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.

Will the financial services industry change?

IStockPhoto

Live Mint ; TUE, NOV 26 2013. 07 18 PM IST

The EIU report examines the role of integrity and knowledge in restoring culture in the industry

Back in 1980, just 9% of Harvard MBAs went into financial services. By 2008, the figure was up to 45%. Short-term profit priorities led to extreme risk-taking at many firms, with employees selling complex derivative products they did not understand, and lending to people who could not afford the repayments. Since the global financial crisis of 2008, the question being asked about the industry is whether it can change, shifting its culture to become more risk-averse and client-centric.

An Economist Intelligence Unit (EIU) report, titled “A crisis of culture: valuing ethics and knowledge in financial services”, sponsored by CFA Institute, examines the role of integrity and knowledge in restoring culture in the financial services industry and in building a more resilient industry. It is a global survey of 382 financial services executives conducted in September 2013. Of these, 42% are based in Europe, 34% are based in Asia-Pacific and 20% in North America. Nearly one-fifth (18%) are executives from asset management companies, 16% are from commercial banks and 15% are from retail banks.

One of the findings of the survey was that most firms have attempted to improve adherence to ethical standards. Over two-thirds (67%) of firms surveyed have raised awareness of the importance of ethical conduct over the last three years.

A lack of understanding and communication between departments continues to be the norm, notes the survey. 62% of the respondents say that most employees do not know what is happening in other departments. On the other hand, over one-half (52%) also say that learning about the role and performance of other departments would be least helpful to improving their performance.

Here are the findings:

Money management: Is it a profession or a business?

Jaychandran/Mint

Parag Parikh :Mint :28 Oct 2013

Since world-over money management is considered a profession, entry barriers are low

The current debate in the Indian mutual fund industry is around the net worth issue with one view wanting this raised from the current Rs.10 crore and the other wanting it to stay where it is.

 I think we need to look at this debate through the lens of whether we consider money management as a profession or a business. 

If it is a profession, then a professional does what is good for the client as the well-being of the former depends upon the well-being of the latter. 

However, if it is a business then one is concerned about making business sense of the venture undertaken. More than the client’s interest, it is the business interest that dominates. I believe that money management is a profession but in India with high entry barriers and restrictive regulations, it has turned into a business. Result: marketing teams, distributors, multiple schemes and the race for assets under management.

World-over, money management is considered a profession. Hence the entry barriers are low so that right investment professionals can enter the field. In the US, one requires just $100,000 to set up an asset management company (AMC), in the UK and the European Union it is €125,000 and in Singapore it is Singapore $250,000. Surprisingly Japan has no such minimum criteria. So with just Rs.3 crore, one can be a global asset manager. While in India, where we already have a high entry barrier of Rs.10 crore, we are trying to make it even higher.

Those advocating higher net worth have two arguments. First, high net worth will ensure only serious and committed entities and second, penetration will be achieved as those with high net worth will be able to open branches.

An AMC is a pass-through vehicle which does not use balance sheet; prima facie there is no need for capital requirement. What is required is intellectual capital: passion for investing, knowledge of stock markets, experience in the capital markets, investment style and philosophy and core investment beliefs.

Large capital does not bring seriousness which is evident from some cases in the past. Moreover, the required capital may bring wastage and cost escalation in terms of salaries, commissions and make the entire industry a high cost one which may not bode well for end investors. As of today, there is no embargo on maximum capital and hence entities that want to pursue business strategy with large capital are allowed. It will become very hard for any new entity to set up an AMC with such requirements as it will take a long time to get the desired return on equity and business will be unviable. So a very few will remain who have clearly demonstrated their ability to create cartels.

