‘God” is believed to have two strengths, viz., “he is omnipresent” and “he is the creator, reshaper and destroyer of everything around us”. “Finance Capital” is fast acquiring both these “strengths”
Believers in “God” believe that “God exists everywhere simultaneously”, not only in living creatures but also in non-living objects like stone and wood. They further believe that God is behind everything happens around us; he creates new things, he reshapes the existing things and if o fit in in his overall scheme he also destroys it. Now “Finance Capital” is fast acquiring both these strengths and may soon be elevated to the “demi-god” status. One can afford to be an atheist and refuse to take cognisance of “god”. But no one can afford to ignore new “demi-god” in an era rightly described as an era of Finance Capital.
Finance capital manifests itself in diverse “avatars” of different financial instruments, in different periods and in different economies. It manifests itself as equity shares invested in a company or in the form of private equity provided to a “shale gas” company in US or as a Hedge Fund invested in acquiring millions of hectares of land in one of the poor African countries or as future contract for millions of tons of agriculture commodities or as microloans given to millions of poor households by microfinance companies; the list can be much longer. In summary, it is embracing every aspect of modern capitalist societies. Similarly, Finance Capital is all the time “creating” new concepts, new financial instruments, new financial institutions, reshape existing laws and values and destroys those “things” which may obstruct its path.
It is true that observations and analysis in this article are largely based on emerging trends in developed economies like the US, Europe and Japan and the pace of its embracing lives of common citizens in developing countries like India may be rather slow. Nonetheless, the speed of changes in the Banking and Finance sector in developing countries is also momentous and direction is irreversible.
This phenomenon is described as “Financialisation” of economies. It can be broadly defined as “increasing roles of financial motives, financial markets, financial institutions in the operation of domestic and international economies”.
The era of “Financialisation” is distinct from that of “Industrialisation”. Both have something to do with the capitalist form of economies, both are about the deployment of capital and both explicitly seek profits. Still, both are distinctly different. Industrial capital undertakes long-term risks, is much more patient and seeks to earn a profit while engaging in the production of goods and services. Whereas Finance Capital is extremely risk-averse, have a short-term investment horizon and seeks to make money out of money.
Having differentiated between “industrial” and “finance” capital, it needs to be borne in mind that they play very complex but supplementary roles in modern capitalist economies. Finance capital bets on profit earning capacities of industrial capital, whereas profit-making potential exhibited by Finance Capital, it is argued, facilitates the creation of the fresh stock of industrial capital. Both types of capital safeguard each other’s interests. When profit margin of industrial capital gets eroded by state imposing corporate income tax, finance capital hammers down stock market indices. When the state levies higher capital gains tax on finance capital, industrial capital threatens that it will affect fresh capital investments in that economy.
“Finance Capital” has arrived at the “stage” much later than the industrial capital. However, the “philosophy” preached by Finance Capital, i.e., “take minimum risks, invest short term, and seek to maximise profits, outsmarting other co-investors” has become a dominant investment philosophy in recent past. Just one example will underline this shift: “In the US in 1960s average period for which shares were held was for about four years; nowadays the average tenure of holding is just 19 seconds”.
“Glut”: Single Most Important Reason
For very long time surpluses generated in developed economies (primarily US, Europe, Japan) were absorbed within those economies for building and running infrastructure, manufacturing industries and houses for the citizens. Reconstruction of economies devastated by second World War also consumed substantial capital. The capital absorption cycle is disrupted in the early seventies when these economies started stagnating. The final blow came in the form of US decision that it will not abide by the Bretton Woods consensus. This consensus forged after WW-II among all the major nations had created a stable and predictable monetary system of gold-backed dollars as international currency, fixed exchange rates and limited capital mobility. Breaking away from this consensus enabled the US to open taps on dollar supply. This gradually resulted in liberalised and deregulated financial sectors, floating exchange rates and unregulated capital flows all over the world.
The world is yet to come out of drowning glut created by the events in the seventies. There are reasons. Barring a handful of emerging economies, particularly China, world GDP growth is muted. Part of the production capacities already created are lying idle. Infrastructure in developed countries reached saturation as there are limits to build roads and airports. The ageing population in these countries depresses household consumption. Lack of employment partly on account of automation and holding down wage levels of the working classes kept households’ purchasing power weak.
