The new banking time in India

The Indian banking is undergoing through some unusual structural changes and naturally the news has been making round about one of those, which is ‘differentiated banks’. As widely reported and circulated, the RBI Governor Raghuram Rajan is a firm believer in the ideas behind it, and thus the central bank’s guidelines come so hands-on this, it leaves no chance unturned to make the keen watcher believe, these new institutions will end all ill in existing system at place.

In principle, the payments banks and small banks are ‘niche’ or ‘differentiated’ banks – with the common objective of furthering financial inclusion. The Small Banks will provide all the basic banking products but will have a limited area of operation – and the Payments Banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds, but will have a widespread network of access points particularly to remote areas.

The role of technology and Business Correspondents (BCs) would be crucial for these new banks, like all other existing banks working in rural and semi-urban areas. So, what is new in that? Nothing much. The concept of local area banks came long back in India – and in fact, the Regional Rural Banks (RRBs) took that concept of local banks much ahead than anticipated earlier.

Today, total 57 RRBs have more than 16, 664 branches – remarkably, these banks are still operative at low cost than PSBs and Private Sector Banks in rural terrains – and most of them are in profit. Surprisingly, the RBI has no plan to make these banks more aggressive – and making addition of the Post Offices, as next banking institutions.

The NABARD has for long ceased to offer any noble solutions for rural banking in India, so even in close bearings with the Chicago School of Economic Thought – Rajan should scrimp little bit time and vision to put forth a workable model rather loosing time with too romantic ideas of ‘differentiated banks’ – that appears in its idealistic fold, beating the blue eyed professionals’ flop venture in India, MFIs.

In retrospection, we would get some insights on failures from the distant land of west that has been charming Indian policy makers in recent few years like never before. The ‘hole and corner’ life philosophy of Wall Street bankers and their understanding about the game of banking could be summed-up in few clumsy but truthful words: ‘for them – money is fact, rest all is fiction’.

Time and again, these words came into fruition and brought to the world, such ‘catastrophe’ – not normally to be hatched by someone having capacity lesser than of a double-dealer.

This clears the fog to know that the winds from west seldom come with underlying merits to be known ‘progressive’. This reckoning was although at place in late 1960’s when Indira Gandhi redrawn the character of Indian banking in a single stroke of pen by nationalising fourteen major commercial banks of that time. The inherent aim was much broader and that for creating the culture of profitable Public Sector banking in India – with focus on strengthening the core economy of the country, through readily available banking services hitherto denied.

These banks played their role to an extent and indeed ensured banking among the masses – that exercise could be seen as the biggest financial inclusion drive in India. This was much effective than the Swabhimaan or Jan Dhan Yojna, whose accomplishments would not travel (based on their theoretical positioning) beyond the bank account opening in crores.

Coming to the solution side, the policy debates on banking have to take a cue from erroneously rumoring, the existing banking players in India are wimps – they are not actually. So, selling the already used applications of mobile, low cost innovations would not help now – the real course of correction would be through differentiating between the performer and pretender.

For making financial inclusion effective and rural banking spectrum, free from the unrealistic notions – first and foremost, the RBI should trust more on the RRBs, besides making PSBs and Private Banks less pampered, so they can work and don’t show excuse that the ‘baking is expensive for poor’. They should make profit by banking with the poor, but must stop making BCs, not only poor – but pauper, by offering less than 1/3rd of minimum wage made mandatory by the Constitutional provisions.

The Post Offices have already a huge network at place that covers the nook and corner of the entire country. If the Finance Ministry and the RBI is really serious for going ahead with actual financial inclusion drive – the next banking license should be given to the Post Offices. As not all existing things could be called bad – the time is ripe now to make the plethora of ‘innovations’, truly grounded and coming into terms with the realities of India.

Also an understanding should be at place, the Indian banking is not in nascent phase – and it certainly has some strong economic fundamentals, which giving enough reasons for the banks to get serious about their business prospects. Even those have not returned recently after attending a short-term crash course on ‘emerging economies’ in any Ivy-League Institution (including this writer), can have a logical edge in saying Indian villages have enough too offer for the bank, who will follow the basics of banking there. Not that any show of dramatics would return back well.

The game plan should be to make better course and stay on that. A differently famous, Gordon Gekko from Wall Street (1987), delivered these words very aptly, ‘don’t run when you lose – don't whine when it hurts’.The banking in new time in India has to go that way, it could be said by this moderate polemist!
-Atul K Thakur
Email: summertickets@gmail.com
(Published in INCLUSION)

BRICS 'development bank' must aim effectively to end Bretton Woods Institutions' disparities

The move to establish BRICS bank is meant to provide patient money and risk capital to long term projects and not aimed at challenging the existing multilateral financial institutions like the IMF and the World Bank, the RBI Governor Raghuram Rajan has said in a speech at an event organised in Chicago on Friday by the Chicago Council on Global Affairs.

In verbatim, his views came as: "I don't think it was primarily meant to challenge the existing multilateral institutions but it certainly is saying look we have plenty of money ourselves, why don't we put some of this money to use in a way that benefits us rather than necessarily depending on the multilateral institutions to change which is taking much more time than anybody thought of".

This is quite surprising from him, seeing he is heading India’s Central Bank and India is going to get the first Presidency of the new bank, would be headquartered at Shanghai. Rajan’s remarks certainly have potential to start a serious debate, about the future course of old mammoth discriminatory financial institutions, which have underwent almost no practical changes (mildly he admitted this time too) towards the need of the developing countries since their inception and on wake of sea of changes in the fundamental orders in the world.

As in collective reckoning, the consensus among the BRICS countries (Brazil, Russia, India, China and South Africa) to establish a New Development Bank (NDB) and a Contingent Reserve Arrangement (CRA), finally emerged out of their dissatisfaction with the ultra conservative Bretton Woods Institutions, such as the World Bank, International Monetary Fund (IMF) and the unflinching extremes of west-centric dollar dominating global monetary system.

The US has been ruling the multilateral institutions – and the BRICS that include five super-performing economies with over 20 per cent contribution in the global economic activity, posses just 11 per cent of the votes in IMF.

Adding more jerks to the adversities, the IMF's precautionary credit lines found reluctant receivers in underrepresented countries – that made central banks of these sides desperate for dollars to obtain the credit from the Federal Reserve only. The Fed played a proactive role during the height of global economic crisis in 2008, but not necessarily the similar policy will be replicated ahead too.

The BRICS countries’ inhibition in such scenario is forthcoming but rational – and their beliefs in NDB and CRA have sufficient logical traction. The NDB aims to meet with the credit requirements of heavy infrastructural projects – although the demand for credit will not be equal from these five countries, as they are into different development stages. But for meeting additional needs of infrastructure creation, the NDB has a balanced approach in terms of activating the prospective creditors and borrowers at same platform.

So, the business proposition of NDB is free from contention. However, the Bretton Woods institutions and the flocks of economists nurtured through their legacy have reservation on it, as this new development bank will promote regional co-operation unlike the already existing Inter-American Development Bank, Asian Development Bank and African Development Bank. That apprehension is totally misplaced, as the NDB with seed capital of just $100 billion or even with an incremental outlay will be not able to challenge the might of an established and mighty, IMF or World Bank – but it would be surely a beginning for BRICS to chart a new course for them in meeting with the bundled challenges of long-term finance.

Intently, the CRA intended to lessen the BRICS dependence on the Fed and dollars, showcases something different than the NDB. It is allocated $100bn – for swap lines, accessible to all five-nation members. With no permanency of lending and borrowing structure, the idea of CRA may not work as expected. But it would be naïve to reject it too early, as the potential of closer co-operation among the BRICS can unleash conducive impacts on its functioning.

Remarkably, these arrangements by the BRICS were made to counter the persisting discriminatory policies of the giant financial lenders – as in the case of IMF, it has changed everything but not its conservative structure, aligned in favour of the western countries. There is enough merit lies in the BRICS claim that the international financial system has worked against their interest. Rajan and others must heed to this truth.

Policymakers from the BRICS have been vociferously airing their views about the partial policy stances of the rich countries’ institutions, disguised as ‘multilateral agencies’. Earlier, Raghuram Rajan, was one among them, who aptly identified rich countries for pursuing selfish policies with no thought of their negative impact on emerging economies. Will he recall it now?

And the economic bubbles, their temptation of falling and making the global financial system on toe is something never amiss the scene. The Bretton Woods institutions in their present shape will be keeping such threats alive, so the notion of getting adrift from the crisis would be rather too simplistic at this point of time.

Hence, the space is for an alternative financing arrangement – first at regional, and next on the international level. This new bank is capable of bringing that, although initially with limited impact. China has been lending in Africa and that made good effects but it also violated many basic procedures – the BRICS bank has to move cautiously on this, as carrying forward the legacy of any one country out of those five would be against its collective foundational spirit. So, the mode of operation must be carried forward with a standard set of norms, never to be tempered with any one member’s discretion.

