From Guwahati to Coimbatore, Mumbai to Kolkata, if you ask any businessperson these days about his business, you will find one
unique answer "AREE BHAI, BYAAZ BHIN NAHIN PADTA KHA RAHAN HAIN".
A layman will understand that he is not doing well, but then what does this "Byaaz" means here? For a layman that would mean,
"Interest Rate", but going in financial terms it would mean, "A RISK FREE RATE OF RETURN OF 12% p.a." In this "New Economy age" this return is justifiable, but not the "Risk Free Return".
Here, comes the paradox and we need to understand how this situation has emerged and whether there is any solution to this paradox.
In the pre-liberalised era, Indian economy was following the great principle of economics,
"Principle of "Scarcity", which predominantly meant fewer goods to consume and less money to invest. This translated into very simple working procedure, you had money, and since it was scarce, you set the rules. The
rules were to produce goods and as goods were always short in supply compared to their demand, therefore, you could easily sold them in the market at your chosen rates, which would give you enormous returns, unheard in any other
Therefore, you need not had had any "Vision" or "Risk taking capacity" or 'An opportunity" to generate high returns on your capital but you need to had good liaison to get license to
manufacture and if you don't had that, then you need to liaison with "these manufacturing companies babus" for distributing their products, which used to sell in the market at seller's rate assuring very high returns.
Goods to consume were as scare as money and people used to make money by booking "Bajaj scooters", "Telephone connections", "LPG connections" and then selling these allotted "luxuries" on
premium to more needy (and of course more rich) person, thus getting a return varying from 100 % - 200%. In the same way, since there was less money to invest, banks could afford to borrow at 12% -15% from individual depositors,
add margin up to 8% and lent to corporate at 24% - 25%. But, unfortunately this cycle was good for only a few classes of people, which I would name as "PRIVILEGED" class of the society, who had correct liaison.
The "NOT SO PRIVILEGED" section of society would depend on the local financiers (traditional moneylenders) for taking benefits of these opportunities whose benefits would not last for more than a year. These local
financiers would finance them for a "Risk free return of 12% p.a.", although the market rate of interest was generally between 30% - 40% p.a.
With liberalisation the "SCARCITY" principle vanished in
context to goods, and over capacity production started, "MARKETING" took place of "RATIONING". Benefits of both "PRIVILEGED" and "NOT SO PRIVILEGED" class started vanishing. As benefits
started vanishing, high returns associated with these benefits started declining, with this the risk free rate of return for local financers started squeezing.
With industry slowdown, things started worsening for these
financiers too. Delay in payment of interest followed by non-payment of interest to one-time settlements of the principal and interest amount. Things reached the last stage of financial crises, bankruptcy. Frequency of news
of bankruptcy ("PARTY FAILED") overtook the frequency of daily fluctuations in the most volatile scripts of the stock market. These traditional financiers start realising that there is no concept of
"risk free return"; each and every debt is associated with the risk of default. As this situation percolated from the cosmopolitan to metros to mini metro cities, the effect was seen in the entire economy with low level
of investment in the economy.
Now these local financiers should accept the present situation, when real rate of return (adjusted to inflation) in the bank deposits is more as compared to a decade before and therefore they
should try to look for the alternative feasible solutions.
One of this solution can be associating the returns with different indices like stock exchange indices, the average time deposit interest rate of the banks (rate of
interest paid of fixed deposits by banks), agricultural indices like of prices of bajra or rice or wheat production. This is not something new, it was done in a systematic fashion, when there were organized future exchanges or
markets for the commodities like of Jute, Cotton, etc., center being Calcutta, the commercial capital of India in those times.
Financing when done in cosmopolitan to mini metros, then they can associate it with the stock
indices, but if financing is in smaller cities and rural areas then they can take any of food grain price or time deposit rate of banks as their base.
For example, if 9% is the interest rate of 3-year time deposit
with scheduled commercial banks when inflation measured in terms of CPI is 3%, and then they can link their lending rates with this interest rate as base. These lenders can charge the premium over the lending rates of the banks on
account of many factors like they lend the money with no time lag, which means the funds are made available within a week time, there is no transaction fees in terms of paper processing fees and there is facility of early repayment
for borrowers with no penalty, which means they can repay the money whenever they don't need it with a short time notice of just 15 days. This is in tune with recent announcement made by RBI allowing the banks to offer the varying
interest rates FDRs.
These local financiers can play more important role in today's scenario, when banks are flooded with money and projects with slight high risk are not financed because of fear of NPA level. These local
financiers can bridge this gap, and trend has already started towards it. A recent survey done on the regional rural banks cost of collection of funds came out with a very interesting finding that the percentage of the advances of
these banks for less than Rupees 2.0 lakhs is decreasing very rapidly, that means projects which require capital of more than Rupees 2 lakhs are being taken into consideration only.
The local financiers should take benefits
of this situation and should finance these projects to enhance their returns. Projects, which have risk, associated to it due to newness of the sector, or which need funding within stipulated time period in order to get benefit of
being first in the market in that segment, should be financed partly by debt and partly by taking equity stake in these projects. Debt part will take care of assured returns and the returns generated from equity stake will take
care of extra risk associated with these projects. They can bridge the existing gap between bankers and these new project takers representing the upcoming new generation. In this process they will learn the ins and outs of these
new projects, which have relatively short life cycles as compared to the traditional industries.
Thus we see that these local financiers have to change their outlook and if want to maintain their statusquo in the new
emerging economy, then have to adopt as per the new rules of the economy, and can play a more vital role in the economy.