Thoughts & Ideas

Friday, August 07, 2020

On Vegetarianism

Much hallabalooo is made about practice of vegetarianism in Indian society and its supposed superiority. With non-vegetarian food being classified as "tamsic" (foods whose consumption are harmful to both mind and body). Harm to mind includes anything that will lead to a duller, less refined state of consciousness.

But the fact of the matter remains, (a) eating preferences are largely governed by locally available foods, and (b) need for good quality protein in the diet for living a healthy life.

We Indians are lucky due to large availability of fairly good quality vegetable proteins in our lands due to which a largely vegetarian diet can be followed by many. In spite of which it does not preclude us in any way in making various concessions, such as, considering milk and milk products as "vegetarian" (which it is not by any stretch of imagination). Or inventing the concept of "ram laddoos" or unfertilized eggs which many consider to be as good as vegetarian!

From here it is just a short distance away for some Indian communities to consider eating fish to be acceptable as nearly vegetarian since it is nothing more than "jal ka phal" (fruit from the water). Going a few more steps, we have meat eating brahmins who cook their mutton without onion or garlic since these two food spices are considered tamsic.

Venturing further afield, we have Tibetan Buddhists for whom killing is a sin, but subsist on a diet in which meat forms a major component. In Tibet it would be difficult to survive otherwise since due to difficult weather and land conditions, very little plant grows, they have to perforce eat meat. They have solved the difficulty of avoiding killing animals by having a social structure where the butchers are non-Buddhist. The salve to conscience is that killing is a sin, but purchasing meat is not.

A little further away, in Middle-East sacrificing animals for food is a necessity for survival towards which two innovations have been made. The first is the practice of halal, whereby the sacrificed animals’ jugular vein is cut so that the animal literally bleeds to death. This ensures that the meat does not deteriorate fast, a necessity for times when refrigeration was not known. The second, is the practice of reading aloud portions from Holy Books to the dying animal.  I do not how much help that would be doing to the sacrificed animal, but I am sure it would be putting salve on the conscience of the meat eaters.

An interesting innovation in prohibiting meats of some kinds was also made in the Middle East. I refer to the proclamation of pigs as unclean animals and religious prohibition in eating pork. The connection between eating pork and disease (which is now known as trichinosis) was initially discovered by ancient Jews who justified prohibition in eating pork on religious grounds. The practice was later also adopted by Islam. It was much later that the modalities of the connection between trichinosis and pork eating was unravelled and the solution found (cooking meat thoroughly at high heat).

In recent times, there has been a lot of revulsion in public on the practice of eating dog meat in some societies. Dogs are friendly animals and have been one of humankinds very faithful friends and therefore even thinking about eating dog meat can be quite revulsive to most people. But as Jared Diamond explains in Germs, Guns, and Steel the practice of eating dog meat is generally due to absence of alternative means of partaking of animal proteins in the diet in some areas of the world. He in fact extends the logic to cannibalism too.

In all the confusion about the supposed superiority in the practice of vegetarianism it is refreshing to find a few sane and logical voices. For example, Swami Vivekanand. Not only was he partial to meat and fish, he did not proscribe a non-vegetarian diet for this disciples.

This is not supposed to be a polemic justifying eating of non-vegetarian food but an earnest request not to make vegetarianism into a fetish. After all mankind is the only species which kills for pleasure.

Tuesday, May 19, 2020

Train Travel & Shramik Specials



In view of the clearly demonstrated strong dependence of the Indian economy on the masses of internal migrants, Shramik Specials should be a regular feature between major industrial urban centres and the hinterland and back.  These trains could be point to point, fast, comfortable, cost effective with no frills.

It could be a game changer for the entire economy. Such trains services would help the labour supplying areas by way of inward remittances and improvement in skill levels. The industrial areas can make productive use of the labour and prosper.

Railways should prioritise running between centres where the respective State Governments are willing to provide facilities and subsidise costs so that running of such trains would not involve any subsidy by the Railways. The subsidies should come exclusively from the concerned State Governments.

