Book Review : Easy Money - Vivek Kaul

Rolling like a coin: the evolution of money down the ages

EASY MONEY: Vivek Kaul; Sage Publications India Pvt. Ltd., B 1/I-1, Mohan Cooperative Industrial Area, Mathura Road, New Delhi-110044. Rs 395.

Review by ; Nupur Pavan Bang The Hindu  26 Nov 2013

I wish somebody had told me these things when I was a student of Finance and while I was pursuing a PhD in finance. I would have had a much better perspective of how and why things work (or don't) the way they do! That's the first thought that came to my mind when I read the first book of the trilogy tracing the evolution of money.

The second thought was that this indigenous writer has written a book which is truly global in every sense. I would take the liberty of placing him in the same league as a Niall Ferguson or a Peter Bernstein, even though this is Vivek Kaul's first book.

We have heard of many college dropouts who have gone on to become billionaires. Here is an example of a PhD dropout, who it seems, is on the path to becoming a best-seller and an authority on Money, its evolution, regulation and consequences.

'Easy Money' published by Sage Publications takes us through the era when anything and everything was treated as money in some or the other part of the world. From salt, to dried cod, cowry shells to cattles and even slaves! Going as long back as the 12th century BC, the book chalks the path for evolution of Gold as money by meticulously laying forth the problems with alternatives and with having too many different money types.

There are many interesting facts throughout the book. It is fascinating to know that it was the Chinese who first started using coins and that they "believed that money is meant to roll around the world, and so it should be round". That the Chinese thought of this in the 12th century BC is fascinating.

The depreciation of the currency, or debasement, as it was known in the early centuries of the Christian era, and practised by reducing the metal content in the coins, eerily echoes the concept of printing more and more paper money to meet expenses, whereby 'money' systematically loses value.

From barter to commodities as money to paper money and then the evolution of the banking system, the journey has lessons, as highlighted by the author in the conclusion, that all regulators would do well to imbibe. Wildcat banking, free banking, bailing out institutions existed centuries ago as well. But we have not learnt from history and hence history repeats itself.

Kaul weaves together stories from Egypt, China, India, Rome, USA and UK effortlessly, as also he does with Marco Polo, Leonardo Fibonacci, Kublai Khan and the kings of the United Kingdom. He explains the evolution of concepts like 'settlement' and 'bill of exchange' through simple examples which make the book highly readable by even those who do not have a basic degree in Finance, Accounting or Economics.

The research is thorough, language simple, stories fascinating. Everyone should read it.

The “remaking” of Indian banking

The Hindu :CPChandrasekar Nov 29 ,2013

Reserve Bank of India governor Raghuram Rajan has declared that he intends to launch on a “dramatic remaking” of Indian banking.

 In fact, his case for a ‘remake’ had been made as far back as 2009 through the Committee on Financial Sector Reforms that he chaired. 

But with far less influence and power then, that case was for reform through “a hundred small steps”. Since taking over as RBI governor he has been far more enthusiastic.

It must be noted that there is little innovation in the nature of the remaking Rajan recommends. What is being done and what is planned to be done are all proposals that have been unveiled in the past, by a series of “committees” (from Narasimham I and II, through Tarapore and Mistry, to Rajan) that were set up to launch the trial balloons that would test the political and public response to various kinds and degrees of financial sector “reform”. They are also proposals that have been adopted, in almost tiresome fashion, in one or other developing country seeking to remake its financial system in the image of the post-1980s Anglo-Saxon ‘model’, which still rules despite being discredited by the global financial crisis.

Rajan’s contribution lies in the fact that he has, since taking over as governor, begun implementing in right earnest the different proposals and initiatives that were in process. There has been substantial advance in two areas. One is the set of measures that give foreign banks greater access to and more freedoms in the domestic banking space. The other is the issue of new private bank licences, for which applications have been entertained from domestic corporations and business groups as well. The latter had been kept out of this space since bank nationalisation. But now, with the committee to examine and decide upon the applications in place, expectations are that one or more business group would re-enter Indian banking. The Rajan machine seems to be working, facilitated by substantial media support, and possibly the fact that Parliament has hardly functioned and now elections would occupy the nation’s political attention.

