The Enigma of Disappearing Loans
On 2nd March 2016, Vijay Mallya fled India, defaulting on a US$1.3B loan. As a member of parliament he epitomised the business-politics-banking mix the most — inviting not just politicians but also bankers to party on his extravagant yachts — in better times. He was not alone. Less than two years later — jeweler Nirav Modi decamped, perpetrating another US$1.8B fraud on Punjab National Bank, forcing the Reserve Bank and the Government of India to intervene.
CASHe is a Bangalore based FinTech platform that uses Artificial Intelligence to issue instant loans to millennials based on their social media scores. Once the borrower provides consent to access social media profiles, email accounts and mobile phone records, a credit score is obtained — confirming a decision to lend. The platform has made, since inception, US$100M worth loans — with less than 7% default rate.
Networks of communication that connect people, like the one CASHe uses for credit underwriting have existed since long — centuries before social media came into vogue. Large businesses are plugged into intricate social and business intelligence networks — beginning with the watchful eyes of various authorities that governments put in place and also those that connect employees, suppliers and vendors and business analysts and media at large. For those ready to listen into those networks — both formal and informal — it is not difficult to assess the state of a corporate’s financial health.
Mallya’s ability (read inability) to repay existing loans was widely known. Yet bank officials — some under political pressure — others who had visited his yachts, figured out creative means to lend him more — until he was gone. As extraditions efforts come to a naught, Government is recapitalising the Banks with public funds. Roughly 470 million Indians who cannot afford two proper meals a day — will see their children stuck in the arms of poverty for a few years more.
As a young entrepreneur in the 90s, I felt aggrieved every time a bank rejected my request for a business loan. The moment of truth came several years later when I unexpectedly found myself as a shareholder in a bank. For a moment it appeared to me that the banking system was not to be blamed and that my long held impression was misplaced. After all, banks are important financial institutions, working under strict government control, that are expected to hold public monies in trust and therefore cannot be allowed to lend to early stage companies like mine — that are prima face risk prone. It would be in breach of their mandate.
In a perfect world, banking would be a boring business that provided loans against a security deposit and charge a fee for doing so. In reality, banks, other than, providing saving and checking accounts, engage customers in all kinds of myriad products and services that are borderline fraud. All that flows up to the top managers who craft their own sweet deals. It is inconceivable that banks could offer such high salaries to its employees while expecting them to take no risks — in violation of the risk-reward principle. Something must be amiss. Or dangerously wrong!
Despite a mandate to the contrary, banks actually do undertake risks. The point is this; to whom should the benefit ( if any) of such risk taking be rightfully accrued? Particularly if it arises out of their special status in the economy and the position of trust they behold.
Should it benefit the new age entrepreneur who is most in need of funds and have nowhere else to go or should it benefit existing oligarchies utilising low cost credit as a means to further improve their bottom-lines or engage in reckless expansion with little skin in the game?
On the face of it, most governments are sympathetic to the needs of entrepreneurs. Sometime they setup Banks of their own but often they would find ways and means to exert invisible pressure on exiting ones. Frequently, the entrepreneurs they prop up are of the wrong kind — politically aligned and scheming — exploiting the governments’ public duty to support.
Ultimately the behaviour of the banks is reflection of the economic realities of the place. If entrepreneurs are sidelined to the advantage of established businesses and firms, to the corrupt and the politically influential wannabes, it is partly because the society has implicitly rejected the entrepreneur’s role; as an instrument of economic progress and agent of positive change. Their role as creators of informal jobs and sustaining economic activity at the bottom of pyramid also equally ignored.
It is not for me to detest the banks — my painful experience now a forgotten past. Yet, every time I see a budding entrepreneur with a promising idea being returned at the bank’s doors, I wish the the situation would not have been the same.
