An unholy nexus binds Government to industry

From the Planning Commission and the apex bank endorsing corporate events organised by shady consultancies to the Finance Ministry supporting toothless industrial lobbies, the political class signs in tune with India Inc
We all know how UPA2 has stopped performing and is scoring poorly in most of areas. This well-choreographed plan is a rare phenomenon in realpolitik which re-defines the Darwinian principle of existence (Charles Darwin tried to, wrongly, make us believe that only the fittest can survive).

The existential quest is blurred, and configured so that action is presented as sin and inaction as unwavering virtue. Those in Government are a happy lot, but escapist business honchos are disturbed. They are not getting their favours on time — a throwback to the slow socialist days. This is a funny situation, especially when the country has no dearth of ‘non-performing assets in the form of some corporate leaders. The list is long but deserves not to elaborated.

There are countless activities in India’s burgeoning metro cities where the beleaguered corporate lot, mostly from the wonderland that is the West, has foolish interests. But here the safeguard to national interest is coming through collective angst. This is a sort of strength for new India that trounces Goldman Sachs and WalMart and the insightfully-poor rating agencies’ hope of making the country a parking lot for many of its useless minds.

The corporate world is in desperation, as it genuinely finds it difficult to stay exuberant beyond the happy premises of five star hotels — momentary relief though comes quite often, as India’s Finance Ministry is fully committed to acknowledging the events of toothless industrial lobbies and shady consultancy companies.

Nothing is taken for granted at such events — so everything is productive and meaningful within that ambit. A photo session with a Cabinet Minister has its high demand, speaking from the dais (before an indifferent and slumbering audience) is important, being front-running sponsor of an event has its value.

The Reserve Bank of India and the Planning Commission also support such corporate events where we hear many useless speeches. But despite the good tuning between the Government and business sector, those with money are still sad souls in India.

This might be because, sometimes, the cycle fails and then layoffs begin. At this stage, the top honchos recall the value of money and in the process goes back to the long-discredited economist Adam Smith (sadly, he couldn’t understand the discipline). But the tragical wind is unbiased, and it is dutifully blowing across all the sectors. Job cuts are all-pervasive including within the media which silently suffers much management atrocities.

Another area of unethical exploitation is the intellectual festivals. The Tehelka-Tarun Tejpal-Think Fest episode is a good case in point. Generally speaking, these conditions should have kept the humour alive in business circles but as the tough reality of the current situation is known to all, the sentiment will be in a jittery state.

The boom-time of ignorance is over now. The chances of course-correction are also few, especially given the current functional arrangement of the industry-Government dynamic. So, to be sure, in the time ahead, the Indian economy will seem to be more shocking than entertaining. Besides a failed Government, the corporate sector too has to be held accountable for its inability to rise to the occasion and make the most of several opportunities that have presented themselves over the years.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in The Pioneer,on December06,2013)

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

The Unquiet Regulation

In India, RBI has an edge to regulate key financial markets-money markets, government securities market, credit market and forex market besides the usual role of a Central banker. This enables RBI to apply regulatory purview over the interconnected channels between banks and other financial sector entities-but with such unusual regulatory load, do RBI justify its every role as top authority from financial stability perspective? It’s hard to defy the growing overload on RBI-creation of Financial Sector Legislative Reform Council {FSLRC}&Financial Sector Development Council {FSDC} during the last Union Budget have even maximized the RBI’S overtures with Finance Ministry. The mammoth task and hyped expectations forced RBI Governor, D.Subbarao to accept the denial of additional arrival of debt market under the purview of RBI; he even laid stress for divulging the existing power from governor to respective committees on key policy decisions.

Out of conservatism and indeed with many insightful policy measures, RBI has ensured over the years a stable growth of Indian financial market albeit the shade on its autonomy and new circumstances in the post reform era have diminished its earlier touch on crucial policy matters. If RBI knows that despite hard efforts, still half of Indian population is unbanked, so the goal of financial inclusion is distant reality-on the other side, Finance Ministry works on popular temptations of growth instead considering inclusive and stable development of economy. Confrontations of RBI-Finance Ministry, especially in last few years have sharpened and it’s obviously an unfortunate outcome of Finance Minsitry’s intervention in day to day working of RBI. This is a worrying trend and must be checked out before the nerves of Indian financial market will be finally derailed from the esteemed regulation of RBI.

