Financial Times

The debt trap
Just for a few dollars more - the bad and the ugly
(Prof. Arjuna de Zoysa discusses the debt trap in this short piece taking a simple example of an individual securing a loan from a bank. Recently Treasury Secretary Dr. P. B. Jayasundera told reporters the IMF and World Bank imposed a lot of conditions on loans)

Imagine visiting your bank manager for a loan, and he is willing to lend some cash in dollars for you to construct that dream house on some never-never land that you managed to purchase cheaply. His smiling demeanour and easy ways completely disarm you, while the manager hides his affluence-generated paunch behind an imposingly large desktop.

The conditions on the loan package appear 'soft' and hence attractive; low interest (3%) and a period of 30 years for repayment. You go back elated and show it to a financial guru who happens to befriend you. He looks at the terms and conditions on offer and using a simple calculator, he does a few deft computations. Your financial friend points out the following:

(a) Interest on repayment of a 30-year loan at 3% amounts to 1.5 times the capital.

(b) Since the payment stipulated by the smiling manager is non-reducing, that is you do not 'pay' capital until the interest is paid for, you would have to pay 'interest' for 18 years and then only begin to pay any significant amount of the capital.

(c) Although the loan is in dollars your repayment would be in rupees, past trends indicate that the rupee/dollar ratio depreciates by around 18% for every five years, meaning in rupee terms your payment over the 30 years is liable to be over six times the original borrowed amount.

(d) There are various other conditions in small print, which stipulates the type of architect, engineer and building contractor you may hire and with firm guidelines on where and how you may obtain the construction material. All of which is designed to enrich the manager and his relatives, who incidentally own a huge construction firm with many subsidiaries -- a wheels-within-wheels scenario, which only a sharp and astute eye could detect. All these suggestions and guidelines are presented to you, so that 'you' presumably obtain the 'best' service for your constructions.

You are saddened by these observations, but is advised by your wife to go ahead, and she asks as to what other options you have. Not having much imagination, and being of a somewhat lazy turn of mind you argue, that while living in the 'real' world; this many be the best of all available options and you go ahead and borrow the monies.

Twenty years hence, you have had to cut costs, build a smaller house than first envisaged and are yet steeped in debt to the bank manager. Meanwhile the manager and his relations have grown even richer, and appear to be benevolent. He promises to write off part of the debt, at least on the accumulated interest, but ventures to mention that he would in return wish to own a small part of your land. Since there has been a portion of land that you have not built on, you agree and you are given some debt relief. In return you have built a smaller house, lost some of your land and are still in debt and beholden to your bank manager.

Meanwhile the manager in his wisdom and sagacity begins to dictate as to how the debtor should live. Even his idea of instrumental morality is thrown at the debtor as a universal ethic and the grip on the poor debtor's life is now complete.

Ever wondered why the other half of the world remains hungry and strife strewn?

The Global Banker (Ode to an
International money lender)
There once was a banker,
Who waived a big stick.
The customers however
Shied away from him
Now he hides his stick,
And wears instead,
A big smile.

It is far easier this way,
To grip you in a debt trap,
Urging you on to do,
Things you never wished to.

But wait;
I notice,
The hidden stick,
Has now grown,
Sharp thorns on its sides!
And we brown sahibs,
Worship at the altar,
Of this fiscal god,
Whose lashes draw blood
From our people.

Our dignity offended, I ask,
Will there be someone to
rise up against
such oppression,
And claim our humanity?

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