In layman's terms, loans are alternative money. A tad formal definition describes loan as the temporary provision of money, usually at an interest. One needs to pay back a premium for being given that much bulk money, in one shot, no sooner the demand for it was put. Banks are the primary source of loans. Hence or otherwise, the reason for their bankruptcy too.
The loan - technically, credit - is given after assessing the credibility of the borrower. If the borrower doesn't have the assets worth to payback the loan, the loan won't be issued. Many joke about this premise calling it as incredibly foolish - The borrower needs to prove that he doesn't need the loan. The fact is, the guarantee the borrower provides say, by mortgaging house or any other fixed asset, can be redeemed by the lender, i.e., the bank, if the borrower defaults. The banks are into business, not philanthropy. Ask yourself, will you invest in bankrupt firms or profit making firms? The loans, and for that matter, any form of credit - monetary or emotional - is extended to them who have the worth to possess it, not moochers. So, if one is denied loan for being poor, it's perfectly correct. The poor must save rather than begging. It's always better to learn to fish, over the Fish in a dish.
What if the borrowers default? In the worst case, the bank will collapse. A well is abandoned if there is no water in it. If the sources to replenish the water in it dry, the well gets dried. If customers of bank, borrowers and depositors both, don't supply money - the depositors withdraw money incessantly and the borrowers default - the bank must collapse. Two things one might have observed lately. Firstly, the unsolicited calls for Personal and Vehicle loans from the banks have dwindled. Secondly, the interest rates for short term loans - 390 days, 400 days, 590 days, and ilk - have shot up. A few days back, there was a report in the newspaper that a few private banks are in bad state of affairs. Of course, it didn't get footage in the prime time news, for Ms. Shitta Shilpi was in demand! The sorry state of the banks was because they had lent more loans than required. The central bank has hiked the Cash Reserve Ratio to be maintained by each bank with the itself. A hike in the CRR means the banks had to part away with their pile of money and relinquish it to the central bank. Deposits hence reduced, loans given too many, guess, what can happen to the balance sheets.
Lets take a hypothetical case. The bank has had given some shaky loans, to increase the profit margin. To add to the woes of such a bank, a rumour is spread amongst the depositors that the bank is in a bad state and may collapse soon. The customers, mostly dirt stupid, queue up the bank to withdraw their deposits. The first day, the branches can pay off with the money collected during the regular retail banking transactions. Towards the end of the week, the bank needs to borrow money from other banks, at higher rates, to match unprecedented withdrawal rates and stave off the notion of the bank being in shambles. The bank being already in bad state, for those shaky loans were being defaulted, time and again goes even more deeper in red. Within a month, the bank has to close the doors as there is no money to quench the withdrawal. The newspapers print pictures of the people, suddenly gone poor, calling names to the bank management. Within a few days, the bank is declared insolvent.
Now, whom to blame? Three variety of people. One: The Customer. Two: The Newspapermen. Three: The Auditor. Never Management. The customer, for it invested in the bank without bothering about the fiscal condition of the bank. The newspapermen, for highlighting the misery of the aftermath over the cause of insolvency. The auditor, who approved the manipulated balance sheets. The management is there to make money, howsoever it may come. The clerk, to earn a regular salary. Have you ever seen a clerk or a management being crucified? The reason is not the deficiency of penal law but the incorrect reasoning. Banks, I reiterate, are the only institutions that run on pure trust. If it breaks, the institution collapses. One should trust intellect over instincts, at least in matters of money. So, if one deposits in a bank that has a track record of shaky loans and favouritism, over business acumen for lending loans, and loses when such a bank collapses, it's not the bank to be blamed. The bank never gives you a promise to return money in case of insolvency! The newspapermen are supposed to keep track of the state of affairs of the bank. What Paris Hilton does or what is the new slogan of the political campaign is of little use to men of sense. If that's amiss nothing changes in one's life. However, if the scamp goes undetected and is discovered when the damage is done, it is of no use. Exposé are good (and proven) catalyst to rev up the circulation count. The Auditor is supposed to be moral and ethical. What for? Same salary and no incentive? Such hypocrisy looks good in HR newsletters, not reality.
The understatement is not that one should be corrupt. It is that the customer should be vigilant. Stupidity, in the namesake of ignorance, is not warranted. If one is careless about one's money, why blame the other (read management). Had one not invested in that bank beforehand, or withdrawn at the slightest hint of mismanagement, the bank would have collapsed naturally, on it's own! You consciously poured the liquid in the bottomless hole and now complain that I can't get it back!!
