Monday, March 23, 2009

Basel II Norms – A Revised Framework

Basel II framework, refers to a set of document named “International Convergence of Capital Measurement and Capital Standard: A Revised Framework” released by the Basel Committee on Banking Supervision (BCBS) on June 26th 2004 and added more in November 2005.No doubt, the Basel I framework played a key role in raising capital levels across the banking system over the late 1980’s and 1990’s. But in the wake of present crisis,Dr Nant Wellink (President of Netherlands central bank and chairmen, BCBS) emphasized on its failure to deliver on the four objectives: -

I. To develop a more meaningful link between bank’s on and off balance sheet risk exposures and the capital supporting them.
II. To beef up the links between sound regulatory capital and risk based supervision, as a way to foster strong risk management practices at banks.
III. To enhance market disciplines through better information about banks risk profiles, risk management techniques and capital.
IV. The Basel committee endeavored to develop framework that was adaptive to rapid financial innovations.

Further he laid out how the implementation of the Basel II framework would provide an opportunity for banks and supervisors to strengthen the banking system against financial and economic shock.
Key Areas Of Importance: -
I. Basel II delivers great risk differentiation. Banks that move from prime to sub prime mortgage lending or that move from traditional or corporate lending to leveraged lending would see a hike in their capital, commensurate with the changing business strategy and risk profile. Under Basel I all such exposures receive the same charge.
II. Off balance sheet contractual exposures to structural investment vehicle (SIV) and conduits would be brought into the field and subject to regulatory capital, whatever the accounting treatment.
III. There will be much more risk sensitive treatment for secrutisation exposures.
IV. Banks will have to develop more rigorous approaches to measures and manage their operational risk exposures and whole commensurate capital.
V. Banks will have to develop more rigorous methodologies for capturing counter party credit exposures including a wrong way risk. It capitalizes on the modern means of risk management and efforts to establish and improve risk-responsive linkage between the banks operation and their capital requirements.

In modern banking sector where the transactions are increasingly becoming complex and techno specific,so,improving regulatory mechanism is an utmost need especially to deal with international banking. Basel II norms posses all the qualities that a modern global banking system needs to share. Some desirable approaches of Basel II norms are –
I. Create attention to data planning for insures meeting of evolving compliance requirements
II. It is an evolution and there is more to come
III. Pr pressure continues to propel activities
IV. Built in flexibility is mandatory for future proofing compliance initiatives of banks
V. Transparency will be the norm
VI. Modular yet integrated in an enterprise – wide approach is the only long term solution
VII. More investment will be made

It has based on the pertinent pillars which overt its aim more closely: -

I. Pillars Ist : - Deals with the maintenance of regulatory capital circulated for the major components of risk. Risk weights were linked to the external ratings by accrediated rating agencies of some of these assets. Finally, banks were allowed to develop their own internal rating of different asset and risk weight them based on these ratings.
II. Pilllar II nd : -Concerned with supervision by national regulators for ensuring comprehensive assessment of the risks and capital adequacy for their banking institutions. It provides a framework for dealing with all the other risk a bank may such as systematic risk, liquidity risk, pension risk, concentration risk, strategic risk, legal risk, reputation risk etc which are represented under the tune of residual risk. It gives bank a power to review their management system.
III. Pillar III rd: - Provides norms for disclosure by banks of key information regarding their risk exposure and capital positions and aims to improving market discipline. This designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counter parties of the bank to price and deal appropriately.

Effects Of Implementation

I. Basel II allows national regulators to specify risk weights different from the internationally recommended ones for retail exposures.
II. Varying risk weights assigned by the agencies like Fitch, moody, ICRA etc.
III. In the case of retail exposures, the RBI has gone with the lower 75% risk weight prescribed under Basel II norms, as against the currently applicable risk weight125% and 100% for personal/credit card lone and other retail loans respectively. The Indian banks can get enormous benefit to deal with its un-rated high risk loans and other investments like Commercial Papers presenrly carrying 100% risk weight.
IV. The RBI’s draft capital adequacy guidelines provide for lower risk heights for short term exposures, if these are rated.
V. Its enabled Indian banks to significantly reduce their credit risk weight and their required regulatory capital. If they suitably adjust their portfolio by lending to rated strong corporate, will increase their retail lending and provide mortgage loans under high margins.

But the same is not applicable on operational risk. The Basic Indicator Approaches (BIA) specifies that banks should hold capital charge for operational risk equal to the average of the 15% of annual positive gross income over the past three years. Excluding one year when the gross income was negative. Gross income is summed as net interest and non interest income.
Basel II and India’s Banking Structure: -
In their column MACROSCAN (Business Line 2007), Jayati Ghosh and C.P. Chandrashekhar visualized some potential change in the Indian Banking System after its adaptation with Basel II norms. Some key points of their observations are: -

I. Developed countries are at a completely different level of development of their economies and of the extent of deepening financial intimidation as compared to the developing countries.
II. In principles the adoption of the core principles for effective bank supervision issued by the Basel Committee on Banking Supervision (BCBS) is voluntary. India like many other emerging countries adopted the Basel-I guidelines and has now decided to implement Basel II. India has adopted Basel-I guidelines in 1999. Subsequently, based on the recommendations of a steering committee established in Feb 2005 for the purpose the RBI has issued draft guidelines for implementing a new Capital Adequacy Framework (CAF) in line of Basel-II.
III. Regulatory capital is defined in terms “tiers of capital” that are characterized by different degrees of liquidity and capacity to absorb losses. The highest tier I, consists principally of the equity and recorded reserves of the bank assets to be risk weighted.
IV. Initially set for march 31,2007 deadline later extended for foreign operation of banks to March 31,2008 (overall Indian Overseas Banking) while all other Schedule commercial banks (SCB) will have to adhere to the guidelines by March 31,2009.

