Recent events have dredged up my long time disdain for banking in general and Indian bankers specifically. The misgivings I have for the banking system in India are centered on a few themes.
A) Legacy Baggage
B) Present Obstacles
C) Future Obstacles
Banking as an industry has for long been selling only two core products that no other competitor has been able to sell due to governmental meddling in financial matters, security and guaranteed returns. Let’s take a look at each of these products.
Legacy Baggage: Security
This is one of the fundamental legacy functions that banks built their business on. Dating back to the 1700s and 1800s when the rule of law wasn’t enforceable effectively enough, and people needed a place to stash their life savings, banks capitalized on the ineffectiveness of taxpayer-funded security as well as the unaffordability of private security.
They proposed a model of centralized security by pooling all the at risk assets into fewer locations that would make private security affordable. This served two purposes, providing banks with ready capital that they could invest, and relieving the government of having to allocate already scarce taxpayer-funded security towards a rash of burglaries which were essentially a low value crime in the genre of theft, and concentrate those resources on other higher value crimes, i.e. crimes involving destruction of public/private property, crimes involving physical harm to the public, etc.
This however brought with it, a new breed of criminal. Ones who were desperate enough to risk skirmishes with the bank’s private security in order to make a previously unviable operation of breaking and entering viable. The money at an individual’s house, was barely secure, especially from armed robbers, but it was not worth the trouble of organizing an armed robbery of most houses, since over 90% of the population was poor, and the payout from such a robbery would be such a pittance, that they would have to commit a dozen such robberies a day, to even pay their gang. This put them at extreme risk every single day with hardly any reward.
The centralization of risk, gave these criminals a new option by making it viable to commit armed robbery. By making it possible to get those 90% of the populace to gather all their money at a few locations, it made the haul size big enough, that such criminals could hit one bank and live off their share of the loot for many months, before having to rob again. In many cases, the take was so large, they could even retire for the rest of their lives. That was such a strong motivator, that this resulted in a rash of bank robberies, which got the government worried.
Banks were (are?) a very important cog that kept two inter-related machines moving smoothly, the machines of commerce and elections. The machine of commerce needed vast amounts of money as every newly independent country needed to invest in basic infrastructure facilities like transportation, electricity and water in order to be able to prop up the rest of the economic engine. These were long gestation capital-intensive projects that were so exorbitantly expensive that no single person, or group of persons could invest in them. This is where banks came into the picture. By acting as brokers of trust, they save the business the hassle of dealing with a hundred thousand investors, and they gave the individual a safe way to invest their meagre savings without having to track its progress.
This way, a cycle could be established whereby, banks would authorize a line of credit to such businesses, who would then use that to pay workers their wages, who would then deposit said wages in the bank, which would lend it right back to the business, to keep the cycle going while an asset got created in the process. On their own, neither party would be able to arrive at a deal, the business not wanting to deal with raising finances from a hundred thousand investors, and the investor not trusting the business their life’s earnings, however little that may be. The bank’s guarantee of their deposit was what enabled this cycle to start and maintain momentum.
The electoral machine was (is?) an interconnected machine, that promised people jobs in exchange for votes, and they got the banks to advance money to businesses who then created jobs. In return, the businesses funded the elections while the workers provided the votes. This helped keep the election machine in motion.
So these bank robbers were destabilizing two very huge machines, which were the backbone of development itself. If public lost faith in the bank’s ability to protect their money AND provide a return on it, they would cash out. If they cashed out, banks couldn’t lend to big projects. If big projects didn’t get funded, they couldn’t hire. If they couldn’t hire, those who were cashing out from banks, would be out of a job. This would mean the commerce and election machinery would simultaneously break down. Since unemployment would not act as an incentive for voting, and elections wouldn’t be funded by businesses without money.
So the government got into the ring, and threw regulatory punches all around. It started by insuring all deposits out of its own pocket, so long as the banks followed certain rules, to ensure the government wouldn’t get the short end of the stick. This ensured that the public were reassured about putting money into banks, since the government would guarantee their deposits. The government then went after banks, asking them to further centralize their cash holdings into designated government warehouses that were further secured with such an intimidating show of force that even considering robbing such a place would be tantamount to contemplating suicide. To finally seal the deal, they drastically increased the penalties for such offences making the time not worth the money, since banks no longer had that kinds of cash on them and the penalties were so stiff, most people simply opted for less riskier criminal endeavors.