True. Developing countries were and even now could have absorbed substantial capital. It is also true that, over the last couple of decades, global capital has succeeded in convincing the developing countries to adopt open-door economic policies. However, for many reasons global investors are extremely conscious while investing in developing countries. Muted economic growth in developed countries and over consciousness while investing in developing countries has constrained capital absorption capacities in the world economy.
“What is to be done with the overproduction of capital in world economy vis-à-vis its absorption capacity” is the single-most concern of all the mainstream policy makers, academicians and researchers, fund managers, political leaders. For whatever reasons they have convinced themselves that the interests of the capital shall prevail over any other economic or social considerations like productive employment to the people, ensuring distributive justice and environmental protection.
It needs to be emphasised that the problem of “glut” is manmade and systemic and not akin to any natural calamity. The glut is caused because of a particular set of economic policies and glut will certainly ease out if another set of economic policies are implemented. These alternate economic policies will ensure that capital will be put to use as per society’s economic priorities and capital will not be allowed to dictate its own terms to the society. That demands the leaders of the world economy dispossess their single-mindedness of keeping capital rights to “maximise profits and minimise risks” above every other consideration. That demands honest intellectual reflections and sensibilities towards co-human beings and the mother earth from these leaders. This is certainly not going to happen in foreseeable future. The global economy will continue to reel under measures undertaken by global finance capital to overcome the glut, without addressing the root causes.
These measures are quite diverse; we have listed down only seven prominent among them, viz., (a) ensuring that economic policies of nation-states will be conducive to finance, (b) blurring sharp distinctions between banking and finance / non-banking sector, (c) globalising Banking and Finance sector, (d) emerging role of fund managers, (e) creating large financial entities, so large that society can ill-afford to allow it to fall, (f) presenting financial instruments as panacea for all serious economic woes, (g) inflating bubbles in asset markets, (h) using debt extensively to fuel economic growth and (i) penetrate to the Bottom of Pyramid households with liberal credit.
(A) “Ensuring” Conducive State Policies
No industry with a countrywide footprint and registering impressive growth rates years after years can do so without active patronage by the state. This is true for the finance sector too.
The most obvious way state (which includes all the state organs, viz., legislation, administration, regulation/ judiciary and even law enforcement) facilitates functioning of the Finance Sector is by enacting conducive laws, not enacting prohibitive or restrictive laws and refuse to intervene even during “crisis like” situations under the pretext of principles like “let market take care” and “buyer shall be beware”. Nation State explicitly permits entry and exit of capital crossing national boundaries; do not take cognisance of businesses worth of billions of dollars being diverted through shale companies registered in tax heavens; regional governments allow microfinance companies to charge usurious rates of interests to poor borrowers and regulators refuse to take cognisance of excesses in stock markets. These are a few examples; there are many more the world over.
Over last few years, the nation-state is “compelled” to keep interests of the finance capital as a central consideration while formulating major economic policies. Here, we will examine only two: Monetary and Fiscal policies.
Monetary Policies: State apparently believes that by making cheap and adequate credit available, entrepreneurs will set up new firms, existing firms will expand their production capacities and household will increase their consumption levels, boosting economic growth. Many developed countries, in the recent past, resorted to “Quantitative Easing (QE)”. QE involves central banks of respective countries purchasing long-term bonds from the financial entities like banks, insurance and pension companies using newly created (digital) money. This improves liquidity in an economy and also keep interest rates low. The experience of QE in developed economies for the last 10 years does not confirm the underlying hypothesis. Instead, cheap and abundant credit has been usurped by speculative investors, who in turn invested it in secondary markets of financial securities, creating asset bubbles (more on this elsewhere). It will be naïve to assume that proponents of QE monetary policies are unaware of this fallout.
Interest rates are also calibrated to suit the interests of the finance capital. Financial markets distaste any hike in rates of interest as it adversely affects the valuation of financial assets. Valuation of financial assets in the secondary markets go up with every basis point reduction in the interest rates. This is what exactly happened in the US prior to the US Sub-prime crisis. US Fed went on reducing rates of interest from the mid-90s onwards till it reached sub-zero levels, which eventually culminated in the crisis in 2008.