Following the incessant soft touch on credit policy and its ineffective impact on inflation in last few quarters, RBI has increased the Repo and Reverse Repo Rate by 50basis point and deregulated the Saving Bank Deposit Interest Rate. In a recent discussion paper on Saving Bank Deposit Interest Rate {RBI, April 2011}, the reason cited that monetary policy transmission has been suboptimal as it was unchanged since 2003 when the rate was last raised from 3.5% to 4%. As expected banking stocks promising negative past credit policy of RBI, hereafter atleast in short terms, investors will have to cope with the perplex scenarios.

Inflation is much bigger issue and RBI Governor, D.Subbarao sounds very rational when he said there is no quick-fix solution for inflation control in a rapidly growing economy like ours-in a complex economic matrix, it’s truly unreasonable to expect that only monetary policy will ease the pain of inflation. Those who are in political authorities have to realize sooner that inflation is not strictly the sole by-product of demand supply mismatch from the technical parameters of Whole sale Price Index{WPI}& Consumer Price Index{CPI}. The growing cohorts nexus among Corporate, Politicians, Government officials and relentless supply of unclean funds by many routes including suspicious Sovereign Wealth Fund, Participatory notes are making this nation reach in terms of obscene numbers of billionaires and leave majority lagging behind that itself narrates the story of our wounded economy.

Amidst the surging scams, Government/Regulators stand like mute spectators which mark the complete shift of democratic values. There uses to be time, when for a few lakhs rupees of wrong investment, Nehru’s son-in law and MP, Feroze Gandhi started a historic debate in the Lok Sabha [1958}on the state-owned Life Insurance Corporation’s investments in the dubious companies of a tainted industrialist, Haridas Mundhra {The Mundhra affair, Indian Express, December 12, 2008, Inder Malhotra}-though the financial charge was a few lakhs but Nehru’s response was in sharply contrast to what happens these days. He spoke of the “Majesty of Parliament” and instantly ordered a judicial inquiry by one of the most remarkable judges, M.C.Chagla. The inquiries findings led to the resignation of finance minister T.T.Krishnamachari and an exceptional Civil Servant, H.M.Patel. This was the first such case of high official’s sacking Indian democratic history but alas, similar couldn’t replicated here onward and what we witnessed the consistent erosion in democratic values with terrible misuse of power.

In such gloomy parochial atmosphere, it’s hardly surprising to see the working of regulators like SEBI&IRDA which runs like sovereign horse… without any clear mandate or essential /constructive intervention from government. G.Mohan Gopal, a former board member, SEBI has recently highlighted how the SEBI board abused powers to protect Chandrashekhar Bhave {Then Chairmen, SEBI} in IPO scam {2003-06}-it’s an open secret now how the Bhave has stagnated the highly promising Indian Mutual Fund Industry through many ambiguous regulatory changes. He scrapped the load regime that made this sector unhappening in terms of employment &further very unfortunate spate with the insurance regulator, IRDA over ULIP products finally forced the mutual fund business on fringe. Apart from jeopardizing the business, he outgrew the credible impression of fund management in India. Following the too much technical line, no big hope can be conceive from the new Chairmen of SEBI, U.K.Sinha…most of his announcement are equally ambiguous and unusual like predecessor and holds no bright prospects at all. Without any reversal on entry loads, he has plan to widen the geographical spread of mutual fund business, which is completely ironical…another big fatal, he is going to make by pushing the investments by foreign pension and retirement funds on the line of global markets. Ruling out a review on the asset qualities and nature of funds with an extra regulatory shortfalls, here in India, mutual funds’s ordeal is still seems far from being over.

Presently, Indian financial market is grappling with many awkward regulatory instances-a swift appropriation is worthwhile in some area by little more supplementation of regulatory measures and at other end, relaxation to let them work more freely and in accordance to situation instead of popular demands. As the entry of third generation private sector banks and many other reforms are on hold, government must collaborate with regulators much efficiently and without thinking of deviating political compulsions to forward ahead the Indian financial sector from this transition. Integrity and performance by the three regulatory arms of Indian finance-RBI, SEBI and IRDA will decide the overall growth of Indian economy in coming years. The unquiet regulation can lead to dooms, so it’s terrible and undeserving…an efficient regulation instead can further the broader task, so government should choose later and let make the ground clear for good and impartial business. But in meantime, we have to wait to see when and how the financial regulation will be streamlined…
Atul Kumar Thakur
Tuesday, May 23, 2011, New Delhi
Mail: 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

Reckoning Basel-III Norms!

