In October 2016, I had written a post about how I let an opportunity to buy HDFC Bank in the middle of 2006 pass by, and why I have never come to regret that decision (the stock has turned into a 10-bagger since then!).
My reasons to miss that stock was my inability to understand the complexities of the banking and finance business, and more importantly that I have never trusted banks to uphold high levels of honesty and integrity in their business operations.
I received a lot of brickbats for that post for castigating an entire sector (and the bank) that has created so much wealth for shareholders in the past, and that constitutes such a big part of India’s stock market capitalization.
Well, I stand by my thoughts which, by the way, are my personal thoughts and are not binding on you to also avoid stocks from the banking and financial services space.
Investing is a personal affair, and what makes me uncomfortable can be comfortable for you, and vice versa.
Anyways, now the question is – Why am I writing a second post on my unwillingness to invest in banking stocks?
As a customer, I’ve had a harrowing experience with my bank (again, HDFC Bank) in recent times, and thus wanted to find a way to vent my anger against the system that banking has come to become – a system that not just compromises on ethics in the way it operates, but is also rigged in favour of the elite (senior bankers, industrialists, politicians, etc.) and often at the expense of its small customers, and sometimes investors and taxpayers.
Before I begin, let me take you back to the last major crises we had in India.
Do you remember the end of 2008? No, not the stock market one. But one when uncertainty had enveloped the real economy in India. Contrary to the ‘decoupling theory’, India was hit by the banking and financial crisis that had its roots in the western world. Small businesses were closing for want of funds. Jobs were at risk. People almost stopped buying real estate, and thus real estate demand collapsed. You remember all that?
Now, do you remember what happened to real estate prices then? Well, they fell for some time and marginally, and then rose again to beat their previous highs.
People weren’t buying real estate that was already expensive across the country, and despite the collapse in demand, realty prices did not fall much.
This defies economies, isn’t it? The price of something is usually determined by its demand and supply. A thing that is in excess supply and faces low demand sees a fall in its price. But Indian real estate defied this in 2008 and 2009.
Here is a chart that explains why it may have happened.
Data Source: RBI
This chart shows the growth in Indian banks’ non-agriculture lending versus growth in lending to commercial real estate sector (real estate companies; not individuals borrowing to buy real estate). See the red line between mid-2008 and mid-2009, when the crisis was at its worst. Even as bank lending to the Indian economy, in general, took a hit, lending to real estate sector surged.
In fact, in the month of January 2009, when most of the new construction activity was frozen as demand had collapsed and real estate companies’ balance sheets were stretched, the annual growth in bank lending to commercial real estate stood at 67%, versus 23% growth in non-agricultural lending.
Why do you think this happened? When bank lending to the broader economy had taken a big hit, why were banks still lending more and more to real estate companies?
Let’s invert this question – What would have happened if banks did not lend more and more to real estate companies then?
The straightforward answer is – many real estate companies in India, with their stretched balance sheets, negative cash flows, lack of creditworthiness, and facing a collapse in demand, would have announced bankruptcies. But that did not happen.
No real estate company in India went bankrupt because banks kept their taps of cash open for them, despite knowing that a large part of what they were lending may not come back.
Now the question is – Why would banks do that? Didn’t they check the creditworthiness of their customers – real estate companies in this case – before lending?
Well, if that’s always the case – that banks really check the creditworthiness of their large clients before extending credit – how in the world do you think would India’s top-most banks lend thousands of crores to bad businesses like Kingfisher, Jaypee, Essar, JSW, GMR, and GVK even when they would do endless amount of KYC and sometimes deny lending when you and I go to borrow Rs 10 lac or Rs 1 crore?
Note that, in this case, we are talking about lending to real estate companies that also find support among politicians. How difficult would it have been for politicians to call the big bosses at banks and ask them to lend to save real estate companies they were connected to?
If you can find a mid-level credit manager appraising lending at a bank (search from within your friends, like I did, as they would be honest with you), you would know how lending is often done at the whims and fancies of the bank bosses (and big industrialists, and politicians) than the creditworthiness of the borrowers. And the bigger the lending amount, the bigger is the potential for corruption. This is because senior bankers receive bigger incentives – direct and ‘indirect’ – the bigger the amount of money they lend. Damn the return of the money thus lent.