These thoughts are based on my experience in traveling by train. I often travel between Bangalore / Hyderabad and Banaras / Patna – at least once or twice a year. Sleeper class coaches of trains running in this sector are always full of such economic migrants – throughout the year, and the choice of trains is limited to one a day. It is next to impossible to get reservations by sleeper class on the trains unless done 3 months in advance. Even Tatkaal bookings get filled up within minutes of their being made available online. By the time the train reaches its destination it is invariably 4-5 hours late. Average speed is less than 50 kmph. Half-way through the journey the toilets invariably become filthy and there is no water in the coaches. I have tried innumerable times to contact the various Railway helpline numbers in such situations. Either the numbers are not reachable or no one responds. Sometimes, one gets a “please check the number you have dialled” kind of error message. On the rare occasion, that one is able to contact a railway official on phone or corner the hapless one fishing around the train in search for easy money, the response is either – it is not my responsibility or we will inform next station and they will attend to the complaint. Never has a complaint been addressed to the extent that a solution emerges before the journey is completed, or even after.

On one occasion, I along with co-passengers sort of gheraoed the coach conductor since there was no water in the train from Nagpur onward. His response was classic – please tweet to the Railway Minister it will get rectified. He was somewhat subdued when I asked him if the Railway Minister is supposed to attend to such small problems, what is he drawing his salary for? Post this, the best I could manage was to get me his complaint book so that I could make a written complaint. There was no solution to our problems till the train had reached Varanasi where I got down! Yes, I did get a call from someone from Varanasi Cantt station the next day apologising for the deficiency in service and promising to look into the matter. Thank God for Small Mercies.

I have also tried lodging online complaint a number of times on the public grievances portal. Yes every time I have got an automated polite meaningless acknowledgement but never a resolution of the problem. Seems like railway officials in general are extremely skilful (or should I say slimy and slippery) in getting away by inventing far-out explanations. Or is it the general state of affairs of my country!

A long time ago I used to travel regularly between Katihar and Patna / Mughalsarai by a train which was meant essentially for catering to needs of agricultural labour travelling from Bihar to Western UP / Punjab and back. The train consisted largely of unreserved general compartments. The train was classified as an express but was effectively a passenger train, stopping at virtually all stations and given the last priority on use of tracks. It was impossible to be sure when one would reach his destination. On one occasion it has taken me over 24 hours to travel the 300 kms from Katihar to Patna by this train, even though there was no problems with the tracks or the engine or the rolling stock. Incidentally, I have never met anyone travelling without a ticket on these trains. But the Ticket Examiners used to really fleece the mostly illiterate passengers with all kinds of threats. I have no clue if the situation in those areas have improved over the last 30 years.

These days I also travel frequently between Hyderabad, Chennai, and Bangalore - invariably by overnight sleeper class. Coaches are clean. Staff are polite and responsive. There are no ticketless travellers and rarely do people without reservations board the train. During peak seasons, generally on weekends and during major local festivals, for getting confirmed reservations, one can generally plan 10-15 days before date of travel date, failing which Tatkaal is a decent alternative. Moreover, there are multiple options so that even if one does not get reservation in a train with most convenient timings, there are other options available. Railway stations are invariably spotlessly clean with various passenger amenities, with comfortable waiting rooms, escalators connecting all or most of the platforms (at least for the ascending section), and most importantly trains run on time with higher average speed. The staff must be getting paid the same kind of salary and allowances and getting similar perquisites. But what a difference in quality of service. One reason could be the lower pressure on railways due to good quality inter-city road services too.

All said and done, it is always fun to travel by general and sleeper class coaches of Indian Railways. One gets to a feel of the country, its colours, and foods and of course one gets to meet the most interesting people.

After all Mera Bharat Mahan!


Tuesday, April 28, 2020

The Jews


A Background

Jews as a community are reviled and bad-mouthed across nearly all countries where they live. My first encounter with this community was in the novel, A Stone for Danny Fisher, where the protagonist remembers being bullied as a child in New York just because he was a Jew, and being totally bewildered on that count – and so was I. Later I came across other historical and current accounts of Jew-baiting. Jews are also supposed to have super-human intellect and other qualities with the community having contributed to a large numbers of scientists, philosophers, economists, doctors, sportsmen etc both in Europe and in America.

But both the conceptions fly in the face of basic finding in psychology that human nature is common to all human beings and their talents and intellect are normally distributed. Shakespeare put it very graphically and forcefully in The Merchant of Venice, in which Shylock, a Jew money-lender puts up his defence in these terms. “I am a Jew. Hath not a Jew eyes? Hath not a Jew hands, organs, dimensions, senses, affections, passions? Fed with the same food, hurt with the same weapons, subject to the same diseases, healed by the same means, warmed and cooled by the same winter and summer as a Christian is? If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? And if you wrong us, shall we not revenge?”

