tag:blogger.com,1999:blog-196194582024-03-18T02:48:22.893-07:00Thoughts & IdeasSushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.comBlogger96125tag:blogger.com,1999:blog-19619458.post-3816117351445091552023-09-05T04:12:00.003-07:002023-09-05T04:20:30.619-07:00A Tribute to my Teachers on Teachers Day<p><span style="font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;">Today is 5</span><sup style="font-family: "Times New Roman", serif; text-align: justify;">th</sup><span style="font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;"> of September, the
day India celebrates Teacher’s Day as a tribute to Dr. Sarvapalli Radhakrishnan,
independent India’s first Vice President and later second President. He was
essentially a noted academician and philosopher, and had held distinguished
positions in the Universities of Mysore, Calcutta, and Oxford. He had also
served as the Vice Chancellor of the Banaras Hindu University (1939-48).</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">As a story goes, after he became the
President of India in 1962, a few of his students requested him to allow them
to celebrate his birthday. However, Dr. Radhakrishnan asked them to observe it
as Teacher’s Day instead. Since then, September 5 has been celebrated as
Teacher’s Day.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">On this day, the general trend is to meet,
felicitate and honour one’s school or college teachers throughout the country. But
life is life and it has many teachers - they come in all shapes, sizes, and
temperaments. Today I plan to remember and honour some of my life’s teachers.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The first person who comes to my mind is
the lift-man in a high-rise residential building in which I then lived – a short,
quiet, diminutive man with a shy smile. It so happened, that while travelling in
the lift, one of my fellow passengers casually mentioned as to why do we need a
lift-man in a fully automatic lift. Prima facie, a most logical question. But I
noticed that the lift-man cringed on hearing this and in his soft spoken manner
replied in chaste Hindi – “it gives employment to one man”. Later I came to
know that the person had an MA in Sociology and had come to the city (from a
small place near Varanasi) in search of employment and with much difficulty the
only work he had been able to find was that of a lift-man. He worked 12 hour
shifts and lived in a room which he shared with five other men in similar circumstances.
I soon moved away from that city, but the lesson I got from that one sentence
remains with me.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The second teacher who comes to my mind is
a truck-driver I befriended while I was doing my rural assignment in the back-of-beyond
a small village in Bihar. Against normal practice of most bankers in similar predicament
I had decided to live in that village rather than commute from the nearest town
(see </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;"><a href="https://sushilprasad1.blogspot.com/search?q=a+rural+sojourn">A Rural Sojourn</a></i><span style="font-family: "Times New Roman", serif; font-size: 12pt;">). I got acquainted with this man at the small
eatery in the village which we both frequented. He was about 40 years old, dark,
short, wiry and used to have a permanent salt and pepper stubble on his face,
and invariably wore just a lungi with a singlet. He used to drive someone’s ramshackle
truck on some kind of commission basis and just about managed to keep his body
and soul together. It is more than 35 years and I do not remember his name but
his image remains crystal clear in my mind’s eye.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">One day, this man very hesitatingly approached
me with a request to help him open a bank account. Thirty-five years ago, having
a simple savings bank account used to be a prestigious affair which also
involved battling a major exercise in bureaucracy. This man’s main worry was
that he did not have a “guarantor”. The local practice was that the introducer
was referred to as a guarantor and few people wanted to take the responsibility
of that risk. However, since I had become fairly well acquainted to this man, I
readily signed the account opening forms as introducer and arranged for opening
his account the next day. </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;">He used to
regularly drop into the branch to deposit small amounts and we would greet each
other. Around six months after the account was opened later, he came to get his
pass-book updated which then came to me for initialling. I was surprised to
note that he had a balance of around Rs.10,000/- in his account! While handing
his pass-book to him I joked, hey you are a rich man. After nearly three years
of service I had never had so much money in my SB account. The man looked at me
with folded hands with a look of utter gratitude in his eyes and replied, “Huzoor,
if someone had opened this account for me ten years ago, the truck that I drive
would have been mine”. This was my first lesson on the importance of promoting
savings habits for equitable economic development of a society, and the role
that financial intermediaries can play in it. It was later that I read and
started understanding the various implications of this seemingly simple intervention.
I have written about it in my blog </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">“<a href="https://sushilprasad1.blogspot.com/2013/08/on-financial-inclusion.html">On Financial Inclusion</a>”</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;">, and the
article, </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">“<a href="https://www.moneylife.in/article/savings-banking-industrys-step-child/61919.html">Savings - Banking Industry’s Step Child</a>”</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;">, published by Money
Life. I also have some lovely memories of my trip to Siliguri (see, </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;"><a href="https://sushilprasad1.blogspot.com/search?q=siliguri">Kursela Days 11 – A Trip to Siliguri</a></i><span style="font-family: "Times New Roman", serif; font-size: 12pt;">) with this man on his truck!</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Having studied in seven schools and three
colleges, I have had innumerable formal teachers but only a couple of them have
left any kind of lasting impression on me. One was Sister St. Pius – a Keralite
nun and Principal of the small school from where I did my 9</span><sup style="font-family: "Times New Roman", serif;">th</sup><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> and 10</span><sup style="font-family: "Times New Roman", serif;">th</sup><span style="font-family: "Times New Roman", serif; font-size: 12pt;">
years of school. I was in the incorrigible habit of getting into all kinds of scraps
and being sent to the Principal’s office for punishment – at all the schools I
went to. This kind of affair was ordinary and boring until I got to meet Sister
St. Pius. She did not scold me but got me to tell her my side of the story.
This was a major shock to me, as I had never encountered anything like this
before. After I had mumbled my side of the story, she kept quiet for a few
moments and then softly asked, “Why do you think you are justified in doing
what you did?” I had no reply to give. She then asked me to think about it and
let me go. Forty-five years later, I am still thinking.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">At the university, in course of my final graduation
exam, I chose to answer a problem which involved deriving a fairly complex
mathematical solution. This was in a paper in mathematical statistics. I was
able to think out the solution and derived the answer using first principles.
But as luck would have it, I had made one silly mistake because of which the
answer was wrong. It so happened that the professor who had taught this course
passed by on invigilation duty, peeked into my answer sheet and casually mentioned,
“revise your derivation”, and then walked away. This man was an absolutely no-nonsense
person, a stickler for discipline, and generally a very unfriendly person. I realised
that I must have made some mistake in the derivation and slowly rechecked all
the steps and figured out where I had made the mistake, which I then rectified.
I can never forget this teacher.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Starting work brought another cohort of
exciting teachers – bosses, customers, and colleagues. I have been extremely lucky
to have the opportunity of working under a series of great bosses – gentle,
calm, but politically adept - who mentored me to who I am today. There were also
a couple of sadists – but one gets to learn some great lessons from them too!</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">I would like to share one good and one bad
memory here – though in retrospect both were essentially educative.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">I had a boss who was notorious for
refusing leave. As luck would have, I had to attend to a pressing family affair
and desperately needed three days leave. It was with great trepidation that I entered
my boss’s chamber but before I could utter a single word, he barked without
even looking up, “I can’t give you any leave”. I was more than perplexed as to
how could he be aware that I had come to request for leave, and what was I to
do now. The background was that my sister’s father-in-law had expired and I had
to go to the funeral to represent my side of the family. It was a social need
which I could not avoid. I finally screwed up some courage and blurted out as
to why I needed the leave. He thought about it and immediately agreed to give
me the three day leave (but not a day more), with the remark, “If you do not
go, your sister would have to hear taunts all her life that no one from your
family came for the funeral”. Later on in my professional career, I have always
tried to understand my subordinate’s leave requirements and hardly ever had occasion
to refuse one.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The second incident relates to my
interaction with our Law Officer. There was a large loan proposed to a PSU
which was backed with a Government of India guarantee and we were feeling quite
smug about bagging this “safe” business. I had gone to meet the Law Officer to
get the guarantee formally vetted by him. </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;">He was a competent and genial person (a rare
combination), and after he had done the vetting he cheerfully remarked, “if the
loan goes bad, would the Bank have the guts to prosecute the President of India”.
He said it in Hindi using very colourful language – </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">“Kya iss guarantee ke
bal pe aap President of India ke kamar mein rassi bandhwa payenge”</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> (which
translates to, “On the strength of this guarantee would you be able to tie up
the President of India in ropes as a prisoner). At that point of time, I took
it as a joke and laughed it off.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">It was only over time that I realised that
the best or rather the only viable security in any lending operation is a
borrower who can utilise the funds and generate a positive return, along with ability
of the lender to entrap the cash flows. All other kinds of security are not
just secondary, but rather tertiary. Banks being highly leveraged entities,
working on thin operating margins, have a low margin of safety. Depending on
foreclosure of security as primary security for collecting its dues would push
up transactions costs to the extent of making the business unviable. This was
one mighty valuable lesson.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Customers can also be great teachers, and in
fact the bad ones teach you more about banking and the politics which goes and
can go in it, than the good ones.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">One such memorable learning experience relates
to the branch where I did my rural assignment. The branch had a tractor loan
which had gone bad. In fact, the borrower had filed a counter case against the
tractor dealer and the Bank for cheating him and selling him a second-hand
tractor for the price of a new one! The logic being that when the tractor was
purchased by him it showed an odometer reading of some 15 kms. Though lending
operations were not under my purview, I sort of bull-dozed the Branch Manager
and the Field Officer into letting me meet this borrower so as to try and recover
the amount. POs in Patna Circle were held in pretty high esteem and my BM rarely,
if ever, refused any of my suggestions (he was uncomfortable with most of them).</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">I took the Bank’s jeep and drove off to
meet this borrower. The borrower was a fairly well-to-do farmer, and sarpanch
of his village (Jhagduchak Panchayat in Katihar District). As soon as I reached
this person’s house and introduced myself, I was greeted very warmly and with
the deference due to some kind of high official (I would not have been more
than 26-27 years old). After I had explained the reason of my visit, the borrower
feigned as if I (and the Bank) were doing him a major injustice and insulting
him. His primary take was how could the Bank even imagine that such an
honourable person as him could default on his commitments. The Bank should
worry on giving loans (under IRDP) to marginal farmers who take loans and then
disappear since they have no land to tether them. There was no way that he with
his vast land holdings could disappear. Moreover, he was a just, respected, and
honourable person and the sarpanch of his village. Then he went on into a tangent
and started discussing all kinds of things. Every time I tried to bring up the
subject of his repaying his loan his standard response was that the Bank should
rest assured that he would honour all his commitments before going off on
another tangent. I made at least two more visits and the same drama was
repeated. Later while talking to other people in the area, I came to understand
that this person was notoriously slippery in all his dealings. But the lesson,
that one should know the borrower well before taking any kind of credit exposure,
remains.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">With warm and respectful salutation to all
my teachers.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt;"><o:p> </o:p></span></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com1tag:blogger.com,1999:blog-19619458.post-16719141819500663502023-09-04T05:39:00.016-07:002023-09-04T05:46:06.985-07:00Adventures in Banking (To be read as Reminiscence of an Old Man) - I<p><span style="font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;">“N” was a large
well-known profitable company with sound financials whose main business was
production and marketing of chemicals and fertilisers. Naturally it attracted
corporate bankers the way honey attracts flies.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">"N" had a borrowing
arrangement through a consortium for its working capital requirements and with
all India DFIs for term debt. In addition, it had borrowed (rather it was lent)
clean “corporate loans” with no clear end-use from a number of banks trying to
edge into its regular working consortium or generally start a relationship. </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;">These loans were largely structured by way of
periodical payment of interest with bullet repayment of principal. In view of
the size of operations of the company or exposure, each of these corporate
loans was of relatively small size and could be easily repaid out of its cash
flows – provided there was no bunching of repayments.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">In this way the
company had raised about Rs.100 crores and had invested it in an unrelated
diversification project which had some major teething problems and the expected
cash generation did not happen. This in turn resulted in severe liquidity strain
for the company. So much so that the WC consortium leader was monitoring each
and every payment with the condition that only payments for regular operations
were permitted.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Given the size of
their operations and stability of cash flows servicing of these loans had not
been considered a major risk factor by the lending banks. I had just joined a
new assignment and the branch had one such Rs.20 crores corporate loan exposure.
Interest was being serviced regularly but at the time of bullet principal repayment
the company requested and was given time for 30 days to repay the amount. The
30 days turned to 60 and then to 90, but the principal repayment did not
materialize. Interest payment also started getting delayed and then stopped. In
effect the exposure became an NPA.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Given the size and
prestige of the company, taking legal recourse was temporarily deffered.
However, regular visits were made to meet and request the top managers for
repayment of the loan. In this course I met the CEO who directed me to the
Director Finance. We had a couple of very cordial meetings where the DF
explained the liquidity problems being faced by them and assured me it was a
temporary issue and thereafter small amounts dribbled in which just about covered the
accrued unpaid interest. The proof of the pudding is in eating it, and there
was no further repayments.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Then the DF
started avoiding meeting me and I ended up sitting long hours in his
ante-chamber trying to meet him without any actual meeting. This was upsetting
my other work schedules and therefore I decided to try and meet him in the
evening after finishing my day’s work. This tactic was also unsuccessful and I
could not get to meet him even though I sat quite late in the evening in this
company’s office over several days.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Meanwhile pressure
on me to get the account regularized had become very intense.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Now this company
had a culture / practice of serving tea with a heavy snack for all employees
and visitors sitting in office after 7 pm. The first day I also partook of the
tea and snacks, but later felt uncomfortable of having taken it. From the next
day, I politely refused it under some pretext or other. After a few days, the
DF’s secretary came and requested me to take the tea and snacks. I thanked him
and very politely told him that I have been coming to meet the DF and not eat.