Enough has been said and written about how banks globally have mishandled their small customers to favour the big ones (Wells Fargo is a recent example). In this case of Indian banks’ lending to non-creditworthy real estate companies during 2008 and 2009, it was your deposit that went on to fund a troubled real estate company, which thus managed to avoid bankruptcy, which helped it keep its property prices artificially high despite weak demand, which ultimately hurt you as a potential buyer who could not afford an expensive property.
If this side of the banking system’s high-handedness isn’t enough, look at the practices of banks who, in their aim to grow profits despite rising bad loans and low recoveries, have fleeced small depositors with charges that have changed frequently and arbitrarily.
I wrote about my harrowing experience with HDFC Bank’s fraudulent charges on Twitter recently. And it’s not the first time that I was fleeced by this bank, with whom I’ve had a 14 years’ relationship, which I am looking to end now.
Anyways, how I have been fleeced isn’t much considering this fraud perpetrated by HDFC Bank on its ‘preferred’ clients. As detailed in this post, the bank sent emails to its preferred clients offering them the services of a virtual relationship manager, for which a fee of Rs 100 per quarter would have been charged. Now, this wasn’t the fraud. The fraud was that someone from their business development team had this brilliant idea of placing a “opt out” link near the end of the email to ensure that if the recipient did not read the email and did not opt out of this service, he was automatically considered an opt in (in short, silence meant consent), and would be levied this fee.
Call this the heights of being unethical and deceitful. But that’s how so many banks have acted over the years, rarely in the interest of its customers, especially the smaller ones. (See here – Moneylife’s petition against banks fleecing depositors)
And, by the way, I have not even touched upon another area where banks’ maligned interests come to fore – the rampant misselling of financial products like insurance policies to gullible customers.
Here I remember the 24% annual return from mutual funds and insurance that Bollywood actress and singer Suchitra Krishnamoorthi was guaranteed by HSBC a few years back, and where she lost a large part of her money. As is known now, the bank used confidential information about the hefty deposit in Ms. Krishnamoorthi’s savings account and began to market bad investments to her.
Not just celebrities, countless small depositors have lost their hard-earned savings investing in bad financial products mis-sold to them by their bankers and relationship managers.
How Deep is the Malaise?
Tamal Bandyopadhyay wrote a nice article in Mint recently on corruption levels in the Indian banking system. You would be aghast at some of what he wrote –
…the pressure on giving loans without proper risk assessment mounts on senior executives just ahead of their interviews for promotion. If they don’t oblige, the risk of missing promotion is high. The senior executives also run the risk of being transferred to places not to their liking if they reject a loan proposal, recommended by the boss.
The current boss of a government-owned bank has recently told his executives to sanction loan proposals that he recommends (of course, verbally) and not bother about whether they will turn bad. His philosophy is: As long as the loan book is growing, none should bother about non-performing assets as bad loans as a percentage of overall loans can be contained through aggressive loan growth.
Tamal also wrote –
Instances of borrowers taking care of a senior banker’s child’s education overseas or picking up the tab for wedding reception of the daughter and even honeymoon at Bali are not rare. Similarly, a real estate firm may not mind selling a flat to senior bankers at a hugely discounted price to ensure speedy appraisal of the loan process. There are also borrowers who offer “annuity” to bank chiefs after their retirement to express their gratitude for the support extended to them in appraisal of loan proposals and disbursements of loans.
The annuity comes in the form of annual holidays, chauffeur-driven cars and guest house or hotel accommodation at certain cities.
Now, this is not to say that all banks are deceitful or all bankers indulge in corruption. I have seen and known honest, hard-working bankers. But the fact remains that banks in India, like globally, remain hotbeds of corruption. And the malaise is deep…very deep.
Whom to Blame?
Blame the misaligned incentives for the same. A banker is awarded a bonus or incentive not for making high quality, but high quantity loans. Relationship managers are incentivized when they meet their targets for the number of insurance policies and other investment products they sell, not whether what they sell are good for customers or not. Branch bankers are incentivized for the number of accounts they get in, forget the way they manage the relationship with account holders.