Again, an aboriginal hunter in the Kalahari who can track and identify from tracks in the desert sand as to the identity of a person or animal which made those tracks can be considered of as high intellectual capacity as the top-most theoretical nuclear physicist. It’s only a question of identifying the intellectual capacity, as George Stigler put it succinctly, “in a regime of ignorance Enrico Fermi would have been a gardener, Von Neuman a check-out clerk in a drugstore”. So how come Jews are considered superior intellectually to others.

To get to the roots of how and why Jews picked up such an unhealthy reputation, we need to take a detour – into of all things - the time value of money!

A Detour – Time Value of Money

As everybody knows and acknowledges, a rupee today is worth more than a rupee say one year from now. The reason being that a rupee today can be invested in some kind of productive purpose which may possibly yield a positive return. Even if the holder of a rupee today has no productive use of the funds, he can always lend it to someone who has. Say, the borrower is able to use his skills and talent to generate a return of 18% per annum after meeting all expenses, including his labour. It would always be beneficial for him to borrow the rupee at any rate below 18% per annum since he would have always have a surplus over his borrowing cost. In effect, time value of money is a natural and logical feature of money– something like gravity – life would be practically inconceivable without taking into account the time value of money! It is beyond imagination as to how would human society function, leave alone prosper, if the time value of money is not explicitly accounted for in daily life.

At the same time, interest, has a dirty sound to it for very many people to the extent that it is prohibited both in Christianity and Islam.  We Hindus are different since we are much more pragmatic and explicitly incorporated risk in our analysis, and in addition have a magic called caste. As per Dr. Y V Reddy, the ex-RBI Governor, “According to Manu and Vasistha, the interest rates were not to vary depending on the risk involved or the purpose for which the money was borrowed. But, they were directly linked to the caste classification of the borrowers. Brahmin was to be charged 2 per cent, Kshatriya 3 per cent, Vaishya 4 per cent and Shudra 5 per cent per month. However, Chanakya’s interest rate structure was risk-weighted since the rate of interest increased with the risk involved in the borrowers’ business. The interest rate worked out to be 15 per cent per annum for general advances. The traders were charged a rate of 60 per cent per annum. Where the merchandise had to pass through forests, the traders had to pay 120 per cent per annum while those engaged in the export-import business handling sea-borne cargo had to pay 240 per cent per annum.”

Back to our story

Now since it is virtually impossible for human societies to function without borrowing and lending money and also handling such funds need special skills, various social groups developed in different parts of the world in the business of money lending. The Jews were natural money lenders since their religion permitted it in the Middle East and they later spread throughout Europe and later to the Americas. Similarly, various social groups developed skills in money lending and spread in other regions. For example, Gujaratis in Africa, Tamils and Chinese in South East Asia, Marwaris all over Indian sub-continent and Afghans in pockets of North India – and life went on for centuries.

However, about 500 years ago the Jews started getting lucky. Europe, which was one of the main areas in which Jews operated their traditional profession, started to develop and modernize with increasing speed with the coming of the Industrial Revolution there. This led to increasing accumulation of wealth in these areas. The increased scale of manufacturing and trade needed larger and larger amounts of capital, a large part of which was provided by the Jew bankers, which made them wealthier and wealthier over time. With wealth came education and social prestige. The education helped in funding and nurturing the legions of Jewish scientists, philosophers, economists etc. The wealth and social prestige invited jealousy and hatred, which was greatest in areas which had seen the most economic growth – Western Europe. The Middle East saw little growth till recently, and Jews continued to live across their traditional areas such as Egypt, Levant, Iraq, littoral states of the Persian Gulf etc. as they had lived over the ages – in comfortable co-existence with other social and religious groups. And in this historical circumstance lies the ill reputation that Jews have unwittingly got built around themselves!

The irony lies in the fact, that Jews, Christains, and Islam share very many common cultural and religious symbols and practices. They all are part of what is known as the Abrahamic religions, with all the Prophets of Jews being acknowledged as Prophets by the Christians, and again all the Prophets of the Jews and Christians being considered as Prophets by the Muslims! But the reverse is not true and that is where the clash begins.

Similarly, restrictions on the consumption of pork are common particularly in the Middle East amongst both Jews and Muslims. Even some Christain sects, such as, Seventh-day Adventists Eritrean Orthodox Church, and the Ethiopian Orthodox Church also disfavor consumption of pork and consider it taboo.

