Would you prefer a big bank over a reliable bank?
In this issue:
» More reasons to buy gold
» Will natural gas reserves save Cyprus from bankruptcy?
» Why do MNCs want to delist profitable arms?
» How about a European Union for BRIC nations?
» ...and more!
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But what if the banking entities fail to live up to their trust worthiness? What if the depositors feel unsafe about their hard earned money? A run on banks is one of the biggest economic catastrophes in today's time. The tiny nation of Cyprus came close to witnessing one in recent days. The revelation of money laundering in three of India's largest private sector banks also gave Indians a scare. One would even recall depositors, including large corporate, shifting money from private to PSU banksin the aftermath of 2008 crisis. Hence the kind of bank that one would want to trust is a very important decision.
The government of India has on multiple occasions stressed on the need to consolidate Indian banking sector. It believes that smaller players, especially in public sector, are not geared enough to support the needs of a growing economy. Plus that corporate and retail depositors would want to bank with entities having large balance sheet sizes. Even the fact that no Indian bank comes close to claiming the size of monolithic balance sheets that some Chinese ones have, seems to disappoint the Finance Minister.
That State Bank of India (SBI) will eventually be merged with its associate banks is no news. But it seems Mr Chidambaram is also working on merger plans for 5 other PSU banking entities. In the past too, merging weak banks with stronger ones has worked in favour of depositors, if not shareholders of the bank. Hence we can understand the compulsion of the government to merge the weak entities before it is too late. But should India ape the Chinese even when it comes to creating monolithic banks? Or for that matter would big banks be more trust worthy than their smaller and nimble peers? Chinese banks for one have a very poor reputation in terms of transparency and asset quality. Hence the desire to create such entities is misplaced. But most importantly, would depositors want to trust such big banks. Having witnessed the fate of too big to fail banks in the West, we would rather recommend trusting small and transparent banks with sound managements.
Would you prefer a big bank over a small but reliable one? Please share your comments or post them on our Facebook page / Google+ page
01:35 | Chart of the day | |
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Source: Equitymaster, Economist |
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In addition to the troubles of the Euro zone, particularly Cyprus, there are also other factors that support the strength of gold. Demand from China and India, the largest markets of gold, has grown in recent times. As per Reuters, India's gold imports in January 2013 increased by 23% YoY. Demand from China too has not seen a fall, though it has not seen an increase either. Therefore as long as the demand for gold remains strong, prices would eventually follow. It is just a matter of time. Investors would therefore do well to use the dip in prices as an opportunity to pick up gold for their portfolios.
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Many investors thought that this norm would force MNCs with high promoter shareholding to delist. So went on a buying spree for all such MNC stocks. They thought that the MNCs would ready to pay any price to get delisted. Yes, some investors did make money on stocks that got delisted. But this was not the case with all such stocks. In cases where the delisting did not materialise, investors lost money heavily.
As per an article in Business Standard, MNCs tend to be more aggressive when it comes to delisting their profitable Indian subsidiaries from the local stock exchanges. On the other hand, they are less persuasive when it comes to smaller or less profitable subsidiaries.
In our view, this kind of investing is highly speculative and hence, very risky. We do not believe in trying to guess the promoter's mind. We like to stick to the good old principles of value investing. Buy a stock because for its intrinsic value and not based on a future event.
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Indian stock markets traded in the red for most part of the week and finally ended lower by 3.6%. This was largely due to political uncertainty arising out of the withdrawal of a key ally from the Union government. The Cyprus crisis too spooked investors.
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Source: Yahoo Finance, Kitco |
04:50 | Weekend investing mantra |
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11 Responses to "Would you prefer a big bank over a reliable bank?"
Prakash Holla
Mar 24, 2013I only have a SB ac with Karnataka Bank. Low NPAs. 25-30% solid growth each year. Ably led by a solid team lead by Ananth Krishna. No promoter group but shares held in small lots by brahmins of Karnataka coast. KBL does not issue credit card. Use your own money via atm/ debit card!
Why should I go for a lootera bank like Citi, HSBC, ICICI ???