Fiscal Policies: Any state in developed or developing countries needs financial resources to run the state and undertake many socially relevant programs. Direct taxes, among others, is one of the important sources for this purpose. Financial Sector always resists any proposal to levy fresh taxes or increasing existing levels of taxes on personal or corporate income, dividend income or capital gains. On the other hand, they rejoice in any reduction in tax rates. Recently Wall Street indices registered historical highs when Donald Trump reduced corporate income tax from 35% to 21%.
Many financial entities operate in a very complex organisational network of subsidiaries and step-down subsidiaries. Many of them are “shell” companies. Taking advantage of Double Taxation Avoidance Treaties (DTAT) in a pair of countries, they register their group companies in zero tax countries, which are known as tax heavens. What needs to be noted is all these transactions are not explicitly prohibited under any extant laws and hence are not illegal.
A question needs to be asked, “why do nation-state fall in line with the machinations of the global capital”?
In globalised national economies, investors always enjoy multiple options of investment avenues cutting across many countries. Taking advantage of their strength they play one nation against another. If nation “A” contemplates adverse monetary or fiscal policies they threaten to take away their investments to some other investor-friendly country. There are instances of financial entities hammering stock markets, or local currencies in case they perceive these policies of the host countries as unfriendly.
In addition to such direct threats from the existing and prospective investors, nation states are also indirectly influenced by multiple international institutions like World Bank, IMF, BIS, ADB etc. to adopt a particular set of monetary and fiscal policies. Global think tanks, global management consultancy firms (like Deloit, KPMG, PWC) also chip in identical policy advice.
With all these “chaining” the economic sovereignty of the nation states has been severely eroded.
(B) Blurring lines between Commercial Banking and Finance/ Non-Banking Sector
Historically, there has been clear distinctions between banking and non-banking sectors in terms of their activities, regulatory norms etc. The distinctions still persist, but the lines are decisively getting blurred.
The organisational form and core business model of a commercial bank have remained more or less unchanged for the last many decades. However non-bank entities have thrown up diverse business models. These include “shadow banking” and “investment banking” activities. A commercial bank stands out among all other “banks” as it is licensed to accept “deposits” from the citizens and provide cheque facility against it. This activity is highly regulated in all the countries. An investment bank primarily acts as a market intermediary for large firms and also underwrite issuance of securities etc. An institution said to be involved in “shadow banking” when it extends credit type services to other banks and corporates. They are not allowed to take deposits from the citizens. Hedge funds, Mutual funds and some other funds fall in this category. The regulation of these entities is not so stringent compared to commercial banks.
For centuries commercial banks were walking primarily on two legs; aggregating savings generated by the households by offering them interest and deploy them in interest-earning investments or lending and earn net interest margins. Under “financialisation” commercial banks are changing tracks. For example, they themselves are repackaging their loan portfolios, a process termed as “securitisation”, and selling them to non-banking entities or in capital markets after listing them on stock markets.
Another example of commercial banks being guided by the interests of non-bank entities arises on account of their changing ownership patterns and getting listed on the stock markets. Management of listed commercial banks is always under pressure to “perform”, i.e., to somehow earn profits, even if it involves digression from their core banking businesses so that the market price of the equity shares of their bank will always be appreciating.
But, why banks are succumbing to such pressures? Once again the reasons can be traced back to changes taking place at the behest of finance capital in the Banking and Finance sector itself.
As financial markets became flush with liquidity, corporates, commercial banks’ traditional borrowers, started accessing capital markets frequently. It reduced their age-old dependence on these banks. But the flow of savings to banking sector never shrunk, creating a serious issue of their deployment. If these deposits are not deployed, they are likely to threaten the viability of the commercial banking model. The seriousness of the situation can be gauged by the “negative interest rates” regime unleashed in the recent past. In order to dissuade depositors from depositing their savings in the banking system, central banks in Japan and few European countries are charging negative interest rates, i.e., penalise depositors for depositing money instead of paying interest of that deposit. In spite of such punitive measures flow of to the banks in these countries are huge and they are under pressure to earn a positive return on these liabilities. This has forced banks to undertake “shadow” and investment banking activities by setting up separate subsidiaries.
