Random Musings

Credit Suisse –A series of Stumbles and Tumbles now threatening its existence

2023-03-19T06:33:00.005+00:00

VIEWS EXPRESSED ARE PERSONAL

CREDIT SUISSE (CS) - A Global Financial Leader

Credit Suisse Group is a global financial services company with a history of over 160 years and a presence in more than 50 countries. CS is a global wealth manager, investment bank and financial services firm founded and based in Switzerland, growing to be large investment bank and wealth manager for the ultra-rich.

What happened last week?

On Tuesday, 14 March, Credit Suisse said in its 2022 annual report the bank has identified “material weaknesses” in internal controls over financial reporting and not yet stemmed customer outflows.

The reporting of material weaknesses came even as Credit Suisse was seeking to recover from a string of scandals that have undermined the confidence of investors and its clients. Customer outflows in the fourth quarter rose to more than 110 billion Swiss francs ($120 billion).

A week before this revelation Harris Group, one of CS’s major and long-standing shareholders, sold all its stake in CS, creating nervousness amongst investors.

Harris Group's CIO for International equities, David Herro, said this in a Financial Times interview:

“It has been a measurable drag on our performance... We meet every company we own, but you spend a lot more time with your problem children. Credit Suisse has been a drain of time and value for years.”

According to CS’s filings, depositor outflows have been much more severe than anyone may have realised. CS's most recent annual report shows how the bank lost a staggering $120 billion of client funds in just the last quarter of 2022.

Reuters reported that Swiss regulator FINMA is investigating comments made by Lehmann at a December 1st conference, in which he claimed that outflows had "completely flattened out" and "partially reversed." This contradicted with CS’s regulatory filings, which showed a deluge of outflows even as the Chairman made those statements.

Bank run on CS seemed to be a top concern for Harris Group. It is reported that CS is now offering aggressively higher deposit rates to attract new funds from wealthy clients to reverse the tide. Obviously, this comes at a higher cost denting its profitability and threatening the viability of its business model going forward.

Meanwhile the strategic investor, Saudi National Bank (SNB), expressed that it will not be able to provide further capital support due to regulatory constraints.

Over the past couple of years, CS's stock price has continued to slide due to its brush with one scandal after another.

But what ails Credit Suisse?

At the heart of CS’s woes is its “POOR RISK CULTURE” and this emanates right from the top. The risk ethos was lamentable judging by CS's CEO and Chairman's conduct. CS’s CEO (Tidjan Thiam) was forced to resign following a corporate surveillance scandal in March 2020 and its Chairman (Antononio Horta-Osario) was forced to resign in January 2022 following breach of Covid 19 protocol on several occasions.

CS has been stumbling from one scandal to another that illustrates its weak risk culture, poor risk management and an inadequate compliance framework.

Listed below are CS’s major scandals which reflect its poor risk culture and weak risk management and a monumental failure of all the three lines of defences.

The timeline of its repeated risk management failures demonstrates its poor Risk ethos and lackadaisical approach to Risk management. The following is a brief summary of their blunders:

1. Return of stashed money of Ferdinand Marcos – In 1995, CS was among the Swiss banks ordered to return nearly half a billion dollars stored in the accounts of Philippines ex- President Ferdinand Marcos, funds which the Philippines said was “plundered from the national treasury”, reported the AP at that time. It was later revealed that Credit Suisse opened accounts for the dictator and his wife under the names “William Saunders” and “Jane Ryan”, which helped to “shield their funds from scrutiny”, said The Guardian.

2. Sanctions breaches – In 2009, CS was fined $536m for violating US sanctions against Iran and several other countries, including Libya, Sudan, Myanmar and Cuba, between 1995 and 2007.

3. Corporate Surveillance Scandal - CS’s former chief executive Tidjane Thiam was forced to leave the bank in March 2020 after an investigation found that it had spied on two of its employees. The bank hired private detectives to follow Iqbal Khan, its former head of wealth management who was leaving to join its arch-rival UBS, and on Peter Goerke, its former head of human resources. The private investigator hired for surveillance of the head of wealth management committed suicide.

CS repeatedly played down the spying allegations but in October last year the Swiss Financial market Supervisory Authority (FINMA) said that the bank had planned spying operations on seven occasions between 2016 and 2019; and carried out most of them.

4. Archegos Hedge Fund default - The bank lost $5.5bn when Archegos Capital Management collapsed in early 2021. The US hedge fund of Bill Hwang had placed highly leveraged bets on certain technology stocks that backfired and the value of its portfolio with Credit Suisse plunged leading to margin shortfalls and credit losses.

An independent report found that its losses were the result of “a fundamental failure of risk management and control at its investment bank, and its prime brokerage division.

5. Greensill Capital collapse - The bank was forced to suspend $10bn of investor funds in March 2021 when the British supply-chain lender Greensill Capital collapsed.

Credit Suisse had “sold billions of dollars of Greensill’s debt to investors, assuring them in marketing material that the high-yield notes were low risk because the underlying credit exposure was fully insured”, said Reuters. Several investors have sued the bank over the Greensill-linked funds, with the bank still in the process of trying to claw back money for clients.

The bank said in September last year that it had returned about $6.3bn to investors, but has warned it may not be able to recover another $2.3bn of losses.

6. Tuna Bond Scandal - CS was fined nearly $400m by global regulators in October 2021 after pleading guilty in a long-running scandal that pushed Mozambique into a financial crisis. The Tuna bonds scandal resulted from Loans arranged by CS between 2012 and 2016 for the Republic of Mozambique to the tune of $1.3bn. This was aimed at government-sponsored investment schemes including maritime security projects and a state tuna fishery.

But a portion of the funds were unaccounted, and one of Republic of Mozambique’s contractors was later found to have covertly arranged kickbacks worth at least $137m, including $50m for bankers at Credit Suisse meant to secure more favourable deals on the loans, regulators found. The international scam resulted in the International Monetary Fund (IMF) to suspend its assistance to Mozambique, ultimately causing a financial crisis in the country.

7. Chairman breaches Covid-19 rules - Antonio Horta-Osorio resigned as Credit Suisse chairman on 17 January 2022 after repeated breaches of Covid-19 quarantine rules, less than a year after taking up the role.

An investigation by the bank’s board found that Horta-Osorio, had broken quarantine rules several times, “including on a trip to London last year to watch the Wimbledon tennis finals”, reported the Financial Times.

Credit Suisse immediately appointed board member Axel Lehmann as its Chairman, who had been “at the helm for only five weeks” before the massive data leak, said The Guardian.

8. Data leak – February 2022 - CS has been known to have more than 18,000 accounts for an extensive list of clients involved in torture, drug trafficking, human rights abuses and other serious crimes. The accounts hold more than 100bn Swiss francs, reported The Guardian based on a data leak. The leaks point to “widespread failures of due diligence by Credit Suisse, despite repeated pledges over decades to weed out dubious clients and illicit funds”, said the paper, which was part of a consortium of 48 media outlets given exclusive access to the data.

CS either opened or maintained bank accounts for an range of high-risk clients including “a human trafficker in the Philippines, a Hong Kong stock exchange executive who looted Venezuela’s state oil company, as well as corrupt politicians from Egypt to Ukraine”, said The Guardian. The information was initially leaked to German newspaper Suddeutsche Zeitung by an anonymous whistleblower, who said Swiss banking laws were “immoral”.

CS’s attempted to bolster its reputation by wooing new institutional anchor investor and strengthen its capital position.

In October 2021, Saudi National Bank made an equity investment of $1.5bn for a 9.9% stake in CS. The capital ratios appear strong, though the haemorrhaging of its client deposits is its principal cause for worry. Despite continuing to lose its customer deposits, it maintained satisfactory liquidity ratios, and it carried low interest rate risk.

But the elephant in the room was the loss of stakeholder trust and confidence. And that cannot be fixed overnight with a capital infusion when its culture is steeped in poor risk practices.

Is CS's business model broken?

CS’s declared its largest ever loss in 2022 (since 2008), as its business was severely affected by significant deposit and net asset outflows in the fourth quarter of 2022 (it reported a deposit outflow of $120bn). Net revenues for 2022 decreased by 34% year on year, driven by declines across all divisions.

The net loss attributable to shareholders for 2022 was CHF 7.3 billion, compared to a net loss attributable to shareholders of CHF 1.7 billion in 2021. The net loss attributable to shareholders for 2022 included an impairment of deferred tax assets related to comprehensive strategic review of CHF 3.7 billion taken in the third quarter of the year.

All the divisions, except for the Swiss Bank, reflect poor profitability bringing into question the viability of its business model.

The Balance Sheet shows a decline of CHF 225bn in its total liabilities, confirming a massive decline in its customer deposits of CHF 155bn in 2022.

As CS continues to raise new deposits to stem the deposit outflow at substantially higher interest rates, its profitability is likely to diminish further. The future of CS was hinging on the Restructuring Plan of Ulrich Korner that he unveiled last year. But the events of last week will make it difficult to see through.

Strategic Review - Restructuring Plan

Ulrich Korner’s three-year recovery plan involves 9,000 job cuts, dismantling the investment bank (Credit Suisse First Boston) assembled over five decades and returning Credit Suisse to its origins as banker to the world’s ultra-wealthy. That entails spinning off CSFB, an American investment bank it acquired in 1990 with a view to listing it in 2025, and selling parts of its securitised products group unit to Apollo Global Management, which it has confirmed that in an advanced stage of execution.

The CEO is seeking to protect the best-performing investment bank parts, such as advising on mergers and acquisitions, while pivoting the parent company further toward wealth management.

However, all of this may not come to pass!

On March 9, the US Securities and Exchange Commission queried the bank’s annual report, forcing it to delay its publication. On Tuesday, 14 March, Credit Suisse said in its 2022 annual report the bank has identified material weaknesses in internal controls over financial reporting and not yet stemmed customer outflows. The bank also said customer outflows had stabilised but “had not yet reversed”.

Meanwhile, panic in the US market spread following the collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank. The contagion spread to other regional US Banks as stocks of these banks lost between 35% to 80%, and there was significant deposit flight from these regional banks to larger US Banks.

Amid all this turmoil, CS’s shares drop by as much as 30% after its largest shareholder Saudi National Bank said it could not provide more support because of regulatory constraints. Several Banks started to cut their counterparty limits to CS. The cost of insuring CS’s bonds against default for one year surged to 836bps, a level not seen for major international banks since the financial crisis of 2008.

This prompted Credit Suisse to ask the Swiss central bank for a public statement of support. Swiss National Bank issued a statement that it was prepared to provide liquidity if needed. Credit Suisse secured a $54 billion lifeline from the Swiss central bank to shore up liquidity, the first major global bank to get emergency funding since the 2008 financial crisis.

The Swiss authorities provide assurances that Credit Suisse has met “the capital and liquidity requirements imposed on systemically important banks”.

CS has substantial liquid assets to call upon and access to central bank lending facilities, and is less sensitive than many rivals to sharp moves in interest rates. However, CS's business model is fundamentally broken following a series of scandals severely denting its reputation, one that would make it hard for it regain the trust of its investors and customers.

A disorderly failure of CS would cause a crisis similar to that experienced in 2008, a situation all Central Bankers wish to avoid. Swiss National Bank will be at the forefront to prevent such a crisis.

There is a growing speculation that UBS, its rival, in advanced stages to acquire part or whole of Credit Suisse.

A 160+ years of CS’s Banking history is likely to come to an end.

VIEWS EXPRESSED ARE PERSONAL

The Sudden Demise of Silicon Valley Bank

2023-03-12T14:58:00.009+00:00

VIEWS EXPRESSED IN THIS ARTICLE ARE PERSONAL

Silicon Valley Bank (SVB) was established in 1983, in Santa Clara - California, to provide banking services to the mushrooming technology ecosystem that was taking hold in the Silicon Valley. SVB became one of the several new banks launched in California that year.

SVB offered technology companies a range of banking products and sevices: deposit services, loans, investment products, cash management, commercial finance and fiduciary services. Because tech start-ups tend to have more cash in the beginning, and most of the SVB’s income was traditionally made on the deposit side of the business, as a good portion of these deposits were non-interest bearing. Driven by a boom in venture capital funding, many of Silicon Valley’s customers became flush with cash over 2020 and 2021. Between the end of 2019 and the first quarter of 2022, the bank’s deposit balances than tripled to $175 billion (aided by a small acquisition of Boston Private Financial Holdings).

By 2022, SVB the 16^th largest bank in the US and to give a comparison, the deposits of SVB were of similar magnitude to that of HDFC Bank in India! SVB was also rated a buy by many equity analysts until a few weeks back and was also listed in America’s best banks list by Forbes for 5 years in a row.

On Wednesday, 8^th March 2023, SVB announced a share sale of $2.25bn ($1.25bn to public, $500m of private placement and $500m of Mandatory convertible preferred stock) to shore up its capital.

SVB said that due to the restructuring of the Balance Sheet it sold its AFS securities portfolio of $21bn to raise cash and to reposition its asset sensitivity to interest rates. This resulted in a realised a loss of $1.8bn due to the sale of its securities and it was seeking to bolster its capital position and improve its asset-sensitivity to rates.

The timing of the stock offer coming on the heels of the collapse of another Californian Bank (Silvergate Bank - that serviced cryptocurrency users), meant that the news of SVB’s stock offering was received with apprehension and, its stock price plummeted at open on Thursday, dropping from $268 to $176. By market close on Thursday, the stock fell further to close at $106, recording a whopping 60% drop within the day!

On Friday, 10^th March 2023, trading in SVB stock was halted as it lost more than 60% of its value. Before the end of the day, the California Department of Financial Protection and Innovation closed SVB and named the FDIC as the receiver. The FDIC in turn has created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits from SVB. FDIC deposit insurance covers up to $250,000 per account but the average balance of SVB customers were ~$4million. So, based on high level estimates, FDIC insurance would cover less than 10% of the insured customer deposits. It remains to be seen how the issue of unsecured depositor payout is resolved.

Within a couple of days, SVB’s market capitalisation of ¬$16bn was totally wiped out, as if it was struck by a lightning! And a total of $100bn was wiped out from market capitalisation of the banking sector due to fear of contagion.

What were the key issues?

Its normal for Banks to engage in maturity transformation to make a spread by borrowing short term and lending long term, with established limits for such asset-liability mismatches.

Asset Liability Management (ALM) entails managing mainly these types of risks amongst others:

· Liquidity risk

· Funding risks arising from refinancing risk, funding concentration etc.

· Interest rate risk in the Banking Book (Trading Book managed with VaR limits) while IRRBB is managed with Earnings-at-risk (EAR) measured as a % of Net interest income over 12 months and change in Economic Value of Equity (EVE) measured as NPV of future cash flows with limit for delta.

· Capital ratios and other related risks e.g., leverage

Robust ALM policies ensure mitigation of the above risks, and these are typically mitigated by a multitude of ALM strategies with an appropriate risk appetite thresholds and early warning indicators for each of these risks.

While Basel 3 has an outlier limit of 15% for change in EVE, they have not prescribed any limit for EAR for the outlier test and left this at national regulator’s discretion.

SVB, based on publicly available information, did not employ sufficient mitigating strategies for:

· Interest rate risk in the banking book (IRRBB), as it invested in a long-dated fixed rate securities (USTs, MBS and CMOs with greater than 10 years maturity at a yield of ~1.9%), probably under the assumption that the risk is well covered by non-interest-bearing deposits, without validating those assumptions for customer behaviour in higher interest rate environment i.e., failure to validate and stress the assumptions for customer behaviour under different interest rate environment. As evident from the customer behaviour, over $45bn of non-interest deposits declined with 2/3rds of it moving to interest-bearing demand deposits. Such a move would cause a massive shift to SVBs cost of funding leading to earnings drag on their low yielding fixed income portfolio (estimated drag of $2bn p.a.).

· Deposit concentration to a single industry segment, though it did carry a large stock of Liquid Assets Buffer, it failed to diversify its funding base and with most of its funding in demand deposits, it was disaster waiting to happen

While it’s possible to hedge interest rate risk with derivatives and mitigate liquidity risk with sufficient levels of liquid asset buffers, it is impossible to hedge sector concentration of funding sources while sector itself is undergoing stress, which in SVB’s case was funding source (tech and VC segment).

What went wrong with SVB?

SVB’s Key metrics were robust and on surface the key metrics were strong!

SVB was rated BBB by S&P and most leading investment banks and equity brokers had a buy rating on the stock with a target price ranging from $325 to $400 (Wednesday close was $268), implying a potential gain in value of 20% - 50%!

But, the devil is in the detail!

SVB’s investment in Fixed rate securities portfolio grew significantly in 2021, by a whopping ~$82bn, mostly in long-dated fixed rate securities (maturity > 10years). The overall yield on these securities were ~1.9% when its cost of funds was less than 10bps. What seemed to be a great idea in 2021 when Fed Funds Rate were 25bps, quickly unraveled as FED raised rates through beginning of 2022, from its lows to end the year at 4.5%. The inflation expectations and interest rate forecasts were completely undone by the Russia-Ukraine war causing supply disruptions across several economies, fueling a runaway inflation. This led to many Central Banks raising its policy interest rates sharply and continually to tame inflation, though the inflation still remains stubbornly high. The mantra of higher for longer came into being, i.e., interest rates will remain higher for longer.

Now none of this new! The Savings and Loans Crisis (S&Ls) in the 1980s was triggered by a similar reason, when Paul Volcker hiked policy rates aggressively to tame inflation. S&Ls had issued long-term loans at fixed interest rates that were lower than the newly mandated interest rate at which they could borrow. When interest rates at which they could borrow increased, the S&Ls could only attract more deposits by offering higher interest rates which led to liabilities that were higher than the rates at which they had loaned money. The end result was that about one third of S&Ls became insolvent. History repeats itself!

How did it impact SVB?

Fixed rate bond prices fall in value when interest rates go up as the market yield adjusts to the new normal. The Interest rate risk manifested itself by way negative market value on SVB’s Available for Sale (AFS) securities portfolio of $26bn, and this fed through to its equity via Other Comprehensive income leading to erosion of its equity capital and capital ratios. Despite this, SVB had strong capital ratio of ~16% at the end of December 2022.

The Held-to-Maturity (HTM), the larger portion of their investment portfolio at $91bn, does not require a mark-to-market as per accounting standards. To that extent, the drop in value in this portfolio (estimated at $17bn) remains buried, and it flows through gradually into P&L in the form of negative interest earnings over the life these securities i.e., a slow bleed of ¬$2bn each year, if interest rates were to remain elevated through this period, which is typically unlikely, and hence the negative earnings drag would moderate over time. Unlike AFS securities, HTM securities cannot be sold as sale of even a single security taint the portfolio resulting in redesignation of the portfolio to AFS. This will lead to the recognition mark to market through OCI which will deplete its capital base, thereby wiping the entire equity (as the estimated MTM on HTM is a negative $17bn.

If there is a potential buyer of SVB, they would write down the HTM portfolio, which would result in a negative equity position! And if there are further asset write-downs, it’s inconceivable that depositors would be made whole. A recovery rate of ~80c is the most likely outcome for the unsecured depositors, absent any form of a bailout.

So, where did it go wrong for SVB?

There were four main reasons for the sudden collapse of the Bank:

1. Interest Rate Risk in Banking Book (IRRBB) not managed robustly - Significant exposure to Fixed rate risk and soft assumptions for non-maturing deposits. With a portfolio yield of 1.9%, as Fed Funds rate increased from a low of 25bps in January 2022 to a high of 4.25% in December 2022, bonds prices slumped leading to build up of losses in the bond portfolio. Meanwhile the cost of funding increased as customers shifted their deposits to higher interest accounts from non-interest-bearing accounts. For AFS securities the MTM losses impacted OCI leading capital shortfalls. While negative earnings drag on the HTM securities would bleed through P&L over time.

2. Depositor concentration – While SVB had some diversification with 38k customers with balance over $250k accounting for almost $150bn in deposits, it had concentration from source of these funds to the tech firms and VC funding client segment.

3. External factors resulting in cash drain for tech firms, as VC capital funding activity slowed while techs firms cash burn increased leading to withdrawal of deposits causing liquidity squeeze.

4. Poor management decision to sell AFS portfolio and crystallise the loss through P&L of $1.8bn and simultaneously launching a stock offering of $2.25bn, when none was required, on a day when another Bank had collapsed (Silvergate Bank that serves crypto currency), thereby causing a market panic followed by loss of customer confidence and a digital Bank run!

Detailed analysis

While all banks invest their surplus liquidity in Treasuries and bonds, SVB was an outlier with its investment strategy with its portfolio increasing to 57% of its total assets against an average of 24% for US Banks.

SVB was a bit slow to react to the shifting sands in the business environment of its client segment. The VC investment activity slowed in 2022 and the cash burn of tech firms increased since Q3,2021. It missed the alarm bells, and these were sounding louder since Q2/2022, by way of increasingly negative client funds position as shown below:

This general weakness in SVB's client segment, together with the rising interest rates right through 2022 resulted in a significant shift from non-interest-bearing demand deposits to interest bearing deposits, as shown below:

The decline in deposit balances and a shift to interest-bearing demand deposits meant that SVB was beginning feel the pain of liquidity and earnings squeeze as it would have to offer higher interest rates to attract deposits which would cause a spike in its cost of funding. This alone would cause an earnings drag of ~$2bn p.a., wiping out its profitability entirely.

What could SVB have done differently?

In some ways, SVB brought this collapse upon themselves!

1. It was ill-advised to sell the AFS Securities portfolio ($21bn) and crystallise the loss through P&L

Their March 8^th presentation shows that they had ample liquidity and the ability to meet their cash needs through available REPO lines:

By selling the AFS portfolio of $21bn, SVB crystallised a lost of $1.8bn. This MTM loss was already feeding through to their equity via the OCI line. And liquidity could have been raised via REPO, without having to report a huge headline loss of $1.8bn. Yes, there would be some collateral haricut but that’s not a huge constraint for SVB. They could have closed the interest rate risk on the portfolio by hedging with fixed pay Interest rate swaps.

The AFS security sale process to make it asset sensitive is a red herring! Their intent was to raise cost free equity to shore up their net interest income and this whole asset side restructuring seems like smokescreen for that. They were looking improve net interest income by raising equity to camouflage the negative bleed on the HTM portfolio.

2. The need for capital is questionable and the timing of capital raise was awful

SVB had strong Capital Adequacy Ratio at 16% and hence there was no need for a capital raise, at least at this moment. And the timing of the announcement was awful, coming close on the heels of another bank failure in the Valley (Silvergate).

Unfortunately, the capital raise never got done. The bank chose to announce its balance sheet restructuring the same day that Silvergate Capital announced it is going into voluntary liquidation. As a result, customer fear turned Silicon Valley Bank’s manageable deposit outflows into a flood.

Founders Fund, the venture capital fund cofounded by tech billionaire Peter Thiel, on Thursday advised companies to withdraw holdings from SVB, due to concerns about financial stability, Bloomberg reported. Stability concerns reverberated across the banking sector, hitting banks base in the Western U.S. particularly hard.

We’ve never really had a bank run in the digital age. Here’s how it looks:

People posted screenshots of Silicon Valley Bank’s website struggling to keep up with user demand.

Is there a risk of a contagion?

There has been a panic reaction in the market with more than $100bn wiped off the market capitalisation of banks in two days!

Though, my view is that broader risk of contagion across the banking sector is unlikely. Some of the smaller banks and fintechs may witness a flight of their higher value deposits which could potentially lead to failure of some of the smaller banks but banks with diversified business model and large customer base will remain unaffected as there is ample liquidity in the banking system.

What are the lessons?

Each crisis brings with it an opportunity to introspect and learn. So, in summary these are the learnings from the SVB saga:

1. IRRBB - Without a doubt, Regulatory oversight on IRRBB is likely to be the main theme for 2023. Global regulators and central banks will have an increased focus on IRRBB and banks will do well to revisit their IRRBB model assumptions and validate them, and set risk appetite limits for both EAR and EVE and a regular assessment with interest rate simulations.

2. Don't put all your eggs in one basket – This one applies to both assets and funding sources. Investments should be laddered to allow for 15% - 20% to mature each year to manage both liquidity and rate risk. There should also be maturity tenor limits, more so when the funding source is largely short-term. EAR and EVE limits should be set in line with the ability to absorb shocks. Diversification of funding sources is key and its should be not just by number of customers but also across industry segments, and maturity profile.

3. Never go for a capital raise if you are solving for liquidity – Liquidity risks cannot be met with capital. The solution for liquidity risk is to hold liquid assets and reduce refinancing risk by having a proper asset-liability gap limits.

CONCLUSION

The pressure to enhance shareholder value drives banks to take risks that appear low at inception but is not always fully tested for severe stress scenarios. Regulatory oversight together with stronger governance where the board members have a very good understanding of risks provides a good level of safeguard in most banks. But quite often, I see a great focus on P&L performance and there is very little probing on the Balance Sheet and Notes to the accounts, where many skeletons can be buried! (e.g., MTM on HTM bonds).

Banks are in the business of taking risks, but they have a primary fiduciary duty to keep their depositors’ money safe.

VIEWS EXPRESSED IN THIS ARTICLE ARE PERSONAL.

ECONOMIC CONUNDRUM - HOW TO TAME RED HOT INFLATION WITHOUT DERAILING GROWTH ?

2022-07-04T12:08:00.008+01:00

For well over a decade Central Banks in G7 economies have been pursuing loose monetary policies (Quantitative Easing and low interest rates) to avert deflationary risks in the aftermath of global financial crisis and been wishing for inflation. Now that they have got what they wished for, they are dreading it! The sudden spike in inflation has sent Central Bankers into a state of anxiety and they are now playing a catch-up mode.

How did we get here?

a) Covid related supply disruptions

In March 2020, WHO declared Covid as a pandemic and this led to lockdowns in many countries and regions as a response to contain the rapid spread of the pandemic. As a result, there was a sudden stoppage in economic activity as the duration of the lockdowns kept increasing. To counter the adverse effect of lockdowns on the economy, Governments and Central Banks across the world adopted unprecedented measures ranging from cash support to credit concessions to fiscal stimulus, and monetary policy actions to restore stability and to keep the economy moving. Central Banks dropped the already low interest rates to near zero as a response to the Covid shock.

As economies began to open slowly, the consumer demand bounced much quicker while production had not been fully restored. The on-going impact of Covid in different countries meant that there was a large enough disruption in the manufacturing sector. This led to supply chain disruption, resulting in inflation perking up. The ongoing trade disputes are further worsening the supply chain problems.

b) Inflation fuelled by Oil price (and other commodity prices)

Oil price, which dropped to $25/bbl during Q2/2020, recovered to an average of $70/bbl from Q2/2021 as economies opened fueling demand following successful vaccination programmes leading to a containment of the pandemic. The Russian invasion of Ukraine in late Feb 2022, that was quickly followed up with economic sanctions on Russia, resulted in Oil prices spiraling beyond $100/bbl mark adding further fuel (pun intended) to the already rising inflation caused by supply chain disruption.

