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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Wisely Speaking- 3

Posted by Muthu on November 17, 2011

The flip-flop on the petrol prices in the last 2 weeks is hardly surprising. The government is getting more confused then ever.

It would be better to link the fuel prices to markets with the exception of kerosene and domestic LPG.

This would end the constant blame game between ruling and opposition parties & central and state governments.

All the opposition parties ruling different states conveniently do not talk about the huge taxes they are levying on fuel.

Government can remove subsidy entirely on petrol and diesel. We forget the fact that we are the ones who pay for subsidy too.

The subsidized diesel prices are happily being exploited by automobile companies for producing diesel run sedans and SUVs. People who drive these definitely do not belong to the poorer section of the society requiring subsidy.

Talking about subsidy, there is no need for us to follow the flawed western model of bailing out private companies at the cost of tax payers’ money. Vijay Mallya can afford to live without us paying for his losses. Why we have to share the losses of his airlines business? The profits from the liquor business was never shared with us:-) I was not there during King Fisher calendar shoot:-)

As many economists have repeatedly pointed out; privatizing the profits and socializing the losses is the recipe for disaster. Companies which are efficient and prudent would have no motivation if their reckless counterparts are bailed out by public money. There has to be both positive and negative incentives for businesses.

Nearly 6000 children in India die every day due to hunger and these 2 million deaths every year of  future India deserves priority over saving flamboyant businessmen. If their business fail; they and their generations would still be well off and have a life style which even a hard working upper middle class Indian can never dream about.

Dr.Subbarao, governor of RBI in a recent speech has mentioned that there over 6 lakh inhabitations (metros, tier 1 to tier 6 cities, towns and villages) in the country and only thirty thousand  of them (just 5%) has reach to banking system. He has also further said that only 40% of the population has bank accounts and even this may be on higher side due to dormant accounts.

When it comes from horse’s mouth, we can definitely take it on the face value. What we see around is also validating the above data. The country’s largest bank, SBI itself has only around 14,000 branches. A prominent private sector player, HDFC Bank has only around 2000 branches.

In the draft guideline for new banking licenses, thrust is given for compulsorily operations in semi-urban and rural areas. If you think, banks predominantly operating in these areas would be sick, take a look at Tamilnadu based banks like Karur Vysya Bank, City Union Bank etc. A bank can reach out to these segments and still be commercially successful too. (Disclosure: I ‘m a shareholder of City Union Bank).

Interestingly being regional players: KVB & CUB has around 400 & 300 branches respectively. In Tamilnadu, KVB, CUB, LVB & TMB have made banking accessible for many. These are all private sector banks, have been around for generations and are being run both prudently and profitably.

If financial inclusion, with out compromising prudence or profitability is the aim; I think there is so much which can be learnt and emulated from the above by other ‘new age’ private sector banks.

Also I’ve accounts with both the ‘old’ and ‘new’ private sector banks (I’ve never had accounts with any PSU bank, except SBI for our family’s PPF accounts). In the ‘old’ ones; atleast till now there is no concept of ‘Relationship Manager’. Still they know each customer well. Around 12 years ago, I gave a bearer cheque for Rs.10,000/- to someone. As I never issue a bearer cheque, the teller got suspicious, went to the manager’s cabin and informed him. The manager immediately called me on my mobile (the call charges was very high those days) and asked me whether I’ve given that particular cheque or should he alert the police!

Even last year, I issued a cheque to someone and forgot to sign the same. When it came for clearance, I got a call from the bank requesting me to come and sign the cheque so that they can honour it. I can write many more instances with my 2 decades experience of banking with these ‘old’ banks.

In the ‘new’ ones; our accounts fall under ‘Privileged’ or ‘Priority’ or ‘Preferred’. So we always have a RM assigned to us. On an average, a RM changes atleast twice a year and he keep calling us pleading to help him in achieving his targets in selling financial products, gold etc. No one in the branch knows us personally. We are just another account number. Now it has mellowed down; till 2008, we used to get pre-approved loan letters and calls routinely.

I used to wonder why a bank wants to lend me without me asking for it and also without any supporting document whatsoever. Once I called up a bank’s call centre and asked them how they ascertain my credit risk since the loan is offered without any proof or collateral. The lady on the other end got terrified with my questions and brought her manager on the line.

He told me that since my cheques do not get dishonoured and I maintain a decent balance, they found me worthy of offering loan without asking for any proof or collateral or surety. I pointed out that the loan I was offered is many a times the balance I maintain with them and asked what recourse they have if I default on my loan and how my repaying capability is assumed on the flimsy ground of the average bank balance and not dishonouring the cheques. He did not know what to say and profusely apologized for offering me a loan:-)

If you want to experience prudence, just walk into a Shriram Chits office and ask for a loan. The level of verification they do, collaterals, surety… the way they appraise the credit risk, would put even a banker to shame. I’m saying this based on what borrowers from the above company has told me.

If you wan to know how reckless a bank can be, read the books written by Ravi Subramanian, a former banker. Who knows it better than an insider?!

As I repeatedly mention that we all belong to 25% India which is growing and doing well. We happen to be in this minority club and just imagine how more difficult life would be if we have been part of the majority club.

The strange paradox even if you belong to minority club is how much is enough. One recent report mentioned that only 0.4% of our country’s population has assets of $100,000 (Rs.50 lakhs) other than primary residence. In one such family I know, the head of the family has to go through prolonged hospital admission and an organ transplantation which cost more than Rs.25 lakhs. Due to his hospital confinement, his business suffered, the debts mounted as they no longer could be serviced. The story did not have a happy ending. He passed away, the entire networth got wiped out, the house was kept as co-lateral for the loans… Well, I do not want to write further what the family went through.

When a family member narrated these details; I was dumb struck as to how much is enough when such a calamity happens to a family, despite belonging to the top 0.4% of this country.

I was discussing about these kinds of huge expenses due to medical exigency with another advisor. He has keen insights on health insurance and told me that many companies do not renew the health insurance if the claim during the life time exceeds a particular percentage, say 200%. This means that if you have Rs.3 lakhs cover and is promptly paying the premium year after year; once you totally claim Rs.6 lakhs (in different years), the company would refuse to renew your health cover further. And as claim history and pre-existing condition needs to be disclosed and is also shared between companies; you may not get a new cover from any other company too.

I’m trying to understand this further and since I know many fellow advisors also reading our blog; request you to share your thoughts with me.

Whenever someone meets me for investment advice, I always ask whether they have adequate risk covers. If the risks are not covered, savings can get wiped out even by one single event.

I’ve to write a separate piece on people’s attitude towards risk. A guy who considers investing Rs.5000/- a month in SIP as risky does not consider not having a term cover as risky; when he has dependant parents, home maker wife and young kids!

The general perception is that risky things happen only to neighbours and not to us. We are also some one’s neighbour, isn’t it?

4 Responses to “Wisely Speaking- 3”

  1. SnowWhite said

    flamboyant businessmen… hahaha… very nice article!

  2. rohit said

    does our mind in sync ,I also talk about not get a chnace to participate in kingfisher calendar shoot & other lavishness -LOL

  3. Subramanian K said

    It is difficult to understand you do not have any bank account with any public sector bank State Bank of India, Canara Bank etc. You are well aware that the Public sector banks are lending more to the poor strata of the people. Inspite of many social commitments from compared to other private sector banks, the public sector banks are making profits. The burden of Financial Inclusion is taken more by public sector banks. If you do not agree then you are biased over private sector banks. Private sector banks are good when you are in good weather and they show you the door when you are in bad weather.

  4. CodeRed said

    nice article… please write more often!

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