In my last post, I detailed some ways that Banks passively siphon money of the customers. Today let me describe who profits from us using the plastic cards and also why moving our hard earned money to banks is a very bad move.
After the demonetization move, we have seen the privileged, software professionals and people living in cities remark that they use credit/debit cards for all their transactions and how it is much easier than dealing in cash and so on and so forth. Now if there is one thing that this world has browbeaten into me is that there is no free lunch. So if using plastic cards makes my life so much easier, who profits from it?
Well the finance infrastructure of course. People use the plastic cards which the Banks have to issue, authenticate each transaction, track those transactions, maintain the balance sheet, generate monthly bills, provide customer service and a whole host of other functions seemingly for free since cards are issued freely(there are some credit cards which demand a yearly usage fee but they are for the wealthy) and people don’t see any maintenance, usage fee in their monthly bills. So how do these Banks make money? Here in lies the rub. For every purchase that a consumer makes using credit cards, the business must pay a fee of around ~2% of the transaction fee to the banks and card issuer(like VISA and MASTERCARD). This is called Interchange Fee.
Now when a business starts accepting plastic cards for the first time, they will sure as hell not accept a 2% reduction in their profits. They cannot ask the consumer who uses the credit cards to pay the 2% since it is illegal. So they will simply raise the cost of the product to cover the 2% loss and thus the cost is simply pushed down to the consumers and everybody wins except the consumer.
Banks have bad loans in their balance sheet to the tune of 7 lakh crores. Bad loans are those that cannot be expected to be repaid back with interest. These are all people’s money. This current demonetization drive has made people to move their money to banks and increase the banks balance sheet which in turn will be used by banks to provide bad loans. The rub is banks award bankers when they lend but no punishment if the loans have to be written off.
Remember the 2008 financial crisis(the house bubble) which was precipitated entirely by banks and the US government used people’s hard earned money to bail out these banks and to rub salt in the wound, none of the bankers were ever charged and no one went to prison. These bankers robbed everybody and when shit blew up in their faces, people had to bail them out and now they keep going in their merry ways. Now in US, there is a crisis in bad car loans and every financial expert has said aloud that the current state cannot prevail without something giving out under.
All over the developed world, there are dire financial crisis. In US, the number of corporations filing for bankruptcies has increased manifold in 2016, we have the Greece situation and banks in Italy and Germany on the verge of collapse and so much more. In short, developed countries that pushed down the new global economic policy down our throat is reeling and we are content to follow in their foot steps.
India was not hugely affected during the 2008 crisis for a couple of reasons
- We are a savings economy. We invest our savings in gold, real estate and government employees invest in government backed schemes.
- When we start a business, we don’t get loans from banks but rather we lent money from our parents and relatives(I am talking here about the people even below the middle class families which is more than 90% of the population)
- Middle class families were not exposed much to the stock market unlike China where there was a huge crisis in 2015 because the middle class had invested in stock market and they could not absorb the volatility of stock markets.
- India had just entered the world economy two decades back and as such did hot have much exposure to world economies and our investment in infrastructure was not dependent on Bank loans but rather on our savings.
- It also helped that we had a strong central Bank and great Governors like Raghuram Rajan, Subbarao and YY Reddy who have lead the country in the right direction.
As such PSU exposure was limited and banks most of the time performed the function of accepting deposits and paying an interest on those deposits. But the way the Bush/Obama administration handled the swindlers(no one was prosecuted) gave strength to our bankers to lend people’s money with no scrutiny to Mallaya’s and such who spent it in parties and functions and refused to pay back the loan to banks with no fear of legal action.
If not for Raghuram Rajan, the public would never have come to know about these nefarious activities. RBI forced the banks to take account of the bad loans and people have come to know about the various players who along with Bankers have swindled the population of its hard earned money.
From the Economic Times post of Feb 21, 2016 we have come to know that PSU had lent money with such little impunity that the bad loans far exceed the market valuation of these Banks.
For every Rs 100 parked in shares of public sector banks, investors carry the burden of Rs 150 as bad loans, which have cumulatively ballooned to Rs 4 lakh crore or 1.5 times the market value of these lenders.
In comparison, bad loans of private sector banks are just about 6.6 per cent of their total valuation.
All those people who have invested in PSU will expect the Government to bail them out if the Banks fail(becomes more likely if the current practice continues) and it will be people’s hard earned money that will be used by Government to help these bankers.