Following the recent financial meltdown, the leaders of the group of G-20economies asked the Basel Committee on Banking Supervision{BCBS} to reach the new rules needed to prevent another financial crisis in future. The aim was to mitigate the greed ridden financial crisis instead to block the real factors behind it; real notion of Basel-III norms could be sensed out with the statement of Hant Wellink, head of Basel Committee on Banking Supervision-“Partly banks will have to retain profit for years which they can not use to pay shareholders or bonuses.
For another part, this will vary from bank to bank; they will have to get it from the capital market. I think it will make a new crisis less likely. Chances are much smaller, we have made calculations on this but we can’t rule it out completely”. Last Para reflect the genuine apprehension ahead in financial market…so; life even after the Basel-III norms wouldn’t remain indifferent from regulatory considerations.

Basel-III norms, with its underlying proposition of insulating banks from adverse shocks by adequately enhancing the amount of its own capital holding compared to overall deposits and other borrowing can be regarded as an improved and standard set of rules over the existing Basel-II norms. Rule of Basel-III norms written by the Bank of International Settlement’s Committee on Banking Supervision {BCBS} with lucid mandates to define the reform agenda for the banking sector across the world. The new rule comprehensively entails how to asses risks and capital management anticipating theirs risk bearing.
On September20,2010 {Sunday}, agreement finally taken place on Basel-III at a meeting of Central bank Governors and top Supervisors from 27 countries chaired by ECB President, Jean Clande Trichet. They reached to the consensus with focusing on prevention of any further International Credit Crisis with provisioning more than triple of top quality capital as reserve for addressing any meltdown sort of occurrences.

Predominant component of capital is common equity and retained earnings-new rules restrict inclusion of items such as deferred tax assets, mortgage-servicing rights and investments in financial institutions to no more than 15%of the common equity component. Here strong bank would avail an edge as now they can put excess cash to better use though with ample transition period for raising funds to compliance shouldn’t be any big issue for even smaller banks. The new norms are centered around the renewed focus of Central bankers on Macro-prudential stability. The global financial meltdown following the crisis in U.S Sub-prime market has shaped the entire propositions. Earlier guidelines, popularly known as Basel-II was focused on Macro prudential regulation, those features being carried out in Basel-III norms as well with added advanced support. That systemizes the changed motives of regulators now-they have eagle eyes on financial stability of the system in totality rather than Micro regulation of any individual bank.
Under the Basel-III norms, Key Capital Ratio has been raised to 7%of risky assets-Tier-I capital that includes common equity and perpetual preferred stock will be raised from 2 to 4.5% starting in phases from January2013 to be accomplished by January2015. Moreover, banks will have to set aside another2.5%as a contingency for future stress, taking the overall capital ratio or Capital Conservation Buffer to 7%. Banks that would fail to comply after the stipulated timeline would be unable to pay dividends, though they will not be forced to raise cash.

A further counter-cyclical buffer in average of 0%-2.5%of common equity is to be imposed depending on specific circumstances of an economy to protect the banking sector from periods of excess aggregate credit growth. In addition, a liquidity buffer, much like our Statutory Liquidity Ratio {SLR} is to be made mandatory by January2018 to check the risk based measures and higher capital norms for systemically important bank. On paper, Basel-III will triple the quantum of capital, banks will need to maintain but whether it will risk-proof the banking sector is doubtful. So, regulation would decide whether Basel-III norms is light touch set of rule or indeed an effective panacea for hassle free and ethical functioning of banking system.

Impact on Indian banks: - RBI Governor, D.Subbarao is stoutly confident that Indian banks not likely to be adversely impacted by the new capital rules. At the end of June30, 2010; the aggregate capital to risk –weighted assets ratio of the Indian banking system stood at 13.4% of which Tier-I capital constituted 9.3%. So, it wouldn’t leave any pressure on Indian banks in near future albeit there may be some negative impact arising from shifting some deductions from Tier-I and Tier-II capital to common equity.
Despite strong fundamentals, RBI should ensure even more capital than essentially stipulated limit under the Basel-III norms; besides stress must be given on long term capital inflow rather on risky short term investments. Besides, innovative credit policies, RBI should also stringently ensure the well capitalized subsidiary structure for foreign banks and financial institutions operating in India, since the stability of Indian banking system have lot to with it.

