and strong-arm loan recovery by unregulated apps is also designed to curb money-laundering, and will include monitoring of rented accounts, review of dormant credit companies and time-bound registration of payment aggregators. Complaints over dubious instant loans from outside India have mushroomed and investigations have widened to cover payment gateways. To its credit, Google has removed over half the instant lending apps it had.
Releasing rules for online lending last month, the RBI had recommended that the government should bring in legislation to ban unregulated entities. The rules for entities regulated by the RBI require them to disburse loans into bank accounts of borrowers, pay the fees of lending service providers, inform borrowers transparently the all-in cost of loans, and provide other details for borrowers to be able to make informed decisions. It also specified how user data may be collected, involving prior and revocable consent. These rules ought to tilt online lending towards an assets-driven model and away from the current originator-distributor format.
But asset-based lending is easier said than done in the humdrum of one’s personal life. It is possible to a large extent in project financing but personal loans do not lend themselves to such strict regimentation. The RBI cannot escape a share of the blame for the present malaise of buy-now-pay-later (BNPL) culture almost becoming a status symbol. So, when the time comes for paying the merchant, one rushes to a loan shark in a manner of borrowing Peter to pay Paul, thus locking one in a vortex of borrowing. The decadent practice of living beyond one's means has infectiously spread from the US where there is a definite amount of swagger and pride in going on a binge unmindful of the bill. Thrift and conservativeness are now associated with financial cowardice.
The RBI must encourage the long-term saving habit with recurring deposit schemes that cannot be broken midway through except on the death of the deposit holder. Interest rates must be attractive and rewarding as the term and lock-in period increases. The government too must step in with inflation-index bonds so that people are assured that their savings are not eaten away by inflation, and instead they are compensated for inflation and more.
Banks in India have historically courted big borrowers and in the process also courted humungous bad debts estimated to be close to 13% of the lending. A few latter-day private sector banks saw sense and merit in retail lending, shunning big borrowers. They have been amply rewarded for their broad-based loan portfolio. Big borrowers should be left to fend for themselves. A start can be made by mandating listed companies to meet their loan requirements by floating bonds as the legendary Dhirubhai Ambani did for Reliance. Bonds are a martinet. They are the greatest disciplinarians.
There is no reason why banks cannot encourage microfinancing as pioneered by Muhammad Yunus, the founder of Grameen Bank of Bangladesh, way back in October 1983. He and Grameen were decorated with the Nobel Peace Prize in 2006 for grassroots lending, which microfinancing is all about. It was a tacit recognition of the axion that peace and prosperity are intertwined and go together. The model junks the traditional emphasis on collateral which the poor cannot provide. He thus set store by the group approach starting with a group of five. Typically, two of the five prospective borrowers are granted loans. If, after a probationary time period, the first two borrowers meet the terms of repayment, then loans are granted to the remaining group members. Peer pressure acts as a replacement for traditional loan collateral. More than 97% of Grameen’s loan recipients have been women. The fear of the entire group being blacklisted in the face of default by one of them has been found to be the best example of peer pressure working for the good of everyone in the game.
RBI then must bring about a paradigm change in bank lending practices. Bank officials must fan out to the fields, as it were, instead of functioning from airconditioned comfort dealing with pinstriped company executives. Managing a few big borrowers may cost less in terms of administrative expenses but when the cookie crumbles, bad debts prove more expensive than savings in administrative expenses. Lending to the masses or microfinancing may cost more in terms of administrative and travel expenses but is a lot more effective in terms of repayment.
The writer is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues
