Marketing & Modern Banking
These days I am intrigued by the quantum jump in the business of banks. While discussing it with one of my erstwhile colleagues who is a Regional Head in the bank, I was shocked to know that these days banks have to pay incentives to the Automobile Dealers and Builders for referring their customer files to the bank for grant of loans.
The bankers are always on their toes because they are expected to attain a business growth of 25 per cent every year. The business base itself has grown so enormously that 25 percent growth in absolute terms is very difficult to achieve. So "creativity" replaces the customary caution of bankers in their lending operations. All sorts of exotic credit products are available on tap.
A conservative and conventional banker like me is at his wits' end. He cuts a sorry figure in the periodic meetings by the higher ups for monitoring the credit growth. When he admits that he does not understand the mechanism of high sounding derivative products, he gets fired and transferred to the Stationery Deptt.
He finds the job in Stationery Deptt. is not demanding at all. Most of the time he is at ease and start reading a lot. One day he comes across a wonderful story that has been doing rounds on the Net and in an instant he understands how a castle of cards is being created in the banking industry:
Heidi is the proprietor of a bar somewhere in Europe. In order to increase sales, she decides to allow her loyal customers, most of whom are unemployed alcoholics, to drink now and pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around and as a result increasing number of customers flood into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively and the balance sheet looks robust with all the favourable financial ratios in place .
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a Risk Manager (subsequently of course fired due to his negativity) of the bank decides that now the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.
However, they cannot pay back the debts.
And consequently, Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.
The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities, are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for rescuing the bank are arranged by a tax levied on the non-drinkers.
Finally an explanation I understand ... why the world is hit with a recession........ and the honest tax-payer has to bear the brunt of ever-increasing taxes!
Word gets around and as a result increasing number of customers flood into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively and the balance sheet looks robust with all the favourable financial ratios in place .
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a Risk Manager (subsequently of course fired due to his negativity) of the bank decides that now the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.
However, they cannot pay back the debts.
And consequently, Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.
The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities, are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for rescuing the bank are arranged by a tax levied on the non-drinkers.
Finally an explanation I understand ... why the world is hit with a recession........ and the honest tax-payer has to bear the brunt of ever-increasing taxes!
Three cheers for our marketing experts, financial engineers and the ruling political parties!!
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