Saturday, June 28, 2008

Withdrawing umbrellas when it rains

More than two decades ago, a wise old friend more than twice my age told me that when people most need the credit, banks will suddenly pull it away. He said, the business community called the phenomenon, ‘withdrawing umbrellas when it rains’. He explained it this way.

Banks freely provide easy credit when you least need it, lending out ‘umbrellas’ so to speak on sunny days. However, just when you run short of money especially during financial storms - an economic or financial crisis - banks will reduce or entirely withdraw the credit leaving the desperate, those who need it most, nowhere to turn to. This phenomenon is known as ‘withdrawing umbrellas when it rains’. “

Sure enough, time and time again, the phenomenon happened. It happened during the Malaysian economic recessions in 1985/86 and 1997/98. The same phenomenon is currently happening in the US and the UK.

According to NYTimes.com on June 21, 2008, after fostering the explosive growth of consumer credit in recent years, banks in the US are cutting (the headline word used is ‘trimming’ – perhaps it sounds softer and nicer than reality) the spending limits on credit cards of millions of consumers often without warning, especially those customers who run up big debts, live in areas that are hit hard by the housing crisis or work for themselves in troubled industries. Sounds familiar?

Remember the sudden 25% reduction on cash withdrawals on credit cards by banks and card companies alike in Malaysia during the 1997/98 Asian financial crisis? A financial crisis is the time when credit card holders or consumers need cash the most to fund their daily living expenses.

Impending crises are the heavy ‘monsoon’ (rainy) seasons where it is better to have your own umbrellas ready for shelter, unless you prefer the banks to withdraw them when you need it most. If you are familiar with monsoons, it does not rain, but pours.

Therefore wherever you are, it pays to start reducing your outstanding amounts in credit cards, overdrafts, or loans where possible. Otherwise when the crunch comes to your country, when the push turns to shove, the banks do not seemed to know you unless you have the money.

If you are cash rich in such times of trouble, banks might still try to lend you money from your term deposits held with them!

And history (read cycle) repeat itself, once again.

5 comments:

blur said...

hi allan,
i sense tat u r calling for a crisis in seeing future :(

Anonymous said...

Hello. A bit off-topic, but can you tell me if there has been a banking crisis in your part of the world similar to the Northern Rock failure and bail-out in the UK, as well as the Bear-Sterns problem in the US? I am researching something, and I can give you details if you wish.
Yours,
johnballantrae@gmail.com

Allan said...

Blur, the key words are ‘History repeats itself, once again’.

Allan said...

John,
There were failures of credit / finance companies and a co-op bank during the 1985 / 86 recession in Malaysia. A few were absorbed by larger financial institutions while many others were liquidated.

In the 1997 / 98 financial crisis, small and medium sized failed banks especially those linked to or owned by the Government were bailed out or absorbed.

You may have to research the archives of news media to get to the stories and their names.

Anonymous said...

Hi Alan,

I have been reading your blog these last few months and enjoy it very much. I am disappointed that you are calling a temporary halt.

How do you foresee 2009? Will stock market recover by then?

KP