(C) Globalised Banking and Finance Sector (BFS)
This is an era of “globalisation”. The economic thought behind “globalisation” states that there shall not be any restriction, whatsoever, on the national boundaries on to and fro movements of goods/ services, labour and capital. Among these, it is the capital, which has forced its way and has almost made the entire globe as a single investment avenue for it. Compared to capital, movements of goods and services are still subjected to quite a few restrictions, whereas the proposal of free movement of labour remained on paper.
It is true that in a country like India there are still some restrictions on flows on capital account, but the direction of Indian BFS sector getting integrated with global BFS is irreversible. Following indicators will corroborate this. The foreign ownership in Indian Banks and Financial Institutions has been liberalised over the years. For example, the top four Indian private sector banks, viz., ICICI, HDFC, AXIS and YES are majority owned by non-Indian entities. Foreign ownership, with strategic collaborations in Mutual, Insurance, Pension, Brokerage, Asset Reconstruction companies is increasing. Though technically regulatory bodies like RBI, IRDA, PFRDA formulate regulatory policies for the respective sectors, these policies are never in acute deviation from those in vogue in developed countries and will never put the foreign investors in discomfort.
Facilitated by revolutionary changes in computing and telecommunication technologies, cross-border flow of capital has registered exponential growth. With a click of a key, millions of dollars cross national boundaries. Continuous debugging in the related software has created near the full proof worldwide payment system. This is unprecedented and has further consolidated globalisation of BFS. This is more prominent in secondary markets where the already issued financial securities are traded. Almost all major countries, including China and India, have trading platforms to buy and sell equity, debt and derivative instruments. It is noteworthy that, the daily turnover volumes (not necessarily their dollar value) on the Stock exchanges in India and China is more than those in the US and European countries.
No other economic sector is as truly globalised as Banking and Finance. The prevalent concepts, definitions, financial instruments, regulatory norms, legal frameworks are almost identical from the US to China to Brazil and to India, facilitating trillions of dollars seamlessly entering and exiting national boundaries.
(D) Funds and Fund Managers
An organisational vehicle of finance capital is ‘fund”. The fund is a ring-fenced pool of financial resources contributed by individuals, institutions and even state. The fund is created when individuals and/ or institutions purchase financial products like units, equity shares, bonds, policies issued by the sponsors of the fund. When citizens pay insurance and pension premiums to insurance/ pension company or purchases units issued by a mutual fund or when high net- worth individuals contribute in a private equity or venture capital fund, a fund is created. All over the world, there is a growing tendency not to undertake investment activity directly but aggregate individual’s resources in the form of a fund and hand over its management to a professional Fund Manager. Fund has emerged as the most dominant investor entity in all the asset market in all the economies. It is estimated that more than 70% of the investments outstanding in global securities markets are made by Funds.
There are different types of funds each pursuing different “risk and return” profile of its investments. Insurance (Life, Health and General) and Pension Funds normally have a low-risk appetite and settle down with low returns. Mutual Funds will be managed according to the mandate obtained from the retail investors. All these funds have been there for decades. Finance Capital has thrown up new types of “funds”, with an investment philosophy more aligned with its own. These are Private Equity, Venture, Hedge, Vulture, Asset Reconstruction and a few others. Even nation states have set up their own investment funds called as “Sovereign Wealth Funds”. The financial and real assets under management of these new types of the fund are ever increasing. These new funds are invariably manned by a new creed of “fund managers”
The new “fund managers” are given full operational freedom by the sponsors and investors of the funds with a clear goal to maximise returns in a given investment period. On their part, fund managers demand hefty management fees and a large performance bonus linked with the level of profit earned. Equipped with a clear mandate and driven by a burning desire to earn millions of dollars, these fund managers adopt ruthless investment and disinvestment strategies, at times bordering being unethical. Fund Managers are indifferent if their investments and disinvestment decisions destabilise a market or, in exceptional cases even the entire economy.