The BRICS bank has immense potential to bank with the huge number of roads, power plants and sewerage systems, as those all need large-scale funding. With the long-term capital base of the bank and meeting with the financing demands of these projects, the purpose of its establishment would be justified.

However, the new bank is not completely free from the challenges. Among the shortcomings it has, is its relatively small size, seeing it will have to work on international level. Also as Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, China, India and Brazil have borrowed $66bn from the World Bank alone – more than the entire subscribed capital of the BRICS bank. That indebtedness may hamper these countries to go too agile in promoting policies in favour of their new bank and finally to counter the influence of the World Bank – possibly, there may be temporary ambiguity in loyalty.

Moreover, the BRICS bank will be facing adjustment related issues with the different political systems of the five member countries – as the differences between the systems in India and China are far too wide to be adjusted so easily. The new bank will have to look on the ethical concerns, include that related to the handling of natural resources by the projects, it would be financing. Its articles, which ensure that the founders will never see their voting rights drop below 55 per cent, must be scrapped or made more democratic. As this particular clauses make the idea of BRICS bank, less democratic than claimed.

Beyond even an iota of doubt, the Bretton Woods institutions are symbolising the spent time of empire, which are on verge of ruining after a painfully long saturation phase. The rest world, including former colonies have changed in the recent decades – so, the experiments like BRICS bank outlines positively where the future is – apparently, its on the side of emerging economies. Rajan should see the turning point of history little more cautiously, wishfully like he once saw the spectre of global financial crisis as early as in 2005– and delivered memorable Jackson Hole lecture.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in INCLUSION)

Wrong advice that we must avoid

Banking reforms are definitely needed, but they have to be driven by recommendations that people who are thoroughly conversant with the sector, make

The idea of inclusion, otherwise a ‘progressive hypothesis', has been sadly confused with ‘technical overplay' by the Reserve Bank of India and the Union Ministry of Finance. The most sightable case is Aadhar that lays too much emphasis on technical procedures and the opening of a maximum number of bank accounts. But merely having a bank account does not make someone genuinely aligned with formal banking.

Financial inclusion is a broader aim, and its ambit is far too wide to be limited to symbolic gestures. The incentive-based system, especially in private sector, has rather ensured the low effect of recently channelised banking access. In such a backdrop, Mr Nachiket Mor-headed Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, makes the chance of financial sector reform even more distant.

The sharp corporate edge is visible in the recommendations of this committee — as it was expected of RBI Governor Raghuram Rajan. Quite naturally then, Mr Mor has seen the real solution of financial inclusion in covering each and every Indian with a bank account in next 24 months.

It is not that all initiatives taken by the RBI in the past had failed. Some did really well in increasing the delivery of institutional credit and relationship-based banking with the masses. In the first four decades after India's independence (1951-1991), the reach to institution credit went up from 7.2% to 64 per cent but to fail again at level 57 per cent with the opening of economy that year. Also money lenders have largely stayed on in the post-reform era, with some statistical differences.

They kill business with spirits of ‘wayward innovation' and walk easy step in this jubilant phase, when lobby rules the whole course. Mr Mor has missed an opportunity to re-define the utility of micro-lending. Instead, he committed blunder by underestimating the contribution of regional rural banks and cooperative societies. Probably out of focus, he couldn't check the past and present of RRBs, which are serving the rural segments, and solemnising the real intent of financial inclusion.

The RBI has played stringent with the branch affairs at banks. It is hardly a revelation, though the committee presented both malady and cure as something in fledgling state. Even before the birth of this committee, Mr D Subbarao, the former RBI Governor, had taken some crucial steps which, although not in the limelight, have done well in relaxing certain norms of banking.

In the ambit of financial inclusion, the basic rights should begin with making banking simple and accessible to all. Moreover, the services offered should be diversified and not restricted to offering a bank account, and stay satisfied. The overtures with people have to be at fast pace and fine carved out — disconnect with people or potential client makes the equilibrium of ‘good intent and business', impossible to achieve.

While opening another round of bank licensing, Mr Rajan has a fair opportunity to circulate in the vein of new entrants, sustainable determination to go ahead for achieving genuine financial inclusion. A lot would depend on how the RBI will deal with the aspiring banks and those existing ones.

A great deal has to be achieved in the months ahead, but mostly without any support from Mr Mor's recommendations. The RBI will realise this sooner than later. Next time, hopefully, it will include some bankers who have worked across this wonderland. India is a complex set of systems and our corporate lieutenants need to sharpen their knowledge and intuitions thoroughly, if they have to remain relevant in the changing environment.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in The Pioneer,on January21,2014)

More than a rockstar performance

The new RBI Governor has loosened capital controls to attract investments from abroad. But the weather is still rough and the economy weak. Raghuram Rajan has a lot to do, and his debonair looks will not see him through...

These days everyone, including celebrity author Shobhaa De, is writing about Mr Raghuram Rajan for the country’s leading pink papers, which surprisingly cover lifestyle alongside business news. In the Reserve Bank of India’s long history, such excitement over a new Governor is unprecedented. But much of this has been manufactured by the Union Ministry of Finance which also clouded the end of Mr Rajan’s predecessor’s term.

Mr D Subbarao was given a politically-motivated farewell for his conservative handling of the central bank. He will also be remembered for his principled tussle with the Finance Ministry for quite a long time. It is a cliché that the nitty-gritties of politics overrule broad-based approaches because, for now, politics has won, and the Finance Ministry and the RBI are enjoying a rare harmony.

I have known Mr Rajan since his early days in Government, was impressed by his celebrated 2005 lecture, The Greenspan Era: Lessons for the Future, that was delivered at a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. I also read with great interest his radically upfront book on capitalism, Fault Lines: How Hidden Fractures Still Threaten the World Economy.

If his 2005 lecture placed him among visionaries who sensed in advance the impending trouble in the Anglophone financial model, his 2010 book added to his position as a rational thinker who had confronted the ills of the financial model, spoke against the rise of cronyism and the suspicious increase in the number of billionaires in post-reform India. Unfortunately, I fear we will miss that person now that he has taken his position at the helm of the RBI.

There is good reason why Mr Rajan’s nicely tailored suits are more talked about than his policies. Some of these, for instance, he has taken overnight to stop the downfall of the vulnerable rupee. Mr Rajan has also loosened capital controls to attract investments from abroad. But the weather is still rough and the fundamentals of the economy still weak. The pampered corporate sector is in no mood to fight its incompetencies.

In the last three decades, financial systems around the world have witnessed major change. The credit system has liberalised and the reaches of financial markets have expanded. But these changes have come with greater risks. The RBI, on many occasions, has had to step in to control visible and imminent challenges such as the earlier East Asian crisis to the worldwide recession of 2007-2008, from which we are yet to recover.

The RBI especially deserves praise for maintaining an effective regulatory grip over the new entities in the financial sector such as private equity and hedge funds. But on the other side, it remains a helpless hawk that cannot control the unethical business model of the capital market or rein in the impractical mutual fund sector which is destined for be untrustworthy. But with regard to the banking sector, the RBI has appeared to be in sync with the Finance Ministry. As a result, this sector has remained semi-reformed and non-progressive.

The last two decades have seen the emergence of diverse institutional networks in India and together they make a huge impact on policy-making. From inflation control to monetary policies, the RBI is controlling them all but individually. The clout of established third party financial assessors and lobbyists is also being strongly felt, now that India’s financial system too is seeking to become a clone of the Anglophone financial model. This is fine in the short run, but will lead to heavy losses in the medium to long term.

Mr Rajan has to take a position on this. But in the short span of time that he has been in office, he already seems to be losing his sheen. The Economist, which for some reason is religiously read in India, has compared the RBI with a pressure cooker and covertly offered sympathy for Mr Rajan. I don’t subscribe to such an extreme evaluation but have no doubt that leading the RBI during the last months of a beleaguered UPA2’s term is not a comfortable task.

At a time when the Government has made governance a redundant theme, reviving growth and containing price rise are among toughest tasks for the new RBI Governor. Also, since election is around the corner, agencies that have been sleeping all this while, such as the Planning Commission, will awake to action and offer concessions to cover up the incumbent regime’s fiscal imprudence. The RBI will come under pressure from the top and play safe, or not play at all.

Of course, India will eventually bounce back but the recovery will happen with a volatile financial sector that will remain densely populated by crony-capitalists and marred by their incompetent corporate spirit. The impressive ratings of the new RBI Governor must be taken with a pinch of salt.
Atul K Thakur
Email:summertickets@gmail.com
(Published in The Pioneer on 25September2013)

What’s stopping financial inclusion?

India must stop chasing the bandwagon of hyped western model of over-sized baking
It’s not believable that worldwide financial crisis is over, as the recovery so far has failed to bring back the sentiment in financial sector of days back to 2008. Though in downturn, the profound importance of finance for the global economy could be easily realised – this effect is visible even when 2.5billion people worldwide still have no access to formal banking services.

