What I am going to write below is the most important thing that I have ever wanted to say to everyone- general public, bankers, politicians , policy makers to every entity that can think. No it is not a jargon on ethics morality or spirituality but it is about something much more practical which affects each of us every day. Money .. more specifically INTEREST RATES IN INDIA.
How do we all define a great life in India ? Rather than great- say best life in India. What is every working individual's ( a Businessman's or employee's ) dream. I think we can summarize it as follows.
1) Have a great EMI free house to live in
2) have a solid bank balance which will generate enough interest every month to take care of our monthly needs with some extra scope to increase our savings after expenses on a couple of good vacations every year..
I am more than sure I have summarized the financial target/dream of more than 95% of the people.
Will you be shocked if I tell you that most of the western world's inhabitants do not, or better putting it, CANNOT think about it this way specially when it comes to the second point.
In the developed countries THEY DO NOT GET the kind of INTEREST RATES that we get in India and hence just having a good bank balance ( deposited at a great interest rate ) to get regular monthly income cannot be an option. They have to further think on how to invest and grow their savings by putting EFFORTS. Generally they would have 2 options one acquire real estate( which has good appreciation potential and give it on rent) or invest in stocks. Having relatives abroad I have often observed how meticulously they think about how to invest their money so that it grows either in real estate or in stocks. I have seen them think and work on remodeling the houses in order to attract higher rents , talking about various aspects to understand industry and governance which would affect real estate or industry performance. This automatically leads them to assess their leaders and their policy as that will have a direct impact on stocks and industry and therefore the real estate prices. But in India we are impervious to that. Whether a leadership takes a good decision or a bad decision the Indian's saving keeps getting its regular monthly interest irrespective of industry performance. Whether the NPA levels rise or sink whether the stock market performs or not whether the reservation seats outnumber the number of available seats whether Andhra Pradesh splits into 2 or 23 whether Mr Sahara spends the rest of his life behind bars or the best Indian Product called Kingfisher Beer meekly goes into foreign hands without the least defense or from anyone by a little amount spent on politicians- the savings continue to get interests without fail. And Most Importantly because the interests on those savings have to be paid the businesses have to continue to pay atleast 5 % more interest on the borrowings than that is paid to the depositor as the bank managers and the banking system has to sustain itself by paying their salaries and their establishment charges .......
.....And just because they get higher and SAFE returns on putting money on interest the Indian public does not invest in companies and businesses and stock exchanges.... And just because we do not invest in businesses our companies perennially face equity shortage and just because public does not invest in business only people with lots of money can do business. So that allows only the rich to get into business and the poor to remain poor and the middle class to always remain middle class by getting their perennial 10% interest.
The biggest irony is that banks invest on the collateral security ( the properties that the entrepreneur brings in like his house, his inherited house etc) of the entrepreneur and not on the capability, talent and qualification of the entrepreneur. The banks are not wrong. They are more worried on how they would pay the depositor's interest and recover the money given to the entrepreneur rather than the success or failure of the business itself.
Whereas in the developed economies, people have to search out good talented entrepreneurs to invest their money to make it multiply, they have to locate good policy makers and politicians to run the nation so that the nation grows and becomes a better place to live in. A nation where money multiplies and then everyone gets the due of the money multiplication process. The entrepreneurs have to be more accountable to the society because they know that the public and the nation looks forward to them for multiplying their monies, The social systems automatically reorient themselves to suit growth and development of businesses as they directly impact them. The nations have to look at the quality of goods produced assess them and give feedback to the manufacturers and product designers so that they all collectively improve the product experience so that the products would sell in the outside market and earn revenue for the nations so that their stocks' performance would improve in the stock exchange.
Whereas in India it is exactly opposite. For us politicians and corporate and municipalities are a topic of entertainment and time pass as their performance hardly impacts what interest we earn out of our savings. The biggest irony is that banks invest on the collateral security ( the properties that the entrepreneur brings in like his house, his inherited house etc) of the entrepreneur and not on the capability, talent and qualification of the entrepreneur.
Take a scenario where we earn only 2-3% on interest on our savings. That would impel us into thinking and working on how to multiply our money. If returns on invested amounts would be 2-3 % businesses would get money at 4-5 % making them more efficient. Since 2-3% is not very attractive public would think of investing more in real estate or setting up businesses or INVESTING IN BUSINESSES. Automatically one the one hand money would be available at lesser interest to businesses small and large and on the other hand businesses would start getting more equity from small investors. Remember in India one rupee from one individual is 120 Crore rupees. So businesses would be full with debt at lesser interest and equity. They would make more ground breaking products and put more efforts on product development which is in modern-era-business the most important but most costly and most resource ( money ) intensive. Currently Indian Industry does product development on either the personal money of the entrepreneur ( which has to be limited unless you are a TATA or somebody like that) or at monies borrowed at 15% net ( which is very costly)from the banking system by pledging the entrepreneur's personal assets . Hence the zeal of an enterprise to invent and innovate is highly dampened. From the above it is a logical deduction that higher interest rates not only throttle and poison the industry but they are actually a burden on the enterprises.