RBI had taken a view that only Indian Banks that get 20% of their business from abroad need to follow the Basel Norms. In 2003,SBI’s international operations contributed just about 6% of its business.
Difficult Aspects of Basel-II: -

I. Differing cultures, varying structural models, complexities of public policy and existing regulation.
II. Foreign pressure impacts adversely on priority sector lending. A match up attitude on profit may grow further.
III. Following the reforms; the credit-deposit ratio of commercial banks as a whole declined substantially from 60.4% in 1990-91 to 55.9% in 2003-04.
IV. Deregulation, which takes the form of both easing the entry of domestic and foreign players as well as the disinvestments of equity in Public Sector Banks (PSB) forces a change in banking practices.
V. Even the earlier implementation of Basel-I was not proven positive for credit delivery. This would worsen after Basel-II. The preferences of banks for government securities and the increased risk aversion of banks following the adoption of Basel-II would adversely affect credit allocation to priority sector.
VI. Priority sector lending as a proportion of net bank credit after reaching the target of 40% in 1991 had been keep falling short of target till 1996. It has subsequently been in excess of the target and stood at 44% in 2004, because having inclusion of funds provided to RRB by their sponsoring banks that were eligible to be treated as priority sector advances.
VII. Small Scale Industries (SSI) finance is a major problem; which fall from 17.3% of the net banking credit from PSB in 1999-2000 to 7% in 2003-04.
VIII. Basel II norms would introduce pro-cyclical elements in developing economies.

So, the Basel-II norms will effect dubiously on Indian banking system, but that does not mean its disqualification on policy matters, because its consists some very effective tools for Indian banking. Banking sector has a lot to gain in near future from Basel-II norms implementation...

Atul Kumar Thakur
New Delhi
March 23rd 2009

Micro finance: A Panacea of Sustenance

Micro finance notionally stand with social aspects of economic requirements for marginal or weaker sections,both at the rural and urban spaces. It caters the micro credit for immediate requirements of initial capital for farming activities as well as for lower scale entrepreneurial activities.It introduced superb social binding over its recipients with it's theoretical aim to promote group effort during the attainment of specific enterprise.
Popularly these groups are known as Self Help Group(SHG) can be regarded as a forward move with community involvement as a key specialty potential in strengthening the social fabrics and further ushering towards the more regulated social development.

Micro finance as a concept reemerged and gained popularity in 1970’s in East Asian and South Asian countries like Philippines , Bangladesh etc: later caused for the social orientation of banking in developing nations. By which affect the formation of rural banking (Gramin Bank) in Bangladesh and India infused immense hope for inclusive development in these countries.
Dr. Muhammad Yunus received accolades and numerous international awards for his extraordinary accomplishment, so much so that many believe that Micro finance as an institution began only in the 1970’s and that too only in Bangladesh. In fact there have been also earlier claim of successes like William Reiffcisen’s village banking movement; another noteworthy was caisse populaire of Alphonse Desjardins in France were amongst the notable instances where considerable improvement was brought in the condition of the extremely disadvantaged peoples.

Such early conceptions were not entirely hypothetical, though all the previous success of Micro financial activities were not operationalised in an organized banking system,so, such initiative were largely remained confined beyond the institutional pattern.
So, seeing huge success of Gramin Bank in Bangladesh under the visionary leadership of Md Yunus and satisfactory success of Indian Gramin Banking (RRBs) in their goal; now this so far untapped sector is drawing fresh insights from commercial banking NBFC and NGOs.Over the years,Micro finance has emerged as promising way to check the poverty and empowering the underprivileged especially Women, Unemployed and Disabled.
In India a measure policy initiative was made by NABARD in 1992,for SHG-Bank linkage as a pilot project which in course of time grown into one of the largest micro finance programme in the world.

The NABARD is planning to start a MFI to take financing to the” poorest of poor”. The venture will be launched in partnership with Commercial Banks(49%) and NABARD(51%). NABARD will also launch a Financial Advising unit to help bring down the high incidence of farmers suicides.
Despite observing high growth of rural credits and other small segments of lending in last decades the formal sector, nevertheless Microfinance accounts for less than 40% of the agriculture and rural credit; these demonic reality still haunts the welfare aim of institutional finance.Another alarming area of concern would be the burgeoning SHG and Microfinancial organizations becoming a favourite hobby horse of the NGO for exorbitant business that is going to be a grave challenge for original conception behind this movement. Most of them fail on all the basic criteria. Such tendencies needs an immediate cure through stringent regulatory mechanism…

Recently the Government is also proposing a legislation by which it will be able to regulate the Micro financial institutions to ensure fair, equitable and ethical practices and democratic functioning but that regulatory checks must be timely implemented before loosing the essence behind this social venture.Legislation also propose a ceiling of Rs50,000 by MFI; which is considerable in rural segments of Micro credit but will not be suffice in enterprise finances. NABARD would be its regulator.
In some more forward move banks must approach to a customized savings products targeting the poor. NGO should assist SHG to usher in flexible savings options too likewise banks and MFI should deliver agricultural seasonal loans with flexible repayment options through groups on a pilot basis.