Young Committee that recommended for the establishment of Bank of International Settlements {BIS} in1930 had enough sense for volatility in International financial market and greed’s of bankers. Actual effects of even best designed rules are of no value if lacked by the competent, proactive and fearless supervision. Strengthening the global banking system should be and must be the aim of every new financial rules but it’s equally imperative to stop the adverse lobbying that makes regulation nothing more than a print order. We can easily assume this from recently enacted Dodd Frank Act {Wall Street and Consumer Protection Act} in U.S.A which loosing its effects under the stern pressure from affluent lobbyist.
Regulation couldn’t have any parallel while enforcing a law; our regulatory strength has recently tested during the world wide financial meltdown-Indian banking relatively emerged unscratched comparing the western counterparts. More attention is needed from developed world for compliance of rules envisaged under the Basel-III norms-make or break of this rule would be decided by the both Individual as well collective performances of economies. Co-operation at international level would be the real bone of contention for an ambitious rule like Basel-III…meanwhile let’s watch the movements around the financial circle!
Atul Kumar Thakur
October20, 2010, Wednesday, New Delhi
atul_mdb@rediffmail.com

Survival: New Buzzword in Mutual Fund Industry

The recent regulatory ruling by the Stock Exchange Board of India {SEBI} of scrapping distribution fee from equity schemes has multiplied the adversity of smaller fund houses. Enforcement of this practices are now shaping the investors temptation in completely new direction as cost and quality conscious investors now increasingly contemplating both the brand name and long-term performance of the fund house before investment.
In the first sight, nothing seems wrong albeit a slight inquisition of Indian fund businesses would reveal the actual stark reality of smaller fund houses-their's plight haunted me when I got interacted with the national sales head of a small fund house, he had shared with me in heavy down sound about his inability to cope with current approaching challenges in the wake of new regulatory challenges.Impact of present regulatory challenges grew sharper since it proposed at a transitory time-Recession was just over and Insurance sector too started posing some unique challenges before Mutual fund business despite their severe variance in business basics.

Although, banks are indeed remains major supporter for fund houses both in implicit and explicit way-investment in Mutual funds allows more liquidity than an investment in Bank’s fixed deposit besides saving and current account gives negative real return; apart from that banks at large emerged in a capacity of solid investor in these fund houses that enhances both the liquidity and consistency of funds. So, overall bank provides an utmost imperative channelization of capital that indeed plays a catalyst role in shaping the fortune of a fund house. But these advantages have asymmetrical binding over the different segment of Mutual funds hierarchy-where big brands, such as UTI, Reliance, ICICI, Birla Sun life, HDFC ,Franklin Templeton, Fidelity could be counted as top beneficiaries, on the other hand even urban elite fund like-Canara Robeco, Taurus, Sahara, Principle etc are hardly getting able to tap same opportunities.

Indian Mutual fund business is going through very swift changes that resoluteness being visible after more than three decades of UTI monopoly; in changed scenario, Avant-garde of foreign fund business like, T.Rowe.Price, Nomura, BNP Paribas etc are now foraying through distinct route of joint venture to penetrate in resilient and happening Indian market. Although in absolute terms, these foreign fund houses are hardly posing any challenges before entire Indian Mutual fund industry in similar way- Morgan Stanley, an early entrant in 1990’s, today stand with Asset Under Management {AUM} of worth Rs2, 300 crore which while Reliance despite making late voyage in fund management industry recorded an exponential growth with huge Asset Under Management of Rs 1, 17,249 crore. Today nine of top ten fund houses hail from established brand and particularly from Indian business-data reveals that the market share of the top five fund houses in the country have increased from about 50% in 2007 to more than 56%by January 2010; Moreover the top fund houses of the country accounts a market share of about 80% vis-à-vis 73% in 2007. These proportion are combined of both corporate and retail investment-in retail segment, 75% of investment goes to the top ten players {Source-AMFI}; strikingly this proportion is more aggressive in Debt-Corporate money where 93% goes to the top ten fund houses. These ground realities are hardly inclusive in nature as merely size of fund house becoming a deciding factor than overall performances that creating haunting challenges before smaller fund houses including of transparency.

The real worrisome trend that appearing is the diminishing value of performance as paradigm; the remaining two rudimentary indicator-brand and distribution are now becoming catalyst manipulator that making difficult for small fund houses to compete in respect of their strong peers on distribution and brand management front. Fund selections and entire investment process are obviously shaping through the management credentials and scale economics-despite such uneven scenario-in 2009, Indian Mutual funds business had reached to the accumulated height of Assets under Management {AUM} of worth Rs,8,00,000 crore. Indeed it’s a healthy growth even when thin pace of inflow into equity Mutual funds during recession and impressive profit booking by the investors, the performance of equity schemes stood out last year that strengthened the sentiment in broader terms. But statistical indications alone shouldn’t be conceived as a matter of complacency, because development would touch to zenith only when it let allowed its components a fair chance for their deserving stakes otherwise data’s would remain only the roaming spaces of financial experts. SEBI must come forward with some new regulation to address the pressing plights of small fund houses , larger pool of distributors and of course of low end investors beside pushing fund business to Indian rural hinterlands.
Atul Kumar Thakur
February20th 2010, 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

SMEs Financial Worries

SMEs have emerged as the most vibrant sector of the Indian economy accounting for about 95% of industrial units in the country. The sector contributes approximately 40% of value edition in manufacturing and around 45% exports. It has emerged as a panacea for providing employment to around 42 million persons and promoter of inclusive economic growth.
The Planning Commissions Working Group on SMEs for the 11th Five Year Plan has estimated that SMEs need approximately Rs3000 billion in working and term loans during the plan period. This sector remains neglected since long time; a reliable database on the sector concerning with heterogeneous range of activities is the need of hour which would boost the proper policy framing.