Central Banks have been behind the curve

Central Banks were cautious in their monetary policies in Q3/Q4 2021 even as inflation figures were showing a rising trend. Their primary concern was not to derail the fragile recovery following Covid related economic decline and the expectation was that inflation would fade. Well, that didn't quite play to their expectations.

Clearly, they were behind the curve in their actions and are now pushed into a catch-up mode to contain runaway inflation, particularly in the US, where aggressive interest rate hikes are in train. While we can expect ECB and BoE take a more moderated and nuanced approach, the cycle of rates seems to be headed higher in the near term, until of course it pushes the respective economies into contraction.

In the short-term Inflation is likely to get worse

The inflation is likely to worsen further due to the ongoing demand from labour for wage hikes to meet rising food costs, soaring energy bills, and depleted spending capacity. There have been large scale protests by Unions for wage hike as people struggle to balance their budget. Further increase in interest rates will squeeze the spending and cause further economic pain to the already suffering masses. There is a risk of wage increase feeding into inflation while impact of rates is likely to have a lagged effect.

Some economies are having disproportionate impact of rising prices with countries like Sri Lanka, Afghanistan, Myanmar and many others facing food and energy shortages and many forced to skip meals due to lack of means. This situation is not likely to be addressed without political leadership from G-20 nations to support these economies in their economic and social hardships.

Are interest rates rises sufficient to tame inflation?

If the only tool you have is a hammer, every problem looks like a nail!

Unfortunately, this is the position of Central Banks. While they are mandated to control inflation but have limited tools to achieve that. Monetary policies have its limitations and are not necessarily the right tool for every situation (e.g., supply chain shock). Furthermore, monetary policies have a lagged effect on inflation.

Increasing interest rates alone is not going to get us out of this difficult economic conundrum. If anything, aggressive interest rate hikes will lead to the recession as it will deplete demand without necessarily addressing the core issue of supply chain disruption and high oil prices. And once the economy gets into stagflation, it will become extremely difficult to reverse it.

While the US FED is likely to pursue its aggressive interest rate actions, the ECB and BOE are likely to be more moderated in their actions as they acknowledge the limitations and unintended consequences.

What other actions would help?

Besides some action on interest rates, there needs to be a concerted action to address the following key issues, as monetary policies on its own cannot resolve the current economic situation.

· Actions to tame Oil Price – As higher energy prices cause cost push inflation; it is extremely important that this is addressed urgently. Securing higher production from OPEC, increasing shale oil production, releasing oil reserves, and lastly rapid investment in renewable energy to reduce dependence on Oil (though this is not a short-term solution).

· Supply chain disruption – Restoration of production and easing of transport and logistics are essential to control price inflation caused by supply chain disruption. Addressing this could require fiscal incentives, credit concessions and other policy support measures to support the manufacturing, and transport and logistics sector.

· Trade/Tariff barriers - This will require leadership from G-20 nations to rise above their current disputes as there is a bigger and common economic issue facing the global economy.

· Essential Commodities – Release surplus food stocks to curb price inflation and channel to countries in dire need. This would require greater coordination and leadership amongst G-20 nations.

· Resolve political impasse – While this is the most obvious cause for the runaway spiraling of inflation, this is also the most difficult one to resolve. The significant economic shock to many countries reliant on commodities imports following Russia’s invasion of Ukraine causing economic pain is telling. With each passing day, the situation is getting further worse with ratcheting up of the political rhetoric on both sides. Commodity prices can remain elevated for a considerable period of time, despite monetary policy actions, if the political impasse continues. JP Morgan estimates that under an extreme scenario, Oil price could even get to $380/bbl. That would be catastrophic for many economies reliant on oil imports.

In Summary

The issue of high inflation cannot be fully addressed by aggressive interest rate hikes alone. Despite this, Central Banks are mandated to curb inflation with limited tools at their disposal. They will act with the only tool that they have i.e., monetary policy actions as do not have much else to demonstrate that they are acting on inflation.

Political leaders need to step up to the challenge and work together to address this global challenge of looming stagflation. The underlying causes of low growth, and high inflation need to be addressed that requires concerted action on restoring supply chain, an interim agreement on Trade and tariff and a firm resolve to address with Political conflicts.

We are in for a scorching summer, one that is not just due to the heat alone. The red hot inflation is about to get hotter!

The Covid-19 Pandemic that’s left everyone in a flap

2020-05-18T22:49:00.002+01:00

The onset of the Wuhan Coronavirus has impacted almost all parts of the world with some countries more severely impacted than others. The pandemic is wreaking economic havoc and testing the medical infrastructure in many countries. Every government has been stretched to its limit while developing its response to this unprecedented and extraordinary crisis. With number of positive cases nearing 5 million and the death toll surpassing 316,000 (as on May 18^th, 2020), the economic and social cost of this is deep and severe that may take a few years to heal. The often changing advisory from the World Health Organisation (WHO) made matters worse. First, they said there was no risk of human to human transmission, then risk of air travel, then changed to say it can infect through aerosol and so on so forth.

[Source: www.worldometers.info/coronavirus]

The first case of Covid-19 in India was reported on 30^th January 2020. The initial response of the government was to introduce thermal screening at airports and nothing beyond this was done until early March. The World Health Organisation declared Coronavirus as a pandemic on March 11^th, 2020.

India cancelled all foreign visas and OCIs effective March 13^th, 2020 leaving several of the OCI holders with family in India unable to visit and some could not see their near ones in their final moments of life. However, during this period the government continued to allow all Indian passport holders to return from overseas and subsequently all international flights were suspended on March 22^nd, 2020.

As the number of positive cases began to show an uptick, the PM responded with an address to the nation to reassure the public that government had things in control and there was no need to panic. And as part of that televised address, the PM announced a Janata curfew (voluntary curfew) to be observed on 22^nd March and requested the public to maintain social distancing. He also asked the public to clap from the balcony, ring the bell or bang utensils, make noise, all as an act of gratitude to frontline medical staff that evening, much like what Italy had done before. The public responded with unprecedented levels of compliance to the call. So much so that many took processions on the street to make it a celebration ignoring the calls for social distancing.

Probably encouraged by the public’s enthusiastic response, the PM announced on national TV on 24^th March at 8pm to announce quite dramatically a national lockdown from midnight of the same day for a period of 3 weeks (Lockdown 1.0), leaving many stranded, bewildered and in a state of anguish. This was déjà vu, Demonetisation 2.0 moment.

Again, cheered by the level of compliance, he announced his next task of “diya jalao” (light the lamp) or shine a flashlight for 9 minutes at 9pm on the 5^th of April 2020, which seemed much like the tasks on the reality show “Bigg Boss”, probably to keep people engaged and deflect their attention or may be to assess his popularity with the masses, latter more likely!

Meanwhile, there were shortages of PPE and testing kits and the pace of testing was extremely low, which perhaps explains the low number of positive cases. In this aspect, most countries have struggled to secure PPE and testing kits. The lock down did help to slow the spread of infection but despite this the cases began to rise quite rapidly in recent weeks confirming the main reason for the low number of cases to be low level of testing in the initial phase.

Even, now India is amongst the lowest in terms of testing per million population at 1,671 per million (as of 18^th May 2020) as shown below:

[Source: Statista.com]

India could have used the period of lockdown for rapid testing and this would have allowed it to open many of unaffected districts much ahead of the 5 weeks lockdown.

India also revised its discharge policy and as per this Covid-19 patients with mild and moderate symptoms need not be tested before discharge. It allows for mild and moderately-ill patients to be discharged from hospital 10 days after the onset of symptoms, if there is no fever and no need for oxygen therapy for three days, without testing them before discharge. Meanwhile, it states that severely-ill patients should test negative once after clinical recovery. While this will reduce the strain on health facilities, the potential for the spread of infection remains.

In its penchant to boost recovery rates, India seems to have revised its discharge policy but this opens up the risk of reinfection.

So, it’s too early to declare victory!

The Dreadful Apathy of the State – India’s forgotten lot

Roll forward a few weeks and what we see is the unfolding of a worst ever humanitarian crisis since the time of partition in 1947. With no money, food and a place to stay, many labourers decided to head back to their home village with their families, on foot! There was exodus of millions of workers people from many cities like Mumbai, Surat, Bangalore, Noida, Gurugram to U.P., Bihar, Jharkhand from where these labourers migrated to find work in the cities. The Railways didn’t run the trains, or the promised trains were cancelled at the last minute, and the States failed to run their buses to provide transport. Many were prevented from leaving by the administration at the behest of industry lobbyists who wanted these labourers held captive so that they can begin work upon lifting of the lockdown and the State government turned a blind eye. States like Karnataka actively engaged in retaining the workers in shanty camps and cancelled the trains. Both the Centre and the States were busy pointing fingers at each other and the Railways administration was indifferent. Meanwhile, the labourers were being treated like slaves or captives. This lead to a massive upheaval and in some cases these workers resorted to pelting stones in sheer frustration,

In sheer desperation they began walking on the streets in the scorching heat of May with their toddlers and young ones - hungry, homeless, shattered, and deceived by the government. The businesses at which they toiled left them on the streets at the first sign of trouble with no compassion. The scenes of thousands of distraught labourers walking back or cycling on the highways for hundreds of kms, some carrying their children on their shoulders while others making them hang on to strollers or lie on a cart in the scorching was heart rending.

While the ruling party practices politics of communal divide, the reality on the ground amongst ordinary folks is quite different. On top right, you see a picture of Yakoob Mohammed and his friend Amrit who hitched a ride on truck from Gujarat to UP. Amrit fell sick so Yakoob stayed back to help him. Amrit later passed away while on ventilator. Yakoob still awaits his test results.

So many stories of distress emerged including that of a woman delivering a baby on the road shows the extent of apathy and the disconnect between the government and its people. A 12-year old girl walked 100kms and died of dehydration and exhaustion in Bijapur dist., just 11kms short of reaching home. In another incident 16 migrant workers who had fallen asleep on railway tracks were run over and killed in Aurangabad district.

Stranded without work and money 18 labourers set on a journey of 1,400kms from Mumbai to UP in a concrete mixer truck! At the quarantine centre, one of the workers Manoj Yadav, who was supposed to get down at Lucknow to embark on yet another 200 km-journey to his native Prayagraj on foot, said, “The heat inside (the drum) was more bearable than the hunger.”

Even while all this was happening, the government was busy arranging repatriation flights for Indians stranded overseas – “Vande Bharat Mission”.

It was a collective failure - of the States, the Centre, the employers, people who failed to help, and much of the main stream media (busy pedalling hate) didn’t wake up to the crisis until it was no longer possible to ignore.

This also exposed the dreadful apathy and is a blot on the government across the spectrum. An utter and disgraceful failure of epic proportions. The poor are treated merely vote banks and are a forgotten lot once the election is over. Come election time, give some sop and they are too willing to forgive as the alternative choice can be equally abhorrent.

The dichotomy of India couldn’t have been starker! On the one hand you have an India that made meticulous arrangements for testing, quarantine facilities at hotels with discounted rates for people arriving from overseas, and on the other hand, an India that left the poor labourers and their families on the street to suffer in hunger, thirst, blistered soles, no shelter and no money to hand!

The yawning gap between the professed ideals of compassion, service (athithi devo bhava), ancient civilisation, rich heritage etc., and the actual practice at the time of distress faced by the poor vegetable vendor or a factory worker or a cleaner came out in the open.

This also showed a lack of concern of the uninterested rich and a largely indifferent middle class who are only too happy to do their clapping, lighting the lamp and sharing it on social media.

Thankfully, some blessed souls, charities, the Jain and Sikh langars came out in good numbers to help these workers on their journey by handing them cooked food, water, and temporary shelter.

It is easy for many of these middle class and rich Indians to comment from the comforts of their home as to “Who asked these people to walk or take to streets?” One has to feel the expe

With no clear guidelines, the Indian Police did what it does best. It indulged in abuse of power and let loose its batons on people in a callous, high handed, and arbitrary abuse of power.

The message of “Atmanirbhar Bharat” was clearly intended to these poor workers and their families who were left literally on the street to fend for themselves!

The PM, who likes to indulge in monologues with his “Mann ki Baat”, strangely never acknowledges these issues. While the PM was quick to launch the PM-Cares fund for raising funds for the epidemic, it lacked the transparency, probity and quick disbursals to provide relief. After a lot of social media backlash, the PM release Rs 3,500 crores. It is still not clear as to how much was collected. Sadly, there is zero public accountability.

Why don’t more people speak up?

I often wonder how come many of the educated class ignore this basic point of seeking public accountability. Perhaps, centuries of subservience have blunted the Indian psyche to such an extent that they naturally take to sycophancy and cheer leading (either in order to fit in or because of “chalta hai” attitude or my life is not impacted so what do I care) and have lost their ability to demand accountability. Also, the government has been restricting the ambit of RTI and thereby restricting probity.

The Indian Babudom (bureaucracy) can make anyone frustrated, tired and helpless resulting in the continuation of bureaucracy’s power over people. The odd few who demand accountability or speak truth to power are either subjected to harassment through the State machinery (ED, CBI, IT etc.) or branded as “anti-nationals” or “Urban Naxals” or such other terms that have been coined by the eco system of this government which indulges in spreading fake news, communal hatred and trolling on social media platform with impunity.

Demanding accountability shouldn't lead to what-aboutery or to the question - If not him who? or there is no other alternative etc. Its about holding the government to account and demand information or question actions. The pradhan sevak has an obligation to the people and respond to people's questions. Not holding a press conference after six years in government either shows insecurity or lack of willingness to be subjected to basic probity.

While the government has miserably failed on the social front, let’s examine their performance on the economic front.

Post the twin successive shocks of Demonetisation and GST, the economy has never really recovered. The government initially was cavalier about it, citing it to be temporary factor and failed to make any course correction. The GST, while a good idea, was implement very poorly both in design (too many slabs/rates) and the inadequate IT infrastructure. This resulted in a significant impact on SMEs, many of whom suffered significant decline in business volumes. The unemployment levels also rose significantly during this time reaching a high of ~8% due to the slowdown in the manufacturing sector.

Despite a secular slow down across all sectors and a decline in personal consumption expenditure signalling a falling demand, the government continued to persist with supply side actions. Even in budget 2020, the reduction in corporate tax rate was preferred over let’s say lowering personal income tax. There is very little room for alternate views and when there are some such views, it’s quickly stifled (e.g. Rathin Roy).

Goldman Sachs estimates the growth in April – June 2020 to decline by a whopping 45%, and are predicting a deep recession for 2020-21 of 5% decline in GDP.

The stimulus package announced by the PM to be 10% of GDP, while significant at a headline level, needs to be carefully examined for details and its potential impact on reviving growth.

The PM announced a relief package of Rs 20 lakhs crores (~$265bn) on 12^th May 2020, which was widely cheered as an unprecedented level of relief package even though it had very little in terms of detail. The PM outlined his vision to create a “Atmanirbhar Bharat” – a journey towards self-reliance. He left it to the FM to provide the information on the nuts and bolts of the relief package.

The FM laid out the details of the package, in what seemed like tele-serial, over five days. As the details were revealed each day, it became clearer that there was very little substance to the whole relief package. Much of relief measures was either liquidity support to the system that was already announce by the RBI or new loan schemes. That would hardly qualify to be called a stimulus package. Let’s look at the components of this “illusory” relief package. While the FM has proposed structural reforms in agriculture & fisheries, coal mining, aviation, space research etc. these are unlikely to have any short term impact.

The illusory Stimulus Package

Relief Measure	Rs Crores	Remarks
Earlier Stimulus measure	1,92,800	PM Kisan (Rs 1.7lakh crores – partly covered earlier – Rs 70k crores, Health care and Tax concessions – Rs 22,800 crores
RBIs liquidity measures to Banks	8,01,603	Liquidity measures on its own not adequate for credit flow
Loans to MSME, NBFC and Power sector
- Working capital for Business incl. MSME	3,00,000	PSU banks will be required to lend
- Sub-debt for Stressed MSME	20,000	Welcome initiative – details to be seen
- Fund of funds for MSME	50,000	No clarity on how this will operate or deliver relief
- EPF support for Business & Workers	2,800
- Reduction in EPF rates	6,750	Reducing workers savings - How is this even a fiscal relief?
- Special liquidity scheme for NBFC/HFC/MFIs	30,000
- Partial credit guarantee scheme for NBFC/MFIs	45,000	20% first loss guarantee – Rs 9,000 crores
- Liquidity for Discoms	90,000
- Reduction in TDS/TCS rates	50,000
Total	5,94,550
Loan schemes for Nabard Mudra, NHB etc.	310,000	Includes food gain supply for 2 months of Rs 3,500 crores and interest subvention of Rs 1,500 crores
Agriculture Infrastructure fund and Fisheries	1,50,000
MGNREGA	40,000	Additional relief
Viability Gap funding	8,100	Whatever this means!
TOTAL	20,97,053

So, of the Rs 20 lakh crores only about Rs 1,77,000 crores represents the real fiscal stimulus. Less than 1% of the GDP against the headline grabbing 10% of GDP is the real stimulus.

In short it’s just another “Jumla”!

My recommendation for the fiscal measures to drive demand and consumption as well as some revenue raising measures are:

· Reduce personal income tax rates for income up to Rs 25 lakhs
· Direct benefits transfer of at least Rs 5,000 each
· As crude prices are at multi-decade lows, reduce fuel taxes – will create a virtuous cycle of lower cost, lower inflation, reduce interest rates and spur demand
· Simplify GST with a single rate of 20% and exempt essential items
· Bring agricultural income above Rs 10lakhs into tax fold; this will only impact the disguised agricultural income (mostly abused by businessmen and politicians to launder money)

· Stop hounding businesses with tax notices and create a culture of trust to promote compliance

And this is the time to use quantitative easing to support infrastructure asset creation that will drive jobs growth and have positive knock on effects for other sectors. As long as there is a clear medium term plan to unwind, this is one of the most important tools that the government should employ.

Conclusion

In Summary, the government is found wanting on both social and economic front. On economic issues its disingenuous and known to suppress and/or massage data. On the social front it has demonstrated that it lacks empathy as evidenced by its failure to address the plight of migrant workers leaving them distressed.

With respect to its management of the Covid-19, it was slow to start, but made up with the bold measure of complete national lockdown, though the wisdom of this is questionable. A more nuanced approach of lockdown of the affected districts or states would have had the same effect with lesser economic destruction. The change of discharge policy is short-sighted and could potentially lead to an increase in infections.

The battle has just begun and it’s a long road to recovery.

PMC Bank - RBI's Draconian Action to Freeze Customer Deposits

2019-09-25T20:23:00.003+01:00

The Reserve Bank of India, under the powers vested with it under Section 35A of the Banking Regulation Act 1949, placed Punjab and Maharashtra Cooperative Bank (PMC Bank) under its directions for a period of six months from the close of business of the bank on 23^rd September 2019. Specifically, the following directions were issued to the Bank:

· Depositors will be allowed to withdraw a sum not exceeding Rs. 1,000 ($14, yes you read that right!) of the total balance in every Current, Savings bank, Term or any other deposit account by whatever name called, subject to conditions stipulated in the RBI Directions.

· the Bank will also not be able to grant or renew any loans and advances, etc without prior approval in writing from the Reserve Bank;

· the Bank cannot open new accounts or accept new deposits

With the above the directions, the Bank essentially ceases to be operational and has the effect of placing it under a run-off mode.

PMC Bank, established in 1984, is a multi-state scheduled urban co-operative bank with its area of operation in the States of Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh. PMC Bank has a network of 137 branches in six states and ranks among the top 10 cooperative banks in the country.

The announcement of the direction led to a panic amongst the depositors who rushed to the branch to lay their hands on their hard-earned savings only to return distraught and disappointed. Many of the customers had their life time savings with the Bank due to both proximity and good interest rates given by the bank. The fact that the entity is regulated by the RBI adds to the Trust amongst depositors.

Many have their primary account with the PMC Bank with standing instructions for Mortgage payments, Pension receipts, Salary account, Utility payments, school fees etc. By restraining the withdrawal to Rs 1,000 ($14) over the next six months, the RBI has played a cruel joke!

RBI’s Powers u/s Sec 35A

The directions were imposed in exercise of powers vested in the Reserve Bank under Sub-section (1) of Section 35A of the Banking Regulation Act, 1949 read with Section 56 of the said Act.

Section 35A in Banking Regulation Act,1949 empowers the Reserve Bank to give directions —

1 Where the Reserve Bank is satisfied that—

a) in thepublic interest; or

aa) in the interest of banking policy; or

b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

c) to secure the proper management of any banking company generally

it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

2 The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.

The issue of the directions by the Reserve Bank should not, per se, be construed as cancellation of banking licence by the Reserve Bank. The Reserve Bank may consider modifications of these directions depending upon circumstances.

RBI’s regulatory oversight model

Co-operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Banking related functions are regulated by the RBI and management related functions are regulated by respective State Governments/Central Government. Powers have also been delegated to National Bank for Agricultural and Rural Development (NABARD) to conduct inspection of State and Central Cooperative Banks.

The co-operative banking structure in India is divided into following main 5 categories:

Primary Urban Co-op Banks
Primary Agricultural Credit Societies
District Central Co-op Banks
State Co-operative Banks
Land Development Banks

Many of the regulatory norms applicable to a commercial bank also apply to cooperative banks, e.g. Capital, liquidity and other prudential limits.

In case of PMC Bank, while the capital ratio (12.6 per cent as of March 2019) was above the RBI’s requirement, despite a sharp increase in the gross non-performing assets to 3.8 per cent from 1.9 per cent in the previous year, which impacted its profits. Nevertheless, the bank had reported profit for the year.

So, what went wrong at PMC Bank?

Co-operative banks usually finance small borrowers in industrial and trade sectors, besides professional and salaried class. Also, the prudential lending norms would limit exposure to single obligor to 20% of the tier 1 capital and 25% for an obligor group.

However, the information in the media is that the Bank had a large exposure to a Real Estate Company, HDIL (Rs 2,500 crores - $350m) while its Tier 1 capital $140m. If this is true, this is a clear case of fraud by management and the Board.

Several questions emerge from the above:

How could the Bank lend 250% of its capital to a Single Obligor against a prudential of 20%? Against a limit of Rs 200 crores (assuming it was legit customer), the Bank lent Rs 2,500 crores!
How could the company borrow from the cooperative bank when as per its charter it can only lend to its members?
Why did the RBI not pick this up as part of its prudential supervision from a simple review of the Large Exposures report?
What is the extent of oversight does RBI have on these entities?

These are some pertinent questions for which RBI owes an answer to the depositors of the Bank. For its negligence in oversight, the RBI has put thousands of depositors into untold misery.

What could the RBI have done?

The principal role of the Central Bank is to maintain financial stability and prevent risk of a contagion. Unfortunately, RBIs action will create panic amongst customers and will potentially lead to a bank run on other cooperative banks.

RBI cannot absolve of its responsibility to supervise these institutions properly. If RBI is issuing banking licenses, then the onus is on it to regulate them properly. The fact that RBI gives a banking licence to an institution, the depositors assume that these are regulated by the RBI and repose their Trust in these institutions.

Not only has the RBI failed in supervising these institutions but has added to the misery by freezing deposits. This is both negligent and inexcusable.

Instead of a freezing the operations of the Bank, the RBI should have taken several other measures like (not an exhaustive list):

Freeze new big ticket lending and renewals and let the Bank carry on with its transaction banking activities and small business loans (with a cap of say ~$0.5m per obligor) while conducting its investigation to establish facts on this exposure;
Sought the Bank to sell part of its loan exposure to other banks to shore up its liquidity and funding;
ask the Bank to increase its capital contribution from members;
prosecute the errant officials and Board members for flouting the rules and perpetrating a fraud by granting the loan against the norms;
seek damages from auditors for their negligence and ban them from practice for failing to report irregularities in both lending norms and provisioning;
stitched up a takeover over the weekend for Re1 by writing off the entire capital like the take-over of Banca Popolare di Vicenza by Intesa Sanpaolo in Italy. Assuming even a write down of 40% on this large loan, it would support a take-over at Re1.

The RBI should have pursued some of the above actions before freezing the operations of the Bank which is essentially putting the Bank on a run-off mode.

Deposit insurance
Many of the depositors with balances below Rs 1 lac would be able to recover their amounts under the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) though this would only kick in if the Bank is liquidated.

Conclusion

The RBIs action to freeze the Banking operations of PMC Bank is draconian and for the customers of the Bank this is worse than the effect of Demonetisation.

The RBI needs a lot of explaining to do for its failure of regulatory oversight and act with urgency to relieve the pain of the depositors.

The Great Indian Fiscal Give Away

2019-09-20T16:21:00.001+01:00

In an effort to jump start the flagging economy, the FM announced, in a surprise move (or should I say knee jerk move?), a big fiscal give away by reducing the Corporate Tax rate to 22% (25% including surcharges and cess), giving up ~$20bn in tax receipts (Rs 1.4lakh crores). Such a big shift in fiscal plan should be ideally be part of the budget and a matter for parliamentary discussion. This shows that the government has very poor strategic planning and is always on a tactical mode with piecemeal announcements that do not show the larger design of these actions.

Quite expectedly, the market received the news with cheer sending the equity indices up by ~6%. While this is positive, it remains to be seen whether it holds on to these gains or the benefit of the entire initiative is lost if economy continues to flag which could well result in markets giving up these gains.

The move has effectively resulted in frittering more than the special dividend received from the RBI’s (adjusting for the budget dividend assumption of ~Rs 85,000 crores). This tax rate cut would push the fiscal deficit higher by ~50bps and take it closer to the 4% mark (after considering the RBI special dividend).

While the Companies are looking for top line growth while the government has handed a bottom line relief. This Corporate tax rate cut is a right move at the wrong time!

When Trump cut taxes for the Corporates, they did not rush out to invest it in more manufacturing or expanding their business. They enhanced their earnings per share by either buying back stock or paying down the debt. Increase in corporate profits need not necessarily lead to higher investment unless the economic outlook improves. Otherwise, it will most likely be used to pay down debt or buyback shares to boost Earnings per share for the shareholders.

And tax rates are not the only reason when investment decisions are made. Several other factors like, ease of doing business, availability of skilled labour, state policies, land acquisition norms, law enforcement, social harmony, infrastructure etc. amongst other things.

While it is important to maintain the international competitiveness and keep the tax rates in line with regional manufacturing hubs, tax rate is not the only factor that drive investment decisions. If that was the case, all the tax havens would have been manufacturing hubs. Be that as it may, the urgent need in the current scenario is to drive demand higher and put more money into the hands of the people.

Money going to people (instead of Corporates) will help drive consumption which will revive growth and nurse back the manufacturing sector and bring back jobs which will then lead to further earnings for people thereby creating a virtuous cycle.

What could the government have done instead?