While Rs.100 crore may be peanuts for large conglomerates, Rs.10 crore may be significant for professionals; so skin in the game is a function of relative situation and not an absolute number. The real skin in the game is when sponsors, fund managers and directors invest in the scheme aligning their interests with that of investors. Some of the well capitalized fund houses and their associates have well publicized integrity issues and punitive actions that have been taken by the Securities and Exchange Board of India. Thus higher capital is no guarantee of integrity. There are enough empirical evidence that larger a balance sheet neither is a guarantee for seriousness nor for integrity. With high net worth, we are giving wrong signals to investors about an illusion of a safety net. If any thing goes wrong with investments, the high net worth will take care of the losses.

Penetration by opening new branches is an idea whose time has gone. In an era of Internet, physical presence is less significant. There are third-party execution platforms such as registrars and stock exchanges which ensure that even though the fund house does not have presence, investors have smooth execution capabilities across the entire country. Excessive emphasis and economic incentive for selling in remote areas actually makes investors from these areas exposed to predatory mis-selling and ultimately they loose faith in such instruments. E-commerce in India is highly successful and should be embraced with an open mind rather than insisting on physical infrastructure.

A financial product is very different from a banking product. Such products require financial professionals with passion and expertise to educate and convince clients of the benefits of the investment process. Investor education is a process and would be achieved by proactive investment professionals. The US has more than 600 AMCs whereas India has just 50.

We have enough checks and balances in place to ensure that investors are protected from professional misdemeanours. Besides, safeguarding one’s reputation is of paramount importance for professionals as, often, this intangible asset is the only one they possess. Hence I intuitively feel that they are likely to exercise much greater care compared with a conglomerate for whom this is only one of many activities. Why not reduce the capital requirement or do away with it all together? After all, if entry barriers have to be imposed, let them be intellectual rather than monetary.

Should the RBI be made more accountable? —Part1

Money life :RAMESH S ARUNACHALAM | 17/10/2013 07:44 PM

The time is now ripe to make the RBI more accountable to the people of India. With its wide ranging powers and greater impact on all aspects of the economy, the accountability of RBI assumes even greater importance and should not be ignored.

When I was growing up in the 1960s/1970s, the RBI governor could perhaps walk down the main street of any Indian metropolis unnoticed. That is not the case today. In India as well as many other countries, these unelected officials are so much in the media glare. In fact, their actions and words are the subject of much heated debate in newspapers, TV channels and the like. Thus, there is no escaping the fact that from being ‘behind the scene actors’, central banks have now been forced to assume very public (multi-faceted) roles —ranging from setting monetary policy to supervision of financial institutions and the like. Through their participation in the Basel framework, many central banks are involved in establishing global standards for the regulation of the banking sector as well. Thus, they are therefore legitimately seen as the primary guardians of the integrity of the global financial system in a general sense, especially at this time of global economic crisis.

Indeed, the continuing global economic and financial crises has pushed central bank further to the forefront simultaneously as originators of the crisis and as well as potential saviours (of their countries) from these. Many central banks have in fact admitted at least partially, if not completely, responsibility for the circumstances resulting in the current set of international economic and financial problems. They have also promised to do better. As Ben Bernanke, chairman of the Board of Governors of the Federal Reserve, is said to have told Congress in 2009, “There were mistakes made all around. … We should have done more [in banking supervision]. We should have required more capital, more liquidity. We should have required tougher risk management controls.”ⁱ

Thus, without any doubt, the world over, central banks have engaged a greater variety of tasks than what they were originally established for. They are also handling very large sums of public money. While the increased role for central banks is perhaps here to stay, this added responsibility has naturally fuelled the demand for enhanced transparency and greater accountability on their part. That being the case, several legitimate questions arise regarding the accountability of central banks and transparency of their operations:

a) To whom should central banks be accountable?

b) What is expected of central banks in the name of this accountability and transparency?

c) How transparent should that accountability be to the media and to the larger public?

These questions are equally relevant to India’s central bank —Reserve Bank of India (RBI). We specifically explore, in a series of articles, how accountable and transparent the RBI has been. However, before looking into the above questions, let us first look at RBI’s mandate, which is rarely well understood!