(E) Becoming “Too Big to Fall”
Mergers and Acquisitions in BFS is a routine affair. Big financial entities are becoming still bigger, by swallowing small and medium-size financial entities. This trend can be seen in banks, non-banks, mutual funds, asset reconstruction and even microfinance companies. The entire portfolio of liabilities and assets of the smaller entities are bought out overnight by the bigger entities.
This phenomenon has macroeconomic implications. A big financial entity has a countrywide footprint, it caters to millions of households, it has business dealings with a multitude of other financial entities and has huge funds at its disposal. When such financial entity, with a high degree of integration with the national economy, has serious problems in its normal functioning, because of fraud or misjudged decision will not only erode the interests of its own stakeholders but will also adversely affect national economy as a whole. In such circumstances, though technically, the decision regarding its future course of action lies with its management and equity holders, the state cannot sit as a mute spectator. It steps in and invariably bails out such a “too big to be allowed to fall” financial entity. World over there many instances of bailing out finance entities by the nation-state by using public money. It will be once again naïve to believe that the big bosses of the big financial entities, being fully aware of the vulnerabilities of the respective state, may not be exploiting them to their benefits.
Even in India, RBI has identified Systemically Important financial institutions like SBI, LIC, ICICI Bank etc.; financial stability of which are monitored more stringently than other financial entities. We have seen how our central government has to bail out, using public money, almost all public sector banks saddled with lakhs of crores of NPAs.
(F) Plethora Financial Instruments
Finance capital wishes to earn money but does not wish to undertake long-term risk. The only way this can be achieved is by creating suitable financial instruments, which can be purchased (invested) at will and sold (disinvest) if the investors’ risk perception undergoes change. For this to happen, there is a need for a trading platform (Stock Markets) and mechanism backed by the respective state (Regulator like SEBI) to ensure settlement of contracts between counterparties.
Financial Instruments like equity and bonds are being traded on the stock exchanges for a couple of centuries. They were serving the purpose of genuine investors, who used to stay invested for a long time in the respective instruments. However, a speculative investor prefers a more diverse set of financial instruments, so that he can “reshuffle” his portfolio frequently. A set of Financial Instrument to speculative investors is a set of playing cards to a gambler. They can reshuffle the pack all the time. Accordingly, the financial sector is witnessing a plethora of financial instruments being fabricated by the back-office “researchers” employed specifically by it.
Banks have been lending for centuries, Insurance and Pension companies have been selling policies for centuries. Under the pretext of better risk management and unlocking the resources, they have commenced “securitisation” of their portfolios. Millions of securities with standard face value are issued, by repackaging existing loan or policy portfolio of a bank or insurance company respectively. Similarly, derivative instruments like futures and options for a handful of industrial and agriculture commodities existed for decades. But in the recent past, derivatives have been introduced for almost every conceivable situation, as a measure of better risk management, viz., interest rates, foreign currency etc. With low margin money, an investor can take a bet of very large amounts in derivative markets. This has seen an unimaginable rise in the outstanding amounts in derivatives. For example, the speculative transactions in foreign currency markets risen from just 18 billion dollars per day in 1977 to more than 6000 billion dollars per day in 2015. This is the story for almost all derivate markets. This has provoked one of the well-known hedge fund investor George Soros to label derivatives as “Weapons of Mass Financial Destruction”
The dominance of the finance capital can be better gauged by the fact that policymakers grappling with quite complex problems are settling with an idea to float a “suitable” financial instrument, so that “that” problem is blunted if not resolved. There are a number of examples. In order to mitigate climate change problem, “carbon credits” a tradable financial instrument was devised; to resolve the issue of urban planning, s new instrument called ‘Tradable Development Rights (TDRs) has been introduced and for dealing with the issue of equitable water distribution “water entitlements” are being experimented.
(G) Frequent Asset Bubbles
Secondary markets of financial security (like say equity or bonds) have evolved, over a period, to meet genuine needs of genuine investors. A genuine investor is defined as one who, at the time of investing, has an intention to hold that security for a reasonably long period and intends to earn money by way of interest on bonds or dividend on equity and not necessarily by way of capital gains to be pocketed after selling that security. No one will deny that there will be an occasion when in spite of his intentions to hold that security for long period, the genuine investor will have to liquidate his investments. But he will be confronted with a few serious issues, viz., how to identify a potential buyer for his holdings, how to arrive at mutually agreed “price” of security for the transaction, how to ensure that securities will be actually handed over to the buyer and money will be received by the seller within a reasonable time.
