The more you borrow, lower the interest There is no collateral required And there is no need to repay the loan
This is the story of Indian banking. Collect retail and distribute wholesale. When the money gets over, the taxpayer bails you out. The bank PO exam is a way to sure wealth without any risk. It is the ultimate startup format. As deposits gallop, so does the ability to write off. FD rates are broadly set by the central bank and then fine tuned by banks depending on redemption pressure. Loans don’t come back so old FDs have to be retired from new FDs.
It is a remarkable machine which has no FD default inspite of almost 100% big loan default. Even the American economy is nowhere near in terms of economic scam.
Now one has to analyse why the banks don’t go belly up. Actually they do. We had 20+ private banks. They all went bust and folded up into hdfc, icici, axis and kotak – all of which are bubbles. These banks don’t lend to business. That is too risky. They lend to salaried class. And where do they get the money to lend ? They get it from the balalnces in the salary accounts of the salaried class. They give them 3% interest on their account and lend to them at 9%. Effectively they make 6% for free. The poor service guys don’t default as they use the money to buy a house or a car and cannot afford to lose it.
Now come to micro finance. They lend to even poorer people. People who don’t even have a job. They are hand to mouth. And we reward them with loans that carry 36% or even 48% interest. Then when these scamsters perform well, we upgrade them to a full bank.
And interest rates in India have made doing business in India unviable. Short tenure loans and high interest rates coupled with high corruption rates have made make in India unviable. In capital intensive industries like semiconductor mfg – we have no chance – unless funding is in dollars and earning is in dollars. But that doesn’t happen because electricity, real estate and steel prices are all uncompetitive.
There is just no way out of this imbroglio unless we free float interest rates. RBI has to stop interfering through repo rates. Repo has to be made zero (but if they do that rbi will have no work). Immediately both FD rates and interest rates will collapse. Indian industry will become viable and the economy will take off.
For the poor, we need to have some kind of credit system. When someone gives a loan he gets credit points similar to frequent flyer miles which can be used to take a loan. Digital platforms enable this. This will make money both available and affordable. It will of course put the banks out of business
Which I think is a good outcome.
We are the only country in the world which can actually do this thanks to our payments infrastructure.
We need a trustless system to implement this. Can be blockchain based. And cbdc would be the start point to making this happen.