WILD COOT: Banking in chaos
The saying goes that behind every dark cloud there is a silver lining. What is now a 14 per cent record in delinquency loans with the commercial banks can be a blessing in disguise to the skilled banker.
It is a truism that to manage a performing loan is quite easy, in as much as whatever arrangement made is readily adhered to. However, when a loan becomes delinquent it can do so in many ways. The payments can fall behind or fall off, security can be compromised either by way of non-payment of ancillary obligations or deterioration in value or dispute, or customer might have suffered some unforeseen circumstance.
Thus delinquency may benefit the banker in many ways. It is now a justification for selective lending, it is a tax benefit, it can be a profitable area now and in the future. This situation appears to be contradictory, but it does not always have to be, and seldom is.
Banks can thrive in times of chaos and can maximize their profits for their shareholders. But how, Wild Coot? Ah, boy, that’s the question. I am still a banker.
Additionally, the banker is prompted to examine other areas of activity for increasing profit – and there are many. Customers may cry blue murder but if they want the services there is not much that they can do, especially if all the banks’ charges are similar or near similar (which they tend to be). The alternative of placing your money in a “safe” place can hardly replace a bank; moreover, banks can provide ready access as well as they can be a source of interest earning; banks can be a lifesaver in times of emergencies when loans become necessary.
The greater the necessity the wider margin for profit.
Accounts that are not performing well do not have to go into delinquency where interest is not assigned to profit. Like the stores and credit houses, repayment can be stretched, thus providing more profit over a longer period. The altruistic banker may not be so altruistic after all. For example, if the loan is scheduled to expire in ten years, and the customer is experiencing difficulties now, extending it for another five years on more favorable terms to him and to the banker is available. This means five more years on the bank’s books, five more years of profitability, probably higher interest for the bank, and extended pain for the customer.
The skilled banker in times of chaos will find ways to increase charges for himself. Times of chaos are opportunities for the skilled banker so there is no need to shed crocodile tears for him and his shareholders.
Already we see changes in the ways banks deal with the public. Recently banks were offering long-term mortgages at 5.5 per cent for two and a half years. In the natural order of things, rates will change. If they do not go down, they will go up.
On a $200 000 mortgage the interest rate from 5.5 per cent to 9 per cent can be over $400 per month more. On a customer’s budget for him, his wife and two children, the food bill alone can be $400 or more. What will he do when the interest goes up? When the banker is doing his due diligence before granting the loan does he take into consideration this factor and allow a tolerance? Does he say, “Well, the customer will get increased earnings?”
Can we say that offering 5.5 per cent is brinksmanship? Perhaps! But the law says “caveat emptor” (Let the buyer beware).
Banks can profit from saving on overhead expenses. Computerization and centralization offer other ways of saving for the bank.
On the one hand cheaper senior staff overheads at the branches and lesser and more junior staff to attend to customers can go a long way to lessen costs.
A central bank therefore must be on the alert in shadowing the goings on in commercial banks. In monitoring the banks then it needs to know the thought process of the commercial banker and his experiences. But Wild Coot, what are you saying?
• Harry Russell is a banker.