The Hindu Business Line : Time for venture banking

By opening a branch in Dharavi, the nationalised bank may unlock immense economic opportunities. For even without a formal backing, Asia's biggest slum produces a billion dollars worth of goods and services every year. With some push, such business-savvy persons can provide a boost to the economy even faster than legitimate businesses can. But this goes beyond conventional banking to venture funding, says P. V. INDIRESAN.

A NATIONALISED BANK at Dharavi, Mumbai... Giving the economy a push.

A fortnight ago, a momentous event took place: A nationalised bank opened a new branch.

Considering that nationalised banks have already several thousand branches in operation, adding one more will normally be a trivial matter. However, this addition is different: It is located in the notorious slum of Dharavi in Mumbai.

One should read two passionate books of Hermando De Soto: The Other Path, and The Mystery of Capital to appreciate the significance of a national bank opening a branch in a slum. De Soto has spent a lifetime studying the economics and social life of slums. Briefly speaking, he makes the following points:

Slums occupy land that is not their own. Hence, they are illegal, at any rate, start off as being illegal.

Poor occupy slums illegally because they have no alternative but squat on someone else's land.

Slums provide valuable, even essential, services to richer sections of the economy.

Yet, businesses conducted in slums are invariably illegal because it takes years (at times as much as twenty) and innumerable visits to a multitude of authorities to start a business legally, and the poor cannot afford to invest so much time and effort to have their business legalised.

As slum dwellers are in illegal occupation, and slum businesses have no legal sanction; they enjoy no protection from the law.

For their protection, they have no option but lean on local thugs; that aggravates their illegal conduct.

As their assets are not legal, they are not fungible — they cannot be used as collateral, they cannot be divided, combined or mobilised to suit any commercial transaction.

Although the legal value of their property is nil, their intrinsic value is enormous; they are sitting on valuable real-estate; they provide important services and products; they are virile and growing.

Slums and slum businesses have no access to formal credit; they have to pay usurious rates to moneylenders who too are illegal.

Slums tend to improve; in contrast, fashionable areas tend to deteriorate.

Slums are bound to grow fast in developing countries because traditional agriculture cannot support the growing population, nor satisfy the aspirations of ambitious youth.

In other words, slums are a gold mine of economic opportunity. If only they are legitimised, they can provide a significant push to the economy, even faster than legitimate businesses can.

The nationalised bank has grasped this opportunity. It is treating slum dwellers as legitimate citizens. It is offering them credit to the tune of tens of thousands of rupees, a facility that was beyond the wildest dreams of many slum dwellers.

That is not enough. Credit lines need to increase ten-hundredfold before slum businesses will reach their full potential. Allowing higher credit to slum businesses with nothing legal to offer as collateral is a banking challenge. It is in the realm of venture capital funding; it is not conventional banking.

Conventional banking uses capital accumulated from the past (either permanent structures and/or savings) as collateral. Venture capital funding depends on the promise of the future, accepts human capital as collateral in the place of physical capital. That is how the Silicon Valley became the economic powerhouse it is today.

Technology Frontier

In the Silicon Valley, technology was the frontier that bankers crossed riding on human capital of the highly educated. In urban development, slum is the frontier that bankers have to cross; they have to ride on the ingenuity of the poorly educated.

In the Silicon Valley, venture capitalists estimated the potential of half-baked technology; in slum development, bankers should learn to estimate the potential of half-baked businessmen.

It is estimated that, in spite of all the handicaps of being illegal, with little or no credit facility, Dharavi produces a billion dollars worth of goods and services every year.

How much more would it produce if it were legitimised? What risks do banks face if they treat slum businesses as legitimate? How can banks determine how creditworthy any individual slum dweller is?

Nobel Laureate Mohammad Yunus has demonstrated that friends and peers are the best source for determining the creditworthiness of the poor. His Self-Help Groups have been a success because peer assessment has been a cheap and reliable estimator of creditworthiness. The same principle can be applied for slum businesses too.

THE SHG IDEA

In the case of SHGs, banks lend money to village women with no business experience, and are embarking on a hitherto non-existing business. In places like Dharavi, they will deal with much more experienced and much more productive business-savvy persons with already existing businesses.

Then the banks should enquire whether the principles and techniques of SHGs can be extended to slum dwellers to estimate how creditworthy they are even when they have no legal collateral to offer. SHGs are actually a simplified form of the partnership firm. Such firms have not attained their full potential in India because existing laws are far too restrictive; in particular, it is very difficult to exit from such a firm. Proposed changes, which include easier exit, are likely to make partnership firms popular.

Banks would be well advised to have a readymade plan to make use of the new business opportunity that reforms in the law of partnership firms will produce.

At the same time, we have to consider whether slums like Dharavi can grow economically or whether they have reached the saturation point. There are two ways a slum business can grow: One, vertically in space; two, technologically in quality. Most plans, including the much-admired Mukul Mehta plan for Dharavi, concentrate on vertical expansion, not on improved technology. For instance, it talks of removing altogether polluting leather industries, not of making them eco-friendly.

In the Central Leather Research Institute in Chennai, India is fortunate to have one of the world's most reputed research laboratories in leather technology. Both politically and economically, better technology is a better option than castration.

We are followers, not leaders. We fear to tread fresh ground. We admire new ideas and new technology — provided they are second-hand and have been used by somebody else.

Vision lies in exploiting non-obvious hidden options, in exploring uncharted territory. We like Vision Statements but not vision itself. However, we are good copycats; we will now see many more banks repeating what the bank has done.

There is saying in Kannada: ketta adigeyannu attavale jaaney meaning she who sets right spoilt food is the clever one.

To do things right requires ability; to set right things that have gone wrong requires super ability. The bank branch in Dharavi is a small step for any bank, but it is a giant step for slum-kind. However, there are pitfalls ahead.

(To be continued.)

(The author is a former Director of IIT Madras. Response may be sent to: indiresan@gmail.com)

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