That in short, is the story of how banks came to be the de facto warehouse of cash by virtue of security services they provided. Cut to the present, robberies, especially armed robberies, are at an all-time low. Civil law enforcement has caught up to such an extent, that the number of robberies per street per year has fallen into the decimal territory. Take a moment to fully absorb the implications of that statement. It means that on an average, for any given street, there have been less than 1 robbery every 10 years. This includes business establishments as well as homes.
Surely, this is a no-brainer you say, there are hardly any more robberies, because nobody has any cash anymore. Everyone deposits their cash at the bank, so there are no homes and businesses to rob. The banks deposit their cash at the government’s strongholds, so there are no more banks to rob, not cost-effectively at least. The government stronghold is so heavily guarded, which makes it suicidal to attempt to rob, hence no robbery there as well. Ergo, the system works, making banks essential to the security of our money. If you stop putting money in the banks, and people start stocking cash at homes and businesses again, the cycle of robberies would start right up again, since there would be incentive for petty thieves again, right?
Wrong. Now consider this, if the system was working because everyone was securely storing their cash at the bank, how come at the time the demonetization was announced, banks and the RBI combined has less than 25% of the demonetized cash with them while the public had the rest? The demonetized cash amounted to 16 lakh crores, of which banks and the RBI hardly has 4 lakh crores on them. The demonetized cash accounted for 86% of the cash in circulation, which meant that the rest 14% was made up by smaller denomination notes. From a security perspective, it is safe to assume that smaller denomination notes have a lesser chance of being at the bank than a bigger denomination note, given the security risks of each.
This can further be backed up by crime statistics. Look at the number of violent muggings that involve people with only smaller denomination notes, versus those who had higher denomination notes on them, and study the level of physical violence involved with wresting said cash from its holder. So it would be safer to assume that the amount of small denomination cash with the public is much higher at figures nearing or over 90%, leaving the rest 10% with banks and the RBI.
Let that sink in fully. The banks and RBI were securely protecting less than 25% of high denomination notes, and less than 10% of the low denomination notes. If an average of 85% of all available cash was out in public hands, are banks really performing a security role worth mentioning? From these statistics it clearly plays out that improved law enforcement is what allows 85% of the cash to be held by the public with minimal concern, than faith in the banking system.
Legacy Baggage: Lending
There are a number of service deficiencies I would love to cover, so let me quickly run though the highlights of some of them. The first of them would have to be the lending bias. Banks are insured by the government, and as one of those conditions of insurance, they have to abide by certain lending norms. These norms may have a benefit in terms of the entire banking industry per se, but become an impediment at an individual transaction level. They ensure the public’s faith in the banking system, by rewarding caution and encouraging conservativeness. However, in a bid to bring objectivity and auditability to the process, they created a documentation and securitization bias. Docu what?
Documentation bias is the bias towards applications that are heavy on documentation. Ideally such an application would have reams of data, citing industry reports, customer surveys, viability reports, feasibility studies, license documentation, regulatory compliances, years of accounting data, auditor reports, and the like.
Unfortunately, this leave the process inaccessible to small businesses and other businesses that are not docu-savvy enough to jump through all these hoops. It also ensures that only people with pockets deep enough to afford jumping through these hoops actually get loans from banks.
Securitization bias is the bias towards an applicant with collateral that can be securitized. In simple words, if you want 100 bucks, you have to prove that you already have 120 bucks worth of stuff that the bank can seize in case you don’t pay up. If you want 100 bucks but don’t have 120 bucks, you’re out of luck, since the bank will only lend to those who already have money, and not to those who need money to make money. The proliferation of money lenders is due to this phenomenon, where bankers try to pretend multiple-personality disorder with their customers and regulators. When it comes to charging, customers for services, they pretend to be businesses that need to meet costs that they’re passing on to customers. When it comes to lending money, which is the business they are actually supposed to be in, they pretend to be custodians of public faith, and hence cannot lend money unless every single buck they lend is covered by collateral. That is the exact opposite of business as an idea, which is to risk something to get something more. If lending is your business, and you don’t lend until every buck is guaranteed, then you’re not really a business. Hence the pretense of custodians of public faith.
