As a mother of a 6 year old who loves to imagine stories, your Gruhini imagined a story that will help you understand the current state of banks and markets.
Once a Jeweller had six daughters who were bitten by the start-up bug. Their dream was to start a jewellery lending business.
The father agreed and lent his precious diamond gold and silver pieces from his showroom. But he had one condition– the sisters had to keep their pocket money savings as a security deposit.
The six sisters started the lending business started with few rules.
>The sparkling diamond necklaces were given on rent for Rs 100 a day. The target audience was rich friends. Friends will keep their promise, the sisters assumed. No security deposit was demanded for this lending.
> Gold jewellery rent was Rs 500 a day. Borrowers had to give their fixed deposits as a security. so if they defaulted, they could recover the money by breaking their fixed deposit.
> The artificial and silver jewellery could be hired for Rs 700 a day. The target audience was young college going girls.
As it turned out, the rich and the famous queued up to borrow diamond pieces. The working women and housewives borrowed gold as they wanted variety from what they already had. The young college girls went for silver pieces.
Lending business flourished for years. The father happily lent them more jewellery from his showroom.
Occasionally if gold or artificial jewellery borrowers defaulted, the sisters would double the rent or liquidate the security deposit. At times they would send recovery agents to remind them about the return policy.
One fine day, a diamond jewellery borrower didn’t return the pieces on time. She promised to continue paying the rent until she managed to return the piece. The sisters agreed and hoped that friend will keep the promise.
As years passed by, most diamond borrowers delayed in returning the pieces. Some continued to pay the daily rent but others could neither pay rent or return the jewellery.
The sisters waited patiently, hoping that the borrowers will return diamond pieces. One fine day they realized that the borrowers had sold off their diamond necklaces to pay for their own business losses. They had no assets, which sisters could take over, sell and recover the amount of their sparkling jewels.
To recoup losses, the rents for gold and silver borrowers were doubled overnight.
Realizing the mess being created, the father asked the sisters to pledge their own jewellery, the profits from the business and the pocket money savings with him. He in turn expected them to work harder to recover the money. But the word was already out on the street that the sisters failed in doing good business, so nobody was willing to give them a job too.
Now what do you think the sisters can do to return the money to their father? They have to work in father’s showroom and follow his stringent rules of doing business.
The real story
The story of six sisters is nothing but the story of your trustworthy sarkari, friendly banks who have seen their profits tumble due to loans not being repaid by the large corporate borrowers (aka diamond jewellery borrowers) over all these years.
Fearing that banks will be in for a deeper trouble, the stock market investors sold shares across the board on Thursday. That is why you read headlines like “Rs 3.22 crore investor’s wealth eroded in a day”. This figure is nothing but a notional loss in the value of shares that were traded on that day.
As far as your deposits in the bank are concerned, you don’t have to worry. Just like the father who watched over his daughters lending practices, we have a banking regulator, Reserve Bank of India who, lays out stringent norms and conditions. And in times of crisis, just like the father, he lends a helping hand too.
The format of this post is also inspired by Haresh Chawla’s facebook post in which he explained the Greek crisis to his kids. He is a partner at India Value Fund, a private equity fund and founding CEO of Network 18 Group.