A reading of the preamble to the RBI Act, 1934 describes its main functions as follows:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."ⁱⁱ

Likewise, other Acts provide additional mandates and the various core and additional functionsⁱⁱⁱ performed by the RBI are summarised in Table 1 below

Table 1: Functions and Mandates of The Reserve Bank of India
Functions of RBI	Legal Basis for Performing Function	Classification of Function
Issuing of currency	RBI Act	Core Function
Acting as Monetary Authority	RBI Act	Core Function
Regulation of NBFCs	RBI Act	Additional Function
Management of Foreign Exchange Reserves	RBI Act	Additional Function
Management of Sovereign Debt (Central government)	By Statute	Additional Function
Management of Sovereign Debt (State governments)	By Agreement	Additional Function
Regulation of forex, money and government securities markets and their derivatives	Mandates from Various Sources	Additional Function
Regulation and Supervision of Commercial Banks and Cooperative Banks	The Banking Regulation Act, 1949	Additional Function
Regulating the Foreign Exchange Market	The Foreign Exchange Management Act, 1999	Additional Function
Regulation and supervision of the payment and settlement systems	The Payment & Settlement Systems Act, 2007	Additional Function

           

As can be seen from the above, the RBI is therefore, what one would call as a “complete full service” central bank as it:

a) Is the issuer of currency;

b) Is the monetary authority;

c) Regulates and supervises banks, non-bank financial companies and other critical segments of financial markets in India;

d) Is the banker and debt manager to the government;

e) Acts as the gate keeper of the external sector; and

f) It regulates and supervises the payment and settlement system among other things.

Further, because the RBI is the monetary authority and it is also empowered to act as the banking sector regulator, the primary responsibility for financial stability also lies with RBI.

This is not all.

In reality, RBI’s statutory mandate is, perhaps, much broader compared to many of the other full service central banks because, historically, the RBI has played a key role in the overall development agenda of India. Innovations like credit to the agriculture sector and MSMEs (micro, small and medium enterprises), the lead bank scheme, the various priority sector categories, targets and associated lending, the fairly recent emphasis on financial inclusion and financial literacy have all flowed from this development role of RBI. In fact, the huge development finance institutions (DFIs) that exist (in India) today—such as, NABARD and IDBI—are, strictly speaking, offshoots of the RBI. The RBI has done much more than a typical full service central bank. And with the advent of the global financial crisis, RBI’s role has only increased further!

Given the above discussion, one is tempted to ask: how accountable has the RBI been and how transparent are its operations?

Indeed, I was surprised to find that there is no formal mechanism of accountability enshrined in the RBI Act and I quote Dr Subbarao, former governor, RBI who argued that:

“Neither the RBI Act nor any rules lay down a formal accountability mechanism. In the absence of a specific formulation, the fallback is on the general principle underlying a democracy—which is to render accountability to the parliament through the Finance Minister. The Reserve Bank assists the Finance Minister in answering parliament questions that pertain to its domain. Besides, the Standing Committee on Finance of Parliament summons the Governor for testimony on specific issues including legislations under consideration.”^iv

And surely, this lack of this accountability and transparency seems to be showing on the ground as highlighted by the spate of recent (not-so-transparent) incidents involving the RBI:

First, was the case of Mr KM Birla, who initially did not resign from the RBI board despite his group company having applied for a banking license. In fact, RBI’s handling of this conflict of interest matter was very indecisive (referring it to the Union Government) until Mr Birla was forced to resign because apparently a member of the Parliamentary Standing Committee on Finance (PSCF) objected. It is entirely another matter that Mr Birla has recently been named in the CBI first information report (FIR) in the coal scam. A person like Mr KM Birla, whose companies had a strong commercial interest in financial services through the Aditya Birla group companies, was allowed to serve on the RBI board (uninterrupted) for many years suggests that he could have perhaps even lobbied for the entry of large business industrial houses into banking. The results are there for everyone to see as when the RBI called for banking licenses in 2013, they strangely permitted the entry of large industrial business groups into banking, a practice hitherto avoided in several countries globally. This, in fact, vitiates the entire bank licensing process in a significant manner.