What Henry Ford said about the American banking system long time back stands true even today, in America and in India –
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
And what America’s founding father Thomas Jefferson said also remains true to the core –
I sincerely believe…that banking establishments are more dangerous than standing armies.
The irony is that, despite all their misdoings, banks are often not allowed to fail (their stocks may go to zero, but they still survive). This is because repercussions of a bank failure would be felt on the economy.
Then, those perpetrating crimes at banks – who are often at senior levels – don’t go to jail. So, even when banks may pay steep damages for their misdoings, don’t expect any senior executives to be criminally indicted.
In other words, it’s a system that’s totally rigged in favor of the banking elite, and it’s often at your expense…as a customer, investor, or taxpayer.
It’s a Bizarre System
They’ve created a system whereby we entrust our hard-earned savings to banks that never miss an opportunity to abuse that trust. Look at it this way. When we make a deposit at banks, we become their unsecured creditors. And in exchange for taking on that counterparty risk, the banks provide us almost zero transparency in what they’re doing with our money (like bailing out real estate companies or lending to other unscrupulous promoters).
Even still, they are protected by the government and are not allowed to fail, especially when they grow large to shake up the entire economy.
So, forget understanding their complex financial statements, I personally don’t find any compelling reason for investing in a business that’s tainted and often does not treat its employees and customers well. There are hundreds of other untainted and simple businesses I would rather look at.
I prefer investing that helps me sleep peacefully at night. In that pursuit, I am fine missing out on the wealth creators some banks may become.
Banks and financial institutions find a place only in my “too hard” and “too terrible” baskets. But as I mentioned above, it’s purely a personal choice.
- Moneylife’s petition against banks fleecing depositors
- Blog post on HDFC Bank’s unethical invite-only program
- HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns
- Are realty prices supported by your branch manager?
- How corrupt are our bankers?
- How I Missed a 10-Bagger, and Why I’m Proud of That
Dr.Sunil Patil says
Kudos. But you will find many such pockets of misselling in all industries. Chemical stocks rallied as China put in stricter pollution control measures.
So now the Indian is supposed to Bear the excess load of polluting chemicals. Also aircoolers, do you think this box of plastic would cost 18k to 22 K.
No, but it’s stock price is in thousands.
Now tell me, how do I sleep peacefully in mera Bharat Mahan.
Vishal Khandelwal says
True, Dr. Patil. Only that I don’t understand when my banker is scamming me. It’s like trying to find out when a fish is drinking water. Regards.
Venkatesh Jayaraman says
It appears that i have missed your earlier article in October 2016. I see no reason why someone must “brickbat”. You have right to share your perspective.
I am also getting such dirty experiences from my bank. I fear that closing account may not be only option. Would there be a forum to address such customer issues? Say RBI or some other similar body?
As you rightly pointed out, this banking sector is not ethical to small customers like us. One info. I am also a HDFC customer. i am sure i would have missed this Email ‘Opt Out”. Now is there a way out?
Abhinav Mehrotra says
What is sad is that the government is taking away the citizen’s right to hold their money and wealth in any form that they like and choose. By attacking physical cash the government forces us to handover our money to the banking sector/nexus/mafia even if we do not have trust in their system. It should be a citizen’s right/freedom to choose how they hold their wealth, right after freedom to speech and to vote.
Having worked in a public sector bank for couple of years and that too watching closely, how loan disbursals happened 12-13 years ago, I could personally relate to some of the corrupt practices listed above. And, by way of contrast effect, after working in a foreign bank for few years, I could see how deeply the malpractices were entrenched in Indian Public sector banks. Where, some of the proposals were not even touched by a barge pole in foreign banks, public sector banks have embraced such entities by providing them large loans. But as we all could see now, the cleaning up process has slowly begun and may be in few decades, we could see a much better banking system in India. Fingers crossed!
S G Arun says
Public sector banks are corrupt, political driven and have too many holidays and the customer-be-damned attitude. Private sector banks are too-smart, fleece customers, unethical and unprincipled and customer-be-damned. What’s left? Either as an investor or as a depositor?
