Financial Daily from THE HINDU group of publications
Monday, Aug 23, 2004
Money & Banking - Insight
On savings in a season of lending
Mere business volumes would not spell success the way they had earlier. Suddenly, the game was all about getting deposits at ever lower rates and being smart enough to find borrowers who would pay a higher interest rate without bringing losses by defaulting on payment of interest and monies borrowed.
Like all fundamental shifts in operating paradigms, this one was also accompanied by a change in the metaphors and mindsets. "Loans" morphed into "assets" and "deposits" became "liabilities". A decade on, the "assets" seems to have gained total ascendancy over the "liabilities".
Loans brought interest earnings, the bread and butter of a bank's bottomline. With corporates becoming increasingly fund-savvy and learning to raise money from sources other than banks, retail loans emerged as a beacon of hope for banks. Simultaneously banks were awash with liquidity as most savers, twice shy from their less than happy encounters with capital market, and company deposits decided to stay with the banks. Thus it was that lending in retail became the flavour of the industry with retail business almost coming to mean only retail loans.
To talk of savings to an industry thus charged up on retail lending seems like playing spoilsport. But a comeback by savings may be necessary in the long-term (pun intended) interest of the industry. There are three reasons why this is so.
First, more than a century of commercial banking has not changed the fact that deposits are the basic building blocks of business for a bank.
It is precisely because each person in need of borrowed money finds it too complicated to locate savers who can spare their funds for him that banks are required. No savings would mean no lendable funds and, hence, no need for intermediaries, the banks.
Savings, thus, are one half of the raison d'etre for the existence of a bank and, hence, need to be promoted with the same gusto that marks the marketing of loan products.
Are not deposits coming in any way, so why should banks promote savings? Will it not suffice for the present to just focus on the retail loans where spreads are maximum? But the problem is it may not always be this way.
Today, the lack of alternative options is driving the customer to keep most of his money with banks but what if things change and more attractive options emerge? Should banks not be cultivating their deposit constituencies all the time?The second reason for savings to be pushed is to promote better quality in lending.
Paradoxical as this may sound, this is so obvious that it is in danger of being missed altogether. Often, what many a borrower and a lender tends to overlook is the fundamental principle that what is offered as a loan is nothing but an aggregation of the borrower's future savings or disposable income. And for giving this upfront, the price charged is the interest on the loan.
Before you dismiss this as too simplistic, let us take a look at some experiential evidence. The dramatically low rates of defaults enjoyed by micro-credit are, perhaps, to a large extent attributable to the savings platform on which it is offered.
Loans under self-help groups are available based on the potential for savings demonstrated by the borrower. Not very different is the experience of the chits, which are also a savings-linked lending arrangement. It is not surprising that these arrangements are also usually characterised by lower defaults.
The counter argument to this is: Why should banks care about the past savings history of a borrower as long as they can lend at an attractive margin and recover their money somehow?
But, then, a person with a poor history of savings is most likely to default and unconcern about his disposable income sets up the bank for a bad loan ab initio.
There is a poignantly human side to this argument. Persons engaged in recovery are familiar with the experience of calling on the home of a defaulter, only to be greeted at the door by the wife or elderly parent of the borrower with a haunting question: "When his bank pass book and salary slip give evidence of his profligacy, why did you lend to him?" Clearly regular savers are less prone to default on loans taken by them.
The final reason for advancing the cause of savings centres around the larger social responsibility that banks carry. Banks in India have in the past preserved and promoted the savings culture in the country, a role that they should continue to play. Plus banks have a stake in standing for responsible borrowing that does not cut too deeply into household savings.
When the entire economy is raising a toast to affordable credit, it is very easy for individuals and families to forget all about savings and go overboard on borrowings which lenders are only too eager to give away.
The experiences of East Asian nations have shown the perils of no holds barred consumer lending. Each business has its own special ecology that has to be preserved.
Just as fishing to excess can endanger the supply of marine life, loans at the cost of savings can raise the risks of lending unacceptably by increasing the potential for defaults in general.
While selling a loan product the borrower should ideally be made aware of how much will be a sustainable loan limit for him in relation to his future savings. It may also not be a bad idea to bring back a dash of old fashioned banking and check whether the money lent is being used to further the interest of the borrower or will fritter his savings, especially in a milieu where social security options are not many.
One might be tempted to ask: The guy who takes the loan is not wet behind the ears; does he not know what he is getting into? But lending should empower and not emasculate the recipient. And that is the only way to healthy banking. Lending that tips families over into the debt trap is not good lending.
It is not the case of this story that retail lending is bad or that retail loans should be given only to savers. All that this story is trying to say is that it is time for bankers to sort of get back to their basics, especially in the matter of encouraging savings which is their natural dharma and do more than a perfunctory check on the sustainability of their retail loans in relation to the savings potential (read disposable income) of the borrower before lending.
Perhaps, this aspect is not getting the attention it is crying out for in the present scramble for a share of the retail cake.
If you think that this is all too idealistic and woolly-headed, hear these words written in a different context nearly eight decades ago: "It is necessary that a co operative movement fraught with so much good to India should not degenerate into one for merely advancing cheap loans... The registrars will have to ensure the moral growth of such societies... This will mean tracing the course of every pie lent to the members. Those responsible will see to it that the money does not find its way into the toddy-sellers' bill or into the pockets of the keepers of gambling dens. I would excuse the rapacity of the moneylender if it has succeeded in keeping away the gambling den or toddy from the ryot's home."
If there is a timeless quality to the wisdom in these words, with a ring of uncanny prescience, it is because they were those of Mahatma Gandhi.
What was written of the co-operative movement then is equally sage counsel for banks today. So the next time you are looking for a piggy-bank to present your favourite niece or nephew to bring home the power of savings, buy one extra. It would make a perfect gift for your friendly neighbourhood banker as well.
(The author, a senior manager with a public sector bank, can be reached at firstname.lastname@example.org The views are personal.)
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