Second, as the Mint writes and I quote, “Two months after the deadline for applications for new banks expired, there have been two changes in the list of applicants. One, Value Industries Ltd, a unit of Videocon Industries Ltd, has withdrawn its application for a banking permit, and two, Chandigarh-based real estate and hospitality company KC Land and Finance Ltd has sought a banking licence. The original list of 26 permit seekers, released by RBI on 1 July, did not have this name. Many are finding the sudden appearance of a new applicant and withdrawal of the Videocon group mysterious.”Whatever be the reasons, I am not sure that the above represents the procedural transparency required of institutions like the RBI.

Third, when the Hon Parliamentary Standing Committee on Finance (PSCF) was seized of the bank licensing matter, RBI’s hurried decision to grant banking licenses cannot be rationalised at all. In my humble opinion, irrespective of whatever the RBI says, this action by the RBI (alone) carries huge implications because it shows utter disrespect for parliamentary democracy. 

Fourth, the banking selection advisory panel has significant conflicts of interests and many weaknesses as enumerated in Moneylife articles. It should also be noted that the Banking Selection Advisory Panel includes several past regulators, who, in my humble opinion, will not be able to dispassionately and objectively analyse past regulatory and supervisory failures at RBI —an aspect so critical for making decisions with regard to providing bank licenses to large industrial corporate groups and NBFCs MFIs. Further, it also needs to be emphasised that many panel members have had (and some continue to have) strong associations with institutions that were at the heart of the 2010 AP micro-finance crisis. Finally, the panel also includes regulators whose questionable approach (and actions) during the years preceding the October 2010 AP micro-finance crisis had serious consequences in the ground. These certainly, resulted in some form of regulatory/supervisory failure which, in turn, exacerbated the 2010 AP micro-finance crisis. Therefore, I am not sure that due thought and procedure has been applied to deciding on the composition of the Dr Bimal Jalan Banking Selection Advisory Panel.

Fifth, the suddenness with which a new committee on financial inclusion (FI) was appointed by the RBI really surprised everyone because a live committee on the same subject has already been functioning at the RBI under senior deputy governor, Dr KC Chakravarthy, since 2012. That is not all. As noted in previous Moneylife articles, the composition of this new financial inclusion (FI) committee has left a lot to be desired as many members of this (FI) committee have significant conflicts of interests. Apart from being closely related to each other in a professional sense, a couple of the members of the FI committee represent institutions that have directly applied for the banking license. Also, there are many members of the committee who represent (and/or serve on the boards of) institutions that have significant relationships with various banking license applicants.

Further, many of the institutions — that the new financial inclusion committee members represent (directly or indirectly) — also have very significant commercial interests in the area of financial inclusion. And what is really shocking is that this insider (industry) committee with the above characteristics is to draft the overall vision and recommend the regulatory architecture for the broad area of financial inclusion. This is surely, a recipe for big time disaster as past global crises have clearly demonstrated. And the icing on the cake is the fact that this financial inclusion committee runs parallel to the banking selection advisory panel (in terms of its time frame) and the chair of the financial inclusion committee is also a member of the banking selection advisory panel. As noted above, recall that two banking applicants are themselves part of the financial inclusion committee and also that several members of this FI committee represent institutions (directly or indirectly) that have provided (or are providing) debt, equity and other support (in a commercial manner) to the banking applicants and other micro-finance industry players —in other words have significant professional interest in these banking applicants as well as other micro-finance institutions, some of whom were also involved in the 2010 AP micro-finance crisis. As a reputed professor of finance at IIM so aptly put it, the new RBI financial inclusion committee, has no CONFLICTS but ONLY interests.

Sixth, when the Hon PSCF, is looking at the broad subject matter of financial inclusion through the prism of the Micro-Finance Institution Development and Regulation (MFIDR) Bill, RBI’s action of appointing a new financial inclusion committee smacks of total disregard for the Indian Parliament. I simply do not understand the need for pre-empting Parliament!