Between the financial years 2013 and 2016, 29 of state owned banks have written off Rs 1.14 lakh crores of bad loans. SBI here takes the lion’s share of this whole debacle and even though we are yet to see any meaningful legislation to prevent this kind of crap pulled by the bankers and make sure to hold bankers responsible for issuing bad loans, Modiji has made a surgical strike against Black money(more information on the ineffectiveness of this move) bringing the entire cash based economy(of more than 95% of Indians) to a standstill.
RBI is no angel here. Here is the Supreme Court’s judgment on a case forcing RBI to release information concerning PSU’s bad loans when requested through RTI.
Point 65: And in this case the RBI and the Banks have sidestepped the General public’s demand to give the requisite information on the pretext of “Fiduciary relationship” and “Economic Interest”. This attitude of the RBI will only attract more suspicion and disbelief in them. RBI as a regulatory authority should work to make the Banks accountable to their actions
Point 68: The facts reveal that Banks are trying to cover up their underhand actions, they are even more liable to be subjected to public scrutiny
Point 69: We have surmised that many Financial Institutions have resorted to such acts which are neither clean nor transparent. The RBI in association with them has been trying to cover up their acts from public scrutiny. It is the responsibility of the RBI to take rigid action against those Banks which have been practicing disreputable business practices.
Point 70: From the past we have also come across financial institutions which have tried to defraud the public. These acts are neither in the best interests of the Country nor in the interests of citizens. To our surprise, the RBI as a Watch Dog should have been more dedicated towards disclosing information to the general public under the Right to Information Act.
The entire judgment is quotable. Please take time to read to see how to system protects the swindlers and robbers.
When asked about the 7 lakh crores of bad loans, People are told by RBI that write-offs(technical term used by Banks to move bad loans here and there to clean up the balance sheet) are just a technical term and the recovery efforts will continue unabated which when you think about, you come to the realization that it is a load of hogwash because when written off, the loans become losses and since losses have been duly noted in the balance sheet, Banks have no incentive to follow up on these. When a Banker issues new loans, there are incentives, performance bonues but no such incentive is offered when you are off chasing a bad loan.
RBI’s former deputy Governor K.C. Chakrabarty on write-offs
Technical write-offs by Indian banks are inequitable and should be stopped. It is a big scam. Small loans are rarely written off, most of them are big loans
Here is KC Chakrabarty’s interview with Hindu regarding Demonetization. I have quoted a couple of his answers below.
- What is your view on the ongoing demonetisation exercise? It has no economic rationale. It does not serve any purpose.
- Why do you say so? The government claims that the move is aimed at curbing black money… What is black money? No notes are black. All notes are white. It is the process that creates the black money. When a person does not pay tax, it becomes black money. Here you are killing the notes and not the fellow who is not paying tax.
- The government also argues it will address the issue of counterfeiting… If you buy a kilo of rice, there will be some small stones (interspersed). What you do is remove those particles and not the entire rice. The law enforcement authorities should identify those notes and take action. Here people are standing in the queues to get their own money because there are inefficiencies with the income tax (process), police machinery etc.
The amount of influence that the Indian Government has on the population is unhealthy to say the least. One the slogans of Modi going into the 2014 election was minimal government but this move pins the people that much more to the government. Every transaction that you do will be tracked, sold to others(happening in US and if you think you are immune, you are uninformed to put in mildly), used by the government to threaten you and so much more.
In today’s world, privacy laws are yet to be updated, the security that underpins all online transactions are tenuous at best, credit card theft is rampant. Now your credit card details are held on by Business for no reason except that they can hold on to it and the question of who is responsible if your credit card details are lost because the Business did not put in adequate measures to protect your personal details is unanswered. Who will validate that the measures put in by the Business is adequate? We do not have laws which will hold the incompetent responsible for your loss. We Indians do not care about privacy because we don’t really know and care what personal information of ours is tracked by the companies which in turn is tracked by the Government of India.
A democracy is one in which people rule and the simple fact is that India is no democracy. We still have age old Penal laws inherited from the British which were designed to suppress the people’s voice. We have one of the worst bureaucracies where each and every one is a King. Modi’s government is no better than the Congress. This government has already handed over our high school education to WTO-GATS(which even the African nations refused). This demonetization favors only the Finance and Banking sector where the common people are forced to use these needless services which gives no tangible benefits for these People. It allows the elites to run ponzi schemes using People’s money to make profits and if it fails, it is only the hard working people’s money that is lost.
So in a nutshell, you cannot put your money in banks unless the above concerns are addressed, we do not have powerful laws to protect the consumers and even if there are laws, our criminal justice systems refuses to be reformed and moves at a snail pace delaying justice and with all of this taken in to view, it is better for people to not trust the banks and Government.