Tuesday, October 23, 2012

Poor Are Honest Borrowers: Chidambaram

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"The point which I have driven home so many times, the poor in India are not bad borrowers, the poor in India are not dishonest borrowers, the poor in India are ethical, honest, are deserving borrowers. Therefore we must lend more to the poor," he said at a function

Link

Such remarks being made by someone once considered to be a financial genius… rather pathetic.

I really don't see what being poor has to do with being honest. I seriously doubt if any correlation exists or can be proven.

Its not as if the banks are giving them a tough time or being hesitant because they doubt the honesty of the borrower. The bank couldn't care less if the borrower is honest or not. The bank is more concerned about repayment and THAT is the reason for hesitation.

I have so much more to say on this, but can't seem to word it properly. I can't put it down without the risk of being termed an 'elitist'.

Sigh… fucking peasants.

9 Opinions:

Happy Kitten said...

na Raj what do you say when the rich become a bad borrower and most of the time?

Remember Mallya? Taxpayers money will soon go down the drain since he was a "good" borrower to the banks unlike the poor peasants who borrow in a few lakhs and most of them lose it due to a bad harvesting, non availability of jobs after a student loan etc.

L o r d R a j said...

Hello Happy,

Like I said - Being POOR doesn't necessarily imply one is HONEST. The same goes with being RICH.

RICH is not equal to HONEST (OR DISHONEST for that matter).

The banks are not supposed to give out loans based on how HONEST or DISHONEST they think you are. They are more concerned about recovery and ability to repay.

That is when the business model or repayment plan comes into play.

Now... as I had mentioned in my post - THERE IS SOOOO MUCH MORE I want to say on this.

You have started off a bit for me, so I will elaborate JUST on that point.

"LOST due to bad harvesting". Now - This is an uncertainty. An event which is not in the direct control of the peasant / farmer. Him being honest / dishonest has very little effect on his ability to repay the loan.

It is not as if - BECAUSE he was dishonest, there was no rain (or too much rain).
It is not as if - BECAUSE he was dishonest, he wasn't able to secure a job.

When a BANK is considering repayment plans / options - they are SUPPOSED to look at the business model.

Someone like Mallaya with huge assets and a plan to expand his airline operations - definitely SEEMS a more sound business operation.

Obviously the banks would feel a certain level of comfort advancing a loan to a sound business plan as opposed to something which is more prone to be effected by external factors (beyond the control of the borrower).

Things can go wrong for the RICH guy or for the POOR guy. There are a lot of things that are uncertain. How the market reacted to the merger of Kingfisher and Deccan could not be predicted. If you were to ask the individuals who proposed the merger, even in hindsight, they would conclude that the merger was a good move allowing Kingfisher to start int'l flights (yes, they needed to merge with Deccan for that, because Kingfisher on its own hadn't been in operation long enough to qualify for int'l flights).

It didn't work out. Kingfisher Red became more of an economy class thing as opposed to the luxury brand that Kingfisher was.

In addition to that, there were shit loads of external factors as well that contributed to the mess Kingfisher is in NOW.

THAT said, when one looks at a business model or a proposed source of repayment of loans - one would STILL be more comfortable with a plan such as expansion of Airline business (as huge as the amount may be) as opposed to someone who is taking a loan for something that has too many variables beyond the control of the borrower (as low as the amount may be).

That is really it. The HONEST / DISHONEST - Good borrower / Bad borrower remark is what I find ridiculous. Coming from someone like Chidambaram ... is just sad / pathetic.

The ability to repay is NOT dependent on how HONEST the borrower is.

Again, there is WAAAAYYY tooo much I would like to say on the topic... but if THIS doesn't get the point across, then nothing will.

Some people CAN'T understand. For them, I can try to explain.
There are people who DON'T WANT TO understand. For them, the explanations just don't matter.

Unfortunately, there are lot of people who don't want to be perceived as politically incorrect even if the thought is logically correct.

Happy Kitten said...

Raj, you seem to be too soft on Mallya :)

The King of Good times goofed up due to mismanagement alone.. Mallya is just a playboy and soon the fool and his money shall be parted.

as for your statement..Obviously the banks would feel a certain level of comfort advancing a loan to a sound business plan..
Banks should not give loan based on business plan alone.. if I have read it correctly, even if Mallya has enough assets to repay the loan it cannot be taken by the banks since he is not personally liable! Which means Banks indulge when it comes to people like Mallya.

L o r d R a j said...

Of course Mallaya is NOT personally liable. The COMPANY is liable. Mallaya's liability is only upto his contribution to the capital of the company.

Soft on Mallaya - NO! I mentioned him ONLY because you had mentioned the issue in your comment.

What the banks DO and what they are supposed to do are very different things.

Of course they indulge people like Mallaya. It is the same reason why your neighbourhood grocer greets you with a smile and advances credit to you based on the fact that you have given a lot of business to his shop over the years.

L o r d R a j said...

The exclamation point you used after 'he is not personally liable' just makes me conclude that you are not familiar with the way companies are set up.

There are companies with limited liability, partnerships, sole proprietorship etc.

Each of them have a distinct structure.

For example - A shareholding company would have a different structure from that of a sole proprietorship.

Kingfisher IS NOT a sole proprietorship.

For all legal and operational purposes, the company has a distinct legal existence. A distinct legal entity.

Managements goof up. That doesn't NECESSARILY mean that they are DISHONEST people.

Again, my opposition is to the fact that someone once perceived to be a financial genius concludes that "All poor people are honest and hence should be granted loans without due diligence". That is a pathetic notion.

Due diligence may not always yield the desired results (abundant cases to prove that), but due diligence HAS TO BE followed.

You do lock your house. Many people do. But locked houses too get broken into. That doesn't imply that everyone should STOP LOCKING their front door.

Chidamabaram issued that statement strictly from an election point of view. It is sad to see a mind - that was once rated as financial genius - making pointless statements and being reduced to that of a mere politician.

Happy Kitten said...

Maybe it is time the corporate laws are changed.. if an individual is asked for collateral security for loans, why not companies? Nation cannot afford this loot and that too when it happens in crores.

L o r d R a j said...

Perhaps.

Also, it wouldn't be a bad idea for more people to educate themselves on how things work before making an investment.

Again... my post is NOT about the corporate laws. OR bad management decisions OR external factors.

My post is about a stupid statement made by a person who was thought to be a sensible guy.

L o r d R a j said...

BTW,

If you think corporations are given loans without a collateral or security, you would be wrong on that count as well.

L o r d R a j said...

Collaterals are determined based on the business model / repayment plan / purpose of loan etc.

At times, the security offered could also be Debentures in the proposed company. Or Preferential Shares.

A quick business studies lesson for you - Debenture holders are NOT the owners but they are people who have advanced a loan to the company. In the event of a liquidation - they will have preference over common Shareholders.

Shares are of different classes as well. There are preferential shares / common shares etc.

Shareholders are usually settled in the end - when the company has paid off everyone else.

Companies file for bankruptcy. That doesn't imply that the person(s) associated with the company are (were) corrupt or dishonest.

Shit happens. Business models fail. Not every GOOD film is a hit at the box office. Not every GOOD business decision yields desired results.

Change to the corporate laws - Of course. Why not. With time - everything should be changed and amended... for the better. This is NOT limited to just corporate law.

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