This fiscal give away could have been directed better with greater (and perhaps a multiplier effect) on the economy:

· Raise the minimum slab for income tax and deliver tax relief of Rs 50,000 crores;

· Invest in market access of farm produce and raise MSP;

· Reduce / Rationalise GST for specific sectors that are deeply hit to an appropriate level to drive up demand;
· Cash for clunkers to drive auto demand;

Further actions are required besides the Tax rate cut for Auto like review of BS6 implementation timeline, review of insurance rates, reduction in road taxes etc. to improve automobile demand.

The proposal for real estate sector is unlikely to lead to a revival of the sector as the unfinished development and unsold inventories is not wholesome.

The above suggested actions would have more salutary effect than the headline grabbing Corporate Tax rate cut.

Sequencing of reforms is very important. When Banks recapitalisation was required, the government gave Demonetisation shock further exacerbating the stress on Banks (as more assets went into NPA, Banks distracted with cash activity etc,).

Before the economy could recover from that shock, it gave GST, without proper testing of the system and added to the stress on the economy. Now when direct fiscal stimulus is required, it has come up with the Corporate tax cut that will do precious little to revive growth in the short term. And in the long term we are all dead! This tax rate cut is a right move at the wrong time!

Unfortunately, this Government continues with its approach of headline management instead of well thought out actions to manage the economy!

The Economic Survey and Budget 2019 rests on a wing and a prayer!

2019-07-06T17:49:00.000+01:00

A) Economic Survey 2019

The Chief Economic Advisor Krishnamurthy Subramanian, in his latest Economic Survey, laid out the Indian government’s Big Hairy Audacious Goal (BHAG) (borrowing the term from Jim Collins) of becoming a $5 trillion economy by 2024-25 from the current level of $2.6 trillions. This translates to an annualised real GDP growth rate of 8% (at an inflation rate of 4% p.a.).

It is indeed refreshing and great to set an aspirational goal and ascertaining the required run rate to achieve it. Equally it is also necessary to map out key initiatives that will enable the drive towards that required pace of growth, if not all the way but at least to the extent possible to assess the gap that will have to be figured out along the way.

It is perfectly acceptable to have all the answers nor is it realistic to expect to have them at the outset, which is why they are called BHAGs. But it would be wise to assess the enormity of the challenge so that it can be grappled over a period of time with collective thinking or as the paper says through “creative destruction”.

In that earnest, I expected the Survey to bring together at least a dozen key strategic initiatives to address some of the key sectors such as education, health care, infrastructure, job creation and growth in farm income. Also an assessment of resources required to support those initiatives together with other enablers needed to achieve that could have been spelt out. Such a blue print is more valuable for policy formulation than any amount of economic theory or myriads of schemes that seek to do something for everyone. The Economic Survey identifies the issues but fails miserbly on creating a blue print for focussed policy making and implementation that would add up to the ask.

The FM also stated in her maiden Budget speech that the economy was at approximately US$ 1.85 trillion when they formed the Government in 2014. Within 5 years it has reached US$ 2.7 trillion. Hence, it is well within their reach the US$ 5 trillion in the next five years. It is commendable that the economy grew by $1 trn in the last five years but to create a critical mass, it takes decades and hence, to down play the era of economic liberalisation is disingenuous.

Coming back to the BHAG, against the required growth rate of 8%, the past five years growth in GDP was well below 8%, with the exception of the year 2015-16. Further, the GDP growth rate in Q4/2018-19 dropped to 5.8%, making that 8% growth rate that much harder to attain. And there isn’t much in the Budget either that points towards an acceleration in economic growth and employment. There is an expansion of the current schemes and as Albert Einstein says, you can’t expect different results by doing more of the same.

Source: CSO, Min of Statistics, GoI

With the geo-political situation, rising trade protectionism and crude prices and an expected slowdown in global growth, it puts into question the basis the 8% growth assumption from the current levels of 5.8%. The survey, which is about 225 pages long, delves into economic theory of behavioural economics (Nudge) to influence citizens’ behaviour to achieve its objectives, for e.g. voluntary relinquishing of LPG subsidy.

The document presents a lots of correlation graphs between several factors such as:

Savings rate, gross capital formation and economic growth rate;
GDP growth with exports growth and productivity gains;
Access to toilets and literacy;
Demographic dividend without assessing the associated risks of large scale youth unemployment;
Role of job creation and earnings;
Firms that are Dwarfs vs. Infants (new) and the need to grow the Iinfants

and draws heavily for inspiration on ancient philosophy and mythology and tries to link that with the various schemes.

…but there is no assessment or actions outlined for:

how to attract private investment of such a large magnitude? Annual investment of $1.5trn is needed over the next 5 years, against the current annual FDI of ~$65bn, leaving a huge gap;
measures required to increase the Savings rate from 30% to 40%? (perhaps this will be through nudge economics but no concrete measures in the budget to encourage savings)
required enablers for Exports growth;
support required for Productivity gains through simplification of labour codes and other regulations

The economic survey stresses on the demographic dividend citing 50% of the population is of working age, between 20-59 years old, and will increase to 60% by 2040 but fails to acknowledge the acute level of joblessness as noted in the NSSO survey and fails to consider the implications of this. This should be a cause for worry and cannot be glossed over as a strength.

While improving the Savings rate is noted as one of the principal drivers of growth but it does not assess the impact of shift to consumption that resulted in savings rate in India to drop from 40% levels to 30% levels in the last decade. There are no clear suggestions on what approach needs to be adopted now to reverse this trend and boost the Savings rate.

The Survey analyses data from other economies like Japan, China, and South Korea that grew at a rapid pace in the past few decades to draw some lessons. It concludes that Savings, Investments and Exports will lead to a blistering pace of growth required to achieve the $5trn economy without quite considering either the changed global economic scenario or the assessing the quantum and feasibility of achieving higher savings, investments and growth in exports. It also assumes productivity gains will lead to higher exports rather than a weakening in the exchange rate. This is a lofty assumption to say the least.

The report recognises the challenges of high cost of capital in India which reflects the higher risks for the investors but doesn’t quite address how this will come down in the short term without a change in risk perception or an upgrade to the country’s sovereign rating.

“Nudge” Economics

Chapter 2 elaborates on the idea of behavioural economics to drive “good behaviour”. It begins with a quote in Sanskrit that translates to “We cannot rely total on rational thinking to gain information, as it is not without bias”. The chapter has been dedicated for behavioural economics of “Nudge” to influence citizens’ behaviour.

This replicates the United Kingdom model which had set up a Nudge Unit in 2010 to apply behavioural economics theory to public policy. This idea is based on a research by Richard Thaler (An American Economist from Chicago Booth and a Nobel laureate) who built a link between economic and psychological analysis of individual decision making. He had recommended that the government should pursue ‘nudge policies’ to gently steer people towards desirable behaviour while preserving their choice.

One example of this in the Survey (and the budget speech) is where it implores citizens by saying, “India @75 is envisaged as a ‘New India’ where every individual realises his or her full potential and looks for opportunities to contribute rather than claim entitlements”, laying out an example for key behavioural change. An example of this is the social change through economics of “nudge” - Give up LPG subsidy for the nation.

The report also cites other examples on how the nudge theory can be used to improve compliance or can influence a change in behaviour. Beti Bachao Beti Padhao (BBBP), Beti Aapki Dhan Aur Vijay Lakshmi programme (BADLAV - using mythological examples!) have been quoted as examples.

It aims to move from Swachh Bharat to Swasth Bharat and eventually Sundar Bharat and suggests public data for public good where by citizens’ records are proposed to be stored to assist formulation of policies.

Examples of nudge approach in India:

The Survey lays down some high level principles for using behavioural economics and quotes Mahatma Gandhi’s Seven Social Sins to appeal to the conscience of the citizens and gives examples of moral and ethical behaviour from Hindu, Islamic and Christian traditions.

The Survey has made a good attempt to relate each of the above Principles with Behavioural Economics and suggests its application to appeal to the conscience of the legislators and the people.

But it misses on setting some goals for the first sin. I would suggest that the CEA can suggest to bring all political parties under RTI and transparency on political donations to address the first sin. How about some nudge economics on this front? Or this theory is only for the citizens?

The Survey uses religious custom, social norms and cultural traditions to make people pay taxes, keep young people away from alcohol and drugs and engineer gender equality. For gender equality campaign, the Survey proposes the use the concept of Ardha-nareeshwarar, an amalgam of Shiva and Shakti – and cites examples from Vedic times by mentioning philosophers such as Gargi, and Maitreyi who sought spiritual knowledge and equality with Men in pursuit of knowledge to reinforce the message. It goes further to state that “Men in ancient Indian society were identified with their mothers, Yashoda-Nandan, Kaushalya-Nandan, Gandhari-Putra, as well as their wives/consorts, Janaki-Raman, Radha-Krishna. Since such positive mythological insights about gender equality are readily available and deeply understood in Indian society, these can be used as part of a revolutionary BADLAV programme.

It contends that given the importance of religion in Indian culture, the principles of behavioural economics need to be combined with this “spiritual/religious norm” to reduce tax evasion and wilful default”, the survey argues.

Similarly, nudge economics is proposed to be used for better tax compliance and debt repayment by citing evil consequences by quoting religious tenets. It goes to elaborate that In Hinduism, non-payment of debts is a sin and also a crime. The duty or obligation of a child to repay the debts of the deceased parent is rested upon a special doctrine, known as ‘The Doctrine of Pious Obligation’. Islam says a person cannot enter paradise until his debt is paid. All of his wealth could be used to pay the debt and if it is insufficient, then one or more heirs could voluntarily pay for him. The survey also quotes the Bible: “Let no debt remain outstanding except the continuing debt to love one another’’ and “The wicked borrows and does not repay, but the righteous shows mercy and gives”.

Rest of the Survey delves into ways to influence behaviour, mostly motherhood and apple pie, and lists a myriads of correlation of factors to substantiate the hypotheses, cites enabling actions for growth without making an assessment of resourcing needs, expected outcome and its impact on the overall objective. Needs a building blocks approach to bring all the proposed actions together to show the impact and cohesiveness of the various initiatives.

In Summary, the Survey fails to pull together a coherent plan or a blue print with details of actions, estimates of costs, resourcing plan, expected outcomes, timelines and its impact on GDP growth.

B) UNION BUDGET 2019

Swiftly moving on to the maiden Union Budget presented by Nirmala Sitharaman who carried the budget laden in a red cloth and called it Bahi Khata (Ledger or accounts), marking a symbolic departure from the Western tradition of carrying the Budget in a brief case. One would have expected with the launch of Digital India, she would have carried a Surface Pro or an Ipad!

But her maiden Union Budget speech was more like an election manifesto and less like a Finance budget. She enumerated the various schemes administered by the Government and her plans to increase allocations to some of them without getting into the details of the estimates of sums from her various revenue raising measures or giving an account of her revenues and expenditure for the last year.

It must be made mandatory by law, as part of the Fiscal Responsibility and Budget Management Act (FRBM), for the FM to give account of the actual Revenues and Expenditure for the year and explain the variance much like what one is expected in the corporate world.

As an after-thought she mentioned that the fiscal deficit for 2019-20 would be 3.3% to observe the Fiscal Responsibility and Budget Management (FRBM) Act close to the committed glide path of achieving 3% by 2020. However, poring through the detailed budget, we get information on both revenue expectations and expenditure allocation, though the impact from revenue raising measures is not clearly set out.

Moving from election mode to governance mode, the Government needs to get out smell the coffee. There is large scale unemployment, farm distress, creaking infrastructure with the economy slowing to a 5.8% growth. Not a single smart city has been showcased and pollution, air quality and water situation continues to worsen. With the aspiration of 8% growth, the budget didn’t spell out clear measures on how it’s going to stimulate growth nor did it address the looming issue of youth unemployment.

She has missed a good opportunity to be bold with her measures coming back on a strong mandate. Instead, the government has resorted to the routine measures for revenue raising by raising taxes on fuel, raised import duty on many items, raised surcharge on higher income earners (which goes against the economic survey which talks about horizontal fairness), and included a series of additional sops to the various segments, increasing social spending that does not result in investment or helps to boost productivity. Basically, she has disregarded the good suggestions in the Economic Survey.

What’s wrong with the approach?

There are 721 Central Sector Schemes that have an aggregate Revenue spend of Rs 5.69 lakh crores ($81bn), growing from Rs 4.61 lakh crores ($66bn), a growth of 23%! The single biggest item of growth is in PM Kisan of Rs 55,000 crores ($8bn), a cash subsidy for farmers, rather than implementing the Swaminathan report on assuring a higher Minimum Support Price. The second biggest increase in allocation is for food subsidy is Rs 14,000 crores ($2bn) to FCI for food security. The Capital expenditure on these schemes increased to Rs 3 lakh crores ($43bn) from Rs 2.76 lakh crores ($39bn).

There are 31 Centrally Sponsored Schemes that have an aggregate spend Rs 3.32 lakh crores ($47bn), rising from Rs 3 lakh crores ($43bn). The biggest allocation is for MGNREGA at Rs 60,000 crores ($8,5bn) dropping from Rs 61,000 crores. There are several other rural development schemes under this section.

With so many schemes, there comes the challenge of assessing eligibility and delivering on each one of them burdensome and comes with friction.

The FM seeks to attract foreign students for higher education in India, the allocation for school and higher education was a paltry Rs 92,000 crores ($13bn), representing 3.7% of the annual expenditure budget. The total spend on education from both Centre and States is about 3.8% of GDP while most developed countries spend between 5% - 7% of GDP on education. The Central and State government need to increase their current spend on education by 50%.

Overall, annual expenditure is growing from Rs 21.4 lakh crores ($ 305bn) to Rs 24.5 lakh crores ($ $350bn), a growth of about 14.5% over last year while revenue is expected to grow from Rs 17.6 crores ($251bn) to Rs 19.6 lakh crores ($280bn), a growth of 11.6%, leaving a primary deficit of $70bn. The fiscal deficit at Rs 7.04 lakh crores ($100bn) represents 3.3% of 2020 nominal GDP, though this does not cover borrowing by public sectors to fund sale of Government’s stake. This is like shifting the deficit from one pocket to another, a poor attempt at financial engineering. For e.g. ONGC buying HPCL stake from the Government. Overall fiscal deficit, including borrowings of States, the position worsens from 6.7% to 6.9%. The FRBM should mandate the assessment of fiscal deficit at both levels.

Now let’s see the various policy initiatives that the FM lays out in her Budget Speech.

a) Banking and NBFC

The recapitalisation of Banks with Rs 70,000 crores ($10bn) and the asset protection scheme for NBFC of Rs 10,000 crores ($1,5bn) in the form of credit insurance of 10% of first loss tranche of NBFC loans (up to Rs 1 lakh crores for six months) will be met from expected dividend from the RBI of Rs 80,000 crores! While this recapitalisation is a necessary move, it is nearly not enough to address credit growth required to support a 8% GDP growth.

b) Railways

On the transportation sector, the Railways need an investment of 50 lakh crores ($70bn) between 2018 and 2030, which is approximately 3x of current levels. The government is proposing to use Public-Private Partnership to unleash faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight services, though much work needs to begin on this front.

c) Investment

Investment-driven growth requires access to low cost capital. It is estimated that India requires investments averaging 20 lakh crores every year (USD 300 billion a year). The measures laid out in the Budget speech will in no way bridge the gap between current levels of $65bn p.a. to the required level of $300bn p.a.

d) Debt Market

There is a recognition that Corporate Debt markets are crucial for the infrastructure sector. Given the need to further deepen bond markets, a number of measures are proposed to be taken up like Corporate tri-party repo market in Corporate Debt securities, Government will work with regulators RBI/SEBI to enable stock exchanges to allow AA rated bonds as collaterals. But the rigour of rating agencies need to be addressed as we saw the sudden downgrade of the securities like that of IL&FS debacle created the NBFC liquidity crisis.

e) Water (It's the new Oil)

The FM seeks to grapple the Water problem and pronounced her mission of “Har Ghar Jal” (Water to each household). of ensuring India’s water security and providing access to safe and adequate drinking water to all Indians by making it a priority of the Government. This Mission, under the Department of Drinking Water and Sanitation, will focus on integrated demand and supply side management of water at the local level, including creation of local infrastructure for source sustainability like rainwater harvesting, groundwater recharge and management of household wastewater for reuse in agriculture. The Jal Jeevan Mission will converge with other Central and State Government Schemes to achieve its objectives of sustainable water supply management across the country.

The Budget also makes some attempt at widening the tax base based on consumption of electricity (Rs 1 lakh), overseas travel (Rs 2 lakhs )and deposits in current accounts (Rs 1 crore).

In Summary, the Economic Survey and the Budget 2019 rests on wing and a prayer!

While laying criticism is easy, I don’t want to stop there and go on make some SUGGESTIONS FOR CONSIDERATION....

Here’s what I would recommend to the CEA and the FM to consider to make it more purposeful:

A. Fiscal measures:

While the FM quoted from Sangam literature “Pura Naanooru” by Poet Pisirandaiyar, with some difficulty, to imply that the Government will be sensible in collection of taxes and not trample the taxpayers. However, the revenue raising measures does quite the opposite by raising taxes of fuel, raising import duty (inflationary) and increasing surcharges on higher earners.

The CEA and FM should evaluate the Laffer’s curve to determine the appropriate rates of taxation that drives greater compliance and improved collections.

i. Introduce Tax on Agricultural Income on rich farmers with income above Rs 50 lakhs – while it will hurt a lot of politicians, this is the kind of bold measure we would expect from a government that professes transparency and attack on black money. This also fits with the nudge economic theory of limiting “politics without principle”;

ii. Incentivise Savings – Deductions for investment in Infrastructure bonds – This will improve the savings rate that is essential to drive investments in infrastructure

iii. Simplify GST – 0%, 12% and 20%; Bring fuel within GST.

iv. Surcharges and Cess – Drop all surcharges and cess in the spirit of Cooperative Federalism as the tax collected from Surcharges and Cess is not shared with the States.

v. Simplify the tax code – Remove the numerous deductions (limit it to drive Savings and home ownership) and reduce rates

B. Policy Measures

a. Consolidate the myriads of Centrally sponsored schemes and Central Sector Schemes (about 750 odd schemes in all!) aggregating to Rs 8 lakh crores ($115bn). Do a few things but do it well rather than dabble a bit in everthying!

b. Have a couple of dozen schemes that are focussed on key areas of:

i. Farm distress (implement MSP),

ii. Education (build quality government schools, focus on teachers training, e-learning, higher learning and research)

iii. Healthcare – build primary health centres and hospitals and not fritter away on insurance schemes; Standardise pricing for common treatments for private hospitals and legislate stringent actions to deter medical malpractice;

iv. Infrastructure (Water, Electricity, Rails, Roads, Swachh Bharat, Broadband, Climate Change et al) and

v. Employment – Fill up all existing vacancies

vi. Eliminate/Reduce waste in spend to fund investments (e-procurement, warranties and penalties on contracts etc.)

c. Move from Final Salary Pensions to Savings based pensions like private sector for new hires to reduce fiscal burden

d. Collaborate with the States for delivery of the Schemes - Practice Cooperative federalism

e. Rationalise various subsidies and handouts into a simple minimum income support rather than various schemes like LPG subsidy, PM Kisan, MGNREGA etc.

f. Focus on building primary health care centres and improving access to government hospitals rather than squander it on insurance schemes which only absolves the government of its responsibility to provide quality health care;

g. Divestment – Accelerate divestments and focus on running public services

h. Fix the Real Estate Sector – Revive the abandoned projects by auctioning these projects – A combination of increase in FSI, auction to new developers with a haircuts for Banks, small increase in price for buyers and impose total loss on promoters. As Real Estate is a big employer, this will provide some immediate boost.

i. Recapitalise Banks with a meaningful amount, Rs 70,000 crores or $10bn won’t be enough; modernise the banks and ensure the Board is made up independent professionals and not nominate appointees of the Government;

j. Public- Private Partnership – Simplify land acquisition, enforcement of contracts, address risk perception to reduce cost of capital etc. It also requires a communal and social harmony as investors are reluctant to bet on markets with social tension or unrest

k. Tourism – Training of tour guides (starting with cab drivers like in Singapore), Improved security, tourism eco system (good, clean and affordable hotels), and better connectivity; Besides this strict action needs to be taken against vigilantism that is undermining law enforcement and threatening communal harmony. Tourism cannot thrive whether there is social tension and bad press.

l. Other enabling initiatives are good and need to be brought together to promote innovation, start-ups and infants e.g. Payment platforms, crowd funding, simplify employment laws, develop debt market etc.

IN CONCLUSION

The BHAG of $5 trillion economy within 5 years is certainly laudable but is a stretching target in current economic scenario. It is certainly worth trying and with appropriate enablers and a focussed implementation of identified Strategic Initiatives, it may well be possible.

However, a proper assessment of current issues like slow growth rate, high levels of unemployment and a weak banking system needs to be addressed. Being in denial of problems or suppression of data or manipulating the data will only make it difficult. Appropriate corrective measures are needed to be initiated quickly.

Finally, CEA needs to identify the key initiatives, dimension their impact and prioritise them, assess the resourcing needs and bring it all together to map it against the stated goal. It may not all add up to the desired goal but it will show what else may be required to get there.

Best wishes to the CEA, FM and the government to deliver on this BHAG! It will require the support from everyone to get there. Sabka Saath and Sabka Vishwas needs curbing of vigilantism and maintain social order and enforcing the rule of law without prejudice!

Is the Fed unwittingly engineering a Recession?

2018-12-20T20:23:00.003+00:00

The Federal Open Markets Committee (FOMC) increased the FED funds target rate yesterday, for the fourth time in 2018, by 25bps to take the Fed Funds Target rate to 2.5%. Much of this increase was widely expected as the FED had been communicating the future interest rate direction through its “dot plot”, the latest of which from yesterday compared to the Sep 2018 view is given below:

Note: The dot plot is updated each time the Federal Reserve votes on whether to raise or lower interest rates. It plots where each member of the Federal Open Market Committee believes short-term interest rates, specifically the fed funds rate, will be over the next three years.

We can infer from the dot plot that a further hike of up to two times in 2019 is expected which has shifted from the previously held view of 3 hikes for 2019.

The Federal Open Market Committee released on Wednesday, the 19^th December 2018, the following statement (excerpts):

“Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.”

The Fed ignored repeated calls from U.S. President Donald Trump in the lead up to the decision to refrain from lifting borrowing costs again amid the volatility in financial markets. In a way, Trump had put the FED in a bind as even if they wanted to pause, it would appear as if they succumbed to the pressure from the White House and that would have undermined FEDS independence in the eyes of market participants and caused serious damage to its reputation.

The markets reacted negatively with stocks across the world declining by ~1.5% to 3% following the rate hike. The Bond yields fell further with 10 years treasury yield now lower than 3m Libor! The bellwether 2-10s UST spreads (difference between yield on US Treasuries of 2 years and 10 years) now 5bps apart! A negative read is a harbinger of recession.

Market participants are sending the Federal Reserve a message that it might be making a policy mistake by raising rates at a time when inflationary expectations are tame. But it’s not just about the policy rates.

A more burning concern is about the unwinding of Fed’s Balance Sheet, a.k.a. “Quantitative Tightening”. Since October 2017, the FED has been steadily reducing its holdings of Treasuries and mortgage-backed bonds that it bought during the crisis era post the collapse of Lehman Brothers. The FEDS Balance Sheet has increased from $800m in 2008 to close to $4.5T in Sep 2017.

Post Lehman Brothers collapse, GDP was contracting and the economy was losing hundreds of thousands of jobs each month and the United States economy fell into deep financial crisis. The Fed funds target rate was already close to zero with no further room to cut rates.

Not wishing to pursue a negative interest rate policy (NIRP) like the ECB, the U.S. FED took unprecedented steps to spur the economy and nine years ago embarked on a Quantitative Easing program buying trillions of dollars of government bonds and mortgage-backed securities to add liquidity into the economy. The Fed’s bond buying, or quantitative easing, pumped trillions of dollars into the banking system to support the economy after the financial crisis. (The Fed bought bonds from pension funds and banks and paid for them by crediting their reserves with the Central Bank). Between 2008 and 2015, the Fed's balance sheet ballooned from ~$900 billion to ~$4.5 trillion.

Now, with the economy on much stronger position, FED is unwinding its bond holdings and effectively sucking out liquidity from the system. Since Oct 2017, the FED has reduced its Balance Sheet by ~$400bn from $4.5T to ~$4.1T. The estimated impact of this QT is the equivalent of a ~50bps of rate increase. The Quantitative Tightening (“QT”) or the unwind of FEDS Balance Sheet has picked up at a pace of ~$50bn a month and is having knock-on effects in the overnight money markets, where the demand for short-term cash has been on the rise.

There are two factors at play as a result of FEDs QT:

The shrinking B/S is driving tighter liquidity conditions leading to higher short-term rates

The impact of QT is resulting in money moving away from financial assets like stocks to cash and bonds (for reserve maintenance) leading to lower yields on Treasuries

It remains to be seen whether the current rate actions and the pursuit of QT at current pace will ultimately trigger a recession. The early signs are pointing to that with the UST 2-10 spreads at 5bps (dropped to 1bp).
One thing is becoming clear, volatility is like to increase, so brace yourself for a bumpy ride in 2019!
x

With the introduction of Basel 3 liquidity regulations, Banks are now required to hold much higher levels of liquid asset buffers in the form of High Quality Liquid Assets (read Cash reserves and Highly rated Bonds) leading to a general increase in demand for Liquid Reserves and US Treasuries.

In many ways, it’s the reversal of the FED actions during the financial crisis when it adopted a combination of QE and rate cuts to stave off the economy entering into a depression. It will be interesting to see what this does to the credit spreads….conventional wisdom says that credit spreads should widen as the liquidity squeeze extends leading to increase in cost of funds for Banks.

Fed officials have discarded the notion that they are to blame for the short-term rate increases. However, the market participants have a different view and are vocal in their comments that if the Fed doesn’t slow down or stop its unwind, it could end up draining too much liquidity from the banking system, causing excessive market volatility and ultimately undermine its ability to control its rate policies to maintain stability in the financial markets.

How does Quantitative Easing work?

Through QE, the Central Bank purchases financial assets – almost exclusively government bonds – from pension funds and insurance companies. It pays for these bonds by creating new central bank reserves. The pension funds would sell the bonds to the Central Bank and in exchange, they would receive deposits (money) in an account at one of the major banks. Banks would end up with the new deposit (from the pension fund), and a new asset is created in the Bank’s Balance Sheet– Reserves at the Central Bank.

Quantitative Easing therefore simultaneously increases the:

a) the amount of reserves at the central bank in favour of banks that can be used for lending by banks; and

b) the amount of commercial deposits with banks

This in theory supports the credit creation process as only the deposits can actually be utilised in the real economy, as central bank reserves are just for internal use between banks and the Central Bank. Fed officials contend their unconventional policy actions saved the U.S. from a crisis worse than the Great Depression.

GDP growth has bounced back since 2008 and has held steady near 2 percent over the past few years.