In summary, given the above, I strongly feel that the time is now absolutely ripe to make the RBI, India’s central bank, more accountable, to the people of India. With its wide ranging powers and greater impact on all aspects of the economy, the accountability of RBI assumes even greater importance and should not be ignored. Indeed, as Mr Surjit Bhalla and others have long argued, “The time has come for accountability at the RBI. This institution makes decisions that affect the fortunes (lately misfortunes) of many Indians, rich and poor.”^v And this accountability will have to come in several transparent ways and these are discussed extensively in a sequential article.

---

ⁱ Source: Senate hearing, December 2009. (and as cited from other web documents)

ⁱⁱ Source: RBI Act of 1934, 2 of 1934, page 12 of pdf file from RBI site -http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.pdf

ⁱⁱⁱ Compiled from various Acts and documents available on RBI site, www.rbi.org.inincluding speeches of past RBI governors. When I say additional function, I am strictly interpreting what has been said by past Governors like Dr Subbarao and also the documents available on the RBI site. I am not implying any hierarchy in functions, as far as the RBI is concerned

^iv http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=563, point 7

^v http://www.indianexpress.com/news/holding-rbi-accountable/888648/

(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)

Know your bankers

Anush Kapadia : The Hindu ;17 Oct 2013

India needs to have development banking that speaks the voice of the people

India’s economic model is broken. The dominant, liberal, economic philosophy fails to answer our defining question: how do we develop democratically? The cookie cutter, laundry list reform agenda is a distraction. We can look nowhere for intellectual bailouts via off-the-shelf solutions. We need our own answers to rescue our system from its lurching stimulus-response.

It now seems clear that the sum total of forces at play, intellectual as well as political, have led our system to an equilibrium that simply cannot hold. The private-sector oligarchs have attempted to carry a load that is beyond them, and the state has been reduced to limply ameliorating the model’s intrinsic harshness. It’s time for a serious rethink.

Much like 1991, our present crisis is the result of the overheating of an internal debt engine and a perilous turn to foreign borrowing at the margin. In the 1980s, the government’s domestic source of borrowing overheated as the nationalised banking system became saturated with government debt, forcing the government to borrow in foreign currencies at short maturities. Staking on thin ice, things duly fell apart with the fall of the Berlin Wall.

This time, it's the private sector that is overleveraged, saturating the capacity of the ill-equipped commercial banking system to lend to large, long-term projects and again resulting in a turn to foreign debt. In the context of a widening current account deficit, this could spill over into a banking crisis as firms buckle, and therefore fiscal strife as bailouts are required.

INSIDERS RULE

Our reality is of course far from liberal. Insiders rule. Yet, by rendering government as merely a fetter, the dominant philosophy unwittingly serves to naturalise oligarchy. There is, it need hardly be said, much government bungling. But if the common sense desires a nightwatchman state, it is not only utopian but functionally undemocratic. This common sense might be leavened with calls for inclusion, but this view blends a noble, ameliorative sentiment with the bad faith of barely-disguised patronage, neither of which have transformative energy.

Stuck between the short-termism of a patronage-fuelled polity and the utopianism of economic liberalism, our system lurched towards a solution: pair the nationalised banking system with the balance sheets of the oligarchs to do heavy-lifting of development. Commercial banks were drafted in to do the work of long-term funding for large projects in infrastructure. When these banks inevitably proved too small, foreign debt filled the gap.

It might well have come off, but the odds were heavily against it. The mushrooming of corruption scandals was a sign that the balance of power between the state, its banks, and the oligarchs was malfunctional for development.

BALANCE OF POWER

In most cases of rapid growth, substantially large banks have invariably driven heavy industrial or infrastructural projects; take German universal banks of the 19th century or the East Asian development banks of the mid-20th. The key was a balance of power between the lender and borrower that enabled discipline and scale. Yet in India, oligarchical power blunts banks' discipline on investment even as banks’ resources were limited by unproductive pre-emption through compulsory government debt purchases.