Secondary markets precisely address these issues by creating requisite institutional mechanisms.
However, the situation dramatically alters when securities are bought not by genuine investors but a speculative investor. A speculative investor is one who at the time of buying that security, intends not to hold it for a long time. He is not interested in earning a return by way of interest or dividend but through capital gains, however small they might be. He would like to sell it whenever either there is an opportunity to book profit and/ or his risk perception about that security at the time of buying changes.
Each speculative investors buys in the hope that the price of the security will rise in near future and with a presumption that there will always be another willing buyer to buy that security from him. None of them are actually interested in the long-term performance of the company, whose equity shares they intend to buy. In due course, the price quoted by the buyer and seller loses any relationship with the intrinsic value of the underlying assets. Prices become unrealistic. In this market price of a security traded gets inflated to an unrealistic and unsustainable level. A bubble is formed and gets burst eventually.
This is not happening in equity markets alone, but every financial asset which is available for trading on stock markets; commodities, carbon credits, bond values all witness formation of asset bubbles intermittently. Asset bubbles are also formed in real estate markets in all the major urban centres in all the countries. All are invariably driven by “speculative investors”.
Had these transactions remain confined among the group of speculative investors, we would not have bothered much about it. However, in real life, price movements in secondary markets decisively shape prices in primary markets, where actual goods and services are bought and sold for money. Wild fluctuations in secondary, prices becoming unrealistic, asset bubbles being formed and burst one day disrupts the real economy and credit markets, affects employment generation and erode net-worth of the citizens and make lives of common people miserable.
How the formation of “asset bubbles” has anything to do with the glut of excess capital in the global BFS?
The excess capital, unable to find productive real sectors for investments, is reaching the hands of potential speculators. It may be recalled that among the Indian banks, not only the private sector but public sector too, routinely advertise loan product for investing in shares. With this, even genuine investors are getting tempted to speculate. These are called as liquidity driven secondary markets. The investors tend to overlook the reasonableness of the price of the security they are buying, as they convince themselves that they have to hold that security only for a short period.
When such speculative investors form a majority in the secondary market, one can imagine the madness gripping the entire market. Such madness has been witnessed time and again in world financial markets in last three decades, viz., 1990 (US), 1990 (Japan), 1997 (US), 1997 (Asian Tigers), 2000 (US), 2008 (US).
(G) Debt-Driven Economic Growth
In economic development of modern industrial societies, availing “debt” has played a very decisive role, be its housing loan taken by a family, a term loan taken by a manufacturing company or long tenure sovereign paper issued by a state. All these forms of debt have created assets, enhanced production capacities and build infrastructure in an economy. So raising debt per say was never a problem.
However, any debt has to be serviced by paying interest as also the principal has to be repaid by the debtor. For this debtor shall have adequate cash inflows either from its salaries/ wages, income generating activities, annual revenue of a company or tax collection by the state. So, the question is not whether prospective debtor shall raise debt or not but how much debt shall he raise. The obvious answer is “that much debt which he will be able to service, after meeting his essential expenses from his income streams”. In other words, the level of outstanding debts for a debtor shall be capped by his income levels. The ratio of outstanding debt to the income levels of the debtor shall be within some reasonable limits. If not, there is a high likelihood of default.
This is exactly an area of concern in the era of “Financialisation”.
World over all the potential debtors, viz., families/ petty businesses, corporates, states and even financial entities are raising debt years after years. Had “incomes” of these debtors were also increasing commensurate with their debt servicing burden, there was no need for concern. If world GDP is taken as a proxy for income levels, then the ratio of outstanding global debt vis-à- vis world GDP is rising continuously: It was 87% in the year 2000, 142% in 2007, 200% in 2014 and 225% in 2017.
If families, companies and states live within their means, use the debt to acquire assets then the entire economy will be pushed in upward moving spiral. But it may be seen that during the last couple of decades the GDP growth has been fueled not by recycling of surpluses but, largely by raising debt.