Here it’s a chance to create a Micro financial promotional agency on the lines of Pali Karma Sahayak Foundation (PKSF) of Bangladesh programmes.Government must consider making NABARD MCID (Micro Credit Innovational Department) an autonomous promotional body. Having lower competitions among MFI is an another area where the India lag behinds from Bangladesh. Here some innovations are needed in Indian financial sector to infuse competition in Micro financial segments.
This is need of hour to innovate the existing products and introduce to some new product lines. Such some products which has called attention in Bangladesh can be also effective in India because of having many common grounds between two countries, some of those are: -
I. Risk Mitigation – As their insurance programmes are community managed on the basis of mutuality, they do not extend cover for risk of a co-variant nature, such as flood cover and crop failure.
II. Flexible Savings – To cope with food insecurity, employment insecurity etc.
III. Agricultural Finance- This product is already exists in India; only it needs more optimization for better needs and outcome.
IV. Larger Individual Enterprise Loans- This segment has drawn attention from policy makers like Dr Arjun Sengupta, chairmen, National Commission for Enterprise in the Unorganized Sector (NCEUS) expressed his views “If Micro finance properly nurtured and strengthened the unorganized non farm sector can be a pertinent tool of employment creation, poverty reduction and faster inclusive growth and would go a long way in closing the widening devide between urban and rural India.

NCEUS targeted fund corpus of 1,000 crores by 2011-12,target group for this corpus are small enterprise and the unorganized sector covering non farm activities employing less than 10 workers, primarily those with investment in plant and machinery not exceeding Rs5 lakh (excluding land and building at 2004-05 prices) if engaged in manufacturing and investment in plant machinery not exceeding Rs 2 lakh if engaged in non manufacturing.
However the upper limit of financing by the fund would be for enterprise with investment in plant and machinery not exceeding Rs25 lakh if engaged in manufacturing and investment in equipment not exceeding Rs 10 lakh if engaged in non manufacturing activities. As the commission cites the third census of SSI(2001-02);98% of all the manufacturing non agricultural small enterprise employed less than 10 works with an average capital investment of Rs1.47 lakh, quite a good number of them are also engaged in service business and trade.

Despite having all such arrangements, they hardly received about three percent of gross bank credit during 2002-03 to 2004-05 against the RBI priority sector plan that Micro enterprises should get 60% of total credit to SSI, they have been getting just about 40% and this had skidded to 34% in 2004-05.Even more surprising within the non farm, unorganized sector, the most vulnerable group is the smaller size micro enterprises with investment up to Rs 5lakh.
Here it will be quite imperative to channelize better policy options to minimize the suffering of this sector and enabled them for more healthy functioning. It could be a major area of employment generation, which follows by its stabilizing factor to domestic economy, So Government must also leveraged corporate to enter in Micro financial sector in more efficient and regulated manner-away from exorbitant aim of business.

Present presence of Corporate is still standing in obscure proportion, hope they will more motivated in near future with obeying the regulatory norms.In recent years Indian financial institution specially the Regional Rural Banks, some commercial Banks and to some extant Co-operative Banks displayed healthy trends in delivery of Micro credits in rural areas for farming and other employment generation programme. With merger and consolidation, RRBs being able to systematize restructuring of its business and healing from previous loss, now strengthening RRB; would indeed influence much stoutly to Micro finance programmes in near future.
Its huge branch network and strong presence in rural areas would be the most strategic factor in rural credit disbursement.Having tuned negatively for their poor financial structure and inefficient management system ; Co-operative Banks lost much of its reputation as pioneer of Micro financial movements.

Though implementation of Vaidyanathan committee is infusing some new hopes for their strategic revival. If it will able to regain its potential glory then, of course the task of mushrooming productive Micro credits would become much smooth.In present circumstances of financial meltdown, it would be desirable for Indian policy makers to stressed more on domestic financial features ; because it’s sheer domestic demand which is catalyst in sustaining the growing economy.
Hope the Micro financial programme along with other Priority sector programmes would get more attentions from policy front irrespective of any political rotations...besides RBI and NABARD have to keep vigil alive to not let deviate the social orientation of Microfinance for exorbitant greed of business by Corporates.

Atul Kumar Thakur
New Delhi
23rd March2009

Friday, March 13, 2009

Introspecting NREGS

National Rural Employment Guarantee Scheme introduced as fresh employment scheme by the Government of India, which treats employment as a right and the program is conceived to be demand-driven. It will worthwhile to note that NREGS is entirely different in its conception as well as in execution pattern. Essentially it’s a step forward for social inclusion.
NREGS has potential to transform rural socio-economic mode of relations at different levels. Obviously NREGS essentially challenges the prevailing power structures. NREGS is necessarily “inclusive” at the most basic level in economic terms. Partial success of scheme is a sources of optimism. Despite having huge variation in participation in states. NREGS present optimism at national level.

Share Of Women : -
India’s(36.2%) in total rural workforce,48.9% in NREGS,differences-12.7%
Share of SCs-16.2% in total population, 30.9% in NREGS.differences-14.7
Share of STs-8.1% in total population, 24.1% in NREGS, differences-16%
(Sources-NSS 2004,NREGS Report on January 2008,Census 2001)

Participation of women shows inclusive potential of the program NREGS which involves a very fine gender balance which enabling a large number of them for institutional finance. Such involvement of womens in NREGS is likely to be positively reshape the gender configuration. High participation of SC in NREGS is quite natural as they lack access to means of property, their's share are similarly disproportionate among rural laborers and any other employment program of government.
Moreover,such high participation of STs in program is quite amazing. Because neither Geographical nor previous track records with other scheme was so conducive. Huge participation of STs at national level is a very encouraging sign of success for NREGS.

