BOOK REVIEW
By
Randeep
Wadehra
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
No comments:
Post a Comment