Some Concluding Remarks

The power of bankers and banking should never be underestimated. Just consider WW I & II. The cause of both these wars was need to prove their superiority by the imperialist powers. In Europe all the main powers were either fighting with each other or trampling over the rest. No country was left unaffected – except one – which was small and virtually in the centre of all the fighting and had no army or other protection worth the name. But their defining strength was that they were bankers to all the countries involved in the Wars. The country is Switzerland.

It is through the control of banking in Europe and America and the associated wealth, that Jews continue to hold disproportionate power across the world, which in turn gives them substantial political power. So much so, that all the Arab powers with their vastly larger populations and plenty of oil money have not been able to displace tiny Israel, which is surrounded on all sides by extremely hostile neighbours.

Monday, April 27, 2020

The Humble Baigan



Baigan, brinjal, aubergine, eggplant, is a vegetable which comes in various names, shapes, colours, and sizes. Critics also often derisively refer to it as be-gun,  ie, that which is bereft of any redeemable quality.

This vegetable is native of the Indian sub-continent but is also grown and savoured in quite distant geographical regions. Naturally the recipe and techniques for cooking it varies widely. It can be had baked, deep fried, shallow fried, boiled, curried, pickled etc – though I have never heard of it being eaten raw.

The preferred choice in the Levant and Middle East is Baba Ghonoush / Muttable which is essentially baigan bharta made from baked large baigans which has been seasoned with salt, olive oil, and tahina. Another dish common in these regions is the pickled version using small sized baigan.

Ellen’s (Vijay Alexander’s wife) favorite dish for us vegetarians was an Afghani version shallow fried, with dahi, and served like a salad. And very, very delicious.

In North India baigan may be cooked into a curry along with either palak, सेम, मटर, सोआ, बरी, काला चना, nutri nuggets etc. etc. There are wide variations in the choice of condiments and spices which may be used. I am familiar with three kinds of masala for curried baigan. First is the most common - use chaunka of green chillies and a generous amount crushed garlic. Add baigan and tomatoes, haldi & namak and cover, along with whatever other ingredient one would like as mentioned in the first line of this paragraph. The second variation uses panch phoren. Cooking this version in cast iron kadahi gives it a dark colour and typical taste. The best are found at myriad breakfast joints in Banaras where it is served with kachoris. The last and best is cooked using sarson ka masala. It is heavenly, but unfortunately I am yet to master the recipe or the technique and can’t comment more.

The variety of baigan generally preferred in eastern UP and Bihar is known as bhanta. It is roundish and of deep purple colour. Apart from being cooked in a curry (eaten with puri, roti, or rice) it is also used for making bharta wherein it is baked whole directly in fire (best wood or goitha fire), skinned (since the outer skin gets burnt) but the inside flesh turns soft and tender. The flesh is mashed and seasoned with salt, raw mustard oil, crushed raw garlic, and thinly sliced green chillies.

There are variations in the making of baigan bharta. Some bake the baigan, others roast and grill it, while others actually cut and cook it. The range of condiments used also varies much. Some people prefer to add boiled mashed potatoes into the baigan bharta. I feel it destroys the pristine taste of the baigan.

Another version of savouring bhanta is by slicing it into quarter inch round slices and deep frying and commonly known as baigani. There are two versions of deep frying it. The first consists of marinating it in haldi and mircha powder along with ginger-garlic paste and salt for about an hour and then deep-frying the individual slices. The second involves coating the slices in a thick batter of besan and then deep frying. Vaishnavs and other vegetarians prefer that the batter be seasoned only with salt, haldi, and ajwain. Non-veg eaters and other gourmands prefer that the batter with seasoned with haldi, namak, jeera powder, dhania powder, mircha powder, ginger-garlic paste and maybe a pinch of garam masala too.

No self respecting Bengali bhoj is ever complete without begoon bhaja served as starters. But its been decades since I have been invited to any decent bhoj by a Bengali and how I am missing the taste.

Down in South India the baigan is smaller and has more seeds. Reason being (as per a conversation with Dr Manmohan Attavar of Indo American Hybrid Seeds more than 20 years ago) that growing conditions, especially ambient temperatures, is higher in South India. Poor man invested a lot of money in buying a large piece of land near Lucknow to set up a farm for developing seeds of fruits and vegetables typically grown in North India and I believe lost most of it. It’s a very sad story and I will not go into details since I am not very sure of it and it is of little concern to the matter in hand.

