The
other day a friend of mine was asking me about Educational loans. Given my
brief association with the Banking sector and the fact that my dad is still in
active service with a Public Sector Bank, I have become some kind of a
'go-to-guy' for basic information regarding banking products. The friend's
friend on whose behalf he was enquiring had aspirations to make it to a foreign
university in a European country and my friend was quite excited,
understandably, given that the aspirant was quite studious and well deserving.
However, there was a problem. The aspirant's family was into agriculture full
time and his dad, despite being quite successful, didn't possess any
substantial assets other than massive farm lands.
Now
that was bad news. The banking sector in India has been undergoing a silent
crisis in the form of NPAs (Non Performing Assets) for some time now. A lot of
corporate loans viz. Kingfisher have gone bad and many including Adani, GMR, et
cetera are expected to go bad and not just that there has been a lot of
delinquencies in the personal loans segments as well, especially Education,
Home and Car loans, due to drying up of the job market. The picture was never
green as far as Agriculture was concerned. It was almost a given that the
Agriculture loans are either written off by the Banks or the Government at some
point of time. Moreover, most public sector banks won’t accept Agricultural
land as mortgage because they cannot go after it if the loan is defaulted as
easily as they could with other property and also because in some states it’s illegal.
If the banks were a little more cautious in extending credit earlier they
wouldn't be so neck deep in trouble, the banks having realized that have pulled
up their socks and in the process bringing untold misery to deserving loan
applicants.
Recently
a couple of news made headlines. Current Account Deficit (CAD) increases;
driven mainly by Gold imports, Money Laundering by Banks expose by Cobrapost, Tax
evasion and its impact on the fiscal deficit, Moneylenders, et al. I personally
feel that the Banking structure in our country has directly resulted in such
irritants in the system and I am going to follow the family and how their quest
for funds for a legitimate and noble cause might come from unscrupulous and
dubious sources.
There
was a time not long ago when farmers can submit a proof of possession of
agriculture land and Gold ornaments and collect nearly 75% of the value of the
Gold as loan at a mouth watering interest rate of 7%. This was when Gold was at
its all time peaks and there was a possibility that the interest rate might further
go down to 5% with excess government subsidies. At that time the interest rates
on Term deposits with the Bank was around 8% and technically if one invests the
loan amount back in the bank they can earn up to 3% net interest margin (NIM).
Just to give a perspective the NIM of popular banks during the same period
hovered around the same figure give or take 1%. Now that gold has climbed down
from its historic highs, the common man, especially small farmers, believing
the trend would be repeated is trying to amass as much as they can, driving
volumes up. Now RBI and Government had stepped in to douse the fire kindled by
the passion for the fiery yellow metal which they could have done earlier and
avoided the whole situation now. Now they blame the obsession of people with Gold,
however, they were prima facie the reason for this obsession.
Turned
away from the Banks and having already pledged all their Gold, the family might approach a
Moneylender. These days’ moneylenders are exclusively servicing clients turned
away from Banks and financial institutions and charge them interest which
amounts to as much as the principle in many cases if not more. Over and top of
this, since they aren't regulated, they take lands or other properties, even
those banned from being mortgaged as security. None of the money that transfers
hands goes through any bank accounts or anything, thus the whole transaction is
as good as never happened, no taxes, nothing.
Now
the family probably has enough money, however, he would have to wire a part of
that money as college fees and other expenses. Now the Banks which had earlier
turned them away due to systemic reasons will have to act intermediaries to
transfer the amount. Call it strung by guilt of not able to help a hard working
farmer and setting it right or to earn some precious commission from the wire
transfer, the banks would give out some precious ‘advise’ on how to do it
without arousing the suspicion of the Income Tax Department.
The money
borrowed would soon be back doubled or tripled and end up with the money lender
as black money. The banks might bend backwards to convert it to white counting
on precious commissions, anyway, if not they some other bank would do it and
the process goes on. If the farmer was able to get help through official channels
easily this whole trail could have been avoided.
I
have personally seen how farmers and small businessmen suffer because they don’t
have proper banking access. RBI’s ‘Financial Inclusion’ through opening banks all over the country alone will not help achieve anything. Some prejudice against
such debtors and systemic bias in the system should be corrected for real betterment
of the society.