This ‘missing segment’ poses question mark over the claim of financial inclusion, which is breathlessly pervasive from all the corners. In India, the situation is much worse, as almost its half of population is unbanked and that blocking their convergence with the global economic model of consumption. The usual cycle (that thrives on limitless consumerism) of consumption is compromised here, and that is an obvious reality.

Atleast in India, the idea of financial inclusion has not travelled beyond the infancy, as the technical understanding of this issue and infrastructure available here does not appear in functional equilibrium, so the deviation is unrelenting. It’s beyond common reckoning that globalisation is not a zero-sum game, so not essentially emerging economies can benefit from the opening of markets for developed world.

Rather if the world’s 2.5 billion unbanked could be included in the fold of financial inclusion, every industry will experience innovation and growth. The empirical evidences suggest that the homegrown policies are more effective than borrowed tailor made ideas from different set of system. A common solution is hard to find for the financial inclusiveness, as factors that are common across countries hardly provide a smooth way forward.

The asymmetric use of technology is the most dampening bottleneck of free and fair operation of institutional financial services in emerging countries. It’s true populations worldwide is embracing technology, especially cell phones but still people throughout the developing world terribly lack the basic identification, formal employment and a permanent address. Such impediments stop a bulk of people to avail the benefits of institutional financial services.

In Indian case, the lapses in perception and action towards the financial inclusion drive generate confusion and deviation from base issues. The government and regulators still lacks to configurate and channelise it as a viable model for business. This overlooks the bright outcome of opening the financial system to the world’s poorest people, which could open their economic and social potential-to the benefit of all.

Presently, financial inclusion campaign in India is erroneously being handled by the banks or other corporate entity like a part of lackluster CSR schemes. This is a serious violation of fundamental conception attached with this plan-recently Raghuram Rajan, who chaired the Committee on Financial Inclusion in past has himself admitted the prevailing unrealistic state of affairs in India’s policy circle, in which the big claims of financial inclusiveness more often surfaced.

It’s not true that efforts have not made in the past as well to promote financial inclusion-in some senses, they were better organised to address the targeted issues then the current policy feeds being issued from RBI. The RBI’s pre-determined policy stances have inhibited the healthy growth of financial institutions and services, which affected the natural course of financial inclusion in the country.

The RBI is maintaining silence over the future growth of India’s financial sector, which has been safe more for its undersized ambition than the claimed ‘prudence’. This is totally ironic watching the curtain down on the future of India’s more than 55 percent unbanked citizens and overall the growth of financial sector at large.

The path India’s banking has travelled so far hardly allows one to part the views between progressivism and ultra-materialism, here the things have to be seen in the right context. Public sector banking was more a hedging intervention, so it would be unfair considering the nationalisation of banks as the complete socialistic manifestation. PSBs/RRBs played their role immensely well and would do more good under the perfect competition around the every nook and corner.

With more than 17,000 branches across the India’s rural heartlands and the small towns, RRBs can be seen as the engine of rural growth in India.

India’s financial policy regime must believe in the certain goodness, which its institutions offer-and for making things better, they must stop chasing the bandwagon of hyped western model of over-sized baking or doubtful idealism of microfinance businesses.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in Millennium Post,on 19April,2013)

The Policy Muddles at Mint Street

The RBI (Reserve Bank of India) has been the master of all weather and seasons concerning India’s financial sector. It holds the pulse of the national economy with tempestuous effects. But even with all its prominence, the RBI has seldom crossed the contoured spirits which obfuscate the existing macroeconomic scenario. The scrimmages from its side are causing the fixture of topsy-turvy status in the policy domain, finally making the broad brush more frequent than the desirable spunky actions.

Until two years back, the world was witnessing the central bankers’ sullen acts; India was indeed a sort of exception so far. But things have entered in torsion once India’s impregnable finance ministry and the RBI got struck in the endless war stimulated by the egoists.

It’s clear that the finance ministry is the most important place in India after the Prime Minister’s Office. This sounds awkward, but becomes evident when seen against the recent reshuffling in ministries, when the serving home minister was called to hold the command of the economy.

This marks the moral bankruptcy, as the new finance minister will be hardly reckoning the plight of the economy which originated through the clash of interest between real and rave components. Moreover, he lacks the critical tributes like acceptance and expertise for handling a diverse economy like India’s.

This mischance will boost many inside the RBI, who earlier relied on static and soft monetary policies that at least in the last one and half years have cut India from both of its central economic ideologies based on “half-willing socialism” and “half-sighted dreams of reform.” Among the list of blunders, the RBI’s extraneous policy regarding the licensing of new banks under the private sector refers the unique misunderstanding of the whole issue.

It’s obvious that the RBI is not keen on banking licenses for corporates, not to work with any neo-egalitarian model of banking based on the “maximum happiness” of clients of different types and figures, but for securing the power to supersede the boards of existing banks and leaving the case of banking expansion in its backyard.

The insistence of the central bank on amendments to the Banking Regulation Act by the Parliament as a prerequisite for any potential flex on banking licensing is flawed and objectionable. It may be true that none of India’s NBFCs (Non Banking Financial Companies) are fit enough for the award of banking business, though the many interested public sector entities could be taken for a ride under the joint venture in private partnership.

Also, there would have been nothing wrong by downing the obstination on allowing the corporate world at large to enter the fray of banking based on competency, not by the channel of cronyism.

By the impression of numbers, India’s corporate sector is performing, but by the spirits, in no manner is it worth calling robust. For example, almost all heads of India’s private sector banks have downplayed the chances for a few more private banks, citing the already high competition and its aftereffects on their businesses.

These were all untoward statements with no technical precision or understanding of a height of possible stagnation with which India’s banks will be reckoning sooner rather than later. Banking should be a means for the profit, but not for the oligopoly; unfortunately, the reverse is the case in India today. Not surprising in the present scenario, if the SBI (State Bank of India) has lost its tag of being the most valued bank in market terms from one of its shrewd peers.

Notwithstanding its actual role, the RBI is maintaining silence over the future growth of India’s financial sector, which has been safe, more for its undersized ambition than the claimed prudence. This is totally ironic watching the curtain coming down on the future of India’s more than 55 percent unbanked citizens, and overall the growth of the financial sector at large.

The path India’s banking has traveled so far hardly allows one to part the views between progressivism and ultra-materialism; here the things have to be seen in the right context. Public sector banking was more a hedging intervention, so it would be unfair considering the nationalization of banks as the complete socialistic manifestation. PSBs/RRBs (Public Sector Banks/Regional Rural Banks) played their role immensely well and would do more good under the perfect competition around every nook and corner.

Not even remotely, the arrival of a few more banks would harm their business; contrarily it would help the sagging market sentiments to get an upward touch. Instead of fearing and sharing those misleading apprehensions, the RBI should create a true healthy work culture in PSBs/RRBs, which are remarkable by their business and reach. RRBs especially deserve a much better deal in terms of human resource policies. It’s shocking to see the RBI/finance ministry’s dualism in taking them as at par with the PSBs, where the service benefits like pension are now the part of system.

This discrimination should be ended by introducing the service provisions, including pensions for the RRBs employees on the line of PSBs. With more than 17,000 branches across India’s rural heartlands and small towns, RRBs can be seen as the engine of rural growth in India -- so they need an immediate broad unification at the national level with an effective professional board, which can lead the rural banking for more inclusive businesses.

India’s jobless growth or the slow industrial momentums are the outcome of chronic pessimism from the RBI for the mass issues. It’s not more than an excuse in passing the fault on global financial uncertainty by India’s policy regime for the present mess-up at the domestic front. The last two decades of India’s growth story were based on the domestic consumption strength, rather than on any other fancied factors.

This is high time for India’s central bank to move clearly and with a well- defined goal for keeping the Indian economy robust and promising. Certainly this would be a better replacement over the current placid show off, which exudes nothing except the aura of gloom. The change in attitude of the RBI will determine the course of India’s growth story and its global economic status.

Atul K Thakur
Can be emailed at: summertickets@gmail.com
(Published in India America Today on February10,2013)

The RBI's unsavoury policy dictates!

The RBI has been the master of all weathers and seasons concerning India’s financial sector. It holds the pulse of the national economy with tempestuous effects. But even with all its prominence, the RBI has seldom crossed the contoured spirits which obfuscate the existing macroeconomic scenario. The scrimmages from its side are causing for the fixture of topsy-turvy status in the policy domain, finally making the broad-brush more frequent than the desirable spunky actions. Until two years back, world was witnessing the central bankers sullen acts; India was indeed a sort of exception so far. But things have entered in torsion once the India’s impregnable finance ministry and the RBI got struck in the endless war stimulated by the ‘egoists’.