I do not begrudge the necessity of these biases, because documentation biases help filter out kite-fliers from borrowing for frivolous concepts, while also helping guide the discretionary powers of the lender while keeping them objective, by making them check items off a list. Securitization bias brings a level or seriousness to the borrower, and ensures they have some skin in the game rather than simply playing off on the house’s money, while also protecting the depositor’s interests. It also helps keep borrowing costs low.
However, we must also acknowledge that these biases have restricted lending to only a few elite, which fits the generally derisive motto accorded to bankers, a banker will only lend you money if you can prove that you don’t need it. While the documentation bias, keeps those who have collateral from getting loans by making them jump through paperwork hoops, the securitization bias keeps money from getting into anyone without collateral by prioritizing the depositor’s interests over all else, ostensibly. More on this in the PayPM section.
These are a set of obstacles that have plagued the industry for a while now and continue to plague them. Unlike security, which was the basis of their genesis, or lending which is a regulatory hurdle, these are obstacles of their own creation, through which they have shackled themselves and their customers.
Present Obstacles: Customer Service
For as long as I can remember, or those I’ve spoken to can remember, Indian bankers have treated customers like shit. Special thanks to the nationalization of most banks, it created a class of employees who behave like entitled bureaucrats smugly smirking in their lifetime appointments with retirement accounted for through taxpayer money. They are ostensibly running a business, albeit one without risk, in a role that doesn’t hold them accountable beyond the specifics of their jobs, for an owner who doesn’t give a damn because the shareholders don’t hold the owner accountable.
Customers are harassed when opening an account to give money so that banks can make money off it. Knowing fully well that they would be the least likely person to get that money as a loan, customers queue up to put money into banks, so that banks can profit from it, and in return get harassed while in the process of enabling the bank to exist. Banks exist because thousands and millions of people come in and deposit money, and when you harass a person who comes to open an account, it is like the tree hacking its roots because they are ugly and make the tree look ugly.
Customers are harassed when depositing money into their account, the very activity that lets the bank give out a loan. They are also harassed when withdrawing money from their account. What is this harassment word that I liberally sprinkle into every sentence? Here’s a small list:
1) The banker is happily seated, while the customers stand in queues often for hours.
2) The banker leaves for lunch, while the customer continues standing in queue lest they lose their spot in the queue.
3) Most banks don’t even have drinking water available for customers standing in queues.
4) Most bank don’t even have toilets that the customers can use.
5) Most transactions require a form to be filled.
Are you kidding me? Filling a form is harassment? You may ask. Let me put you in someone’s shoes for a bit. Let’s say you couldn’t swim, and someone forced you onto a rickety boat. Once on board, the oarsmen take their own sweet time rowing, while all the time verbally abusing you. You take it up with the captain who threatens to throw you overboard if you speak about the crew again. Would you call that harassment?
Imagine denying someone who cannot speak entry into your premises unless they clearly stated their names for the record. It may be a security measure, it may be a protocol you are ordered to follow, but that doesn’t make it right. You have brain for a reason, generally that reason would be apply common sense about when to enforce or not enforce a rule. You may request an ID and scrutinize it all you want, but denying a dumb person entry until they can speak their name out loud, would be easily beyond that common sense line.
Similarly, forcing a person who cannot read to fill a form because that’s the way your bank does things IS harassment. There are millions of Indians who cannot read, and I have personally seen old people break down in front of me requesting me to help fill their form, since nobody else would, and the bank staff were dismissive of requests to help.
Let me back up a little, and explain the customers-like-shit part in more detail. In many rural branches that I’ve been to, I have repeatedly seen customers abused in filthy language for not comprehending what the banker told them, and I personally have been subject to some friendly banter from bankers with greetings like “Why the hell do you come to the bank without a pen. Do you think this is a cinema hall to come without pen. You know there will be forms to fill, are you stupid to come here without a pen.?” My crime, trying to withdraw money through a cheque. I had filled in the details before I left home, and expected to just present the cheque. The banker wanted an extra signature on the back of the cheque that already had a signature on the back, after collecting a photocopy of my ID and verifying my original ID and confirming that it was me who was the account holder, present in person to withdraw money from my own account, having signed on the front and back of the cheque. The signature was not done in his presence, so he wanted to see me sign. Since I had not expected any paperwork, I did not bring along my pen, so I asked him for his, since he was the one who asked me to sign. That was the friendly banter that ensued. Top-class customer service.