So the oligarchs came to be overleveraged on two fronts, economic and political. Connections secured projects, and substantial financial leverage was deployed to execute them. But their political bets were far from hedged. Just as central planning failed to insulate economics from politics, the nexus between the oligarchs and the ruling combine — corruption — failed to insulate investment from accountability. The exposure of excessive self-dealing on all sides further slowed things down as the polity raged.

Our economic model now stands exposed. With balance sheets too small to weather the nation’s stormy politics, the leviathans of the private sector have been shown up as having shoulders too narrow to bear the load of development. This of course is the old saw of development planning, now seemingly proved right. Under Indian political conditions, it appears that only the Leviathan of the state has the risk-bearing capacity to do the job.

FOR US

We have come full circle. There are no short cuts through public-private partnerships or other contrivances to insulate economics from politics. Democracy demands getting politics and economics pulling in the same direction. Anachronistic as it may sound, we need to reinvent development banking, and get it right by setting it on the firm ground of popular consensus. We need more than a mere regulatory state; we need a developmental state running a sound development bank.

Our model of development depends on a degree of insider capture that is not only undemocratic but exposes us to the fissile material of global capital. Ironically, even the giants of the private sector are too small to deal with political risk, while the banking system doesn’t have the scale thanks to the debt dynamics of our politics. So we turn outward, and again pay the price. But the people are the real bankers of our government. Now let’s get the government banking for the people.

(Dr. Anush Kapadia is a lecturer in international politics at City University, London.)

How 54-year old CEO TK Kurien has put Wipro back on track to regain its lost ground

Lison Joseph, ET Bureau | 9 Sep, 2013, 05.57AM IST23 


BANGALORE: Within the last few days,Wipro has been announcing a flurry of large deals worth over $100 million (Rs 650 crore), a sign of its improving prospects and rising confidence. While these contracts are by no means conclusive evidence that the company is returning to the pink of health, they nevertheless demonstrate that Chief Executive TK Kurien has been implementing a turnaround plan that has earned him a reputation within the company and without as a CEO who is made of stern stuff.

Two-and-a-half years after taking over as CEO, the 54-year old is aware that the initial expectations of a swift turnaround were too optimistic. But Kurien also believes the time has been well spent in laying the foundation for strong, sustainable growth in a rapidly-changing industry. "The hardest one (job) I have ever done," Kurien told ET.

Wipro is still underperforming the industry, but on the brighter side, the company has signalled a silver lining ahead — robust growth forecast for the July-September quarter, which is the highest in nearly two years. While Kurien has not engineered a spectacular turnaround, he did not inherit a garden variety problem either. He took charge from two company veterans, Suresh Vaswani and Girish Paranjpe, under whose watch Wipro's performance turned dismal, forcing the hand of founder Azim Premji.

The job description did not capture the scope of the challenge at the company that employs 135,000. In February 2011, the former GE executive was handed a disillusioned organisation that was bleeding talent and was staring at potential customer desertions. And the outsourcing market's dynamics were changing fast.

Scarred by the 2008-09 financial crisis, clients in the US and Europe demanded tangible value and not just pieces of software or hardware. They also pushed more risk on to service providers. "I didn't plan for the ground shifting beneath my feet," remarked Kurien.

He had to change the organisation internally, banish cynicism and find the right talent to help Wipro get in sync with external realities. His reputation as a ruthless taskmaster did not help matters, but Kurien was not prepared to put up with people who did not believe in Wipro's ability to fight back. His biggest challenge was to be able to work with long-time colleagues and friends without letting familiarity get in the way of taking tough and necessary decisions. "You get comfortable with each other and tend to avoid conflicts. In the process, you forget the customer," he said.

As Kurien started shaking things up, employee churn peaked to as much as 30 per cent in some divisions. "The biggest thing was putting your arm around people and making sure that the good ones didn't go away." It appears to be working, if the June quarter attrition rate of around 13 per cent is anything to go by. In fact, Kurien considers the "touchy feely" side of people management as one of his biggest lessons.

