Financial engineering for low-income households Edited by Bindu Ananth & Amit Shah
Sage. Pages:xviii+226. Price: Rs. 595/-
With the restructuring of India’s economy, there has been a paradigm shift in the middleclass profile. Earlier, it comprised mainly government servants and small to middle level businesspersons. Government servants largely aimed at saving enough so that the interest on their savings would supplement their pensions, thus ensuring a reasonably secure retired life. Businesspersons approached banks mainly for accessing bank credit. However, today, with abundant availability of white goods and a rich variety of built houses on offer, more and more households are going in for various consumer loans. Simultaneously, unlike government servants, most of today’s middleclass employees in private sector do not enjoy assured pension or a social security net. Therefore, they look for investments that would be reliable and, at the same time, assure them long-term returns that would take care of their post retirement needs. This is where the role of banks becomes important.
Nachiket Mor rightly points out in the foreword that finance is vital in enabling households to manage several risks by providing them with tools with which they can plan their lives, maximize their growth potential and provide protection against both unforeseen and predictable contingencies. Here, the bank staff must be suitably trained so that they can offer right solutions to customers who have a wide range of aspirations, needs, financial situations and abilities. However, this is not really happening. Various banks have target oriented approach to selling their services and product-suites. Consequently, the staff’s perspective remains focused on meeting their own targets rather than address the specific needs of their customers. It is not uncommon to come across cases where customers are fobbed off with instruments, products or services that really do not meet their requirements, and often do not even come up to the promises made to them by the concerned staff. Apart from the institutionalized skewed approach, another reason for inadequate quality of services could be that banks do not train their staff properly so that they are equipped with skills for understanding the needs of their customers and providing solutions to their specific requirements.
Since low-income households are most vulnerable to fluctuations in economic conditions, there is a need for banks to design specific services for them. For example, a farmer approaches a bank for loan to finance sowing operation. If it is a simple crop loan, then an uncomplicated product that requires repayment of loan in specified installments over a specified period should be enough. However, suppose the loan’s repayment is linked to the amount of rainfall obtained in that region. This brings “insurance-like features” into play. How would the bank handle this complex need of the farmer? Naturally, one would need a more skilled staff to assess all the related risks, come up with a solution that would be affordable for the farmer while the bank does not run the risk of adding another figure to the “Bad and Doubtful Debts” column in its account books.
Presently, banks generally leave the assessment of loan requirements to their clients. The onus is on the client to come with a viable proposal for loan, which the concerned bank manager may or may not accept, without offering an alternative solution. The book argues that this approach needs to change. The client is aware only of his financial requirements. He or she does not have the skills to come up with the right solutions. Banks, on the other hand, have the wherewithal to assess and offer the right product package, customized to individual client’s needs. This volume provides invaluable insights into how this can be done in such chapters as Asset Allocation, Portfolio Choice, and Capital Asset Pricing Model, Basics of Credit Risks, Human Capital, Commodity Price Risk and Financing etc. Case studies and a cogent illustration make this book useful enough for bank officials to have on their bookshelves.
Published in The FinancialWorld dated 12 July 2013