Sunday, 22 September 2013

The banker’s role, from a bank employee’s standpoint and in Poland

My brother Marek e-mailed me with his observations about my last post, pointing out the importance of the banking sector to the entrepreneur. Indeed - such a valid point that it will make a separate post.

Instead of posting a drawn-out comment in response to Michael’s insightful post, I decided to dedicate a separate note to his text, making references to each paragraph and put his reasoning into the context of Polish banking sector, far younger than those established in Western economies. Beware though, the picture presented is biased, inevitably, when written from a bank employee’s perspective. A for starters, a valid point – I don’t feel I’m a banker, I’m only a bank employee – just an in a 5-year-old Polish joke, there difference between bankier and bankowiec is roughly the same as difference between rentier and rencista… There are no bankers in Poland, there are banks and their representatives who do exert influence on how businesses are run.

Looking in stereotypes, the British believe the Germans have got it right. Their Landesbanks provide a capital lifeline to small and medium-sized family-owned businesses for generations. They know their clients personally (often having a banker sitting on the firm's supervisory board). When the firm needs money to buy another production line because it's just won a new order in South America, the bank looks at the firm's track record and says "by all means".

Is this really true the British envy the Germans how their banking system functions? In Poland such relationships simply cannot exist, because civilised banking sector emerged only after 1989 and had to be developed from scratch. It has grown out of the teething phase quite quickly, as Polish banks have been sold to foreign investors, who have contributed with their know-how of doing banking business.
Deals in which there is a too profound relationship and a client smell a rat to me. Whenever I see a transaction in which someone from a bank knows too well a company, it heralds troubles, if it goes through… The proper distance between a bank and a company increases… bank’s safety…

In the UK, the banks have done away with personal relationship managers and have outsourced the loan decisions to a call-centre in Bangalore, which mechanically ticks the boxes and says 'no', just in case. Online banking has many positive facets for the consumer, but for the small business it has killed off the personal nature of the banking relationship. "Lend to the man, not to the asset" was the golden rule for Mr Mainwaring and his generation of bank managers, who knew their customers, but this is no longer the case. Today, UK banks talk of 'relationship banking' as if it were a new discovery; the truth is they lost it long ago and are now trying to rebuild it on the basis of call-centres, internet banking and algorithms that replace loan decisions.

As a rule – the bigger the Customer is, the more personalised the relationship must be. And whenever you speak of a relationship manager, you should have in mind somebody who knows its customer inside out and fosters its interests, not just foists upon them services they don’t need only to get a bonus. But personalised relationships do cost money, so probably the cost-to-benefit analysis has led many banks to give upon the relationship model. Let’s face it – does an average individual or small company need a dedicated employee who knows them and their needs well? Such approach costs and this cost will be passed on to a client, often reluctant to incur additional expenses. The question one needs to answer is whether a customer prefers and individual approach or low cost of banking services. Cost savings are also the driver of automated loan decisions – in assessing creditworthiness of a small business, one of many millions in the country, a well-designed system will beat a not infallible human. Another advantage of a score-based loan decision system is its quickness – within a few minutes you know whether you are eligible for a loan or not. Of course, again, the bigger the business, the more complex the credit analysis and the less reliable simple algorithms based on questions are cut-off points are. Plus an important note – in Poland credit risk management cannot be outsourced, so whenever you apply for a loan in a Polish bank, be sure it is not farmed out to Bangalore.

Now that the economy is on the rebound, British banks have only got worse in this respect. Want to borrow money to buy a house on a rising market? Why certainly! Mortgage lending is back to 2008 levels. Want to borrow money to expand your small business...? Ooh... That's a bit difficult... We'll need to send someone over to check your business in person, but that costs us money, so we won't bother, so to save time, our answer is no. Bank lending to business is 30%-40% down on 2008 levels (depending on sectors and regions).

The rationale behind such stance is as follows: for housing loans, a bank has a tangible collateral and very strong incentive for the debtor not to lose the roof over their head. For small business the risk profile is far worse. I don’t know how law in terms of creditor protection in the United Kingdom exactly works, in particular I’m not familiar with issues of owners’ liability for their business’ debts. A small company might easily wind down in a few days, owners may go away or tell their venture didn’t work out, having pumped out cash beforehand and the bank is left out in the cold… Oddly enough, in Poland mortgage lending has been curbed, while SME lending also, but not to such extent…

What's it like in Poland? Banks have generally tended to say 'no' from the outset (that lack-of-trust issue again), so Polish entrepreneurs have just got used to financing growth out of saved earnings. Over the economic slow-down (no recession here, remember!), Polish entrepreneurs drew in their horns and sat on their cash, tempting politicians to tax it or somehow put it to better use.

Rightly discerned, it all boils down to mistrust. Banks are too wary to lend to small firms, which are risky businesses, less transparent and more shaky and corporate clients. The other story is when you criticise banking sector’s mistrust, you should keep in mind a bank collects money from depositors and has to return the money to them, no matter of its borrowers settle their debts or not. Banks’ restraint in lending is also a form of prudent management of someone else’s money. As a depositor I also must trust my bank that it doesn’t engage in risky lending.

Poles, like Brits, look across to Germany's Landesbanks as the ideal model for small- and medium-size businesses, yet another reason (along with apprenticeships, a high social regard for engineers and manufacturing industry) why the German economy weathers the storms well (and can still afford to bail out the lazy southern Europeans).

I would also add focus on competitiveness. This praise of the German economy is quite surprising when made by someone who support liberal economic agenda of the Conservative Party.

Ethics in banking? Polish bankers are nowhere nearly as well paid as their British counterparts. The result is that here in Poland, people have no problem inviting bankers to dinner parties, saying 'hello' to them in the street, or generally treating them as fellow human beings.

What earnings have to do with ethics? Ethics is about conduct, not about salaries – one could even point out someone who earns less is more encouraged to behave unethically in pursuit of quick wealth.
Still, banking sector employees in Poland earn well above national average. It just the gap between average salary in the national economy and in the banking sector that is much smaller than in the UK. A relationship manager for corporate clients in Poland earns on average between 10 and 15 thousand PLN per month before tax (some three times more than average salary in the national economy), plus it gets numerous perks (company car, phone, etc.) and discretionary bonuses for meeting sales targets – unlike in Anglo-Saxon banks, bonuses are not contractually guaranteed. Still, although quite wealthy, Polish banking employees are ordinary people, unlike their spoilt counterparts from the City or Wall Street.

The Polish banking sector is generally in sound shape, but still has much to learn about working closely with the entrepreneur for the benefit of the economy at large.

And the essential thing on both sides is empathy – the bank needs to understand the entrepreneur and the other way round – banks have status of ‘public trust institution’ and no matter how ludicrously it sounds, their primary goal is to ensure the safety of funds entrusted with them, this can be achieved by cautious risk management…

1 comment:

Michael Dembinski said...

An interesting financial-linguistic question: at what point does a bank employee become what's generally recognised in the English-speaking world as a banker? I'm sure that a million-dollar salary plus bonus would do the trick - in which case Polish bank employees would be a long way off making the grade.

Indeed, you could (almost) state that Poland has no bankers - they're all abroad.