Right after the nationalization, bankers treated customers like they were the plague, and needed to be avoided if possible, and if absolutely necessary to interact with them, to wear a face mask and gloves and keep them at am arm’s length. I have seen people who go to banks to deposit their money treated like they were there to ask the bank for a favor. People who go to banks to withdraw their money, are treated like they’ve gone there, not to collect their money, or borrow from the bank, rather like someone who had come to beg alms from the bank. Ironically, those who go to borrow large sums of money are taking straight to the manager’s cabin, with the AC cranked up if available, and given a cushy chair and cool drink, while those who go to deposit a small amount into their own account, are made to stand in queues often for hours.
With the advent of a few private players like ICICI and HDFC, bankers started showing a tiny bit of respect for the customer, and service levels in public banks rose from abysmal depths to basement levels. They still have a long long way to go, and the first step to doing that would be to stop feeding like leeches on the customer and at least accord them the respect that you give to guests at your home, who come to eat your food and leave while being treated with respect. Even people who come to your place and cost you hospitality expense in return for some jokes get more respect than the person who pays your salary twice so that you can entertain said guests in a home, let alone have a home. Yeah, that wasn’t a typo, the customer pays your salary twice. Once when they pay taxes that allowed the government to get the capital to put the bloody bank in the first place, and secondly when they give you the money to lend and earn your actual salary out of, and finally when they continue paying your taxes which allow the government to pay you your salary in case the bank is not self-sufficient.
Future Obstacles: PayPM
RaGa seems to think he’s finally figured out the secret to poetry. Poetry is simply rhyming two words and putting a bunch of words between them. So when says “PayTM is PayPM”, he smirks thinking what a smartass he must be to come up with such a catchy phrase. Makes me want to yell, you idiot, is this how short sighted you are you moron. PayTM would be PayPM if the PM (literally Modi as an individual investor, or PM the designation as a substitute word for the government as an investor) was an investor in PayTM. Sadly there are two disturbing facts in that jibe, which is that using PayTM actually enriches investors who are mostly not even Indians, by virtue of their funding the concept. They did not have a problem with a Chinese businessman holding a huge stake in a company that signed up millions of new customers in a matter of days, but have no qualms using the company’s name to take a jibe at the PM.
It shows a serious failing on the part of those running banks from two perspectives. Firstly, the fact that nowhere in the world did a bank back a billion dollar business from scratch during this millennium. There have been over a dozen billion dollar companies that have been established in this millennium but not a single one of them has received any significant money from a bank. In India, there have been over a dozen new companies that have created mass hysteria and widespread customer adulation have gotten money from banks. Secondly, the fact that PayTM even exists, and millions of people signed up for it within a few days shows the quality and levels of service that banks have been providing up until now.
If banks were really bloody doing their job and keeping up with customer’s expectations from them, why would a PayTM even come into existence, let alone obtain such a wide user base in such a short span of time? RaGa doesn’t question the disease and instead questions the symptom like the genius that he is. The question should be why banks were not already doing this, and not why PayTM is receiving this money. PayTM found a deficiency in the customer service offered by banks in relation to what customers wanted, essentially banks were out of touch with what customers expected, and commercially exploited it. The sad part is, public sector banks never got out of touch with customer needs, that would imply that at some point history, they were in touch. Public sector banks have never been in touch with customer needs and don’t give a damn what those needs are.
Public sector banks have a history of reacting to change with extreme reluctance and only when forced through sheer public protest, even then only after repeated regulatory prodding. Even cattle walking the slaughter line have move towards the blade faster than these banks have moved towards customer satisfaction.
They try to find innovative ways to avoid opening accounts, by continuously pointing to real and imagined documentation deficiencies. If you somehow manage to get an account opened, they try to wear you down by harassing you out of transacting by driving you out of the bank through sheer exasperation and their own blend of lackadaisical attitude. They had to be forced to enable Net Banking, forced to issue out cards, forced to allow funds transfer, forced to offer new modes of banking. There is hardly any popular examples of a public sector bank coming out with a service for customers that did not involve the RBI shoving a streetlamp up their behind. Even then they try their level best to drag their heels on the adoption hoping any such new initiative dies out of frustration before they have to act on it.