Please let me know if you do close the HDFC account and do tell which Bank you decide to open an account in. I have not gone so far as to close my account with HDFC, but who knows when/if that day will come.
1. HDFC Bank has a very healthy asset book. NPAs are a chronic problem with PSUs and few private banks. However, most private banks have a healthy asset quality.
2. I understand you had a poor customer experience with HDFC Bank as its customer. Is that good enough reason to not even consider buying its stock? Isn’t it similar (and as wrong) to saying we should buy a company stock because it’s product is good?
3. Even I hate the fees it charges, but have we seen huge customer drop off because of this yet? I hate the high rates PVR charges for its movies compared to other theatres and don’t usually go there. But the stock performance has been way above average.
I think multiple issues are being conflated here?
My experience with IDBI bank is very good. They don’t sell you anything. Their online portal is simple and it works. They didn’t change it for years. It got same look and feel for the past 16 years. So go for IDBI Bank. How ever dont buy its stick as its not doing well.
Your post reminded me of Mark Baum from the movie The Big Short 🙂
On a more serious note, Your thoughts resonate with me. Banking systems worldwide have been a complete rot. Unfortunately we r so used to (and are in such love with) the imperfect world that nobody cares to make it perfect.
There is one more point I wish to add. In real estate the banks do not allow the builder to reduce the price as then the full loan recovery would not be possible. I know for a fact that few builders wanted to reduce the rate but were forbidden by banks and other builders.
I fully agree with your views, having been a Non Executive Director in a Bank in the past.
I had similar bad experience with HDFC Bank with whom I have been banking for last 20 years. In view of their callous approach,I am shifting my Account to another Bank.
Ankur Agrawal says
I don’t have any bad experience with my bank SBI so far. They charge 15₹ quarterly for sms charges and 115₹ annually for atm charges. Nothing else.
Their online portal is very user friendly. Besides, I don’t keep a lot of money in my bank account. Only 50-60K maximum.
I put the rest of my money in any good short term gilt fund and redeem when required. It gets deposited in my bank account within 2 days.
Rashmi Singh says
Thank you for sharing an entirely different perspective!
vikas rana says
Thanks Vishal for pointing out these issues that all of us have been facing for a while now.
I have seen the worse, most of these banks/nbfcs/wealth management firms are “Boys Club”. I have experienced it personally 🙂 where a prestigious (so called) firm refinanced bad debt of a friend Realtor without any guilt.
Retail banks are another problem all together. I’m sure 90% of customers don’t call their banks questioning such “small” quarterly charges but they make up huge amt when you add up for thousands/lacs of customers in a given year.
Misselling is also a big issue which made me write this post.
That’s the very same reason I keep minimum in the bank but yes it is a serious issue for the masses.
Akhil Jain says
Here is a joke on banks I got reminded of:
I was telling a friend how I got started in the bank business. “I used to sell ice cream when my stall board got damaged, so i purchased a second hand board which then said “Bank”. I thought i will go the next day and get it re-painted. Meanwhile i just hung it on the stall. The same day, a man came in and deposited 250 with me. Next day, another fellow came asking for 200 at 10% interest in return for a golden watch worth 500 as collateral. I gave my icecreams as a thanks to customers and I tell you people called it the best bank ever.”
Padmesh H says
Thanks for sharing this article, Vishal. I thought HDFC Bank is the most conservative and ‘play by the rule-book’ type among private banks in India. Personally, I’ve seen officers of Govt. owned banks playing to shady promoters’ tunes, who return ‘incentives’ to the officers. Most of these incentives are similar to what you’ve mentioned in the article. It is indeed a sham of an industry with least accountability. I liked Henry Ford’s quote.
Dear Mr Vishal, each and every word in this article is true. Unknown or hidden charges, mis-selling products, bad customer care services…. Been through this, but from icici. Recently opened account in hdfc only to read this :(. He insisted on opening different account for my husband, me, my two children despite me refusing! I don’t see any use of my 5yr old n 13yr old having an account. Should I close them? He managed to convince my husband saying no extra charges which I don’t believe! Let me go through the a/t statement n take a decision. Thanks for the article!
NaMo is funding all these banks on the pretext of the cashless society and taking money from small customers