A financier is the one who finances, but defining a responsible financier can be tricky. Is a responsible financier the one who takes care of the depositors’ money by giving loans stringently or the one who ensures that the needy get timely loans? In the former case, one will get a loan only after proving his financial strength and the genuine “have nots” won’t get a loan. In the latter case, the depositor’s money would be at stake and the risk of losing it rather high. Thus, the dilemma is, whether the financier’s responsibility is towards his depositors or borrowers? The former works at the micro-level, the latter at the macro, both being interconnected. Let’s see if management education can guide us through the dilemma and help create a responsible financier.
Banks and FIs
Financiers work at three levels: domestic banks and financial institutions; national central banks; and global institutions such as IMF and World Bank. Banks are responsible towards their lenders who have deposited money and trust in them. Hence, they must lend this money carefully to borrowers who have good repayment capacity and sound mortgage or collateral. This would keep their non-performing assets (NPA) at a minimum and render the financial system strong. But this very caution would keep the poor deprived of the funds needed badly.
Central banks carry the dual responsibility of ensuring financial inclusion as well as maintaining a strong financial system. These are apparently contradictory goals, leading to a dilemma, but RBI, for instance, has found a way in making microfinance lending to priority sector compulsory. Public sector banks take the major burden and, hence, have more NPAs, but ensure financial inclusion, a step towards inclusive growth. Management education would do well to give the would-be managers this larger perspective so they comply in letter and spirit.
Lender of second-last resort
Being a lender of the second-last resort, the central banks as responsible financiers take a macro view, and balance financial inclusion with banks’ profitability. Public sector banks can be entrusted with the former while private banks would automatically ensure the latter. RBI could also invent a PE (private equity) type of a model wherein the lending bank monitors, nurtures and helps the borrower build up repayment capacity so as to reduce NPAs from priority sector lending.
Lender of last resort
Being the lender of the last resort, IMF as a responsible financier must monitor and regulate the myopic practices of banking sector, especially when ignored by a nation’s central bank. A classic example is the 2008 US subprime crisis wherein not only the Federal Reserve ignored unscrupulous lending by banks to the subprime sector and then getting rid of the loans by selling them off to hedge funds, but also ignored two huge government agencies underwriting 80% of the toxic assets, thereby letting C category paper pass into B category. Another example of negligence was the European Central Bank letting huge unsustainable debt get built up in the eurozone economies at all levels.
China, the world’s second largest economy, is also one of the most indebted ones. In 2009, one dollar of debt was required to generate one dollar of growth, now over four dollars of debt is required. The reason for high debt is government-directed lending to create jobs and infrastructure, but has significantly raised the NPAs, rendering their financial system weak. This is the paradox of responsible financing—what’s good for the economy may not be good for the financial system, at least in the short run.
Debt is also asset
One entity’s debt is another entity’s asset, so if one must pay, another must receive reciprocally. So, where is the worry? The worry starts when the debtor appears unable to pay not only the principal but even interest. That’s when the creditor’s wealth gets eroded or debtor must perish, or both! And when the system allows high leverage, allowing paper multiple times of the value of the underlying asset, the system and subsequently the real economy must get ready for a crash. Only a responsible financier at the local, national and global level can avoid all this and save the real economy from the perils of irresponsible financing.
As this year sees Indian economy reviving, it will bring opportunities and challenges for higher education. Just as recession is the time to weed out the bad, recovery is an opportune time to build afresh. If the HRD ministry is led by someone with a deep understanding and rich experience in the education sector, the Indian demographic dividend can be turned into an asset by focusing on school and college education in terms of quality, quantity and easy accessibility so as to build a strong base for better higher education. Misdirected polity heading the effort will be the biggest challenge to nation-building.
Management education specifically must help resolve the dilemma a responsible financier faces: capitalist profits or socialist financial inclusion? Isms are fast getting outdated. Nations are swaying between left and right, in search of a new centre. So how about a convergence between “isms”; indeed, rising above them to achieve both profits and financial inclusion simultaneously creating a stronger financial system in the long run? Good education can help achieve this miracle.
By Shubhada Sabade & Saamarth Bali
Shubhada Sabade is faculty of Economics, and head, SIMS Economics Think Tank (Simsett).
Saamarth Bali is an MBA student, SIMS, Pune, and member, Simsett