The loan - technically, credit - is given after assessing the credibility of the borrower. If the borrower doesn't have the assets worth to payback the loan, the loan won't be issued. Many joke about this premise calling it as incredibly foolish - The borrower needs to prove that he doesn't need the loan. The fact is, the guarantee the borrower provides say, by mortgaging house or any other fixed asset, can be redeemed by the lender, i.e., the bank, if the borrower defaults. The banks are into business, not philanthropy. Ask yourself, will you invest in bankrupt firms or profit making firms? The loans, and for that matter, any form of credit - monetary or emotional - is extended to them who have the worth to possess it, not moochers. So, if one is denied loan for being poor, it's perfectly correct. The poor must save rather than begging. It's always better to learn to fish, over the Fish in a dish.
What if the borrowers default? In the worst case, the bank will collapse. A well is abandoned if there is no water in it. If the sources to replenish the water in it dry, the well gets dried. If customers of bank, borrowers and depositors both, don't supply money - the depositors withdraw money incessantly and the borrowers default - the bank must collapse. Two things one might have observed lately. Firstly, the unsolicited calls for Personal and Vehicle loans from the banks have dwindled. Secondly, the interest rates for short term loans - 390 days, 400 days, 590 days, and ilk - have shot up. A few days back, there was a report in the newspaper that a few private banks are in bad state of affairs. Of course, it didn't get footage in the prime time news, for Ms. Shitta Shilpi was in demand! The sorry state of the banks was because they had lent more loans than required. The central bank has hiked the Cash Reserve Ratio to be maintained by each bank with the itself. A hike in the CRR means the banks had to part away with their pile of money and relinquish it to the central bank. Deposits hence reduced, loans given too many, guess, what can happen to the balance sheets.
Lets take a hypothetical case. The bank has had given some shaky loans, to increase the profit margin. To add to the woes of such a bank, a rumour is spread amongst the depositors that the bank is in a bad state and may collapse soon. The customers, mostly dirt stupid, queue up the bank to withdraw their deposits. The first day, the branches can pay off with the money collected during the regular retail banking transactions. Towards the end of the week, the bank needs to borrow money from other banks, at higher rates, to match unprecedented withdrawal rates and stave off the notion of the bank being in shambles. The bank being already in bad state, for those shaky loans were being defaulted, time and again goes even more deeper in red. Within a month, the bank has to close the doors as there is no money to quench the withdrawal. The newspapers print pictures of the people, suddenly gone poor, calling names to the bank management. Within a few days, the bank is declared insolvent.
Now, whom to blame? Three variety of people. One: The Customer. Two: The Newspapermen. Three: The Auditor. Never Management. The customer, for it invested in the bank without bothering about the fiscal condition of the bank. The newspapermen, for highlighting the misery of the aftermath over the cause of insolvency. The auditor, who approved the manipulated balance sheets. The management is there to make money, howsoever it may come. The clerk, to earn a regular salary. Have you ever seen a clerk or a management being crucified? The reason is not the deficiency of penal law but the incorrect reasoning. Banks, I reiterate, are the only institutions that run on pure trust. If it breaks, the institution collapses. One should trust intellect over instincts, at least in matters of money. So, if one deposits in a bank that has a track record of shaky loans and favouritism, over business acumen for lending loans, and loses when such a bank collapses, it's not the bank to be blamed. The bank never gives you a promise to return money in case of insolvency! The newspapermen are supposed to keep track of the state of affairs of the bank. What Paris Hilton does or what is the new slogan of the political campaign is of little use to men of sense. If that's amiss nothing changes in one's life. However, if the scamp goes undetected and is discovered when the damage is done, it is of no use. Exposé are good (and proven) catalyst to rev up the circulation count. The Auditor is supposed to be moral and ethical. What for? Same salary and no incentive? Such hypocrisy looks good in HR newsletters, not reality.
The understatement is not that one should be corrupt. It is that the customer should be vigilant. Stupidity, in the namesake of ignorance, is not warranted. If one is careless about one's money, why blame the other (read management). Had one not invested in that bank beforehand, or withdrawn at the slightest hint of mismanagement, the bank would have collapsed naturally, on it's own! You consciously poured the liquid in the bottomless hole and now complain that I can't get it back!!
The connection between loans and intellect is best explained in the Marathi proverb, used when someone amiss, अक्कल गहाण ठेवली होतीस का? (Had you loaned your intellect?)
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