It’s clear that, the finance ministry is the most important place in India after the Prime Minister’s Office --this sounds awkward but becomes evident when seen against the recent reshuffling in ministries, when the serving home minister was called to hold the command of economy. This marks the moral bankruptcy, as the new finance minister will be hardly reckoning the plight of the economy which originated through the clash of interest between real and rave components -- moreover, he lacks the critical tributes like acceptance and expertise for handling a diverse economy like India’s.

This mischance will boost many inside the RBI, who earlier relied on static and soft monetary policies that at least in last one-and-half-years have cut India from both of its central economic ideologies based on ‘half-willing socialism’ and ‘half-sighted dreams of reform’. Among the list of blunders, the RBI’s extraneous policy regarding the licensing of new banks under the private sector refers the unique misunderstanding of the whole issue. It’s obvious that, the RBI is not keen on banking licenses for corporates, not to work with any neo-egalitarian model of banking based on ‘maximum happiness’ of clients of different types and figures but for securing the power to superseded the boards of existing banks and leaving the case of banking expansion in its backyard.

The insistence of the central bank on amendments to the Banking Regulation Act by the Parliament as a prerequisite for any potential flex on banking licensing is flawed and objectionable. It may be true that none of India’s NBFCs are fit enough for the award of baking business, though the many interested public sector entities could be taken for a ride under the joint venture in private partnership. Also, there would have been nothing wrong by downing the obstination on allowing corporate world at large to enter the fray of banking based on competency, not by the channel of cronyism.

By the impression of numbers, India’s corporate sector is performing but by the spirits, in no manner it’s worth of calling ‘robust’. By an example, almost all heads of India’s private sector banks have downplayed the chances for few more private banks, citing the already high competition and its aftereffects on their businesses. These were all untoward statements with no technical precision or understanding of a height of possible stagnation with which India’s banks will be reckoning sooner than the later. Banking should be means for the profit but not for the oligopoly; unfortunately, the reverse is the case in India today -- not surprising in present scenario, if the SBI has lost its tag of being the most valued bank in market terms from one of its shrewd peers.

Notwithstanding its actual role, the RBI is maintaining silence over the future growth of India’s financial sector, which has been safe more for its undersized ambition than the claimed ‘prudence’. This is totally ironic watching the curtain down on the future of India’s more than 55 percent unbanked citizens and overall the growth of financial sector at large. The path India’s banking has travelled so far hardly allows one to part the views between progressivism and ultra-materialism, here the things have to be seen in the right context. Public sector banking was more a hedging intervention, so it would be unfair considering the nationalisation of banks as the complete socialistic manifestation. PSBs/RRBs played their role immensely well and would do more good under the perfect competition around the every nook and corner.

Not even remotely, the arrival of few more banks would harm their business; contrarily it would help the sagging market sentiments to get an upward touch. Instead fearing and sharing those misleading apprehensions, the RBI should create a true healthy work culture in PSBs/RRBs, which are remarkable by their business and reach.

RRBs especially deserves much better deal in terms of human resource policies. It’s shocking to see the RBI/finance ministry’s dualism in taking them as at par with the PSBs, where the service benefits like pension is now the part of system. This discrimination should be ended by introducing the service provisions including of pensions for the RRBs employees on the line of PSBs With more than 17,000 branches across the India’s rural heartlands and the small towns, RRBs can be seen as the engine of rural growth in India -- so they need an immediate broad unification at the national level with an effective professional board, which can lead the rural banking for more inclusive businesses.

India’s jobless growth or the slow industrial momentums are the outcome of chronic passivism from the RBI for the mass issues. It’s not more than an excuse in passing the fault on global financial uncertainty by the India’s policy regime for the present mess-up at domestic front. The last two decades of India’s growth story was based on the domestic consumption strength, rather than on any other fancied factors. This should be the time of reckoning by India’s central bank, moving clearly and with a goal must be the basic catch which it has been missing for long under its mix of placid shows off and painful affects. Until India’s central bankers will rise from their very long slumbering, any hope to see the financial sector on bloom would be near about the day dreaming in a rainfed season like the present!
Atul Kumar Thakur
August31st2012,Friday
Email: summertickets@gmail.com
(Published in Governance now on August27th 2012/ http://governancenow.com/views/columns/rbis-unsavoury-policy-dictates )

In Times of Change

The recovery from the chronic global slowdown is only partially complete in both developed and developing countries. However, developing economies are better off depending on local conditions and medium-term productivity growth rather than the large, globally integrated, influential forces that dominated economic activity before the financial crisis, and still play an important role in moulding global regulatory policies. The robust growth registered in emerging economies in the last decade has thwarted suspicions regarding these blocks. Yet, several tensions and external events have the potential to disrupt the process of development.

Output is expected to come in stronger than anticipated in performing economies. The other case could be that very strong speculative capital flows that characterised the third quarter of 2010 may return. Either scenario could potentially accentuate inflationary pressures in the global economy: both those emanating from commodity markets and those coming from increasingly binding capacity constraints in a number of emerging markets. In such a scenario, which pre-supposes that policy tightening efforts underway are not sufficient to rein in demand, authorities would be obliged to tighten more aggressively in 2012, thus leading to a more pronounced slowdown in 2013.

The big dilemma confronting democratic governments is the choice between bailouts and debt waive off. Undoubtedly, capitalist prudence orders for the former. Often bailouts occur more frequently than mass waivers of debt, albeit India presents little difference with its distinct polity and populist commitments. Indeed, complete financial recovery could be a desired endgame, though conquering it would be a pipedream under the present circumstances in which regulators, governments and financial institutions are functioning across powerful economies.

Moreover, high fiscal deficits and rising sovereign debt pose medium-term challenges to a wide-range of OECD countries. So is it time for top rank global policy makers to acknowledge this epoch making economic shift in favour of emerging economies and start sending telepathic connections across the world?

Consumption Conundrum
The global economy has grown over the decades by relying heavily on American consumption and policy dominance (good or bad). This intensified with the disintegration of the USSR in 1991 as it resulted in the demise of an alternative ideological block. The structural force behind large US consumption has been a significant middle class. The middle class is an ambiguous social classification, broadly reflecting the ability to lead a comfortable life. But the current downturn has brought this process to a halt. US households are saving again in an effort to rebuild lost wealth. The consensus forecast is that this will be a lasting effect of the global financial crisis.

How can the world economy fill this void in global demand brought on by the retrenchment of the American consumer class? Naturally, the emerging middle class in China, India and other populous countries are moving to become the next global consumers under the changed set of conditions. But the policy support to achieve such a rebalancing is not easy in these countries facing different lacunas. In short, Asian consumption is tied, according to many analysts, to long-term institutional changes.

Shifting Nexus Of Power
At this decisive phase, as economies in Sub-Saharan Africa and the Middle East develop and open up to trade, links between Asia, the Middle East, and Africa are expected to grow further. Economic integration between these regions and the emergence of south-south trade will certainly result in the formation of influential trade hubs. The trade of the future will be determined by the availability of cheap resources and the destination of final demand; this would be a big accomplishment for these hitherto tail-spinning economies. Big corporations from the developed economies have already begun to question whether the challenges of outsourcing their production processes outweigh the benefits of producing locally. In this respect, Africa and the Middle East offer both low-cost production capabilities as well as a rapidly growing domestic market.
It is becoming rather obvious that China may be losing its status as the "manufacturing leader." Cost economics that have long worked in China's favour have come full circle: domestic wages are on the rise, eroding much of the cost arbitrage offered to foreign companies. Even Chinese companies are affected as improving living conditions in the hinterland discourage potential migrants from seeking work in urban coastal provinces. Furthermore, an aging population in the next decade will likely weigh down labour supply and impact wage competitiveness. As Chinese production moves up the value chain, workers are demanding higher wages, better working conditions, and added welfare benefits. Thus, rising labour costs, along with pressure to loosen control on its exchange rate, could pose a serious threat to China's international competitiveness if productivity does not correspondingly improve.

Intermediate production, rather than locally produced finished goods, as an economic structure presents immense opportunities for emerging markets to develop specific capabilities and capture a bigger share of the supply chain. From a company's perspective, an emerging trade network with a wide portfolio of capabilities allows for diversification in the supply chain rather than extreme reliance on a single country whose competitiveness may be decreasing.

Nonetheless, China will remain an important, if not dominant, player in the future. The country's burgeoning middle class is set to become more affluent and boost consumption levels in the next decade. The head of emerging markets at Morgan Stanley, Ruchir Sharma's newly published book, Breakout Nations: In pursuit of new economic miracles gives some lucid views about the new wave of competency coming from the side of emerging economies.

Challenges On Home Ground
The cheap flow of foreign capital had made Asian economies such as China and Japan exclusively powerful in the region for a long time before opening of other economies, primarily India. But lately both Chinese and Japanese economies are under excessive strain because of their over integration with western nations. The case with India is different because liberalisation took place later and with active regulatory restraints.