He went and informed this to the DF, who came out of his cabin and escorted me
to his cabin. He then told me that my refusing the snack was embarrassing for
him. I just reiterated my request for repayment of our loan and took my leave.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The next day we
got a cheque for the full principal dues paid out of an account which the WC consortium leader was not aware of! We appropriated it and advised them the
remaining interest dues (a very nominal amount). Within a couple of days that
payment was also received.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;"><b>Lesson 101</b> – There
is more to loan documents, security, financial analysis, legal recourse,
registration of charges etc etc for effecting recovery in NPA accounts.</span></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-91056546283794751712023-08-26T07:51:00.009-07:002023-08-26T07:51:56.786-07:00IndAS and Indian Banks<p> </p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Ind-AS refers to Indian Accounting
Standards and they have been formulated keeping the Indian economic & legal
environment with a view to converge accounting standards in India with International
Financial Reporting Standards (IFRS).<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The RBI had issued a circular in February
2016 requiring Scheduled Commercial Banks (SCB) to implement Indian Accounting
Standards (Ind-AS) in order to bring Indian accounting standards in line with
international standards, and prepare standalone and consolidated Ind-AS
financial statements with effect from 1 April, 2018. However, in April 2018 RBI
deferred the applicability of Ind AS by one year, i.e., implementation was to
be effective from 1 April, 2019. Later, RBI issued a circular in March 2019 which
deferred the implementation of Ind-AS till further notice, giving the reason
that implementing Ind-AS would require amendments to be made by the government
to the relevant banking laws. The legislative amendments recommended by the RBI
are still under consideration by the Government of India.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Financial institutions like banks,
preparing their financial statements under Ind-AS norms would, </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">inter alia</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;">,
have had to calculate Expected Credit Losses (ECL) on their loans and advances during
each reporting period and make necessary adjustments to their profit-and-loss
account </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">even before a borrower had defaulted on a certain loan</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;">.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Presently, SCBs are required to make loan
loss provisions based on an “incurred loss” approach, which implies that they need
to provide for losses that have already occurred / incurred.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Since classification of a loan as NPA
normally takes place after a loan becomes overdue, the loan loss provisions are
only made thereafter. By this time the borrower may have started facing
financial difficulties which is reflective of increased credit risk faced by
the banks which is not captured by existing accounting norms.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Ideally, the bank should have recognized
the increase in the credit risk and started making provisions for the losses
that would be expected in such exposure much before the default happened let
alone the subsequent classification of the exposure as NPA.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The adoption of Ind-AS could, therefore,
cause banks to proactively recognise losses on their loans and build up the
necessary underlying provisions. This would lead to increase the reported level
of NPAs and banks who have more to hide would naturally try to avoid adopting Ind-AS
accounting norms for as long as possible.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">At the same time, implementing Ind-AS
would put further pressure on the Central government to increase the amount of
funds required for recapitalisation our PSU banks. This would further
exacerbate their already stretched fiscal situation. </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> </span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">One of the pillars of sound banking
regulation is effective use of disclosure as a lever to strengthen market
discipline and encourage sound banking practices. That is, more transparent
financial disclosures would force banks to be more careful in their banking
practices and make for sounder and healthier banks.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">In this regard it is interesting to note
the ground level reality as reflected in the Annual Reports (for FY 2021-22) of
some major banks. For this article a sample consisting of Axis Bank, HDFC Bank,
and SBI has been considered.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">HDFC Bank reports that it being an
associate of HDFC Ltd. submits its consolidated financial information prepared
in accordance with the recognition and measurement principles of IndAS to HDFC
Ltd for the purposes of its consolidated financial statements / results.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Axis Bank reports that, it is in the
process of implementing necessary changes in its IT systems wherever required
and other processes in a phased manner and it is also submitting Proforma Ind
AS financial statements to RBI on a half-yearly basis.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">SBI blandly mentions in its AR that it is
already geared up for implementation of Ind-AS. However, implementation of Ind
AS in Banks has been deferred by RBI until further notice. No further
information is given. Thus implying that its reported financials are not IndAS
compliant.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">The level of transparency practised by
these banks should be apparent from the above.<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Is it a wonder that there is such a wide
divergence as to how the market perceives these banks as reflected in their
stock prices!</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">This does not bode well for the health of
the banking system as banks that do not recognise their problems have much
lesser pressure to resolve them.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The pain is likely to continue till GOI puts
in place structural reforms for putting the governance of PSU banks on sounder
footing.</span></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-26222513609500655952023-07-21T21:33:00.011-07:002023-07-21T21:41:04.834-07:00 Bank Nationalisation – A Different Perspective<p style="text-align: justify;"><span style="font-family: arial;">Most friends find it difficult or even impossible to believe or even consider that nationalisation of banks (in 1969 and 1980) was anything other than an economic masterstroke.</span></p><p style="text-align: justify;"><span style="font-family: arial;">Well, they can't really be blamed. That is what we have been brainwashed with over the last 50 + years. The irony is that no political party, irrespective of persuasion, wants to call out this bluff. The benefits of having a pliable banking sector under constant leash is too lucrative. </span></p><p style="text-align: justify;"><span style="font-family: arial;">Most economists, social scientists, or policy makers, who should be aware of the horrendous and prolonged ill-effects of this decision are unwilling to go on record if they have any misgivings. It is human nature that it is extremely difficult to go against the grain. (With the honourable exception of Arvind Subramanium - his view is included in this essay). </span></p><p style="text-align: justify;"><span style="font-family: arial;">There are at least three conundurams to the issue of bank nationalisation. <i>First</i>, was it essentially a political bluff or an economic game-changer. <i>Second</i>, has this decision adversely affected our economy and society and how. <i>Third</i>, what can be done to rectify the situation, if it needs rectification.</span></p><p style="text-align: justify;"><span style="font-family: arial;">This is the first part of my series where I give evidence as to why I changed my opinion and am now convinced that the sole reason for nationalisation of banks was purely political for extremely petty and selfish reasons. </span></p><p class="MsoNormal" style="text-align: justify;"><b><span style="font-family: arial; line-height: 17.12px;">From: Of Counsel by Arvind Subramanian (page 18)<o:p></o:p></span></b></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial; line-height: 17.12px;">If you were to ask me what the two egregious economic sins we committed in the past were, they are the Industrial Policy Resolution, which started the licensing of industry, <b><i>and bank nationalisation in 1969.</i></b></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;"><b><i><span lang="EN-GB">Extract from
Jairam Ramesh’s biography of PN Haksar (</span></i></b><b><i><span lang="EN-US" style="color: #222222; letter-spacing: -0.35pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;">Intertwined Lives – P N Haksar
& Indira Gandhi)</span></i></b><b><i><span lang="EN-GB">, who masterminded the nationalisation of
banks announced by Prime Minister Indira Gandhi.</span></i></b></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">As late as 9 July
1969, [PN] Haksar was not entirely convinced that banks had to be nationalised
right away. Then three days later came the assault on Indira Gandhi’s authority
with the announcement of Sanjiva Reddy as the Congress’s presidential candidate
(12/07/1969). Subsequently, Morarji Desai’s resignation was secured after four
days (16/07/1969).</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">My guess is that
between 12 July 1969 and 15 July 1969, Haksar and Indira Gandhi must have
confabulated and decided to shed their caution on bank nationalisation. On 16
July 1969, she asked PNH to meet with KN Raj, one of India’s most distinguished
economists and find out his views on bank nationalisation.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">Another eminent
economist, PN Dhar, was also present when PNH and K N Raj met. Dhar was to
later write that Raj strongly favoured nationalisation but felt it would take
at least six months to carry it out.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">But just three
days later, on 19 July 1969, 14 banks were indeed nationalised, making one of
Indira Gandhi’s “stray thoughts” an immediate reality. This account is from the
memoirs of DN Ghosh, who was then the official concerned in the banking
division of the Ministry of Finance and who was to later become the chairman of
the State Bank of India (SBI). It was the night of 17 July 1969 and Ghosh
recalls being summoned to Haksar’s residence:</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i><span lang="EN-GB" style="font-family: arial;">I
saw that Haksar was browsing through a mass of papers, among which I could spot
the Reserve Bank publication, Statistical Tables Relating to Banks in India. He
was trying to figure out how many banks accounted for 80 per cent to 85 per
cent of the total resources of the system. Off the cuff, I said the number
could be 10 to 12 banks.</span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i><span lang="EN-GB" style="font-family: arial;">Just
then, the Union Minister of State for Company Affairs, KV Raghunatha Reddy,
strolled in and stood listening to our discussion. He piped up that it was a
golden political opportunity to nationalise all banks and that we should go
ahead with the bold decision. Haksar waived his suggestion politely and
requested him to keep his impetuous radicalism to himself.</span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i><span lang="EN-GB" style="font-family: arial;">Haksar
wanted to be left alone till he himself had been fully briefed on a subject
that was entirely foreign to him. I then asked him if the Prime Minister had
made up her mind on nationalising the banks. “Not yet”, he replied. “We are to
discuss this tomorrow morning.” He was not sure if it would be possible to sort
out all the legal conundrums involved and have the ordinance [for nationalisation]
ready by 19 July which was a Saturday. The date was crucial for two reasons.
[Acting] President VV Giri was due to demit office on the forenoon of 20 July
and the Lok Sabha would begin its monsoon session on 21 July.</span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">The choice of
Ghosh by Haksar to be the “keeper of secrets” as far as bank nationalisation
was concerned reveals much of how PNH operated.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;"><span>A Bakshi, who was
then deputy governor of the RBI, had worked with Haksar in London in the early
1950s. They were ideologically also similar and were exceedingly close personal
friends. Thanks to Haksar, Bakshi would join the </span><span>soon-to-be-created
department of banking in the Ministry</span><span> of Finance and later become the Comptroller and Auditor General (C&AG) of India in 1972. It was Bakshi who
had given the seal of approval to Ghosh and had joined the duo late that night
of 17 July 1969 for confabulations.</span></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;"><span>The next day (18</span><sup>th</sup><span>
July 1969), Ghosh writes, the prime minister herself summoned him in the
morning. </span><span>She wanted to be convinced that the legislative draft for
nationalisation of banks could actually be prepared in less than 24 hours. When
she was told that such a draft had, in fact, existed from the end of 1963 when
nationalisation of five banks had first been considered</span><u>,</u><span> she appeared to
relax and swore Ghosh to absolute secrecy saying that in case of any hitch he
should apprise PNH.</span></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">For the next few
hours, Haksar, Bakshi, Ghosh and a few others who had been specially
commandeered for this purpose, like RK Seshadri (an RBI official) and Niren De
(attorney general) slogged to prepare the ordinance – which was an executive
order that would have to be ratified by Parliament later.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">At 8.30 pm on the
night of 19 July 1969, Indira Gandhi addressed the nation on radio and
announced the nationalisation of banks.</span></p>
<p class="MsoNormal"><b style="text-align: justify;"><span lang="EN-GB" style="font-family: arial;">From:
India – Government & Politics in a Developing Nation</span></b></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i><span lang="EN-GB" style="font-family: arial;">Robert
L Hardgrave Jr, & Stanley A Kochanek</span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">In an effort to
build and maintain a progressive image, the Congress party over the years had
adopted a series of resolutions promising a fundamental transformation of the
Indian economy. These resolutions had acquired an increasingly radical tone as
Congress fortunes began to slip at the polls. Calls for nationalisation of
private-sector banks, insurance companies, and key industries entered the
Congress program.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;">Demands for
redistributive justice became embroiled in Congress factional politics when
Indira Gandhi’s power was challenged by her senior and more conservative
colleagues in the Cabinet and the party. Mrs Gandhi, on the advise of P N
Haksar, decided to counter this challenge by transforming the factional dispute
into an ideological crusade. …. The strategy was a resounding political success
and resulted in reversing the process of economic liberalization. (Page 361).</span></p>
<p class="MsoNormal"><b style="text-align: justify;"><span style="font-family: arial; mso-ansi-language: EN-IN; mso-bidi-font-size: 11.0pt;">From : Barons of Banking –
Glimpses of Indian Banking History by Bakhtiyar K Dadabhoy</span></b></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: arial;"><span>(Dr.
I G) Patel gives us his version of events in his memoirs. Indira Gandhi sent
for him and asked him if banking was under his charge. No one else was present.
On his telling her it was, she simply said: </span><b><i>‘For political reasons,</i></b><i>
it has been decided to nationalise the banks. You have to prepare within 24
hours the bill, a note for the Cabinet and a speech for me to make to the
nation on the radio tomorrow evening. Can you do it and make sure there is no
leak?’ </i><span>(Page 305)</span></span></p>
<p class="MsoNormal" style="text-align: justify;"><i style="mso-bidi-font-style: normal;"><span style="font-family: arial; line-height: 107%; mso-bidi-font-size: 11.0pt;">Dadabhoy has supported this view
point by referring to The Evolution of the State Bank of India (Vol 3, Pae 34)<o:p></o:p></span></i></p>
<p class="MsoNormal" style="text-align: justify;"><b><span style="font-family: arial; line-height: 107%;">From: Perspectives on
Development by Dr. V V Bhatt (GM & CEO IDBI at that time)</span></b></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span lang="EN-GB" style="font-family: arial;">By 1969, prominent
commercial banks were nationalised by Prime Minister Indira Gandhi, purely for
political reasons. L K Jha (RBI Governor) was not in favour of this policy.
Neither was I. I wrote an article in the Economic and Political Weekly (October
1970) criticising the move (I have been unable to access this article).<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><span style="font-family: arial; line-height: 107%;">From: Interview of Y V
Reddy published on 15/07/2019</span></b></p>
<p class="MsoNormal" style="text-align: justify;"><i><span style="font-family: arial; line-height: 107%;">https://www.bqprime.com/business/dont-allow-public-sector-banks-to-whither-away-says-yv-reddy<o:p></o:p></span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span lang="EN-GB" style="font-family: arial;">“Banks were
nationalised at the whim of a Prime Minister, they will be de-nationalised at
the whim of another Prime Minister.” Y V Reddy.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><span style="font-family: arial; line-height: 107%;">From: Bank Nationalisation:
The Original Sin by DN Ghosh</span></b></p>
<p class="MsoNormal" style="text-align: justify;"><i><span style="font-family: arial; line-height: 107%;">https://www.bqprime.com/opinion/bank-nationalisation-the-original-sin<o:p></o:p></span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span lang="EN-GB" style="font-family: arial;">So, is bank
nationalisation the original sin? Alternatively, was it a case of bad economics
but good politics? To answer all that, some contextualisation is necessary.<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><b><span style="font-family: arial; line-height: 107%;">From: Finance at the
Frontier by J D von Pischke</span></b></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial; line-height: 107%;">Commercial banks were
considered by some central bankers, government officials, academicians and by
many politicians to be at best indifferent to farmers and at worst unpatriotic corporate
citizens.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial; line-height: 107%;">This report <i>(Report of
the Expert Group on State Enactments Having a Bearing on Commercial Banks
Lending to Agriculture – Talwar Committee 1971)</i> dispels the view that prior
to their nationalization Indian commercial banks were unwilling to lend in
rural areas because of urban bias or lack of interest. (PS: I have been unable
to locate this report)<o:p style="font-size: 12pt;"></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><br /></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-79627084914841739032023-05-29T03:30:00.000-07:002023-05-29T03:30:03.865-07:00Ananthan Gets Shot<p><span style="font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;">It was just another boring day in office.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">After completing my rural assignment at
Kursela I was posted to the Zonal Office, Purnea, where I was attached to the
Development Officer in the DGM’s secretariat. Apart from writing a few letters
and collating some statistics, I had very little else to do. Time hung heavily
on my hands and we spent our time going down to drink tea at least 4-5 times in
a day, discussing office politics day and night, and desperately seeking some
excitement.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">One morning, as usual, we had reached
office by about 10 am and till about 10.30 people were still settling in with
their morning cup of tea, when the Personnel Officer walked in. He used to
commute daily from Katihar, which was 40 kms away, but invariably used to reach
office on time. Therefore, his reaching late was a little unusual.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">After reaching office, he immediately
called for me. Since I had been awaiting transfer to Patna for quite some time,
even though my transfer orders had come but there was no sign of any
replacement joining, I had not been relieved. With the happy feeling that my long-awaited
replacement had come I sauntered into his chamber trying hard not to let the
anticipation of being relieved show on my face.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">What awaited me there was quite different
and totally unexpected. With a very grave face he informed me that my friend
Ananthan had been shot and was presently admitted at the District Hospital in
Katihar. He had very little details beyond this, which he had gathered at the
Katihar bus-stand while coming to Purnea. After passing on this information, he
practically washed his hands of this affair.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Chokalingam Ananthan was a batch junior to
me, and posted at some rural branch around Purnea. I was aware that he had accompanied
Pawan, another batchmate of his and the two had gone to Patna, which was about 300
kms away, to purchase a motorcycle for Pawan. My mind was in a twirl and for a
few moments could not make out what I could or should do. On instinct I went to
the branch, withdrew all the money I had (a little less than Rs.1000/-), informed
one or two of my colleagues, picked up my mobike and drove down to Katihar.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">I reached Katihar District hospital by
about 11.30 am where I found a big crowd of people, quite a few of whom were bank
staff, both from SBI and other banks, milling around the place and just adding
to the confusion. No one seemed to have any details except that some bank
official had been shot on the Katihar-Purnea highway that morning and the
person was still alive. After some time, I was able to establish contact with
the doctor on duty who in a matter-of-fact voice informed that luckily the
bullet had missed Ananthan’s heart and spine, and they had been able to stitch
up the wound. However, for further medical assistance and follow-up he should
be taken to Patna. Ananthan was at that point under deep sedation.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">I then chanced upon Pawan in the crowd.
Pawan seemed to be in a complete state of shock, with wide open blank eyes complemented
with an equally blank look on his face. I took him away from the crowd and
tried to piece together what had happened. By this time, my friend and batchmate,
Mohit Sinha who was also posted at Katihar had joined us.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Pawan had purchased the bike the previous
day in Patna and he and Ananthan had taken the night train to Katihar with the brand-new
bike booked in the luggage van. The train journey was quite uneventful and on
reaching Katihar early next morning had got the bike released from the railway
authorities. Since, Pawan was not sure of his driving skills, Ananthan was
driving it with Pawan in pillion as they drove down from Katihar to Purnea. At around
8 am while they were somewhere midway between Katihar and Purnea they
encountered a couple of young men who signalled them to stop. The decided to ignore
them but had to slow down a little. It was then that one of these young men whipped
out a country made pistol and shot at Ananthan. Even though hit, Ananthan kept
driving for a little distance before collapsing.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">This being Bihar, things took an
interesting turn here. Some local villagers who had witnessed the incident
immediately came to their rescue. They first caught hold of the assailants.
