Usury in the city that never sleeps

Thoonganagaram (தூங்க நகரம்) ....Madurai. The city that never sleeps...and it is the city that never lets some sleep. The city that is famous for the Meenakshi temple, for its malligai poo (jasmine), for its jigarthanda, for its Murugan idli, for its 'passakkara pasanga' (beloved pals)...and once upon a time for its Tamil Sangam, is now infamous for Usury.

Some years back, I had watched usury in all it's glory at close quarters. Meter Vatti, Kandhu Vatti, Speed Vatti , Hourly Vatti were strange and scary sounding words, when one of my client had got into this trap.

As a banker usury was not an uncommon concept for me. Lending ₹ 90 to small traders - particularly vegetable vendors in the morning and collecting back ₹ 100 in the evening is not uncommon in many places....go ahead and calculate the rate of interest for this ...This is an 'acceptable and accepted' business model for lending. People in the know vouch that this lending model does work for small amounts, particularly when the money is lent for productive purposes. It is supposed to 'help' small traders, who borrow on an unsecured basis and can return cash back in the evening.

When the ticket size increases, it doesn't help....particularly since such borrowings are for consumption. The meter and speed interest charged by these modern day Shylocks is so exorbitant that borrowers can never repay fully in a lifetime. Money that is repaid keeps going to service interest and the principal remains unpaid for most of these borrowers. The lenders live off the lives of the borrowers. A blank pro note or a cheque is usually the only document taken - but defaults seldom happen, for debt collection is merciless. Detailed records of repayment for such loans are seldom maintained and borrowers meekly submit to the terms of the lenders.

It is not just so in the unorganised sector. Sometime back micro finance institutions had charged usurious interest rates...and credit card companies conveniently charge as high as 3.26 % per month...that is some 40% p.a. When the organized sector can get away with such rates, one can easily guess what the unorganised sector can charge.

Although there exists a Tamil Nadu Prohibition of charging exorbitant interest rates Act 2003 and the Tamil Nadu Money Lenders Act 1957 prohibits usury and fixes a maximum rate of 12 % pa for unsecured loans , a vast majority of the people are unaware of this Act and its provisions and its implementation is virtually absent.

Helpless borrowers who are in dire need of money fall into this trap. Yet another category of borrowers is that segment which does not postpone gratification and borrows for consumption. Either way, very rarely does a gullible borrower who resorts to this borrowing escape this trap.

Madurai is a hub for usury and it is not surprising when Justice N.Kirubakaran called it the 'capital' of usury. Many people commit suicides, women get abused and children abducted...the number of cases filed is low and the conviction rate is even lower...it is obvious that the implementation authorities of the laws in this city that never sleeps have gone to sleep....making it a நரகம் (hell) for borrowers.

Forcing policy changes by threat

Fitch Ratings , the international rating agency has reiterated its negative outlook for India and has warned of a downgrade. The agency complains that structural reform process is sluggish. This is the era of policy making by threat. The agency is concerned over
a)India's economic and fiscal outlook
b)Sharp slowdown in growth
c)persistent inflationary pressures
d)weaker public finances.

Probably these are concerns, but should the government choose to cut back spending to ensure that the fiscal deficit is contained, it will impact the already fragile recovery , and should the central bank increase rates to cut out inflation, it will affect growth. Less taxes may help growth, but will increase the deficit. Cut rates to spur growth and you have the threat of inflation picking up again. Look anywhich way, the Goverment cannot really do much. And this is after the spate of 'actions' taken by the Government.The fact is that we will need to live with this situation till global growth rates pick up. What the agencies would desire is a cut in subsidies (which is only huge in absolute amounts - in relative terms it is not really as big a problem as it is potrayed to be), lowering of taxes and a cut in rates. They forget that this country has a population of 1.2 billion and all that we have been taking in terms of growth has not been very inclusive. NSSO data clearly shows that the growth has not resulted in increased employment - it is a jobless growth.These policy prescriptions by Fitch or S&P will only aggrevate the problem. Running a country is not like running a company. And that is where the problem is.

Ratings are statements of opinions and the track record of thees agencies in rating corporate bonds is decent. What is questionable is their ability to rate other issues (their track record in rating mortgage backed securities is disastrous) and sovereigns. Sovereign debt rating is almost entirely unsolicited and the ratings and policy prescriptions of the three big agencies Fitch Ratings, S&P and Moodys has played a major role in accentuating the EU crisis, forcing governments to consider placing curbs on the timings of release of such un-solicited ratings and curbing ownerships. There is nothing to prove that these agencies have been successful in predicting crises.

What happens is that rating changes affects the ownership pattern of sovereign bonds - as most institutions. Because most institutions have allocations for bond holdings based on the ratings of the bonds, when a downgrade happens, it results in a huge sell off.... well that is what is supposed to happen in theory. But when US had its AAA ratings stripped, its bonds rallied ! Bloomberg reports that 'Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974'....

So should the Government worry ? Reforms are required. But we should make haste slowly. Policy should not be made under threat.

Deregulation of interest rates on SB account

Those who clamour for deregulation of interest rates on savings accounts found a new supporter in the Deputy Governor of RBI , who said that RBI was keen on deregulating all rates - including SB rates. ( The Business Line , without naming him reports that he was vehemently against deregulating SB rates, when he was CMD of a bank which had a large SB base !!! ..well they say the only thing that is constant is change !!)

Banks have always competed for current accounts which are non interest bearing and savings accounts which are low interest( 3.5% pa) bearing - as these are the cheapest source of funds for banks. Some nationalized banks because of their large presence and some private sector banks , because of their deliberate strategy have a larger share of these accounts than others. The have nots - if I can call them thus, had to compete with the haves on all parameters - except interest rates. With this ( likely ) move, they would also be able to compete on interest rates.

Most banks already segment their customers based on the balances they maintain in their savings account. In my view, the higher end segments might get another 50 to 100 bps more for their account balances. The lower end segments may lose out - that is if one considers 3.5% interest rate to be a number of any value - particularly considering the current inflation rates !. I also expect banks to step up charges for deposit related services and penal charges for non maintenance of stipulated balances. At the end of the day, I dont see the net adverse impact on the bank's financials to be more than say 25 bps.

The usefulness of this move in asset liability management is, in my view, stretching things a bit too long. Currently 10 % of the SB balances are considered volatile and withdraw-able and are bucketed in the 'next day', 2-7 days and 8 to 14 day bucket. The rest of it is bucketed as core deposits in the long term bucket. I dont see how a 50 to 100 bps change will impact this bucketing significantly.