The next step should be developing a capital market exclusively for SMEs on the lines of Alternate Investment Market (AIMs) of London, NASDAQ, NSE and even NIKKEI have separate windows for small companies. Earlier OTCEI and INDONEXT were promoted by BSE for the same purpose albeit both experiments failed; hence optimum precaution must be put in place in any further endeavors in this regard.
In present circumstances SMEs are unable to borrow sufficient funds that is absolutely alarming for both the immediate and long term perspectives; the share of Micro enterprise in net bank credit witnessed a sharp decline from 42 percent from 2002-03 to 2.8 percent in 2007-08.

The share of enterprise with an investment below Rs5 lakh fails more drastically from 2.2 percent to 1.6 percent of total bank credit over the same period. Besides SMEs sector also requires dedicated Venture Capital Funds that must be willing to invest anything between Rs2 crore and Rs50 crore to facilitate innovation in SMEs.
Presently, Private Venture Capital funds prefer to invest Rs50 crore or more and are hence irrelevant to SMEs. In view of the enormous demand for equity capital for SMEs in the country, a major initiative is required in this direction.

Challenges are heading much faster; according to All India Census (2001-02), only 14.2 percent of the registered and 3.09 percent of the unregistered Small Scale Industries (SSIs) had availed themselves of bank finances.
SMEs are vehicle of inclusive with huge potential for employment generation, therefore it wouldn’t be viable to surpass the rudimentary requirements of this sector; Basel II Norms on Banking Supervision and Mandelson plan in UK could be the fine example before Indian government to infuse financial support to SMEs.
MSMEs (Medium and Small Scale Industries) Act, 2006 modified the title enterprise instead of industry to provide proper recognition to the service sector and conferred pride of place to Micro-enterprises; ceilings are also redefined now as up to Rs25 lakh is called a Micro enterprise, up to Rs5 crore Small enterprise, up to Rs10 crore as Medium enterprise.

These modifications necessitate for change in lending pattern of financial institutions; adjustment must be made to tap the various financial requirements of SMEs. Task force constituted by the Central government and initiation of SME Rating Agency (SMERA), a group venture of SIDBI, Dun & Bradstreet Information services India ltd and several leading banks of the country are welcome initiatives for the sake of SMEs and hope that it would boost the much needed morale of entrepreneurship in the country.
Atul Kumar Thakur
October3rd2009, New Delhi
atul_mdb@rediffmail.com

Lessons from Lehmen Brothers Failure

Lehmen Brothers is no more ….Alas, September2008 was truly a black month that grasped such iconic financial giant from scene, even more such financial crisis that only occurred in a generation finally amounts the toll of institutional banking failures up to sixty-nine until now.
Impact of current financial crisis could be judged in retrospect as the most financially devastating after the Second World War; no regulators (including IMF) could timely foresee the actuality of potential situation despite possessing the thousands of economists battalion. Crisis broke out with the continuing fall in U.S home prices that relentlessly faded the price of Mortgage Backed Securities (MBSs); it had also hit those who insured MBSs against default through Credit Default Swaps (CDSs).

Consequently unrealistic returns that equity investors have expected to earn by taking the additional risk simply failed to materialize. If we got back to the actual causes of such large-scale failure, it becomes essential to distinct it between practice related causes and the causes emerged through institutional tempering in some core regulation.
Like former Federal Reserve chief Alan Greenspan had kept interest rate too low for too long time which led to negative sentiments; in1999 the Glass-Steagall Act of1933, which had prevented commercial banks from tying up with risky bets on securities had been repealed, further it curtailed the checks from any irregular financial practices. Even more, Securities Exchange Commission in 2004 relaxed the limits on top investment banks to leverage; so policy makers grossly exhibit the oblivious attitudes towards mushrooming of complex derivatives.

In extreme sycophancy financial regulators couldn’t became able to assess risks and also the inherent interest of financial market participant towards multiple market transaction which finally leads to excess volatility and state of chaos in financial sector across the integrated economies.
During that period of volatility, some regulators resorted to a ban on short sales to alter the movement of market, at least for time being. Albeit, that idea could not succeed as subsequent events and studies shows us in later course.Unlike initial observation of 2008, our engagement with western market is quite deep, so it was unlikely that we would have been completely saved from a financial crisis of mammoth proportion.