Then they stopped a passenger bus going from Katihar to Purnea, got all the
passenger to get down, got the driver to turn the bus around, loaded Ananthan
and Pawan on to the bus and brought them to the Katihar District Hospital where
Ananthan was admitted. Meanwhile some other villagers took the two assailants and
lodged them at the local police station.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The dilemma now was how to take Ananthan
to Patna. Though there were crowds of people, including some from the Officer’s
Association, no one was willing to involve themselves. Katihar is about 300 kms
from Patna by road and there used to be a pot-holed apology of a national
highway connecting the two which it took a minimum of 10 hours to cover and could
easily stretch to 14 hours. No ambulance or private vehicle was available and carrying
Ananthan in that condition by bus was out of question.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The only other alternative was to take a train
which left Katihar at about 4 pm and reached Patna by 11 pm and consisted only
of second-class sleeper coaches. One of those slow trains meant for ferrying cheap
Bihari labour to Punjab. We decided on taking the train as through the good
offices of the local Officers Association we were able to get tickets and
reservation in sleeper class. Ananthan was coming in and out of drug induced
coma and was on oxygen support. In one of his lucid moments, we asked him of
how could we inform his folks of this incident. He was clear that his parents should
be informed only if he became well or died. They lived somewhere in the interior
of Tamil Nadu, knew no Hindi or English, and would have no clue as to how to
handle the situation. However, he had a brother who worked somewhere in the
armed forces and should be informed.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">So, we boarded the train - Ananthan on a
stretcher under oxygen support, Mohit, a young lad who was some private doctor’s
assistant and knew how to handle the oxygen cylinder, and myself. Thanks to a
friendly coach conductor we got decent berths and the train was not too
crowded.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">As we were approaching Patna, a fresh
dilemma struck us. What were we to do after reaching Patna. How to get Ananthan
off the train, what hospital to take him to etc. etc. However, luck was with
us. LHO had been informed about the incident and the SBI fraternity, both from
the Personnel Department and the Association, were in present in full force on
Patna station. The Personnel Department was led from the front by the First
Officer, Yashi Sinha, himself.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">They were aware of the train we were
coming on, but had no clue as to in which coach we were in. Yashi had therefore
stationed people all along the entire platform. He had also arranged for a doctor,
ambulance, cash, police assistance etc. and we were immediately whisked to
Patna Medical College Hospital. For the two days Ananthan was admitted there he
received virtually no medical attention. Then it was decided to shift him to
the private hospital of Dr. Abdul Hai, one of Patna’s leading surgeons where
Ananthan was operated and over the next ten days slowly recovered and was back
on his feet in about two weeks.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">There are some interesting sidelights to
the episode. Since Mohit and myself had moved directly from office we had no
change of clothes, tooth brushes etc. Since my brother lived in Patna I managed
by borrowing his clothes. With the money Mohit was carrying, he managed to
purchase a ridiculous looking orange T Shirt and trousers from some pavement
shop and lived in it for the next one week.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Once Ananthan’s condition stabilised, Mohit
and myself returned to Purnea. The first thing the Personnel Officer asked me
was how come I was away from office for some ten odd days without a leave
application. Mind you, this is the same guy who did not lift his little finger
to help even though he was physically present in Katihar when the incident
happened and he was aware of the situation and was fully aware of where and why
I had gone!</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Every dark cloud has a silver lining.
Ananthan had been desperately seeking an Inter Circle Transfer to Madras
Circle. He got it on priority soon after he was well enough. And all our other
friends who were seeking ICTs from Patna Circle thereafter plotted to seek out
someone who would be willing to give them a glancing shot, not life threatening
but just enough to get them an ICT. Ananthan got married soon after getting his
ICT to a medical doctor.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Pawan did not fare as well. Being the sole
witness to the attempt to murder he remained under constant police and societal
pressure for a long time. At the same time, he kept on getting transferred from
one forsaken branch to another in Purnea Module over the next 3-4 years. He got
caught up again in a highway hold up and his bike was snatched never to be
returned. After a long time he got an ICT to his home state, Hyderabad. He was one
of the brightest and most upright officers I have known. Typical Hyderabadi, absolutely
unflappable but with nerves of steel. He retired as a DGM.</span></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com2tag:blogger.com,1999:blog-19619458.post-83139267252767439472023-05-27T01:03:00.004-07:002023-06-11T21:17:36.884-07:00What is Wrong in the Risk Management Process in Indian Banks?<p style="text-align: center;"></p><p align="center" class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: center;"><i style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The hard truth is that every loan has both a
borrower and a lender. </span></i><i style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">If the loan is inherently bad, the lender is as much at
fault as the borrower.</span></i></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The literature on managing the “NPA” problems of
Indian PSU Banks keeps growing, but the “NPA” problem keeps growing even
faster! Somehow, the weak, archaic, and anachronistic conceptual framework
under which most commercial bank lending is done in India, and its
associated processes, rarely find mention - other than exhortations that banks
should improve their risk management systems.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">In a
manufacturing organisation to have low levels of rejects not only should the technology and design of manufacturing process be in tune with the product being manufactured, but also the quality control process should monitor the level of bad parts
being produced. Accordingly, indications of larger than permitted number of
rejects suggests that entire manufacturing process needs to be re-tolled and / or fine-tuned.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">For banks
to have low levels of NPAs, their entire lending process from initial
appraisal, to detailed due diligence, to monitoring, to detection of incipient
sickness, to recovery has to be under control. The key to this is an
appropriate conceptual framework for lending, ie, the technology of lending. Recurrent high NPA levels
clearly indicates that debt capacities are being overestimated by the
appraisal process and the relevant monitoring parameters are not doing their
job. The responsibility for rectifying this rests squarely on the lender.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Along with this there should be low tolerance for
NPAs. Banks are highly leveraged entities and start making operating losses if
gross NPA levels are more than 4-5%. The ground level situation is that gross
NPA levels of PSU Banks was as high as 24.8% for the year ended March 1998, before
slowly falling down to a low of 2% by March 2009 before bouncing back to a high
of 14.8% by the end of March 2018, suggesting high tolerance to NPAs.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">That the conceptual framework for commercial bank
lending is a major impediment in making good quality lending is reflected not only in recurring bouts of high
NPAs, but inter alia, in constant complaints by industry that credit decision
making in banks is slow and cumbersome, getting credit, especially by the MSME
sector is extremely difficult, involves humongous amounts of paperwork, the
extremely long appraisal notes, the low level of credit as a percentage of GDP,
the over-emphasis on availability of tangible collateral security, the
preference of making investments in SLR securities than in making loans and
advances etc. etc.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Let me try and substantiate my contention.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Modern banking in India evolved out of Calcutta
Agency Houses which were trading firms which undertook banking operations for
the benefit of their constituents (Tannan’s Banking Law and Practice in India).
Naturally, the methodology which developed was geared for lending for trading in commodities. This is a natural outcome, since the evolution of
capital markets through the introduction and diffusion of financial innovations
is largely dependent on occupational specialisation of financial intermediaries
(V V Bhatt EPW May 1987).<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The credit risk in such cases was substantially
covered by the cash credit system and its associated practices of stock
statements, its verification and calculation of drawing power. Moral hazard
being eliminated by having goods under lock and key of the banker, and by
periodically inspecting stocks to ensure that they confirmed in terms of
specified quantity and quality. Adverse selection was controlled by keeping a
margin over market value of security. This was easy as long as valuation of the
underlying assets was straightforward and simple.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">This credit risk management framework starts
breaking down if it is extended for lending for industry. <i>First</i>,
the dichotomy between working capital and term finance is artificial since most
borrowers need both to continue as a going concern, and only a going-concern
can service its debt.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Second</span></i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">, in a manufacturing concern it is difficult to
identify and easily value the various components of current assets. The more
complex the manufacturing process, the more difficult it is to value the
underlying security. This system breaks down completely while evaluating the
borrowing capacity of borrowers operating in the services sector – where most
of the earning assets are intangible. Currently the services sector contributes
more than 55% of the country’s GDP while its borrowing levels have been
hovering around 30% of bank credit over the last few decades – and most of the
exposure is predicated against tangible security.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Third</span></i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">, the holy methods of lending laid down by Tandon,
Chore, Nayak Committee et al, and still being followed in various avatars are
essentially credit rationing devices. The background for setting up the Tandon Committee
(1974) was the need to curb the use of bank credit for hoarding of commodities
in short supply. The mandate given to them was for framing guidelines for
commercial banks for follow-up and supervision of bank credit for ensuring
proper end use of funds.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Similarly, the mandate of the Chore Committee
(1979) was to review the operation of the cash credit system of lending,
particularly with reference to the gap between the sanctioned credit limits and
the extent of their utilisation.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">These methods of lending were never designed or
meant to be credit risk management tools. The fact that credit rationing
implied some kind of credit risk control is only incidental. Debt repayment
capacity under methods of lending is predicated on underlying security rather
than debt servicing capacity. This leads to the primacy of the Current Ratio,
while leaving estimation of leverage and interest coverage ratios or designing
processes for entrapment of cash flows, as after-thoughts. The possibility and
need for amortisation of working capital borrowings, including the ubiquitous
large permanent cash credit component is wholly missing. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">It also leads to much avoidable confusion on the
concept of leverage and its calculation. For some it is Total Term Liabilities
/ Tangible Net Worth (TTL/TNW) – which was used typically by term lenders. For
“working capital” bankers, it is generally calculated as Total Borrowings (Term
plus Working Capital) / Tangible Net Worth. Other use the concept of Total
Outside Borrowings (say including Trade Credit) / TNW.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">If leverage is to be considered as a measure of
extent of (a) Moral Hazard (the extent of the borrower’s stake in the business
as a proportion of total capital employed by the business) and (b) Debt
Servicing Capacity, it is the third measure which is more appropriate for
banks. In fact, TOL should include contingent financial liabilities (say,
Financial Guarantees, Outstanding LCs, Bills discounted etc), ie everything
which is taken at more than 0% risk weight in calculation of CRAR.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Fourth</span></i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">, methods of lending, such as MPBF, creates
entitlements on the amount of borrowing. What is lost sight of is the kind of
risk involved. In this process, the credit exposure comprises
both equity as well as debt risk, while the pricing is wholly related to debt
risk. It is natural that the overall portfolio is sub-optimally priced - result
NPAs. The fact that at times bank finance substitutes equity is acknowledged by
various authorities (e.g., Dr. C Rangarajan in the TTK Memorial Lecture
(11/11/1997; Dr. Raghuram Rajan, Note to Parliamentary Estimates Committee on
Bank NPAs dated 06/09/2018;).<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The comfort that entitlements of the amount of
borrowing is covered by security (current or fixed assets as the case may be)
is misplaced. No bank can run its business on foreclosure of security as the
primary means of recovery, especially in India with its slow and cranky legal
processes. The transaction costs would be too high, especially since banks
survive on high leverage with thin operating margins. The predominant
consideration of tangible security in lending, not only limits the volume of
good loans which can be made but also low recovery in case the loans go bad.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The primary value the banker brings to the societal
table is ability to evaluate and manage all kinds of risks in the lending
process. As such, the risk management processes in banks should be able to
handle all kinds of risk, including credit risk. This realisation is also
conspicuous by its absence. The view that the latest round of high NPAs
resulted inter alia from falling commodity prices and exuberance in lending for
infrastructure is a reflection of lack of skills in handling such risks.
Classifying it as a reason for creation of NPAs from this perspective makes it
sound more like an excuse.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">An oft heard reason for high levels of NPAs in bank exposure to the infrastructure sector is that such lending created large
asset liability mismatches. But then this should have first led banks to breach
their asset/liability prudential norms. There is no mention of this ever having
happened.<br />
<br />
The main factor for non-evolution of viable and cogent lending mechanisms is
the complete break-down in governance in PSU banks, essentially due
to the extremely corrosive influence of the DFS in their functioning.
While the mandarins in DFS exercise large control rents they have effectively
no equity stake. The pathological effects of such control have been documented
time and again starting with the Note by Prof M Datta Chaudhury and Shri M R Shroff
in the report of CFS (Narasimham I), to the Nayak Committee Recommendations,
and by Viral Acharya and Raghuram Rajan in their paper, <i>Indian Banks: A
Time to Reform</i>, wherein they have strongly recommended for abolition of
DFS. The end result of this hegemony of DFS is the slow but steady
deterioration in the levels of professionalism of our banks with all its
negative consequences, including non-evolution of workable processes to handle
credit risk. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">A pernicious aspect of the control by DOFS is
reflected in their interference in transfers, postings, and appointments,
especially senior level positions. There is no reason that DOFS had
to issue a clarification wide Office Memo dated 13/01/2015 to the effect
that, <i>“Each Bank/FI should have their own objective, well laid out
transfer and posting rules which should be followed strictly. No exception,
should be made in such rules at the behest of any recommendation given by
anyone including anybody from the Ministry of Finance.”</i><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The poor governance of PSU banks is reflected not
only in the recurrence of high NPA levels but also other aspects of their
functioning – witness the steady decline in their market share in all aspects
over the last 30 years. To give just one example, the complete neglect of the
importance of providing safe, convenient, remunerative deposit services. The
opportunity offered by the PMJDY has been all but squandered away.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Most policy prescriptions on managing NPAs seem to
be focused only on timely recognition of NPAs and actions to be taken after the
loan has gone bad or at the most likely to go bad. There is very little
discussion on how to make good loans. After all, prevention is better than
cure.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;"><i><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Was it Einstein who said that "It is insanity doing the same thing over and
over again, and expecting different results"?</span></i></p>
<p class="MsoNormal"><o:p> </o:p></p><br /><p></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com2tag:blogger.com,1999:blog-19619458.post-60550909052790112982023-05-23T21:58:00.001-07:002023-05-23T21:58:50.198-07:00<p> </p><p class="MsoNoSpacing" style="text-align: justify;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">The Hollow
Men<o:p></o:p></span></b></p><p class="MsoNoSpacing" style="text-align: justify;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;"><br /></span></b></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">We
are the hollow men</span></i></p><p class="MsoNoSpacing" style="text-align: justify;"><i><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">We
are the stuffed men</span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Leaning
together<o:p></o:p></span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Headpiece
filled with straw. Alas!<o:p></o:p></span></i></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">(W H Auden - The Hollow Men)<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;"><o:p> </o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Think of an Indian banker and the picture
which invariably comes to mind is of a man wearing a suit and a tie and looking
quite uncomfortable doing so. It is worn more like a uniform rather than a
smart piece of clothing which enhances one’s personality. The irony is that our
women bankers, and there are quite a few in the top echelons, appear quite
comfortably in command in a saree!<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Dress codes in every society are
essentially a function of local living conditions and available material for
making apparel. I fail to understand as to why we men in India still insist in worshiping
European apparel standards which evolved for much colder climes, considering
that we are a tropical country!</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">A western suit, except when worn during
winter months in North India, not only keeps the wearer uncomfortable but is
also requires much higher levels of air-conditioning (where available) with its
ill consequences on energy consumption and environment. Though, in India some
concession was made in the form of a Safari Suit.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Most of us have been subtly conditioned through
centuries of colonisation to believe that while the traditional Indian clothes is
acceptable attire for home or ceremonial gatherings, for formal or informal
occasions the correct dress code is trousers and shirt (preferably full
sleeves).</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Apparel also helps in fixing one’s
identity to some preconceived notions. For example, </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">Massey Saheb</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> started wearing a coat and tie to help freeze his
identity as a Christian in the film by the same name. Again, we have a lot of
Indian women who start wearing a frock to delineate their Christian identity. Or
there are plenty of born-again Hindus who sing paeans on the myriad benefits of
wearing saffron clothes.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Banking is a service organisation, and
being well groomed at all times in public, even outside work is highly
desirable if for nothing else than for maintaining the look of stolidity of the
profession.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">For some strange reason, which I have been
unable to fathom inspite of pondering over it for the last 36 odd years, the
western suit preferably with a tie is the accepted attire for bankers.
Concession to that is made on 'casual occasions', say on working Saturdays
where the garb, more often than not changes to jeans, T Shirt, and sneakers.