This trend is worth of admiration. Since the initial 200 districts were chosen on the basis of their backwardness and these tend to be tribal dominated areas as well as in many states,so it may not be surprising that STs have been so magnificently working in NREGS at the aggregate state level.Partial success of NREGS does not ensure a rosy path ahead. Institutions and Individuals are rapidly involved in the arena of corruption. The tremendous potential of the scheme is in danger of being wasted in some states.
There is too much scope for introspection to deal with massive corruption. There prevails a very low consciousness among the workers to their rights. Even 30 percent among them are exactly aware about their rights and their entitlement to 100 days of employment per year under the Act. This powerlessness is also due to the absence of any effective grievances redressal system for NREGS.

Effective presence of IT facilities in rural areas and unorganized civil society vitally determined the state of affairs. Weakness of local governance, also substantially affected the successful enactment of NREGS, this case is very strong in Jharkhand where Gram Panchayat elections have not been held since the enactment of 73rd &74th amendments of the constitution.
Jean Dreeze in his introspection of NREGS found some factors, which rapidly ails the system. These are: -
1.A repressive state people
2.Helplessness of working people
3.Lack of system to redress grievances
4.Absence of Gram Panchayats
5.Casual attitude of government

There are some key restraint before the NREGS. These maladies needs immediate checkout by strong measures by Peoples institutions through appropriate technology, skill development, leveraging market and adequate public investment.NREGS is a major source of domestic demand, which is very crucial for Indian Economy in present circumstances to come out from global financial downturn. Now it is time to realize that NREGS is about more than equity, it is also a very useful macroeconomic weapon against the economic slump and recession .
A strong civil society has off course plays very crucial role, though there effects are not alone enough. In a very lucid inquiry; Mihir Shah & Pramathesh Ambasa (Hindu, Sep 8,2008) found the success of NREGS. Social audit in Andhra Pradesh covering 12 million people is a brilliant example of civil society action, enriching mainstream politics.

In Andhra Pradesh, a fine understanding exists between peoples institution like Mazdoor Kisan Shakti Shangthan(MKSS)& Government. Besides this a separate existence of social audit is another favourable condition which enabled Andhra Pradesh to get breakthrough in NREGS implementation.The MKSS led by Aruna Roy, one of architects of NREGS introduced the concept of social audit into development practices nearly two decades ago. But even in Rajasthan, where MKSS started its work could not meet with same achievements to mainstreaming social audits.
A social audits of 17 NREGS Works in five Gram Panchayats of Deoghar district (Jharkhand),conducted on 12-16th October 2008,revealed some alarming facts related to discrepancies in bank payments .Lot of manipulated bank accounts were found which strengthen the chances of corrupt involvement of institutions like bank. So, it raises question marks on bank payments and Direct Cash Transfer(DCT) to cope with the corruption in NREGS.

Before NREGS, Indira Awas yozna(IAY) used to avail the DCT, where its proved inadequate to cope with corruption because biased involvement of government officials and middlemen’s.Situation is absolutely puzzling how to deal fairly with cash transaction during a project. For policy makers, it still remains a distant dream. Indeed DCT system is most improved solution till now; Economist like Arvind Subramanian even regards DCT as the “first best option “to address poverty in India.
Infact there shall be major concern towards growing violence in its path-like tragic death of Tapas Sen ,who immolated himself in Hazaribagh to protest against official harassment.Mode of NREGS functioning raises serious question against the partial functioning of authorities.

Violence during the project are quite rampant .Brutal murders of two NREGS activist (Lalit Mehta and Kameshwar Yadav) during a survey of NREGS initiated by the G.B .Pant Social Science Institute in Palamu and Kodarama districts left a frightening scar over the program.
Still a lot of fight is needed with such oddity to overcome from imposed hurdles. The NREGS has huge potential to enhance socio-economic dynamicism in country which makes alone suffice to makes its utility evident. Let us hope for more breakthrough…

Atul Kumar Thakur
New Delhi
March 2009

Financial Inclusion-A Basic Approach

Financial inclusion is an institutional move to cover those unbanked masses who so far have been denied access to formal banking/financial services. So, it has motive to ensure these services to all people in a fair, transparent and equitable manner at an affordable cost.Lack of credit for working capital is often cited as a major reason for the sickness in the agrarian finances/small scale industries,the core aim of this drive is to assist the aspiring peoples with hassle free finance at rational rate of interest besides putting them into overall banking culture.
About 75% of the bottom half of Indian households still rely on informal sources of finance like Moneylenders, and less than 15%have access to bank credits.

So, socio-economically weaker section of country still remains largely untouched from institutional credit despite impressive growth of banking system over the decades. Nearly three quarters of farm households in the country still have no access to any formal source of credit.
According to the Invest India Incomes and Saving Survey Of 2007 by research firm IIMS Data works, just 44.9 percent of Indian earners had bank accounts, though coverage rates varying widely in individual states. Just as 38% of paid workers in villages had accounts compared to 62% of their counterparts in urban areas. These divides creates major loopholes in the development path of financial inclusion plan.

