Sunday, January 15, 2006

What is a Bank?

Was suddenly wondering what does a bank mean and did a search for its definition - A business establishment in which money is kept for saving or commercial purposes or is invested, supplied for loans, or exchanged. What then is our relationship with the banks when we entrust the banks with our money? The simplistic definition of bank only makes me wonder more.

As a simple depositor with the banks, we should consider the banks to be our clients who are trying to borrow our savings by offering us interest to make use of OUR money. Only when we lend the banks our money can they carry on their business.

Too people have failed to see the relationship we should have with the banks and had happily given the banks chances to give us the raw ends of banking deals. We Asians somehow have this obsession with savings and will still keep putting money into the savings accounts even when we are given close to nothing for it. At interest rates of 1% p.a., a S$10,000 deposit will earn only $100 and for most parts of the last few years, banks were offering rates nowhere near 1% p.a. nor anywhere near 0.5% p.a. Even today when interest rates have risen, barely 0.25% p.a. is being offered for sums of S$10,000. If you are financial savvy enough, factor in the rate of inflation (0.4% for the first 11 months of 2005) and the real rate of return from the interest rates of these savings accounts is negative or close to zero. The unhealthy Asian obsession with savings is imposing extremely high opportunity costs on money that can be put to better use.

If you are still not convinced to save less, think about what banks are charging you for their services. If you have credit cards, unsecured personal credit lines, housing loans, car loans or mortgages, what are the interest rates being charged? How many times is it of your savings account interest rates? The banks are paying nothing to get your money and loaning it to you at sky high rates!

Still not convinced? Check out the fees imposed on accounts that do not meet the minimum average daily balance, cheque books, bounced cheques, early account closure, coin deposits (!) and monthly account fees. The banks are holding our money for nothing and charging us for it again!?! Will anyone in their right mind agree to this sort of arrangement? Seemingly, tonnes of people are not in their right minds and are accepting these hook and sinker.

Banks' denial of square deals to the consumer is more extreme these days in their push to enhance the bottom-line. Instead of sticking to the standard banking services, banks have come up with new pushes into the arena of insurance and investment offerings. When the banks' over-the-counter staff realises that you have enough savings, you will be referred for sales pitches of insurance/investments. Since I have been saying that savings are actually depreciating our money, this must be a good thing... Wrong! The advisors employed by the banks are usually far from competent and most likely will offer poor/misleading advice. Just test them a little asking about real rate of returns, taxation, etc and these so-called advisors of the banks will easily show their incompetence. Too many ill informed consumers have taken up the advice of these incompetent in-house advisors and made losses.

No comments: