personal finance

Coronavirus lockdown: 3 ways households can lend a financial helping hand to the underprivileged

By Uma Shashikant

We are staring at a disruption in our economic lives. Things will return to normal eventually, and we may all behave better. There is nothing like a crisis to offer hard lessons. While we wait for things to play out, what are the economic tasks we can do better? The most immediate economic impact is on cash. The first response of businesses will be to conserve cash. An enterprise might be profitable and thriving but operating with a small amount of cash. Higher sales are achieved by offering credit; and goods are bought from suppliers on credit. As one set of cash inflows are realised, another set of cash outflows are funded. There is working capital funding from banks and NBFCs to meet shortages.

A fall in economic activity hits this cycle first and hard. When no sales happen, there is no money to pay suppliers, employees, utilities, and other costs. Businesses will ask suppliers to wait; that in turn will create cash crunches for the supplier, for whom this is revenue. Firms will ask employees to take salary cuts. This is better than being laid off, an option that may not be available to many. A slowed down production, transportation, storage and distribution system will make lower demands on cash. Businesses will work on existing stocks to incur lower costs until demand comes back. Liquidity in the system to support this level of economic activity is critical.

The long-term investment cycle comes to a standstill. Faced with uncertain revenue, new projects will stall, and businesses will be unwilling to make capital investments. Precious cash will be preserved to run the business than expand. Cash that is locked into half-finished projects will hurt businesses. They will have to fund these assets until they become productive. Lenders will have to wait longer, and be willing to defer the interest payments where needed. Interest is income to the lenders, and that chain reaction hurts their cash inflows.

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We will thus enter a period of accommodation in the business segment: suppliers accommodating buyers; employees accommodating employers; lenders accommodating borrowers and so on. These adjustments are critical to keep afloat.

What about households? How well prepared are we to manage the cash flow requirements of our family? More importantly, how well do we recognise that we are economic units with the power to influence the cash and income positions of people who live in our community?

First, many households in India have moved from a position of shortage of income to a position of comfort, where a small surplus remains in the bank after all expenses are met. These are cash surplus households. They are in a position to build assets with the surplus incomes they have. These assets offer a buffer and help them tide through tough times. These households should see themselves as mass affluents that can keep their communities going: they are in a place where they can still buy goods, pay for services, and rebound quickly when normalcy returns. They should continue to pay their household help, buy from local vendors to keep them going, support local small businesses and enterprises, and bounce in to spend.

Second, there are households with remarkably stable incomes that are not at risk due to the economic crises that businesses face. They draw government pensions; are supported by well-heeled NRI children; or work with the government departments and large profitable enterprises, or in senior positions and face lower risks of pay cut and retrenchment. They are a segment that enjoys stability and should contribute to their community by doing what we listed above, apart from being able to lend or offer cash support where needed. Personal loans may be unpalatable to many, but chipping in to support someone in need due to the financial crisis, by paying a college fee that is overdue; or a medical bill that is high; or a rent that has become tough to pay due to pay cuts; and so on. Their stable incomes can offer solace in these tough times, both for spending and for lending.

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Third, there are households that are in wealth, with adequate and diverse sources of income and assets that are inherited or built to last generations. They can undoubtedly spend and lend like the other two segments we discussed, but they have the unique power to give; to extend their wealth in charity; and to invest capital. They can begin and support local initiatives to feed the hungry; to house the poor; to offer subsidies to families impacted by unemployment; to begin local enterprises that need capital; to support with funds entrepreneurship ideas for these tough times; and so on. They are like the bank that local community can lean on during tough times.

We all worry about the daily wage earner. Without access to bank lending or any other formal finance, how would someone with no income tide over this period? Without a community that respects the services of such workers, and chips in to support by way of demand where possible, subsidy where needed, lending where feasible, and charity without loss of self-respect, how would we protect the vulnerable? We can begin with the simple act of paying our household staff even if they can’t come to work. But we may have to do more – to find out who depends on us for their daily living and how we depend on them for our comforts, and to redress their cash crises. Being willing to ask, enquire, empathise, organise and distribute is all it takes.

As we hoard our kitchen cupboards with rice and flour, sugar and oil, we might want to pause to think about the farmer. Those who grow our food still have the power. They stand out there, seeds in their hands, and a prayer for rains on their lips, growing food so we all live. May this crisis restore their true place at the top of this world.

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(The author is Chairperson, Centre for Investment Education and Learning)


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