The Great Bank Robbery and your housing loan

You should bother precisely because now there is a difference. The essence of free markets is fairness of opportunity and accountability. Free markets run on impartial regulation, prudential norms, protection of investors’ money from risks other than what an instrument of investment justifies for the returns promised.

This Great Bank Robbery, our ongoing investigation featured on our front pages (for a summary of this week’s, read Defaulters Inc: one by one) is not about companies taking legitimate market risks. It’s about total subversion of the principles of free markets.

So, here is the first question you should be asking. Why is it that your bank pays only 6 per cent or so on your fixed deposits but charges 10 per cent on your housing loan? Why should you pay 13 per cent on your car loan? And why is it that you so often read on the front pages of the pink papers about fresh government bailouts for your financial institutions? This money, too, comes out of your pockets, your common tax kitty.

In civilised countries with free economies, banks work on spreads of no more than two per cent. In India it is four. So, overseas, if your savings bring you four per cent interest, your housing, loan would cost no more than 5.5 or 6. Here, you first pay for the inefficiency of your bank, the overheads and the bloated bureaucracy.

Second, you also under-write your bank’s Non Performing Assets (NPAs). The big guys steal, then get write-offs or bailouts. You and I meanwhile keep the banks afloat by paying that additional spread on our borrowings.

Now, if you want to know how comprehensively you are being robbed, ask your biggest banks and institutions one question, or, if you are so inclined, look at their balance sheets. Which is the one area of operations where they have the smallest (almost non-existent, actually) NPAs?

It is retail lending. People who borrow to build houses, buy cars, televisions, refrigerators, even foreign holidays, have a nearly spotless repayment record.

A company like HDFC which primarily lends to individuals for housing has more or less no NPAs on that portfolio. The other big boys, the State Bank of India and ICICI Bank, are making a strategic shift to the retail borrower, the godfearing you and I.

Yet, you are the one to end up paying higher interest. You also cannot default or even delay your repayments. You may lose the only house that you love so much. Or you may be stopped on the street and be deprived of your only Maruti 800.

The idea of this investigative series goes back to May 27, 1999, when this newspaper reproduced a stunning article from The Wall Street Journal, headlined ‘Pay up your credit card bill or lose a kidney’. Reporters Jonathan Karp and Steve Stecklow had meticulously put together a series of examples of how banks in Mumbai were hiring petty criminals and thugs to recover debts from small, retail defaulters.

The kidney example was a Citibank cardholder Deepak Gandhi, who the collector allegedly advised to sell off one of his kidneys to repay. Citibank, of course, denied this, and blacklisted that particular collector. There were also several other examples, of collectors of several banks threatening the borrowers to pay up, or get their throats slit, bones broken.

IF this is how banks were going to recover debts from people like us, why were they bending over backwards to offer bailouts to those who had defaulted on thousands of crores? The norm so far has been, lend big, hand out a bailout when there is a default, and when too many of those stack up to destroy the lending institution or bank, get the government to bail that out in turn. The government is now talking of resuscitating IFCI, the first of our institutions to collapse.

A good question to ask, before that is done, is: who were the people sitting on its board when these loans were given, where are the defaulters now and do their personal wealth, lifestyles, match the bankruptcy of their lender? If it doesn’t, why should we tax-payers fund its revival?

This particular Wall Street Journal story had coincided with one of the earlier phases of institutional bailouts for many defaulters in this week’s hall of fame.

In the world of money, it has always been said that a small loan is the borrower’s problem and a large one is the lender’s. But this had gone too far in our system. That is why the passage of the Securitisation Bill in Parliament last week, the unanimity of the entire political class in backing it and Finance Minister Jaswant Singh’s promise to go after those responsible for the ‘‘loot’’ are such vital steps in our economic reform.

But banks are always known to lose money and big banks lose big money. So, if you still think why you should bother, here is a story former Prime Minister V.P. Singh used to tell in the Allahabad parliamentary bye-election of June 1988 to explain to mostly illiterate villagers why they should be angry about the Bofors scandal.

‘‘Your house has been burgled,’’ he would say, and then explain how. ‘‘When you buy a matchbox for 50 paise, five paise go to the government as tax. With this the government builds your roads, hospitals, bridges, schools, buys guns for your army. This is your money. It has been stolen. That’s why I say, your house has been burgled.’’

Remember that story next time you borrow to build a house, or, God forbid, if you delay or default in repaying, when the muscle-man knocks at the door to remind you you have one kidney to spare.

Write to sgexpressindia.com