Encouraging banks to engage in responsible lending activities

At the post-Budget breakfast seminar held earlier this month, the Secretary to the Treasury Dr. Jayasundara did not mince his words in being highly critical of the bankers, who resort to lending backed by gold jewellery of the downtrodden rural masses. He was very correct in saying that the bankers should not consider this ‘pawning business’ as bank lending.

He further said that banks go outstation, collect the jewellery of the poor farmers, their wives and other siblings, and lend them paltry sums and then auction such jewellery, when they fail to redeem them on time, due to crop failures, family sicknesses etc.

As Dr. Jayasundara said, it’s not necessary to have bank branches in rural areas to do this type of lending. There are pawn brokers and village ‘mudalalis’ to do this type of lending. Banks should if at all, engage in more responsible type of lending activities, which eventually would enhance the standards of lives of the people in the rural economies, while making their own share of profits, but not through these petty types of lending.

At this seminar, while talking to a senior banker, I gathered that the finance authorities of this country too are responsible for this irresponsible lending by the way of pawning by the banks. I was told the banks make excessive profits, without much of a risk being taken on pawning advances.

They also have a distinct advantage of not taking their pawning portfolios for their capital adequacy computations. Pawning advances attract a minimal risk rating and therefore, banks are not required to keep capital to back those advances. This is a huge advantage that banks are enjoying. No wonder the banks are falling over each other, offering various gimmicks, to grab a higher share of this lucrative pawning business.

Judging by the number of pawning auction notices displayed by the bank branches in their premises all over the country, how could one categorise this as a risk-free business? Not yet, in this country, where the rural economy is still in the doldrums. Hence, the concessions and undue advantages being offered to these pawn broking bankers should be withdrawn and instead what the finance authorities should do is to land higher taxes on the profits earned from their pawning portfolios.

I trust that our Secretary to the Treasury and the Central Bank Governor would rise to the occasion and I have no doubt that the President would give his blessings in the interests of the poor rural masses.

S. Wanasinghe