Nothing to bank on

Our state-owned banks have some explaining to do.

As this newspaper reports, the state-owned banks (SOBs) are a disaster.

When we start to look up which banks have lent money to folk who just aren’t going to pay it back, the SOBs are at the top of the list.

This is obvious too when loans are made on political grounds they’re less likely to be repaid than if loans are made on the basis that they might be repaid.

We really don’t need to have a degree in accounting to see that one coming.

The problem with this is that it’s worse, much worse, than the headline figures make it seem.

So, the starting point is that there are state-owned and private sector banks.

If the private banks lend to those who don’t pay it back then the management at some level of failure gets sacked and the owners and the shareholders lose their money.

While this isn’t a perfect system, the interests of all are at least aligned.

We, as a society, desire that the money be lent to those who can make good use of it that requires a profit to be made.

The profit is what enables the interest and loan to be repaid.

So, having the money be lent out by those who will lose their own cash and/or jobs by getting it wrong does align with those interests. 

State-owned banking subverts this process.

At least some of the decisions will be made for political reasons, not economic.

Of course, politicians love this because it makes them the “big wallahs” who decide who gets to borrow money and if you don’t have an ego that needed assuaging.

You’d not have gone into politics, would you?

But those political decisions are, by definition, not made on the basis of value added, of profit, and so are wasteful.

Wasteful of the general societal resources.  

Some of this we can put up with, of course, for political egos do have to be assuaged.

But, sadly, such a system of political allocation of loans is much worse than this.

Because wasting societal resources on what politicians think is a good idea if they had such good ideas they’d be in business, not politics isn’t in fact the real cost of such a system.

What is the major cost is that if politicians are to invest societal capital, then there will be vast lobbying attempts to gain that investment capital being allocated by the politicians.

This could be relatively benign: Harvesting farmers’ votes by promising fertilizer subsidies for example.

Or it could be hugely damaging, a domestic manufacturer insisting there should be tariffs protecting his company at the cost of everyone else in the economy. 

But what makes this all so damaging is that it’s a negative sum game.

More is spent, in aggregate, on gaining the minister’s (or the minister’s banker’s) favour than any even possible gain from the allocation.

Because many people will be trying to gain access to those loans, that non-commercial money, yet only a few will succeed.

We thus have to bear all the costs of the attempts. And people really work very hard to try to gain access to free or cheap money.

All those efforts being costs to society as a whole.

There are arguments in favour of certain forms of state-supported banking. But note the -ing there “banking,” not “banks.”

We do think it would be a good idea that those out in the country could have a safe place for their savings rather than having to put cash under the pillow.

Indeed the grand lesson of M-Pesa (in East Africa) and Grameen (here in Bangladesh) is that the biggest value of rural banking is the ability to save, not borrow.

This might not be something that is worth the cost to a profit-making banking organization, but for societal reasons we might well want to subsidize it from the general tax revenues. 

But that’s all entirely different from those cash savings being allocated into loans to the minister’s favourite projects.

Or those costs of everyone trying to make their project one of the minister’s favourites.

“SOB” is an acronym that has two meanings in English. Yes, state owned banks and also sons of, umm, a female dog.

The correct response to state-owned banks, the first of those possible acronym meanings, is to sell them off, and if they fail, ah well, they’ve failed.

As they do, at least they are not making everyone else poorer by wasting societal resources on whatever it is that politics thinks was a good idea today.

This, of course, is why politicians don’t want to do this.

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