  
Even as he was getting the employee side of things right, Kurien did not take his eyes off customers and pushed sales staff to get bigger share of clients' technology spending.

 "Kurien knows when to go out of the way to entertain clients' demands and where to draw the line without putting them off," said Sid Pai, president for Asia-Pacific at TPI, one of the largest technology sourcing advisories.

"TK has made Wipro a more customer-centric organisation," said Rishad Premji, Wipro's chief strategy officer and the elder son of chairman Premji. "His boundless energy, no-nonsense style, openness to take risks and strong execution rigour have been instrumental in setting us on our transformation journey and also carrying people along."

A senior headhunter who has worked with Wipro closely for many years, said Premji, has told Kurien not to get bogged down by what the press writes about Wipro or its pilgrim's progress. For his part, Kurien says Wipro being a promoter-driven organisation is a blessing. "It is surprising, the level of risk I have been able to take. I would have been fired 100 times over in a market-driven company," said Kurien.

On why he thinks Premji chose him for the top job, Kurien said "I have no clue. Probably (because I) happened to be around!" Kurien has no qualms in admitting that Wipro is still work in progress, with plenty to be done still. But beyond the metrics and data points, he said he is working towards more long-term goals.

"My success is in being able to hand over something to my successor that is better than what I inherited," said Kurien, who is also candid about the job being a mixed bag of things he loves and aspects he can do without. "A leader has to live with both the hopes and the nightmares of an organisation, every day. You can't choose just one."

Bank profits to fall below five-year low on rupee

Live Mint ;Mumbai: Aug 26,2013

Indian banks’ profitability, already at the lowest since 2009, is poised to decline further after measures to stem the rupee’s record slump drove up borrowing costs and exacerbated rising bad loans and slowing loan growth.

“Return on equity, which measures profit generated with shareholders’ funds, may fall below 10% in the year to March for banks from last year’s 12.8%,” said Vibha Batra, co-head of financial-sector ratings in New Delhi at a unit of Moody’s Investors Service. “Stressed assets are approaching levels last seen in 2002,” she said on 21 August.

India’s banking index, which tracks lenders including State Bank of India, has lost 20% since 15 July following liquidity tightening measures from the central bank, which caused interbank rates to surge to a 17-month high last week. Those steps may drive up the risk of defaults in an economy that expanded last year at the weakest pace in a decade.

“With the rise in interest rates, the cash crunch and forex volatility, the evolving operating environment for banks in India is worrying,” Batra said. “With the operating environment becoming tougher, stressed assets in the banking system are rising.”

Interbank funding costs jumped after the Reserve Bank of India (RBI) raised two interest rates and capped cash injections into the banking system to stem the rupee’s 18% slide against the dollar since the end of April.

Developing nations

The rupee’s slump is part of a sell-off in emerging-market assets as growth in the biggest developing nations slow and speculation increases the US will start tapering its stimulus programme. The MSCI Emerging Markets Index of stocks slumped 2.7% last week, the most in two months, while a gauge of a currencies in Brazil, Russia, India, China and South Africa touched its lowest level versus the dollar since June 2010.

The rate at which Indian banks lend to each other for three months climbed to 11.2% on 23 August, the highest level since March 2012, compared with 8.52% at the end of June, National Stock Exchange of India Ltd data show.

RBI’s attempt to check the rupee’s slide threatens to curtail lending that has already slowed in an economy that expanded 5% in the year ended 31 March. Loan growth at Indian lenders fell to 13.7% in the 12 months to 14 June, the lowest since December 2009, before rising to 16.6% as of 9 August, central bank data show.

“We reduced our exposure to Indian banks in recent months,” David Gaud, a Hong Kong-based senior portfolio manager at the asset management unit of Edmond de Rothschild Group, which oversees more than $157 billion, said by phone on 21 August. “Nonperforming assets will rise and loan growth will be slower. There will be further pressure on return on equity.”