While many economists had opined that QE would lead to a runaway inflation but it has defied such predictions and has remained surprisingly low. This has further called into question the need for the FED’s rate action in the present time when inflation is stubbornly hovering around 2%.

The Fed's low-interest rate policy made it inexpensive for the government to continue to borrow and spend. U.S. public debt is near $20 trillion. Investors had hoped for a less aggressive approach after U.S. stocks tumbled into a correction zone amid concern that global growth is slowing.

Many think that the Fed has completely misjudged the situation. Though they have signalled a less aggressive path for rate hikes in 2019, the quarter-point move on Wednesday and the recent market turmoil doesn’t unduly worry the U.S. central bank. Global stocks are set for their worst quarter since 2011, yet Jerome Powell in his press conference said that “we don’t look at any one market,” and that in the abstract “a little bit of volatility” probably doesn’t leave a mark on the economy.

The feedback into credit spreads as a result of the current sell-off in equities and bonds is yet to take effect and when that happens, there will be a lot more pain to endure and that will impact economic growth.

Besides the Fed’s monetary policy related impact, there are worries of global trade wars, domestic politics and the geo-politics. America and China are planning to hold meetings in January to negotiate a broader trade truce.

What’s all this brouhaha between the RBI and the Government?

2018-11-01T15:08:00.001+00:00

The current sparring between the RBI and the Government comes at a horrible time even as the Indian economy is facing headwinds from high NPAs, higher oil prices, weak banking sector, a weakening Rupee and crisis in shadow banking sector.

While disagreements between Central bank and the Government are neither uncommon nor unique to India. Also, it is pertinent to note that several of the incumbent RBI Governor’s predecessors, like Raghuram Rajan, Duvvuri Subba Rao have had disagreements with the government on interest rates and other policy matters.

So, what is different this time and why is there so much brouhaha?

The Government and the RBI are not seeing eye to eye on many issues, some of the important ones are as under:

Proposal on setting up a new Payment and settlement systems regulator – RBI is opposed to the idea
Forbearance norms to be relaxed for Power sector and other SMEs to promote credit growth – RBI is focused on cleaning up the Bank’s Balance Sheet and improving financial stability
Interest rate policy – government is pressuring RBI to reduce interest rates on the bank of controlled inflation. RBI does not agree with this view as outlook for inflation given the increase in oil prices is set to increase
Liquidity support to the NBFC sector – RBI is tightening liquidity norms for NBFCs and is not prepared to play the liquidity backstop role
Easing of reserve requirements – Government wants reserve norms to be relaxed while RBI doesn’t want to change
Higher dividends – Government is seeking a higher dividend from the RBI to ease fiscal pressure
RBI is seeking more powers to regulate public sector banks in particular it wants a say in the appointment of management and Board members of these banks. Government is not conceding and maintains it has sufficient powers to regulate them.

While debates and disagreements on such issues are to be expected and even healthy to reach a well-reasoned decision, the manner of public sparring has left everyone stunned. The Finance Minister publicly rebuked the RBI by laying the blame for high NPAs squarely on the doors of RBI citing poor regulatory supervision and easy lending norms.

Incidentally, Indian banking sector NPAs is one of the highest amongst large economies at 11.6%.

As the Government faces reelection next year, it wants banks to extend loans at cheaper interest rates quickly to keep the economy firing as a way to secure its re-election campaign. But the RBI is wary of already high levels of bad debts and weak rupee threatening to add to inflation, and hence has different priorities i.e. to ensure financial stability.

The stand-off between the government and the RBI started with some non-official directors reportedly pressing for relaxation in the prompt correction action framework for weak banks, increased flow of credit to micro, small and medium enterprise sectors, and a special liquidity window for non-banking finance companies at the RBI’s last board meeting.

Frustrated with the unbending approach of the RBI, the Modi government has apparently sought to invoke a little known Section 7 that undermines RBIs autonomy, and perhaps a provision reserved for extreme circumstances. Hence, this little known provision has never been considered in the past and this is something that has never been used even during Emergency, the economic 1991 crisis, the 2008 Global Financial Crisis or the 2013 regional crisis!

What is Section 7 of the RBI Act?

Section 7 of the RBI Act, when invoked, allows the government to consult with and give instructions to the Governor of the RBI on certain issues that it believes are serious and are in public interest. The relevant section is reproduced below:

Section 7. Management.

The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.

The Government, it appears, has sent the central bank letters seeking to overrule the RBI in a bid to push through measures that would potentially support rapid credit growth.

The Central Bank, which is meant to function autonomously and independently, has alleged that the government has been trying to interfere in its functioning. Tensions between the RBI and the government went into public domain after Deputy Governor Viral Acharya said last week that undermining Central Bank independence could be "potentially catastrophic", indicating the authority is pushing back against government pressure to relax its policies and reduce its powers ahead of a general election due next year.

In a speech last week, Deputy Governor, Viral Acharya said, "Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”

In the wake of the above developments, there were strong indications that the RBI Governor was considering resigning from the position, a move that would have dented the government’s image severely with catastrophic effect on the financial markets, at least in the short term.

In an effort to limit the damage, the government issued a statement saying it “respects and nurtures” central bank’s autonomy.

Markets punish economies if Central Bank independence is not respected

The situation in India is similar to the Central Bank spats in countries as varied as the US, Argentina, Turkey, and this is unlikely to go away soon. Trump has been openly criticising the FED for raising interest rates and is blaming the FED for the recent stock market decline. Recently, Turkey got severely punished for interfering with monetary policy of the Central Bank and its currency plunged by over 50% within a short period of time dealing a severe blow to the economy.

The government is playing with fire and is treading on dangerous ground that could severely dent the external perception of the RBIs autonomy which will damaging effect that will hurt FDI, borrowing costs and eventually economic growth.

Earlier this month, the government removed the chief of the Central Bureau of Investigation in a dramatic late night order. Such actions undermine the institutional framework and cause severe long-term damage to the economy.

What next?

RBI Governor has called a board meeting on November 19 to discuss the outstanding issues that created a rift in its previous meetings.

The Finance Ministry has said that both the government and the RBI “have to be guided by public interest and the requirements of the Indian economy. The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so,” the ministry, concluding statement said.

Having recently won 23 positions on ease of doing business, the government should not fritter it away by scoring a self-goal. International investors seek to exercise their investment decisions and draw comfort from matters such as autonomy and the credibility of the Central Bank to steer the economy and maintain financial stability.

Let’s hope that better sense prevails and the Government exercises discretion as this has far reaching consequences and could potentially derail the economy.

IL&FS debacle – Have the lessons from the 2008 Global Financial Crisis been learnt?

2018-10-22T16:24:00.001+01:00

September 2018 marked the 10^th anniversary of Lehman Brothers’ collapse and one can’t be faulted for thinking that the regulators would have upped their game by learning from that experience and implemented sufficient regulatory safeguards to avoid a similar situation requiring a taxpayer funded bail-out of some shape or form.

But the reality hit hard for several Indian investors when India's leading infrastructure finance company IL&FS defaulted on payments to its lenders triggering a minor panic in the markets.

Infrastructure Leasing & Finance Services (IL&FS), is an investment holding company with business operations through separate companies which form an ecosystem of investments across infrastructure, finance and social and environmental services. IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Corp to fund infrastructure projects. Besides this, IL&FS has institutional shareholders including SBI, LIC, ORIX Corporation of Japan and Abu Dhabi Investment Authority (ADIA). As on March 31, 2018, LIC and ORIX Corporation are the largest shareholders in IL&FS with their stake at 25.34 per cent and 23.54 per cent, respectively. Other prominent shareholders include ADIA (12.56 per cent), HDFC (9.02 per cent), CBI (7.67 per cent) and SBI (6.42 per cent). Another important investor in the company is the Employees Wealth Trust (EWT) owing about 12% stake, which is now at the centre of the storm owing to several sweet deals executed by it to enrich a small group of senior executives. This reeks poor Corporate Governance standards where the executive management was brazenly securing deals for the benefit of a small cabal of senior executives.

What caused the panic?

IL&FS Financial Services, a group company, defaulted in payment obligations of bank loans (including interest), term and short-term deposits and failed to meet the commercial paper redemption obligations due on September 14. On September 15, the company reported that it had received notices for delays and defaults in servicing some of the inter corporate deposits accepted by it.

Consequent to defaults, rating agency ICRA downgraded the ratings of its short-term and long-term borrowing programmes. The defaults also jeopardised hundreds of investors, banks and mutual funds associated with IL&FS.

· The rating agencies downgraded the long-term ratings of the parent entity IL&FS multiple notches from AA+ to BB on 8^th September and then to D on 17^th September.

· The short-term rating was also downgraded from A1+ to A4 on 8^th September (4 notches on a single day!) and then to D on 17^th September.

This is not normal for any issuer and is usually the jump-to-default cases are rare. This points to the weakness in the rating agencies standards and their lack of rigour as such a sharp downgrade in a single review shows that they failed to pick up early signs of weaknesses in their liquidity risk management.

This may also call into question the sanctity of the ratings of other bond issues and it is likely that several other issues may face downgrades when the rating agencies pull their socks up and conduct a thorough review and tighten their ratings criteria.

Market Impact

What followed its default was a knock on effect on several mutual funds that had exposure to IL&FS and its group companies in their portfolios. The Mark to Market (MTM) impact on these bonds, resulted in a sharp drop in NAV of many of these funds. While bond prices move as a result of credit spread changes, the speed and the extent of the downgrades hit their holdings hard and the pain may yet continue due to a contagion effect. As many of the funds will have an investment mandates to hold bonds of issuers above a certain ratings threshold, further sell-offs are likely to keep the bond prices low. Besides Funds, several Public-Sector Banks have exposure in IL&FSs bonds and loans (~$ 2.5bn) and the impact of the failure of IL&FS will have a telling effect on an already weak banking system which will further impact credit growth that may slow down the economic growth.

The Bail out

The Life Insurance Corporation of India (LIC) is expected to once again come to the aid of a distressed ‘systemically important’ firm (after bailing IDBI recently) as struggling infrastructure major IL&FS is set to receive some form of financing from the insurance major. LIC, which holds the largest stake in IL&FS, is expected to purchase IL&FS’s non-convertible debentures.

What ails IL&FS?

IL&FS is afflicted by several factors, the principal ones being poor Corporate Governance and even poorer regulatory oversight. NBFCs have been performing shadow banking services, yet the regulatory regime was inadequate for the systemic risk that they collectively pose to the regulated banking sector and to the wider economy.

The management of the company is facing several allegations:

· Poor overall risk management disciplines in general and liquidity and funding risk management in particular (excessive maturity transformation, leverage)

· Poor corporate governance especially around disclosure of conflicts of interest

· Enriching a small group of employees at the expense of the company

· Nepotism by offering jobs to family, friends and relatives

As infrastructure became a prime focus for successive governments in the past two decades, IL&FS, with its prime mover position in this segment secured several of these projects. Over time, the company funded its growth through a series debt issuances and commercial borrowings which resulted in a leveraged Balance Sheet with debt-to-equity of ~17 and resulted in over 169 subsidiaries at last count.

While this in itself may not have posed as much trouble if the projects went on-stream in a timely manner allowing for mini-perm refinancing to kick-in, the delay in execution of projects and the consequent delay in cashflows required to service these debt issuances was severely dented. This adverse cashflow position was further compounded by excessive maturity transformation that added to the funding requirements as repayment of maturing debt came in quick succession.

The Group has a debt of about $12.5bn (Rs. 91,000 Crore) of which about $5bn (Rs. 37,000 crores) is short term and due to mature within a year. About $9bn (Rs. 60,000 Crores) of the debt is project specific, including road, power and water projects.

As the nature of business is long term projects and capital intensive, the business model is predicated on refinancing of projects (mini-perms) as risks are mitigated with project completion and revenues are stabilised. A major reason for delays in project execution was due to the complications and delays in land acquisition which is an endemic issue in infrastructure projects.

The 2013 land acquisition law also made many of its projects unviable as the compensation for land acquisition increased considerably. Delays in project completion, cost escalation and poor funding profile led to a squeeze on its resources besides poor risk management that did not consider the consequences of several incomplete projects. Lack of timely actions to stabilise and diversify funding exacerbated the problems.

Regulatory landscape - RBI regulations on Asset Liability Management (ALM)

While maturity transformation is an important part of financial intermediation as it contributes to efficient resource allocation and credit creation, the risks associated with it needs to be carefully monitored and managed with sufficient safeguards in the form of contingency funding actions.

The RBI had put in place Asset Liability Management (ALM) regulations for Banks in 1999 and for deposit taking NBFCs in 2002 (DNBS (PD).CC.No.15 /02.01/2000-2001 dated June 27, 2001) which was expanded to cover all NBFC in 2011.

The regulatory requirements currently require submission of liquidity maturity mismatches for various tenors with a mismatch cap for the first month at 15% of cumulative outflows within one year. This kind of blunt approach considers neither the unique funding needs of a business model nor its funding profile, allowing for excessive maturity transformation.

The regulations governing NBFCs are not fit for purpose and the risks have been accentuated further by inadequate regulatory oversight. The lack of appropriate regulations to mitigate funding and liquidity risks allowed for these risks to mount unchecked. The rating agencies also failed to assess these risks as their approach places excessive reliance on Parental Support (Qausi-sovereign) which allowed them to assign high credit ratings. This further contributed to the complacency within the system that allowed several mutual funds to invest in IL&FS bonds as it met their investment mandate.

Basel 3 liquidity regulations

Basel and other regulators like the EBA, PRA developed liquidity regulations in the wake of Lehman collapse to address risks emerging from excessive maturity transformation. In order to address both short term and structural liquidity risks, Basel developed a framework for short term risks with its Liquidity Coverage Ratio (LCR) with its BCBS 238 and the Net Stable Funding Ratio (NSFR) for structural liquidity risks. The Basel guidelines for LCR (BCBS 238) was issued in September 2013 and was effective from January 2015 with transitional provisions up to 2018 and for NSFR (BCBS 295) in October 2014 effective January 2018.

RBI followed the BCBS guidelines on LCR for Banks in June 2014 (DBOD .BP.BC.No.120/21.04.098/2013-14) and NSFR in May 2015 (DBR.BP.BC.XX/21.04.098/2014-15) with similar timeline and transition provisions. It is important to note that none of these applied to shadow banking world of NBFCs which perform similar functions to that of a Bank except for its deposit taking activities.

NBFCs have largely relied on funding from banks and capital markets for its core business assets besides public deposits in some cases. Collectively they pose a systemic risk to the banking sector and to wider economy. RBI making an exception for NBFCs from complying with these liquidity regulations was imprudent.

What next?

One might wonder what is the great hullabaloo over a debt of $12 billion? As many of these debt is owned by public sector banks and mutual funds, the potential of a contagion is significant as that will lead to further deleveraging resulting in an even slower credit growth.

As an immediate step, the government sacked the current board and replaced it with a new seven-member board headed by Uday Kotak, MD and CEO of Kotak Mahindra Bank. This should be followed up with an independent forensic investigation is required to ensure there is no conflict of interest in the investigations as well as to determine the impact from conflict of interest that allowed the senior management to enrich themselves.

But these actions alone will not be enough. Several other steps are required to put the NBFC (and the banking sector) on a firmer footing. These include, but not limited to:

1. Appointment to the Board of significant financial institutions to require financial risk management domain expertise and should not be used to reward pliant bureaucrats

2. Enforce high level of Corporate governance standards and conflict of interest rules. Conflict of interest is endemic within the financial sector and needs to be stamped out with a vengeance.

3. Enhance liquidity risk regulations on NBFCs by tightening the ALM framework and imposing LCR and NSFR requirements

4. Stipulate stringent stress testing standards to assess capital and funding requirements under stress and impose sufficient counterbalancing capacity requirements in the form of capital and liquid asset buffers.

5. Finally, hold Rating agencies to account by reviewing their ratings criteria and practices. They cannot continue to rely on parental support of quasi-sovereign entities to support a higher credit rating.

In conclusion, RBI needs to up its game and tighten its Supervisory regime of the financial sector. This is not merely about issuance of regulations but requires follow up with a Pillar 2 - Supervisory Review Framework that examines the risk management framework and disciplines of major financial institutions in a more systematic and programmed manner. If the RBI has inadequate skilled resources to conduct such reviews, it should seek external support of experts to perform such roles on its behalf, much like the Section 166 - Skilled persons review by the FCA in the U.K.

Donald Trump - An Enigma

2017-01-29T14:45:00.001+00:00

Donald Trump has defied all expectations from the very start of his presidential campaign more than a year ago. Very few people believed that he would actually run, then he did. They thought he wouldn't be a serious candidate and will not do well in the polls, then he did. They said he wouldn't win any primaries, then he did. They said he wouldn't get the Republican nomination even if he wins the primaries, then he did. Finally, they said there was no way he could match Hillary’s candidature, let alone win the election. Now he is President Trump! Rest is history!

Trump, the businessman, has shown that he can turn a negative situation into his advantage, after all he has seen bankruptcies and emerged stronger by cutting deals! So who better than him to turn a controversy, or even notoriety, into a winning position, by a good margin. Despite the abrasive and negative campaign, the Trump brand has clearly made its impact. As Donald Trump made the journey with his pompous showmanship, there was no trace of any doubt and he was oozing with his characteristic confidence, projecting supreme self-assuredness, the personal magnetism, the winning aura that's so appealing to many of his followers.

He has demonstrated his skills at setting the agenda, and framing the contest on his own terms. Trump owes his success to what he calls “truthful hyperbole”. He claims it's an innocent form of exaggeration - and a very effective form of promotion."

Transferring his skills as a reality TV star to the election campaign trail, he reduced the complex global issues into simple black or white messages. He anchored his campaign on simple messages

like “Make America Great Again” #MAGA, Build the Wall, Drain the Swamp, Bring back the jobs, America First, Locker her up and Rigged. He attacked the government policies on trade and treaties as destroying American jobs. His campaign, simply said ‘Our government is screwing you’. So the enemy was within namely the Establishment, Democrats, the Republican elite, the media, and the crony corporates.

One political observer (Nunberg) commented that, "The idea of the wall was genius too. It touches on immigration, so it's a policy issue. Two, it touches on Trump's brand. Builder, Developer. Three, it fits the rationale and appeal of his candidacy. The wall. Subliminally, you're saying it's time to take care of America's problems. Then you have the wall between the Trump people and the establishment people. And every single time you mentioned the word wall, wall, wall, on TV, the prospective primary voter is going to think, 'Trump, Trump, Trump. He's our protective wall. To protect us.”

He's a natural when it comes to the stagecraft of campaigning. It was simple and repetitive which struck a strong chord with the voters.

His attack on unauthorised Mexican immigrants, whom he decried as criminals and "rapists," had an electrifying effect on his candidacy. Far from disqualifying him from the presidential nomination, they propelled him towards it. A hardline stance on immigration, especially when coupled with fears about national security, is a big vote winner. When a poll suggested he had fallen behind, he announced his plan to temporarily ban Muslims from entering America. Again, his poll numbers soared. It's been the calculus of his campaign. His outspoken attacks also reinforced another of his great selling points, his delight in railing against "political correctness". These Trump tirades especially resonate with his core support, lower income white males, and that earned him the blue-collar appeal. Whatever the reason, he was bulletproof.

Trump insulted decorated war veteran John McCain. He picked a fight with Fox News and its popular presenter, Megyn Kelly. He doubled down when asked how he once mocked the weight of a Hispanic beauty pageant winner. He offered a half-hearted apology when the secret video surfaced of his boasting about making unwanted sexual advances towards women. He gaffed his way through the three presidential debates. The criticism that he is a racist demagogue, and the shower of international criticism especially from Muslims and Hispanics, did nothing to harm his candidacy.

None of it mattered. Quite the contrary. While he took dips in the polls following some of the more outrageous incidents, his approval was like a cork - eventually bouncing back to the surface. Perhaps the various controversies came so hard and fast that none had time to draw blood.

Trump labeled competitors with unflattering names like “Crooked Hillary” and “Lyin’ Ted” to solicit reactions from the candidates and psychologically repositioned their standing among voters. He also applied a problem/solution marketing formula. He framed the “problem” as the nation being in economic and societal trouble, rallied people to galvanize their dissatisfaction with government and positioned himself as the change agent.

As to "false equivalency" - they treated Trump as a nasty, throwback, stupid, ignorant racist and bigot. They treated Hillary as a queen, only awaiting the coronation that was her due.

He ran against the Democrats. He also ran against the powers within his own party. He beat them all.

In the final analysis, the rise of Trump says a lot about the deep rooted anti-establishment sentiment and points to voters’ distrust for Hillary than a ringing endorsement for Trump. This was Brexit Mark II when the popular sentiment was against the politicians who have consistently let down the vast majority of middle and lower income earners.

However, his rudimentary policy platforms will come under increasing scrutiny, like the apparently unspecified plan he says he will destroy ISIS within months. It's the same story for his fiscally questionable promises to simultaneously cut taxes, raise military spending, take care of veterans, safeguard social safety net programs and eliminate the national debt.

Let's fast forward into his new “POTUS” role – Phew! What a week that was!!!

For Trump, winning the Presidency was not enough. He wanted to win the popular vote too and has launched an investigation on Voter fraud. A man who has obsessed for TRP ratings for his shows, wanted a mega event for his coronation. But that was not to be. The crowd was small, the weather was bad and his speech was dire.

His ego was dented by the sparse inaugural crowd but that didn’t deter him from making outlandish claims with his “alternative reality”. His Press Secretary, Sean Spicer, made the claim as “This was the largest audience to ever witness an inauguration, period. Both in person and around the globe.” When the media confronted with facts, Kellyanne Conway, Trump’s counsel, justified Sean Spicers figures as “alternative facts”. And then they threated to hold the media accountable for bad press!

O’ what an eventful first week Trump Presidency has delivered! Seven days into his presidency, the series of official actions, at the rate of as many as five a day, has created a new national reality on central policy concerns from the environment to voting rights to international commitments to immigration, healthcare and trade; making it clear that as President he is not going to moderate his positions than what he took as a candidate. Since being elected, Trump has largely stood by his campaign promises. Here's a breakdown of some of his plan and initial actions:

1. Repeal Obama care

Trump’s first move was to roll back the “regulatory burden” of Obamacare pending the act’s “prompt repeal”.

2. Withdraw from Trans-Pacific Partnership (TPP)

Trump said he intends to withdraw from the Trans-Pacific Partnership negotiations and replace it with "fair bilateral trade deals." And he has already initiated the process.
The move will shatter President Barack Obama's aim of strengthening US influence in Asia and could leave the Western world's trade agenda in disarray. The TPP, which was aimed at linking the US economy with 11 countries around the Pacific, took years to negotiate.
"The TPP without the United States is meaningless," Japanese Prime Minister Shinzo Abe said

during a recent visit to Argentina. Some experts claimed that the TPP would kill jobs and worsen income inequality across the 12 nations, particularly in the US. Trump said he intends to withdraw from the Trans-Pacific Partnership negotiations and replace it with "fair bilateral trade deals." And he has already initiated the process.

The move will shatter President Barack Obama's aim of strengthening US influence in Asia and could leave the Western world's trade agenda in disarray. The TPP, which was aimed at linking the US economy with 11 countries around the Pacific, took years to negotiate.

"The TPP without the United States is meaningless," Japanese Prime Minister Shinzo Abe said during a visit to Argentina.

Some experts claimed that the TPP would kill jobs and worsen income inequality across the 12 nations, particularly in the US. He has also indicated that he will review the NAFTA pact.

3. Examine Visa programs

During the final weeks of his campaign, his plan that would end illegal immigration and suspend immigration from terror problem regions. He also said he would "stop illegal immigration, deport all criminal aliens."

In one of his most provocative actions, he has passed one of the most controversial executive orders that is riling people up within America and around the world. President Donald Trump's seismic move to ban more than 130 million people from the United States and to deny entry to all refugees reverberated worldwide Saturday, as chaos and confusion rippled through US airports, American law enforcement agencies and foreign countries trying to grasp Washington's new policy.
Trump's executive order bars citizens of seven Muslim-majority countries (Iran, Iraq, Syria, Sudan, Libya, Yemen and Somalia) from entering the United States for the next 90 days and suspends the admission of all refugees for 120 days causing serious disruption resulting in large scale popular outrage amongst people across the globe and within the US with many US corporates speaking out against the move reiterating vociferously that this goes against what America stands for!

4. Build the Wall

Trump issued an executive order on Wednesday to “Build the Wall” calling for “the immediate

construction of a physical wall on the southern border, monitored and supported by adequate personnel so as to prevent illegal immigration, drug and human trafficking, and acts of terrorism”.

Trump proposes to pay for the wall by levying a 20% duty on Mexico. He also moved to deny federal funds to "sanctuary cities" – the more than 400 cities and counties in the US that offer some form of safe haven to America’s 11 million undocumented migrants.

5. Cancel environmental restrictions

Trump was consistent in his promise to reduce environmental restrictions. Now he is vowing to deliver on that. The plan, which Trump has previously said he would scrap, targets existing coal-fired and natural gas power plants in an effort to reduce greenhouse emissions in the US by 32% by 2030. It is expected to go before the Supreme Court in early 2017.

6. Cut regulations on businesses

Trump says he will formulate a "rule that says for every one new regulation, two old regulations must be eliminated." He has previously spoken on his desire to axe the Dodd-Frank Act, which was created after the financial crisis to abide by a litany of new rules to prevent another crash.

The Fed also does annual "stress tests" to simulate whether the bank was strong enough financially to withstand another financial crisis. All that regulation has triggered huge backlash from Wall Street and Republicans, including Trump, though he has also supported stricter regulations in the past.

7. Protect against cyber attacks

Trump says he will establish a cyber-review team made up of members of the military, law enforcement and private sector. He wants to audit the security of the federal government's computer systems and strengthen the hacking division of the US military. Trump also wants to "develop the offensive cyber capabilities we need to deter attacks by both state and non-state actors and, if necessary, to respond appropriately."

The US government is credited with having some of the most dangerous hacking tools on the planet. Yet these weapons haven't deterred Russia from hacking into the Democratic National Committee or China from hacking into American companies.

8. Enact lobbying bans – “Drain the Swamp”

Trump promised to "drain the swamp," so it's little surprise that he has focused his ire on lobbyists. The move will prohibit officials from becoming a lobbyist for five years after leaving government.
Trump's goal of making sure that people aren't using the government to enrich themselves and using their service in government to do that, says Republican National Committee spokesman Sean Spicer.

"Everybody's a lobbyist down there," he said. "That's the problem with the system -- the system," Trump said. "We're doing a lot of things to clean up the system. But everybody that works for government, they then leave government and they become a lobbyist, essentially. I mean, the whole place is one big lobbyist."

In Summary

The Trump is acting like a man in a hurry. He seems to be clearly conveying to his supporters that he means business and will not fail them on the campaign promises.