And most folks wearing it look quite smug and contented doing so.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">It is a rare business executive (and never
a banker on duty) that one can find wearing any kind of Indian formal attire -
say a pyjama-kurta / dhoti-kurta combo, especially considering it is one of the
most comfortable clothes to wear. It is not very expensive, easy to maintain,
covers you well, goes well in casual, informal, and formal settings too, and
the most important aspect is that it is very comfortable for Indian weather
conditions – in summer, monsoon, or winter.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The fascination of wearing western style
lounge suits with a tie can be found in most countries which were under
European colonial occupation for long. I was most surprised while traveling
through the Middle East to see many prominent Arab bankers and business
executives continuing to work and function well wearing their traditional
thobes.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">And contrary to what Wikipedia says, the
seminal contribution of the Arabs to the banking profession cannot be
discounted. For over 3000 years they managed the bulk of the trade between
Europe and Asia (along with Indian merchants) and developed the basics of what
is now known as commercial banking, such as, deposit keeping, promissory notes,
and bills of exchange.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">The clearest evidence of the contribution of
Arabs to commerce is the fact that Arab merchants picked up and adopted Indian
number system. While the Arabic language is written from right to left, they
write their numbers from left to right and still refer to it as "Indian
numerals". They then passed on the number systems to Europe, who used to
labour with their calculations using the cumbersome Roman numerals. Till
recently, international numerals were widely referred to as Arabic numerals.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">Indian bankers need to get out of their
fixed modes of thinking and what easier and better way to do so but to do away
with the highly restrictive western lounge suit!</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><br /></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com1tag:blogger.com,1999:blog-19619458.post-21607530571014952522023-03-13T21:52:00.000-07:002023-03-13T21:52:11.963-07:00 The Robber Barons<p><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;">The Hindenburg Report on the Adani Business Group released on 24//1/2023
has generated a lot of controversy apart from blood-bath in the stock market
for Adani Group company shares.</span><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;"> </span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">But is the kind of corporate wrong-doing as alleged in the report
unique? It is difficult to believe that Mr. Nathan and his associates have not
heard of the Standard Oil Company and its promoter John D Rockefeller, who at
one time was supposedly the richest man on earth and all the manipulations
which went into building up the monopoly which was the Standard Oil Company, before
it was broken up.</span><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;"> </span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">Incidentally, the term "Robber Baron" evolved in the 19th
century in America to describe successful industrialists whose business
practices were often considered ruthless or unethical. Included in the list of
so-called robber barons are Andrew Carnegie, Cornelius Vanderbilt,
and John D. Rockefeller. Very respectable business families in present day
America!</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">The Hindenburg Report is far from being unique in its perspective. We
have had many wholly Indian studies and reports which has pointed out various
kinds of shenanigans by our entrepreneur class.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">For example, the Hazari Committee Report of 1967, which, inter alia,
stated, </span><i style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">"It is to some extent legitimate to infer, that Birla
enterprise, justifiable or not in terms of ultimate performance, does tend to
pre-empt licensable capacity in many industries. … It is perhaps no accident
that certain Birla companies which appear repeatedly among the ranks of
applicants - and some of which do get approval for their proposals – have
little to boast of in their balance sheets and profit and loss accounts. …
There appears to be some evidence that a few influential houses make a
deliberate attempt to foreclose licensable capacity by putting in multiple
applications and taking our several licenses for the same product."</i></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">Or for that matter the preamble of the Omkar Goswami Committee Report of
1993 which states in so many words, </span><i style="color: #050505; font-family: "Times New Roman", serif; font-size: 12pt;">"There are sick companies, sick
banks, ailing financial institutions and unpaid workers. But there are hardly
any sick promoters."</i></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="background-color: transparent; font-family: "Times New Roman", serif; font-size: 12pt;">The findings of the
Hindenburg Report are more suggestive of failure on the part of SEBI and RBI in
adequately and comprehensively regulating the functioning of our financial markets
so as to both protect investors and maintain sanctity and robustness of our
financial markets.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; line-height: 107%;">What is troubling is whether
SEBI & RBI missed picking up the alleged machinations in a proactive manner.
Even more intriguing is their silence for over a month in addressing the
allegations made in the Hindenburg report. SEBI had to be eventually nudged by
the esteemed Supreme Court to investigate and come out with its findings.
Something which is its primary role as the capital market regulator. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; line-height: 107%;">While aberrations in the
functioning of financial markets are natural and expected, their constant
monitoring and the evolution of corrective measures by the regulators is
essential for progress of our economy and society. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; line-height: 107%;">Only a strong
institutional framework will ensure a strong and prosperous nation.<o:p></o:p></span></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-60082781317841984892020-08-07T01:18:00.009-07:002020-08-07T01:18:47.296-07:00On Vegetarianism<p><span style="font-family: "Times New Roman", serif; font-size: 12pt; text-align: justify;">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.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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!<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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. </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> </span><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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).</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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 </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">Germs, Guns, and Steel</i><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> 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.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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.</span></p>
<p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: "Times New Roman", serif; font-size: 12pt;">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.</span></p>Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com1tag:blogger.com,1999:blog-19619458.post-60499275466112211912020-05-19T02:02:00.005-07:002020-05-19T02:02:31.534-07:00Train Travel & Shramik Specials<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div align="center" class="MsoNoSpacing" style="text-align: center;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<span style="mso-spacerun: yes;">
</span>These trains could be point to point, fast, comfortable, cost effective
with no frills.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">On one occasion,
I along with co-passengers sort of <i style="mso-bidi-font-style: normal;">gheraoed</i>
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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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!<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">After all Mera Bharat
Mahan!<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-43602917798186281062020-04-28T11:14:00.000-07:002020-04-28T11:14:02.310-07:00The Jews<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">A Background<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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, <i style="mso-bidi-font-style: normal;">A Stone for Danny Fisher</i>, 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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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 <i style="mso-bidi-font-style: normal;">The Merchant of Venice</i>, in which Shylock,
a Jew money-lender puts up his defence in these terms. <i style="mso-bidi-font-style: normal;">“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?”<o:p></o:p></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><i style="mso-bidi-font-style: normal;"><br /></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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!<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">A Detour – Time Value of Money<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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.<span style="mso-spacerun: yes;"> </span>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,
<i>“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.”</i><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">Back to our story<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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!<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">Similarly,
restrictions on the consumption of pork<span style="-webkit-text-stroke-width: 0px; float: none; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-spacing: 0px;"> are common particularly in the </span>Middle East amongst </span>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.<o:p></o:p></div>
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<br /></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">Some Concluding Remarks<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-71537580308763568122020-04-27T07:13:00.003-07:002020-04-28T11:11:24.986-07:00 The Humble Baigan<div dir="ltr" style="text-align: left;" trbidi="on">
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Baigan, brinjal,
aubergine, eggplant, is a vegetable which comes in various names, shapes,
colours, and sizes. Critics also often derisively refer to it as <i>be-gun, </i> ie, that which is bereft of any redeemable
quality.</span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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. <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">The preferred
choice in the Levant and Middle East is Baba Ghonoush / Muttable which is
essentially <i style="mso-bidi-font-style: normal;">baigan bharta</i> made from baked
large <i style="mso-bidi-font-style: normal;">baigans</i> which has been seasoned
with salt, olive oil, and tahina. Another dish common in these regions is the pickled
version using small sized <i style="mso-bidi-font-style: normal;">baigan</i>.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">In North India baigan
may be cooked into a curry along with either palak, </span><span lang="EN-IN" style="font-family: "kokila" , "sans-serif"; font-size: 12.0pt;">सेम</span><span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">, </span><span lang="EN-IN" style="font-family: "kokila" , "sans-serif"; font-size: 12.0pt;">मटर</span><span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">, </span><span lang="EN-IN" style="font-family: "kokila" , "sans-serif"; font-size: 12.0pt;">सोआ</span><span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">, </span><span lang="EN-IN" style="font-family: "kokila" , "sans-serif"; font-size: 12.0pt;">बरी</span><span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">, </span><span lang="EN-IN" style="font-family: "kokila" , "sans-serif"; font-size: 12.0pt;">काला</span><span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"> </span><span lang="EN-IN" style="font-family: "kokila" , "sans-serif"; font-size: 12.0pt;">चना</span><span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">,
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 <i style="mso-bidi-font-style: normal;">baigan</i>. 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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">The variety of
baigan generally preferred in eastern UP and Bihar is known as <i style="mso-bidi-font-style: normal;">bhanta</i>. 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 <i style="mso-bidi-font-style: normal;">bharta</i>
wherein it is baked whole directly in fire (best wood or <i style="mso-bidi-font-style: normal;">goitha</i> 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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Another version
of savouring <i style="mso-bidi-font-style: normal;">bhanta</i> is by slicing it
into quarter inch round slices and deep frying and commonly known as <i style="mso-bidi-font-style: normal;">baigani</i>. 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. <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">No self
respecting Bengali bhoj is ever complete without <i style="mso-bidi-font-style: normal;">begoon</i> <i style="mso-bidi-font-style: normal;">bhaja</i> 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. <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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. <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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! <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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!<o:p></o:p></span></div>
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Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-56909179189060671742019-09-24T09:33:00.000-07:002019-09-24T09:33:15.719-07:00On PSU Bank Merger - Missing the Woods for the Trees<div dir="ltr" style="text-align: left;" trbidi="on">
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<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Mr.
Krishnamurthy’s spirited views on how the proposed merger of PSU banks be
handled (The Hindu, 24th September 2019 - <i style="mso-bidi-font-style: normal;"><a href="https://www.thehindu.com/opinion/lead/">Makingthe grand Indian PSB mergers work</a></i>) 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! <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">It
also raises some interesting questions.<o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">First</span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">, 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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Second</span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">, 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?<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Third, </span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">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. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Fourth, </span></i><span lang="EN-IN" style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 107%;">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 <i>ab initio</i>
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.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Fifth</span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">, 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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Sixth, </span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">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?<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;"><br /></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">Seventh</span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 107%;">, 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.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Seventh</span></i><span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">, 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<span style="mso-spacerun: yes;"> </span>PSU banks, what are bank managements expected
to do?<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-IN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">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!<o:p></o:p></span></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-89765413520190264252019-07-03T10:32:00.002-07:002019-07-03T10:33:07.092-07:00Term Lending Institutions or Universal Banks?<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span lang="EN-GB"><span style="font-family: "comic sans ms" , sans-serif;">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 (<i><a href="https://www.thehindu.com/todays-paper/tp-opinion/the-key-agenda-must-be-to-accelerate-growth/article27280720.ece">The key agenda must be to accelerate growth</a></i>, The Hindu, 29<sup>th</sup> 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.</span></span></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span lang="EN-GB"><span style="font-family: "comic sans ms" , sans-serif;">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.</span></span></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span lang="EN-GB"><span style="font-family: "comic sans ms" , sans-serif;">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.</span></span></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span lang="EN-GB"><span style="font-family: "comic sans ms" , sans-serif;">Addressing all such inconsistencies in their organisation design would convert the term-lending institution into a universal bank!</span></span></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: blue; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div class="m_1493535884993985254gmail-MsoNoSpacing" style="background-color: white; color: #222222; font-family: Arial, Helvetica, sans-serif; font-size: small; margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span lang="EN-GB"><span style="font-family: "comic sans ms" , sans-serif;"><span style="color: blue;">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.</span></span></span></div>
</div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-38463108100289698462018-12-18T03:48:00.001-08:002018-12-18T03:48:35.387-08:00Are Interest Rate Subventions a Cure to Improving Financial Health of SME & Small Agriculturists?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Prof. Pulapre
Balakrishnan’s article, <i style="mso-bidi-font-style: normal;"><a href="https://www.thehindu.com/todays-paper/tp-opinion/independence-and-accountability/article25448443.ece">Independence and accountability</a></i> published in <i style="mso-bidi-font-style: normal;">The
Hindu</i>, dated 9<sup>th</sup> 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. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Interest rate
subsidies, which such subvention would entail, creates various distortions and
negative consequences for the economy and society. These include,<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">It is available only to those who have
taken bank loans, ie a small minority of the populace.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">The excess demand for credit cleared
through extra-constitutional means, also leads to generation of humungous
amounts of corruption – affecting politicians, bureaucrats, and banks.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">The losses on account of bad loans in
turn make the banks weak / sick.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">f)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">g)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span lang="EN-GB" style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">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 <span style="mso-spacerun: yes;"> </span>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?<o:p></o:p></span></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-11398915675340088352018-12-18T03:20:00.001-08:002018-12-18T06:39:13.885-08:00Governance in PSUs<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<div style="background-color: white;">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><br /></span></div>
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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, <i><a href="https://www.thehindu.com/todays-paper/tp-opinion/the-rbi-concedes-a-vital-principle/article25561726.ece">The RBI concedes a vital principle</a></i>, carried by <i>The Hindu</i>, dated 22<sup>nd</sup> November
2018 makes a number of valid observations and deductions. However, I would like
to differ with him on the following issues: </span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span lang="EN-GB" style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span lang="EN-GB" style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">c) If RBI’s revaluation reserves have
arisen due to changes in rupee value of its <i>gold and foreign currency
holdings</i>, will it not violate the matching concept accounting principle
by <i>netting it off against government securities</i>? 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”!</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span lang="EN-GB" style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm 0cm 0cm 36pt; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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. </span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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. <i>First</i>,
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. <i>Second</i>, 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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><span lang="EN-GB" style="mso-ansi-language: EN-GB;">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.</span><o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span lang="EN-GB" style="background-color: white;">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. <span style="mso-spacerun: yes;"> </span>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. <o:p></o:p></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span style="background-color: white;"><br /></span></div>
<div class="m5951605824211432823gmail-msonospacing" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; margin: 0cm; text-align: justify;">
<span lang="EN-GB" style="background-color: white;">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!</span><span style="background-color: white;"><o:p></o:p></span></div>
</div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-75664909541096057642018-12-09T21:25:00.002-08:002018-12-09T21:29:25.608-08:00GUJARAT FILES – A Review*<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">I
am quite sure that </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">Maithili Tyagi, a
Kayastha girl from Kanpur, </i><span style="font-family: "times new roman" , serif; font-size: 12pt;">would be an extremely unique person. For that
matter, any man, woman or child belonging to the Kayastha community, hailing
from any part of India (the Kayastha community is quite widespread over Bengal,
Bihar & Jharkhand, UP, Rajasthan, Madhya Pradesh, and parts of South India
such as Hyderabad & Aurangabad) with the surname of </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">Tyagi</i><span style="font-family: "times new roman" , serif; font-size: 12pt;"> would be a particularly rare exception. I have not met anyone
or heard of any Kayastha with such a surname. Though I am sure, so many </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">seasoned, senior IPS officers many of whom
had had successful stints with RAW and IB </i><span style="font-family: "times new roman" , serif; font-size: 12pt;">and </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">were thick skinned diplomats</i><span style="font-family: "times new roman" , serif; font-size: 12pt;"> would have been easily hoodwinked into
believing that </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">Maithili Tyagi, was a
Kayastha girl from Kanpur.</i></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">I
am also surprised as why<i style="mso-bidi-font-style: normal;"> Maithili Tyagi,
a Kayastha girl from Kanpur and daughter of a conservative Sanskrit teacher, </i>could
not and should not have been familiar and comfortable with the Urdu language
(page 83 – <i style="mso-bidi-font-style: normal;">The urge to reply to Ashok
Naraya in an Urdu couplet was strong but I had to refrain from doing so</i>).
The Kayastha community is known for its long association and erudition in Urdu
and Persian, with local lore in UP & Bihar often referring to them as <i style="mso-bidi-font-style: normal;">adha-Mussalman </i>(semi-Muslims). Prominent
Kayasthas such as Munshi Premchand wrote in Urdu and Firaq Gorakhpuri was a
very famous Urdu shaiyar. Babu Rajendra Prasad, mentions in his autobiography
that he learned Hindi after the age of 24-25 and had started his law practice.
Prior to this, the languages in which he had had his formal education and in
which he was comfortable were English and Persian. That is, apart from Bengali,
having picked up that language on shifting to Calcutta for his education from
his middle-school onwards. Hyderabad is famous for its Kayastha connection with
prominent members of their nobility being from this community. Incidentally,
Wikipedia informs that there is a fairly large Kayastha Muslim community in
India (and Pakistan)!<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">If
Maithili Tyagi, as a good investigative Kayatha journalist, had done some
background check, she would have come to be aware that as per some modern (and
much respected) academic work on social change in India, the Kayastha community
owes its formation to those Indians who associated themselves with Muslim
rulers in helping them run their administration, which could not be done
without local help. While caste Hindus, would lose their caste by associating
themselves with the Muslims, this left only those locals for this purpose who
were outside the caste system – the Outcastes (referred to variously as
Depressed classes, Scheduled Castes, or Dalits) and who had no caste to lose!