I have come across three variations of eating baigan in southern states. First, is the ubiquitous use in sambhar. Second is in Brinjal rice (vangi bhat). Third is a north Karnataka speciality curry, marinated and cooked in peanut & coconut paste and various local masalas and eaten with jowar rotis. It is simply divine. The baigan curry eaten in and around Hyderabad is similar to the North Karnatak version and generally eaten with biryani.

I have also had baigan - the white eggplant version - at a Chinese monastery in Hongkong. It was a completely different experience. Lightly cooked in a delicate gravy accompanied with rice - the sticky variety.

There have been some eminently forgettable encounters with the humble aubergine too. One was at a fairly fancy pizza joint in Milan. The day we landed in Italy also happened to be my better half’s birthday. Pizza being one of her favorite dishes we went to a wood fired pizza place highly recommended by the manager of the hotel we were staying in. We explained our requirement of a vegetarian pizza to the waiter who seemed to perfectly understand our requirements. The pizza came - very proudly served by the same waiter. Topped with brinjal and zucchini with a bare minimum of cheese. It was barely edible.

We had a similar encounter in Istanbul. We had been walking all morning and were tired and famished and stopped at a restaurant for lunch. We explained our requirement for some vegetarian food. The waiter beemed and assured us that he will arrange for something. It came - grilled pieces of various vegetables, including baigan. Very lightly grilled, nearly raw without any condiments. Offered to us for eating with salt, pepper, and a slice of lemon!

The variations in recipes is virtually infinite. Each has its die-hard fans. But the sad part is that this great vegetable is placed low down in the vegetables pecking order. I still remember taking a visiting cousin to a very fancy vegetarian restaurant in Vashi, where one of the dishes we ordered as a baigan dish – supposedly a signature dish of that restaurant. When we returned, she looked less than pleased. On being questioned, her reply left me totally confounded. Kya bhaiya – ghas-phus khila ke pooch rahein hain ki khana kaisa laga!

Tuesday, September 24, 2019

On PSU Bank Merger - Missing the Woods for the Trees


Mr. Krishnamurthy’s spirited views on how the proposed merger of PSU banks be handled (The Hindu, 24th September 2019 - Makingthe grand Indian PSB mergers work) seems akin to a typical response in banks where loan appraisal notes are prepared after the decision to sanction a loan has been made so as to ensure smooth and hassle free disbursement without leaving any trace of the indiscretions on those who have to implement the decision!

It also raises some interesting questions.

First, does the merger move demonstrate the lackadaisical approach of policy planners? There is a one word answer to that. NO, in capital letters without any spelling mistakes. Irrespective of persuasion or ideology it is always in the interest of the ruling political class to keep control of the key financial intermediaries firmly in their hands. In India this has ensured, on one hand control over sanction of freebies in the form of cheap & directed credit and loan waivers to key players (read that as local politicians and strong-men) in the mass market which in turn enables them to get the votes in required numbers to win elections. On the other hand, it has helped steady and assured funding to key businessmen and industrialists who in turn finance and grease the political machinery. Merging the PSU banks by reducing the numbers would enable easier control on both sides of this game. It is as simple as that! This is also the main reason why some of the key recommendations over the decades have been blissfully ignored. Such as disbanding of Department of Banking (Narasimham I), more care in selecting top executives (Nayak – short-listing was opaque and typical interviews were virtually a shame), or the continued operations of BBB in selecting top executives from the same jaded cohort and no progress in recruitment of competent and professional for Bank Boards.

Second, was the key concern about announcing the merger lack of clear articulation of the rationale behind bringing disparate and weak banks together or the desperate need to announce some mighty sounding changes so as to dampen the effects of other disturbing information about the economy? Is it just a coincidence that the merger was announced about 1 hour after the latest GDP numbers were announced?

Third, as far as efficiency gains or improvements are concerned, why does all discussion get stuck only at the high NPA levels? Net profits in banks is arrived at by first deducting operating costs and then provisions from net interest margin. Staff costs of PSU banks as a percentage of Operating Costs is 3 to 4 times that of their private sector counterparts. Now since staff in PSU banks are not on the average paid 3 to 4 times that of private sector banks (not even by a very long shot), it should be obvious that a major reason for the lower profitability is also on account of high staff costs on account of low staff productivity. The underlying reasons could be low morale, outdated and redundant operating procedures, low skill levels, over manning etc. Somehow this aspect, that proximate cause of low profitability in PSU banks is also due to low staff productivity, hardly finds mention in any discussion.

