Financial markets — Segmented domestically, integrated globally

Though the unorganised sector dominates in sectors such as trade, private transport and hotels, it does not get adequate funds from the public sector banks, which are geared to “asset based lending” rather than lending based on cash flow forecasts. To reduce the borrowing cost of the unorganised sector, the financial market has to be integrated by making the informal credit agencies channel partners of large banks.

THE interest rates have been moving south, and many large corporates are now in a position to access funds from banks at less than 10 per cent. Helped on also by the RBI Governor, Dr Bimal Jalan, cutting the Bank Ratio and the CRR. But my flower girl and vegetable vendor get it at 0.5 per cent per day (returning 50 paise for Rs 100 borrowed in the morning). My grocer gets Rs 45,000 up front and pays Rs 500 per day for 100 days to repay Rs 50,000. It turns out to be more than 10 per cent for three months. My barber gets it through a local chit-fundat around 4 per cent a month. The fast-food restaurant at the street-corner gets funds at 3 per cent a month from a non-banking agency. The private bus operator in the suburb gets it at 2.5 per cent, and the construction contractor at 3 per cent per month. The plumber, carpenter, fitter, painter and others pay 3-4 per cent a month.

The segmented financial markets present an ironical (if not tragic) picture of the large funds available with bankers, on the one hand, and the prohibitive interest rates at which funds are accessed by trade and commerce, particularly the non-corporate sector, on the other. In sectors such as trade (wholesale and retail), construction, hotels and restaurant, private transport and other services, unorganised or non-corporate organisations dominate. Hence, we are not talking of some “residual” segments. These sectors constitute nearly 30 per cent of our economy and are the fastest growing “service sector” in the last decade, mostly above 7 per cent every annum.

It is also to be noted that the market knowledge and information regarding these services are not fully available with the commercial banker. The typical bank manager of a public sector bank has a two three-year tenure in a branch, and is also shifted across various sections such as foreign exchange and administration. By and large the public sector banks are geared to “asset based lending” rather than on cash flow forecasts. This is all the more true of such activities as trade, transport and hotels, where there are significant fluctuations in the cash flows on a daily basis.

In other words, the risk assessment capabilities are not adequate in the context of these activities. Also, funds need to be available to these players without much paperwork and based on personal assessment. So, these activities are mostly financed by the non-banking finance companies (NBFCs).

As a result, the distribution system is segmented and the financing cost at the retail level prohibitive. For many fast moving consumer goods (FMCG), the gap between the balance-sheet figure and the street price is more than 30 per cent.

One of the reasons is the “open market” interest paid by the trade channels. In the developed market this gap is not more than 10-12 per cent. In the case of cash crops and vegetables the gap between producer and consumer prices can be as high as 70-80 per cent. Here, again, the financing cost — both for holding and transport — plays a major role. What is the source of funds for the non-bank financial sector?

The Karnataka Lok Ayukta recently conducted raids in various government departments in Bangalore. Based on the figures reported by newspapers, one can make a conservative estimate that at least 50 lakh is generated daily as “rent” income by the government officials in a city such as Bangalore. This translates into nearly Rs 150 crore per annum in one city. Imagine what the national figure would be like. All this money is not locked up in the cupboard — it is deposited with the local lenders, who offer a rate of at least 3 per cent a month. There is a need to integrate domestic financial markets by making un-incorporated bodies (UIB’s) in the credit market channel partners of large banks.

The reforms have focussed only on the liability side of the NBFS and the failures therein, but the asset side is equally important in terms of credit delivery to large segments of economy.

MNC Game: Rule what is divided already

Unless the domestic financial markets are integrated, the global integration may turn out to be marriage of unequals with devastating consequences for the unorganised borrowers and lenders.

Why is it so? The segmented markets in India are not organically linked unlike in the West. One major attempt to integrate the financial markets was undertaken by Indira Gandhi in 1969 when banks were nationalised. This was a “socialistic” attempt — that is, through the state process — to integrate the markets. In other words, the funds mobilised in one corner of the country could be redeployed at another corner through state intervention. This model has limited success in terms of branch expansion of banks, and mobilisation of small savings. But the model could not go beyond a point as the major constituents (bank officials, clerks and others) did not have a stake in the process beyond promotions and some economic benefits.

Hence, state-inspired integration has its limitations, as bank officials do not have intimate organic links with the market.

The underlying economic philosophy of credit delivery to the meek and the weak could not succeed in the absence of the all-pervasive social acceptance and local movements for the same.

The major group, which enthusiastically welcomed such a move, consisted of communist unions, which were more interested in obtaining economic benefits to the bank workers than helping the end users of credit.

For instance, in a different context, the state-inspired integration of different territories by Sardar Vallabhbhai Patel succeeded because there was a social yearning for the same.

The lack of integration of our financial markets provides opportunities to global players to offer “efficient solutions” by the takeover route. State-owned institutions could be acquired or non-bank institutions could be taken over or the global players could use NBFS as channel since there is no unified market here. Incidentally, a large portion of FDI flows is used for M&A activities.

Also, there is an urgent need for pension funds in the US and European countries to earn adequate returns to meet the ever-increasing requirements of the ageing population.

At last count, these pension funds had nearly $15 trillion and not much of it has entered India. Further, domestic savers would be too eager to give money even at low rates to these “global funds” since anything “foreign” is great for us.

In other words, the Indian middle-class would rather lose heavily by investing with J.P. Morgan, Merrill Lynch and other global firms rather with “Meenakshi Enterprises” or “Siva Parvathi Finance Company”.

This will create distortions in the domestic savings habit since the allocation of financial resources will be as per the needs of old people in Europe, rather than the requirements of savers and users in Tindivanam or Tinsukia.

It was the power of gunpowder and cannons that overcame the arrows and swords of the local rulers in the past, and, now, we have the “modern finance — institutions, instruments and regulations” from the same groups to make us “efficient” and more “productive”.

The segmented markets are the sure recipe for disaster, in spite of lots of garbage being peddled by the “domestic experts” whose interest in globalisation is related to a few foreign trips and sinecure positions.


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