Liquidity arises as major problems of Indian financial sector especially the Mutual funds industry that were handled efficiently by RBI and SEBI. So, matter siege to growing in worse direction, although the Indian financial sector particularly Mutual fund industry keep witnessing the sluggish response of its business until the bad developments are halted at Dalal Street.
Despite relieve from slowdown it’s imperative for us to keep eagle watch on the development in the crisis strife markets to assess its actual impact in Indian market; the second wish list could be to bring as many as viable product to exchange traded markets, so the regulations will have better say on unrestrained myopic financial roots of investment.

Those who cannot learn from history doomed to repeal it that shows their failure ness to rationalize the unduly persisting greed’s; U.S.A Banks in large fails to learn such exercise. U.S economy roughly account for quarter proportion of world economy when its population only accounts for five percent.
It would be worthwhile to note that despite having such superb statistics America remains the largest borrower even from developing countries like India that shows the rampant artificiality in U.S core strategy; so bubble had to burst, so it has burst.

Bubbles followed by crashes are actually a recurrent theme in financial history (Tulip mania 1634-37, South sea bubble1711-20, the long Depression1873-96, Great Depression& Stock Market crisis 1929-32, Asia/ Russia/ LTCM crisis 1996-98, Dotcom Burst2000-02 and current crisis 2007…?); the impact of the present crisis was exacerbated due to a vicious circle of defaults and liquidation…and indeed also through bandwagon mania.
Innovations is always desirable in financial domain only a distinction is must between innovations like technological up gradation and complex derivatives because the ability to use derivatives to speculate, create off balance sheet positions, increase leverage, arbitrage regulatory and tax rules… and manufacture exotic risk cocktails will continue to a major factor in derivative activity.
Tectonic shift that we need in financial market should come as meticulously crafted process instead through push-button methods that would require clarity on the goal of financial sector reform. For the time being, it is quite essential to reduce the unintended consequences of financial meltdown like spiraling inflation and increase in western government’s debt & budget deficits.
Escalation of top-notch officials in American financial circle is not a right step forward instead; a utility-based pay scheme should be approached in banks and other financial institutions that would lessen the hassles from exchequer. Keynes came back in fashion…so government should ensure employment first; like NREGS (India) was implemented much before the downturn of economies.

Now it would be quite blissful for nations to appropriate fine mix of socialism and capitalism as it was conceived by the India’s first Prime Minister J.L Nehru for India’s planned development.
Also essentially we should carry on the teaching of our grand mothers on practical financial behaviors, so we become able to avoid gaining $613 billion dollar debt on iconic bank like Lehmen Brothers( Whom we commemorate our adieu presently) as policy makers. Ultimately quotation of Charles Dickens, (Literary protagonist of Great depression era, from his magnum opus work” Great Expectations”); that “we have every thing before us and we have nothing before us “…it’s up to us how we visualized the things.

Atul Kumar Thakur
22nd September2009, New Delhi
atul_mdb@rediffmail.com

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

March of Universal Financial Access

Debate is still in full swing for attaining the goal of financial inclusion in stipulated time-frame to usher India in a new age of institutional finances. The rudimentary goal of financial inclusion in Indian perspective is very compatibles with the long sought-after necessity of expanding institutional financial services to the unreached segment of society. It would be imperative here to see that despite witnessing spectacular success with regulated inclination of Indian financial sector still a considerable pool of population is out from its core ambit.
These financially untapped common masses are not only missing the access of formal banking services but they are also deprived from a proper entitlement which eventually outpaced them from mainstream and leads them in the trajectory of exploitative money lending markets.

Such conditional fall leads them to the financial viciousness and alarming indebtedness that altered the course of their lives; for checking these sorts of unfortunate developments, institutional financial delivery at rational interest rate would be a plausible panacea. As the maladies of indebtedness being evident among the farmers, it’s an urgent need to combat these problems on two different front; first to raise the reach of institutional financial services among untapped groups with avoiding the practices of exorbitant charges as some of Micro Financial Institutions (MFIs) are indulged in similar practices and second to offer timely credits for productive purposes instead for consumption.
Models of Regional Rural Banks (RRBs) and co-operative banks could be the fine example for newly emerging Micro financial institutions by lessening their operating cost through technological innovation and adaptation to local conditions and wisdom of practices.
Movement of Universal Financial Access or UFA is a very comprehensively shaped idea that drawn and being propagated by the distinguished banker Mr. Sanjaya Bhargava who left his illustrating full time career for activism of financial inclusion. The basic idea of UFA is meticulously woven for the conditions which are frequent in bottom level of banking practices in India.
Today lack of entitlement primarily fuelled by the low penetration of formal banking and other services among the marginalized section especially in rural areas. UFA movement is trying to bridge the gap between actual demand and supply scenario by tracing the operational loopholes in existing Micro financial institutions and retrieving solutions for better materialization of financial inclusion.