Fourth, the narrative does not explain the high NPA levels at par with PSU banks in many high-profile private sector banks (both existing and those who have become history) or some well-known and established foreign banks. Could there be some other underlying reasons such as an outdated conceptual framework or misplaced regulatory priorities under which banking is practiced in India which contribute to the regular occurrence of high NPA levels? A framework which is not challenged by the academic community but carefully nurtured by the regulator? For example, the artificial dichotomy between working capital finance from term debt (only going concerns can hope to service debt and for an entity to continue as a going concern, it requires both working capital as well as term finance), or the heavy reliance on security as the basis for most lending (depending on foreclosure of security as the prime means of recovery of debt would impose such high transaction costs that no financial intermediary can even hope to be viable), or failure to differentiate between equity and debt risk (where the asset portfolio contains both equity as well as debt risk with no clear demarcation between the two and the pricing is based wholly on debt risk) ensures that the portfolio is perpetually sub-optimally priced and lending operations would be ab initio non-viable and there would be a steady incidence of NPAs which no amount of window dressing (including indefinite postponement of implementation of the Indian Accounting Standards (IndAS) norms for banks) can hide. No amount of ministrations or efficiency gains can help convert this congenital defect.

Fifth, a suggestion which keeps recurring is the need to induct professionals, especially in risk management and technology areas, at market related remuneration levels. What seems to be forgotten is that monetary returns are far from being key drivers of any professional worth his salt. Good professionals also need a culture and working environment to live up to their potential and in the absence of which they either become white elephants or simply pack up and leave.

Sixth, without clarity on market niches which exist and may be fruitfully exploited, and the kind of products and skills required to exploit them, there can be no direction on the kind of training that is required or should be imparted. Without such clarify, there would continue to be extreme competition in narrow product market segments leaving vast sections of the society and economy outside the pale of formal financial intermediation – with its accompanying discontents. One example which should provide the proof – if a proof is required – is the extremely low levels of utilisation of humongous numbers of PMJDY accounts. And this is not because the potential for savings is absent in the Indian economy. Is it a wonder that Indian financial markets continue to be highly fragmented?

Seventh, related to the above is that if PSU banks are to be really efficient and effective they need to build the ability to strategize and develop skills in identifying and exploiting market niches.

Seventh, why should and to what extent could governments actively plan steps to offset a possible slow expansion in bank credit? Is that an acceptance of the unsaid fact that existing PSU top management are incompetent? Or that the patronal relationship carefully built up over the last five decades between bank management and their political masters has ensured that present day management are incapable or precluded from taking independent decision taking? Moreover, if the government has to involve itself in distangling ownership in JVs of  PSU banks, what are bank managements expected to do?

No amount of visionary leadership or rhetoric can replace a basic understanding of how financial markets operate, which is in no way helped by the fact that they have a mind of their own and operate in fairly counter-intuitive ways. And without that understanding any fiddling around in the policies and practices on operation of financial markets is nothing short of quackery. Research over the last half a century has helped clarifying very many aspects, but our policy makers and academics refuse to take cognizance. The irony is that a key aspect of this understanding was developed by an American economist working at the Indian Statistical Institute at Delhi!

Wednesday, July 03, 2019

Term Lending Institutions or Universal Banks?

There has been and continues to be a failure for a long term market for funds to develop in India. In this context, Dr. Rangarajan’s suggestion (The key agenda must be to accelerate growth, The Hindu, 29th May 2019) to revive the setting up of separate long-term financial institutions, partly funded by government, on the face of it, seems a plausible solution.

However, considering that financial intermediaries are highly leveraged entities who function on thin operating margins and are able to attain viability through economies of scope, whereby they offer numerous varied services, pure term lending institutions would be incomplete organisations and may find it very difficult to continue as viable going concerns without continuous budgetary support.

Furthermore, the limited interactions they would have with their clients as pure term lending organisations would preclude accumulation of vital information on their clients’ intention and  ability to service debt. Again, term lending institutions with a portfolio of debt exposure would find it difficult to build remunerative viable asset portfolio since on one hand they would be exposed to the down-side risk on their exposures virtually without limit, their upside benefits from pure debt exposures would be limited.

Addressing all such inconsistencies in their organisation design would convert the term-lending institution into a universal bank!

