EVEN THE AMERICANS MISS THE RIGHT TO INFORMATION!

It was just a thought. But it had a powerful appeal, powerful enough to spread from Seattle to Gothenburg and Genoa, to lead to demonstrations & bloody protests, and to become a new movement that apparently labels itself as anti-capitalist.

The anger this time is against Wall Street and the quite obvious reason is the overstretched and persistent US economic crisis. As they see the situation, it’s all an offshoot of corporate greed. Corporations have, in a sense, infiltrated their way into the government and the way it makes policy. They were given undue advantages, including the legal means that were provided to the companies and their shareholders, but not to the consumers. But the question is – why has the whole of US suddenly risen to the anti-capitalism movement?

Well, consider this. The 400 richest families in the US now hold as much wealth as the bottom 50% combined & 1% of the people control 40% of the wealth. Since 2009, 88% of the income growth went to corporate profits and 1% went to wages. During this period, the US government bailed out banks and big corporate houses with huge amounts of ‘public money’ to boost growth and create jobs, but unemployment constantly remained at historic highs. For that matter, till September, it was still at 9.1% with little hopes of easing in the near future.

This is where the thoughts of the two German Economists Hayek and Mises comes into mind. In 1944, they wrote, “In the eyes of the public, not anti-capitalistic policies, but capitalism is the root cause of economic depression, unemployment, inflation and rising prices, of monopoly and of waste, of social unrest and of war.” Those who learned from this, did well. What can be a better example than Germany itself (one of the few countries in the world that has learned the lesson this century and has restrained spending), which is not only among the strongest remaining economies at present, but also, in a way, has become the growth (& hope) engine of the crisis-struck EU zone.

Moreover, policies that create a non-transparent wall between capitalists and the public add to the woes. For example, a promoter employee of a company gets both dividends and remuneration from a company. While the salary saves him in the bad days, he gets a double benefit in the good days. But what about a normal shareholder in the days of loss, when the stock prices don’t even offer positive returns under market pressure? Small disillusionments like this finally add up to bigger movements like the anti-capitalism movement we see today. And their incidence is all the more likely in a prolonged period of recession, joblessness, bankruptcy and high prices such as the one that is currently on in US.

A logical way out would be to become transparent. For example, all discussions and debates that take place before enactment of a law must come to the public domain and people should be given sufficient time to react to it & to express their concerns. This is even more important when it is about serious policy measures like bailing out the private sector on public money and then seeing them distributing hefty bonus packages in the board room, while continuing job cuts on the ground. It’s not only about the US. Nations across the globe must understand the very fact that if a movement that started in Egypt can go on to rock half a dozen nations, and bring about the end of a powerful dictator like Muamar Gaddafi, the furore over the anti-capitalism ideology has the potential to spread really wider and a lot faster.

BANKS AND ‘COLLATERAL’ DAMAGES TO ENTRE-PRENEURSHIP IN INDIA

Ask any entrepreneur what was the biggest hurdle that they had to face in the process of making their dream venture a reality – and more often than not, you will hear: getting the project financed. This is more so, when the entrepreneur has no assets to offer as collateral to obtain funding. The practice of collateral based funding, widely used by Indian banks, has been a great deterrent for entrepreneurs in this country. Owing to family-owned business structures and underdeveloped capital markets (lack of any primary market platform to support MSMEs like AIM, the London Stock Exchange’s international market for smaller growing companies), banking finance has been a preferred choice for Indian entrepreneurs not only as seed capital, but also as growth capital. But stringent collateral requirements including personal guarantees and short lending periods, have always restricted entrepreneurs either from obtaining the desired amount of capital or, at times, from getting any capital whatsoever.

No doubt, some wise men in the country’s banking system attempted to experiment in the late 1960s to move away from the “security based lending” practices to “purpose based lending”. The purpose underneath, as described by K. C. Chakraborty, Deputy Governor, RBI recently, was that credit and finance were instruments of empowerment. By unfettering credit from security, those who were able and willing, creative and talented would not be constrained by lack of funds. The security for the funds lent would not be physical assets but the discounted value of cash flows that the enterprise would generate. This marked a decisive shift in methods of lending – it reoriented lending from a static to a dynamic concept. But the real problem came thereafter. The experiment was a success, but it was never pursued the way it should have been. There is also the biggest fear that the massive corruption and rampant criminality existing within the financial industry’s rank and file would ensure that loans are blindly handed out to ‘purposes’ that are either fraudulent or impractical at the best. Still, till a way is found, entrepreneurs with great ideas but with no money or collateral, will keep suffering.

But this is not to say that there is no way. Some sparkling exceptions are already taking place. Take for example the case of SMEs. This is one segment which accounts for close to 40% of the country’s manufacturing output and over 33% of the exports. And most importantly, this is where most entrepreneurs first step into. The segment suffered for long in the hands of the banks to obtain funds, and finally the RBI came to their rescue in 2008 when it passed guidelines that asked banks not to insist on collateral security from SMEs for advances up to Rs.500,000, but only take into account the viability of their projects. However, as Usha Thorat, Deputy Governor, RBI in 2008, pointed out in a seminar, that despite banks not being supposed to ask for collateral security in SME requests, a few banks are still insisting on the same. Moreover, banks which did not ask for immovable collateral securities, required even tougher guarantee norms to be fulfilled, charged higher rates of interest and even the loan period was shortened. All this defeats the very purpose of equitable growth, where it has been proven way and beyond that a nation can spread economic gains equitably only when it promotes the SME sector – which results in massive increase in employment rates. 65% of Europe’s GDP comes from SMEs; 45% of US GDP too comes from SMEs.

Entry of an increased number of private equity players, both domestic and foreign, over the past decade has helped entrepreneurs to obtain finance on the basis of the merit of their projects. But a lack of a platform to facilitate the same and insufficient awareness is still playing spoilsport. And bank financing still remains to be the major source of funding.

To achieve and continue with a dream double-digit growth, India today needs a lot more entrepreneurs who can add to the GDP by creating employment. But for that, their basic necessity of finance must be taken care of in a good manner. And considering that India will still take some time before entrepreneurs look forward to PE players and not banks for getting their projects financed, it’s high time that RBI comes forward to facilitate the process, not just by bringing out some radical guidelines, but also by ensuring that the banks follow them religiously.