Future Obstacles: Government Apathy
Every government department that accepts digital payments to customers charges them for it. Seriously? What do they smoke? You try to pay your current bill, or water bill or even bloody municipal tax, they charge you 2% or 20 bucks or whatever, as a convenience charge to offset their payment gateway charges. Even things like gas booking and petrol pumps charge this ridiculous fee. The rationale behind it, being that not collecting it would mean they have to bear that cost, causing revenue loss. First of all, the most banks as well the government service agencies from gas agencies, petroleum companies, utility companies are all government owned. It makes no sense for one arm of the government to profit due to another’s insistence of charging the customer for convenience.
Then there’s the whole issue of the ‘convenience’ itself. With today’s burgeoning population availing government services, it is imperative of the government to provide facilities that are convenient to the customer and not the other way round. The government works for us. If there are 40,000 electricity meters under a particular sub-station, and they generate bills with a 10-day lead time, they better have the staff to handle either 4000 bill payments a day for 10 days, or even 40000 bill payments a day on the last day. It is the customer’s choice given a credit period, on which day they can find the time to make the payment. If you don’t like that, then increase the lead time to 20 days or 30 days, else increase your staff. Instead when they come up with a system that allows them to accept crores of payments in a single day with a staff of 2-3 people to maintain the servers, they charge the customer for this, calling it a convenience charge.
Let’s take a look at this convenience. The government incurs staff costs and also the ensuing pay hikes, and strikes and leaves and idle time and chitchat, and accompanying bullshit baggage that people carry with them. Add to that the regulatory framework of their working days and working hours and working conditions, and you have a handful of headaches already. Add to that the benefit that taxpayers get, of standing in line in the scorching sun, in places without even drinking water or restrooms for hours to pay their bills. Then consider a system that lets people skip the queue and pay at any time of any day at their ‘convenience’ and the ensuing cost savings of hundreds of employees and their shenanigans. Yet the government feels it is justified in charging customers for the ‘privilege’ it granted them of not standing the queue. The government won’t increase staff costs to handle the additional connections, and yet charges customers to not stand in lines. Let’s say customer chose to stand in lines, the government can’t even handle that demand. They can’t provide the service through traditional means which are free for the customer, and when it is possible to provide the service through another means, they charge the customer for it, calling it a convenience. Just the reconciliation costs itself would cover their payment gateway charges and leave room to give customers a discount.
Very smart move for Digital India. Ask customers to pay their bills digitally and then charge them for it, instead of paying in cash and not facing additional charges. Which idiot came up with this Digital India concept without even making basic governmental changes in terms of charges to customers? Given the number of savings that digital payments confer to the respective government agencies, they should offer customers discounts for paying through that route. But no, let’s take Ambedkar’s name, whip up a shitty acronym that we can link to it, and then fleece customers. Time for these guys to stop smoking whatever Rambrosia they’re on.
Future Obstacles: Modi Mafia
Here’s a sample of the charges at banks nowadays.
1) Cash handling charges: That’s for whenever you visit the branch to take cash or give cash. Charges based on number of transactions per month, with some free allowance. In a way, it is charges to deposit money
2) Chequebook charges: That’s for when you write cheques to draw money, or give money to someone else. The charge is for the chequebook, with a few free cheques every month. In a way it is a withdrawal charge.
3) ATM charges: That’s for when you don’t feel like writing cheques but still want to pay the bank some money to let you take your money.
4) Transfer charges: That’s for when you’ve had enough of this cash charges and want to send money through the banking system instead. RTGS, NEFT, IMPS, UPI, BHIM, or whatever other pokemon chota bheem acronym they come up with, are all chargeable. Why, well because unlike cash deposit/withdrawal which require humans to sit in the counter and cost a lot of human money, servers use electricity and they too need to get paid.
5) Swiping charges: Using your debit/credit card anywhere incurs charges for the merchant, who in most cases promptly transfer those charges onto customers.
When somebody tells you whom you can do business with and whom you can’t and then even charges you for it, you call them the mafia. In this case I would call this the Modi mafia. When you force people to use digital methods only and then let banks profit from said digital methods and said banks are owned by you, essentially, you are forcing people to only deal with banks, and then making people pay for the privilege of dealing with banks. Sounds like the mafia to me. Let’s examine two of the aspects that are central to this ideology: governance and costs.