State Bank

“HDFC Bank Ltd had an ROE of 20.6%, the most among India’s 10 largest banks, while state-run IDBI Bank Ltd had the lowest,” according to data compiled by Bloomberg. State Bank of India, the nation’s largest by assets, had an ROE of 13.59% at the end of March, according to an e-mail from the lender’s public relations department.

“IDBI’s ROE had fallen to 6.3% as of 30 June from 10.1% a year earlier due to higher provisioning for soured debt and restructured assets,” chief financial officer Pothukuchi Sitaram wrote in an 23 August e-mail.

“Bad loans in the banking system rose to 3.92% of total lending as of 30 June, the highest in at least five years, from 3.4% at the end of March,” according to central bank data.

“The stressed-asset ratio, which measures bad loans and restructured assets as a percentage of loans, was at 10.02% at the end of June, central bank data show. The measure is approaching 10.4%, a level last seen in 2002,” said Batra, who works at rating company ICRA Ltd.

More action

To ease the cash crunch, the RBI will buy Rs.8,000 crore ($1.25 billion) of long-dated government debt, the authority said after markets closed on 20 August, a day after India’s 10- year bond yield reached the highest level since 2001.

“The central bank may take more measures,” Alex Mathews, head of research at Geojit BNP Financial Services Ltd said by phone on 22 August. “Easing the cost of funds can help in reviving the economy and improve the profitability of banks.”

Mathews, who doesn’t have official ratings on India’s lenders, is recommending his clients to gradually accumulate ICICI Bank Ltd, Axis Bank Ltd, Yes Bank Ltd and HDFC Bank Ltd as their share prices drop.

“The S&P BSE Bankex Index surged 6% at the open on 21 August before paring to close 0.5% higher as foreign investors sold a net $118 million of Indian equities,” according to data compiled by Bloomberg. “That was the fourth straight day of sales, the data show. The rupee is little changed since the RBI’s action and closed on 23 August at 63.33 per dollar.”

Worst performers

“The recent measures by the central bank to ease liquidity are not changing the operating environment,”Dolly Parmar, Mumbai-based banking analyst at IFCI Financial Services Ltd said by phone on 23 August. “The concerns will remain until the rupee stabilizes and the economy grows at a faster rate.”

Parmar has buy ratings on HDFC Bank and ICICI, and recommends investors sell Union Bank of India and Bank of India.

“Union Bank and Canara Bank, which are both state controlled, have fallen more than 50% this year. The two are the Bankex’s worst performers in that period amid concern growth in bad loans at government banks will outpace private sector lenders,” Geojit’s Mathews said.

The gross bad-loan ratio at India’s state-run banks was 3.8% as of 31 March, compared with 1.91% at private sector lenders, central bank data show.

Capital injection

Investors are demanding a higher premium to hold the debt of Indian banks. The yield on State Bank of India’s 4.5% euro debt due in September 2015 rose 79 basis points this month to 3.59%, heading for the biggest increase since September 2011, according to data compiled by Bloomberg.

“India may delay injecting capital into government banks including IDBI Ltd and Dena Bank because of the slump in their stock prices,” Rajiv Takru, the finance ministry’s banking secretary, said in an 19 August interview. “The government, which usually puts capital into lenders by buying their shares, doesn’t want to lose money as prices slide,” Takru said.

Moody’s downgraded the financial strength ratings of three state-run lenders—Bank of Baroda, Canara Bank Ltd and Punjab National Bank—to negative from stable on 16 August, reflecting the challenges of the current economic environment that had been exacerbated by the weakening rupee. Shares of the three banks have slumped at least 1.8% since then.

“The RBI measures to support the currency have not reversed the depreciation, implying interest rates may remain elevated,” Moody’s said in a statement. “State-run lenders will have more difficulty responding to slower economic growth and declining margins,” it said.

‘Until the rupee volatility subsides, banks’ profitability will keep falling,” IFCI’s Parmar said. “Banks will feel more pain in coming months.”