Raghuram Rajan in his remarkable work, Fault Lines mentions India's growing income inequality and the dangers that a social underclass poses to the country's economic future. His strong emphasis on the ills of maturing cronyism in India's power centre is worthy enough to be considered as a grave threat to the essence of India's constitutional mandate. Rajan is right in pointing out the growing numbers of Indian billionaires are mostly products of networking rather than enterprise.

For the last several months, the Indian economy has been consistently juggling between controlling inflation and maintaining robust economic growth. In order to control spiralling inflation, the Reserve Bank of India chose to sacrifice growth in order to check the inflation. The 20-month period, until October 2011, of rising interest rates has slowly but surely put the brakes on economic growth.

For keeping alive the basic mandate of India's growth, the wave of policy/regulatory laxes need to be checked at any cost and synergising efforts should be made to retrieve Indian economy's lost confidence. Instead for unwarranted follow-up laws, we require an overhaul in the existing regulatory framework;India can't afford an ill policy regime.

Inflation, that had threatened to derail India's growth for several months, had shown signs of weakening in the recent past weeks. However, inflation is on the rise again, and it is likely to stay in the 7.0-9.0 percent range in the coming months. The central bank cannot afford to conclude that inflation will stabilise in the medium term. So far in 2012, the RBI has already eased the reserve requirements for banks, infusing liquidity into the economy. It is likely that further liquidity could be infused into the economy in the coming months. Measures to ease liquidity may, however, not be enough to provide a much-needed fillip to the economy.

Growth is slowing down, investment is falling, and business sentiment is on the decline. In the absence of any credible government action, the central bank may not be able to stave off calls for reducing interest rates for too long. Questions about whether or not the interest rate will be reduced ahead are giving way to when and how dramatically it will be cut.

Leading social historian, Ramchandra Guha's assertion that the India's economy is a fifty-fifty economy, best reflects the trend, and our economy has been following since 1991. Making Indian economy hundred percent functional should be the prime task of policy makers-the two basic ideas cam materialise this dream-growth with equity and emancipation of the marginalised with ensuring lowest possible economic disparities. Under a mixed or market driven economy, nothing more could be anticipated.
Atul Kumar Thakur
Email: summertickets@gmail.com
(Published in Businessworld, May16th 2012)

Fault lines of microfinance

The brief euphoria generated by the private MFIs withered away with the collapse of their doubtfully structured model. Its representative face in India, Vikram Akula’s high rise and bottom low with SKS microfinance initially leveraged the market’s attention towards this nascent industry and later made it synonymous with degenerated “business class”. Business wise, private MFIs like mutual funds have always underperformed its peer in financial sector and both were hyped up and then saturated, leading to the slide towards underperformance under the unquiet regulatory treatments.

The idea of microfinance was presented as altruistic, which was the fatal error. Had it started with the aim of optimising operational costs and its final lending rates to the end users, surely it would have never got the tag of “non performing heaven”! Broadly, the managements of MFIs have missed the business mission as direct lender to the petty customers and instead they got accustomed to play as unethical lending brokers to the severely needy customers. Hence, they have been and still playing a mean role between blood sucking moneylenders and organised financial institutions and surprisingly feeling not bad doing this.

They charge almost 20% more than banks and less than moneylenders. Question arises in present scenario; do MFIs need a major revamping or simply shut down? So far, their managements have failed to realise the essential evils, foremost among them is to acting in capacity of brokers on the money of banks instead sustaining in lending market with alternative cheap funds. As private equity players are never going to spend their shrewd pennies in Indian MFIs without inserting unviable conditions and MFIs can also no longer survive on the bank’s money, so chances are very thin that they would remain relevant to low scale financing. After Kingfisher Airways, it would hardly be a surprise if SBI will lose its many thousands crores of rupees as NPA on the MFIs ventures.

The bright performance of microfinance has only witnessed in inglorious Regional Rural Banks (RRBs), which truly acted as the financer of poor rural folks on very just lending rates set by the RBI. Despite that, they always remained ignored and never got the attention it deserved. With cooperative banks reduced to a tool of political patronage and commercial/private banks lukewarm in lending microfinance portfolios, RRBs are the institutions that stand out as a beacon of hope. For revamping microfinance in rural and semi-urban areas, integration of RRBs into a single fold would be a revolutionary step besides giving it the all service/operational benefits as like of Scheduled Commercial Banks.

RBI and finance ministry have to act fast to make Priority Sector Lendings completely stringent, and under this regulatory changes banks would be liable to lend atleast 1/3 of their genuine funds under the welfare measures. Prospects of microfinance would be boosted with it. Second regulatory change immediately required is to capping the MFIs lending rates on par with the banks and if they found business tepid there should be no looking back. In present scenario, RBI can’t and shouldn’t afford the luxury of artificially keeping the solvency of beleaguered MFIs alive, the best it can do to give them fair chance to run in the Indian market.

The efficient and organised microfinance could be channelised well through the existing public/private sector banks under the consistent regulatory monitoring of RBI. Private MFIs have to learn raising the seed capital for running a profit making business, and not only under the hippocratic guise of false idealism. Once they will learn to compete with banks, their business model would become credible. Unbanked sections are big opportunity and that must not be taken as granted…end of policy hassles would make microfinance a truly vibrant area under the institutional finances. India may be the nation of poors but it’s not poor itself, so chances are not yet dim for a better time ahead!

Atul Kumar Thakur
February 28, 2012, Tuesday, New Delhi
Email: summertickets@gmail.com

Fragility of Reluctant Reform

Dichotomy of reform and progressivism represents the India’s policy maneuvering since 1991. Long way back, then Indian sensed a “déjà vu” to move for a “remodeled tryst with destiny” which was essentially bounded to delinking Nehruvian ties and ushering herself into a new world of unrestricted and aligned competency. Its first major impact on macro economy was felt in terms of multipolar evolution of economic interests…no longer, prioritization of national economy remained a trend. The inbound competency that came with the reluctant liberalisation programme didn’t create niche for the healthy operation of government, public and private sectors. Instead it given leeway for mushrooming of “clicks supremacy “and forced a “Democratic, Secular, Socialist” state as hub of crony capitalism. Underneath the swift processing of forward capitalist agenda, India produced the record numbers of billionaires {both in rupees and dollar terms} and worst positional status in Human Development Index {HDI}, which is ofcourse any longer averses a thinking mind to be in good humour!

The second big casualty after the misplaced wave of reform is the, state of reform? Until few years back, India’s regulatory institutions with their cautions approaches were doing great services by maintaining normalcy in business. Its effects led India to avoid the bubble burst like scenario during the peak of traumatic recession and when banks were falling on Wall Street, our Mint Street was still keeping jubilant mood. Alas, same friendly atmosphere is no longer persists now…RBI, which holds the pulses of Indian economy seemingly losing its earlier touch in market intervention and taking forward the growth of Indian financial sector.

In last few quarters, RBI has failed to control the spiraling inflation and its policy responses as interest hikes leaving extra adverseness on the anticipated growth agenda. Here, contradiction between market sentiment which is naturally consumerist now and policy stances are looming large and enforcing uncertainty. Sidelining the ideological convictions and routing through the same reform debates, it disappoints to note that the gulf between finance ministry and nation’s central bank was never so wide. In the last Union Budget, declaration was made by the finance minister for further opening of Indian banking that was a long due since 2003 but under the new unwarranted redtapism of RBI-licensing of few new banks are taking too long and perilously injuring the sentiments of near about stagnant financial market. Under the uniform set of regulations, RBI must shoe its trust to allow atleast six new banks to join the fray besides focusing more on compliance to the nuanced recommendations of Basel-III norms.

It appears a paradox that new Indian corporate private sector banks, Regional Rural Banks {RRBs} are in better shape with their standard quality of assets than the peers of leading Public Sector banks, turmoil Co-operative banks and narrowly motivated foreign banks. In such case, policy framing must enable these existing banks and prospective banks for pursuing the advanced banking in the days ahead. Withstanding the truth of global financial condition, RBI must lend unwavering support to the prospective banks and should keep the profile of global integration on equilibrium. Today, another haunting challenge is of financial inclusion, still majority of Indians are not banking…here, strict adherence to compliances shall be streamlined for making rural and untapped area as priority zone for every banks operating in India.

Capital markets in India often cited as dynamic and sound out of confused euphoria, which is completely false as Indian equity market is one of the most crisis ridden in the world. Insider trading is frequent here and still surprises to not get a Galleon type case like in U.S or finding few spoiled icons like Raj Rajaratnam or Raj Gupta. Years back, Harshad Mehta and Ketan Parikh rocked the party here and got bad tip from regulators but since then SEBI seized to be angry and moralistic institution. SEBI’s second hammering fallen on rapidly growing Indian mutual fund industry which through bad regulatory step {scrapping of entry load etc.}, left it in hibernated state and in comparison of the past, we find it only as shadow. The weak confidence among the top management of SEBI is another matter of grave concern…things have still little changed with its new chief, U.K.Sinha. Finance ministry and RBI must end their slumbering and India’s capital market is on the verge being a show piece.

