Of Credits And Debits : Banks As Villains

Government does not make loans cheap. If it does, banks finally collapse. Interest rate is a function of so many things. One is chances of getting the money back. If chances are good, interest rates will be lower. If government is lowering them through a mandate, it is only causing loans to who do not deserve it at that rate. So more undeserving will get the loans, won’t repay, and bank would collapse. That is what happened in the US in 2008.

Banks lend to those who seem to be able to return the money. And they are in the business of making money, therefore they would happily lend to all those who seem to be able to return the money. If they are not lending money to a person, it is not that they are being discriminatory. They are just being realists and prudent as they should be if they are honest to their depositors.

If banks have been forced by some law to lend money to those whom they would otherwise not lend, it is certain that they would have to be bailed out. What we do not know is that PSBs in India are bailed out every year, through our tax money, just like that. In budget every year there is “infusion of fresh capital” into PSBs. And availability of money does not make entrepreneurs. Arranging money is part of the efforts needed to be a businessman. To a man, and to each man, his own business idea looks like he is going to be next Ambani or Gates. In America, 50%, that is 50% , businesses shut down within two years of getting started. And in India itself, Tatas, a business house older than 100 years, with best market analysts at its payroll, financial analysts at its payroll decided that Indians want Rs 1 lakh car. In reality they didn’t, and Nano bombed big, making all that investment worth the foot mats of Nano. Banks are in the business of telling men that they can not be given other people’s money just because they have a dream. We all have. Nationalisation of banks in India was a catastrophe. It distorted the market that it has not recovered yet. Nationalisation taking banks to every nook and corner is actually anti-market. Banks go to places where they make money, even if that happens to be hell. And should not go where they don’t expect money. If government forces them, it is only making them risk depositors’ money in fulfilling fantasies of politicians. That is not the job of banks. Banks in India would have gone to every nook and corner if those nook and corners had money. If they didn’t and still banks are there, that means banks are losing money. And making credit cheap is in fact setting up people to ruination. For example, making credit cheap or easy to farmers does not help them, it ruins them, as then they make investment and take risk which they won’t do otherwise. And as a result, in case of crop failure or glut, are ruined and are driven to suicide. In the world of hard realities, common sense is not always good, some times it is pure non-sense.