The poor more credit-worthy than the filthy rich

The first document Chandrababu Naidu signed after being sworn in as the Chief Minister of Seemandhra on June 8, 2014, was a loan waiver to the farmers to the tune of Rs54,000 crore. This was a pre-election promise that had to be fulfilled. We know of several instances of politicians doling out money and waiving loans at the expense of the public exchequer. What about the farmers who had already cleared their debt with interest? Would their money be refunded? Seemandhra is known as the rice bowl of India and some of these farmers may be quite well off. This kind of indiscriminate loan waiver sets an unhealthy precedent, discouraging law-abiding citizens from honouring their debts.

The word 'credit' in English originated from Latin word credere, meaning 'to believe'. Banks advance credit to businesses and individuals in the belief that they would honour their debts, unless they declare themselves bankrupt. This belief is the bedrock of banking and, in fact, the entire financial system.

Recently, the Governor of Reserve Bank of India, Raghuram Rajan had expressed serious concern about rising non-performing assets (NPA) or bad loans of public sector banks. When they exceed 4 per cent of their total advances it gives rise to a dangerous situation. Interestingly, private banks have no such problem. This clearly indicates that while advancing loans, PSU banks go by considerations other than the creditworthiness of the borrowers — a form of crony capitalism. 

Pramod Mittal, the steel magnate, spent $85 million (approximately Rs500 crores) on his daughter’s wedding in Barcelona, a spectacle that left many Spaniards awestruck. No one should have any problem with that so long as Mittal makes some earnest efforts to repay the outstanding loans of thousands of crores of rupees he has taken from public sector banks. 

We are all too familiar with the Kingfisher Airlines saga. The company owes about Rs7,500 crore to various banks. Employees of the airlines have not been paid their salaries for months together; but the owner Vijay Mallya continues with his flamboyant lifestyle. He has invested crores for an IPL team and race horses and has been navigating the oceans in his luxury yacht. Mallya’s contention is the airlines is the defaulter, and it is not his personal liability. But had the company been a success and its shares skyrocketed, wouldn't Mallya have enjoyed the fruits as the largest shareholder?

Nobel laureate Muhammad Yunus, founder of Grameen Bank in Bangladesh, had shunned all the banking practices followed for centuries by the industry. Grameen Bank advanced credit to the poorest of the poor who had no property, movable or immovable, to pledge as collateral. Hundreds of thousands of such people were given loans; they were also helped with the plans as to how to invest this money to start and sustain a small business enterprise. Yunus's success was an eye-opener for the bankers. The percentage of bad debt of Grameen Bank was significantly lower than large commercial banks. Thus, the concept of microcredit or microfinance was introduced. Yunus and his bank were jointly awarded with the Nobel Peace Prize.

As a banker, who would you trust with your credit? A poor woman or a globetrotting industrialist/ politician. The former, it's evident, has more credibility.

The author is a teacher and corporate trainer