Has India solved the problem of banking regulation?

by on August 5, 2012 at 5:41 pm in Uncategorized | Permalink

Forget Glass-Steagall:

The branches are run almost entirely by and for the children, with account holders electing two volunteer managers from the group every six months.

“Children who make money by begging or selling drugs are not allowed to open an account. This bank is only for children who believe in hard work,” said Karan, a 14-year-old “manager”.

During the day, Karan earns a pittance washing up at wedding banquets or other events. In the evening, he sits at his desk to collect money from his friends, update their pass books and close the bank.

“Some account holders want to withdraw their money. I ask them why and give it to them if other children approve. Everyone earns five per cent interest on their savings.”

This system now has over two hundred branches in half a dozen countries.  The article is here, hat tip goes to Kottke.  If I understand the account correctly, it is also run largely by street children.

anon August 5, 2012 at 6:08 pm

Fathers, love your children.

david August 5, 2012 at 7:48 pm

The oldest form of bank: a co-op way to keep savings safe. Since everyone involved is so poor, there’s not enough money to fund theft and flight.

I imagine the absence of lending, investment, or even branch-to-branch credit keeps administration simple, too.

Back in the 1960s many semi-socialist states simply issued passbooks for accounts at some state bank to children en masse, did India never do that? Guess not.

Willitts August 5, 2012 at 8:21 pm

Depositors receive five percent interest from the nationalised bank in which it invests.

So either banks in India are earning a healthy net interest margin on five percent interest expense or there is some inefficient subsidisation going on. Nothing wrong with the latter if that’s how the state wants to conduct financial education.

I learned how to save with low interest savings bonds and no interest Christmas Club accounts (a bit awkward for a Jew). I made my first commodity trade selling 18 old silver dollars that my great aunt gave to me for Bar Mitzvah. My kids have savings accounts earning the same 1% I get on mine. I think they get about 2% on their CDs. Then again my kids have other forms of family subsidies that kids in India don’t have.

This is a good thing these banks are.

Rahul August 6, 2012 at 12:48 am

Indian inflation is probably 8%.

Ed August 5, 2012 at 8:22 pm

“Children who make money by begging or selling drugs are not allowed to open an account. This bank is only for children who believe in hard work,”

This approach is obviously incompatible with the modern adult banking system.

Alan August 5, 2012 at 9:15 pm

Bravo!

fred smalkin August 5, 2012 at 11:16 pm

Zing!

On a serious note, why are they moralizing? I suppose the criminal class makes for bad clients more often than non-criminals. Still doesn’t strike me as fair, especially for a public interest organization.

Stormy Dragon August 5, 2012 at 9:43 pm

Some account holders want to withdraw their money. I ask them why and give it to them if other children approve. Everyone earns five per cent interest on their savings

Oh yeah, because what I want in my bank is a method for giving busybody neighbors veto authority over my purchases.

fred smalkin August 5, 2012 at 11:13 pm

Think of it as an effective but costly way to prevent runs.

TJ August 6, 2012 at 6:04 am

While people can generally withdraw money as they choose, in some countries it is not unusual to have an assigned account manager at your bank, who will have an overview of your finances and question it and advise you if you all of a sudden withdraw all of your savings.

In the case of the banks in this article they operate savings accounts, not current accounts, and in conditions of poverty where drug abuse, extortion, etc. are very likely, the withdrawal “hearing” works as a commitment device. Maybe you would mind if somebody questioned asked why you were kept increasing your credit card debt and used up all your savings, but you probably wouldn’t be worse off.

Gunnar Tveiten August 6, 2012 at 3:29 am

Inflation in India is currently at somewhat over 7%, down from 9% a year ago.

5% interest thus is a few percent less than inflation – you’re paying for the priviledge of having them store your money.

A bank with negative interest, and that only gives you your own money if they “agree” with the withdrawal can only be a success if the other options available to these people suck even more.

TGGP August 6, 2012 at 10:55 pm

MiKe Munger said that many of the poor in the third world are so vulnerable to having their money on-hand confiscated that they will pay for the privilege of locking it up with a microlender.

zzk August 9, 2012 at 3:21 pm

not to mention that 3 points under inflation is still better than 8 points under.

JoeDog August 6, 2012 at 7:04 pm

I’ve met one programmer who passed the Turing test. Back in the Naughts, we encountered an ardent Bush supporter in an IRC technoloy channel. This programmer wrote a bot that offered canned criticisms of Bush at lengthy random intervals. Then he parsed the predictable response and offered rebuttals. Once the Bush supporter started arguing with the bot, the Turing Test was passed. Granted it wasn’t the highest bar but it did impress me.

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