Savers Need A Different Sahara

Subrata Roy exploited a credit market gap and played the political system. But decades later, informal credit thrives & there are too few investment opportunities

Subrata Roy: Savers need a different Sahara

Subrata Roy was indeed a titan of Indian business, rising from relatively humble origins to become India’s biggest employer in the private sector, presiding over a business empire that sprawled across financial services, real estate, aviation, media and entertainment. He converted the chutzpah of a small-town businessman into remarkable entrepreneurship that elevated him to national stature, and secured the fawning allegiance of politicians, civil servants and entertainers, besides the admiration and camaraderie of business and film celebrities.

His company’s symbol, melding the national flag’s saffron, green and white into a circle with spokes that resembled the Ashoka Chakra, was emblazoned on Team India’s official jersey.

Yet, we admire Saharasri, as he liked to be known, much as we admire Tyrannosaurus Rex, apex predator of the Jurassic era, thankfully and firmly behind us. The conditions of the time that allowed Subrata Roy to grow and thrive were of stunted formal credit, and credit disbursal based on trust and the muscle power needed to collect, if that trust were misplaced.

He started off with chit funds, taking advantage of India’s paucity of formal credit, and missing organised and easy investment opportunities for small savers. He diversified into small loans, mobilising armies of workers to collect repayments/deposits at short intervals. It was not difficult to parlay his large network of financial dependents and intermediaries into political clout at a time when businesses could be broken by misuse of political and administrative authority.

He had access to sufficient capital to expand into diverse areas, when the reforms of 1991 opened up the economy. His entrepreneurial zeal took him to the skies, literally with Air Sahara, and figuratively, with his huge forays into real estate, entertainment, media and retail.

Chit funds are widely misunderstood in north India as ascam by definition, whereas in south and east India, chits are commonplace financial instruments. They are segmentedcredit markets, comprising a number of saverscum-borrowers, who accumulate a target amount of saving over the life of the chit. All members pay in a monthly instalment each, the contributions add up to a tidy sum, generally equal to the chit’s lifetime target for each member.

The pool then lends this sum to the member-borrower, who has the most desperate need for credit and is willing to pay the highest cost of borrowing. If the size of the monthly kitty is, say ₹1 lakh, a borrower would be willing to pay back ₹1 lakh in instalments, while taking out an amount far lower than that – how much lower would depend on his need. That cost borne by the borrower forms the return on savings for other members of the group. The next month, another member of the group gets achance to borrow. So long as the trustee who runs the pool does not run away with the money, the chit fund works well for its members. The Chit Funds Act 1982 put in place prudential regulation for chits.

An individual who serves as the trustee for multiple chits makes a tidy sum, and, more importantly, gains public trust as someone who can handle money, including deposits. For small borrowers, saving takes the form of repaying loans, of course with interest, the loan having been taken to create an asset, say, a piece of machinery or home improvement. Some loans go to finance a large consumption expenditure, whether for a health emergency or a wedding. The viability of such small loans depends on the ability to collect small, frequent repayments. That means an army of collectors, which explains Roy’s scale as an employer.

Imagine a situation in which everyone has access to bank credit, comes armed with a credit score based on accessible financial history, and legal, institutional recourse is available to recover loans not paid off. There would be no more room for a Sahara in this world than there would be for T-Rex in contemporary Holocene.

Today, we make digital payments, most people have bank accounts and formal credit is far better regulated than it was in the 1980s. Yet, how close are we to the conditions that would make a Sahara redundant? With ahistory of evolved financial intermediation and no history of hyperinflation since Tughlaq’s experiment with token currency in the 14th century, India should have a high level of bank credit to the private sector, not the actual lowly 50% of GDP. The comparable figure is 97% for the world at large and 180% for China. Clearly, the bulk of credit in India still takes place below the radar, in the informal sector.

RBI’s annual report says financial savings of households are on the decline. Yet, mutual funds are flush with funds and the share prices of a few hundred companies keep going up to unrealistic price-earning multiples, even as foreign funds dump them. Indians need more, and more diversified, savings opportunities, even if we are better off than the Chinese, who desperately buy second and third homes to squirrel away their savings.

India needs more enterprises, to absorb savings as capital, and better mediation of capital. India needs Titanic-scale entrepreneurship, minus the titans. After all, in Greek mythology, the Titans fall – overthrown and replaced as Gods by their children, led by Zeus.