Mon | Aug 21, 2017

Egerton Chang | Abusive banks and lenders

Published:Sunday | November 27, 2016 | 11:00 AM
Egerton Chang
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I am not your 'perfect' bank borrower/customer. I am not a robot that always pay my credit card on or before the due date, and occasionally, I do go overdrawn.

Moreover, I, like, I assume, most of my fellow customers, don't live on hunky-dory street where sources of income always exceed expenses and never arrive late.

Often, I have to be robbing Peter (my left pocket) to pay Paul (my right pocket). And more times than I would like, neither Peter nor Paul has anything to rob.

Does that sound familiar?

Having said that, I always try to make arrangements beforehand, with my bank manager, to cover my overdraft. And I have been known to pay off loans and mortgages (smile).

In other words, while I may be considered a bank deplorable, I think I am far from being the worst.

I would subscribe that the above portrays a significant portion of bank clients. And I feel there are mutual benefits to be gained from lending to us imperfect people at reasonable rates.

Recently, my wife and I sought to buy a second-hand car for our daughter, and we were turned down by the bank that we have been doing business with for more than 20 years, and still do.

Being 'desperate' to buy that car, we searched around for alternative lenders. What we found were rates that varied between 50 and 100 per cent annum, down to the most reasonable of them - offering a "rate of 14%". That 14 per cent is what is told to clients as the rate. But in reality, I, being a past banker, knew that this rate is of the 'add-on' variety.

 

EXPLAINING ADD-ON RATE

 

It means the entire 14 per cent is added on to the principal on a yearly basis. So that for five years, 70 per cent (5x14%) is added to the principal of, say, $1,000,000, making the total repayment $1,700,000. This is then split over 60 monthly payments ($1,700,000/60).

Because that amount is paid back on a monthly basis, the effective rate is much higher than the nominal 14 per cent. Moreover, since this monthly payment is required to be paid in advance, the effective rate is further increased.

In this case, the effective rate worked out at 22.69 per cent per annum, which is much better than the 50 and 100 per cent per annum rates but still virtually three times the eight per cent rate offered by some commercial banks and other similar entities on such loans.

What makes matters worse for us borrowers is that if we were ever in the position to pay out the loan ahead of schedule, there are substantial penalties that accrue and that are beyond the average person to recognise or calculate.

Yet the information (and security) required is just as stringent.

My question is, aren't the banks and similar financial entities leaving a lot on the table by refusing to deal with us imperfects and forcing us to seek other means of financing at these draconian rates?

The opportunity definitely exists for some enterprising bank to make money off someone like myself at a slightly higher rate, rather than 'forcing' us to borrow from these mercenaries.

How many slightly imperfect deplorables are out there? Deplorables who pay off their loans/mortgages not robotically but yet consider it their obligation and do, in fact, pay them off?

Often, I hear of taxi men complaining about having to borrow at these deplorable rates. Rates that, in effect, put them in servitude to those lenders. And the hard part is, they are unable to determine the actual effective rate charged.

There should be in Jamaica a 'truth in lending' law that requires lenders to reveal certain basic features of their loan, including, of course, the actual effective rate per annum.

And it may not be for a loan of $1,000,000 to assist in buying a second-hand car to give one's daughter or to run a taxi. It may be to help pay for tuition fees for a future prime minister.

 

PASTOR RIPS BANKS

 

And in 'Pastor rips banks for abusing power', in The Gleaner of November 22, 2016, Christopher Serju wrote:

Pastor David Henry on Sunday used his sermon to call out rapacious commercial banks and corrupt public officials, challenging them to stop abusing their positions of power, and instead, to start to truly serve the people.

"Our taxation policies must have special regard for its impact on the poor and vulnerable. You know we have a history in this country of usury, you nuh, some wicked interest rates - I not even going call them high - and they have decimated many businesses and families. I personally believe that interest charges on some credit cards are iniquitous and exploitative," he declared to loud applause.

"Interest rates really are meant to protect reinflation, not to excessively fatten the coffers of lenders. Reasonable profit is fair - don't misunderstand what I'm saying - reasonable profit is fair, but we must not diminish and decimate the borrowers," he explained.

No wonder the minister of finance, Audley Shaw, has turned his attention to the process of creating a new regulatory environment for the microfinancing sector.

 

BANKING COMPETITION

 

Meanwhile, in 'Banking sector shake-up', Balford Henry of the Jamaica Observer wrote on September 30:

Minister of Finance and Public Service Audley Shaw says that two new commercial banking licences have been granted to local financial institutions.

However, he warned that the granting of the licences were (sic) in keeping with the new Government's policy of competitiveness in the financial sector and a policy of financial inclusion, which will include small and medium-sized businesses.

"I say to the commercial banks: Look out because I am pushing for competition," Shaw told yesterday's ninth annual pensions seminar staged by Prime Asset Management Ltd in association with the Private Sector Organisation of Jamaica (PSOJ) at The Jamaica Pegasus hotel, New Kingston.

So that, in a two-pronged attack, Audley Shaw has sought to cater to the borrowers in the middle by creating more competition among the commercial banks while at the same time regulating the microfinance sector.

Good luck, Mr Minister!

 

POLSTER FAIL

 

Yes, I was wrong in my predictions on the recent US presidential elections. But so were the vast majority of pollsters and pundits, including some well-known Republican-leaning ones.

The day before the 2016 US presidential election, most pollsters and statistical models had pegged Hillary Clinton's chances of winning at greater than 85 per cent, with some making her the 98-99 per cent certainty.

In 'It's complicated - Part 2', published November 6, I wrote:

The thought of a facile Clinton victory has been thrown out the window as what had virtually been a certainty (Hillary winning bigly) has been turned on its head with one letter from the FBI to Congress.

While some polls indicate that the Comey letter hasn't affected how voters plan to vote, only a fool (or an ostrich) would discount the significant negative effects of that letter on Clinton's chances of winning the presidency.

While I would suffer less cognitive dissonance to side with those giving Hillary chances greater than 80 per cent, I feel that her real chance is closer to that of FiveThirtyEight, that is, around 70 per cent.

I wish to point out that I had to submit my column to the Gleaner editor on November 3, five days before the actual election.

Yes, we were all wrong, but I was the least wrong of them all. LOL. It is of little comfort that Hillary did win the popular vote by 1.5 per cent.

- Egerton Chang is a businessman. Email feedback to columns@gleanerjm.com and e_rider69@hotmail.com.