Mar 3, 2010

Answers to Money Teaser # 3: Retail Banking

Sorry, for making you wait for so long. Anyway here’s the answer to Money Teaser #3:

Q-1: Why do the lenders quote flat rate of interest instead of reducing balance rate?
Ans: So that it becomes easier for the borrower to calculate the EMI without the help of a calculator.

Q-2: Why do the banks charge pre-payment penalty?
Ans 2: Because it takes a lot of resources to find another GENUINE BORROWER who really needs the funds.

Q-3: Why do banks continue to offer you personal loans while your savings and FD accounts are overflowing with cash?
Ans: Banks very well know that
those are your emergency funds.

Q-4: Why do banks offer teaser loans (fixed-cum-floating-rate schemes with artificially low interest rate in the initial fixed period)?
Ans: This is the sacrifice being made by banks to revive the real-estate market and the Indian economy. Further banks have employed astrologers who can predict with certainty your future salary increments.

Q-5: What makes the banks sure that despite teaser loans being similar to sub-prime mortgage, these won’t lead to large-scale default in future?
Ans: Presence of black money in property deals. Cash or ‘black’ component provides the banks with automatic margin-of-safety / additional cushion.

Anyway, if anything goes wrong government is always there to bail them out with the help of tax-payers money—rescue of US banks on the brink of collapse by the U.S. government has given them a boost. So there is nothing to lose by excessive risk taking.

Q-6: Why do banks offer lower rates to potential customers as compared to the current customers?
Ans: Gifts are meant for girlfriends and not wives.

Q-7: Why the banks have shifted focus from corporate lending to retail lending?
Ans: Unlike corporate, it is much easier to recover money from retail borrowers (just hire some goons!).

Q-8: Finally, what is the definition of retail banking?
Ans: Just reversal of corporate banking. Earlier the main function of banks was to collect deposits from individuals and lend it for business purposes (in the process earning a small margin). Now they collect deposits from corporate, mutual funds and HNIs and lend it to retail customers.

So while focus of corporate banking was lending to businesses for production & distribution of products and services, retail banking focus is to lend for consumption purposes (to make sure that the goods produced are also consumed). Besides, like other businesses banks also need to diversify, counter competition and expand banking business (every company wants to grow too big to fail!).

So, retail banking means to hire relationship managers whose job profile read something like this:

1. To spread the spend-now-pay-later credit culture of US by offering free plastic money (virtually free), so that people enjoy the present without worrying about our future. (In the long run, we’re all dead __ Keynes).

2. To issue chargeable Debit card instead of the free ATM card.

3. To give loans to people who don’t need them for things which they can do without.

4. To do financial planning & wealth management of unwilling customers by cross-selling ULIPs, mutual funds & PMS. (After all, they’re doing your financial planning in minutes and that too free of cost so that you don’t have to hire a financial planner)

I hope you enjoyed it!!

Also see:

1. Money Teaser #2: Life Insurance
2. Answers to Money Teaser

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