However, the irony in some of Trump’s actions is not lost. Although Trump ran as a populist, railing at the elite on behalf of blue-collar workers, he has surrounded himself during his campaign with plutocrats. And now that he’s president, he’s elevating them to power. Trump’s proposed Cabinet has a net worth of more than $6 billion with some of them who have benefited from favourable Government policies in the past!

It is equally undeniable that the new US President also put the rest of the world on notice. His penchant for rapid actions and confrontational style will have far reaching implications for both America and the rest of the world.

We are likely to witness a more protectionist, inward-looking, self-serving, America First policies from the US. This will undoubtedly result in increasing retaliatory actions from other trading blocs and is likely to reshape the world economic order. In the short term, there is likely to be a heightened chaos and uncertainty arising from US policy actions that can cause significant disruptions to cross border trade and global economic growth as well as many business models.

On the geo-political front, Trump is likely to create new political alliances though he has reversed his position on NATO with an agreement to continue his support to it. Trump’s approach to US relationship with Russia including any lifting of sanctions will have serious geo-political implications that might potentially test other alliances and may create a new political order of alliance partners for US, Japan, China, NATO, Middle East and the rest of the world.

One thing is for sure is that there will never be a dull moment in Trump Presidency!

The Hype and Hyperbole of Demonetisation of Rs 500 and Rs 1,000 Notes

2016-11-12T10:50:00.000+00:00

Let me say at the outset that I welcome the demonetisation move but do not support:

· the shock and awe approach that has caused hardships to a vast majority of citizens for the limited benefit this may deliver (more about this later); and

· the hype and hyperbole that this action will deliver a death blow to corruption and black money, which it certainly will not, as the problem of corruption and unaccounted wealth is much bigger and is not limited to hoarding of cash, which if anything is less than 5% of total black money.

Hence, the claims by the Government that this will end the menace of black money and corruption are simply outlandish. Also, the simultaneous introduction of Rs 2,000 note undermines their claim and it simply does not fit the storyline of an attack on black money and corruption.

Now, let's look at the extent of the possible real benefits of this move.

As noted above, to say that this will deliver a death knell to corruption and black money is a massive overstretch and a great exaggeration, and I will come to that in a bit. But those who are going on an overdrive about this being an unprecedented move of epic proportions and the next best thing since sliced bread, need to read up a bit of history. This has happened in the past in India in 1978 and again to a limited extent in 2005 when older notes were recalled but in a more orderly and sensible manner. This has also been tried in many other countries and what these experiences tell us is that demonetisation on its own has a very limited effect for a short while unless backed with several other measures of surveillance.

This is simply because of the fact that significant amount of black money is held via overseas bank accounts or in offshore real assets through a web of shell companies, a fact acknowledged earlier by the ruling party prior to general elections (Kaala dhan videshi bankon mein jama hai!). However, equally it’s undeniable that some portion of it is also held domestically but bulk of this is in the form of real estate, financial assets through trusts, Gold and some amount of it in cash. And it's the last part of this that demonetisation will address and deliver some benefit. This was also the political position of the ruling party back in 2005 when they protested against a move by the previous Government to recall higher denomination notes. So, what are the real benefits of this move?

Let’s look at some of the specifics around expected benefits of this demonetisation and the ways in which this may have an impact:

1. For starters, it will invalidate the fake notes being pumped by some of our neighbours through Nepal and other porous borders;

2. It will bring more cash into the banking system, as even legitimately held cash with people will find its way into the banks, at least for some time (until the cash withdrawal limits are increased);

3. It will bring some amount of unaccounted cash which may either flow back into the banks where people simply decide to account for it and pay tax or otherwise use their extended family and friends network to split the amounts into smaller amounts to recycle into the banking network; and

4. Finally, some cash may simply be unclaimed (though highly unlikely with the Indian Jugaad system).

The benefits case

1. Fake Currencies

The issue of fake currencies was becoming a serious menace and this move clearly stamps it out. It will take a while for them to master the art of new notes that have, purportedly, advanced security features. However, the immediate adverse impact of this will be felt in the form of slower GDP growth and lower consumer spending. The positive effect may be in the form of Inflation trending lower because of this.

2. Cash flowing into the banking system

Irrespective of having a bank account, people legitimately hold cash for their routine and emergency requirements. This move will result in this cash flowing back into the bank, only to be withdrawn after a while. So this will only result in a temporary improvement in the liquidity position of banks as it will leave once the new notes are available and withdrawal limits are lifted. So the real benefit from this is questionable.

However, the cash that was not previously within the banking system will flow into it for the first time. This will lead to an increase in bank deposits and perhaps a reasonable amount of this may stay for a longer period. To the extent of the stability of these deposits, this may help the credit creation process. However, for the credit creation to occur, the PSU banks that are weighed down by non-performing loans have to be recapitalised. So, no tangible benefit to the economy until and unless the banks are recapitalised.

3. Unaccounted Cash flowing back

This is potentially what the Government is really targeting. If some element of unaccounted money finds its way back into the system, this will help in improving the tax take and the Government stands to benefit. Given the ingenuity of these individuals in protecting their cash, it remains to be seen whether this yields a big tax collection or results in just an increase in number of bank accounts and balances as hoarders find ways to split the amounts. It has to be noted that the recently concluded income declaration scheme in September 2016, resulted in an income disclosure of Rs 65,000 crores ($10bn) and netted a tax take of Rs 29,000 Crores ($4.5 bn), much less than the expected hundreds of billions of $.

4. Unclaimed balances

And finally any unclaimed notes in circulation, a highly unlikely scenario as people will find ways to recycle (remember, India is a land of Jugaad), will result in a clear benefit to the RBI and the Government, as RBI can extinguish its liabilities to this extent. This gain can be used by the RBI to pay dividend to the Government which reduce the fiscal deficit. But this process cannot begin until next fiscal year which is when the aggregate of unclaimed balances will be known as RBIs window for accepting notes extends to 31^st March 2017.

Now let's compare the magnitude of black money and the minimal extent to which this action is going to address the problem.

Total money in circulation according RBI statistics is Rs 16.4 lacs crores ($250bn if you can't get your head around that). Of this, about 86% or Rs 14.2 lacs crores ($ 215bn) is represented by Rs 500 and Rs 1,000 notes as per table below.

According to the RBI's statistics, Scheduled Banks and other banks in India hold about ~Rs 6 lacs Crores ($91bn) in Rs 500/Rs 1000 notes after applying the 86% on their total cash holdings to estimate the amount held in Rs 500 and Rs1,000 notes, in their branches and ATMs.

Then you have organisations like the Railways, Post offices, PSUs, Corporates, Petrol Pumps, Hospitals, Government offices, businesses and traders holding cash as part of their legitimate daily activities. Assuming that the legitimate portion of the cash holdings to be 2/3^rd levels of banks (based on an estimate that recognises that the number of corporates, traders, organisations significantly outnumber the banks by several hundred folds), it comes to Rs 4 lacs crore ($60bn), then the remaining cash amount reduces to less than half of the total. So that leaves the balance cash to ~Rs 4.2 lacs Crores (or $64bn). The table below shows the estimates:

Details	Rs (Crores)	~ USD billions	% to total cash in circulation
Aggregate Money in circulation (RBI statistics)	1,640,000	250	100%
Aggregate Money in Rs 500 and Rs 1,000 notes (86% of total per RBI Statistics)	1,420,000	215	86%
Money held with Scheduled Commercial Banks and other FIs includind Cash reserve ratio of Rs 5lacs Crores with RBI (Branches and ATMs) (estimated at 86% of total cash in Rs 500/1000 notes)	~ 6,00,000	91	36%
Estimate cash with Post Office, Corporates, Railways, Traders, Petrol Pumps, Govt. etc.	~ 4,00,000	45	18%
Estimated Balance left with individuals (surprisingly a number we associate with fraud and cheating!)	~4,20,000	~ 64	26%

Out of the estimated amount of cash held by individuals, we can make a reasonable split of cash held by urban and rural folks:

· Urban India - Legitimately held cash for routine and emergency expenses (assuming an average of Rs 2,500* per person for the 400 million urban population) - Rs 1 lac crore ($15bn)

· Rural and Semi Urban – Mainly cash users or not in the banking system - say an average of Rs 500* for the 800 million - Rs 40,000 crores ($6bn)

(* average holdings based on research of Rama Bijapurkar - http://www.ice360.in/uploads/files/ibgc-wp14-03-bijapurkar-et-al.pdf)

So, if we adjust the legitimate amounts held by individuals of ~Rs 1.4 lacs Crores ($21bn) from the aggregate Rs 4.2 lacs Crores ($64bn) of balances with individuals, the net estimated amount of unaccounted cash would be ~Rs 2.8 lacs crores or ~$ 43bn.

This is just about 2% of our GDP! Now cutting all the noise, compare this to the total unaccounted money which was estimated to be ~$1 trillion and you can very easily see that it represents less than 5% of the black money problem!

Even if we made an overly optimistic assumption that the entire amount of ~$43bn can be recognised as a gain either through tax take or unclaimed balances, this would still represent only 4.3% of the total black money problem. While this is still a welcome development and needs to be applauded, but it needs to be kept in the context of the magnitude of the overall problem.

So I would say to all those screaming that this will end black money that after all the noise subsides and the chest thumping is over, please realise that the black money problem is far from over! We have just scratched the surface. But the reintroduction of higher denomination notes will only make the problem worse unless further measure to curb cash transactions are introduced.

An important point to understand that cash is fungible. It has no permanent label as black or white.

You withdraw cash from the bank and buy a durable without a bill to avoid GST or pay a bribe for any approval you need, it become black. The same recipient goes with that cash to a supermarket or a restaurant and spends it and gets a bill, it become white. So not all cash is black and not all cash is white!!!

So the solution is not attacking cash because it will start the day the scheme ends as people as will about their old ways.

What's required is the incentives that drive creation of black money need to be addressed. Attacking cash is like treating the symptom than the underlying problem!

So was the midnight strike really necessary and worth it?

Now let’s look at the dramatic way in which this decision was announced. The move took many by surprise and the reactions in social media has since moved from an initial euphoria to a state of chaos and panic that has left crores of citizens on the streets queuing in front of banks and ATMs looking for the right kind of cash (as lower denominations are only 14% of stock in circulation trying to replace 44% of cash that needs to be replaced!). To top it, the new currency notes do not fit the ATM machines and it will take more than a couple of weeks for ATMs to deliver the higher denomination notes of Rs 500 and Rs 2,000! And the government says it has been planning for well over six months!

In my opinion, the benefits of this surprise element is being significantly overplayed by the Government. If the Government is conducting inspections of gold traders and other places of suspected of conversion of cash, they could still adopt the same process of surveillance and could have given people a reasonable notice to organise their lives. This would have resulted in an orderly withdrawal of old notes and still snuff out the fake currencies without the attendant chaos and hardships to a large section of the population for a limited benefit!

The immediate withdrawal is unjustified as it results in hardships to 99% of the population to attack 1% of hoarders. More so, when taken in the overall context of the contribution of unaccounted cash to the black money problem as bulk of it is held overseas in offshore assets or in real estate or in gold.

While people can be asked to make sacrifices for the nation’s cause, this seemingly ill planned execution together with its limited benefits does not quite fit that bill. The simultaneous introduction of the higher denomination Rs 2,000 note blows a hole into that argument as it clearly defeats the purpose of stamping out black money! All this exercise does, at best, is to reset the base for a small part of the overall issue which could have been managed better.

Here's some context in simple layman terms of the current exercise:

If you earn Rs 100 per annum, how tickled would you be if I told you that you will get a one-time bonus of Rs 2? Mighty thrilled?

And for that I have to inconvenience 99% of people to secure that, and I am not even sure whether it will be Rs 2...That is the nature of the current abrupt demonetisation. This could have been orderly without having to cause chaos, panic and distress.

And BTW, there is another Rs 50 that I know can be recovered without having to disturb the 99% of the people. Ah, but that will involve upsetting some powerful business magnates. We will leave that for another day...

A surgical strike is a precision strike with precise intelligence. Not aimless shooting in the dark in the hope of hitting some targets!

And creating an easy path for future creation of black money cannot be part of such an objective (re. Rs2,000 Note).
Hence, the Government’s claim that this action will stamp out black money is tenuous and a fantasy as the Rs 2,000 note will only accentuate the problem of black money creation. While the move is intended to catch the cash hoarders unaware, there are other effective administrative tools in the form of better surveillance, improving the analytics and intelligence network, and taking action against those who facilitate the fake currency trade from our side of the border.

Conclusion

The monetisation move is to be welcomed as there will be some benefit from this exercise but the justification for a sudden withdrawal is questionable as the surveillance on exchange of notes could have ensured that even orderly withdrawal would succeed.

If the Government is seriously minded to tackle black money menace, it has focus on the 96% of the problem and work with other G20 members on information sharing and take prompt action. So far nothing much has been heard after the initial claim of 650 odd names. Even the Supreme Court has now stopped asking for updates! So the judiciary is also sleeping at the wheel.

I also question the associated hype and hyperbole, which simply seems to exploit the financial and economic illiteracy that is prevalent even amongst the educated middle class who haven’t comprehended the issue, let alone the rural illiterate.

While there is some gain to the Government in the form of a potential tax take or unclaimed balances which will help to reduce the fiscal deficit, but to proclaim that this is the end of corruption and black money is far-fetched.

This move is neither going to deliver a death knell to corruption nor eradicate black money! And the rhetoric doesn’t gel with the simultaneous introduction of the higher denomination note!! The shock and awe approach doesn’t quite justify the hardship inflicted on millions of ordinary folks.

#Demonetisation #BlackMoney

THE OLYMPICS - IT'S NOT JUST ABOUT THE GAMES!

2016-08-24T22:40:00.001+01:00

Rio Summer Olympics 2016 – Citius, Altius, Fortius - Faster, Higher, Stronger

The Summer Olympics in Rio has finally ended after two weeks of intense competition, thrilling contests and nail biting finishes that provided adrenalin pumping excitement. The Rio Games had its finale with brilliant display of fireworks

lighting up the skies in the city of God. After the celebrations comes the after effects of the Games which inevitably leaves behind a trail of despondency and gloom as the party ends and people begin to get back to their routine with a sense of vacuum.

However, the Rio Games also provided its moments of drama and controversies but leaving that aside it was a fantastic event that brought the Olympic spirit alive and the theme of 'Faster, Higher, Stronger' remained much in display with 27 new World records being made and the margins separating the winners and losers becoming ever so wafer thin.

There were several milestones achieved by athletes, for e.g. Usain Bolt’s ‘Triple Triple’, Mo Farah’s ‘Double Double’, Phelps incredible rush of gold, Ledecky making new waves, Simone Biles’s incredible gymnastic routines, the ‘Trotts’ gold haul, Nicola Adam’s power punches, Chen Aisen’s breathtaking dives, Wayde van Niekerk’s 400m world record etc., all of which lived up to the billing of the Olympic Games.

The Olympic spirit came alive when New Zealand’s runner Nikki Hamblin stumbled and fell, accidentally tripping Abbey D'Agostino of the US and went about helping Hamblin back to her feet -- but the American had injured her leg in the incident. When it gave way and she slumped to the track seconds later, Hamblin then helped her up and stayed by her side to make sure she was fine. Hamblin only resumed the round one, heat two race at the Olympic Stadium when she knew D'Agostino was over the worst. And she waited at the finishing line to greet the American -- who hobbled through the pain to complete the race and was helped away in a wheelchair -- with a heartfelt hug. The spirit of Olympics blossomed!

Beneath all the excitement lies stories of blood, sweat and tears of the athletes. Several inspiring tales that brings to fore the enormous grit, perseverance, endurance, self-belief and determination of the participants. Many of them had overcome physical, emotional, societal and financial hurdles. Given the backdrop of their circumstances, their achievement deserves even greater admiration and respect as it implores one to look beyond constraints and inspires us to persevere in spite of immense difficulties.

The stories are hugely uplifting and reinforces the message that human pursuits have no limits. The only limits are the ones that we impose on our minds!

Here are some of the inspirational stories (in alphabetical order) from the Rio 2016 Games:

1. 1. Chris Mears, 23, Team GB

Along with Jack Laugher, Chris Mears won Britain’s first ever gold medal in diving. But just seven years ago things didn’t look so promising for Chris. He contracted the life-threatening Epstein Barr virus, and was given just a 5% chance of survival.

In 2009 the diver suffered a ruptured spleen and collapsed, losing five pints of blood. He stayed in hospital for a month, and had to have his spleen removed. He made a full recovery and returned to the Games in 2010, finishing fourth in the synchro at the Commonwealth Games.

2. 2. Dina Asher-Smith, 19, Team GB

Just four years ago, Dina Asher-Smith was carrying out the athletes’ kit at the London Olympic Stadium. Today, the 19-year-old is Britain’s fastest woman. It’s an incredible rise that leaves the London sprinter on the verge of becoming the first British woman to dip under 11 seconds and is an increase in speed that has taken even her by surprise. “It’s pretty weird,” she says of the tag of the fastest Brit, following her run of 11.02sec in Hengelo, Holland, in May. “I’m still not used to it.

3. 3. Dipa Karmakar, 23, India

Lack of modern gymnastic facilities did not deter Dipa from pursuing her dream of becoming a world class gymnast. She is the first Indian female gymnast ever to compete in the Olympics, and the first Indian gymnast to do so in 52 years. When she began gymnastics, Karmakar had flat feet, an undesirable physical trait in a gymnast because it affects their performance. Through extensive training, she was able to develop an arch in her foot.

She attained 4th position in Women's Vault Gymnastics event of Rio Olympics 2016 with an overall score of 15.066. Karmakar is only the fifth woman in gymnastics history to land the Produnova vault, or the handspring double front. The Produnova is an artistic gymnastics vault consisting of a front handspring onto the vaulting horse and two front somersaults off. The vault currently has a 7.0 D-score, and is the hardest vault performed in women's artistic gymnastics. In the Olympics women's vault gymnastics final she finished at 4th position. Sajad Ahmad, physio/coach of Dipa Karmakar, was rushed to the Rio to keep her in optimum shape only after she qualified for the finals. Her earlier request of company of the physio was deemed wasteful!

4. 4. Houry Gebeshian, 27, Armenia

Houry Gebeshian works night shifts delivering babies – and then goes to the gym. She is a gymnast for the Armenian team – and a physician’s assistant the rest of the time. She told the BBC that she works nights and weekends delivering babies, and then spends her free time around that at the gym.

‘I work a 24-hour shift on Sunday and a 16-hour shift on Wednesday, but the days that I’m not working I’ll be in the gym,’ she told the BBC. ‘I get off at around 7am, I take a bit of time off work – I’ll take a nap for about three hours – and then I’ll head straight to the gym.’

5. 5. Jillion Potter, 30, USA

American rugby sevens star Jillion Potter has overcome every hurdle put in her way to compete in the Olympics.

In 2010 she broke her neck during a game against Canada – an injury that could have left her as a paraplegic, preventing her from ever playing rugby again. However, she was back in the game just one year later.

She went on to play in the 2013 Rugby Sevens World Cup – with what she would find out was a tumour in her mouth, later diagnosed as a rare Stage III synovial sarcoma. Her subsequent battle with cancer, chemotherapy and radiotherapy led to her being dubbed US rugby’s ‘great survivor’. Now, just three years since her diagnosis, she was back on the pitch at Rio 2016.

6. 6. Lopez Lomong, 31, USA

South Sudanese-American Lopez Lomong was one of thousands of child refugees caught up in the country’s horrific civil war. He was one of the Lost Boys of Sudan – a group of more than 20,000 boys of the Nuer and Dinka ethnic groups who were displaced or orphaned during the war.

Lopez was abducted at the age of six while attending Catholic Mass, and was assumed dead by his family. He almost died in captivity, but other people from his village helped him escape.

He sought refuge in the US in 2001, and became a naturalized citizen in 2007. For many years he assumed his parents had been killed by the Sudan People’s Liberation Army, but in 2003 he was reunited with his parents.

7. 7. Michael Phelps, 31, USA

Much has been written about Michael Phelps and his incredible list of achievements. Undoubtedly is one of the Greatest Olympians of All Times (GOAT) with a haul of 28 Olympic medals of which 23 of them Gold! But as a child Michael had to face many challenges. At age 9, Michael was diagnosed with attention deficit hyperactivity disorder (ADHD). With the help of treatment — medication and behaviour therapy — and the support of his mother, Michael was able to channel his energies into swimming, becoming the youngest male record holder in modern sports at the age of 15.

His size 14, double-jointed feet move like flippers, which help power him through the water. Even though he seems to be genetically engineered for the water, Phelps matches his genetics with an incredible work ethic and training regimen. He and his coach Bob Bowman have a strict and disciplined routine; a must-have for anyone who wants that prestigious spot on the podium. He trains in the pool six days per week and circuit trains with weights three times per week. He doesn't lift super heavy because extra bulk wouldn't help him. He wants to keep his body light and lean.

He got 8 out 8 gold medals in Beijing Games in 2008 and in the process created 7 World Records and 1 Olympic Record!

As they say, the rest is history!

8. 8. Mo Farah, 33, Team GB

Mo Farah was born on 23 March 1983 in Mogadishu, Somalia. He spent the early years of his childhood in Djibouti with his twin brother. He moved to Britain at the age of eight to join his father, speaking barely any English. His athletic talent was first identified by physical education teacher Alan Watkinson.He later joined the Borough of Hounslow Athletics Club in west London.

Farah represented the UK at 5000 m in the 2007 World Championships in Osaka, Japan and finished sixth. He was knocked out before the 5000 m final at the 2008 Olympics in Beijing.

He came back strongly at the London 2012 Olympics and won Gold in both the 5000m and the 10000m event. This was Great Britain's first Olympic gold medal in the 10,000 m, and Farah made it a long-distance double, winning the 5000 metres. In Rio 2016, Farah completed the “Double Double” of winning back to back Gold medals in the 5000m and 10000m event, a feat performed by only another Olympian, Lasse Viren, a Finnish Athlete who competed in Munich 1972 and Montreal 1976 Games.

9. 9. Nicola Adams, 33, Team GB

Adams struggled to continue her boxing career due to lack of funds. She worked as an acting extra on soap operas such as Coronation Street, Emmerdale, and EastEnders, and worked as a builder before the International Olympic Committee backed funding for women’s boxing in 2009. She is the first woman to win an Olympic boxing title for Team GB. She has won two back to back Gold medals in the 2012 and 2016 Olympics in the women's flyweight division. As of May 2016 she is the reigning Olympic, World, Commonwealth Games and European Games champion in the flyweight category.

10. 10. Nick Skelton, 58, Team GB

Nick Skelton made his Olympic debut in 1988, but in 2000 his hopes and dreams of continuing his Olympic career came to a halt after breaking the Cl vertebra in his neck from falling at the Park Gate Shows in Cheshire, England. Skelton’s fall also caused a ligament to snap and tore away a piece of his spine. He broke his neck and was told by doctors that he would never be able to ride again. The following year Skelton received news that the bones in his neck had healed beyond expectations and returned to the saddle in 2002.

Fast forward 16 years and the Warwickshire-born horse enthusiast is an Olympic champion in his own right, having earlier won a team gold in London 2012. Skelton, the oldest competitor in Rio’s Jumping Finals, proved that age doesn’t mean a thing except that he’s only gotten better as the 58-year-old delivers three back-to-back clear rounds after starting with a clean slate.

Six Games after his debut, Skelton earns a fairy tale ending to his equestrian career by not only adding an individual gold title to his London 2012 team title, but he became the first British individual show jumper to earn a golden title.

11. 11. Rafaela Silva, 24, Brazil

Rafaela Silva, a Judo star, grew up in Rio’s most infamously violent favela – the City of God.

As a child she faced poverty, inequality and racism – and was first enrolled in Judo by her family in order to keep her away from a life of gangs and drugs. Years later, she’s just earned Brazil its first gold medal in this year’s Games.

Juliana Barbassa, who wrote about the City of God and is a native Brazilian, told the BBC: ‘It’s a situation of literal marginalisation – they were pushed to the margins. ‘To get out of it as Silva has done is really challenging. She literally had to fight her way out of the environment.’

12. 12. Sakshi Malik, 23, India

Sakshi Malik was born on 3 September 1992 in Mokhra village of Haryana. Her father, Sukhbir is a bus conductor with the Delhi Transport Corporation. According to her father, she was motivated to take up wrestling from seeing her grandfather Badhlu Ram, who was also a wrestler. She began training in wrestling at the age of 12 under a coach, Ishwar Dahiya, at an Akhara in Rohtak. Coming from a State known for patriarchal mindset, it is indeed a phenomenal achievement for her to have pursued wrestling, traditionally a male preserve. Her coach and she had to face opposition from the locals for having taken up a sport "not for girls”.

She won a Bronze medal in the 58kg freestyle at the Rio 2016 Games and came home to a rousing welcome.

13. Simone Biles, 19, USA

American gymnast Simone Biles is undoubtedly the shining star of Rio 2016 Games. A newcomer to the Olympics, she’s so far ahead of her competition that other gymnasts joked that the real contest was to see who would be placed second.

But her life hasn’t been easy. Her biological mother struggled with serious drug and alcohol abuse, and when Simone was just five she was taken into care. Simone and her sister Adria, who was three at the time, stayed in a foster home in Ohio waiting to be adopted – until her biological grandparents, Ron and Nellie, found out what had happened and decided to adopt the girls themselves. Biles first tried gymnastics at six years old as part of a day-care field trip. The instructors suggested she continue with gymnastics. Biles soon enrolled in an optional training program at Bannon's Gymnastix. It was while living with her new parents that Simone’s talent began to flourish – and she would be on her way to becoming one of the greatest gymnasts of our time.

With four Olympic gold medals, Biles set a new American record for most gold medals in women’s gymnastics at a single Games, and equalled a number of other records with her medals won in Rio. Biles' win of four gold medals was the first instance of a quadruple gold medallist in women's gymnastics at a single Games since Ecaterina Szabo(Romania) in 1984, and the fifth overall, after Larisa Latynina (USSR, 1956), Agnes Keleti ( HUN, 1956), Věra Čáslavská (CZE, 1968) and Szabo. Biles became the sixth female gymnast to have won an individual all-around title at both the World Championships and the Olympic Games.

She was chosen by Team USA to be the flag bearer for the closing ceremonies. She was the first American female gymnast to be given the honour.

14. 14. Usain “Lightning” Bolt, 30, Jamaica

His parents ran the local grocery store in the rural area, and Bolt spent his time playing cricket and football in the street with his brother, later saying, "When I was young, I didn't really think about anything other than sports". As a child, Bolt attended Waldensia Primary, where he first began to show his sprinting potential, running in the annual national primary-schools' meeting for his parish. By the age of twelve, Bolt had become the school's fastest runner over the 100 metres distance.

He became the first junior sprinter to run the 200 m in under twenty seconds, taking the world junior record outright with a time of 19.93s. Bolt headed to the 2004 Athens Olympics with confidence and a new record on his side. However, he was hampered by a leg injury and was eliminated in the first round of the 200 metres with a disappointing time of 21.05 s.