Keeping the product's quality and user experience on one side for a moment even if we assume that there was enough money to make good fantastic products equivalent to Apple, Google, Siemens, Porshe, Ferari... and imagine for a moment that the whole world market started equally accepting Indian products like Japanese or German Products, even under this condition if our businesses would source money from the Banking System at 15% net how would they be competitive against German Japanese and American Companies who get access to public funds at 2% or lesser for local and export businesses. So it is obvious that due to the interest rates Indian businesses are not at a level playing field compared to their foreign counterparts. No wonder when Jet Airways or any other company struggling with a high debt is sold there are no Indian takers. Only foreign companies who can source funds at lower interests can acquire these debt laden assets. So the cycle is obvious. All Indian companies will become debt laden and be acquired by foreign companies or if they are not acquired like Kingfisher the entrepreneur's personal assets that are pledged with the banks would be auctioned and the government and public will applaud the honesty of the system and celebrate the downfall of the entrepreneur like a Ravan Dahan. We will eternally take pride in begging ( excuse me for the harsh word) for FDI as Indians wont invest in businesses and would invest the money in banks who give fixed interest and safe returns without any effort. (To just put up another tertiary but important angle here- since the system is showing it's non viability the banks have started actually concentrating on earning money by RTGS/NEFT/ATM charges and credit card interests).
I CAN WRITE A VOLUME OF HOW THE HIGH INTEREST REGIME COUPLED BY A APED BANKING SYSTEM ( READ MORE HERE) AFFECTS OUR GROWTH IN MULTIPLE WAYS BUT I THINK IT WOULD SUFFICE IF I TELL THE FOLLOWING:
I HAVE BEEN AN ENTREPRENEUR ( first generation without deep pockets of course! who totally depends on the banking system for funds) FOR THE LAST 15 YEARS.
MORE THAN 50 % OF MY COMPANY'S NET ANNUAL EXPENSES IS BANK INTEREST AND BANK CHARGES. IF I COULD HAVE SOURCED FUNDS FROM THE BANKING SYSTEM AT THE RATES IN WHICH MY COUNTERPARTS IN OTHER DEVELOPED COUNTRIES GET THEN I CAN GUARANTEE THAT OUR COMPANY WOULD HAVE BEEN ONE OF THE GOOD ASSETS GENERATING FANTASTIC TAXES FOR THE NATION AND FANTASTIC RETURNS TO THE INVESTORS. OUR POSITION WOULD HAVE BEEN MULTIPLE TIMES BETTER THAN WHAT IT IS NOW.
So on the one hand I salute Indian entrepreneurship which puts humongous efforts to survive and grow in this one sided and uneven environment tolerating all the hardships and on the other side I humbly urge the government and policy makers just to interview any 50 entrepreneurs out of the thousands of NPA accounts that the banks have now and ask them if they would have become NPAs if the interest rate was 2-4%. The direction for further action would be as obvious as the sun after that.
In writing all this above I may be wrong. But if anyone has any explanation to justify the high interest rate other than the most unscientific intangible " INFLATION" please write to me at prasad@prolabs-vecaun.com. I would be more than thankful to understand the benefits of a high interest regime.
In conclusion I would like to say that the right way to grow wealth is by making products and services which would capture the imagination of the national and international consumers. For this we require innovation and innovation requires entrepreneurship. Entrepreneurship requires risk takin by everyone. Making the entrepreneur stake all his personal assets in a high interest environment is not risk taking- it is something pushing someone to a corneer where fear takes over and creativity ceases to function. We have to make sure that our entrepreneurs get a level playing field to put money in product development and make fantastic products. That creativity and talent is available in India in abundance is a foregone conclusion but should we give that creativity the right environment to grow and flourish and then enjoy together the fruits of that growth like developed nations is what we have to decide.
Currently the truth that is visible to me is that our talent is chained and forcibly tied down to a wrong self defeating system.
Let us endeavor to create an India where risk and returns of entrepreneurship is shared by all. let us wake up into an era of JOINT PUBLIC ENTREPRENEURSHIP AND ACCOUNTABILITY by taking off the chains of high interest regime and collateral security.
JAI HIND
PS:My apologies for the harsh title.
JAI HIND
PS:My apologies for the harsh title.
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