Financial inclusion is a key priority of India not only for sustaining its growth rate but also for poverty eradication at a much faster pace and for bridging the growing rural-urban divide. In crux, financial inclusion needs inclusive developments. The ultimate aim of development in this context is to improve the welfare of common peoples. Size of Indian economy immensely matters during the plan execution; especially with infrastructure development. Its assist a lot in expanding domestic demands which will enhance overall efficiency in the rural sector and boost a large growth of purchasing power.
The declining contribution from the primary sector to GDP reduces the per capita income of the rural population which creating the ground for uneven income distribution.

The overall traditional composition is distorting, average size of farming is declining by effect as proportion of the small and marginal farmer and landless agricultural laborers is rising. In the urban centers proportion of unorganized sectors are increasing besides with the marginalization of laborers.
The committee has also recommended that the government should constitute a national mission on financial inclusion (NAMFI) comprising representative of all stakeholders to suggest the overall policy changes required and supporting stakeholders in the domain of public /private sector and NGOs in undertaking promotional initiatives.
The major recommendation relating to commercial banks included target for providing accounts credit to at least 250 excluded rural households per anum in each rural/semi urban branches; targeted to expansion of commercial savings, credit and insurance products, incentives to human resources for providing inclusive financial services and simplification of procedures for agricultural credits.

The major recommendation relating to RRBs are to extending their services to unbanked areas and increasing their credit-deposit ratios, no further merger of RRBs ; Widening of network and expanding coverage in a time bound manner, separate credit plans for excluded regions to drawn up by RRBs and strengthening of their boards.
In case of co-operative banks the major recommendation were early implementation of Vaidyanathan Committee Revival Packages, use of Primary Agricultural Committees (PACs), and other primary co-operatives society to adopt group approach for financing excluded groups.
Other important recommendation of the committee and encouraging SHG in excluded regions; legal status for SHG, measure for urban micro-finance and separate category of Micro Financial Institutions (MFI).

For focused backing the Lead Banking Scheme (LBS) was introduced in 1969, based on the recommendations of Gadgil Study Group. The bankers committee headed by F.S Nariman; concluded that districts would be the units for area approaches. LBS has some of very vital provisions like, Priority Sector Lending, Different Rate Of Interest Rates(DRI).Potential Linked Plan of NABARD ,Effective channelisation of SHG,SME financing etc.
No doubt, massive investments such of such provisions assist a lot to weaker section upliftment but scale of such benefits are comparatively very low to expectations. Keeping the views of shortcomings in mind Government Of India (GOI) constituted a high power committee headed by Mrs Usha Thorat, Deputy Governor of RBI, to suggest reforms in LBS.

India has been ranked poorly in the first-ever index of financial inclusion (IFI). The index prepared by the Indian Council For Research On International Economic Relations (ICRIER) to find out the reach of banking services in 100 countries world wide ranks India at 50th position this placed below even to countries like Kenya and Morocco. The study underlines the need for expansion of banking services to ensure that they reach the weaker sections. So, banking services have to move from class to mass scale.
The committee on financial inclusion was constituted by the Government Of India under the chairmanship of Dr C Rangarajan on June 26th 2006 to prepare a strategy on financial inclusion. The committee submitted its final report on January 4,2008.

The report viewed financial inclusion as a comprehensive and holistic process of ensuring access to financial services with timely and adequate credit, particularly to vulnerable groups such as weaker sections who falls in low income group at an affordable cost. Financial inclusion, therefore ,should access to mainstream financial products. Such as bank accounts credit remittances and payment services, financial services and Insurance facilities.
The report observed that in India 51.4 percent of farmer households are financially excluded from both formal/informal sources and 73% of farmer households do not access to formal sources of credit. Exclusion is most acute in Central, Eastern and North Eastern region with 64%of all financially excluded farmers households. The overall strategy for building an inclusive financial sector should be based on: -

1. 1.Effective improvements with existing formal credit delivery mechanism

2. 2.Suggesting measures for improving credit absorption capacity especially amongst marginal and sub-marginal farmers and poor non-cultivators

3. 3.Evolving new models for effective reach

4. 4 Leveraging on technology based solutions

Keeping in view the enormity of the task involved, the committee recommended the setting up of a National Rural Financial Inclusion Plan (NRFIP) with a target of providing access to comprehensive financial services to at least 50%(55.77 million) of excluded rural households by 2012 and the remaining by 2015.This would require semi-urban and rural branches of commercial banks and RRBs to cover a minimum of 250 cultivator and non-cultivator households per branch per annum.
From35,000 in early 1990s to as low as 30,572 by March 2006 through mergers and swapping of rural branches –share of 16,000 people per branches is not satisfactory; Any how to see it on all India basis, still only 30% of the rural people have bank account the. The rural people get only 9.2% of the total credit lent out by scheduled commercial banks.

According to NSS data (Indebtedness of farmers households-2003) 46% of the outstanding debts of farmers is sourced from the unorganized financial system. In such despairing scenario, some moves like priority sector lending have come up with extraordinary results; Under this plan ,scheduled commercial banks including RRBs are mandated to lend at least 40% of their net bank credits at concessional rates to the priority sectors comprising agriculturist(18%),SSI(10%) and other small credit seekers from different sectors. By this move, the credit to priority sector increased from 14% in 1969 to 37.7% in 1991 of net bank credit.
RRBs are allowed to fix interest rates and to more relaxation to usher its branches in semi-urban areas.

Now some new priority sectors included new borrowers such as professionals, SMEs , Leasing& hire purchasing companies etc. Priority sector lending are a major stimulus towards the mission of financial inclusion in India which also holds very positive underlying to rural economy.In current global economic crisis it becomes imperative to reshape some regulatory as well as operational practices of financial institution to cater the needs of mass peoples and sustain Indian growth story with more inclusive developments of its people.
Let we hope that financial inclusion’s plan may reestablish more focus on rural development and infuse happiness& esteem in the life and profession of our food earners.