Therefore, while Kayasthas remained Hindus by religion, they are not part of
any of the four varnas – they are neither Brahmins, Kshatriya, Vaishya, nor
Sudra. The community is essentially formed of those dalits who moved up the <span style="mso-spacerun: yes;"> </span>social ladder by associating themselves with
the Muslim rulers and in the process picked up various Muslim cultural
traditions such as love for non-vegetarian food and partiality to Persian,
Arabic, and Urdu language. By the way, a friend informs me (and I have no
reason to disbelieve him) that <i style="mso-bidi-font-style: normal;">Tyagis</i>
are a sect of Brahmins who have given up (<i style="mso-bidi-font-style: normal;">tyaag
diyaa</i>) presiding over pooja and yagya. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">By
the way, yours truly (another Kayastha) had his <i style="mso-bidi-font-style: normal;">aksharabhyas</i> (a child’s initiation to formal education) on Basant
Panchami in front of image of Goddess Saraswati by writing <i style="mso-bidi-font-style: normal;">alif, be, the</i> with a piece of chalk on a wooden slade and not <i style="mso-bidi-font-style: normal;">ka, kha, ga</i>. For the <i style="mso-bidi-font-style: normal;">aksharabhyas</i> of one of my cousins, the
Moulavi Saheb, was an intrinsic part of the ceremony!<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">For
a book with an arm long list of endorsements (at least 16 in the edition of the
book with me) and acclaimed by among others, <i style="mso-bidi-font-style: normal;">Caravan</i>, <i style="mso-bidi-font-style: normal;">The Wire</i>, and <i style="mso-bidi-font-style: normal;">Scroll</i> who published chapters of the
book, it has too many mistakes - typographical, grammatical, syntactical, and
conceptual. For example, Rajan Priyadarshi, moves from being an OBC (page 38 – <i style="mso-bidi-font-style: normal;">Priyadarshi, he informed us, also belonged
to the OBC class</i>) to being a Dalit (page 43 – <i style="mso-bidi-font-style: normal;">I met Rajan Priyadarshi, the person you had asked me to speak to as a
Dalit</i>; and page 44 – <i style="mso-bidi-font-style: normal;">I am a Dalit</i>).
Similarly, Girish Singhal’s surname suggests that he is from the <i style="mso-bidi-font-style: normal;">bania</i> caste, ie, which would make him from
the OBC community and not a Dalit. I little more serious, careful proof reading
might have helped. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">Like
any respectably Bollywood potboiler, the book inserts an item number in the
form of Usha Rada (with all due respect to this lady). There is virtually a
whole chapter (Chapter 5) devoted to her, though her only connection to the
subject matter of the book seems to be that she was an IPS officer of the
Gujarat cadre and as such a professional colleague of most of the other <i style="mso-bidi-font-style: normal;">dramatis personae</i> around whom the book
revolves. There is absolutely no rhyme or reason as to why she should find
mention in the narrative.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">One
aspect of the author’s personality which is surely to be lauded is her sense of
self-importance verging on the psychotic. Statements such as, “<i style="mso-bidi-font-style: normal;">That I was the journalist who had sent the
Home Minister of Gujarat behind bars”</i> surely seems to suggest something
like that.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">Justice
B N Srikrishna mentions in the <i style="mso-bidi-font-style: normal;">Forward</i>
to the book that, <i style="mso-bidi-font-style: normal;">the nature of truth has
baffled philosophers all over the world for ages.</i> He goes on to mention, <i style="mso-bidi-font-style: normal;">“As to whether the material presented in
this book represents facts, or mere perspective events, is for the reader to
judge.”</i> <span style="mso-spacerun: yes;"> </span>After reading the book,
cover to cover, twice over, I have a dirty hunch that he might be hinting to
the hapless readers, who would be investing their time and money in wading
through the tome in the hope of finding some gems, that it could also be a
piece of hallucinatory outpourings or its more sophisticated version, magic
realism. I have no hesitation in confessing that I am neither a philosopher,
nor omniscient, nor an award winning investigative journalist of national and
international fame. I am just a semi-literate, schizophrenic, unemployed kabbadi
player<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">If,
<i style="mso-bidi-font-style: normal;">the basic rule of journalism is evidence</i>,
the wealth of ‘evidence’ presented in the book should surely have resulted in a
string of convictions by now. </span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">Overall, the book lacks both focus and
credibility – it just seems to be a product of some slick marketing.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">* Notes:<o:p></o:p></span></b></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<span style="text-indent: -18pt;"> </span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<span style="font-family: "times new roman" , serif; font-size: 12pt; line-height: 115%; text-indent: -18pt;"> My views are based on the Second Edition of the book.</span><br />
<span style="text-indent: -18pt;"> <span style="font-family: Times, Times New Roman, serif;">D</span></span><span style="font-family: Times, Times New Roman, serif; font-size: 16px;">irect quotations from the book are </span><span style="text-indent: -18pt;"><span style="font-family: Times, Times New Roman, serif;">in</span> </span><i style="font-family: "Times New Roman", serif; font-size: 12pt; text-indent: -18pt;">italics</i><span style="font-family: "times new roman" , serif; font-size: 12pt; text-indent: -18pt;">.</span></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com3tag:blogger.com,1999:blog-19619458.post-54462299612140625982018-08-12T09:24:00.003-07:002018-08-12T09:24:59.847-07:00Payment Banks<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;">
<span style="color: #1d2129;">Payment
bank’s seem to be much in news lately for a lot of wrong reasons. Some are
questioning their continued viability, especially considering many of those who
had shown interest in obtaining payment bank licenses have backed out. Others
are questioning the very rationale of their existence / formation in view of
seeming never ending violations of license conditions by the existing
players.</span><span style="color: #1d2129;"> </span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">To
appreciate this very topical and interesting issue, which might soon affect all
our lives, one needs to appreciate a little more on how financial
intermediaries, such as banks, operate and maintain their viability and
profitability.<o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Bank's
around the world are highly leveraged entities working on wafer thin margins
and are able to generate profits by resorting to "economies of scope"
and at the same time avoiding bad-debt losses. That is, they use the same set
of available assets (investment in branches, information systems, people etc)
to offer a wide variety of related services, on each of which they make small amounts
of money. These services include deposits, loans & advances, money transfer
services, payment services, investment advisory along with third party sales of
investment products such as mutual funds, insurance etc. Bad debts, inflict a
double whammy on banks. First, bank’s lose out on interest income on bad debts
thereby depressing their operating profits <span style="mso-spacerun: yes;"> </span>and second they have to make provisions out of
their operating profits (and if that is insufficient from their Net Worth) on
the quantum of bad debts. Incidentally, banks start making operating losses by
the time their Gross NPA levels increase a level of 4% to 5%! This makes bad
debts anathema for banks.<o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Payment
bank's by definition / as per their licence conditions are precluded or
restricted from offering a whole lot of these services, thereby, <i style="mso-bidi-font-style: normal;">prima facie</i>, making their operations
sub-optimal by default! So would the brave-hearts (and their financial backers)
who have ventured out in setting up payment banks eventually lose the shirts of
their backs? <o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Inspite of
this congenital draw-back, it was necessary to introduce this innovation in
Indian financial markets, since they bring skills and technology which will
help (is essential) to bring down transaction costs. Traditional banks not only
lack this technology but are by experience / temperament hesitant in adopting it.<o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">The
question here is how would bringing down transaction costs, help. Consider a
simple Jan Dhan Yojana Account. The government has pushed establishing these
accounts and lap-dog banks have fallen all over themselves in fulfilling their
quotas of opening such accounts. But then why are there so few operations in
these accounts? Why have such a large number of JDY accounts virtually nil
balance? The simple answer is because it is very expensive to operate these
accounts! <o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">A poor
worker would have to lose a day's earning to go to the branch to either deposit
/ or withdraw funds, or for that matter do any transaction. The time, effort,
and money spent in going to do the transaction and the opportunity cost of
income foregone in going to the bank are all part of the customer's
transactions costs. Similarly, these small value accounts add more to
transaction costs of the banks than to their revenue and as rational entities
they have no incentive to promote them. Don’t believe me? Try and open a JDY
account in any branch, anywhere in India.<o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Now
technology is available which would substantial bring down such transaction
costs. Many of us are already benefiting from it. The trick is to take it to
the masses. The way the market for shampoos / cell phones exploded in India
when 5 rupees sachets and life time free incoming calls was introduced, the
same way the banking market is very likely to explode with reduction in banking
transaction costs. And this explosion will take the real economy along with it
on a sustainable growth path where there would also be no need to cook up GDP
figures.<o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Once the
technology base of banks is strengthened and is assimilated, the same set of
skills can further transform all the other area of banking operations bringing
down overall operating costs of banks even further.<o:p></o:p></span></div>
<div style="background: white; margin-bottom: 4.5pt; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">And such
innovations, especially those bring about disruptive changes, are rarely
brought about by existing players. Hence, Payment Banks, Small Finance Banks et
al!<o:p></o:p></span></div>
<div style="background: white; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Over time, payment banks have only two options – either being
bought out by traditional commercial banks or building up a customer base large
enough to enable them buy out one of the existing banks. I expect that soon,
very soon, they will have plenty of such options available. I don’t expect them
to lose money or investors who have put their money in their equity to lose
their shirts! <o:p></o:p></span></div>
<div style="background: white; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 0cm; margin-right: 0cm; margin-top: 4.5pt; text-align: justify;">
<span style="color: #1d2129;">Yes, there are and will continue to be hiccups.<span style="mso-spacerun: yes;"> </span>But wouldn’t life be extremely flat with
nothing whatsoever to grumble at!<o:p></o:p></span></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-85333781585453489262018-06-25T10:00:00.000-07:002018-06-25T10:00:11.448-07:00NPAs – Isn’t Prevention better than Cure!<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman", serif; font-size: 12pt;">The large and increasing levels of Non
Performing Assets of the Indian banking industry has been hogging headlines for
quite some time now, and there seems to be no end to the saga. To manage and
contain this problem academicians, policy makers, RBI, and the Government have
come up with various solutions with the insolvency code being the latest kid in
the block.</span><span style="font-family: "Times New Roman", serif; font-size: 12pt;"> </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The proximate reasons for phenomenal
increase in <b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">reported</i></b> non-performing assets (NPAs) over the last three
years, is not change in economic conditions or wilful defaults. It is simply
because we had a strong regulator who insisted that banks follow the laid down,
internationally accepted norms for recognizing NPAs – the so called Asset
Quality Review. Otherwise, it would have been business as usual till one fine
day the banking system would have simply collapsed and taken the real economy
(and all of us too) along with it!<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Any solution to a problem needs to first
look at the reasons as to why the problem has arisen. Let us do the same for
our “NPA” problem!<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">A manufacturing organisation makes
physical products – say cars, or detergent, or steel utensils etc. To ensure
consistent production of goods of high or at least acceptable quality they set
up quality control systems which encompass design of appropriate manufacturing
processes, quality control of their raw material or sub-assembly suppliers,
correct operation and control at each stage of the manufacturing process till
production of the finished product. For achieving consistently good quality
products it is therefore essential for the quality control mechanism to be
functioning well throughout the production process. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Similarly, one of the key functions of
banks is to continuously produce good quality loans & advances. By good
quality, it means loans which are remunerative and have low probability of
default. From this perspective, the incidence of high and growing levels of
NPAs in the Indian banking system is akin to a manufacturing organisation
making a larger than acceptable level of defective products. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The production process used by banks to
ensure that consistently good quality loans are made consists of making a
series of appropriate judgments or decisions for which banks need to have, inter
alia, an appropriate conceptual framework for lending, selecting suitable
people with the required skills, giving them adequate and suitable training,
understanding how or why credit risks arise and having clear laid down credit
risk<span style="mso-spacerun: yes;"> </span>management policy, having a suit of
loan products which are in line with the requirements of the potential
borrowers and the risk capabilities of the bank, a not too cumbersome loan
documentation process (this is extremely tricky since workable debt contracts
are far from complete contracts!), monitoring the loans once it is made, and
taking corrective action as and when required, entrapping the cash flows etc.
All these taken together would ensure a high probability that the loans &
advances made are repaid on time and on the terms agreed at the outset.<span style="mso-spacerun: yes;"> </span>Failing which, banks have to have sound
processes for recovering loans which go bad inspite of taking all possible
measures earlier. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Now for banks to be able to take sound
decisions it is essential to create a governance framework which encourages and
nurtures independence and professionalism. Something which is just not
engendered by having RBI, GOI, vigilance departments, criminal investigations,
and courts micro-managing how banks perform their work and breathing down the
necks of bankers 24 by 7. One result of such micro-management is the extremely
voluminous loan appraisal notes prepared by banks. This detracts focus on the
nature, quality and key risks of the credit while protecting all the people
involved in the decision making process from any adverse outcome. The
consequence is extreme delays in decision making and no clear cut indicators on
accountability. In practice, ultimately the most helpless lowest level
official, who has no support of the union or political support of any kind who
ends up facing the music. This in turns leads to decisions being based on all
kinds of extraneous reasoning which have little to do with the borrower and the
credit risk. Appraisal notes running into 100 – 150 pages is the norm. I really
wonder as to what kind of reasoned decision taking can take place under such
circumstances.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">I would like to give another small (and
totally unrelated to present discussion on NPA management) example of
micro-management by RBI. For anyone doing any kind of business, the base level
understanding is that they should know their customer. Even a doctor evaluates
his patients on parameters others than strictly medical, say on socio-economic
parameters, before prescribing any line of treatment. Now banks have to follow
a strict and detailed KYC norms prescribed by RBI (which is also extremely
difficult to comprehend). Are our banks and bankers so incompetent that they
are unable to properly and correctly evaluate their customer? <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Having nearly 70% of our banking system
in the public sector has had another extremely adverse effect – the virtually
complete absence of creativity and innovation. The closed, one size fits all
framework for recruitment, promotions, pay-scales, to the extremely outdated
and dysfunctional conceptual system under which most lending and monitoring is
done, and the identical Core Banking System has left little room for
experimentation and innovation, or growth. After all only open systems can hope
to achieve negative entropy! Public sector does not automatically mean lack of
professionalism and accountability, provided governance systems enable and
nurture it. In this regard the continued interference of DOB, MOF with its
natural consequence of politicization of decision making at all levels is a key
factor and needs to be addressed forthwith. Any change for the better would
have to start from here.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">On the conceptual framework of lending
in India, a couple of issues are extremely critical. First, the dichotomy on
working capital versus term lending is not only artificial but also misleading.