If with every dollar raised, the chances that the debtor might default increases, then the question needs to be asked is why lending institutions are not stopping further lending. It is because, the lending institutions are equally if not more, keen to lend than the borrowers to borrow. The global financial sector, glutted with the capital, is all the time more than willing to lend to anyone.
They are now penetrating into Bottom of Pyramid population, the poor households, hitherto perceived as unattractive customers.
(I) Penetrating to Bottom of Pyramid Population
Historically, in almost all countries, poor have been considered as unattractive clients by BFS, which is primarily driven by commercial consideration and does not believe in concepts like “social banking”. Poor, by definition, are those who always have meagre savings. Creating an institutional mechanism to mop up petty amounts of savings from millions poor spread across the country is considered uneconomical by BFS. Likewise, giving credit of small amounts to poor clients, who neither have steady income flows nor possess any worthwhile assets to be offered as a mortgage to the lenders, was also considered as an unwelcome proposition. The cost of delivery and recovery of small loans is also cost prohibitive.
However, things are changing fast.
BFS, as a result of the financialisation of economies, is sitting on huge capital, without commensurate lending avenues. Urban middle class, with its assured salary income, is an ideal borrower for any lender. However, in terms of a number of middle-class households that market is not only limited but is saturated on account of the presence of multiple lenders. Obviously, BFS is turning its eyes on poor households in Bottom of Pyramid. Poor people are very large in numbers, this market segment is relatively less saturated and their appetite for credit appears to be “unlimited”.
The structural issues which has forced BFS to keep poor people away are being partially resolved. Changes in the policy framework facilitating charging of market-determined rates of interests; newer organisational forms like Small Finance Banks, Business Correspondents, branch-less banking modes and Credit Rating companies; technological innovations like handheld devices directly feeding into server of the host bank branch, Internet fund transfers, smartphone aided banking transactions etc. are facilitating BFS decision to penetrate into the Bottom of Pyramid population.
In India, almost every mainstream lending institution has big plans to lend to poor people. These include commercial banks in public and private sector, credit card companies, small finance banks and micro finance companies, gold loan companies, peer-to-peer lending platforms, manufacturers of consumer durables with Hire-Purchase schemes and even cooperative societies/ banks. (Let us not mention informal sector private moneylenders as we are confining our discussions only to formal finance sector. Nonetheless, the informal credit markets are also quite big in size). The aggregate outstanding loans extended to the BoP population are increasing exponentially.
It is difficult to believe that only a few years back lending to poor people was considered as “low end” credit activity, to be undertaken unwillingly under politically driven credit programs like Priority Sector Lending Scheme.
But now it appears that “micro-lenders” are more enthusiastic in offering small amount loans to poor than the poor people themselves. This is changed is once again traced back to the “glut” situation in the global economy. Even after discounting for the likely delinquencies by the poor borrowers, the return on investments for the debt or equity investors in Micro Finance sector is very attractive particularly when one compares with negative interest rate regime prevailing in many developed countries. This is reflected in very attractive Price-Earnings multiples enjoyed by the Indian Micro-Finance Companies listed on the stock exchanges. This is because Micro Finance as a sector has relatively low non-performing assets and also have higher “net interest margins” compared to other segments of credit markets. Developing country like India is going to witness an exponential rise in outstanding loans given to households in general and poor people in particular.
Even in the learned middle-class Finance Capital is equated with complex dealings in stock markets, flashy black suited Investment Bankers, being covered in pink papered economic dailies etc. There is an impression that only high net worth individuals and elites in the society need to be interested in the transactions taking place in the financial sector. In fact, the opposite is true. Finance capital is fast emerging as an all-embracing force, embracing all mighty “state” to the poor household at the bottom of the pyramid. No one can afford not to take cognisance of this new demi-God: Finance Capital.
(Author acknowledges with gratitude that he has liberally used contents, with value addition, from “Financialisation: A Primer” (October 2015) published by Amsterdam based Transnational Institute; available at www.tni.org)
* Chandorkar is an Associate Professor at the Tata Institute of Social Sciences, Mumbai