It remains a silent convention to priorities Public Sector entities by the regulators but recent stances of IRDA is awkwardly mimicking on those soft forgone traditions. Atleast two Chairmen of Public Sector insurers have recently expressed their anguish over the partiality of IRDA-that’s shocking and henceforth unsustainable as well. Questions arises, in last twenty years what made regulation a stodgy business? And do the true spirits of reform could ever touch the Indian commerce and trade?

The only conclusion could be drawn from the last two decades that the shape of Indian economy has indeed grown up in mid years with making selective few obscene rich, few crores of population as empowered consuming/middle class and rest the paupers. And big dilemma is, we even today can’t figure out the exact numbers of poors in India, leave alone any over expectation of level playing approaches from authorities.

More or less, similar are the cases of regulatory mismanagement in every sector. The last and most vicious happened with the opening of single brand retail for hundred percent FDI and multi brand retail to 51%from existing 26% without making any strict clause which could assured the certain percentage of procurement from Indian domestic market. That could have helped better to farmers, SMEs by cutting their overhead cost and appropriate inventory management. Unfortunately in present frame, it’s unreliable to expect anything positive from this legislation and chances would be likely of Indian market as the junk box of cheap Chinese manufacturing. Opposition is doing series of ridiculous acts by logjamming Parliament instead channelizing proper debate to alter this horrific FDI arrival in retail. At this juncture, regulation is maintaining its fragility and people will be forced to lead a Walmartian life with deep holes and no money in their market..!
Atul Kumar Thakur
Wednesday, November 30, 2011, New Delhi
Email: summertickets@gmail.com

Nail Down the Exorbitant Financing

The Economic Times dated on October 30th2010 {Saturday} rightly placed its views in editorial that banks shouldn’t be forced for lending to Micro Financial Institutions {MFIs} under the Priority Sector Lending {PSL} albeit it straightly down while narrating MFIs as an improvement over conventional money lending system with further advice to RBI regarding the repercussions of interest control on this 27,000 crore rupees Microfinancial business. In the same page, independent views of V.Raghunathan “Permit MFIs higher interest rates” artificially and even better say hypothetically tried to end the genuine acrimony persisting among the MFIs, regulators and targeted clients…views shown by him candidly deciphering the structured backup for the greedy tendencies of MFIs.
The recent broke out at top management level in George Soros backed SKS Microfinance which hitherto have known for experiencing early innovations in Indian financial market have suddenly escalate the scenarios in swift maligning pace to entire Microfinancial sector. Vikram Akula {CEO, SKS Microfinance}, who have received accolades that is lucidly many times of summing the rest alls glamorous quotient for foraying and miraculously absorbing the less privileges dire needs in overt Spartan camouflage.
Height of MFIs limelight came out with the recent success of SKS Microfinance IPO that fetched $358million but before again leaving contagious bandwagon on its wayfarers, it completely caught under the radar of regulators and political parties for proliferation of bad ethics and finance-both within the organization and beyond…?

These institutions completely rest on the overall compulsions of banks struggling to complying with the Priority Sector Lending…they have to disburse at least slightly above of theirs one-theirs of total finances to weaker sections, unemployed, Rural sectors, MFIs etc. In my earlier article, I have elaborated on this subject in detail-how except Regional Rural Banks {RRBs}, not a single Indian bank is disbursing the requisite amount in proper manner…hence, they are banking upon on easy target like MFIs.
They lend them at 11-12% without any default and found freedom from cumbersome process of envisaged compliances…it’s a sort of ethical violation of Indian Constitution’s many articles and notably one its heart “Directive Principles” that is the originating point of Priority Sector Lending or Responsible banking. Founding easy capitalization, MFIs in India summarly violates all sort of moral imperatives in theirs business conduct…many of its ex Wall Street bankers CEOs are capitulating better the commercial pastures than their competitor moneylenders in the race of exorbitant charges. At present most of MFIs are charging near about hovering34%; 22 more than the Indian banks and around less 20% lesser than moneylenders…doesn’t it practicing like patronized moneylenders even under the eagle eyes of RBI?

The kind of business MFIs is dwelling with essentially undeserving to get any more cheap and easy capitalization from Indian banks under the quota of PSL…until the Y.H.Malegan committee report come into place, RBI must seriously look into this specific angle. If a cunning investor like George Soros is taking keen interest in MFIs, it signals something substantial advantage in favour of MFIs in India…intriguing to note that how unethically social capital being transfused for the accomplishment of maddening commercial goals. That’s the main reason, why so far private equity business have not mingled with the burgeoning MFIs…theirs money have few takers in Indian Microfinance business as our banks are more than generous in lending to these unaccountable institutions!

At this point, RBI should ensure the uniform lending rates to all the financial institutions irrespective of the nature of theirs incorporation besides the softening of collateralized loans in Microfinancial segment of banks. Why Microfinancial business should not converge with our real economy? Our banking system is quite robust and mature to trace and cater the financial needs of disadvantaged section without imitating the idealistic notional model of Md. Yunus from Bangladesh whose model is shambling in India through Private MFIs.
RBI before taking any further stances over this issue must enter into an ideation fray along with NABARD with keeping the goal to align Scheduled Commercial Banks, Private Banks and Co-operative Banks with hassle-free Microfinances. Second one, to create a competitive ground for bottom level financing where MFIs or NBFC have to compete with the banks…competition is always good in capitalism unlike the socialistic system where patronism of state plays major role. So, without swapping their inherent characteristics, Indian financial system should create a level playing field for bottom level financing…now goal should be to nail down the hasslefull and exorbitant financing out of sight instead to confusing idealism with Kurta clad CEOs!
Atul Kumar Thakur
November 1st2010, Monday
New Delhi
atul_mdb@rediffmaail.com

Bank Licensing: Task Ahead for RBI

Finance Minister’s pronouncement for further banking license during the last budget speech marked a significant change in Indian banking sector-since last sixteen years, RBI has tried best to optimize the scale of reform in banking sector, by giving nod to UTI {now Axis Bank}for full fledged banking was the way forward in the direction of core competency.
Later entry of some more banks in 2004,enhanced the efficiency in Indian banking scenario-now the condition has changed significantly over the years as technological up-gradation have played very crucial role in meantime. Infusion of over Rs17, 000 crore on technologies since 1999 and relatively unscratched overcoming of Indian banking from global financial meltdown have paving the way for next level of transition under sound regulatory norms of RBI; so, time is opportune for banking in India to transform itself at the level of global standard.
Amidst the growing speculation, officials of RBI have in mind some basic inquisitions, like how many licenses should be issued? What should be the minimum capital requirement? Whether NBFCs should be allowed to convert into banks? Whether Industrial houses should be considered for granting banking license? Obviously for a year ahead, these concerns would cap the regulators like cloud though above all the same meticulousness and regulatory oversight will be the catalyst.
At initial level, RBI is going to post a draft guideline for both the general and expert comments by the end of July; afterwards the notice would be issued for application-in next and final stage, High Power Committee would review the applications and come out with their decisions-entire process will take at least a year.

Indeed, in all manners, RBI has to play pivotal role with its regulatory oversight-it must have to take into account the credibility of the promoter, that means no bank license for loan defaulters; RBI and Finance Ministry, both agreed on strict scrutiny of Books& Accounts ahead of issuing new licenses.
The second most imperative condition is business plan of prospective contenders, they must be asked for a long term plans of business with essential proposition to improve operations of banking Industry in India.
Anticipating the significance of a banking license in this country, contenders must have to demonstrate their vision in terms of enhancement and strengthening of banking business before and after their inclusion in banking sphere-only greed for profit sounds very unethical which hardly create incentive for the regulatory officials who have to play much larger task in terms of streamlining the financial inclusion and financial architecture of the country.

Moreover financial deepening should be and must be the priority task of India’s Central Bank {RBI}, as it forwardly entwined with the growth prospects of economy at this juncture, there wouldn’t be any denial for entry of sufficient new banks for improving the business outlook which despite making progress still lagging behind of actual turn around.
As per the RBI data, retail advances have grown from 10%to 20% of total advances, growth of return on assets from 0.4%to 1%, reduction in Non Performing Assets{NPA} from 6%to less then1%, fall in cost-income ratio from 67%to 44%-on the other side, from total 95 banks, we have 53,000 branch, only 40% people having bank accounts, 25.1 million no-frill accounts have opened in last two years-but they all hardly justified the actual potential of Indian banking which possess worth of 95%of India’s total GDP.

In 1994-95, RBI had issued 10 licenses for new banks, next time in 2003-04, numbers fallen down to merely two-with more applicants this time, RBI has flexible options to make sensible choices, absolutely number wouldn’t cross the double digit this time but its also unlikely that it would juggled beneath the five-six new licenses.
Level of capital requirements needs to be optimized as per the existing needs and better implication for banking business as it’s a crucial determinant of financial inclusion and growth. Some other issues, like granting fresh licenses rather conversion of NBFCs and retaining of RBI’s stand for not issuing the banking licenses to the industrial houses must remain intact as they don’t gives the broad view.

