Thursday, September 3, 2009

Banking consolidation , Microfinance et al
The insightful article on microfinance is a must read. Micro finance is not just about making credit available to the small guys and replace the money lender. It is also about understanding whether money will come back. All was fine till the government introduced this thing called the NREGA (like a dole, but guaranteeing some Rs.100/- per day for 100 days in a year to rural Indians) which has made rural India lazy. A family is quite content with this dole, which is also aided by rice at One rupee a kg (market price 30/- plus, free electricity and housing which is free of any cost.
The rush of people in to microfinance will make rural India undergo a 'credit immunity' syndrome. Very much like in the emergency days of Indira Gandhi, when the nationalised banks were forced to go on a rural lending binge. The borrower ultimately refused to give money back. Bankers who tried to recover were threatened physically and told to buzz off.
Micro finance kind of gives me a 'deja vu' feeling.
I am wary of nationalised banks, since the politicians will use it to get votes and the bank staffing leaves a lot to be desired. Bank chairmen are appointed at the fag end of their careers, where they are reluctant to take decisions, fearing subsequent enquiries, or are so corrupt that they use it as a time to build bases for a corporate life as a director or advisor. No one lasts long enough to give a vision or direction to the bank.
Recently, the ET talked about banking consolidation.
Consolidation in the banking sector, by bringing together banks is a great buzzword and virtually everyone wants it. The argument is that a bigger balance sheet enables you to lend more to a single customer. How true and nice it sounds.
Wait. Let me get the arithmetic right. There are two banks, A and B. Bank A buys Bank B. The cap of A is 500 and of B is 500. So the combined capital, logically, should be around 1000 (Let us not get in to valuation arguments here). So, Bank A, which could initially lend say 75 (if the banks’ single customer limit was 15% of capital) to a single customer, can now lend 150 to the same customer. Does this prove the point?
Let us delve further. Formerly, Bank B was also lending 75 to the same customer. Now it no longer exists. So, what has changed? Instead of two lenders of 75 each, we have created a single lender of 150. Is this what is desirable?
Let us not blindly repeat what everyone says. India is a tiny country, financially, with per capita GDP of less than a thousand dollars. When this rises, the banking sector will grow correspondingly. Global banks have to be large because they operate across borders. Indian banks also can, if they raise capital. By merging two existing banks, nothing changes. Two and two is four, when it comes to counting money. Yes, accountants can make it twenty two, but that does not take you very far.

1 comment:

Anonymous said...

Good post! Interesting and useful.

- Rupa