The year 2005 signaled a fresh start for Bolt in the form of a new coach, Glen Mills, and a new attitude toward athletics. Mills recognised Bolt's potential and aimed to cease what he considered an unprofessional approach to the sport. Bolt began training with Mills in preparation for the upcoming athletics season, partnering with more seasoned sprinters such as Kim Collins and Dwain Chambers.

However, misfortune awaited Bolt at the next major event, the 2005 World Championships in Helsinki. Injuries were preventing him from completing a full professional athletics season, and the eighteen-year-old Bolt still had not proven his mettle in the major world-athletics competitions. Bolt was involved in a car accident in November, and although he suffered only minor facial lacerations, his training schedule was further upset. His manager, Norman Peart, made Bolt's training less intensive, and he had fully recuperated the following week. Bolt had continued to improve his performances, and he reached the world top-5 rankings in 2005 and 2006.

Peart and Mills stated their intentions to push Bolt to do longer sprinting distances with the aim of making the 400 m event his primary event by 2007 or 2008. Bolt was less enthusiastic, and demanded that he feel comfortable in his sprinting. He suffered another hamstring injury in March 2006, forcing him to withdraw from the 2006 Commonwealth Games in Melbourne, and he did not return to track events until May. After his recovery, Bolt was given new training exercises to improve flexibility, and the plans to move him up to the 400 m event were put on hold. He yearned to run in the 100 metres but Mills was skeptical, believing that Bolt was better suited for middle distances. The coach cited the runner's difficulty in smoothly starting out of the blocks, and poor habits such as looking back at opponents in sprints. Mills told Bolt that he could run the shorter distance if he broke the 200 m national record. In the Jamaican Championships, he ran 19.75 s in the 200 m, breaking the 36-year-old Jamaican record held by Don Quarrie by 0.11 s. Mills complied with Bolt's demand to run in the 100 m.

Bolt announced that he would double-up with the 100 metres and 200 metres events at the Beijing Summer Olympics, and the new 100 m world-record holder was the favourite to win both. Michael Johnson, the 200 m and 400 m record holder, personally backed the sprinter, saying that he did not believe that a lack of experience would work against him. Bolt qualified for the 100 m final with times of 9.92 s and 9.85 s in the quarter-finals and semi-finals, respectively.

In the Olympic 100 m final, Bolt broke new ground, winning in 9.69 s (unofficially 9.683 s) with a reaction time of 0.165 s. This was an improvement upon his own world record, and he was well ahead of second-place finisher Richard Thompson, who finished in 9.89 s. Not only was the record set without a favourable wind (+0.0 m/s), but he also visibly slowed down to celebrate before he finished and his shoelace was untied.

He followed that up with a Gold in 200m and in 4X100m relay in Beijing winning 3 Olympic Gold medals. He repeated the feat in London 2012 and Rio 2013, completing the “Triple Triple” earning him the title of “Greatest Athlete of All Time”. Another GOAT!

Regarded as the fastest human ever timed, he is the first man to hold both the 100 metres and 200 metres world records.

15. 15. Wayde van Nekeirk, 24, South Africa

Odessa Swarts, a track-and-field athlete who competed provincially in South Africa, couldn't qualify for the national team, let alone the summer Olympics, because of her ethnicity while the country was under apartheid.

She never got the chance. But her son is making up for it. Swarts' son, Wayde van Niekerk, won gold in the 400-meter sprint Sunday in Rio with a world-record time of 43.03 seconds. The record in the event had been held by U.S. track and field legend Michael Johnson for over 15 years.

Van Niekerk became the only man to have won the Olympic 400 metres from lane eight and the first man to win the race from an outside lane since the 1924 win by Scotland's Eric Liddell in lane six.

16. 16. Yiech Pur Biel, 21, Refugee

Yiech Pur Biel fled South Sudan 11 years ago to escape the civil war, and ended up living in a refugee camp for 10 years. Because of this, his training for Rio has been unconventional. He only started running a year ago, and has said that there were ‘no facilities in the camp, not even shoes’.

But now he will run in the 800m, and just wants to ‘show the world that, being a refugee, you can do something’.

17. 17. Yolande Bukasa Mabika, 28, Refugee

Yolande Bukasa Mabika, a judoka, is from Bukavu in the Democratic Republic of Congo – one of the worst affected areas in the country’s brutal civil war from 1998 to 2003. She was separated from her parents at a very young age, and was eventually found and taken to a centre for displaced children in Kinshasa. It was here that she took up judo.

‘Judo never gave me money, but it gave me a strong heart,’ she said. ‘I got separated from my family and used to cry a lot. I started judo to have a better life.’

18. 18. Yusra Mardini, 18, Refugee

Yusra Mardini is the face of the Olympics’ first ever team of refugees. She had a budding swimming career in her home city of Damascus, but when the civil war started her pool was bombed and life was increasingly perilous. Her family realised that they had to flee.

In 2012, she represented Syria in the 2012 FINA World Swimming Championships 200 metre individual medley, 200 metre freestyle and 400 metre freestyle events.

Mardini's house was destroyed in the Syrian civil war. Mardini and her sister Sarah decided to flee Syria in August 2015. They reached Lebanon, and then Turkey, where they arranged to be smuggled into Greece by boat with 18 other migrants, though the boat was meant to be used by no more than six or seven people. After the motor stopped working and the dinghy began to take on water in the Aegean Sea, Mardini, her sister, and two other people who were able to swim got into the water and pushed the boat for over 3 hours until it reached Lesbos. They then travelled through Europe to Germany, where they settled in Berlin in September 2015. Her parents also fled Syria and live in Germany.

On arrival in Germany, Mardini continued her training with in Berlin, in hopes of qualifying for the Olympics. She attempted to qualify in the 200 metre freestyle swimming event. In June 2016, Mardini was one of ten athletes selected for the Refugee Olympics Team. Mardini competed in the 100-meter freestyle and the 100-meter butterfly at the 2016 Summer Olympics.

Mardini won a 100m butterfly heat at the Rio Olympics, against four other swimmers, with a time of 1:09.21 and a rank of 41st among 45 entrants. All other five heats, with 8 competitors each, had winning times under 1 minute.

19. 19. Zahra Nemati

Zahra Nemati is an Iranian Paralympic and an Olympic archer. She originally competed in Taekwondo before she was paralyzed in a car accident. The accident shattered her spine and she was paralysed from the waist-down. This didn’t stop her Olympic dreams though. At the 2012 Summer Paralympics she won two medals, an individual gold and team bronze.

Zahra, who is now wheelchair-bound, re-trained in archery – and is so good that she’s qualified to compete in both the Paralympics and the Olympics, against able-bodied athletes. She has qualified to compete at both the 2016 Summer Olympics and the 2016 Summer Paralympics.

She’s already broken records. In London’s 2012 Paralympics, she became the first Iranian woman to win a gold medal in either the Olympics or the Paralympics.

Zahra was also chosen to be the flag-bearer for Iran at the opening ceremony – proudly leading out a team dominated by men.

The above stories of individual struggles and triumph against adversities shows the enormous self-belief which is an inspiration to all of us. In the pursuit of excellence the only limit is the one that we impose on our minds!

So go on pursue your dreams with gay abandon! Fortune favours the brave! Best of luck!!!

BANKING - INNOVATE OR PERISH

2014-10-07T12:10:00.003+01:00

Recently, I gave a talk on above subject at a European CFO seminar in London. Here’s the gist of my talk!

Generally when Finance professionals get innovative it’s usually followed by an accounting scandal! Well, I am not talking about that kind of Innovation here!

We usually associate innovation with Consumer Electronics, Mobile Phones, Automobiles etc. where newer models pop up with alarming frequency.

Banking is usually not known for innovation, at least not at a pace that other industries have been accustomed to.

Let’s look at a few examples of technology changing our world in recent history.

1. Technology is mercilessly redefining business models.

'Disruptive Innovation' occurs when a product or service takes hold in simple applications at the small end of a market and then rapidly takes over the market by storm and eventually displaces well established players.

Some examples of disruptive innovation are given below:

the music industry with online downloads (iTunes, Spotify etc.) making record company’s bankrupt (HMV, Tower Records);
changing customer behaviour leading to the emergence of online shopping (Amazon, eBay etc.) and disruption the high street retail stores;
Wikipedia made Encylopaedia Brittanica, a 332 years old print business, extinct;
Netflix gobbed up video rentals like Blockbuster;
online news channels now ‘erasing’ the print media; inflation adjusted there was less money spent on print ads last year than in the 1950s!;
Google erased 85% of the market cap of the top GPS companies after it launched its mobile maps app! and
television viewership is dropping as customer behaviour is increasingly moving towards the internet. For instance there are 4 billion views on YouTube every day!

We have seen yesterday’s big brands like Eastman Kodak, Nokia, Blackberry have all but disappeared as they didn’t keep up with the pace with emerging trends or adapt quickly enough to the shifting customer behaviour driven by the rapidly changing technology.

Eastman Kodak had a dominant of the market share for much of the 20^th century and had 90% yet in the 90s ran into difficulties with the advent of digital photography. It went into bankruptcy and had to sell its patents to emerge as a lean company now focusing on document imaging and personalized digital imaging only.

It took Apple only 5 years to the largest music company in the US and 7 years to be the largest in the world on the back of the launch of their iTunes 99c song downloads!!!

Amazon started as online bookstore and was seen not much of a threat.

When it launched Kindle and other eBook readers emerged, customer behaviour shifted.

When Amazon launched Kindle and Apple its iBooks, they killed the demand for physical books substantially.

Borders, one of the largest retail chain of book stores closed down.

Barnes & Noble revenues declined but survived as it had an online presence and had launched its Nook. Borders closed down.

Incidentally, Borders had outsourced its online operations to Amazon!!!

Amazon today is 2^nd largest ecommerce company as the changing customer behaviour to online shopping and putting high street retail stores out of business; Turnover of $75bn (China’s Alibaba is the biggest at twice the size of Amazon).

2. Changing customer behaviour driving the pace of innovation

Technology has caused a radical shift in behaviour of people. The arrival of Internet and now with Smartphones and tablets, the pace of change has been phenomenal!

We read on the Kindle or iPad, listen to music on iTunes or Spotify, buy & sell on Amazon/eBay, communicate using WhatsApp, and socialise with people on Facebook, express views through Twitter and catch up our favourite programs on YouTube….

Internet came along in 1994. If you think about it, anyone under 40 years of age and in employment has always been accustomed to the online world!!!

Internet has become an integral part of our lives and it has been given a massive boost by technology such as Smartphones & Tablets and wearable tech will only boost this further.

The younger generation has been adapting technology like never before! In fact, people want wi-fi more than their coffee!

...but what has all this got to do with banking?

Banking is a highly regulated business and banks should be not impacted by this....right?

WRONG!

With technology taking over most aspects of our life, there is little to indicate that banking might be an exception to the rule, there’s still enough time for banks to act before it’s too late. They end up looking at their Living Wills instead!

When was the last time when you went in to a bank? How many of you still use cheque books?

We use ATMs to draw cash, remit using online bank transfers etc. People do not want to spend time at a bank branch. Yet we still see banks spending on upgrading the brick and mortar network...

3. The emergence of FINTECHs

Disruption is the latest buzzword in the Fintech industry. Young entrepreneurs are transforming traditional industries and everyone wants a piece of the most profitable sector of the past few decades – the financial sector.

Increased digital disruption led by technological innovation is leading to new market participants in the traditional banking domain.

Financial technology or Fintech start-ups are invading the banking space piece by piece. The first one to fall victim is the payments business.

Payments

The hottest space is payments, as evidenced recently; even the mighty Apple wants a piece of the pie. Square, Stripe, Dwolla, Google wallet, PayPal to name a few have entered the payments business, traditionally a banking domain.

Even companies have started managing their customer’s payments differently. Starbucks, for example, has arguably the most successful mobile payments app.

It processes over 6million transactions a week (15% of its total) and is expected to process almost USD1.5bn in 2014. These numbers are growing at over 75% YOY. It recently announced that it will open up their platform for others companies to replicate.

Fast food chain, groceries, pharmacies, gas stations etc. will soon look to replicate this success.

Mobile payments

Some countries are moving straight from having no bank accounts to mobile payments just like they moved from no phones to mobile phones. Kenya is the prime example where almost half (2014 est) of the country’s GDP (USD 45.9bn 2014 est) moves using mobile payment on a service called MPESA launched by the leading mobile phone operator in the country called Safaricom (owned by UK’s Vodafone).

Globally, over 50% of the population does not have a bank account!! And now mobile service providers are entering this space!

Lending

Even the commercial banking strongholds are slowly coming under attack – the likes of Funding Circle, Zopa, MarketInvoice & Bondora are connecting savers to SMEs that want to borrow, thus eliminating the intermediaries – i.e. banks.

This industry has increased 100% YOY for the past three years and is expected to surpass USD 1.6bn by year end.

IB and Venture funding

We all would have read about startups raising funds on websites like Kickstarter and Crowdcube. Kickstarter has raised over USD1bn in crowd funding from over 5 million investors! Crowdcube has raised over £38m from 90,000 investors.

These are small numbers but what’s important to note is that these are growing exponentially!

Even the Investment banking domains are not being spared. Loans are now even beginning to be repackaged in to securities. Some of you eat burritos at a place called Chillango that is scheduled to raise over GBP 2m in the first ever crowd funded bond offering (called 'Burrito Bond').

Foreign Exchange

How about financial markets? Retail FX is being disrupted by companies such as TransferWise, which claims to offer better rates than all banks – even publishes a comparison on its website. It increased volumes from USD 200m to USD 1.7 billion in just 11 months!

Wealth management

Startup wealth managers like Nutmeg and Wealthfront are also making inroads into the tradition preserve of high heeled bankers.

While these are small numbers but a clear trend is emerging and the rate of growth is exponential. Retail, corporate or investment banking are all under attack. All this will impact bank’s revenues; there are various estimates of this impact - Accenture research estimates about 30% of the banking revenue pool will shrink, McKinsey puts the same number at ~25%.

What we know for certain is that the bank’s wallet is going to be lighter!

While on the one hand revenue pools are shrinking on the other end operating costs have become higher due increased regulatory burden, causing considerable strain on profitability and returns.

4. Regulatory overdrive

Ever since the global financial crisis that hit in 2008 with the failure of Lehman Brothers, there has been a torrent of banking regulations. The suite of regulations (to name a few Basel 3/CRD4, EMIR, Dodd Frank, FATCA, MiFid, RRP,ICB etc.) taken collectively has the effect of knocking off over 25% of the returns. The regulations seek amongst other things:

Higher capital and liquidity buffers;
Increased compliance requirements on customer acquisition, remittances and sanctions monitoring;
Onerous new tax regulations like FATCA;
Higher margining and collateralisation through centralised clearing houses;
Recovery and resolution plans; and
Bank levy

In addition to the above:

Balkanisation of operations is making the business model increasingly expensive; Each of the regulators, in their desire to keep their jurisdiction insulated, are curtailing the mobility of liquidity and capital for cross border banks; and
Banks are required to maintain higher levels of buffers locally as well.

All of this has pushed the cost of operations for banks while revenues have been under attack from non-traditional players leading a significant squeeze on return on capital for investors in the sector.

The Return on equity of banks has dropped from mid-teens to high single digits. A lethal combination of digitisation, changing customer behaviour and regulatory onslaught will leave the banks like dinosaurs if they fail to innovate!

And how are banks coping with new reality?

So where are banks in this dynamic environment? Banks are not generally known for Innovation. Well not anymore! Banks very well recognize the threat posed to their business model and have begun to make changes.

Payments

In the payments space in the UK, several major banks and building societies have started offering the ability to make payments to mobile numbers (no bank a/c required) using their mobile banking app in a service called PayM. Barclays is launching Ping it that allows payments just using mobile phone number.

And in the near future banks will help facilitate retail payments through an app called Zapp, which will also attempt to combine loyalty programs of various retailers.

Some banks are recognizing the power of social media; Banque Populaire just announced that it will start offering the ability to make payments via twitter.

Bank Accounts

Movenbank, a start-up bank offers Facebook integration and ability to open initial account by through Facebook.

APPS based Offering

In other geographies, banks such as Commonwealth Bank of Australia have begun offering services, via its mobile app, that provide information on real estate properties based on image from the mobile phone camera of the property.

The bank of the future will aim to help its clients in everyday financial decisions.

If you wish to buy a house, you would simply open your banking app and view properties in the budget your bank has calculated after analysing your income and payments (of course you would be able to adjust these numbers).

In Asia, Standard Chartered bank offers its clients, through an App, daily discounts from partner retailers.

The idea of such apps is to make the bank more relevant to its customers on a daily basis.

Car Deals – BBVA

BBVA Compass App provides information on traded price of cars to enable customers to negotiate a better price with their dealers.

CASHBACK - BOA

Bank of America allows its customers to choose the retailers for their cash back deals (online) for purchases with a BOA debit or credit card. The cash back you earn is automatically credited to their account next month.

Some banks are taking the M&A route and taking over the innovators as BBVA did in the US through its acquisition of Bank Simple.

BANKS OF THE FUTURE

I believe that the bank of the future will have to fight hard to make itself relevant to its clients.

Some banks are developing an App that allows customers to query and track spends by category simply by a voice command! For example, you can ask how much did I spend at restaurants in the last six months and you will get information!

It has to act like an online financial planner for the client by helping them with their personal financing decisions. Or else, banks are at risk of becoming a back office transaction processing unit while the front end would be APPS developed by FINTECH companies.

From buying flight tickets to cinema offers, banks have the ability to tie up with their corporate clients to offer the best services to its retail clients. A single app with loyalty offers to all credit cards and debit cards for payments should be offered by the future bank.

The ultimate goal is to be able to offer the customer methods to:

save and get value on deals;
help manage their personal finance better; and
reduce friction and speed up delivery time of financial services.

Like the iPhone has combined the camera, music player, phone and now credit cards in to a single product, banks have to create the magic app that combines to meet the customer’s personal finance needs!

And finally comes the question - How can Finance drive Innovation?

The traditional role of Finance covering budgeting, external reporting and business performance analysis, though essential will not be enough.

Finance needs to be at front and centre of the innovation agenda and take the lead to create an environment for:

digitisation initiatives by creating investment capacity through operational efficiencies;
investment to move to a single source for information storage, performance and risk measurement, management, external and regulatory reporting;
deployment of tools to the front-end that provide incisive business performance analysis that looks at profitability from multiple viewpoints;
monitoring emerging trends and be alert to competition from non traditional sources;
reshaping the business to capture the revenue pool shift to non traditional players; and
capital allocation discussions.

I hope this has provided sufficient food for thought to you to put Innovation at the top of your agenda!

ACHIEVE SUCCESS AND HAPPINESS

2014-07-24T00:18:00.000+01:00

Don't we all want to be successful and happy? Regardless of our social class, ethnicity, age, location, education or profession, our goal in life is to be successful and happy. Can one be happy and successful at the same time? Sometimes we see that the more a person is successful and the more he/she has, the greater is the stress he/she experiences. Success and happiness can mean different things to different people and at times appear mutually exclusive. So, is it possible to achieve success without stress?

Let’s first look at how success is defined and see if happiness can co-exist with it. Oxford Dictionary defines success as:

1. The accomplishment of an aim or purpose

2. The attainment of fame, wealth, or social status

Quite often success in life is identified with the latter, i.e. attainment of fame, wealth and social status. However, each person’s definition of success is different, as some may define success in material terms while others may view success as making a difference to the local community or having a harmonious family life or academic/professional achievement of children, attainment spiritual goals or self discovery. 

Success defined:

“To laugh often and much; to win the respect of intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate beauty, to find the best in others; to leave the world a little better; whether by a healthy child, a garden patch or a redeemed social condition; to know even one life has breathed easier because you have lived. This is the meaning of success."  - Ralph Waldo Emerson

The first step in the journey to achieve success (and in turn happiness) is to define your goals and what success looks like to you. It could be a luxury home, a Ferrari, cash sum, holiday home, lovely spouse, obedient children etc...Of course, we do want everything, don’t we? As we go through our journey, our priorities will change and our outlook to life might change leading to reassessment of our goals.

Let’s look at some of the essential ingredients to achieving success (and happiness) in life. The list is by no means exhaustive.

A. External Aspects

Define your goals

The first step in your journey towards success is to know your destination. This will be both material and intrinsic goals. Happiness is essentially intrinsic while success is extrinsic.

“If you don’t know where you are going, any road will get you there.” – Lewis Carroll

So, how to go about defining your goals? It is important to identify your interests and values to help you set goals and give your life a sense of meaning. For starters:

Think BIG!

“The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark”. - Michelangelo

Ask yourself the following questions:

1.1 What are your subjects of interest? What is it that comes naturally to you that can be seen as talent? What is it that you enjoy doing the most? Explore whether you can commercialise that interest and if yes, pursue it with vigour and passion.

“If you enjoy what you do, you will never work another day in your life” –Confucius

DREAM

 “If you can dream it, you can do it.” – Walt Disney

Dream, by all means as that is a necessary first step. But don’t just keep dreaming! You have to put actions behind your dreams and work vigorously to give it life!

1.2 What gives you happiness? Happiness is essentially internal to you and is about setting reasonable expectations that gives you contentment. This does not mean that you need to scale down your professional aspirations and nor does this conflict with your goals. However, contentment will define the intensity of your expectations and will ensure that you set yourself up for sustained happiness in life. Watch yourself against greed as it will lead to undue stress, burnout and unhappiness due to continued discontentment.

It’s very important that we delve on contentment a bit more. Contentment is not about low aspirations or setting low goals, it’s dynamic and not passive. Being content requires:

an attitude of gratitude; Being grateful gives us joy and happiness. The way to improve our life and our relationships, we need to cultivate an attitude of gratitude.

putting in the effort but not getting agitated with the outcome; instead learn to accept the outcome with grace;
‘Greed’ is NOT good! Despite what Wall Street and Gordon Gekko might have you believe, Greed certainly does not lead to happiness though it may give temporary success. You can witness the ultimate outcome of what such excessive greed and unethical practices end up in! The means are as important as the end to have a peaceful and contented life. Remember, what goes around comes around!
When success is pursued without ethics, it unravels in the most unusual ways. An example of this is that of Rajat Gupta, CEO of McKinsey having achieved the pinnacle of success in his professional field, succumbed to greed by indulging in insider trading for a few dollars more!!!
Set your broader goals that aims to cover both personal and professional life.

1.3 What do you want your legacy to be? How would you like to be remembered by others? Is it making the Fortune 100 list of rich and successful people or do you want to be the one who touched many lives?

1.4 How will you make your community a better place? It’s important to give back to the society. What goes around comes around.

2 Make a list of your goals, and what you might do to achieve them. 

Be sure to address both short-term and long-term goals;
Try to think beyond financial / career goals.
Set intermediate milestones and timelines to your goals.
Don’t be afraid to refine them, as you learn more about yourself.

3 Observe your actions and be a Man of action

In order to achieve success, you will have to observe your actions. You have to constantly evaluate whether your actions are taking you in the directions of your goals; Are they aligned to your purpose or are they veering you off course?

If it feels like a chore and you find yourself constantly disengaged and are watching the clock for the day to end, it’s time for you to reassess. You need to ask yourself, do I really want to be in this job? If your heart and mind says no, then it’s time to seek new direction. In order to be happy and successful, you have to enjoy what you do.

Steve Jobs, Co-founder of Apple Inc.: 

“Have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

Believe in your capacity to succeed and

Do not be afraid of failure.

Take your time to plan but don’t stop there,

Be a man of action.

PERSEVERE

Believe in yourself and persevere.

On the plains of hesitation lie the blackened bones of countless millions who at the dawn of victory lay down to rest, and in resting died.

Adlai E. Stevenson

4 Be a Jack of many trades but Master of at least one!

In this day and age of rapid innovation, it’s very important to stay abreast with the latest developments. More importantly, you should broaden your skills as there are seismic shifts in several industries. Having a broad range of skills allows you the flexibility and mobility when required.

The rapid innovation has turned several thriving business models upside down. Many businesses and business models have become extinct or redundant. Notable amongst several examples of businesses failing to change and falling by the wayside is ‘Kodak’, a pioneer that failed to keep up! Newspaper, magazines and high street shops have all suffered by failing to keep abreast of the onslaught of internet revolution!

So, it’s important to be a Jack of many trades but Master of at least ‘ONE’. Broaden your skills to keep you relevant to the market place. More importantly deepen one of your skills to such an extent that you become the ‘subject matter expert’ in that chosen area. Learn all that there is to know and be up to date with the latest developments, be active in the environment that furthers that knowledge and skill(s).

We are significantly impacted by the environment around us. It plays a huge impact on us at all levels of consciousness (subconscious and unconscious). This includes the place we live in, friends we have, things we read, people we see and so on and so forth. Environment is contagious.

We can observe that many researchers become successful when working in an environment with great faculty of scholars. Thomas A Edison said he was able to become a successful inventor because he placed himself in the company of people who were smarter than him and he was able to learn from them. We offer most of our thoughts in response to the environment we are subjected to.

The entities with which we spend most of our time lie in Macro environment. The place you live, the place you work, the colleagues, friends with whom you spend most of the time etc. All these are part of macro environment. It’s very important that you put yourself in a macro environment which motivates you constantly to become successful. When alone, observe your thoughts as they define your character and influence your actions.

5. Develop a creative mind as ideas leads to success!

If you have a mentality that is filled with searching for a better idea all the time, you will have innovation around you before long. You want culture that just promotes ideation and doesn’t care where they come from. Google is a company known to motivate employees to ideate and innovate by allowing time for personal projects.

The people who take ideas from innovators and take them to new levels are the people you want to have around you.

6. Always aim to deliver more than expected and seek feedback

Always Offer Value - Always do more than you are asked for or expected to deliver. It's a great way to sustain success.

Seek feedback

Seek regular feedback from your stakeholders. It's a great way of knowing how well you are performing and perceived by them.

This is a wonderful story of a boy who goes to the local shop to call up a lady to offer her gardening services. He calls her and offers her gardening services at half the price of her current gardener. He even offers to wash the cars free of cost. The lady politely declines by saying that she is very satisfied with her current gardner. The shopkeeper who overheard the conversation was impressed by the persuasive attitude of the boy and offered him a job.

The boy smiled and said, actually he was already employed as a gardner with the lady and was seeking feedback on the quality of his work!!!

7 Manage your finances prudently 

Peace of mind and sound sleep comes from stable financial position. Hence, it’s important to manage your money in a way that will help ensure your financial stability over time, regardless of your income. Get a clear understanding of your disposable income, net of all taxes.

Plan your finances and keep track of your expenses. Review your bank statements regularly and notice where you spend your money. This will help you prevent over-spending and ensure that your bank statements are correct.

Prioritise your spending. Don’t spend the money you haven’t earned to buy things you don’t need to impress people you don’t like! Be honest with yourself and differentiate between your basic needs and your luxuries.