The need of the hour is to salvage the project appraisal and management skills of the DFIs which have been accumulated at much cost and effort over the decades and is unfortunately left to decay. This can only be done if these skills are recognized and given due importance.

Tuesday, December 18, 2018

Are Interest Rate Subventions a Cure to Improving Financial Health of SME & Small Agriculturists?



Prof. Pulapre Balakrishnan’s article, Independence and accountability published in The Hindu, dated 9th November 2018 is well written and a balanced exposition. However, his suggestion (“If, in the spirit of contriteness as it were, the government wants to reach out to them, the right course would be to provide interest rate subvention”) for providing interest rate subvention for improving the financial health of medium and small enterprises seems to be dictated more by emotions than by either logic or empirical evidence on such interventions.

Interest rate subsidies, which such subvention would entail, creates various distortions and negative consequences for the economy and society. These include,

a)      It is available only to those who have taken bank loans, ie a small minority of the populace.
b)      Such policy generates excess demand for bank credit, which gets rationed essentially through exercise of political and economic power. That is, those with political and economic muscle corner a greater proportion of bank loans.
c)      This in turn leads to growing levels of income and wealth inequality. First, because the rich and powerful now have larger capital at their disposal. Second, they get it at cheaper rates than the market clearing rate. Third, their incentive to repay is lower.
d)     The excess demand for credit cleared through extra-constitutional means, also leads to generation of humungous amounts of corruption – affecting  politicians, bureaucrats, and banks.
e)      The losses on account of bad loans in turn make the banks weak / sick.
f)       This in turn forces banks to give lower returns to their depositors. (Incidentally, the Governor of RBI has gone on record in his speech dated 26th July 2016 stating, “Many middle class savers value the high nominal interest rates on their fixed deposits, not realizing that their principal is eroding significantly every year”!). A direct consequent of lower interest rates on deposits is that it reduces the savings rate of the economy, making the country rely more on foreign capital.
g)      Since the benefits are concentrated and the resultant pain extremely diffused over the entire society there is little concentrated efforts to counter it. These aspects of negative consequences of cheap credit is hardly visible in the media or policy documents.   

Furthermore, interest rate subvention would have to be substantial if it is to make a difference to the financial viability of any project, especially considering that total interest costs may not be a very large proportion of overall costs for any but the most profitable projects.

As such, with large amount of the interest rate subvention all the negativities and distortions associated with using interest rate subsidy in promoting trade / industry would very well come into play. 

As an underdeveloped country, higher levels of capital in all forms (physical, financial, human, technological etc.) are required. Making it cheap, but difficult to obtain is not helping anyone, least the intended beneficiaries. It just salves middle class conscience and converts us into a society of alms-receivers. Availability of credit is much more important than cost. Pushing cheap credit does not solve problems of connectivity (roads / telephone lines), irrigation, power, social equality, lack of information, lack of basic skills which make people productive, good health etc. Not having ability to usefully employ credit, is like giving an illiterate man a book on religion or philosophy with the hope that it would do enlighten him! Credit given to persons without ability to utilize it helps in driving borrowers into a debt trap.

A better way to promote accumulation of financial would be by focusing more on the deposit side of the banking business. Especially using technology and redesign of process to make it  easier to open and operate simple depository accounts. Presently, the processes we have implies that for a daily worker to operate his account he / she has to forego a full day’s earnings. Is it any wonder that there are so many dormant PMJDY accounts or that the level of operations in the non-dormant accounts is low?

Governance in PSUs


Prof. T T Ram Mohan’s is a well-known and respected academic, who regularly publishes his views on various banking and financial markets related subjects in established newspapers and journals. In his article, The RBI concedes a vital principle, carried by The Hindu, dated 22nd November 2018 makes a number of valid observations and deductions. However, I would like to differ with him on the following issues: 

a)      The need for the Board to exercise its powers so as to overrule management decisions would not arise if the Board has being giving meaningful strategic direction and the management is up to its responsibilities. Therefore, for a well-functioning organisation the need for Board to exercise its powers so as to overrule management decisions should rarely arise. This is where the criticality of composition of the Board comes into play. Considering the composition of the RBI Board, it is anybody’s guess as to how independent it is in taking considered, non-partisan decisions, and giving broad strategic direction. The composition and functioning of Boards of PSUs, especially PSU Banks, is a readily available glaring example.

