An Open Letter to RBI GovernorDear Shri Dr Raghuram Rajan..
We welcome and appreciate your thoughts delivered at Bharat Ram Memorial Lecture organized by FICCI. We consider your speech as progressive material for our ongoing studies in the field of Wellbeing Economics.
Your clarion call for reduction of transaction costs towards growth of national markets; institutionalization of idea-producing think-tanks; facilitation of young indian entrepreneurship; responsible financing for raising domestic demands, are well received by us as ushering steps towards resilient Indian economy within, while contributing implicitly towards global economy.
During the same time, World Development Report 2015-Mind, Society and Behavior has been released. This report calls for integration of behavioral aspects into development policies, as, policy decisions informed by behavioral economics have delivered impressive impacts on field.
Your responsible caution against export-led 'growth' strategy is being backed by budgetary incentivizing of household savings.
As such, we urge your opinion on an alternative methodology and process to channelize the domestic investments direct in real economy, vis-a-vis incentivizing domestic savings into banks and further being lent to businesses and consumers. With the proposed methodology we foresee chances of overcoming few anomalies:
1- Depositors do not know who their money is being lent to. could we walk into a transparent system where depositor can choose where his money can be lent at?
2- Banks are primarily lending institutions and not investment houses/institutions. Hence, banks can lend and cannot invest. Could we not work out a system where the tier of 'banking the funds' is re-visited, and money moves from the investor to investment(real economy)?
The Depositor Real Economy disconnect
In an early 2013 report RBI calls for designing innovative financial instruments that provide real return to the investors. The interest that banks provide to the depositors is a disconnect with the real economy. Banks need to design innovative models that connect the depositor with the real economy. The depositor can have the choice to invest/lend his own money in whichever industry he would like to invest. The dynamics of the interactions between the depositor, entrepreneur, markets and bankers brings prudency in all sectors. A fresh outlook towards the above points could result in a better investment pattern.
There is a call for honest economics based on credit expansion proportionate to the savings that would be sustainable and avoiding un-resolvable bubbles. In their zeal for profits banks pamper the consumer and the debtor than the wealth creator and the saver. Douglas Carswell, Conservative MP from Clacton, UK, introduced the “Financial Services (Regulation of Deposits & Lending) Bill on 16/9/2010 by which he sought to prohibit banks lending on demand deposits without the permission of the account holder. Quoting his document “My Bill is not just a consumer-protection measure, it also aims to remove a curious legal exemption for banks that have profound implications on the whole economy”. Under his Bill “credit would still exist but it would be credit backed by savings.” The Bill questions the legal privilege enjoyed by Banks worldwide under the ‘fractional reserve requirement system’ where banks leverage on the money of the depositor through ‘credit multiplication’.
The Indian ‘growth’ Obsession
The INR75 trillion Indian banking industry has been the government’s money-purse to push through its ‘growth’ agenda. Not having attempted at alternative models, and stagnated at received occidental versions, the financial system is increasingly being liberalized with no road-map as to how major policy shifts could resolve the socio-economic issues at hand. Banking is being made to tread into risky arenas such as futures-trading and infrastructural lending, incommensurate to its resources and ill-equipped with the know-do; reduced to a gold-selling counter, unmindful of socio-economic repercussions.
Restructuring bad loans
Bank deposits are a huge collection of small savings. No capital risk, assured interest and high liquidity are the expectations of the depositors. Contrary to which, their deposits are lent out to sectors which involve huge capital accompanied with high capital risk, liquidity risk and income risk. Large centralized infrastructure investment more often benefit the infrastructure industries than the common cause. Yet, to press private sector entry into the capital-intensive infrastructural industries, government utilizes the banking system.
CDR, which is a package involving reduction of repayable amount, alteration of repayment period, reduction in rate of interest and conversion of debt to equity, all in favour of the corporate, is being used as a tool by banks for lower provisioning and NPA management.
There seems something intrinsically paradoxical with polices that are rushing the production of public goods into the hands of private enterprises and causing banks - the money purses holding public small savings - to lend to the private enterprises and further restructure the loans to bail out the ailing business houses at terms detrimental to the creditor banks. Are banks strategized and safeguarded to lend to infrastructural projects? Are the projects decentralized, participative, transparent, accountable and carried out under the strictest social and environmental safeguards and addressing the basic needs and social cause directly rather than relying on an agnostic, rather counter-proven ‘trickle-down-approach’?
Bonds preferable to bank credit
RBI had also expressed its preference for a strong bond market over bank credit for infrastructural investment of around $1trillion in next 5 years for XII Plan 2012-17. Both government bond market and corporate bond market could be a facilitating channel for domestic and foreign capital creating essentials for a resilient economy that is diversified in pooling of funds for infrastructural investments.
Intellectual Exchange for Unified Knowledge–
RBI Finance Stability Reports(FSR), periodicals and tables, prod us to think of and promote alternative ways of flow of credit and investment to different sectors of population, area and enterprises.
The present lending system does not have the space for engaging in social responsibility in its pursuits of profit and growth. Banks’ attention on its survival does not allow it to prevail upon the soundness of the project in terms of ramifications of the projects it is financing. Factors such as socio-economic amelioration, inflation, employment, technology, pollution and ethics do not play a role in financing.
Whether it is the world bank, the commercial banks or Micro Finance Institutions(MFIs) they are into similar patterns of lending. That is how we have World Bank(WB) in unethical and lop-sided financing deals. WB finances coal power station using most polluting brown coal(brown coal causes 400% increase in pollution) in Kosovo and other coal projects in south Africa, as well as the funding of large land deals in Africa creating insecurity of food where hunger is most prevalent.
Project has to be financed based on integrated and holistic efficacy of unit, rather than on some rigorous assessment of credit worthiness of the borrower to service the debt. Any enterprise by itself has no value unless it helps people secure better lives. We need institutions that give access to financing and safety of funds. Today as we Indians face issues of poverty, malnutrition, lack of basic amenities of water, sanitation, unemployability, price-rise, absence of sound health care, housing and good education, banking industry has to contribute in abolishing these great evils. Banks have to be agents of progressive socio-economic developmental change. A system of financing, where it is not the narrow segment of profit-maximisation but the common good, socio-economic inclusion, ethicality, that is emphasized under a spectrum of continued and participative learning, should be institutionalized.
It is time we moved away from a debt-money and interest-oriented economy towards dynamics of an asset-based and investment-return type of interacting, real and humane economy. Knowledge gaining and experiential learning demand an intellectual exchange between received and alternative ideas to form an unified knowledge. “Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit;… let my country awake”- Rabindranath Tagore.
Dr Lubna Sarwath, PhD, iWIL-IIMB
Trisakti University, Jakarta, Indonesia www.ief-trisakti.ac.idSave
Our Urban Lakes(SOUL) www.soulhyd.orgCenter for Wellbeing Economics(CWE)