For the lender there should be only one focus, the debt servicing ability (both
quantum as well as volatility) of the borrower and mechanisms for entrapping
cash flows. No borrower can service its debt (which is the same as no lender
can expect recovery) by recourse of foreclosing just either the working capital
assets or the long term assets – or even both. For debt to be serviced the <i style="mso-bidi-font-style: normal;">sine quo non</i>, which is invariably missed
out, is a functional borrower which can be expected to continue indefinitely as
a going concern and create economic surpluses. Second, the single minded focus
on security in lending misses on the nature of risk – whether the risk being
assumed is in the nature of a debt risk or an equity risk – resulting in
mispricing of the risk. An experience through which all of us have lived for
more than 30 years are our DFIs. They were taking exposures on a portfolio of
assets where their risk was essentially equity / quasi-equity in nature while
their returns were wholly debt related. It is natural that the returns from
such a portfolio would be sub-optimal. The main culprit here was <i style="mso-bidi-font-style: normal;">equity risk premium,</i> not sloppy
appraisal or monitoring or the biggest bug-bear of all of us – corruption.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The idea of having a “bad bank” is very
much workable, if and only if, the reasons for proclivity of Indian banks to
continuously create NPAs is first sorted out. The capital requirements can be
fairly easily be met even for transferring entire reported NPA level of Rs.10
lakh crores. First, the bad bank need not take over the entire NPAs at book
value. They can very well take it at a discount of say 10% of the book value
with agreement to share any surpluses in recovery over a certain minimum. That
would reduce the total capital requirement to Rs.1 lakh crore. Second, banks
typically function at a Capital Adequacy Level of about 12%. As such the equity
required to fund holding Rs.1 lakh crores of assets would only be around
Rs.12,000 crores, with the balance funded through debt. This equity be funded
on 50:50 ratio with GOI picking up Rs.6000 crores and the banking industry
taking over the balance Rs.6000 crores. The balance capital requirement could
be met through debt from the banking industry itself specially if such debt
were guaranteed by GOI and qualify as SLR investment. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Keeping NPAs low for banks is critical
for various reasons. <i style="mso-bidi-font-style: normal;">First</i>, NPAs
deliver a double whammy to the bottom line of banks by reducing the quantum of
interest earned (main source of income for banks) while simultaneously having
them to make provisions (from profits and if that is insufficient from capital)
for the principal amount of bad loans. <i style="mso-bidi-font-style: normal;">Second</i>,
banks being highly leveraged entities have much lower room to manoeuvre fall in
operating margins, something rising NPAs result in. As such, it is important
that actual NPA levels be monitored regularly and closely, otherwise they start
making losses. <i style="mso-bidi-font-style: normal;">Third</i>, by affecting
ability of banks to provide loans as well as liquidity services to the real
economy (since the quantum of lending / funds available to grease the economic
system with banks is exponentially inversely proportional to rising NPA levels)
the income and employment opportunities in the real economy start getting curtailed
(rather drastically) with rising NPAs in the banking industry. <i style="mso-bidi-font-style: normal;">Finally</i>, banks maintain the
institutional memory of credit history of all the actors in the real economy in
their records. It is very hard and expensive to recreate this information once
lost. When NPAs become so high that a bank becomes bankrupt and has to be
closed down, this memory is as good as lost forever. This in turn leads to a
break in the payment cycle to and from the various players in the real economy,
which in turn hits the real economy hard by drastically reducing both income
and employment opportunities in the economy. These are the primary reasons that
no society (or its government) can afford even the smaller banks to close down,
leave alone the big ones and making managing NPA critical for our collective
well-being.</span></div>
</div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-72016576777291476982018-06-18T02:20:00.001-07:002018-06-25T09:20:51.292-07:00 On the Functioning of Financial Markets<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
The article, <a href="https://www.blogger.com/blogger.g?blogID=19619458#editor/target=post;postID=7201657677729147698">“The Jan DhanYojana, four years later”</a> in <i>The Hindu</i>
dated 29<sup>th</sup> May 2018 though topical,
and containing a few hard facts and figures, does not do justice to this very
important subject and is way off in some of its conclusions. I will try and
justify my contentions in this monograph. Please have a little patience.</div>
<div class="MsoNoSpacing" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Financial Inclusion is not
just about opening bank accounts, using these accounts, and providing access to
formal credit. To appreciate the importance of the concept of Financial
Inclusion one needs to step back and see why and how strong, stable, and
inclusive financial systems (banks and other financial intermediaries, finance
companies, cooperative credit societies, capital market institutions etc. along
with a strong regulatory framework) are essential for steady, accelerated, and
equitable economic growth. There is extensive literature on the subject
starting from the 1960s, especially seminal ideas propounded by Gurley, Shaw,
McKinnon et al. <o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Naturally, for an inclusive
financial system, all or most citizens need to be involved and be part of it.
For example, people need to be able to ride the Bullet Train if they are to
benefit from it. Just watching it whizzing past is not going to be of much help
to either the people who built the Bullet Train, those who operate it, or the
general public!<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Developed and well-functioning
financial systems, <i style="mso-bidi-font-style: normal;">inter alia</i>, (a) enable
users to reduce the cost of exchanging real resources ie, through elimination
of rigidities and reduction in transaction costs through both economies of
scale and scope and use of technology by the financial intermediary; (b)
leading to more efficient resource allocation, (c) provide the
backbone of the payment mechanism, (d) helping to distribute and reduce risk
for users (through tenor transformation, portfolio diversification, better
monitoring through specialized skills etc), (e) enable easier accumulation
of short & long term surpluses, (f) balance savings with need of funds over
lifetime changes etc. <o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Now starting with saving
mechanisms, for any user of financial savings product (such as a JDY account)
it should be safe, convenient, reliable, and cost effective. If a person has to
spend half a day (that may mean losing a full day's earnings) to go to the bank
to deposit or withdraw money he or she would obviously not use the facility.
Add to that the paperwork in opening and operating the account. Or the transaction
costs for small value receipts / payments using app-based software. <span style="mso-spacerun: yes;"> </span>From the bank's point of view, transaction
costs for servicing small accounts tend to be rather high and are naturally
neglected - it just does not make commercial sense. Furthermore, if there aren’t
steady and regular interactions between the intermediary and its customers, no
trust based relationship can be built up leading to its eventual atrophy. <o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
The authors mention that 48%
of bank holders have not done a single transaction during the past one year. This
statistic by in itself hides the fact that there are have been reports of
bankers putting in paltry sums of Rs.1 to Rs.10 in JDY accounts to show some
transactions and lower number of zero balance accounts!<sup>1</sup> <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
As far as penetration of JDY
accounts are concerned, the statistic that <i style="mso-bidi-font-style: normal;">80%
of adults having bank accounts</i> level mentioned in the article may need some
scrutiny since the thrust of JDY is that <i style="mso-bidi-font-style: normal;">all</i>
<i style="mso-bidi-font-style: normal;">families</i> should have functional bank
accounts and the focus is not on individuals.<o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
It also does not bring out the
urgent need and pent up demand for savings mechanisms for small savers. In a
study conducted by Stuart Rutherford<sup>2</sup>,<span style="mso-spacerun: yes;"> </span>he discusses the service provided by Jyothi, a
middle-aged semi-educated woman who makes her living as a peripatetic deposit
collector in Vijayawada, whose clients are slum dwellers, mostly women. Jyothi
has, over the years, built a good reputation as a safe pair of hands which could
be trusted to take care of the savings of her clients. Jyothi’s accepted
deposits of Rs.5/- every day so as to collect Rs.1100/- over 220 days. After
which she returned Rs.1000/- to the depositor and retained Rs.100/- for her
services<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">. This translates to an annual negative interest rate of 30% per annum
for rendering deposit services!</i></b> Which I suppose is more than sufficient
to make all our academics, policy makers, bureaucrats, politicians to start
shouting Bharat Mata Ki Jai / Holy Marx / Jai Bhim or whatever and jump all
over the place. But the fact remains that savers are willingly paying that kind
of money since they value that service which the formal financial systems has
failed to provide. Rutherford goes on to mention that slum dwellers in a
neighbouring slum where there is no Jyothi at work actually envied Jyothi’s
clients. Service providers for savings take different forms in our slums,
villages, hamlets such as chit funds (formal & informal), Self Help Groups,
and the numerous multi-level marketing companies which keep springing up from
time to time all over the country. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
All this springs from failure
of our organized formal financial systems to provide such a service. The sad
part is that this was not always so. Commercial bank’s did offer variations of
something called Pygmy Deposits where deposit collectors made daily / weekly
visits to collect the small savings and they provided this service without
incurring a loss! For example, see the experience of Syndicate Bank discussed
in <b style="mso-bidi-font-weight: normal;">Financial Innovations and Credit
Market Evolution</b> by V V Bhatt (<i style="mso-bidi-font-style: normal;">EPW,
Vol XXII, No 22, May 30, 1987</i>). These were the days when banking operations
were fully manual and as such the benefit of much lower marginal operating
costs through use of digital technology was not available.<o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
The thrust on promoting
savings also does not take into account another critical aberration in our
financial systems. Namely, due to widespread financial repression financial
savings in formal institutions give a negative return in real terms! In this
context, it is worth quoting the erstwhile Governor of RBI<sup>3</sup> has gone
on record in his speech wherein he mentioned that, <b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">“Many middle class savers value
the high nominal interest rates on their fixed deposits, not realizing that
their principal is eroding significantly every year”</i></b><i style="mso-bidi-font-style: normal;">! </i>Does that indicate as to why our society
is subject to repeated onslaughts of Ponzi schemes all of which eventually and
inevitably collapse. But during the course of their short existence promise an
avenue for building up liquid financial saving which does not give negative
returns in real terms.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>And I am not even hinting on the effect of TDS
on bank deposits which is extracted with clinical efficiency thanks to the
superlative strength of Core Banking Systems. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Now let us see what happens in
the absence of formal mechanisms for collecting small savings. They would have
to be saved in kind since saving in cash would entail it losing value over time
due to inflation if it was not lost, stolen, or borrowed away. If the saver
managed to evade all these possibilities there is always the chance of it being
spent on gambling or liquor. Saving in kind also has the added disadvantage of
lacking fungibility and liquidity (the characteristics which gives fiat money
its intrinsic value). <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
There also seems that there is
another major and deep-seated myth among our academics and policy makers <span style="mso-spacerun: yes;"> </span>-<span style="mso-spacerun: yes;"> </span>that
the poor do not and cannot have savings, or at least substantial savings. They
need to appreciate that since earnings are highly variable and uncertain for
the poor and they have absolutely no social security of any kind, savings are
critical for survival. The small bits of savings is what enables the poor to
survive from one misfortune to another. These savings take various interesting
forms (again due to the failure of formal financial markets), such as, having
reciprocal borrowing arrangements with friends and relatives, maintaining
credit reserves with whom they provide services and products (by not
immediately drawing down payments which are due), social practices such as <i style="mso-bidi-font-style: normal;">neota</i>, maintaining excess reserves of
food grains and other items of inventory, keeping a few heads of goats, pigs,
chicken etc which could either be sold or consumed as per dictates of
circumstances etc. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
This myth is also directly
responsible for lack of attempts to design better savings mechanisms and for
the stress on provision of credit as the proverbial magic wand for solving
issues of “financial inclusion”. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Savers using the services of
formal financial institutions like banks are cursed once again in another way.
Since our bank’s are not making sufficient profits on the lending side of their
business, they are naturally unwilling and unable to provide higher rates of
returns on savings, especially in real terms! This suggests that the
inefficiencies of the banking system and the borrowings from the formal
financial sector are being subsidized by the deposit keeping community at
large.<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Now if one were to argue for promoting
savings since it makes social sense, one could also seek that the
government should subsidize some portion of the operating costs – maybe
through a reverse auction kind of mechanism. Banks could compete for achieving
lowest cost for providing particular desired services, with the subsidy levels being
based on this level. Since this subsidy would benefit society at large there
would be much less scope for corruption. Otherwise banks will (and are
becoming) become sick. Policies and practices which make banks sick will
ultimately be of no good to either its customers or the economy. Continued good
health of banks is essential for the real economy to remain robust - the reason
they are so heavily regulated. Sick banks which have to be closed down also result
in loss of institutional memory of the credit history of society, something which
is impossible to recreate. For social and economic systems it is equivalent to
heart failure in humans.<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Technology may help in
reducing transactions costs. Unfortunately, the system which has evolved over
the last 30-40 years has resulted in traditional (PSU) banks lacking the
requisite technical skills. Even worse, the one size fits all policy with
industry wide equality in pay-scales, service conditions, internal processes,
even the Core Banking System that they use, has stifled creativity and
innovation. Something which is essential for growth of a vibrant financial
system. An argument often given is that bank nationalization has enabled large
increases in financial savings in the economy with its resultant positive
effect on capital accumulation and economic growth. However, no one bothers to
think about the cost of such savings mobilization – could the same levels of
savings have been mobilized in more efficient ways, ie at lower costs?<o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
The new generation pvt sector
banks and the newest chips of the block - payment banks / small finance banks -
either have too little incentives to pursue these market niches or are
circumscribed by definition from benefiting from economies of scope,
respectively!<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Now coming to the stress laid
on provision on easy access to credit, one needs to first appreciate that the
ability or temperament to productively use credit is not very widely prevalent in
any society. As such only a limited number of persons or families can benefit
from access to credit. Furthermore, additional credit, cheap or costly, is no
substitute for functional roads, primary health and education facilities,
organized markets, or an administrative machinery which can prevent
exploitative relationships. Even worse, there are well documented
severe negative consequences in following a credit focused financial
inclusion development strategy which include:<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l1 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Increasing
levels of inequality in income and wealth since directed credit is cornered by
the wealthy and politically powerful who thereby increase the capital at their
disposal and become even more wealthy and powerful. <span style="mso-spacerun: yes;"> </span>Larger loans means larger benefits, smaller
loans means smaller benefits, and no loans means no benefits as far as the
borrowers are concerned. And bulk of the people lie in the third category. <o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l1 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Incentive
to repay by borrowers who have preempted credit (typically through muscle or
political power) is lower which not only further increases their economic and
political status but simultaneously weakens the financial intermediaries who
have lent the funds and have to book the consequent losses.<o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l1 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Development
of large and widespread corruption since the benefits are concentrated while
the pain is widely spread, there is little focus or effort at tackling the
resultant problems. Is it a wonder as to why our cooperative credit system
produces some of our most corrupt politicians?<o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Another issue which hardly
ever gets raised is the cost of capital. Interest rates reflect the cost of
capital and it is well known that in India there is a very wide difference in
the interest rates charged by most formal financial institutions / banks versus
those charged by the fairly well organized informal institutions. The question
that next arises is whether the informal sector is charging excessive rates or
is the formal sector mis-pricing cost of capital. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Well interest rates in the
informal markets are, prima facie, higher than formal markets. But would they
still be considered higher cost after accounting for delays, the numerous
trips, and the bribes with their associated real, direct and opportunity costs
involved in accessing formal credit? The higher interest rates in informal
markets also reflect the fact that (a) they are taking exposure to much higher
risk levels, (b) provide kinds of services (other than credit) that formal
intermediaries cannot even dream of, (c) have much less capital at their
disposal as such require to charge higher rates to generate equivalent absolute
amounts of return, (d) entire capital is in form of personal equity as such do
not benefit from leverage (banks with Capital Adequacy Ratio of say 10%
effectively have a leverage of 10:1) with its consequent benefits, and
(e) during the slack season their capital is idle and does not generate any
returns or meager returns. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Total cost of credit consists
of basically two components, a fixed cost of accessing the credit which varies
little with quantum of credit and a variable component, the actual interest
rate. As such, for small value loans the average cost can be quite high since
the fixed component has to be recovered from a smaller principal amount. This
is another reason as to why informal lenders score over formal lenders,
especially for small value loans and continue to be relevant. In this regard,
Jerry R Ladman<sup>4</sup> argues that <i style="mso-bidi-font-style: normal;">“The
partitioning of the market between BAB (a formal lender) and moneylenders shows
the two lenders are providing different services. The moneylender provides
credit quickly, on short-term basis, and in relatively small amount.”</i><o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Incidentally, the All India
Rural Credit Survey (1951) (considered the gold plate for study of rural
credit world-wide) does not support the prevalence of widespread use of
exorbitant levels of interest rates commonly alleged to prevail in India! Data
in this Survey indicated that village moneylenders grossed only an average of
11 percent per annum on their lending<sup>5</sup>! <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Formal studies<sup>6</sup> also
suggest that the higher interest rates charged by the informal sector can be
largely attributed to risks and administrative costs and not to monopoly power <o:p></o:p><br />
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Considering these factors, the
conclusion arrived by most mainstream policy makers and the impression
generally carried by most of us that informal money lenders are blood sucking
thieves and rogues of the highest order seems not really substantiated by facts
and logic. The reader may also care to remember that interest rates charged by many
formal sector entities such as credit card companies and FinTecs involved in
lending are not exactly cheap and more akin to rates charged by the informal
sector. <o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
Before concluding I would like
to share a few quotes attributed to the ever-provocative Dale Adams, (Emeritus
Professor of the Ohio State Rural Finance Program):<o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo2; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->"It
is curious that the discomforts caused by a few people going into debt and not
being able to repay tend to dominate general views held about financial
intermediaries. The use of extreme cases to make general points is refined to
an advanced art form in discussions about financial markets. Stories about poor
farmers who lose their land to evil moneylenders are retold until people think
that most loans go to default ….". (from <i style="mso-bidi-font-style: normal;">Effects of Finance on Rural Development</i> in Undermining Rural
Development with Cheap Credit)<o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo2; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->…
lenders provide loans, not gifts, and this creates obligations. When
misfortunes strike, those obligations cannot always be met, putting the
borrower into even greater jeopardy (from <i style="mso-bidi-font-style: normal;">The
Economics of Microfinance</i>, by Beatriz Armendáriz de Aghion and Jonathan
Morduch).<o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l0 level1 lfo2; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->…
to the unwashed it (<i style="mso-bidi-font-style: normal;">empowerment</i>) conveys
the impression that smearing a dab of additional debt on a poor woman will
transform her into Super Woman. Those who insist on using this bloated term grossly
overstate the contribution that indebting crusades play in easing poverty. More
debt does not cure malaria or HIV/AIDS. It does not provide clean drinking
water or prevent flooding. It does not improve law-and-order or eliminate weeds
in a borrower’s crops. It does not make crops grow in barren soil or provide
secure title to land that squatters occupy. It does not provide schools or
teachers for the poor . . . (from <i style="mso-bidi-font-style: normal;">The
Economics of Microfinance</i>, by Beatriz Armendáriz de Aghion and Jonathan Morduch).<o:p></o:p></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
There is much room for change
/ improvement in policy framework to enable our banks deliver on their
capabilities. But such change should be based on an understanding of the
nuances of functioning of financial markets and their main players such as banks.