But from the point of view of those expecting much from the current governor, the big test is still to come, and that is the promise to ‘shake-up’ the state owned banks. Thus far, the government’s post-reform attitude to public banks has been contradictory. One the one hand, banks have been prodded (and not just encouraged) into lending to areas such as the retail sector and infrastructure, resulting in a rising volume of non-performing loans and a growing volume of restructured corporate debt. While restructuring has helped conceal the extent of implicit default and dress up the financial accounts of banks, even the RBI’s recently released report on trends in banking expresses concern about the state of public bank balance sheets.

On the other, the RBI and the government appear committed to ensuring that Indian banks meet the increasingly stringent capital adequacy requirements set by the reformed Basel guidelines. There are three consequences flowing from this commitment. First, since the early 2000s, the government has been forced to infuse capital into the public banking system to strengthen their balance sheets and bring them into conformity of globally recommended standards. As the accompanying chart shows, the government has thus far infused Rs.743 billion into the public banking system, with much of it having been provided since 2010. But even this is far short of estimates of what the banks would require if Basel III has to be complied with. One estimate places the requirement at Rs.5000 billion over the next five years.

Second, with the government still looking to the banks to provide the credit that would finance private investment (in areas varying from housing to power) and consumption (of automobiles and much else), non-performing loans are bound to increase. Hence, expectations are that the sums required for recapitalising increasingly weak bank balance sheets would increase.

Third, since the process of recapitalisation started, the kind of capital required to beef up the Tier I (or best and least committed) capital on bank balance sheets has changed. Increasingly what is required is tangible common equity capital. If this has to be ensured while keeping the government’s equity holding in public banks constant, much public resources would be required. The previous governor of the RBI, D. Subbarao, had estimated that the government, which owns 70 percent of the banking system, will have to pump in Rs. 90,000 crore equity to retain its shareholding in the Public Sector Banks (PSBs) at the current level to meet the norms.

If the government is to meet this requirement it will not be able to do it with off-budget measures such as issue of recapitalisation bonds as it did before 2010. It must now provide resources in the budget to buy into equity, with attendant implications for expenditures. If revenue increases cannot finance those expenditures, the fiscal deficit will widen, which goes against the self-imposed targets of the government. This has set off a demand that public sector banks should sell new shares in the open market to finance recapitalisation. But there could be one problem. Current law requires that the government should hold at least 51 per cent equity in public sector banks. A case is being made that reducing public shareholding from current levels to 51 per cent will not yield adequate capital for recapitalisation that permits realisation of Basel III standards. Subbarao, for example, is reported to have argued that “fiscal constraints pose significant challenges” to the effort to re-capitalise banks and ensure they meet Basel III norms, but bringing down government holding to below 51 per cent can resolve the problem. The case for recapitalisation has been converted into a case for privatisation.

Thus the call for privatising public banks also predates Rajan. The Narasimham Committee on Banking Sector Reforms had as far back as 1998 called for a reduction of the government holding in ‘public’ banks to 33 per cent to make them more dynamic. The Percy Mistry Committee had gone further to argue that privatisation is needed because state-ownership had adversely affected the quality of financial intermediation. The only change now is the case is being built on the grounds that privatisation is needed to ensure capital adequacy.

Thus, when delivering on public bank segment of his agenda to ‘remake’ Indian banking, Rajan would only have to implement a policy that has been pushed for quite some time now. But implementing this feature of the financial reform agenda is more difficult, since it requires changing the law, which in turn needs political support. That may be difficult to garner. But Rajan’s brief clearly is that he must give it a try.

Management Tip of the Day: Identify Your 3 Most Important Job Tasks

HBR NOVEMBER 29, 2013

Passion and skills alone aren’t enough to ensure success, but periodically analyzing the key success factors of your job can help you excel. 

To get up to speed, start by addressing the top tasks that are most vital to your career success.

 Ask yourself: If you were starting the job now, what would be the three tasks most critical to superb performance?

 Then assess how your current skills align with those requirements. What training or skills development do you need? 