RBI can also contemplate to issue group licensing with limited voting rights of 10% as they would provide a diversified opportunity with group control-under present regulatory norms, especially on the wake of global recession, this could be another rational choice-there’s lot of room available for banking in India, as still around 70 million population is out of its purview, so it makes sense to tap these unexplored opportunity through introducing sufficient numbers of new banks as next course of action.
Atul Kumar Thakur
June 3, 2010, Thursday, New Delhi
atul-mdb@rediffmail.com

Inculcating a Sense of Banking Consolidation

At global arena, last few years would be recalled for all troublesome reasons in banking sector…havocking recession and later relentless banking failures, bailouts, grim faces of western regulators were suffice to epitomize the gravity of situation which on most of occasion appeared as out of hand. In India too, financial sector at large faced the ire of world-wide recession although the scale was much lower in comparison of western counterparts owing to differences of regulatory norms and variation of disastrous greed.
Obviously cutting edge of Indian financial sector in the wake and after recession allowed it to practice on its own propositions unlike western economies and U.S.A particularly where the focus is now shifting again towards the days of Glass-Steagall Act that originated to contain the financial crisis, immediately after the depression-I in 1933.

Regardless of its intrinsic values, this act diluted over a long period starting in the 1980’s and eventually withdrawn through the Gramm-Leach-Billey Act or Financial Services Modernization Act in 1999, that grossly paved the way for financial innovation and proliferation. Here, policymakers need to check the weak spots in the system and install checks and balances to strengthen them, and avoid any systematic failure;for Indian regulators, it would be equally imperative to make advance efforts on banking and financial reform with keeping in mind the ground realities.
In Indian context, banking consolidation is the most pertinent case en route to financial sector reform which can lead Indian economy to a new trajectory of growth;banking consolidation makes strong sense here but it must be also accompanied by banking sector reform.The process for amalgamation of Public Sector Banks {PSBs}is directed by The Banking Companies {Acquisition and Transfer Understanding} Act,1970-according to the act, the central government may after consultation with the RBI can formulate a scheme to carry out the process of amalgamation of PSBs.

Even now, the country ‘s largest bank, State Bank of India {SBI}accounts for 30% of total banking stake and no other public sector bank is poising any competition with it, as Punjab National Bank merely sharing the 6% footprints of total Indian banking business. So, apprehensions of western regulators that “too big bank may vulnerable to fail” is hardly rational from India’s point of view as even after considerable restructuring of PSBs, they will remain much smaller than major western banks.
In the past half a century, in most rich countries, the financial sector has become too much large for the real economy-in recent survey of the magazine Economist, it was found that, relative to the size of the economy, banks in the UK are 10 times bigger now than they were four decades back-more or less, this is also the reality of U.S.A but Indian banking pitched distinctly, so they now have reason to knock the opportunities in different manner.With considering on factors such as cultural synergies, geographical presence, profitability and market share-three sorts of merger policy would be pragmatic-I. Merger of Associates banks with the SBI, II. Expansion in Regional Rural Banks merger at further state and later swiftly at national level and III. Voluntary mergers among the nationalized banks, where they must be given choice and feasibility to decide.

Government and regulators must play an enabling role by distressing the fear of proposed maneuverings by ensuring all good materialization for employees and clients through its expanded resources. Two appointment {of consultants} have made in this regards by the Finance Ministry-both of them, Mckinsey&Co and Ernst&Young are foreseeing economies of scale as big factor for PSBs to move in the direction of consolidation, a basic assumption of 7-8% market share by the merger of two banks are foremost in their recommendations but its enactment would depend lot on the measures of regulators and their intertwining with deeper nuances of potential change.
RRBs deserve token appreciation for their daring initiatives of consolidation which left all happy changes in their business and outward reach, which was a long due for them to diversify aggressively. Government and regulators in proper consultations with the all PSBs should find a consensus decision to lead Indian banking to the next level by essentially approaching on the issues of human resource development and more professionalism to mark the differences.
Atul Kumar Thakur
April 25th 2010, Sunday, New Delhi
atul_mdb@rediffmail.com

Online Platform: Tech Edge for Mutual Funds

Technologies has many specialties and liabilities to evolve, nurture and grown up the happy means to deliver utmost simplification in day-to-day life. Indeed the Security Exchange Board of India (SEBI) would have been sensed the similar feelings before executing the online trading platform for Mutual funds with aim to reduce its operational costs and address the issue of pan-Indian penetration.The online Mutual fund trading platform would probably do to the Mutual fund space what dematerialization of shares has done for the traders and investors in the equity market.
It will be an online arrangement where Mutual fund schemes can be transacted through the click of mouse; payment directly debited from the bank account and units purchased or sold will be credited or debited to the investors dematerialized account just like the way the shares are traded today; with similar convenience, redemption order will be accepted at a click of the mouse.

Overall the upcoming online platform which start to perform in new financial year (After March 2010) would provide the investors a consolidated view of all their Mutual fund holdings, apart from that platform will bring in simplicity and cost efficiency for investors and will help industry to expand its reach. An another impact of this move would be visible on achieving the goal of financial inclusion since internet as a medium has revolutionary binding over the awareness level; so many frills will be left out for the investors and friendly transaction with many new economy sized Mutual fund products would fuelled incentive for their participation.
Some apprehension regarding the inevitability of demat account for being in transaction have also sorted out as this new portal is not restricted to demat account holders alone; indeed no-frills approach of online trading would increase the transaction and transparency that further fuelled competition and price war between brokerage which eventually would led to highly competitive commissions.

Anyhow some confusion persists on the role of brokers and Independent Financial Advisors(IFA’s) who hitherto have been playing very crucial role in mobilizing around sixty percent of the financial investments in Indian Mutual fund businesses through their channels of recommendations. New platform will be linked to the demat account of the shareholder and the commission payable on every transaction shall be mutually determined between investor and their respective brokers, who will have to be a Depository Participant (DP).
Depository Participants are now present in more than thousand of Indian cities albeit they are hardly in touch to look after the future and just role of small brokers and IFA’S; so it would be better to let brokers manage Mutual fund online trading platforms, as separate infrastructure will defeat the purpose.

Likewise giving artificial support to small Mutual fund agents is hardly compatible in middle to long term perspective as competitive regime is required to infuse constructive morale of these small agents instead to compel them to survive on complementary bucks.
In the wake of SEBI’s move to scraping the entry load, small agents and distributors are facing outright erosion of their identity besides they left with very few options as Insurance sector has introduced D.Swaroop commission meanwhile, which are equally adverse to these middlemen’s. Presently only one lakh AMFI certified agents are in the field with comparison of twenty five lakh insurance agents, so there can be visualize a deep mismatch between demand and supply of effective financial councilors.

So, the present change in the landscape of Mutual fund businesses needs at least a relooking on the plights of consultancy complication since financial awareness level in our country is strikingly lower than counterparts in western and other advanced economies.
It’s worthwhile to note here that despite very high resilience of their economy, western financial regulators still trust and conferred better commission to these financial consultants; even before the scrapping of entry loads in India, there was margin of around four percent of brokerage from western economies. My concern here is not to imitate the western model but to cite the huge potential loss of employment in the wake of new regulatory changes in India…we definitely must go through the all intricacies of pros and cons of its potential outcomes.
Nevertheless, I heartily admire this new technological innovation because its effectiveness lies in many implicit and explicit forms as we have seen previously in the case of Banking and Telecommunication sector in last few years in our country.
Technology both at individual and collective level plays very formative role in preparing the humane psyche to adjust with high end targets; being a very resilient and swiftly emerging economy, Indian economy is indeed ready to upfront with such large scale innovation to achieve the goal of impressive financial literacy as well as financial inclusion. Looking through the technological experiments in past, we can be sanguine about its meticulous performance at Mutual fund arena and further becoming a source for such other innovation in the domains of Indian financial sector.

Atul Kumar Thakur
November29th2009, New Delhi
atul_mdb@rediffmail.com

Dooming Provisions before Indian Mutual Fund /Insurance Industry

Financial reform generally intends for a turnaround story with some fresh provisions although these provisions left different implications for diversely segmented components of industry.
A closer view on modus operandai of Mutual fund/ Insurance industry reveals the segmented interest of its components vis-à-vis the recently introduced regulatory provisions which try to demystify the role of intermediaries by simply cutting their edge of incentives from core of business.

Some fortnight back Security Exchange Board of India (SEBI) came out with a move to end the entry load regime in the pretext of investors welfare albeit that initiative was from reality since the prevailing nature of Mutual fund industry primarily influenced and shaped through bulk investment instead of petty investment.
So, investors are hardly going to benefited as they still have to bear the alternative charges that substituted in further course like, trail fees and entry load etc. In such scenario, the huge distribution network including of Independent Financial Advisors (IFAs) have caught in demure backdrop as their hitherto role are not going to proceed in future time, but this fallout is unlikely to be an universal quotient as the Asset Management Company (AMC) being the third pillar of Mutual fund businesses will surely avail the huge margin in current regulatory framework.