Atul Kumar Thakur
New Delhi

Thursday, March 12, 2009

Myopic Routes of Finance (Sovereign Wealth Funds& Participatory Notes)

Amidst the ongoing crisis; it will be quite interesting to see and visualize the scale of losses…what we have actually lost in recent months, which have been in our possession through a considerable time. A lot of debate and writing has been stuffed about the potential causes of financial failure and diminishing market sentiments in past few months.
There could be many reasons behind the present financial chaos; among them, inflated treatment of stock markets best be attributed because the unprecedented growth till the crisis broke out largely caused by the unrestricted financial routes which don’t even canopied under the regulation of SEBI. So, no one can exactly traced the investors as their business dealt through intermediaries, even those middlemen’s never required to follow Know Your Customers (KYC) Norms.
These myopic investment roots may be considered to progenitor and nurturer of speculative finance. Two most prolific among them are: -

Sovereign Wealth Funds (SWF): -
Some SWF own by the State Governments of countries to handle with its idle assets for its maximization of value. SWF is not a fresh concept since its genesis can be traced back to 1950’s, then their size worldwide was $300billion.The current level now reached to $2 trillion to $3 trillion, the size may be cross $10trillion by 2010.
At present more than twenty countries have set up these funds. A dozen more have expressed willingness in establishing them. More than half of assets are possessed by oil exporting countries. Ranging from Norway to Trinidad, including Australia, China and Singapore. Still the holding are mostly concentrated with the top five funds, accounting for more than 70% of total assets under management.

Like hedge funds, SWF are also not governed by any single authority except the Singapore. SWF also operates through hedge funds, Private Equity for high return. So,it requires great care in fund management.SWF have a positive tendency to go long on securities that means to say, they buy and hold it invested for longer periods. This creates some establishing influence on stock markets.
But this establishing factor of SWF is highly disproportionate with its destablishing factor. Since it creates more place for irresponsible transaction. Overall SWF are immensely surrounded with chances of risk and failures, so neither it’s a meticulous route of investments nor it is good for just and equitable society.

Participatory Notes (PN): -
PN is an investment root by Foreign Institutional Investor (FII), through Offshore Derivatives Instrument (ODI); Such as Equity linked Notes and Participatory Return Notes have created storm in stock markets.
Basically FII issues PN to funds for companies whose identity is not known to the authorities. The PN is discriminatory as it promotes unethical investments; further it creates harmful effects on domestic companies. PN having very firm presence in India, as its proportion lies around 15-20% of stock of the top 1,000 companies. They have almost ruling influence on the market.PN outstanding by middle of 2007 was 3,53,484crores(51.6% of Asset under custody of all FII Sub Accounts). The value of outstanding ODI with underlying derivatives currently stands at Rs.1, 17,071crores, which is approx to 30% of total PN outstanding.

Users Of PN Route: -

1.Regular funds whose twin objectives are returns and more returns
2.Prodigal money returning
3.Foreign Governments/Entities who would like to acquire/control Indian entities by tracking them over.

PN investors channelizes their investment through the FII, but despite playing the role of intermediary, FII are not required to reveal their face. This situation further become more mysterious when regulators like SEBI simply let PN to escape from registration, which set them free from any regulation. Such allowances, promotes Indian financiers to enter in Indian Financials to enter in Indian Financial Markets.
Overall producers of PN transaction violates know Your Customers Norms, lastly, National Security Advisor cautioned against terror financing through stock market channels. Rising concerns of Indian authorities are very genuine, because unprecedented rise as well as fall are misleading the Indian growth story.

Two major constraints, which can lessen the impacts, are: -
1.A Special Purpose Vehicle (SPV), can be created which would be dollar dominated to hold these funds at attractive rates and which are countered over a period of time to minimize the followed impacts.
2.Generally these are two types of PN- Spot based and Derivatives/Future based (ODI). The latter accounts for around 32-33 percent of all PN. FII and their sub accounts shall not issue/renew ODI with underlying as derivatives with immediate effect .It should also mean that the hedge funds ,which has been fairly responsible for the steep rise in the markets, might exit the market because SEBI will never let them register as FII.

On such proposals, due consideration was given by SEBI to cope with threats of PN. Ultimately SEBI allowed 18 months to wind up outstanding PN in late 2007, now the proposed ceiling is near end, which means ends of the unauthorized PN.Decision taken by the SEBI was in very right directions. Since its timely implementation optimized and lessen many future losses. Some such more measure are imperative to check irregularities in financial markets.
Authorities have to play catalyst role in such initiatives. Investors should have also rationalize their paramounting expectations from financial markets and now must start to keep faiths in realistic rewards.
Atul Kumar Thakur
New Delhi

Monday, March 2, 2009

From Wall Street to Main Street(On Financial Meltdown)

The year 2008 must be remembered as watershed year in the financial history as it shattered the confident tone of financial management which has generated through the
recent successes especially from the credit bubble of post 2003-04.Since the year 1987 crash, there have been many financial upsets –the 1997 –98 Asian financial crises, failure of the hedge funds long term capital management in 1998,the puffing Of the stock bubble in 2000,and now the sub prime ‘Mortgage debacle ‘.None has turned into a full-fledged panic, So all three mishappening formed a temptation that we have got mastership over these occurring problems .
Unfortunately situation this time is much grave than initial speculation…gravity of problems recognized very late which deepens the fear of loss and insecurity among both the participant and regulators. The main reasons for the financial mess seem to be the allocation of large funds with U.S Banks and the structural products developed to pass on the risk to investors.

