Banking as an Economic Machine

Anwar Noor Baloch
The practice of Banking came into existence during 1200 or before. Is banking one of the forms of Capitalism? Is the Banking system developing the economy of the world? The appropriate economic system means there shouldn’t be people sleeping in hunger. Capitalism will be another topic for arguments and debates.
The fundamental function of banking is “borrowing and lending”. From this concept banking as a business borrows in the form of deposits “liabilities” for less interest rate and lend in the form of loans and advances “assets” for more interest rate. The difference between the assets’ interest rate and liabilities rate is the margin, where banks make profit.
The economic cycle doesn’t stop here. We are looking for good economic system and profitable transactions for lenders and borrowers. Unfortunately, bankers don’t always educate their customers about economics transactions and how someone can become economically healthy.
One of the problems in personal loans is where most banks offer customers 30-40 times salary. Does this sound good, economically? If customers’ salary is $ 18, 00 (USD – Eighteen Hundred) per month, then he is eligible for around 40 times salary as a personal loan (1800×40=$72,000). What is the purpose of a personal loan or what should be the purpose of it? In some loan applications borrowers write “domestic need” and “personal need” as the purpose of applying personal loan. What does really the borrower do with this amount?
The bankers should have had better role, like being financial advisers not only receiving loan applications and selling products at the counter. If the customers don’t utilize the borrowed money from the bank in an economic manner, then that loan would be converted as a bad loan.
“Five years ago I have borrowed $ 51,000 and spent them unwisely. Today, I am jobless and not able to pay back to the bank”, said Um Abdullah. If she was advised by the bankers at first place that how the borrowed money should be utilized for the economic purpose, she wouldn’t have been into the problem today, financially.  Should it be understood in some extents that bankers are greedy, where they only think of their profitability by increasing the wealth of shareholders?
Such lack of economic and financial education leads borrowers to become default customers and increase of Non-Performing Assets (NPA) of the bank in the financial statement. Such indications discourage investors and depositors not to do banking with them.
In one of the discussions with the remedial manager where he has stated that, he has thousands of cases where customers are not in position to pay the monthly instalment of their personal loan.  It doesn’t mean giving personal loan to the customers is bad, but the eligible amount looks very high. Doubtless, banks make good money on such products, but they will suffer if customers fail to repay and as a result the whole economy of the country gets affected in negative. Shouldn’t be there economists and financial advisers to balance financial status of lenders and borrowers?
Some other problems with personal loan are the interest rate where some banks charge high interest rate to the customers and the period which goes for ten years. Those customers who don’t have financial understanding and education will work for the lender (bank) for entire life by settling the loan as they continuously borrows every one or two years.
Most of the employees have one concept which is “earn and spend”. This is one way of letting the economic machine to move and work as one’s losses will be other’s income.  Earning, savings and investing should be the appropriate concept and practice to be adhered.
Bankers should use their economic minds by letting the country to be developed through borrowers. Once borrowers start using their personal loan as a good loan, which means by starting small businesses and settling their loans before the maturity date, then economic machine will be effective.
Such an economic machine will make the government stronger by receiving more taxes from entrepreneurs. On the other hands, the market will be more efficient and effective with less corruptions and crimes. This will make citizens engaged economically and encouraging them to explore their business skills.
Bankers should understand the concept of “quality assets”. They should know where the personal loan amount is going and being spent. “There are many legal cases on personal loans because of lack of quality assets”, said one of the bank’s lawyers.
Disclaimer: Views expressed in this article are those of the author and Balochistan Voices not necessarily agrees with them.
Share your comments!