However, for the time being it’s seems daunting for AMC to cope with the emerging consequences from unconventional shifting of distribution pattern; so some temporary arrangement have been made although that is not suffice for raising the morale of persons involved in Mutual fond distribution.
Whatever would be the future shift on these matters; at least it’s an arch reality that again the interests of labour forces especially of unorganized sector have been compromised in the name of reforms.

By following same bandwagon for Insurance sector, meanwhile government have appointed a panel on investor protection and awareness under the Chairmanship of PFRDA Chairman D Swarup whose recommendations till now struggling for a consensus for investment advisors and agents selling financial products to usher them in changed regulatory framework. The apparent mandate of D Swarup committee is to synchronize the level playing field for investment advisors who hitherto have been championing for the great growth stories of Insurance businesses in India.
Proposal to remove commission on products such as ULIPS and allow investors to negotiate fees is acutely dampening for lakhs of advisors and their conventional bond (of employer-employees) with Insurance companies. Other plan to set up Financial Well Being Board of India (Finweb), an agency to write rules on the common minimum standards for sellers of financial products, and supervise a Self Regulatory Organization (SRO) of agents and financial advisors.
The mandate for Finweb seems exhaustive as every financial advisors needs to be registered with it; apart from that, establishment of an SRO on the line of ICAI is another move that creates complexities since advisors already have SROs to look after their businesses.
Regulatory changes are indeed essential but it needs to structured in proper sense and complete canopisation of all components plights; financial sector reform is inevitable but it’s implementation would required due diligence to cover all the core quarters.

It’s again a coincidence that marginal forces (Intermediaries) are being victimized from this new regulatory ruling that’s not at par with peoples expectations. Government must ensure the regulatory changes with following the proper care of mass welfare otherwise it would start to visualize as artificial attire with feeble original appeal.
Indeed economic activities without employment generation are nothing but futility especially when the claim of transparency stands lofty high.
Atul Kumar Thakur
November10th2009, New Delhi
atul_mdb@rediffmail.com

Paradoxes of Banking Consolidation

Heading through the cutting edge of modern finances, sometimes policy makers tends for noble experiments with its existing businesses to break the inertia or status quo.
In recent quarters, banking industry and even the overall financial sector has witnessed upright positional shifts with unpleasant repercussions; reasons are many and it’s an open secret now but such eventuality couldn’t be easily surpassed through only following the cunning tactics instead to enlighten the knowledge of history and maximum avoidance of willy-nilly practices would be somehow more healing.

Banking consolidation in Indian context very much seems paradoxical, because Indian banking is too diverse to accommodate in single policy frame.
These banks are possessing numbers of inheritances in their own set of condition; for Regional Rural Banks (RRBs) consolidation has enhanced its efficiency but same can’t be true for other banks because of their distinct compositions.so, the foremost task should be to assess the overall nature of their structural and operational pattern and then strive for next innovations. India’s public sector banks (PSBs) including of RRBs were emerged through a very cautious deliberation to imparting banking facilities for larger masses under the vigilant regulation of Reserve Bank of India.

To a certain extant Indian banks have done commendable job in last four decades to penetrate through the requirements of institutional credit and remaining banking facilities in both urban and rural areas; despite this India is still a shabbily under banked country.
Banks are still lending less than half of as proportion to Gross Domestic Product, what a strong economy without exposing to hyper inflation should have; Indian banking here need to follow the basics, the same way in which it succeeded during recent downturns. On the operational side bank must choose to focus on rural segments where the maladies of private lending are still persisting; by appropriating a hassle free day to day banking practices and more rationalization of service charges from less empowered and under banked population.

Private sector lenders must also endeavor in similar way since the rural areas are still unexplored and they may be heaven of business in coming years; of course their expertise in local conditions rather than their size going to determine the pace of their success.
Today ensuring swift financial inclusion should be the top task before the government to keep the wolf from the door (Avoiding hunger); indeed that would need more meticulous exploitation of our own expertise rather than borrowing the abandoned outdated western ideas of banking consolidation.

United States President Mr.Barack Obama has recently reiterating his fear for unnecessarily big size of banks which creates hurdles in operational efficiency; in same manner top western economists including Joseph Stiglitz, who is known for his fair speaking, preaching the cautions to escape the loopholes of banks giant size.
Stiglitz has firm view that” banks too large to fall may also be too difficult to handle…crux of his opinion is to move in the direction of rationalization of policies as per the local conditions and requirements instead to lost in the unrealistic myopia of universal model to consolidate the banking business to its last extant.

Indeed, up gradation of services instead of size that going to help the banking industry at large…we have account of sixty nine bank failures in ongoing financial meltdown and countless bankruptcies of both institutions and common men’s through unrealistic experiments.
Failure of giant Lehmen Brothers that was many fold bigger in its size to India’s largest bank State Bank of India(SBI) shows us that true competency does not necessarily lies in its size…Indian banks are not crooks, so our brooks certainly
not spoil them.
Atul Kumar Thakur
Octobers8th2009, New Delhi

Indian Model of Financial Services

It has become fashionable in this country to believe that anything to do with financial services has to be made in America without being aware about the ground realities. As the world commemorates the first anniversary of collapse of legendary Lehman Brothers, it would be vital to memorize that India was one of the few economies where banks and other financial services didn’t felt similar trouble; the cause were very simple that regulatory regime in India never shown leniency for unethical practices.
RBI has been consistently monitoring the situation since credit bubbles start in western and some leading Asian economies half decades ago; Indian central bank timely acknowledged the difficulties ahead and so never let allow banks to deal in exotic or toxic financial instruments. Credit delivery structure in India has stark differences from U.S.A or any other western economies; here in India banks follows well placed collateralized support for all commercial lending that minimize the risk of non performing assets.
There is utmost need to understand the Indian point of view to appropriate any functional change in financial system; context out rightly matters in any specific change in a system, like nationalization of banks in 1969 by the government was a prudent initiative from India’s own perspectives but quite astonishing from western point of view as they considered than it as a sheer humble effort of a languishing economy.
But now the landscape is entirely shift and leading policy makers from U.S.A, Vis Joseph Stiglitz, Henry Kaufman (Former board member, Lehman Brothers) necessitates on the better regulation and rationalization of the bank’s size. Indian economy being the second growing economies of the world should avail its edge of financial services which all is in well shape and naturally growing under the regulatory compliance's but still some policy makers in India couldn’t foresee the forward development in appropriate sense.

The Committee for Financial Sector Assessment, the high level RBI- Government of India’s joint assessment group came out with its conclusion that “Financial soundness indicators” like capital adequacy, asset quality and profitability of Indian banks were found in good state at the end of last year. As per the Basel Standards the Capital to Risk Weighted Asset Ratio (CRAR) of banks that’s a required amount to incurred unexpected looses should be maintain at minimum nine percent.
The CRAR for all Indian banks except two (One an old private bank and the other a foreign bank) stand substantially higher than the recommended minimum and also steadily improved over the years. Capital adequacy in the PSBs as group is itself stands above the norms; it was an average of 12.5 percent as of March2008.

In spite of witnessing such conducive fundamentals, officials in finance ministry is making exercise to flee to World Bank for merely three billion dollars loans to recapitalize the Public Sector Banks that seems quite shocking since there are several options are available within their own ambit.
Foreign exchange reserves must be a most reliable source for the government to fulfill its obligations; this way the banks would have recapitalized and they remained in government. China did same with such options even though their requirements were quite high from India, surely such options be less expensive and without any conditions.I again stressing on the potential imposition of conditions from World Bank following after such conceived materialization like, consolidation of banks, abrupt liberalization in their specified terms and conditions which may left many adverse repercussions.

Any major policy initiatives in India must be free from any external pressures because we can judge our requirements best in our conditions. In last two decades Indian financial sector has been witnessing a gradual and regulated liberalization which may remain bone of contention even in further time.
Consolidation is another matter that must be seen in the light of genuine perspectives; U.S.A’s biggest bank is tenth time bigger than India’s largest bank albeit that not guarantee the performances as we have witnessing sixty nine failures in American financial services till now and many more in future. We have many options to follow the Raghuram Rajan committee and Percy Mistry committee on financial sector reform rather than becoming entangled with external institutional pressures.Complexities could never be an ideal condition, so a comprehensive way would always be an imperative; we can come out with many innovations like adoption of consortium finances in place of unnatural consolidation and liberalization with ongoing regulatory norms. So, at the moment our hand is not tight only we have need to priorities the potential propositions.

Atul Kumar Thakur
17th September2009, New Delhi
atul_mdb@rediffmail.com