Focus on a plan to update your skills and spend at least 70% of your time on these responsibilities

. To keep your three key tasks in focus, write them out and look at your list before agreeing to other demands on your time.

 Going forward, reassess your key tasks on a regular basis and update your list.

Adapted from What You're Really Meant to Do, by Robert Steven Kaplan.

Why running a bank did not make sense for Tata Sons

FP Vivek Kaul Nov 28, 2013

Tata Sons, the holding company of the salt to software Tata group, has decided to withdraw its application for a banking license. So you won’t see a Tata Bank anytime soon.

The reason for the Tatas withdrawing the application for a banking license can be best explained through a line that Walter Bagehot, the great editor of The Economist wrote in his 1873 classic Lombard Street: A Description of the Money Market. As Bagehot wrote “the main source of profitableness of established banking is the smallness of requisite capital.”

Among other things that the Tata group would have needed to run a bank would have been to consolidate all the financing companies in the group under a non-operative financial holding company (NOFHC).

This would also mean bringing the non banking finance companies(NBFCs) of the group like Tata Capital under the umbrella of the NOFHC. And this is where the entire business model of the Tata Bank would have started to become unviable.

Among other things that the Tata group would have needed to run a bank would have been to consolidate all the financing companies in the group under a non-operative financial holding company (NOFHC).

The Tata Bank would have had to maintain a statutory liquidity ratio of 23%. For every Rs 100 that a bank raises as deposits, it needs to compulsorily invest Rs 23 in government bonds. The bank would also have to maintain a cash reserve ratio of 4%. Rs 4 out of the every Rs 100 that a bank raises as a deposit needs to be parked with the ReserveBank of India(RBI).

Over and above this, the bank would also have to loan 40% of its money to what the Reserve Bank calls the priority sector. This includes lending to certain segments like agriculture, retail traders, self employed individuals etc, which can be pretty risky.
These requirements make it difficult for corporates like Tata Sons which run large NBFCs, to turn themselves into banks. If it wants to convert itself into a bank it will have to park 4% of its time and demand deposits with the RBI as CRR. It also needs to invest 23% of its deposits in government securities to maintain the SLR.

An NBFC does not need to do this, but a bank does. This immediately means a higher capital requirement for a bank. The banks do not earn any interest on the money they park as CRR with the RBI.

While the risk involved in investing in government securities is low, the returns are low as well.

Hence, the increase in profit will not be commiserate with the higher capital that will have to be deployed to run a bank vis a vis an NBFC. And this goes against Bagehot’s basic principle of banking.

If an NBFC wants to become a bank it needs to ensure that 40% of its lending is to the priority sector. The trouble is that the existing loan book of an NBFC may not meet this requirement. And in order to become a bank it may have to rejig its loan book substantially. Now that, may or may not be financially viable. It may also increase the riskiness of the overall lending.

Further, for an NBFC to become a bank it would have to convert each of its branches into a bank branch over a period of 18 months. It would also have to ensure that 25% of its branches would be in rural areas with populations under 10,000 and without existing bank branches. This is another provision which would require an NBFC wanting to become a bank to invest a substantial amount of capital in setting up branches and other infrastructure. But this wouldn’t lead to immediate returns.

The norms require that the bank promoter list his business within three years and bring down his shareholding to 40%. This has to be further whittled down to 20% by the 10th year and 15% by the 12th year. As explained, any NBFC looking to become a bank will have to invest a lot of capital to get the business up and running. But the returns against this money invested will not come immediately. Hence, it is unlikely that when the bank has to list itself three years down the line, it will get a great valuation.

Given these reasons, running a bank did not make much sense for Tata Sons. The group also felt that running a bank would come in the way of international operation, which account for 64% of the revenue.

A Tata Sons spokesperson explained the reason behind this to several newspapers. As he put it “The operating companies with overseas operations at times need to provide financing solutions to their customers. Since all financing companies in the group need to be under the NOFHC, there could be situations, wherein a given country is not a priority for the proposed bank but extremely important for an operating company.”

The Tata group however did not rule out their interest in the banking sector in the time to come.

