Is your Banker, your best guide for Wealth creation?

This headline is not to mislead you. As the byline to the masthead reveals, the underlying objective of this post is to serve as “The Layman’s guide to Financial Freedom”.

I clarify that, this post is only to provoke the layman to question what lies behind a banker’s actions, goals & objectives, strategies (and advisory?) etc.

In a tête-à-tête with a friend, he said - My young banker friend told me that he had just purchased his 3^rd property (all residential). What is it that is driving smart & intelligent (because he is a banker) professionals to have such high exposure to realty assets?

My friend was also lamenting about the high EMI he is paying for an under-construction property, having booked it during the 2007 peak property season.

Indian banking has evolved significantly over the last 15 years. This is the time (1994) a couple of leading private Indian banks were born. They carved a niche initially and then captured a significant mind and market share through -

1. Advent of anywhere banking and proliferation of ATMs
2. Wider ‘inclusion’ through lower (than foreign banks) min. average quarterly balances
3. Emergence of universal banking - new businesses such as retail loans (personal, cars and homes), credit cards, distribution of 3^rd party products (MFs & insurance) which generated fee income.
4. Growth of trade-finance and project-finance to manufacturers where sales financing tie-ups led to sharp growth in retail loan portfolios (q-o-q).
5. Increase in FII’s investments in listed Indian private banks; Private placements of equity at hefty premiums and ESOP programs for bankers; this led to Business Heads flogging growth in retail loan portfolios and distribution led revenues, which led to further increase in stock valuations.

The greedy consumer of banking services choked himself with personal loans, car loans, home loans MFs and ULIPs. As valuations kept soaring (2003-07), it was a win-win situation for bankers, manufacturer-borrowers, buyer-borrowers, wealth managers and their clients. The financial meltdown of 2008 put the brakes for a while.

2009 brought back the feel good factor, once again based on valuations (rather than earnings) of stocks, property, commodities. All of this was backed by easy liquidity through aggressive currency printing by Central banks across the globe. This was (euphemistically) labeled as govt. induced stimulus for driving growth.

The 2008 financial crisis was a wild fire that was doused by injection of liquidity. This was the mistake that created the mess in the first place. Now, there are signs of the currency printing machines getting weary (metaphorically). This cycle of growing valuations are not driven by real GDP growth but by growth in global money supply.

Is the cookie going to crumble? A trillion dollar question for valuation experts to figure! Will the all important ‘growth’ in the valuation equation last till eternity? Or is it a myth, whose time has come?

My reply to my friend was – In the long term, the rate of return from residential property will definitely be less than that of investment in equity*. Your banker friend will eventually realize this but after paying a heavy price. The longer any bubble survives, the bigger it gets. Eventually when it bursts, all bubbles leave behind a trail of damage and bigger the bubble, bigger the damage.

Sometimes a Banker may also become a victim of the chimera that he creates and sustains! For you, dear reader, the time to introspect is NOW – Will you blindly follow your banker’s judgment when it comes to taking decisions relating to your personal finances?

ESOP – employee stock option; MF – mutual fund; ULIP – unit linked insurance plan; GDP – gross domestic product; * Anybody seeking historical evidence of the same can email me.