Propounding old, half-baked, hackneyed theories is not the way out – it is
getting us into deeper mess.<o:p></o:p></div>
<div class="MsoNoSpacing">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Government
claims Jan Dhan Yojana was a big success. Here’s a reality check by <i style="mso-bidi-font-style: normal;">Mayank Jain, The Scroll, 6th September 2017;
</i> & Jan Dhan Yojana: One Rupee Balance and the Dormancy-Duplication
Problem by <i style="mso-bidi-font-style: normal;">Anuj Srivas, The Wire,
14/09/2017</i>.<o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><i style="mso-bidi-font-style: normal;">The Poor & their Money</i>, Stuart
Rutherford, Oxford India Paperbacks<o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><i style="mso-bidi-font-style: normal;">Policy & Evidence</i>. <span style="mso-spacerun: yes;"> </span>Inaugural Address by Dr. Raghuram Rajan,
Governor, Reserve Bank of India at the 10th Statistics Day Conference 2016,
Reserve Bank of India on July 26, 2016, Mumbai<span style="mso-spacerun: yes;">
</span><o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">4.<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Ladman,
Jerry R. Loan-Transaction Costs, Credit Rationing, and Market Structure: The
Case of Bolivia, in <i style="mso-bidi-font-style: normal;">Undermining Rural Development
with Cheap Credit.</i><o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">5.<span style="font: 7.0pt "Times New Roman";"> </span></span></span>All-India
Rural Credit Survey, Vol. 1, The Survey Report, pt. 2, Bombay, Reserve Bank of
India, 1957, pp. 490-91. - quoted by David H Penny in Rural Financial Markets
in Developing Countries, page 66.<o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">6.<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Bottomley,
Anthony. <i style="mso-bidi-font-style: normal;">Interest Rate Determination in
Underdeveloped Rural Areas</i>, American Journal of Agricultural Economics
1975; <o:p></o:p></div>
<div class="MsoNoSpacing" style="margin-left: 36.0pt; mso-list: l2 level1 lfo3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">7.<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Long,
Millard F<i style="mso-bidi-font-style: normal;">. Interest Rates and the
Structure of Agricultural Credit Markets</i>, Oxford Economic Papers 1968.<o:p></o:p></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-38466215743694154232018-04-15T08:17:00.005-07:002018-04-15T08:20:05.807-07:00On the Importance of Universal Primary Education<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Yesterday, 14<sup>th</sup> April 2018, happened
to be Babasaheb’s birth anniversary and coincidentally Ananya Vajpeyi, a
scholar specializing in Ambedkarite thought, was in Hyderabad to deliver a talk
at the invitation of Manthan which I was fortunate to attend. The focus of her
talk, was the ideas and vision of Ambedkar and its relevance to present day
India. She specifically stressed on the primary importance Ambedkar gave to
education. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Ms. Vajpeyi’s expounded on a lot of
issues in her talk, a couple of which I have been trying to logically sort out.
For example, she spoke of the need of preserving space for youngsters from
different sections of Indian society in terms of caste, and gender, and
economic background to meet, discuss, debate, interact, and disagree and how
Universities provide just that. She spoke on the threat being faced in
maintaining that space, especially after the coming in power of the present
political dispensation. She also stressed on the contribution our Universities
and Institutions of higher learning and research make to the development of
knowledge and skills. I am in complete agreement with her, but I am still
troubled.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Basic economic texts describe how all
societies need to prioritize their requirements. In classic text book terms, societies
need to decide on the trade-off between guns and butter. One can’t have more of
both on the given production possibility frontier. In our case let us consider
the trade-off between primary education and higher education (including
University education). Given our limited resources we obviously cannot have
more of both to the extent we desire. We have to choose between the two, not
wholly, but of course to a large extent. That is, what would give our society a
bigger bang for the buck – institutions of higher education or primary schools?<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Let us look at the spin-off benefits of
both. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">It is well established that better and
widespread universal primary education leads to faster economic growth with
equitable development. This happens, inter alia, since the quality of economic
effort improves with a better educated work force. In other words, human
capital developed through prioritizing primary education is essential for
sustained and rapid long term growth. This is also apparent from the growth
experience over the last 30-40 years of China, South Korea, Taiwan, Thailand,
HongKong, and Singapore. All these countries invested heavily in universal
primary education over the period starting from the 1950s. A similar process
took place in Europe and North America from the mid 19<sup>th</sup> century
onwards.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Apart from helping achieve higher rates
of economic development, universal primary education which includes female
literacy helps in controlling and stabilizing population growth. In Iran
following the “Islamic” revolution in 1979, a generation of girls entered the
schooling system and the boom in female literacy translated in the total
fertility rate coming down from a level of 6.7 in 1980 to just 2.6 in 2000. A
similar negative correlation is seen between female literacy (which can only
ever be part of universal primary education) and population growth rates in the
States of Kerala, Tamil Nadu, and Himachal Pradesh.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Focus on universal primary education,
apart from faster economic growth, leads to more even income and wealth
distribution and consequently a more equitable society. This in turn results in
lower levels of social dissatisfaction and lower crime rates.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Stress on primary education would also
lead to creation of a much larger space for many more young people to meet,
discuss, debate, interact, and disagree with its consequent enriching social
experience than what would be provided by the universities and colleges.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">On the other hand the continued excessive
stress on higher education, without development of adequate economic base
through universal primary education, leads to lack of sufficient amount of work
opportunity which our graduates, post-graduates, and PhDs (rightly) think they
are fit for and deserve. Leaving a large proportion of such educated young
people (Hobson’s) choice between migrating to developed countries (effectively
capital drain from India to developed countries), accepting jobs for which they
are over-qualified and which does not give them either the expected levels of
remuneration or satisfaction, or remaining unemployed. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Ms. Vajpeyi in stressing the importance
of higher education gave the example of present day China which is making
concerted efforts to attract overseas highly educated and qualified Chinese
expatriates to return to teach and do research in Chinese Universities at world
class salaries. But I hope that Ms. Vajpeyi recognises that to achieve this
level the Chinese government and society worked over the last 50 years plus in
developing their basic primary education (and health care) systems, without
which they would never have been in a position to expand their institutions of
higher learning.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I agree that one cannot make something
strong, by making something else weak. So our focus as a society should not be
to weaken the existing structure of higher education, but in terms of priority
it is a “no brainer” that the main focus should be on strengthening the universal
primary educational system rather than on institutions of higher learning. I
think, Babasaheb would have agreed to this proposition.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<br /></div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-57679294304922029342018-02-15T22:20:00.003-08:002018-02-15T22:30:21.835-08:00Financial Inclusion Revisited *<div dir="ltr" style="text-align: left;" trbidi="on">
<div align="center" class="MsoNormal" style="text-align: center;">
<div style="text-align: left;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><br /></span></i>
<span style="font-family: "times" , "times new roman" , serif; font-size: large;"><i style="mso-bidi-font-style: normal;"><span style="line-height: 115%;">The
Road to Hell is Paved w</span></i><i style="mso-bidi-font-style: normal;"><span style="line-height: 115%;">ith Good Intentions!</span></i></span></div>
</div>
<div align="center" class="MsoNormal" style="text-align: center;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">The popular discourse
on financial inclusion in India is heavily dominated, in official as well as popular
circles, in favour of cheap and directed credit as the preferred or virtually
the sole means of achieving quick and easy poverty alleviation with all round economic
development, accompanied with social justice. Notwithstanding the fact that
additional credit, cheap or costly, is no substitute for functional roads,
primary health and education facilities, organized markets, or an
administrative machinery which can prevent exploitative relationships.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">The near exclusive
identification on providing cheap and directed credit with financial inclusion is
inspite of extensive literature (both theoretical <span style="mso-spacerun: yes;"> </span>as well as empirical) from across the globe
that such a policy has severe negative consequences for the economy and
society. The initial findings on this line of thought started emerging by mid
to late 1960s, and was well established by mid 1980s. Moreover this was not a
case of one-off or isolated diversion from main line economic thinking, but is based
on research by a number of economists in over two dozen countries and its implementation
had all round positive results for countries which implemented such policies,
especially South Korea and Taiwan. The irony is that the group of economists
who spearheaded this alternative approach had at least one RBI stalwart (Dr. V
V Bhatt), though RBI or GOI still barely acknowledge it! <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">The main negative
consequences in following a credit focused financial inclusion development
strategy include:<o:p></o:p></span></div>
<ul>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large;">Increasing levels of inequality in
income and wealth since cheap directed credit is cornered by the wealthy and
politically powerful who thereby increase the capital at their disposal and
become even more wealthy and powerful.</span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large;">Incentive to repay by borrowers who have
preempted cheap credit is lower which not only further increases their economic
and political status but simultaneously weakens the financial intermediaries
who have lent the funds and have to book the consequent losses.</span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%; text-indent: -18pt;">Development of large and widespread
corruption since the benefits are concentrated while the pain is widely spread,
there is little focus or effort at tackling the resultant problems. It is
little wonder that our cooperative credit system has never been able to deliver
on its potential and why it produces some of our most corrupt politicians.</span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%; text-indent: -18pt;">Progressive weakening of financial
intermediaries. Since financial intermediaries are typically highly leveraged
institutions with low capacity to handle negative trends in operational cash
flows, they try and stabilize their operations and shore up their income through
economies of scope. That is offering a wide variety of services using a common
infrastructure, thereby spreading their risks and fixed costs over a larger
number of activities. Weak financial intermediaries are unable to fulfill their
obligations by offering a wide variety of financial products and services and
also in terms of mobilization and allocation of capital, and transformation and
distribution of risk in society.</span></li>
</ul>
<div style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; text-indent: -18pt;">The focus on lending being
the main purpose of banks leads to neglect of their other essential functions,
especially providing safe, convenient, reliable, and cheap savings products which
simultaneously provides positive rates of returns to the depositor, and managing
the economy’s payment system infrastructure.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">Lack of good savings
mechanisms leads to a wide variety of negative repercussions, such as:</span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -18.0pt;">
</div>
<ul>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large;">Economy and society is not able to
garner its full potential of savings which leads to lower levels of investment
and growth.</span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%; text-indent: -18pt;">Lack of adequate domestic savings
promotes dependence on imported capital.</span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large;">Savings which are not kept securely (say
with a financial intermediary) but away from the savers tends to be dissipated
through frivolous expenditure (gambling / drinking), borrowed away by friends
and relative, lost or destroyed (physically), stolen, and moreover loses value
over time due to inflation.</span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large;">Since risk aversion and saving for the
proverbial rainy day is an universal human value, lack of provision of safe,
convenient, reliable, cheap savings products by the formal banking system leads
domestic household savings to be either parked in unremunerative and unproductive
capital such as gold / build-up of inventory or in highly risky Ponzi schemes
which promise (howsoever ephemeral) positive rates of returns. This suggests a
rational explanation as to why our society is subject to frequent instances of
various Ponzi like schemes with steady regularity. </span></li>
<li style="text-align: justify;"><span style="font-family: "times" , "times new roman" , serif; font-size: large;">The focus on parking savings in gold is
especially attractive in view of its relative liquidity and as a hedge in
value. However this in turn generates huge demand for import of gold with its
consequent negative impact on the country’s balance of payments / deficit in
current account.</span></li>
</ul>
<div style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large;">Bringing savings into
focus as the prime instrumentality of financial inclusion is not a luxury we
can afford to ignore any longer. This can only be done if our people have faith
in banks as safe and stable institutions that provide services at reasonable
cost. The strategy for developing stable banks should be to ensure that the
users (ie the common man) develop a stake in their continued well-being. This
can only be done by increasing the levels and kinds of interactions they have
with their banks say by having banks offer a wide variety of related services
which are convenient and safe. Moreover, promotion of smaller banks with local
staff would also promote reduction in social distance between customers and
bank staff. Banks could take a leaf from the book of mobile phone companies –
no special literacy lessons had to be imparted to users to help them understand
its utility inspite of complexity in usage.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">Managing the payment
systems in terms of building innovative, cost effective means of universally
available funds transfer mechanisms is another story all together. We have a
superb infrastructure in place, but it is thanks not to banks (who should have
taken the lead) but to RBI and now the mobile phone companies and specialized
payment banks. Banks due to their continued insistence on sourcing all skills
in-house lack the knowledge of cutting edge technology which enables a wide
variety of services in this area. Setting up payment banks might provide some
relief, though their continued viability is doubtful since they have limited
economies of scope. At the most they can aim for is building up dedicated
customer volumes and selling out to established banks.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="line-height: 115%;"><span style="font-family: "times" , "times new roman" , serif; font-size: large; mso-spacerun: yes;"><br /></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">The bottom line for
ensuring focus on good savings products, innovative payment products, and also
reliable credit is to have extensive competition in the banking space
supplemented and supported with strict and comprehensive regulation. Extensive
and intense competition is the only way to promote innovative approaches to
provide financial services. This can be ensured through denationalization of
PSU banks, ban on a cartels such as IBA, complete removal of directed credit
(in any form), increasing interest rates on deposits, and downsizing the
Department of Banking Supervision (it should be made irrelevant). Increasing
interest rates on deposits would imply simultaneous increase in lending rates –
something which is contra-intuitive and politically very sensitive. However,
there is no alternative to developing stable, supportive, non-fragmented
financial systems.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">It is only through
competition that financial innovations may be engendered which would tend to
reduce transaction costs and risk, and as a result bring about the widening, deepening,
and integration of financial markets. Such financial development accelerates
the pace of economic development through its favorable impact on savings,
investment, and output. <o:p></o:p></span><br />
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;"><br /></span>
<span style="font-family: "times" , "times new roman" , serif; font-size: large; line-height: 115%;">* Please also see my blog <i><a href="http://sushilprasad1.blogspot.in/2013/08/on-financial-inclusion.html">On Financial Inclusion</a></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-7550991969203100892016-09-05T09:55:00.001-07:002016-09-05T09:57:41.039-07:00Are High Interest Rates a Primary Reason for Retarded Flow of Bank Credit?<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-size: 12.0pt; line-height: 115%;"></span></b></div>
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<i><span style="font-size: 12.0pt; line-height: 115%;">The Hindu</span></i><span style="font-size: 12.0pt; line-height: 115%;"> dated 29<sup>th</sup> August 2016 reports, <a href="http://www.thehindu.com/todays-paper/tp-business/banks-unaware-of-sme-issues-says-nirmala-sitharaman/article9043824.ece">"Banks unaware of SME issues,says Nirmala Sitharaman”</a>. It reports that our Honourable Commerce Minister is
of the opinion that (1) our banks haven’t been understanding enough of SMEs,
and (2) High interest rates for long. The article goes on to elaborate that the
Honourable Minister feels that interest rates in India are too high which in
turn is effecting adequate flow of credit to MSMEs. </span></div>
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<span style="font-size: 12.0pt; line-height: 115%;">Mrs. Sitharaman seems to be as confused about the issues as
the banks that she is criticizing. Well I agree with her that banks in India
have little understanding of credit risk which retards flow of credit not just
to the SMEs but across all segments of the economy - retail, agriculture, large
corporate – you name it. This is reflected not only in the myriad problems
faced by potential borrowers, but also in other phenomenon, such as high NPA
levels, propensity to invest large amounts in Government securities (more than
the minimum required, even though returns are low - at least the harried
bankers cannot be accused of improprieties in lending decision – the safety of
capital is ephemeral) etc. But laying the blame on high interest rates does not
give the correct or appropriate perspective, and such misplaced reasoning hides
the real reasons for various imperfections plaguing our banking system, which
in turn prevents optimum solutions to emerge.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">For a growing economy like India, availability of adequate <i>and</i>
timely credit is more important than cost. However, subsidizing credit costs
leads to various unhealthy (and unintended) consequences. <i>First</i>, since
the subsidized credit cannot be catered to everybody it starts getting rationed,
inter alia, through muscle and political power – the first step in ever
increasing spirals of corruption. <i>Second</i>, once access to scarce credit is
not on merits but through use of power, the incentive to service it (that is,
repay the loans) is so much lower! <span style="mso-spacerun: yes;"> </span><i>Third</i>,
since muscle and political power plays a largish role in access to credit, it
is the larger and bigger social constituencies who corner the bulk of the
credit. This in turn leads to higher & growing levels of income and wealth
inequality in the country.<span style="mso-spacerun: yes;"> </span>Related to
this is that, not only the more powerful are able to preempt scarce credit and
as such further improve their economic (and social) hegemony, since there is
lower pressures on them to repay the loans they get double the benefit.