Save money. Have a savings target and set aside sums for emergencies. Every month, you should deposit some of your money into a separate savings account and/or mutual funds.

8. Manage your time 

Time management is one of the essential elements in achieving success. Procrastinating important tasks until the last minute can cause you unnecessary stress, and increases the likelihood of errors. There is always a tussle between what’s important and what’s urgent. If you let too many things become urgent, the important tasks will never get done to the required standard!

Manage your time so that you have enough time to complete a task effectively. Learn to delegate effectively and manage expectations wisely. Under promise and over deliver!

Learn to be assertive and say No when you have no capacity. Don’t say ‘Yes’ when you have to say ‘No’! Keep a task list and use task planner and check off each task as you complete it. This will help you stay organised, focussed and motivated.

Value your time and cherish it. Try to spend your free time wisely as it’s the most precious resource. Once spent cannot be regained! So, do things that you enjoy doing, pursue your hobbies, learn new skills, spend time with loved ones, share your knowledge or spend time in community service. Not everything you do have to be productive, but it should be engaging and enjoyable.

B. Internal factors that assist your happiness

1. Enjoy the present moment 

If you are constantly dwelling on the past or daydreaming about the future, you are missing out on the present moment. Remember that the past is over and nothing can change about that and the future is simply an illusion, and that real life takes place here and now.

Start paying attention to negative thoughts so that you can learn to silence them and enjoy the present moment. If a negative thought arises in your head, then acknowledge it, label it a negative thought, and then let it fade away.

Get in the habit of paying attention to the small details around you. Appreciate the flower bed, the sensation of your feet walking on misty green grass, art around you etc. and appreciate every moment.

2. Maintain a positive mental attitude

Always maintain a positive mental attitude.

 “Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude.” ~ Thomas Jefferson

“No one can make you feel inferior without your consent.” ~Eleanor Roosevelt 

3. Don't compare your own life to other peoples' lives

Unfortunately, many people measure their own success by comparing it to the success of those around them. If you want to feel accomplished and happy, you will have to stop comparing your life to other peoples' lives.

Many people have the tendency to compare the low points of their own lives with the high points of other peoples' lives. Remember that no matter how perfect somebody's life may seem, behind closed doors everybody deals with their set of issues, insecurity, and other difficulties.

If you must compare, then think about all of the people who are homeless, chronically ill, or living in poverty. This will help you appreciate what you have rather than feeling sorry for yourself.

4. Count your blessings 

No matter how much you achieve in life, you will always feel unhappy if you constantly focus on things you don't have. Instead, appreciate the things you have and think beyond material things - your loved ones and happy memories.

 "Every day, think as you wake up, today I am fortunate to be alive, I have a precious human life, I am not going to waste it.” - Dalai Lama

5. Take care of your health

A healthy body supports a healthy mind. Eat a balanced diet and exercise daily for at least 30 minutes.

When asked what surprised him about humanity the most, the Dalai Lama replied:

“Man. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

6. Lead a balanced life.

Work has become an integral part of our life. We are in a 24/7 access generation and even our vacations are interrupted by work emails. We need a Life-Life balance as work takes a major part of our life! Many successful people in the business or profession had taken their work far too seriously that they ended up with a bitter family life.

While there are times when the work may take a higher priority, be sure to recognise the impact it’s having on other aspects of our life so that you can manage the consequences of your choices.

IN SUMMARY

It is important to engage in careful planning and goal setting including ethical and value goals. Be action oriented, stay focussed, relevant and at the cutting edge of your chosen field with an awareness of rapid innovation and its implication for your business, and strive to be one step ahead in thinking. Develop and hone your skills, sharpen the saw and constantly think of new ways of doing things and generate ideas consistently.

Be a man of action and manage time wisely. Manage your finances prudently and have a target for savings. Cut your coat according to cloth!

Enjoy the present and live in the present, maintain a positive mental attitude, count your blessings, take care of your health and lead a balanced life!

You might think all this is easier said than done! We have to start somewhere and remember - nothing ventured, nothing gained!!!

Whether it's totally possible to achieve both success and happiness or not we can begin to make a difference by taking some strides towards achieving success and happiness.

Why wait? There is no better time than now. Act! Give it a go!!! Good luck!!!

INDIA ELECTIONS - MODI-MANIA - WILL REALITY LIVE UP TO THE HYPE?

2014-04-08T23:03:00.005+01:00

Elections in India are an elaborate event much like the Big Fat Indian

Wedding, only this one played out over a much longer period! Indian politics is also caricatured as the “Great Indian Tamasha (show)”. They election campaigns are loud, cacophonous affairs spanning over several weeks, this time to be held from April 7 to May 12, often screaming out catchy slogans with very little substance.

A vast majority of Indians are sick and tired of the UPA, the Congress-led coalition. In the past five years, Manmohan Singh has presided over an administration that has been afflicted by ‘policy paralysis’. This has resulted in a decline in business and consumer confidence, growth to slide and corruption to soar with new investment coming to a virtual halt. The sense of frustration is palpable. The opinion polls indicate in no uncertain manner that Indians are dissatisfied with the way things were going and will wish to eject Congress in favour of the BJP.

About 815 million voters are eligible to vote in the current election. There is a brighter side to this story. Voter dissatisfaction is born as much of success as failure. As people have become gradually better off – or at least less abjectly poor – their aspirations have risen. The new electorate, including more than 100m first-time voters, is less concerned with caste and religion. Instead, it wants clean government and opportunity born of economic growth.

Indians are no longer placated by Congress’s brand of welfarism – NREGA – rural employment scheme, other handouts and food subsidies. Because of rampant corruption,

much of that largesse does not reach the masses with middlemen and politicians lining their pockets. Instead, they want jobs, better infrastructure, schools, hospitals, higher education opportunities and a chance to create a better life and realise their dreams.

Congress, has been ruling the country, thanks to the dynastic politics of the Nehru- Gandhi family for all but 13 years since independence. It has now lost the trust and is seen as the ‘most corrupt’ with its series of scams from CWG, 2G, Adarsh, Coalgate to cite a few. The Congress party government lead by Prime Minister Manmohan Singh has in many ways upended the chances of a decent show at these elections.

The rise of new political forces, notably the anti-corruption Aam Aadmi party led by former civil servant Arvind Kejriwal, is a promising sign that voters are now demanding accountability.

The stage is now set for an alternative government, which is a good sign of a maturing democracy and demonstrates the people power thorugh throwing out corrupt governments. Sadly, though there will be no single political party that will clear the half-way mark. The regionalisation of Indian politics has rendered the national parties at the mercy of smaller regional players to muster up the numbers required to form a government.

The key players

Narendra Modi, at 63, the leader of the Bharatiya Janata Party (BJP), which is ahead in most polls, is projected as an experienced administrator with a development track record that is referred as the ‘Gujarat model’. During his 12 years as the chief minister of the state of Gujarat the State’s economic growth was strong, as was the case with a few other larger States.

He is, however, viewed with suspicion by a section of the people over the 2002 Godhra riots, though a report submitted by the Special Investigations team (SIT – appointed by the Supreme Court) of lack of prima facie evidence of complicity was accepted by the Gujarat State High Court and he was absolved.

Rahul Gandhi, at 43, the scion and the standard-bearer for the ruling Indian National Congress (CON),

is projected as the candidate of the youth. He has been a reluctant leader preferring to work in the background thus far and lacks the oratory and charisma of his father or grand mother. His focus has been to strengthen the party at the grass roots level and introducing a pilot programme to select candidates through an internal democratic process like the US primaries. It remains to be seen how far has the party moved from the dynastic process to a democratic process.

He is fighting on the plank of his party providing:

· People with the power to hold the administration accountable, by enacting enabling legislation like the Right to Information (RTI),

· Food Security Bill and

· Promising to bring in legislation for Women Empowerment

These are cornerstone issues in his campaign.

Arvind Kejriwal, at 45, is an accidental politician, stemming out of the India Against Corruption Movement spearheaded by Anna Hazare. Kejriwal established the Aam Aadmi Party (AAP) in November 2012, as he believed that electoral politics was the next logical step in the fight against corruption. In a surprise Delhi State Assembly elections, AAP emerged as the second largest party in a hung Assembly. He formed a Government with the support of CON but later resigned as the Chief Minister of Delhi after a 49 days stint, citing the failure to pass the Jan LokPal Bill in the Delhi Assembly. He blamed the Congress and the BJP for stalling the anti-corruption legislation. AAP is expected to make a very minimal impact in this election as its funding and the organisational strength for a national election is virtually non-existent. Hence he will be an also ran until his party can develop a grass root level national presence.

AAP, in its short life, has indeed changed the landscape of Indian politics with significant focus on Corruption and clean governance. That should keep other parties on their toes, if not completely honest!

The Tamil Nadu Chief Minister, J.Jayalalithaa, at 65, has been leading the State very effectively. She has been introducing several welfare schemes, which are funded by the rising tax revenues from the sale of Alcohol. She fancies her chances of becoming the PM by forging a rainbow coalition called the ‘Third Front. Stranger things have happened in Indian politics which saw a sleepy Deve Gowda becoming the PM!!! So, watch this space!!!

However, everything now points towards a NDA led government with the only question remaining on the number of parties required in the coalition to form the government. The higher the number of political parties in the coalition, the greater will be the instability to the government resulting in its inability to spearhead reforms.

MODI, has the “TINA” FACTOR in the current environment

The Modi Campaign is running ahead with its catchy slogans of “Ab ki bar Modi Sarkar” (This Time Modi Government) and Har Ghar Modi (Every Home Modi supporter) with an expectation to get as close to the 272+ mark.

Some of its slogans were so silly that at one point the RSS (which pulls the strings of the BJP) had to intervene to drop the “Har Har Modi” chant as that had idolised him as God!

What about Mr Modi?

The BJP has refashioned itself over the years from a party associated with identity politics to a champion of good economic governance and business-friendly administration. This shift has been pronounced since the ascendancy of Modi, whose supporters point to a record of growth and relative efficiency in Gujarat. His supporters claim that he can replicate his achievements witnessed in fast-growing Gujarat by cutting through bureaucracy and getting things moving i.e he will usher in the Gujarat model of development to the entire nation.

Hence the groundswell of support and the belief that “There Is No Alternative” (“TINA”) to Modi!!!

Let’s examine the various factors to assess how far this belief is well founded.

1. “The Gujarat Model” of Development

Admittedly, Gujarat has recorded a growth of ~10% p.a. during the Modi years. Interestingly a host of Large States have also done well during this period. In fact, Maharashtra and Tamil Nadu have done equally well with Tamil Nadu, Delhi and Goa outperforming all the States by a good margin. So, what is common to all the States to have recorded growth rate of 9%+ p.a.

If we compare the growth rates across different regimes at the Centre, you can’t help noticing the fact that the growth was weak during the NDA period across all the States while growth rate significantly picked up during the UPA period up to 2011. This underlines the impact of policy reforms at the Centre and its salutary effect on economic growth In the States.

Period	Growth - 5 yrs before NDA [1993-94 to 1997-98]	Growth - 6 yrs that NDA ruled [1998-99 to 2003-04]	Growth - 8 yrs after NDA [2005-06 to 2011-12]	Actual growth over last 5 years [2006-11]
Maharashtra	7.06	4.91	10.53	10.34
Tamil Nadu	7.51	3.78	10.22	9.42
Gujarat	7.36	5.59	9.99	9.34
Andhra	5.38	6.82	8.80	9.18
Karnataka	7.03	6.31	8.80	8.72
W. Bengal	7.35	5.72	7.19	7.46

Based on the above facts, one can reasonably conclude that the Gujarat growth has less to do with the ‘Modi’ factor and in fact, more to do with the economic reforms of the UPA during its first term.

As they say, “A rising tide lifts all boats”! So, there is nothing unique about the Gujarat model!!!

Gujarat mainly owes its growth UPA reforms and to its entrepreneurial Gujaratis. Even the neighbouring State of Maharashtra which has stellar growth record, benefits hugely thanks to the entrepreneurial Gujaratis who dominate the business landscape in the State.

Due to lack of reforms in the UPA2, there has been a perceptible fall in growth rate, underlining the importance of reforms; a stark reminder of the salience of economic reforms on growth. At best, Modi can be credited for cutting bureaucratic delays and implementing a few infrastructure projects.

But, Credit where credit’s due – Gujarat has wrested the No. 1 spot from Tamil Nadu on Economic Freedom. However, this did not translate into higher FDI with TN winning the Auto war!

But where the Government could have (and should have) made a significant difference i.e. in pursing social development and an inclusive agenda, it has sadly been lacklustre.

Hence, if any credit for growth is due, this should go to the Gujaratis’ who are known to be entrepreneurial and risk takers. So it’s not the “Gujarat” model but it’s “GUJARATI” model.

The ‘Real’ measure of development – Backwardness Index

Modi’s record on social development has been abysmal and shows a misplaced urban growth model leaving a vast majority of the citizens behind. Chandrababu Naidu was punished by the people for pursuing this kind of lop-sided development agenda in A.P.!

Much against the popular perception, it is important to appreciate that social development is not about handouts or free lunch. It’s about creating social infrastructure (not glittery buildings and 8 lane city roads) like hospitals, primary health centres, schools, universities, skills development opportunity, low cost housing, infant nutrition and other basic necessities.

Social development is where a government can truly distinguish itself by pursuing policies that enable inclusive growth. Sadly, in the case of Gujarat, this has been lacking. The Independent Committee lead by the RBI governor Raghuram Rajan, used multiple measures to assess the overall development in the State and ranked it at 12 way below its propaganda machine.

The committee assessed the development using an index of backwardness composed of 10 equally weighted indicators for monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of the Scheduled Caste/Scheduled Tribe population, urbanisation rate, financial inclusion and physical connectivity.

Here’s how the various States stack up on the Backwardness Index, low scores indicate good development:

How does Gujarat compare to Tamil Nadu?

Depending on how the final tally of results stack up, there is an outside chance that Jayalalithaa, the CM of Tamil Nadu, could fancy her chances of becoming the Prime Minister. She has openly proclaimed her to be a PM candidate and has formed an understanding with Mamata Banerjee, the CM of West Bengal. Together, they could hold the key to potential formation of the NDA government by Modi. Jayalalitha intends to lead the ‘Third Front’, a rainbow coalition of all non-Congress and non-BJP parties. Of, course this would all depend on the final tally of seats.

Interestingly, Jayalalitha’s economic record stands taller than that of Modi’s on a broad range of measures.

Across all social aspects. TN is head and shoulders above Gujarat. TN is ranked as the third most developed State in India on a broad index of measures developed by the RBI.

In the event BJP falls short by a big margin, Jaya would have decent odds of staking a claim of forming a government, supported by a fractious coalition.

Having firmly established that Gujarat model is not completely attributable to him, let’s now examine other key factors of the Modi campaign.

2. Corruption and Criminal elements

The Modi campaign has also been laying claims of ‘clean’ and efficient governance. Supporters of Modi claim that he is personally clean. But, so is Mr, Manmohan Singh! Presiding over corruption while claiming to be personally clean doesn’t wash as abetment to crime is a crime, nevertheless!

Modi’s brand of crony capitalism and his focus on industrialists like the Adani's and Ambani's is more of the same type of governance that Congress practice (may be less corrupt but corrupt nonetheless).

Modi’s intimacy with the industrialists Adanis’ and Ambanis’ is not a secret. Modi uses the private jets of the Adanis for his campaign and the stock price of Adani Enterprises has skyrocketed by 159% in the last 6 months is reflective of the expected quid pro quo! Our paid media remains oblivious to this!

The Corporate India has thrown its weight behind Modi. BJP is sparing no efforts in its campaign as this could well be its moment in history of achieving largest number of electoral seats.

The recent addition of tainted politicians like Yeddyurappa and Sreeramulu into its fold in order to bolster its position amongst certain castes. The addition of these two and a few others have left some of the party seniors disenchanted manifesting in public expression of displeasure by Sushma Swaraj, the senior most lady member of BJP. Further, all parties have fielded candidates with criminal charges with BJP having the highest number of such candidates.

3. Hindutva / Secularism

While BJP remains committed to its Hindutva stance (RSS still exerts a lot of influence on BJP), but it has scaled down its emphasis. While the Modi campaign at the national level has hinged on Development, efficient and Stable government, the politics at the local is laden with its ‘Hindutva’ agenda.

The struggle within the BJP between those trying to retain the core support base of the organisation through a Hindu nationalist agenda and those attempting to reach out to wider sections of the population through a more inclusive development programme is becoming apparent by the delay in the release of its manifesto and the toning down of certain agendas like No FDI in multil brand retail, restriction on GM, Temple issue etc.

The recent rant of Amit Shah, openly inciting hatred by calling for revenge for dishonour and goes on a step further by naming the State’s ruling party leader as Mulla Mulayam in a blatant attempt to imply that he is pandering to Muslims and thus fan the Hindutva sentiment. He also pledged to dissolve the democratically elected State Assembly upon forming the government at the Centre. This is flagrant violation of all democratic norms and exhibits rank intolerance of a kind that is pernicious for communal harmony and growth!

Finally, the latent Hindutva agenda will resurface with RSS elements trying to stamp their influence in the affairs. If the recent speech by one his trusted lieutenants is any clue to the inherent attitudes of these men, you don't need an oracle to foretell the future.

4. Stability

The party is also suffering from internal dissensions over issue of tickets to both stalwarts and new entrants, and over admission of certain political leaders back into its fold (Yeddyurappa and Sreeramulu). They took swift action to expel another radical Hindutva leader in Karnataka.

The emerging new era of BJP led by the triumvirate (Modi, Rajnath and Jaitley) is causing deep fissures with many of the workers at a local level disenchanted in the way some of the seniors in the party have been sidelined.

For the moment, peace has been bought and It remains to be seen whether there will be further moves by the seniors within the party post the election results to launch a renewed offensive!

Even if the BJP wins, it may probably not earn enough seats to form the government on its own. The real political drama commences post the electoral results with each of the major party scrambling to cobble together a workable coalition with an array of rainbow political parties to achieve the magic 272+ mark required to form the government. While there are pre-poll alliances of a few political parties, the post results scurry to reach the magic mark is largely driven by negotiations and personality politics rather than ideology or issues. It’s not unusual to see the previously estranged groups becoming bedfellows!

That will put it at the head of a messy coalition. Many of the BJP’s state-level partners are also likely to prove noisy opponents of the deregulation and streamlining of government that is needed.

Hopes of a BJP-led coalition to usher in reforms and pro-business policies may not be easily achievable.

CONCLUSION

In Summary, any administration would be more effective than the current UPA (which is in a state of shambles!). So things can only get better and hence the Modi Sarkar's Acchey Din slogan captures this expectation quite effectively.

But there are many caveats.

While NDA will most likely get to form the next government, in my opinion, it's likely to be some form of a coalition.

The reliability of poll predictions made on a sample size of 35,000 spread over 500 constituencies to predict results that has several sub texts in its cohort in the form of caste, gender, income inequality, literacy, Rural vs. Urban, local issues etc. can be extrapolated to determine a seats forecasts within reasonable standard margin of error. Social media and TV hype cannot be a reliable indicator of mood of the India’s electorate. Remember, the pollsters got it totally wrong in 2004.

Furthermore, there is this inescapable reality of the nation’s fractured politics. Even the most lopsided of polls has the BJP coming to power in a coalition and short of the required majority by a good 30-40 seats. Modi’s free-market instincts are likely to be constrained by the preferences of regional allies and the RSS. Irrespective of what anyone says, it all depends on what sort of coalition comes together. No one can promise any real policy change / direction until then.

The longevity and hence the impact of the next government is dependent on the strength or the fragility of the new government. We just have to sit out and wait until the May 16^th!

Have your say and vote with your head!!!

To taper or not to taper, that is the question!

2013-09-25T05:14:00.003+01:00

The Federal Reserve surprised almost all of the market participants last week by deciding to maintain its current pace of asset purchases, at $85 billion per month, rather than "taper". Having guided the market in May to believe, that it will commence its taper by reducing its bond buying program later in the year, its last week’s decision to carry on with its current bond buying program unchanged threw the markets into turmoil.

So what led to this dichotomy in expectations vs. reality?

Earlier in the year, in May 2013, Ben Bernanke guided the market that FED will commence to wind up the QE as and when the unemployment rate falls to 7 percent, with the expectation that that this might happen by mid-2014. FOMC members repeated those details in speeches, some emphasizing "as early as September."

When the unemployment rate fell in August to 7.3 percent, not far from the threshold and with no caution from the Fed, the die was cast for “Septaper”, as far as markets were concerned. As a result of the earlier guidance, the market interest rates started to rise in expectation of tighter money conditions with 10 year UST’s yield rising by almost 90bps over this period, in the process impacting economic activity, including home buying.

So when the FED announced on September 19, 2013 to keep its bond buying program unchanged, it caught market participants wrong footed and caused significant volatility in the global financial markets. Asian equities, Emerging Market currencies and bonds rallied strongly while the UST’s and bonds bled with US equities recording a very modest change.

So, why did the FED decide to delay the taper?

To be fair to Bernanke, he did say that any decision to taper has to be backed by data confirming steady gains in the economy, in particular continued job growth and labour market strength.

Looking a bit deeper in to the data, there are 5 good reasons why the FED decided against the taper:

1. Unemployment rate is misleading

The unemployment rate continued to fall, aided by reductions in the labour-force participation rate. As Mr Bernanke indicated last week, the Fed sees the unemployment rate as an incomplete measure of labour-market health. Guidance that QE3 would be complete roughly when the unemployment rate touches 7% seems no longer a good idea.

Fed has now declared that rates will stay low until unemployment is down to at least 6.5%, it may in fact leave rates low as unemployment falls well below that figure, so long as inflation remains in check. The current GDP growth rate of 2% is not strong enough for a sustained improvement in the labour market conditions.

2. Payroll trends weakened during the summer

When Fed began to indicate its taper program the economy, was consistently adding jobs at a rate of about 200,000 per month. But subsequent reports revised down spring job gains and showed much weaker hiring over the summer. It has therefore reacted to the weakening job growth despite its earlier use of unemployment-rate thresholds as guideposts.

This has led many to argue that the Fed is losing its credibility. In my view, it’s far more important to do the right thing for the economy than being popular or pursue populist actions. Fed needs to be comfortable backing off guidance if it isn't likely to achieve its dual mandate. However, it’s communication of forward guidance to the market needs to get better.

3. Inflation is trending below target

The FED Chairman considered that an inflation floor might be a useful thing to add to forward guidance. Depending on where the floor is set that could be an extraordinarily important development. The big failing of the forward guidance so far has been that it is entirely consistent with continued stagnation: saying rates will stay low until a particular unemployment threshold is met does not rule out stagnation, high unemployment, and low rates forever (e.g. Japan). An inflation floor, if set high enough, changes that by demanding additional action if the economy is not on pace to close the gap. A temporary inflation floor of around 2% would be a consistent with an intended normal growth rate for the economy.

4. Fiscal cliff and Debt ceiling debates looming in the horizon

The Fed is rightfully worried that the "fiscal cliff" could seriously harm the American economy. Unfortunately politics is influencing monetary policy. There is a strong possibility of a deadlock in debt ceiling negotiations potentially leading to government shutdown, Sequester causing deeper impact and a prolonged debt-ceiling discussion. The Fed has erred on the side of caution and has taken the approach of better-safe-than-sorry for now.

5. The Housing recovery has paused

Figures in 000s

The real estate sector has contributed close to 1/3^rd of the GDP growth rate. Recent data is indicating slowdown in housing activity as a result of the interest rate increases over the past few months. FED has an eye on the long term interest rates to ensure Mortgage interest rates do not spike up threatening the economic recovery.

The continued strength in the housing sector is critical for both labour market recovery and strong economic growth.

Is QE damaging?

The biggest argument made against QE when it started was that money-printing would necessarily lead to inflation. Surprisingly, that has not happened yet, and in any case, benefits of continuing the QE in for sustaining the economic growth is arguable. However, the policy has painful side-effects, which is why the Fed wants to exit, albeit gradually with minimal market disruptions. Some of the unintended consequences of QE are:

Poor capital allocation and increased systemic risk

Lower rates, driven by QE, make it easier for inefficient companies to prolong its existence. This means that inefficient enterprises continue to receive credit resulting in poor capital allocation. As the chase for higher yield spreads, risks to the financial system are increased manifold.

Asset price bubbles

Low interest rates will inevitably lead to asset price bubbles as buyers’ tend to take bigger mortgages driving the demand for housing further leading to the creation of conditions of next cycle of defaults as interest rates rise.

Currency volatility

QE has resulted in large scale capital flows into emerging economies resulting in significant credit expansion in some of these emerging markets. The announcement of taper demonstrated its impact on some of these emerging economies causing significant currency and capital markets volatility.

Structural reforms take a back seat

QE also helps governments avoid necessary structural adjustments. Taper talk, starting in May, contributed to a sharp run on several emerging market currencies, with those of India, Turkey, Indonesia and Brazil prominent among them.

The market impact was focused on those countries that had fundamental problems, in the form of high current account and fiscal account deficits. This was not solely an issue of an indiscriminate shift in financial flows. The postponement of tapering raises the risk that adjustment will be painful when the end of QE finally comes.

Pensioners and savers suffer

By reducing bond yields, QE impacts the returns for pension funds. Any situation where many pension funds remain far short of meeting their commitments is undesirable. Senior citizens relying on fixed income from investment in bonds continue to suffer. There has been a massive amount of wealth transfer from savers to borrowers resulting in perverse incentives. The sooner the QE ends the better it is.

SUMMARY

On balance, the FED’s decision to delay the taper at this point seems well founded.

However, improved forward guidance is desirable in order to avoid the gyrations in markets that resulted from the taper talk. The Fed did reckon that those gyrations and the rise in bond yields in particular, were damaging enough to warrant an action —through the choice not to taper.

The FED is rightfully focussed on achieving sustained labour market improvement as full employment will perk up wage growth, which is the kind of inflation the economy would do well with. A period of strong wage growth and higher labour participation rate will be the reassuring signs the Fed needs before allowing rates to rise.

As Bernanke hands over the mantle to the next FED Chairman in January 2014, it is highly unlikely that FED will make a move until Q1/2014 with its taper. Even otherwise, the underlying data have to supportive for a move and the following factors will determine the timing the taper:

· Unemployment rate to fall below 7%;

· A rise in labour participation rate;

· Inflation expectations above 2.5% p.a. driven by wage pressures;

· GDP growth rate > 2.5% p.a.

So, in the final analysis, to taper or not to taper will depend on a combination of factors listed above and data is not likely to improve over the next few months on all fronts.

The precise timing of the taper is a $42 question. As 42 is the answer to the Ultimate Question of 'Life, the Universe, and Everything'!!! [If you believe The Hitchhiker’s Guide to the Galaxy J].

