RE: Banking reform

[Charudatt <charu@iced.com>]

Sanjeev Sabhlok[SMTP:sabhlok@almaak.usc.edu] writes:
>
>Banking and credit for the poor:
>-------------------------------
>Utkarsh writes:
>> Having said that, I would like to discuss as what steps will a
>> government take in India to privatise banking. Going forward I would
>> like to bring up issues which matter to average middle class citizens
of
>> India. I think average citizens goes through hell even to get their
own
>> money out and deposit in a bank. Any takers.  IF we all agree that
>> banking industry is fine in India the way it is today, then we can
move
>> on. 
>
>Great topic: Banking reform. Step 1. Get out of banking. The worry of
>Charu that people need access to credit is genuine and I appreciate
that.
>
>Unfortunately, I have the direct experience (which very few among you,
in
>the USA, or elsewhere, have had) of implementing schemes designed to
>promote this "cheap credit" (so costly for the society!) for the rural
>poor. I am writing much about this in my book, but the essential
argument
>is: 
>
>You cannot, sitting in your office chamber, determine whether a project
is
>credit-worthy or not. The credit-worthiness of a project is determined
by
>two things: an entrepreneur and the opportunity. The best person to
decide
>this is the farmer/ rural artisan/ agricultural laborer. But what do we
>do? We set targets to subsidize a zillion of these people. The
machinery
>to direct funds to these people is huge and unbelievably corrupt. Even
>assuming that no corruption takes place, what essentially happens is as
>follows:
>
>Rs.X is diverted from our national pool of capital into a project that
is
>ill-conceived, not feasible, etc., and the farmer is forced to purchase
a
>capital good that he/she either does not need, or is of low quality ...

In dealing with any problem I believe we should consider all
alternatives.

The problem I have with the above argument is that it implies that the
only way we can provide fair credit to those who have been unable to get
it so far is to have a powerful outsider (IAS officer) decide who gets
loans and who doesn't and then we dictate to the debtor exactly how the
money is to be spent. I agree that this approach is doomed to failure
because the potential creditors have little stake in the success or
failure of the venture. The question then is, what are the alternatives?
Well, there is the existing institution of the village money----------
	 lender who charges interest rates in excess of 50%, taking land
or gold as collateral, or who ends up enslaving his debtors.
For farmers, more recently, there are agri-business conglomerates that
will provide credit for purchase of their products, though experience
shows that their objective is to lock the farmers into a cycle of debt
that forces them to continue to use their products with increasing
dependence. I can conceive of a situation where with a small seed
capital grants, banks are built with the money of local depositors, who
in turn elect the officers from among themselves, rotating the office
frequently. This system like any other is subject to subversion- the
local landlord may try to pack the offices with his people, or corrupt
officers may try to siphon off funds, and this is where safeguards are
needed to ensure that the bodies that control the bank are
representative of the interests of all participants. I see this as being
much more preferable to have the bank be run by some high and mighty IAS
officer who sitting in his chamber has no notion of what is important to
the individual loan seeker because the objective is to give individuals
a sense of control over their own fate and the motivation to take
responsibility for it.

I would suggest (again) that 2 models worthy of study are credit unions
in this country and the Grameen Bank of Bangla Desh.

-Charu