Through January the United State saw on average the loss of over 800 jobs every hour, or 17000 every day since the meltdown began in September ; Off course here in India, too things are shipping but the lessons remain unlearnt .Even in such gloomious atmosphere ,corporate kleptocracy kept very profoundly as Citi group spent $50million on a corporate jet. Now the disgraced CEO of Merrill Lynch, John Thain, spent $1.22million on redecorating his office in early 2008,All that was happening when he prepared to cut thousands of jobs. The amount included purchase of an antique “Commode on legs”.
Even more top bankers from wall street didn’t felt even a bit of reluctance to acquire the hefty amount of perks and bonuses until the U.S President curb such extravagant practices in present troubled phase ,he also barred the maximum compensation to $50,000.No such initiative made from the top notch professional circle except the Citi group chief Mr. Vikram Pandit who voluntary abandoned any fees for his service till the recovery of reputation of his banks .No doubt ,it is suffice to acknowledge the lacking of corporate ethics, among the professional especially who possessed top notch authority.


When wall street was run by individuals without exotic degrees from Ivy Leagues, they had proper skepticism towards fancy models and managed their risk with a great deal of humility and caution.Indeed they create conducive atmosphere for the practice of “Charuvaka Economics (From the epic MAHABHARATA)”, Which expected from people to borrow, spend and live happily without bothering of repayment of debt and not feel guilty if unable to pay it back .
In same manner, the US financial system consciously pushed sub-prime loans to put cash in the hands of gullible and not creditworthy borrowers and make them splurge at shopping malls, so that wealth shifted from Individuals to corporates; And when things fall apart it was also at the cost of the global community.All credit crises having the same origins. They are spotted in buoyant economic growth that promotes over-optimism, excessive risk taking and extreme demands on liquidity. Some of the typical cases are:-

#.1907:BANKERS PANIC-Run on U.S banks and trust companies what J P Morgan did in 1907?At quarter five on a November morning, Mr Morgan presented assembled bankers a documents telling them what they showed through the kitty to restore confidence. The bankers meekly signed, and the crises was over.

#.1909:WALL STREET CRASH-Stock prices plummet for there years following rampant speculation taking almost twenty five years – Until 1954 to regain pre 1929 value.

#.1973: OIL CRISES-Oil embargo and international withdrawal from Breton Woods agreement trigger stock crash.

#.1987:BLACK MONDAY-Panic leads to 22%drop in single day.

#.2000:DOTCOM CRASH-Teach stock bubble bursts.

#.2008:CREDIT CRUNCH-Defaulters on Sub prime mortgage leads to liquidity problems for financial institution worldwide.


#.Collateral Debt Obligations (CDO)-Late1970’s:-Mortgage were packaged together and sold to investors as CDO’s.

#.Mortgaged-Backed Security (MBS): -1983;Larry fink pioneers MBS market while leading bond department at first Boston Corporation .MBS divides package at Mortgages into different tranches of risk. Softest investment grade bonds receive interest rate while riskiest tier-so called toxic dept-is paid 2-3%higher. Investor is now induced for accepting risk, not for lending money.

#.Sub-Prime Mortgages:-In 1990’s demands for MBS results in lenders lowering interest rates and offering 100% Sub prime Mortgage to individuals with questionable ability to pay. Rising house prices protect these borrowers from defaulting.

#.Credit Default Swaps (1997):-Invented by Blythe Masters at Investment Bank J.P Morgan Chase. CD’S or credit swaps are Insurance like contracts intended to remove risk from companies balance sheets. Presently International Swap and Derivative Association regulate Swaps.

#.Shadow Banking System (Late1990’s):-Swaps now used to package everything from Mortgages ,business card, credit card debt, and even education loans are brought by unregulated speculators and hedge funds on behalf of insurance companies and pension funds worldwide value for global CDs market rose from $1trillion in 2001 to $62.1trillion in 2007 and lastly fall to $28trillion in January 2009.

#.Credit Crunch(2006):-Interest rate rises to 5.25%;Housing market begins to confront defaulter –one in five U.S borrowers falls behind on mortgage payments.

#.2007-08:-Banks worldwide suffer huge losses and stop lending despite massive bailouts by taxpayers.


Even before the Bernard Madoff’s scam may other Ponzi scam –In August 2007;the process of price discovery began a long time back when Bear Sterns declares that investment in one of its hedge funds set up to invest in mortgage tracked securities had lost all its value and there is a second such fund were valued at nine cents for every dollar of original investments. Being an interconnected institution holding assets valued at $395.4 billion dollar in November 2007 on an equity base of just $11.8billion,despite having such portfolio, its came under the severe pressure which concluded only with the life support from J.P Morgan Chase at huge loss of share prices.
Normally banking sector considered as the core of financial sector; The equity base of more banks are relatively small even when they follow Basel norms with regard to capital adequacy. Despite such allocation of trenches Banks having considerable derivative exposure.

Citi Group and Bank of New York Mellon estimated to have an exposure to the institution (Derivatives) that was placed at upward of staggering $155billion.In same manner fourth largest bank of Wall street Lehman Brothers came under the severe losses through the Derivative exposure and bad lending, ultimately came to the table with request for support, but it was refused the same. The refusal of the state sends out a strong message.
In a surprise move Bank Of America that was being spoken to as a potential buyer of Lehman Brothers was persuaded to acquire Merrill Lynch instead. But even that deal was not taken place properly and before any move from Bank of America, Black Rock acquired major arms of Merrill Lynch, consequently bringing down two of the iconic and major independent investment bank on Wall street.

