The typical bank has Rs.5 in equity capital and Rs.100 of assets. If things go wrong, losses exceed Rs.5 and the bank is bankrupt. Generally, when a bank goes bad, the managers are in a scramble searching for cash for the months prior to failure. So from the viewpoint of a buyer, a bankrupt bank is a troublesome entity to get into in terms of ownership. It likely has weak processes; the staff is demoralised; there is possibly corruption; the recovery value of the bad loans is hard to ascertain.
When UWB went bust in India recently, there has been a surprising phenomenon of a raft of buyers lining up to grab control! This is entirely unexpected. A Business Standard editorial correctly says that this remarkable phenomenon is caused by entry barriers in banking. It is hard to start a bank. It is hard to get permission to start a branch of a bank. So under these conditions, what does the rational entrepreneur do? Buy a dead bank, for the license value.
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