# Bankers earn more than interest margin on secured loans.

Bankers earn more than interest margin on secured loans

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.39).

1. How much does a bank pay you?

When you deposit \$100 CASH for a fix 1 year term at your bank you may be paid back \$105 at the end of the year.

2. How much does the bank actually earn?

Suppose that some Mr. A may want to obtain a secured loan of \$100 from the bank. He can obtain it provided he agrees that the bank can sell his \$2000 motor-bike to get back its money if he does not repay the loan as agreed. Usually the bank charges Mr. A an interest of \$5+\$2 for 1 year loan. The bank bears no risk and they say that the extra \$2 is their only profit.It does not actually give cash to Mr.A, but allows him to use something like a personal cheque book so that he can write cheques to pay others of up to \$100.

Actually for each \$100 of cash deposited, the bank makes 10 loans of that type to Mr.A. Each of the loan has its own security and is risk free. The total value of loans they give is thus 10×\$100=\$1000. (The ratio of deposited money over loan is typically 1 to 10 but it varies from country to country). The bank can do it as people usually just pass the personal cheques around like a kind of actual money, deposit them into their bank accounts and only 1 in 10 people actually demands cash from the cheque after a while!

The ratio of 1 to 10 is based on their average of millions of customers.

The different scenarios are given in the following.

If Mr.A borrows \$100 cash from the bank and enjoys spending it then the bank makes \$5+\$2=\$7 interest on the cash loan to him while it has to pay you \$5 on interest and it only makes \$2 as it claims.

But if Mr. A uses his cheque book then the bank can keep making other loans as long as the total value of the loans does not exceed 10 times the cash value it is holding. The following calculation shows how much the bank can make if the cash money stays with it for 1 year:

So the bank has 10 secured loans and earns 10×(\$5+\$2)=\$70. Its costs are only \$5 interest payment to you, branch expenses and the salaries of its employees.
The worst case for the bank happens when all 10 out of 10 receivers of those personal cheques use them all for 1 year fix term deposits in the bank. In this case the bank pays out 11×(\$5)=\$55 on deposit interests and collect 10×{\$5+\$2)=\$70 on loan interests, and the margin of \$2 takes on its meaning. However, this worst case rarely happens and even then the bank still makes \$15 profit.

In rough time such as during recession, maybe 10 out of 10 want to present every cheque to get real cash money. In such a case, the government would step in to limit cash withdrawals from banks to give banks time to disengage from their loans (This is a liquidity problem, not a bad debt problem).

Now you can see the real reason why India and a number of other countries simultaneously don’t want people to demand cash. They actually want to help their bankers (or banksters?) and may be preparing their economies for their own BIG DEPRESSIONS.

4. It is a nice earning hidden behind the claim of earning only \$2 margin on your money!

This is why bankers are so rich.

In theory, when people don’t withdraw cash, the bank has the capability to reduce their interest on secured loans down to (\$5+\$2)/10=\$0.7!

References:

RELEVANT PREVIOUS POSTINGS

Demonetizing in India robs the poor.

Cashless and negative interest go hand in hand.

# Avoiding loan recall in a coming recession

Avoiding loan recall in a coming recession

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.31).

#recession, #loan recall, #depression, #deleverage,

Your bank may make you bankrupt in a coming recession.

This scenario has happened to me (with no bad consequence as I was well prepared) and also to one company I unfortunately invested in.

1. The scenario.

Your banker may be quite accommodating to your requirements and give you the best interest rate. You may have been happy for a few years and have lost your ability to move to another bank (having sunk into a too highly geared or “highly leveraged” condition, being unable to lower your debt to asset ratio to suit the market).

When the values of your assets come down during the RECESSION or when the bank wants to reduce its exposure in some types of loan, you may be DELEVERAGED by your bank, and no other bank can accept your high debt ratio for any new substitution loan.

So your assets are destined for a fire sale with terrible consequences. If this is the case for a company then an administrator or liquidator will have to step in.

2. How to avoid this scenario?

1. You have to avoid receiving “special deals” and avoid any deal involving exclusive rights and sole rights to any particular bank.

(Added on 09 Feb 2017) Your bank manager may also try to trap you! See reference [1] for some interesting details.

2. You have to always keep your debt ratio acceptable by at least two different banks, and only borrow half of the necessary loan from each bank, even at the cost of paying higher interest rates.

If ownership and policy of one bank suddenly change, you can borrow all your loan from the other bank and have time to shop for a replacement for your first bank.

3. Always maintain the ability to reduce your debt to asset ratio to suit the anticipated market condition. This requires financial discipline and up to date knowledge of the market condition.

For example, in the final stage of a share market bubble or housing bubble, you should not take on additional loans and so you may miss the chance for making a quick buck but you don’t carry the risk of having a fire sale of your assets.

4. During good time, try to reduce the principal of the loan so that when bad time comes your repayment obligation can be reduced.

5. Have plans for sustainable repayments in bad time . When time is too tough, you may have to talk to the bank to show your plan for repayment and to ask the for an extension of your loan.

6. Never borrow money to deposit into an interest earning account (even in the same bank). This exposes you to a real risk of losing money while still owing a loan.

Reference:

[1]. Ex-HBOS banker ‘sold his soul for swag’, bbc new, http://www.bbc.com/news/business-38842723, 2 February 2017.