2010-01-28

In defence of banks

Would HUL sell its sachets at lower prices in rural India? Would Hero Honda sell its vehicles at a discount to minority community? Would Airtel charge lower rate per minute to the poor? Would Reliance fund government from its capital?

No is the answer in each case. But Banks in India do all of the above. They

- fund government
- provide cheaper loans to the poor
- establish unprofitable branches in the rural areas
- provide 40 % of their loans - some of which will never be recovered and importantly this fact is known at the time of disbursal - to rural / minority segments and most of these loans don't make commercial sense.

Industry, government, and people still complain that banks don't do much. Unfair!

PS:
- Financial inclusion is non negotiable; but the branch model is not the optimal model - neither for the consumer, nor for the banks.
- Liquidity of banks is taken care by CRR
- No reason why a bank should be any different from other commercial enterprise. Why should an investor put his money in banks Vs other industries, if he has to subsidize government and thus get sub-optimal returns. We need banks to be treated as any other commercial enterprise so that we get more capital into banks so that more growth can happen.

4 comments:

Phaniendra M said...

I think what has been compared here is industries which operate under entirely different constraints , objectives and impact.
What would be the impact of a villager excluded from banking vs villager not being able to subscribe to Air tel services.
What would be the reaction of the state when SBI suddenly becomes illiquid compared to a scam in Satyam.

itheabsolute said...

Phaniendra M

We need financial inclusion, but branches are not the correct model; liquity is taken care by CRR; a bank is another commerical enterprise - why should it be treated differently.

In fact, airtel is as important, if not more, because we can deliver financial services through mobile phones. These days mobile phones, again, are a source of livelihood for many poor.


will put a few clarifications on the blog post. Thanks for your comments.

Cheers

Hero honda said...

Nice post.Always your blog is giving useful information

itheabsolute said...

thanks Hero Honda

2010-01-28

In defence of banks

Would HUL sell its sachets at lower prices in rural India? Would Hero Honda sell its vehicles at a discount to minority community? Would Airtel charge lower rate per minute to the poor? Would Reliance fund government from its capital?

No is the answer in each case. But Banks in India do all of the above. They

- fund government
- provide cheaper loans to the poor
- establish unprofitable branches in the rural areas
- provide 40 % of their loans - some of which will never be recovered and importantly this fact is known at the time of disbursal - to rural / minority segments and most of these loans don't make commercial sense.

Industry, government, and people still complain that banks don't do much. Unfair!

PS:
- Financial inclusion is non negotiable; but the branch model is not the optimal model - neither for the consumer, nor for the banks.
- Liquidity of banks is taken care by CRR
- No reason why a bank should be any different from other commercial enterprise. Why should an investor put his money in banks Vs other industries, if he has to subsidize government and thus get sub-optimal returns. We need banks to be treated as any other commercial enterprise so that we get more capital into banks so that more growth can happen.

4 comments:

Phaniendra M said...

I think what has been compared here is industries which operate under entirely different constraints , objectives and impact.
What would be the impact of a villager excluded from banking vs villager not being able to subscribe to Air tel services.
What would be the reaction of the state when SBI suddenly becomes illiquid compared to a scam in Satyam.

itheabsolute said...

Phaniendra M

We need financial inclusion, but branches are not the correct model; liquity is taken care by CRR; a bank is another commerical enterprise - why should it be treated differently.

In fact, airtel is as important, if not more, because we can deliver financial services through mobile phones. These days mobile phones, again, are a source of livelihood for many poor.


will put a few clarifications on the blog post. Thanks for your comments.

Cheers

Hero honda said...

Nice post.Always your blog is giving useful information

itheabsolute said...

thanks Hero Honda