Financial literacy could be a good crisis fallout4 min read . Updated: 16 Nov 2008, 09:54 PM IST
Financial literacy could be a good crisis fallout
Financial literacy could be a good crisis fallout
One can have a four-course meal consisting of chicken pie and chips; spinach, cream and pine nut penne pasta; beef and vegetable Wellington; and roasted vegetables and cheddar cheese baguette for just £4.95, or Rs362.
Saros Twist, an Indian restaurant located at the end of Bridgnorth High Street, London, too is offering a credit crunch meal where three main courses are offered for the price of two. Still, there aren’t many takers for such meals as Londoners curb expenses for fear of losing jobs.
It isn’t just employees.?Banks, too, are playing safe.
Ibukun Adebayo, head of business development for India at the international business development division at the London Stock Exchange, notes banks have halved the spending limit on four of his credit cards. Adebayo has never defaulted in payments but doesn’t use all his cards frequently. The limits have been halved for those cards which are seldom used.
Almost all Indian banks that have overseas branches are present in London. Punjab National Bank is the latest entrant into this market through its subsidiary, Punjab National Bank (International) Ltd. Theyagarajan Natarajan, its senior manager, treasury, says if somebody wants to deposit a reasonably large amount with his bank, he spends sleepless nights until the cheque is encashed and credited to the bank’s account.
Unlike in India, the cheque clearing system in London does not give access to all banks and hence one needs to go through the big local banks and a handful of US and other European banks, which are the members of the clearing system. “What if that bank fails? In September-October we used to think any thing could happen," says Natarajan.
Until about a week before the collapse of the Wall Street icon Lehman Brothers Holdings Inc., Punjab National Bank’s UK subsidiary had a few million pounds exposed to Lehman’s liquid fund in London. The Indian bank withdrew the money in early September before Lehman filed for bankruptcy.
Indian banks had a very difficult time in the past two months when all the money lines suddenly dried up. Unlike in Asia, where banks largely depend on their deposit liabilities to build assets, in the US and Europe they create assets, based on their inter-bank borrowings. Typically, banks raise money from those with whom they have correspondent banking relationships. But they have no right on such funds unless there are committed money lines from the correspondent banks. Since committed lines call for an annual fee irrespective of whether they are used or not, very few Indian banks have such lines in place.
Apart from taking part in loan syndications and subscribing to bonds of Indian firms, overseas wings of Indian banks aggressively sell buyers credit to Indian firms. Typically, importers raise buyers credit from the overseas branches and open a letter of credit, or LC, with a local Indian bank. In other words, a local bank opens an LC—which is nothing but a letter of understanding—in favour of the bank that offers buyers credit, promising to give the money on the maturity of the contract which could range between three months and six months. As long as there is no default by the first bank, the LC issuer bank, which earns a fee, doesn’t need any fund.
The drying of funds has severely hit both trade finance as well as LC business for Indian banks. Banks cannot build new assets unless they can access fresh funds. They are also finding it difficult to maintain assets already created as it’s not easy to roll over the existing money lines. Even if they are able to roll over, they need to pay higher rates for new liabilities and this makes the assets non-viable.
How can that happen when all loans are based on floating rates and interest rates are fixed every three or six months? Well, the benchmark rate for both assets and liabilities is Libor, or London inter-bank offered rate. Typically, there is a gap of say 40-50 basis points between the cost of borrowing and lending and the gap remains the same for the tenure of the asset even though banks roll over their short-term liabilities to fund relatively longer-term assets. Indeed, the existing borrowers are paying more with Libor going up but banks are paying even more to roll over their liabilities in the inter-bank market. Libor has come down but the spread over Libor has gone up substantially for banks and they are still finding it difficult to raise money beyond one month.
Banks need to take a relook at risk management and trust each other. At the same time, the consumers must know to what extent they can stretch themselves. Even in London, the focus is on financial literacy.
Ian Luder, the new Lord mayor of the City, will pursue this theme for the next one year while in office. According to Luder, people who are not financially literate make wrong decisions and very often generations suffer from these decisions. He wants 41,000 volunteers of 108 Livery Companies based in the City to spread the message of financial literacy in schools. Originally developed as guilds, most livery companies now function as charitable organizations and play an important part in social life and networking in the City. Financially literate consumers across the globe can keep the next credit crisis at bay and stay away from credit crunch meals.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to email@example.com
Also Read Tamal Bandyopashyay’s earlier columns