Indeed the conceptualization of financial inclusion by UFA evangelist introduces a new chapter of innovation in Indian financial sector entrusted with broad welfare aims. The drive for universal financial access becomes more vital especially it’s concern with languishing fortune of farmers and others from the bottom of pyramid who grossly left untouched from the great Indian growth story, so its focus area is adverse tantamount generated from unequal growth agenda.
UFA stressed for appropriating technological innovation in the operational domain by the financial institutions in rural areas to curb the cumbersome expense on its service delivery. Revolution in Telecommunication sector is the finest available example before the financial institutions to spread their products at affordable price in hassle free environment.

Consequently with such approaches Telecommunication today enjoying the most respectable position in Indian business and its bullish impact could be visualized any where,spectacular monthly addition of four million subscriber bases with growing Average Revenue per Users(ARPU) rate signaling the makeshift of a sluggish sector into a full bloom arena.At policy level government is too looking serious to attain the goal of financial inclusion by lending directives to Reserve Bank of India,to accommodate the hitherto unbaked persons.
Social schemes like NREGA, Indira Awas Yojna, Self Help Groups etc;are helping the conducive proceedings of financial inclusion plan since the all transactions has to be dealt only through the banks now that giving a lease for institutional financial awareness.

Unique Identification Programme (UID) is an other initiative of government under the visionary chairmanship of Mr. Nandan Nilekani, to end the identity crisis among a large chunks of population who hitherto were not able to avail the benefits of institutional support as they were lacking to fulfills the Know Your Customers(KYC) norms and other hassle full obligations. Previously the only exceptions were the Regional Rural Banks (RRB) & Co-operative Banks as they actively used to practicing the Different Rate of Interest Schemes (DRI) to weaker sections with no frills account services.
Comercial banks including Private sector banks & privately MFIs have to go a long way to come as par the endeavour made by the RRBs & Co- Operative banks through their rural focused & exactly need based services to cater the aspirations of Common Men (Aam Aadmi).

This is the prime area where the UFA movement can persuade to new age players in financial sectors for making action on many previously drifted approaches ;so, first of all it is most essential to be pragmatic on rural India’s needs and than making such effective efforts to contain the handicaps of attaining the full scale financial inclusion.Movements like UFA has greater bearing for the plights of small house holds who involves in unorganized sector and largely defunct from any institutional favour for their basic financial needs.
At this point, rural India’s today needs big push from all sides as the rural hinterland craves for basic facilities & proper opportunities that forces there dwellers towards upward migration in bigger cities; for maintaining equilibrium of prosperities (growth & effectiveness)these area must be given their due.

Financial Services has to play a major role in further development of rural India since investment in different domains going to play catalyst role in economic activities and productions. A grass root effort of spurting entrepreneurship can effectively address the rural areas .
A country like India with billion plus size of population could hardly underrate the importance of its primary sector; so, it should be the foremost aim of any noble initiatives like Universal Financial Access (UFA) to spread the word for saving the villages from despair and infuse hope in these core areas through ensuring basic facilities. Lot of wishes for UFAs like phenomenon movement … hope this movement would relentlessly strive for a vibrant ecosystem that may forward financial inclusion ahead and increase access to financial services in India in very democratic manner.

Atul Kumar Thakur
September2nd 2009, New Delhi
atul_mdb@rediffmail.com

Bumpy Quivering In Indian Mutual Fund Industry

As on July end, the Indian Mutual fund industry manages an asset base of RS 6, 86,946 crore which seems quite impressive in first impression but an in-depth introspection reveals this performances as below of actual potential of presently existing thirty six fund houses. It’s not less surprising that top five Mutual funds houses accounting for over fifty present of the total asset base, so there is huge scopes persist for entry of new players in Mutual fund industry.
According to a recent report of The Economic Times, twenty six funds waiting for approval of business before SEBI (Security and Exchange Board of India); expected potential for more players foraying into the Mutual fund space may lead this industry for stronger consolidation.Mutual fund industry despite having an existence of fifteen years has yet to secure its position as a formidable player in the domain of financial services.