In its update to the Financial Stability Report for 2008,issued on January 28,2009,the IMF has estimated the losses incurred by U.S and European Banks from bad assets that originated in the U.S at $2.2trillion.Barely two months back it had placed the figure at $1.4 trillion. So scale of severity can be easily measured since the late 1940s.U.S. has suffered to recessions, joblessness, 6.1% in September, would have to rise spectacularly to match post second world war highs .
The great depression, that followed the stock market collapse in october1929 was a different beast. By the low point in July 1932,Stock was dropped almost 90% from their peak .The accompanying devastation. Bankruptcies, foreclosures, breadlessness lasted a decade. Even in 1940s unemployment was almost 15%,it was the onset of second world war that boosted spending and bailed out the economy.

The deregulation of Banking was crucial for this transaction that was made possible by the process of deregulation that began in the 1980s and culminated in the Gramm-Leach-Billey Financial Modernization Act of 1999,which completely dismantled the regulation structure and the restriction on cross-sector activity put in place by Glass-Steagall in the 1930s.It is noteworthy that Glass-Steagalll’s own conception that there is less profitability In regulatory regime itself bounded with a deep inner contradiction in the system which set up pressure for deregulation .
Those pressure gained strength during the inflationary years in the 1970s when right monetary policies pushed up interest rates elsewhere but not in the banks .But such any claim deregulation is not justifiable in present circumstances, even the policy maker’s like Allan Greenspan who even facing a staunch liberalist, stressed on need for temporary regulation .This is need of hour, even U.S newly president elect Barack Obama ,not stop to saying that U.S should have the privately held banking system regulated by government.
Bank of Ireland and Allied Irish Banks and in the U.K whose Royal Bank of Scotland and Lloyds group are now under dominant public control, and others are expected to follow. The U.S and the U.K now have what India called the social control of banks. While in India bankers and policy makers are not stopping to encourage riskier loans by banks, In the U.S and U.K, the objectives are exactly opposite .In present circumstances India and rest economy of the world can learn a lot of tracts from Latin America where the first time in a century ,Latin America has managed to atleast partially “cushioned” itself from the seismic waves of economic turmoil in the U.S and Europe.
Even this partial success comes through the balanced monetary policies which undertaken to boost peoples development instead of fascinating merely towards numerical growth.
According to Hayek ,if monetary tightening is undertaken after the upper turning point of inflationary cycle is passed ,the downturn is accelerated. This useful concept is however anathema to Indian policy makers, who’s main focus now is on spurring higher growth. But such measures will add to the suffering of the poor. Now it is quite imperative to think about the falling purchasing capacity at mass level while prices at staple goods are reached at record high up 50%,in the last six months ,global food stocks are reached to historic lows. So, the poor can’t afford the food in present mechanism.
In present circumstances, if there is one enduring idea from Friedman, that central bankers in China and India would be well advised to heed, it is the” Monetarist Paradox” that almost every rate cut leads one time to a higher interest rate. And tightening moves such as raising the CRR do not necessarily ensure that policy has tightened, Reading Friedman tends to be a revelation .

It may interesting to note that popular rhetoric exaggerates damage done by recessions; but recessions have often overlooked benefits too. They moderate inflationary tendencies and punish reckless financial speculation and poor corporate practices like bad instruments, irresponsible lending etc. These effects contribute to an economy’s long term strength .
So, it is imperative to take some very impeccable measures to heed from ongoing downward movement of financial world, International Monetary Fund (IMF)s Global Financial Stability Report (April2008),suggested some very vital policy options to sub-prime crises:-
2.Bank balance sheet repair
3. Management of compensation structure
4. Consistency of treatment
5.More intense supervision
6.Early action to resolved institutional maladies
7. Public plans for impaired assets.


1.Standardization of some components of structured finance products.
2.Transparency at origination & subsequently.
3.Reform of rating system.
4.Transparency & disclosure.
5.Paying greater attention to applying fair value accounting results.
6.Reexamining incentives to set up Special Investment Vehicles{SIV} and its conducts.
7.Tightening oversight of mortgage originators.

Some of these recommendation are really very close to the solution, its judicious formulation may heed the problem to an extent. Apart from this, countries must understand what was lost in 1944 (Bretton Woods Conference) one of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit.
They can easily destined to trapped in vicious circle; the bigger their debt, the harder it is to generate a trade surplus. International debt wracks peoples development, trashes the environment and threatens the global system with periodic crises. There have been more than a dozen financial crises since the beginning of 20th century. The aftermath of each was transitory, and markets rebounded rather quickly.

The current may be different, it will usher in profound and lasting structural behaviour and regulatory changes .In present troubled time a fresh approach is needed on overall policy matters and its implementation to curb occurring such mishappening. For restoration of confidence in financial markets a new look on corporate governance is quite imperative, this is the measure area where a lot of work have to be done in near future, personally I think governance is a biggest determinant in shaping of an administrative order, whatever we have seen in back times may be termed as failure of governance ðical work style.
It would be quite nice to see a new financial world free from such wrong practices, but before this, indeed we have to pass through a long wait…. like the Samuel Backetts Waiting For Godot….
Atul Kr Thakur
New Delhi,March 2,2009