Asset Sterilization

Most parents tech their kids finance by encouraging them to build up a piggy bank (Gullak). So the kid puts his pocket money into a container which they still own but cannot use. (Also known as Asset Sterilization)
Money does not multiply inside a piggy bank, hence no MBA school would recommend you this strategy of trading your liquidity for nothing. Yet the piggy bank strategy has been working for centuries. Simply because ones propensity to spend is directly correlated to the cash at hand. So often the only way to save is by setting aside some money.
A good friend of mine once said (in a very different context): “boys never grow up… they only trade their toy cars for more expensive ones”. A 15 year home loan, a 30 year insurance plan is a big boys version of a Piggy Bank which saps ones liquidity. EMIs forces the family to set aside its surplus for the rainy day and enforces a great deal of financial discipline.
If you never understood why people take so much pride in home ownership, think of it as one giant piggy bank where the family has been pouring each and every Rupee it could spare for the past 5-6 years.


Goodwill in Business

Today I was going across the credit growth numbers of Indian Banks and was surprised to find out that between 16th Jan 2009 to 15th Jan 2010:
Foreign banks lost 9.7% of their business. (credit offtake)
Private Banks grew by mere 9.8%
While Public sector banks which almost constitutes 75% of the total credit offtake grow by an amazing 16.8%
Private and foreign banks tend to have leaner operation cost and more convinient services resulting in lower rates and ease in obtaining credit. Now there can be 2 reasons why the public sector banks are growing at the cost of Private/foreign banks:
1. They are working extra hard to make themselves accessible to their customers while charging them competitive prices.
2. Over the past couple of years the story of private banks man-handling and threatening their defaulting customers have scared even the good customers away.
Tradition demands that the loan shark be shrewd and cold blodded in order to be able to recover his outstanding. However looks like the Public and the foreign banks in India have taken these saying a bit too seriously because now their customers are scared of them.
Note: This theory is unsubstantiated. I really need to organize myself to find out time to dig deep into it before I can confirm what I have written here.


Credit crisis: Access to credit

In our quest to put the blame on the financial institutions, traders etc. for the current crisis, most people have forgotten the biggest issue. Our current society has become a vicious circle. The rich have money and hence the banks lend to them allowing them to get richer. The poor neither have money, nor anyone who lends to them.

Without access to readily available and cheap credit it’s hard for the poor to pursue their dreams and work their way out of poverty. Today whatever little they are able to make is snatched away by loan sharks and mafia to
pay the exorbitant interest rate.

Subprime crisis is soon becoming the thing of the past. However it has kicked all these marginal people out of the today’s modern financial system. Unless they are not brought back, the society is only condemning the masses to an eternal life of misery.



Bank Balance

For VISA applications, loan applications etc, a lot of people ask for last few month’s bank statement. I wonder how accurately can a bank statement capture one’s finances?
For example, even though I have sufficient funds for my needs and small emergencies, in the past 6 months my bank balance has never been more than 15k for a period of more than a week.

however, if I take a small loan, (or put my contingency funds, which I keep in cash in the bank) the same bank statement would look much more attractive.




Visa confirmed it would proceed with a public offering this spring. The company hopes to raise $18.8 billion, making it America’s biggest IPO. Visa takes fees from credit-card transactions;

Isn’t it odd that the in a time when the entire world is facing Credit Crisis, loan defaults are at an all time high, VISA (which makes all its money from Credit Cards) is confident that it can launch the biggest IPO in American history. Maybe it proves that the present crisis cannot scare off the companies with sound fundamentals.

PS: the default risk is borne entirely by the company issuing credit cards and not VISA. Hence the company could take this audacious step.