Now the going away of entry load will leave greater obstacles before industry players in attracting the investors. Scrapping entry loads has apparently put Mutual funds at a disadvantage vis-à-vis viable products like ULIPS at the distribution end. Before August 1st, Mutual funds were charging an entry load of 2-2.5% and paying a commission of around 3% to their distributors that mean fund houses had to burn around the cost of 50 to 100 basis point. Such proportion of cost for Asset Management Company was quite low which now they wouldn’t longer afford in the wake of new SEBI ruling.
Even though withering of entry load by SEBI is logical for the sake of investor’s interest as previously availing with fixed nature of commission hardly compelled distributors and Independent Financial Advisors for better consultancy to investors. In absence of adequate information generally investors couldn’t secure there intended benefits from investment.

Now the Mutual fund distribution set to become more demand based rather than sales push, so the time is ripe for investors to be more careful as distributors might push other products such as ULIPS more at least in short term. Indeed the new ruling will lead market towards stiff competitive regime in which the investor will have greater voice although that would require a better financial literacy scenario which at present is quite unsatisfactory in India.
On the other end new SEBI ruling will adversely affect the Mutual fund industry as the overall distribution network is going to face severe challenges; risk has arises of small distributors losing their business and large distributors getting consolidated. Even before the implantation of new ruling Mutual fund industry lacked the distribution network to cover the entire country in a meaningful manner; some plans are in the air for establishing the grand distribution and trading platforms.

Such materialization would of course mitigate the long pending sluggishness of proper distribution network but that must not oust the IFA’s role; they must have to co-exist for further deliberation.In the new set of condition it would be quite imperative to have a triangular interface amidst the Mutual fund , investors and distributors with a consensus based settlement of commission and various other impetus; certainly it would be require disclosure norms more tightened and transparent. There must be a definite set of rules that apply equally to similar products irrespective of seller’s identity.
Apart from the challenges of new directives from SEBI, existences of some non-serious players in the business are equally posing serious concern over the maximization of its reach in financial market.

It seems quite astonishing after passing through the facts regarding very low requirements (Rs 10 crore) to start a Mutual fund unlike the Banking or Insurance business. Despite such hassle free monetary norms; leaders in Mutual fund couldn’t visualize the need for its pan Indian presence like the counterpart’s Bank and Insurance. Presently majority of Mutual funds business comes from corporate (around 70%); here the Mutual funds business urgently needed for some stringent regulatory mandate like rural penetration of business like the counterparts in financial services.
As per a survey of Value research ( An independent research and analysis institution), the industry’s present penetration is estimated at 4.5% as against 10-15% of Insurance business; there are around 3 million agents for Insurance products and just 80,000 distributors for Mutual funds. Indeed both have their own strength and weakness of business but at the moment Mutual fund industry required a tectonic shift in their products distribution in enhanced innovation and co-operation with Banks and Insurance sector.

Mutual fund industry by remodeling many products can leverage upon Insurance’s distribution networks since both are ‘push’ products. Structural changes in selling practices and better offers of reward in distribution network would be a crucial impetus in sustaining and rising of falling esteems in this business.
Today Mutual fund industry is standing at crossroads where it has to cope with many swiftly approaching challenges including a very consistent stiff competition from Insurance industry. Insurance businesses are in win-win situation in comparison of Mutual funds as they availing the traditional edge of being a tool of tax saving besides having a wide network of its distribution channels lead this industry to every threshold in both the urban and rural spaces in equal manners.

To gain an actual breakthrough, potential think tanks of Mutual fund sector should reassess their ongoing business model in terms of targeted breakthrough and further marched towards the comprehensive diversification. Diversification's in the sense, that it would reduce any adverse exposure from a specific sector and would mitigate other invisible travesty.Probably this lesson is most rational after suffering a chronic, meltdown of international financial system which not only raises question on the confined treatment of financial planning but also showed the solution in a diversified and transparent way of business behavior.
Indian market has a huge potential for the growth of Mutual fund business but it would require first to decipher the codes of investor’s expectation from the products. More and more adaptation with the Indian condition would harness the success story; fewer amounts of frills along with the greater amount of ethics and trust would be matched with the genuine plight of this growing sector.

Atul Kumar Thakur
17th August2009, New Delhi
atul_mdb@rediffmail.com

Basel II Norms – A Revised Framework

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

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

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

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

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

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

Effects Of Implementation

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

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

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

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

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


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

Atul Kumar Thakur
New Delhi
March 23rd 2009
atul_mdb@rediffmail.com

Micro finance: A Panacea of Sustenance

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

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

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

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

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

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

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

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

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

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

Atul Kumar Thakur
New Delhi
23rd March2009
atul_mdb@rediffmail.com