Initially from getting access to credit and having larger capital at their
disposal and subsequently by not having to pay for it! As is said in Hindi “<i>dono
haath mein laddoo</i>”! </span><br />
</div>
<div class="MsoNormal" style="text-align: justify;">
<br />
<span style="font-size: 12.0pt; line-height: 115%;">The adverse effects of artificially lower interest rates on
credit goes on to corrode the viability of our financial system in other ways.
To be able to lend money, any financial intermediary has to first have access
to funds to lend. These funds come from the savings of the society. Now to be
able to keep lending rates low, financial intermediaries have to keep interest
rates on deposits low to ensure sufficient cushion for themselves to survive. The
fact the nominal interest rates on bank deposits, on the average, do not even
cover inflation rates is brutally brought out by statement of Dr. Raghuram
Rajan in his speech titled <i>Policy & Evidence</i> at the 10th Statistics
Day Conference 2016, Reserve Bank of India held on July 26, 2016, wherein he
stated, “<i>Many middle class savers value the high nominal interest rates on
their fixed deposits, not realizing that their principal is eroding
significantly every year”</i>.<span style="mso-spacerun: yes;"> </span>The
result is that millions of poor people lack mechanisms for storing their
savings which is not just secure but also provides a hedge on inflation!<span style="mso-spacerun: yes;"> </span>As is well said – the road to hell is paved
with good intentions!</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">This unhealthy cycle is best illustrated in our cooperative
credit system which has failed to live up to its potential (inspite of various
studies and interventions so as to revitalize it) essentially due to extensive
political interference and corruption led by subsidization of credit. Even
though the nominal rates of interest on cooperative credit may not be directly
subsidized, the fact that the State Governments have year after year kept on
underwriting the losses of the cooperative credit societies and are expected to
continue to do so, provides enough perverse incentives to politicians of all
hues to seek continuation of this vicious cycle. Is it any wonder that the
cooperative credit system in India produces the most corrupt politicians?</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">This lack of understanding as to what constitutes credit risk
and how to manage it, is reflected in the ever increasing procedures, prolonged
delays in approval, all kinds of impractical terms of approval, demand for
collateral security, specialized techno-economic feasibility studies, audited
financials and of course Credit Approval Notes which resemble PhD thesis and
not a tool for arriving at a rational credit decision! Bankers try desperately
to hide themselves behind such smoke-screen since they do not know better, but
it is of little avail. The entire burden of mush misfeasance eventually falls
on us in terms of slower economic growth and an increasingly unequal society
manifested in increasing crime and social dislocation.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">The workings of the financial system are subtle and diffuse,
but its effects are profound and direct on the real economy. There is need for
more careful and deeper understanding of its functioning in the design and
construction of a vibrant financial system which would lead to a better India.
Just blaming high interest rates is simply playing passing the buck.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-89762075778178953112016-07-19T22:27:00.000-07:002016-07-22T23:10:15.612-07:00Appreciating Micro-Finance<div dir="ltr" style="text-align: left;" trbidi="on">
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<![endif]--><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">The Hindu dated 20th July 2016 published a news
article titled</span> “<a href="http://www.thehindu.com/todays-paper/tp-national/tp-andhrapradesh/due-diligence-by-mfis-vital-while-lending/article8872550.ece">Due diligence by MFIs vital</a>”,</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="font-family: "times new roman" , "serif";"> </span>while reporting on the National Summit
on Microfinance organised by Assocham in Hyderabad. While due diligence in any
borrowing / lending situation is essential, the way MFIs go about doing this, which is much in variance to the practices followed by regular banks,
is what makes them special. Not only are the practices developed and followed by
MFIs different, they are cheaper and more effective. Let us see how this
happens. </span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
</div>
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">In any borrowing / lending
situation, if the lender (reasonably) expects the borrower to repay principal along
with interest, the lender has to assess the ability and the intention of
borrower to repay. <span style="mso-spacerun: yes;"> </span>After the funds have
been lent, the lender has to monitor the continued ability of the borrower to
repay. Even with the best and most detailed appraisals / due diligence and
other precautionary measures including insistence of collateral security, it is
not necessary that the borrower would be in a position to repay the borrowed
funds. And this is not because borrowers are inherently dishonest (in fact most
borrowers are quite honest – at least more than the average banker). <span style="mso-spacerun: yes;"> </span>The future is uncertain and circumstances
change due to weather patterns, change in tastes, government policies etc.
which often creates genuine difficulties in making repayments as per agreed
terms.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Assessing the ability and the intention
of borrower to repay and continued monitoring of loans is a costly and time
consuming exercise (known as transaction costs). Moreover, where the loan size
is small, the transaction costs as a proportion of loan size increases
exponentially making small loans costly and unremunerative for regular banks. </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Micro-finance seeks to solve this
problem of high transaction costs by some innovative, by now well established
techniques, which virtually does away from having the lender to do detailed (and
costly) loan evaluations and monitoring. Some of these techniques include: </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Group
lending: Small closed knit groups have a quality whereby the borrowers know
each other well. So lending to groups who have self- selected themselves
ensures that the group does both the appraisal and monitoring. Peer group
pressure replaces due diligence by banks.</span></div>
<div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Loan
repayments aligned to the cash flows of the borrower rather than convenience of
the lender, say through daily or weekly collections. </span></div>
<div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Reducing
costs to borrowers in terms of ease and reduced costs of transactions through standardized
minimal paperwork, centralized collection points which is more convenient to
borrowers, doing away with bribes or middlemen etc.</span></div>
<div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Doing
away with the distinction of loans for productive purposes vs consumer loans. One
of the most interesting and useful characteristics of money is its fungibility
(<i>its raison d’etre</i>). That is, command over money enables a person to use
it for any purpose for which he desires. Therefore, after the money is lent it
is difficult to trace its end use. Even if the loan draw-down is made directly for
the purpose for which it has been approved, monitoring end used is difficult
and costly. A borrower with a hungry child or a sick parent / wife cannot be
faulted for using the funds at his disposal for his immediate pressing
requirement than the purpose for which the loan was approved. </span></div>
<div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Building
incentives for regular repayment in the loan contract itself. Say by giving a
small loan with promise that in case it is repaid regularly the borrower would
become eligible for a (slightly) larger loan.</span></div>
<div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="mso-list: Ignore;">f)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Realising
that making available safe, secure, reliable, and easy means of small savings
are often much more important than making loans for large parts of the
population. </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Over time, MFI have developed a host of
such techniques which have proved their worth in enabling larger flow of
resources to the small and micro end of the financial markets. Traditional
banks by temperament and structure have been unable to address this critical requirement.
Reasons are many and complex, and this short monograph will not even attempt to
address it!</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">It is sad that
the news article did not reveal if the National Summit on Microfinance even
discussed these very important and relevant aspects of this industry.</span></div>
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<br /></div>
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Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com0tag:blogger.com,1999:blog-19619458.post-68591324280980160232016-02-07T06:44:00.000-08:002016-02-07T22:24:24.707-08:00Whither or Wither Indian Banking?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">The news article, <a href="http://www.thehindu.com/todays-paper/tp-business/govt-regulators-must-take-blame-for-npas-sbi-chief/article8099507.ece">Govt., regulators must take blame for NPAs: SBI chief</a>, in The
Hindu (issue dated 13<sup>th</sup> January 2016) reported that Mrs.
Arundhati Bhattacharya, the Chairperson of SBI, in course of delivering the
ASSOCHAM Foundation Day Lecture was of the opinion that the blame for banking
industry’s high (and rising?) NPA levels should not be limited to them but all
stakeholders should share the blame. This seems to echo the old saying that, “To err
is human but to blame it on the other guy is politics”. Mrs. Bhattacharya tries
to pin down the other principal stakeholders with specific examples for the
increasing levels of NPAs in the banking sector. Specifically, according to her
the rising level of NPAs were due to (a) promoters bidding aggressively on the
back of good times and some of them were diverting funds, (b) the regulators were
letting banks make loans with tenors of as much as 30 years, and (c) the Govt. was
permitting policy uncertainty to continue. </span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Such a view point either reflects
poor knowledge of the role and function of banks and other financial
intermediaries in society, or amounts to a clear repudiation of
responsibilities by the banking profession in India. Coming from the
Chairperson of SBI, the chances of the first possibility is low and that is the
reason I find the views of Mrs. Bhattacharya disturbing. Unless, of course, she
is preparing herself for a career in politics.</span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;"></span><span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">The incidence of NPAs in the banking
system is akin to a manufacturing organisation making defective products.
Manufacturing organisations set up quality control systems which encompasses design
of appropriate manufacturing processes, quality control of their raw material
or sub-assembly suppliers, correct operation and control at each stage of the manufacturing
process till production of the finished product. The quality is further tested
as the product is used so that the quality can be further improved / costs
brought down. For achieving consistently good quality products it is therefore essential
for the quality control mechanism to be functioning well throughout the
production process. </span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">One of the key functions of banks is
to produce loans of consistently good quality and the production process in
this context consists of having an appropriate conceptual framework for
lending, selecting suitable people with the required skills, giving them
adequate and good training, understanding how or why credit risks arise and having
clear laid down credit management policy, having a suit of loan products which
are in line with the requirements of the potential borrowers and the risk
capabilities of the bank, a not too cumbersome loan documentation process (this
is extremely tricky since workable debt contracts cannot be complete contracts),
monitoring the loans once it is made, and taking corrective action as and when
required, entrapping the cash flows etc. All these taken together would ensure
a high probability that the loans made are repaid at the time and on the terms
agreed at the outset.<span style="mso-spacerun: yes;"> </span>Failing which,
banks have to have sound processes for recovering loans which go bad inspite of
taking all possible measures earlier. Incidentally, RBI’s concerns on
controlling NPAs seem also restricted on recovery rather than ensuring that
probability of NPAs occurring is reduced. But this is another long story which
I will save for another day. As such, one can safely conclude that the high and rising levels of NPAs in banks in India is a direct result of the failure of the banking industries quality control processes.</span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Keeping NPAs low for banks is
critical for various reasons. First, NPAs deliver a double whammy to the bottom
line of banks by reducing the quantum of interest earned (main source of
income for banks) while simultaneously having them to make provisions (from
profits and if that is insufficient from capital) for the principal amount of bad
loans. Second, banks being highly leveraged entities have much lower room to maneuver fall in operating margins, something rising NPAs result in. Third, by
affecting ability of banks to provide liquidity services to the real economy
(since the quantum of lending possible by banks is inversely proportional to rising
NPA levels) the income and employment opportunities in the economy start
getting drastically curtailed with rising NPAs in the banking industry.
Finally, banks hold the institutional memory of credit history of all the
actors in the real economy in their records. This institutional memory is hard
and very expensive to recreate once lost. When NPAs become so high that a bank
has to be closed down, this memory is as good as lost forever. This in turn leads
to a break in the payment cycle to and from the various players in the real
economy, and hits the real economy really hard by drastically reducing both income and employment opportunities in the economy. This is the primary reason that no society (or its government) can afford even the smaller banks to close down, leave alone the big ones. <span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Coming back to the specific issues mentioned
by Mrs. Bhattacharya, it is the role of promoters and entrepreneurs to be
optimistic about the future without which no society can operate, leave alone
grow. And it is the role of banks to appraise loans so as to avoid adverse
selection of potentially bad loans. Similarly, design of monitoring mechanisms
in loan contracts should ensure that moral hazard problems arising from
diversion of funds is avoided by raising early warning signals. I wish somebody had asked Mrs. Bhattacharya in
that august gathering the reasons for banks not being in a position to fulfill these
basic responsibilities. Isn’t appraising loans and monitoring them, including
design and insistence of restrictive covenants, an essential part of credit
risk management function of banks?</span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Mrs. Bhattacharya reportedly also
mentioned that “Banks extended loans for long duration as much as 30 years
while hoping funds would be recovered in 10 years”. I am not sure what she meant
by saying this. A 30 year loan would have a 30 year repayment, it cannot be a
10 year loan nor a 40 year loan (unless restructured). <span style="mso-spacerun: yes;"> </span>If it has a call option after 10 years, it
becomes a 10 year loan if the call option is exercised but remains a 30 year loan
if the option is not exercised. </span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">This brings us to another key function of banks which is to address the maturity mismatch between deposits and loans, ie, its principal
Liabilities and Assets. This function enables raising funds from, say, millions of small
Saving Bank accounts for making large, longer term loans and investments with
both the depositors and the borrowers being better-off, even after the bank as
financial intermediary makes a decent profit in the process. This kind of
maturity mismatch does create the problem of Asset-Liability management which
can lead not just to Interest Rate risk (hits profitability of banks), but to
severe liquidity problems (survival of the bank itself may be endangered). But
it is part of the banking game which all bankers play all the time. Interest
rate risk can be substantially covered by having floating rate interest rates
on both deposits and loans. Since interest rates on deposits are sticker than
that on loans, there always remains a certain quantum of residual interest rate
risk on the bank’s books. However, if banks consider themselves as going
concerns (and not gone concerns!), they can work out the risk of having a large
Asset / Liability mismatch for a small portion of their total deposits without
the overall risk being too large or unmanageable. This would enable financing
long gestation projects while the bulk of the funding remains from short term sources. These
are the basic skills of the banking profession and I hope Mrs. Bhattacharya
does not mean that SBI lacks it! </span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Handling the credit risks arising
from policy uncertainty by the Government is also a skill a banker brings, or
is supposed to bring, to the table. This can be handled in various ways, say,
by insisting on government guarantees (lazy banking), specifying low leverage
levels, or innovative design of loan products (take out financing / refinancing
/ securitizing loans etc.), restricting the size of portfolio subject to such
risks etc.</span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">The disfunctionality of the Indian
banking system is neither limited nor reflected solely in the high and rising
level of NPAs, but is endemic in nearly every aspect of the industry. It is evidenced
by large scale mushrooming of Ponzi schemes in which small depositors keep
their hard earned savings with finance companies in the hope of getting a return which would not be
negative in real terms because the banking system does not offer them a
feasible alternative. Or, the difficulties faced by the smaller end of the
market in getting loans which results in incidents like the call money racket
recently in TS & Andhra, or the bad name brought on the micro-credit
segment by a few unscrupulous operators. In practice it is a myth that private financiers are more expensive than our regular banking players if the transactions costs for delays, paper-work, bribery and worse are factored in. Even opening a simple deposit account
at any bank requires tonnes of paper-work which can be quite intimidating (I
had to fulfil KYC requirements to continue using by SB account which had been
satisfactorily conducted for more than 30 years!).</span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Banks evolved by providing payment
mechanisms to society. Even in this basic function the sheer inefficiency is
sought to be remedied by having separate payment banks, inspite of the development negating the concept of economies of scope which is one of the key strengths of
financial intermediaries like banks. </span></div>
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<span lang="EN-GB" style="font-size: 12.0pt; line-height: 115%;">Ultimately, the problems being faced
by the Indian banking industry can be traced to ineffective, backward looking top
management. Unfortunately, the price is being paid by all Indians by way of
difficulty in conducting their banking transactions, having few avenues of
investment of their savings which give a decent positive real return at
acceptable levels of transaction costs, or avoiding wading through a tsunami of
paperwork in getting any kind of credit facility.</span></div>
</div>
Sushil Prasadhttp://www.blogger.com/profile/09645411838440372345noreply@blogger.com2