A Financial Institution that may work
By Dr Amiya Sarma
For quite some time now a few of us working in different financial institutions have been thinking about an ideal type of Financial Institution (IFI) that the North East needs. An ideal type of any institution begs more questions than answers. Nevertheless, with a little bit of thinking on this line, if some debate can be generated, it may be a worthwhile venture. The North East today is in the limelight not because of development but the lack of it. Year after year, new projects, studies are being done to find out ways of harnessing the potential. Many a step has been taken but the fruits are so slow in coming that there still remains the feeling of being left out of the overall development process that the rest of India is experiencing.
Under the present circumstances, is there anything that a financial institution can do to generate the kind of euphoria that the states in the Southern and Western parts of India are experiencing? It is accepted that India has started a race towards development amongst states some of which are handicapped. Liberalization is a double-edged sword, punishing the inefficient members and rewarding the efficient ones. It is generally agreed that the present handicap that the North East is facing is not a result of its own doing. But the inefficiencies observed in many aspects are not to be excused because of this.
Union Minister Arun Shourie did rightly point out the same thing when he was told that the Centre had neglected the North East by keeping most of the important sectors under the Union list. According to him there are enough sectors in the state list that empower the state governments to uplift their people. Improving the availability of financial assistance to the people who are willing to set up business ventures can be an important agenda for the state governments in the North East. It is also an agenda for the financial institutions that criticize the government and the first generation entrepreneurs but not do anything much themselves.
First, the financial institution that I have in mind should be an autonomous one. But then it should keep in touch with the government and the other financial institutions so that the important sectors and classes of customers in the region are covered by one or the other. There are many schemes launched by the government the fruits of which bypass the weak and the hungry. This autonomous financial institution should look into the weak points and the missing links in these schemes and try to find solutions. For example, if the SGSY scheme is not taking off because of some problems in the state, this IFI should find ways of getting over these hurdles for the benefit of the region.
Secondly there are many schemes put up by individual financial institution, which go unheeded because of the lack of information and may be because of lack of concern from the other organizations. For example, various schemes of RGVN, NEDFi, may be unknown to the people of some area. The IFI should take upon itself to even spread the schemes and guide the borrowers in obtaining financial and other types of assistance.
Third, regarding the financial schemes that the IFI should take up, the concept of universal banking may be a good base to start from. Term loan, bridge loan, working capital loan, venture capital finance, housing loans, hire purchase, leasing, equipment finance- all such activities must be within the purview of this IFI. At present there is no financial institution that is catering to the needs of all such borrowers in the North East. Instead of borrowers changing their project to suit the scheme of the financial institutions as is happening today, the IFI should be ready to accept any profitable proposition from the borrowers and amend its rules. In the new knowledge-based economy where customers are the kings, let there be a financial institution that matches up to the customers’ needs and aspirations. Just as new processes are being designed based on the new information technology, the IFI should be able to design new products based on the region’s characteristics and the changing environment.
There used to be the distinction between agriculture and industry and the units that can be classified as belonging to one sector or the other. But should such a distinction remain? The government has promoted a number of financial institutions in the formal sector since independence. But have they been able to stop the business of the informal institutions like the moneylenders? One reason is that moneylenders do not distinguish between an agricultural loan and an industrial loan as long as the borrower is good. A good financial institution should come out of the straight jacket of narrow rules and conditions and serve the consumers when needed.
The IFI should cover all classes of borrowers too. Let there be no distinction between a big borrower and a small borrower. If there are good NGOs, then they should be utilized to the fullest since they have local information, are good in using peer pressure for recovery and may have good projects too. If they cannot be roped in under the traditional schemes, micro credit should be taken up and loans disbursed through them.
If there are people looking for small loans of, say Rs 5 lakhs or even lower than that, then the IFI must rise to the occasion to finance such projects. It is argued by many bank officials that it is uneconomical to deal in small loans since the returns do not justify the paper work involved. The IFI will be the one to come up with ways to get around the problem. May be group financing would help whereby a group of similar projects is taken up together area wise or sector wise. Financing joint liability groups as has been practiced in some places like Andhra Pradesh could be another. Instead of dealing with single entrepreneur at a time, it is better to take a group of entrepreneurs together and deal with them. This can generate some sort of peer pressure as in the case of NGOs.
For the educated unemployed, the IFI must devise special schemes so that the ones willing to take up self-employment can do so. In fact, besides making finance available, the IFI should provide educational loans for useful technical courses or apprenticeship that are very essential for the employment seekers. Masons, plumbers, electricians, hairdressers are some of the trades that ordinary undergraduates and even graduates unemployed youths should be able make a living out of. Only special incentives will make the youths take up such trades.
For all these the head of the IFI should be one who is highly committed to the cause, not in words but in deeds. Such a person can even turn a directionless institution into an IFI. But then without a good leader, even the potentially good FI can lose the sense of direction. It is obvious that one does need a brilliant person. It is mainly a question of the heart. One doesn’t even need a team of investigators to find out such a leader. Positive attitude, past performance, involvement with the society, link with politicians and overall idea about the region are some of the criteria on which the leader should be evaluated. Social service records are something very essential for people to climb up the corporate ladder in the USA. This should be kept in mind while identifying the leader. Nobody can become a social worker over night and let us not be fooled by such persons. The North East desperately needs a banker with a will to lead a financial institution that is ideal to meet the needs of the society in an environment that is not really ideal.
Dr Amiya Sarma is working for NEDFi as Manager (Economist)
This article was written on 2004-12-07.
Currently Dr Sharma is the Executive Director at Rashtriya Gramin Vikas Nidhi.