b)      Prof. Ram Mohan states that, “The RBI management may or may not accept the inputs of the Board”. Would this not amount to insubordination? If the management of RBI (or any other corporate body howsoever organised) differs from the opinion of the Board, the options available to it are (i) re-represent with cogent arguments (ii) accept Board’s decision and implement, failing which (iii) step down from the management. The luxury of not accepting inputs of the Board is just not available to the management under any circumstances.

c)      If RBI’s revaluation reserves have arisen due to changes in rupee value of its gold and foreign currency holdings, will it not violate the matching concept accounting principle by netting it off against government securities? And if such netting is done, would it not amount effectively to “stealing” from Paul to pay Peter? Well one of the qualities which make money valuable is its “fungibility”!

d)     Prof. Ram Mohan also suggests and justifies need for relaxation in PCA norms. Which is in other words nothing but support for regulatory forbearance - one of the principal contributing factors to present mess which is Indian banking industry. The concern for adequate, timely, and reasonably priced credit flowing to various economic agents is not just valid but extremely pressing and critical. However, regulatory forbearance (by any name / form including loan write-offs, directed and cheap credit, Mudra Loans, 59 minutes loans etc.) does not address the issue and as has been repeatedly seen contributes in making the problem even more complex and intractable, ultimately adversely affecting all and sundry.

In this context, I would like to mention that the lending procedures / standards which are followed in Indian banking primarily evolved to address financing of trade. Credit risk in terms of Moral Hazard was covered by having security charge over the commodity being financed (preferably under banker's lock and key) and risk of Adverse Selection was addressed by stipulating margins and periodic valuation. This was further supported by stock statements / inspections and worked fine as long the lending was restricted to financing trade in commodities, valuation of which was fairly well predictable. For commodities with high volatility in valuation, suitable higher margins were stipulated. However, once financing of manufacturing is considered there is no way the borrowing entity can continue as a going concern without both long and short term debt. As such, the dichotomy of working capital finance vs term / project finance is not just anachronistic but also illogical. There are several other conceptual inconsistencies in the existing lending framework used by the Indian banking industry.

For example, coming to the financing of services (which now constitute more than 50% of the Indian economy) with virtually no tangible primary security, the existing processes fail all together leaving the financing of this sector to the ministrations of the equivalent of quackery.

The conceptual framework under which lending is done in India is therefore in my considered opinion no more relevant to cater to Indian conditions - agriculture, manufacturing, trade, or services. Therefore the difficulties in accessing bank credit, prolonged delays, and the high levels of NPAs arising periodically should not be surprising. 

In the absence of a suitable, coherent, workable, conceptual framework for lending, bankers have fallen back primarily on provision of collateral security. This in turn brings other complications. First, collateral security does give comfort but hides the nature of risk being taken on by banks on their lending book - in terms of debt risk versus equity risk. Now since both debt and equity risk is indistinguishably mixed up in the overall portfolio of Indian banks, while the pricing is wholly debt related, it is but natural that NPAs arise since the overall portfolio is sub-optimally priced. Second, provision of collateral blinds banks to the basic fact that their primary security is a going concern generating surpluses, which can be pre-empted for debt servicing. No bank can survive by resorting to foreclosure of security especially since they are highly leveraged entities, work on wafer thin operating margins in the lending business, and therefore have very little margin of safety in making mistakes. Let alone relying wholly on rectification of past mistakes.

The lack of coherent conceptual framework for lending is also amply displayed by the decision making process in banks, with extremely long appraisal notes, multiple iterations and queries which prolong the time for decisions to be made, stipulation of all kinds of irrelevant and unworkable loan covenants etc. All these aberrations are essentially insurance policies being taken by officials involved in taking lending decisions. Poor guys are just trying to protect their backsides with the ever present vigilance sword hanging over them.

The present situation of Indian banking is the direct result of mis-governance practised by different governments over the past 50 years plus. Irrespective of persuasion or ideology, the political class has strongly entrenched perverse incentives to control the financial markets – it helps in getting votes by controlling rural elites with promises of cheap credit and lone waivers and at the same time helps in garnering funds for fighting elections from the large capitalist class. Over and above all this, the icing on the cake is the ability to twist the arms of PSUs for financing pet projects through resort to CSR funds.  The strategy is especially endearing since the benefits are highly concentrated, while the consequences are highly diffused over the entire populace and prolonged over time.

To achieve this state of affairs, the first step was emasculation of management – which has been largely achieved for nearly all PSU organisations. Maybe RBI is one of the remaining bastions to be overcome!