Russians bankers are very smart, and thus they will never lend for your business investment (except in resource extraction industry, where it is easier to collateralize you revenues). They know very well that if they do they will end up with a lot of non-performing loans for sure, being aware of the unmatched skill of Russian borrowers in cheating. But is this what we really want? A stable but non-lending banking sector? Why don't you just use your own piggy bank! If they are not performing their roles, why do we care about how stable they are and how low a non-performining loan ratio they've achieved?
Banks not investing enough in economy
Bank credits only account for 7%-8% of total investment in the country and 2%-3% of that are foreign bank credits, he said at a banking conference in Yekaterinburg on Friday. "This is a very small investment in the development of the Russian economy and such a situation needs to changed at the root," he said.
MOSCOW. Jan 27 (Interfax) - Russian banks are not investing enough in the country's economy, Deputy Central Bank Chairman Gennady Melikian said.
China has a huge banking sector, with a lot of non-performing loans. I however argue that, to promote economic growth in a mid-income developing country, it is better to have a Chinese banking sector than to have a Russian one.
Let me explain why non-performing loan is NOT a problem.
When you get bad loans, it doesn’t mean that some wealth is burned away.
Let me give you an example: I have one apple, and I decide to loan it to you and you promise to return two apples to me at the end of the period. You plant the seeds (let’s assume for simplicity that you cannot eat the apple without destroying the seeds), and grow an apple tree with four apples in the tree. Then, either (1) you harvest them and run away from me (i.e. corporate governance problem) (2) Your neighbors come at night and quietly eat them all (business environment problem) . Either way, the result is that I have bad loan, because you don't return apples to me as you promised. But for the society this “project” produces four apples of benefit out of one apple. Remind you that even it the case that you neighbors steal and eat the apples, the society benefit as your neighbors are part of the society too.
However, if I decide not to loan you the apple, but eat it (with the seeds), there will be no bad loans, but no benefit for the society, either. This is what happens in Russia, India,Mexico, etc , where the banking sector doesn’t lend to any risky (but socially productive) investment projects. No one lends, and no bad loans for sure.
In China , however, government-owned banks are “stupid”. They build roads, power plants, steel plants, etc, and somehow borrowers always manage not to pay back the loans, and the banks have a lot of bad loans. But it doesn’t mean that these roads and plants just vanish. The social value of these big projects may be very positive. And as a matter of fact, most of the government-directed investments are put into infrastructure or heavy industries; the tasks are so well-defined that even inefficient SOEs can deliver the projects without wasting too much money (well, they certainly waste a lot of money)
Most private enterprises in China “steal” well-trained engineers and technicians (who bring with them the core techonology too) from SOEs, and some even “loot” the SOEs for machines, but these engineers and machines do not disappear from the economy although they are recorded as loss for the SOEs. So all of these bad loans are just something on the balance sheet, whose share will mechanically shrink as the economy grows bigger.
Finally, I have to remind you that most of China's non-performing loans are the results of policy lending, which means that the state-owned banks are taking away some fiscal burdens from the government. In India, non-performing loan ratio is low, but the government accummulates huge public debts to finance projects that if put into private banks' loan portfoilos will in all cases become "non-performing loans". If you accuse these projects to be unproductive, then they should be unproductive no matter whether they are in banks' portfolios or in government's portfolio. As a matter of fact, Chinese banks allocate resources better than their Ministry of Finance, and thus letting the state-owned banks to perform fiscal role is definitely efficiency-improving.
Smart private sector bankers will shy away once cheated, but stupid state-owned banks will just keep on lending. Sometimes a little bit stupidity accidentally leads to better results. Wright brothers were stupid; Thomas Edison was stupid too.... A smart banker should never listen to Wright brothers, and should never have lent to Delphi, Visteon, Ford, GM.... well, there were no defaults in primitive age when people only bartered...