“The company shall continue to monitor developments in this space with great interest and looks forward to participating in the banking sector at an appropriate time,” Tata Sons said in a statement.

The group can look to enter the banking sector in the years to come, given that the RBI is now looking to provide banking licenses to domestic aspirants on tap. In a discussion paper titled Banking Structure in India—The Way Forward released in August 2013, the RBI has proposed issuing banking licenses on tap. “There is a case for reviewing the present ‘stop and go’ or ‘block’ bank licensing policy which promotes rent seeking and considering ‘continuous authorisation’ of new banks. Such entry would increase the level of competition, bring new ideas and variety in the system,” the paper said.

Foreign banks looking to enter India do so through the continuous authorisation process. But domestic aspirants till now have had to wait for the RBI to open the license window. The RBI issued 10 new banking licenses in 1994. It followed it up with two more licenses in 2004.

De-jargoned: Virtual currency

Getty Images/AFP

These coins are mined through a computer program

Live Mint Vivina Vishwanathan   THU, NOV 28 2013. 06 26 PM I

There are reports that a bitcoin automated teller machine (ATM) has been launched in Canada. Bitcoin is an example of virtual currency.

What is virtual currency?

According to the Reserve Bank of India (RBI), virtual currency can be defined as a type of unregulated digital money which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community. It also provides flexibility in terms of business model and business strategy for the virtual community. Virtual currency schemes are different from electronic money schemes as the virtual currency, used as the unit of account, has no physical counterpart with legal tender status, states RBI on its website.

Different kinds of virtual currency

For some kinds of virtual currencies there is no interaction or exchangeability with the real currency, while for others the relationship with real money, goods and services is more active and direct. Closed virtual currency schemes have no connection with real money. For instance, currency mostly used in online games. Some virtual currency schemes offer the facility of a mostly unidirectional conversion rate for its purchase. These can be used to buy virtual goods and services. Under another category of virtual currency scheme which provide for bidirectional flows, the virtual currency acts like any other convertible currency, with two exchange rates. In such schemes, the virtual currency can be used to buy not only virtual goods and services, but also to purchase real goods and services. Bitcoin, peercoin, litecoin, anoncoin and ripple, are examples of virtual currencies. There’re exchanges available for virtual coins that determine the value of a currency. For instance, for bitcoins the exchanges are BTC China and Mt Gox. On www.cryptsy.com, 60 different virtual coins can be traded.

How does it work?

Bitcoin is one of the most popular virtual currencies that is used to purchase both real and virtual goods and services. These coins are mined through a computer program. The more coins you mine, the more difficult the program will get. Litecoin is also created through similar mining process on a computer. It is said that there are online websites where you can buy goods and also exchange the credits of the digital currency for cash.

What regulators say

According to RBI, the absence of a distinct legal framework implies that the traditional rules under financial sector regulation and supervision, including the institution of central banks, are not involved in the case of virtual currency. RBI further says that the unregulated link between virtual currency (if permitted), and traditional currency with a legal tender status poses challenges as the complete control over the differently denominated virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will.

Bullish November : A smooth sea never made a skillful sailor

Bullish November : A smooth sea never made a skillful sailor

The Spirit of Thiruvalluvar :ஐயத்தின் நீங்கித் தெளிந்தார்க்கு வையத்தின் வானம் நணிய துடைத்து.

 

திருக்குறள் 

அறத்துப்பால்   

துறவறவியல் 

அதிகாரம் 36
மெய் உணர்தல
குறள்  : 353

ஐயத்தின் நீங்கித் தெளிந்தார்க்கு வையத்தின் 
வானம் நணிய துடைத்து.

ஐயப்பாடுகளைத் தெளிந்த ஆராய்ச்சி வாயிலாகத்

தீர்த்துக் கொண்டவர்களுக்குப் பூமியைவிட

வானம் மிக அருகில் இருப்பதாகக் கருதுகின்ற ஊக்கம் ஏற்படும்.

Heaven is nearer than earth

to those men of purified minds

who are freed from from doubt.

.

• திருக்குறளில் உள்ள சொற்கள்-14,000