Why should I go for a heavily under staffed, under trained, overworked bank like SBI where a routine transaction takes 30 minutes? It took me (IIT IIM grad) 5 months to get my mother's PPF even after showing nomination.
SAKHEER HUSSAIN
Mar 24, 2013Imitating China or US for such decisions are blunders of the century. We should do what is suitable to Indians and our culture (and not to some corporates- for them their is Consortium as in the case of King Fisher Airlines). we can not experiment with the economy and banking, when we have examples of GLOBAL TRUST, UNIT TRUST OF INDIA and LIC HOUSING in the finance sector. Indira Gandhi was forced to nationalise the Banks(and did not merge them) for a reason- Banking sector was being exploited by the then Corporates.Read history of banking. Remember that the number of recent Bank failures in the west ! It has crossed hundreds !
cv krishnakumar
Mar 23, 2013India should have big banks; even SBI is a small player on the global arena.
Also one correction. SBI is NOT being merged with Associates, it is the Associates that are smaller and would eventually be merged with the parent bank ie., SBI.
cv krishnakumar
Mar 23, 2013India should have big banks; even SBI is a small player on the global arena.
Also one correction. SBI is NOT being merged with Associates, it is the Associates that are smaller and would eventually be merged with the parent bank ie., SBI.
HG Sharma
Mar 23, 2013Monolith , certainly may not be the right answer. What is required is common rules ,guidelines ,procedures ,inter operability ,similar to what we have in Railways will certainly enhance customer satisfaction and service to nation.
KUMARA SWAMY PAKANATI
Mar 23, 2013Sir, Urgent comment on Pharma sector progress in your report. Some news came that Aurobindo Pharma got approval from USA to sell their some valuable drugs. How will be the share grow?
Govind Ved
Mar 23, 2013Traditionally, in India PSU Banks are preferred for deposit and transactions. Being a vast country ,there are not many private sector banks in remote areas of India whereas State Bank of India has vast presence. Besides, people used to understand the safety of deposits with PSU Banks being government banks.
So far as size of the banks are concerned it is to be noted that there is not a single private or PSU bank which has gone to liquidation in India ,whereas in USA the picture is some what different. Can It be attributed to cautious approach of banks as well as Indian Public at large.
sharad sharda
Mar 23, 2013A person maintains a bank account always on trust. In trust, size never matters, It is the belief of the customer which matters most.
Rajeev Maheshwari
May 2, 2013For me big Bank [surely Bank size in Assets] does not matter. Surely safety and reliability is more important. When it comes to money laundry, this is a Political and developed country money game.
I like Private Bank compare to PSU Bank due to service and communication. However money has to be kept in two different Bank for Saving/Salary purpose and Fixed Deposit /PPF basis. Because keeping all eggs in one basket is always carry high risk.I am sure people have not forget the Bank BCCI failure run by some special people and majority minor has lost heavily.
Read BCCI Scandal:
The Bank of Credit and Commerce International was the brainchild of Pakistani businessman Agha Hasan Abedi, who envisioned a bank focused on the third world. It was set up in 1972 with financial backing from Abu Dhabi, where the ruling family, headed by the late Sheikh Zayed, was said to have a very close relationship with the BCCI.
The emirate was the bank's largest depositor, largest borrower, and for most of its existence its largest shareholder. Ultimately a settlement with Abu Dhabi also provided almost half of the funds recovered for creditors.
The bank set up in the City, with offices at 100 Leadenhall Street, close to the Bank of England, and went on to open 22 UK branches.
The rapid growth unsettled some regulators at Threadneedle Street. As early as 1982 one internal memo described BCCI as "on its way to becoming the financial equivalent of the SS Titanic!".
However, the late governor Eddie George, above, and his bank supervisory team persuaded themselves that ultimate regulatory responsibility for the group lay with Luxembourg, where the bank was incorporated.
This decision led liquidators to sue the Bank of England, alleging regulators had acted with malicious recklessness. The action was a costly disaster, most notable for a 119-day speech — thought to be the longest in British legal history — delivered by counsel for the Bank Nicholas Stadlen QC. The claim was ultimately abandoned, with BCCI creditors bearing the Bank's £74m costs as well as a £57m legal bill for its own legal team.