Governance: You want a cash-less economy so that you can trace the flow of money and arrest the flow as well as source of your so-called ‘black’ money. OK.
Costs: Banks and other government agencies incur costs related to transactions hence need to charge customers in order to provide the service. OK.
Now here’s the parts of this whole clownish scheme that I find silly:
1) Black Money: There is no such thing as black money. It is as real as Godzilla or Shaktimaan. You can read more on this in my next post. Suffice it to say this whole bogus war on black money is clownish, like a dog barking at its reflection in the mirror
2) Costs: Banks charge me an account maintenance fee, for what? To take my account out every month and give it a nice shampoo bath? They pay me 4%(savings)-8%(fd/rd) interest for my money, and lend it out at 10%(vehicle/home)-14%(business loans)-18%(credit cards). The difference in that interest rates goes to whom, and I am not even double/triple/quadruple counting the interest they earn, which is closer to reality. So it safe to say for every 1% interest they bank pays me as cost of funds, they earn at least 3-4% and sometimes maybe 7-8%. If they can’t meet payroll and pay dividends on that, would this 2% or 5-10 bucks a transaction help pay for their electricity needs? Stop bullshitting people with banks need to meet transaction costs. Ghanta costs. If they give money out for 16% while paying 4% for it and still can’t make a profit on it, will this 2% get them out those depths of misery they wallow in right now, pulling in thousands of crores in profits?
3) Privacy: If the government wants to track ‘black’ money, it must improve its taxation oversight, not increase its transactional oversight. As a salaries, if all of my direct tax obligations have been deducted from my employer even before I saw any income, and all my indirect tax obligations are extracted from me during consumption, why should I let the government see how many condoms I bought and where? It is like saying the roof has a lot of holes, let’s stop the rain instead of fixing the roof. Whether I fulfill my indirect tax obligations or not, it is the seller’s responsibility to remit my share of the indirect taxes due. There are a billion consumers, but hardly 20 million retailers. You can’t deal with the data from 20 million retailers and extract whatever tax you need to, so you want to spy on a billion consumers, to extract that data? Duh, wake up bozos, if you can’t keep track of and make sense of info or lack thereof from 20 million people, you really think the smart way to do that would be to collect data from a billion people and make sense of it. Sounds like we suck at small data, so let’s switch to big data. No way I’m letting you know where I buy my chaddis, just so you can maybe, possibly, potentially, supposedly, hopefully catch some will-o-the-wisp that you call ‘black money’.
4) Charge: If you really want me to give up my privacy and others to invest in learning a new way of conducting business, and usher in a new era of end-to-end transparency, hallelujah. But hold on, did I miss the part where I have to pay for it? You want me to tell you where I spend my money, whom I give I to, when I give it, how much of it I give, taxed money mind you, and in return you’ll also charge me for it, what Rambrosia are you smoking dude? If you own the banks and want all of us to only transact through the banks, and the banks charge us for said transactions, this is a shakedown scheme, not some sacred mission. Before you utter another of these delusional ‘BHIM my ass up Scotty’ lines, stop profiting from this so called so-called sacred mission. Most banks or at least most of the money in banks is in public sector banks. When they make a profit, the government makes a profit. It is beginning to sound more and more like this whole drama was enacted to let the government make more profit. If you don’t want it to sound that way, the fix is simple, abolish all transaction charges forever. Why should the banks and government profit off me, just because you want the administrative convenience of a billion people underwear purchases, which you can then handover to bumbling idiots who could not even handle the data of 20 million people?
5) Necessity: If the merchant is right in front of me, why should both of us pay the bank account maintenance charges, transaction charges, payment handling charges, telecom operator charges (internet/ussd), just so that you can spy on both us and give us your benevolent blessing that everything is on the up and up? What is this, the new surveillance state with a topping of charges and shakedowns? Seems like you want us to pay to install a surveillance system on ourselves. If you want the data to catch these ‘black money’ criminals who exist in your imagination, then you foot the bill for it, why should people who have no desire to participate in your Quixotic adventures be charged the entry ticket to your fantasy twice? Once for the transaction, and then as a tax.
There are lots of topics I left out, like the EMV nexus who also profit from wilful banker misconduct, banker corruption, etc. This itself was difficult to squeeze into the middle of a work day, so maybe some other time.