Indian Rupee in Free Fall

2013-08-21T18:53:00.000+01:00

Rupee in Free Fall

The Indian Rupee has been on a slippery slope ever since the FED announced its intent to taper its Quantitative Easing (“QE”) program.

Most EM currencies with the exception of Thai Baht and the Philippines Peso have also suffered large declines.

The Rupee plunged to 64.55 to the dollar on 21 August 2013 before closing at 64.11. Over the last 3 months, the Indian Rupee has declined by a whopping 17%. The Indian stock market has plunged 5.7% in two days eroding over USD100bn in value.

Ever since the announcement of QE tapering by the FED, the US Treasuries 10 year yield has spiked by over 85bps (from ~2% p.a. to 2.84% p.a. YTM).

Such a whiplash move eroded the market confidence with equity and bond markets recording massive correction triggered by the significant unwinding of carry trades.

Foreign investors have unloaded over US$10 billion of Indian debt since May 22, when the U.S. Federal Reserve first signalled its intention to begin scaling back its quantitative easing leading to bond yields to exceed 9% p.a.

In addition to the above growth is at a decade low, trade and current account deficit are at record highs, fiscal deficit is high and retail price inflation is in double digits. And to top it the price of onions and the Fx rate are in a race to get ahead of each other! Meanwhile, the government is engaged in pushing its fiscally irresponsible populist policies with an eye on the forthcoming elections in 2014.

Is it Deja vu ?

So, there is a sense of déjà vu amongst commentators on the recent slide in the India Rupee with many likening this to the 1991 Balance of Payments Crisis. While there are some striking parallels of this to the earlier crisis, the underlying factors are quite different. In 1991, India was staring at a sovereign default as the Foreign exchange reserves had dwindled to less than two weeks worth of imports. Then, the government had resorted to draconian measures such as direct import curbs, ultimately mortgaging gold reserves with the IMF to raise emergency funds.

Now, there is no such risk. Despite the recent fall in reserves, India's foreign currency assets are at USD 280bn is enough to cover seven months imports. On the questions around the ability to meet the Current Account Deficit whether its USD 60bn or USD 80bn, the foreign x reserves at around USD 300bn can fund it. A bigger issue could be the refinancing requirement of USD 170bn odd coming up in 2014.

Also, software exports and other invisible inflows in 2012-13 were equivalent to more than half of India's trade deficit that financial year. On the eve of the 1991 economic crisis, inflows of invisibles were negligible; these were negative in 1989-90. This essentially rules out the possibility of a 1991-like economic crisis, when the gross domestic product (GDP) growth collapsed from a healthy 5.3 per cent in 1990-91 to 1.4 per cent the next.

In summary, 1991 was a Balance of Payments Crisis while in 2013 it’s a confidence crisis arising from policy paralysis, fractious government, corruption scandals and misplaced policy priorities. In essence, the Indian Rupee has become the barometer of the current UPA government’s performance in many respects.

The high economic growth over the past decade led to an increased affluence as well as certain amount of hubris. While the fundamentals are much stronger now than they were in 1991, the stakes are much higher now and hence the fear of losing the new found affluence has set in.

In order to arrest the slide of the Rupee the government has been announcing a series of measures to very little effect.

So do the measures announced add up ?

India’s Finance Minister announced that he expects USD 11bn of additional capital inflows during the remainder of FY14 (ends March 2014) once the following new measures are implemented:

1. easier overseas borrowing norms, especially for oil companies (USD 6bn);

2. liberalisation of the non-resident India (NRI) deposit scheme (USD 1bn);

3. issuance of quasi-sovereign bonds (USD 4bn); and

4. import duty hikes.

While fresh US dollars (USD) will be raised, some areas of concern are outlined below :

Liberalisation of the NRI deposit scheme to add another USD 1bn

While formal notification is awaited, in his press conference the FM announced that the interest rate on foreign currency-denominated NRI deposits of more than three years maturity will be deregulated. This should allow banks to set higher interest rates for its foreign currency deposits.

As is to be expected, it's a wild range as no one can yet get a steer on government's strategy. But impact of some of the actions on INR are assessed below :

The RBI announced more measures to contain the net outflows from India

While accurately quantifying the impact is little difficult (estimate it as at least USD 2-3bn) but these measures together with several other announced measures till date should ease the pain on funding a wider Current Account Deficit.

First, it has reduced overseas direct investment limit for an Indian company in all its joint ventures/ wholly owned subsidiaries to 100% of their net worth (as per the last audited balance sheet) versus the earlier limit of 400%. Few publics sector companies like those in oil sector are exempted from this restriction. If a company wants to invest more than 100% of its net worth it will now require RBI’s approval. However, breakdown on specific type of outflows are not available. However, in FY13 India witnessed USD12.6bn of FDI outflows and even if this has a 10-15% impact this should provide some relief.

Second, it reduced the limit for outward remittances by resident individuals by 60% from USD 200k to USD 75k only. Also, use of such remittances for acquisition of immovable property is not allowed any more. In FY13, Indian remitted INR1.2bn under this scheme out of which INR 80mn was for acquisition of immovable properties (see snapshot below). During the April-May 2013, India remitted INR300mn.The outflows should reduce unless more individuals start remitting in other names (eg, close relatives). Innovative Indians will find a way by using their relatives and friends!

FX impact: The announcement of the USD 11bn INR rescue plan on 12 August, provide the authorities another window of opportunity to come up with stronger steps to address Current Account deficit financing concerns. Before this the government had limited Gold imports and then levied 10% import duty.

Rising yields on government debt will also force banks to write down the value of their bond portfolios. To ease the pressure on banks, the RBI carried out Open Market Operations adding USD 1.2bn to the market liquidity by purchasing long dated bonds today (21 August 2013). The banks valuations were impacted by the series of measures taken earlier and today’s actions resulted in a strong rally in bank stocks. The bond yields had risen to 9.47% (last seen during Lehman crisis in 2008) and with the current action it has fallen to 8.93%.

The latest moves partially reversed previous monetary tightening measures and led to accusations from analysts of Indian policy “flip-flops” just as the governorship of the RBI is passing from Duvvuri Subbarao to Raghuram Rajan, the former International Monetary Fund chief economist who takes over on September 5.

Market is not convinced

While these measures should help ease the upside pressure on USD-INR, market continues to await further announcements like import duty hikes, external bonds etc. before evaluating the impact of all measures. USD-INR is expected to enter into a short phase of choppy range trading as India’s BoP dynamics are reassessed. There is a risk that international investors view these steps as retrograde leading to panic buying of USD-INR.

Powerless so far to rein in the wayward rupee, the government even pleaded with gold-obsessed Indians to stop buying the metal, because it drains foreign exchange reserves.

Far from reassuring investors, the mish-mash of measures has created the impression that the Indian authorities are floundering around for stopgap solutions rather than devising any long-term strategies for economic recovery.

Amidst all this cacophony, the market is taking an extreme view as they see the government’s measures are with no clear policy direction and is ham handed.

What are some of the pundits saying?

The issue has caught everyone’s imagination and several self appointed ‘experts’ are advising the government! Here’s what some experts are saying :

· The PM and the FM to visit the holy shrine in Tirupati, not for praying as the headlines suggested, but to negotiate with the Trustee to deposit their 500 tonnes of gold with the State Bank of India;

Some superstitious Indians have blamed the slump on the new symbol for the rupee, unveiled last year. Experts on “Vastu Shastra”, Indian version of “feng shui” say that the symbol debuted on an inauspicious day and that the horizontal line across the symbol appears to “slit the throat” of the currency!

What should the government be doing?

The immediate task is to improve its communication to the Market of its package of measures together with a strategic policy direction. Markets hate uncertainty and to the extent this can be taken off the table, it improves the overall sentiment.

1. The Government needs to address the cause rather than attack the symptom even as they take some tactical measures. To start with create a predictable investment climate with no policy flip-flops (e.g. Vodafone tax case). Many potential investors have been frightened by an unexpected US$ 2.5bn tax demand levied on Vodafone after it acquired the Indian mobile operator Hutch. Accept the Supreme Court verdict and create an environment of predictability of economic and fiscal policies.

2. Reverse confidence destroying moves like limiting remittances by individuals. This can only result in panic reaction stemming from the fear of total capital controls leading to flight of NRI deposits.

3. Address structural issues by investing in infrastructure projects and help drive business growth. The prospect of the return of strong growth will in itself result in strong inflows.

4. Raise foreign currency funds through either corporate or sovereign bond issuance or by incentivising the NRI deposits.

5. Consider appropriate monetary action to anchor long term interest rates to support credit and economic growth.

6. Put fiscal discipline ahead of populist measures.

Prognosis

The long and short of it is, no one has a clue on where this train is headed but everybody is worried about a looming crash. Forever, the optimist, I reckon that the Finance Ministry and RBI would come up with the right medicine eventually to check and reverse the runaway slide. Until then Rupee will continue to test your nerve !

Near term outlook is that the Rupee might test 65 and worst case outlook is that it may even sink to 70 to dollar over the medium term.

Such an outcome will further burden the already strained corporate balance sheets, squeeze credit flow besides fuelling inflation and crippling growth.

The government’s pursuit of populist policies but fiscally irresponsible has wrecked the script of the India story and crippled the potential of what was once as the ‘fastest-growing free market democracy” as was touted in Davos not so long ago!

Navarathri Golu

2012-10-19T16:52:00.001+01:00

The South Indian festival - Navarathri Golu (Festival of Dolls)

Golu - in Tamil means courtyard. It is an important festival in the Hindu calendar that celebrates women power. The festival marks the victory of Goddess Durga over the evil demon Mahishasura. Special prayers are offerred to worship Goddess Durga, Lakshmi and Saraswathi – the Goddesses of Courage, Wealth and Knowledge & Fine Arts respectively. The Golu festival (celebrated as Durga puja in Bengal) epitomizes the victory of Good over Evil.

Golu is observed over nine evenings, referred to as ‘Navarathri’ – 'Nava' means nine and 'rathri' means night. This year, Navarathri begins on the 15^th October and ends on the 24^th October.

The festival commences with a Kalasha pooja on the first evening and continues for nine nights. Kalasha, also spelled as Kalash and kalasa (in Sankrit: kalasa literally means "pitcher or pot"), is a metal (brass, copper, silver or gold) pot. Such a pot filled with water and topped with a coronet of mango leaves and a coconut. This combination is often used in Hindu rituals and the entire arrangement is called Purna-Kalasha, Purna-Kumbha or Purna-ghata. Each of these names literally means "full or complete vessel" and the Kalasha is considered a symbol of abundance and "source of life" in the Vedas.

During Golu days inviting friends, neighbours and relatives is a highlight of this festival. It’s a fun way of acquainting with the neighbourhood and also an occasion to display one’s singing prowess and progress from bathroom singers to living room singers! :)

In Gujarat’s Navratri Festival, is “a circle of ecstasy” that throbs for nine nights with millions of fantastically costumed devotees swaying in a fusion of dance and devotion. A legendary and unique Folk Dance form known as 'Garba' is performed but in recent times this been heavily influenced by 'Dandia Raas' and these are performed with great splendour.

Chick peas, black eyed peas or other lentils with seasoning is offered to the deity and shared with visitors on all the Golu days. Among Indian festivals, Navarathri is one of the longest festivals celebrated in different styles across India. The 'Golu' is quintessentially South Indian.

Golu Setting Code

There is a defined code in the setting up of the steps for Golu. The number of steps be in odd numbers 3,5,7 and should not exceed nine. The code for setting the Golu is as below:

From the top, for a 9 step Golu:

1^st step - Kalasham and God's idols

2^nd and 3^rd steps - More idols of God. Inevitably, the eight forms of Lakshmi and the Ten Avatars of Vishnu known as Dashavataram idols representing the ten incarnations of Lord Vishnu are placed. The order of the Avatars – Matsya, Kurma, Varaha, Narasimha, Vamana, Parashurama, Rama, Balarama, Krishna and Kalki.

4^th Step - Saints, Gurus and enlightened ones

5^th Step - Freedom fighters, philanthropists' and social workers

6^th Step - Householders, vendors, farmers and so on

7^th Step - Animals

8^th Step - Birds

9^th Step - Insects and crawling creatures

The above hierarchy should be followed if less than 9 steps of Golu is being constructed.

The 10^th Day, known as Vijaya Dasami or Dussehra

The Golu or Navarathri festival culminates on the tenth day that is known as Vijaya Dasami or Dussehra. This day is considered as a very auspicious in the Hindu calendar. The day marks several things, viz.

· the triumph of good over evil and is celebrated as victory of Goddess Durga over demons.

· the day also marks the victory of Lord Rama over the demon King Ravana (epic : Ramayana); and

· Finally, this day also is known as ‘Ayudha Puja’ day or ‘Vishwakarma’ day. Vishwakarma - a divine engineer and architect from the Vedic age. As a mark of reverence, he is worshipped by the engineering and architect community besides by all professionals. Artisans, craftsmen, mechanics, smiths, welders, industrial workers, factory workers, and workers of all kinds worship Lord Vishwakarma on this day and pray for a better future, safe working conditions and above all success in their respective fields.

This year, Vijaya Dasami falls on October 24^th, and the day is considered to be auspicious for commencing new ventures or enrolling into new programmes of learning or for that matter taking up learning of fine arts.

The Philosophy of Navarathri

The form of the doll arrangement is to show that we place Gods, saints and great men above the ordinary human beings and other forms of life. The philosophy behind this is that if ordinary human beings nurture good thoughts and pursue good deeds to others, they will be elevated as a result of such noble thoughts and actions, thus gain saint like qualities and finally attain oneness with God.

The Prayer:

Ya Devi sarva bhuteshu, Matri rupena samsthita | Namastasyai

Ya Devi sarva bhuteshu, Shakti rupena samsthita | Namastasyai

Ya Devi sarva bhutesu, Shanti rupena samsthita | Namastasyai

Namastasyai Namastasyai Namastasyai Namo Namah

Translation:

The goddess who is omnipresent as the personification of universal mother, Salutations to Thee

The goddess who is omnipresent as the embodiment of power, Salutations to Thee

The goddess who is omnipresent as the symbol of peace, Salutations to Thee

I bow to her, I bow to her, I bow to her

Let us celebrate this Navarathri Golu, and harness the spirit of good within us and spread Peace.

The brave new world of QE Infinity….

2012-09-19T16:36:00.000+01:00

“If the only tool you have is a hammer, every problem looks like a nail”! Abraham Maslow.

That may well sum up the current predicament of Bernanke and many of his counterparts in Europe with interest rates at record low for about four years now.

After launching Quantitative Easing 1 (known as QE1) of US$1.65trillion and QE2 of US$600bn, to stave off deflation, Fed has now launched QE Infinity to boost employment. It has committed to buy $40bn of agency mortgage-backed securities every month until the labour market improves. An open ended commitment (as he has not been specific on unemployment targets) besides promising to hold the ultra-low rates until mid-2015.

It signals that he is prepared to hold an accommodative policy stance even if economy gains strength and has moved away from the deflation argument. But before we get to analyse the merits and effectiveness of QE Infinity, let’s understand the theory of behind benefits of QE and why some economists seem to worship it.

How does QE work?

QE is an unconventional emergency tool of monetary policy that the Central Banks can use to boost the economy by pumping liquidity into the system. The Central Bank generates fresh amounts of electronic money to encourage lending to businesses. Specifically, the Bank buys assets like Government and corporate bonds with its new cash. The companies selling those assets - usually commercial banks or other financial businesses such as insurance companies - will then have new money in their accounts, which in turn should feed into the wider economy.

Central banks create money to buy government, and sometimes corporate, bonds, for three main reasons:

To reduce the cost of borrowing - buying government bonds increases their price and lowers their yield, which in turn puts downward pressure on interest rates across the spectrum;
To inflate asset prices - with bonds paying out lower interest rates, investors look to buy other asset classes, such as equities, real estate thereby pushing prices up;
To increase lending - by paying money to banks to buy bonds, the banks then have more money to lend to businesses and individuals.

In theory if QE works, credit growth should pick up and businesses should find it easier to get credit.

How is this different from actions of the 1920s Germany and Mugabe’s Zimbabwe?

Weimar Republic (German Reich) resorted to printing money to finance government debt and war reparation damages. The value of the Papiermark declined from 4.2 per U.S. dollar at the outbreak of World War I to 1 million per dollar by August 1923 and a further slid to 238 million to dollar by November 1923. Following this, new terms were negotiated, a new currency was introduced, at a rate of 1 trillion Papiermark for one Rentenmark, bringing back the US Dollar to 4.2 to a Rentenmark!

More recent actions of printing money were undertaken in Mugabe’s Zimbabwe. In 1980, Zim dollar was worth US$ 1.54. In March 2007, the Z$ 500,000-note was issued, signalling the official arrival of hyperinflation (more than 50% inflation per month). In January, 2009, Zimbabwe issued the one-hundred-trillion Zim dollar note, the largest denomination banknote ever!! It marked the end of the currency. In February 2009, the Reserve Bank of Zimbabwe introduced the fourth Zim dollar, which chopped off 12 zeros. Finally in 2009 the currency was abandoned, a humiliating end.

In contrast the US and the UK are buying asset backed securities and government bonds. To the extent banks are required to hold government bonds as regulatory liquidity requirements, Central Banks buying of bonds indirectly feeds the government deficit financing, very similar to printing money!

Has it ever worked ?

No. Let's look at Japan’s lost decade(s) - After keeping rates near zero for an extended period, the Bank of Japan finally launched QE in March 2001 and dropped in March 2006. Over the five years, the Bank of Japan increased its outright purchases of longer-dated Japanese government securities driving the call-money rates to zero. The policy helped to stabilise the weak banks but failed to spur growth.

At first, it appeared the program had succeeded in stabilizing the economy and halting the slide in prices. But deflation returned with a vengeance, putting the Bank of Japan back on the spot. Critics say the Japanese central bank wasn't aggressive enough in launching and expanding its bond-buying program—then dropped it too soon. Others say Japan simply waited too long to resort to the policy.

BOJ officials have said quantitative easing wasn't the right tool to fight Japan's deflation, which was rooted in structural problems such as a rigid employment system that failed to eliminate redundant jobs to stay competitive.

Some economists support QE as the right medicine, then why doesn’t it work?

The arguments for QE are based on money multiplier effect. As the available reserves increases, banks ability to lend increases, creating the money multiplier effect leading to economic recovery. But for this to work economic conditions needs to be different!

Factors that are NOT aiding monetary transmission or lending growth:

Banks are over leveraged and capital deficient; additional cheap source of liquidity is helping it to refinance expensive funding and improve profitability; but very little flow through to the real economy;
Interest rates have remained low for 4 years and yet demand has been muted, further QE is not going to spur demand;
Over leveraged consumer, weak labour market combined with declining home prices have failed to create any new housing demand;
Small business are not looking to borrow due to the uncertain economic outlook;
Large corporations will borrow more at even lower rates — even though they’re already sitting on mountains of cash.

But such large corporation borrowing won’t create new jobs and may even lead to job losses as they invest their cheaper cash to achieve further economies through mergers and acquisitions. QE1 reduced corporate-borrowing rates by nearly a percentage point; while QE2 succeeded in bringing down corporate rates by only 13 basis points. The law of diminishing returns come into play.

Banks have increased their reserves with the Central Bank rather than use the proceeds of QE for further lending. The average level of excess reserves for banks was roughly $19 billion from 1984 to 2008.

Since 2008 excess reserves held at banks has swelled to more than $1.5 trillion currently!! As explained earlier, this is due to the combination of lack of demand for credit and overstretched balance sheet of banks.

While the pending inventory has dropped to pre-crisis levels of 6 months, this conceals the housing market weakness as the effects of foreclosure moratorium and pending foreclosures on home owners (estimated at 700,000) is not reflected in this. The average time take to foreclose has also increased from 4 months in to over 12 months.

Once banks recommence their foreclosure process, the supply overhang will continue. This combined with lack of credit growth will push the housing market recovery further out.

Quantitative easing didn’t help the Japanese economy, instead it only big Japanese companies and the current experience will be no different.

Do QE programmes have any effect on employment…

The chart shows net gains in employment since beginning of 2009 as compared to the number of individuals that have moved into the "Not In Labor Force" category where they are no longer counted. While there was an increase of 3.4 million jobs since the financial crisis, that is far lower for a sustainable economic recovery. At the same time, more that 8.4 million have either "given up" or "retired" during that period. The decline in unemployment rate to 8.3% is partly as a result of a fall in workforce participation.

There is NO evidence that bond buying programs have any effect on fostering employment. However, at the current rate of individuals leaving the work force, Bernanke is likely to achieve low unemployment rate in the next few of years! Of course, economic prosperity will have deteriorated much further as the rise of the "welfare state" persists.

The charts below show the number of individuals, since 2009, who are now claiming disability and food stamps and the increase in welfare costs.

If core inflation is benign, what is the harm in pursuing QE?

The Federal Reserve claims QE is not a problem because "core inflation" has been relatively contained. But core inflation excludes food and energy prices, which are two of the biggest components of consumer budgets and have been rising. On top of that, the average US household income has declined by over 9% since the onset of recession. As a result, food and energy consume more of wages and salaries it leaves less available for consumption within other areas of the economy. The chart below shows the consumer conundrum where declining wages meet up with rising costs of food and energy. With recent severe drought in the US food prices will only rise further. Of course, the USD benefits from its status as a reserve currency that offsets potentially severe outcomes.

The important point is that for businesses to hire require an increase in aggregate end demand. Rising inflationary pressures in food and energy prices only act as depressants to discretionary consumption thereby reducing the need for employers to expand capacity. It is unlikely that the Fed's purchases of mortgage back securities will spur businesses to expand. The inflation expectation has also risen above 2 per cent and there is little justification for additional QE at this point.

Conclusion

While QE will push liquidity into the equity markets thereby inducing higher asset prices - it will do little to help the economy, employment or housing. Money will chase anything that is perceived as a “hard asset.” Industrial metals have already risen by 16.6 per cent since early August. The S&P is near all time highs, but if viewed in terms of gold it is 61 per cent below its 2007 high. Fed is engaged in debasing the dollar and this leading to competitive devaluation from other Central Banks (Japan has reacted).

Monetary policy has a very limited reach economically and cannot be a substitute for fiscal policy measures that are required to promote economic growth.

With the consumer sentiment weak, unemployment high, foreclosures and delinquencies still burdensome, and businesses constrained by lack of demand - there is little desire or need and even if there was, the banks are too constrained to lend. This is unlikely to change anytime soon even as businesses are forced to pullback as demand is further reduced by rising inflationary pressures.

The lack of employment, lower incomes, excess debt and poor credit history will keep a large chunk of the population from qualifying to avail a mortgage for quite some time. If the lowest mortgage rates in history could not lead a housing market recovery, there is little likelihood that a few more basis points will do the trick.

With QE Infinity, Bernanke is determined to pump up the US economy, full throttle. Be prepared for the next asset bubble burst, only this time it’s going to be a lot bigger and a lot more painful!

TAMING THE BANKS – AN ELUSIVE GOAL?

2012-07-12T14:38:00.001+01:00

Five years since the financial crisis broke and a trillions dollars later, you would be forgiven for thinking that enough has been done to restore the financial system and the banks to pristine health. Nothing could be further from that!

Subsequent to the various tax funded bail outs of various financial institutions in almost all the major western economies, one would have thought that the banks would have learnt their lessons. If recent revelations on libor fixing, swap mis-selling, weak money laundering processes or humungous trading losses are anything to go by, obviously not!

Bob Diamond, ex-CEO of Barclays famously said to the Treasury Select Committee in Jan 2011 that the time for remorse was over. He will be ruing that statement now.

Banks have been handed significant financial penalty in recent weeks but very little of personal accountability is being assigned by the regulator other than moral suasion or by the media outcry. ING Bank was fined c $600m, Barclays was fined c$500m and it is rumoured that HSBC may be fined a whopping $1bn. Other banks including BoFA, Citi, Deutsche, JP Morgan etc are under investigation and are most likely to fined as well for their failures over the coming weeks and sadly may not lead to much more than that.

What this shows is the systematic manner in which corporate greed has eroded the moral fabric of these institutions. The regularity with which we hear of repeated failings in banks, it is obvious that the banks have become ‘too big to manage’.

And if you now thought enough was enough, what are your real choices? Precious little! Competition has been eroded by mega mergers and what we now have is oligopoly.

So where are we now? The short answer is ‘between a rock and a hard place’!

How did we land up here?

The ‘light touch’ regulation and the new set of accounting standards for measurement of financial instruments (introduced in 2005) provided a potent playfield to create weapons of mass destruction to fuel the corporate greed. This combined with the pressure to deliver quarter on quarter earnings growth and the pressure to beat analysts estimates further reinforced the perverse behaviour.

The ability to recognise revenue upfront on long-term products through product structuring was a strong incentive for bankers. Skewed incentive structure resulted in structuring financial products to enable up-front recognition of income facilitated by new accounting standard (IAS39)!

As bankers’ variable compensation is linked to annual performance, early recognition of income leads to a culture of creating more complex structured products. This has lead to mis-selling claims as customers were not offered vanilla products or were lured into structured products by overegging the benefits.

A classic example is the current mis-selling claims of swaps to SME's - bundling of interest rate swap with term loans. A simple term loan product was structured as a floating rate loan with an interest rate swap overlay to facilitate instant revenue recognition by loading the margins on the interest rate swap. Banks have systematically taken advantage of this accounting asymmetry. In many instances swaps were offered as a free product on a floating rate loan as a hedge to these unsuspecting and often uninformed customers. This is not to say that swaps per se are inappropriate as they are a good risk management tool but should be sold where appropriate rather than to unsuspecting and unsophisticated customers.

Even the CDO market was created on the bank of sub-prime and other mortgage loans with the aim of creating marketable securities to accelerate revenue recognition with devastating effect as the greed took hold and underwriting standards were non-existent.

Let’s take a look on what has been done by the regulators and how effective it has been thus far and what else is coming…

Recapitalisation of banks

Soon after the financial crisis several financial institutions were recapitalised by Treasury (in most markets) and saved the financial sector from falling abyss. Banks promptly got back to their old ways, started helping themselves by reestablishing their variable compensation. Conservation of capital or boosting lending for economic recovery was a secondary objective!

Monetary policy actions have run out of steam…

The monetary policy of the central banks has resulted in a near zero interest environment and significant inflation of the balance sheet of the major central banks. Neither of these actions has resulted in any perceptible impact on economic growth but it is widely believed that these actions have certainly helped in preventing a deeper recession.

The low interest rate regime has helped with greater disposable income for borrowers but that has not resulted in increased consumer spending. So far both banks and the customers have been actively deleveraging. And this could go on for a few years! At the same time the low interest rates are hurting the savers and the pensioners. There is a significant wealth shift from savers to borrowers and our pensions are not going to be worth that much.

An avalanche of new regulations…

In order to regulate the banks in a more effective manner, the regulators around the world have been busy developing a raft of regulations that is coming thick and fast! The Basel 3 or CRD IV directive covering new capital and liquidity requirements for banks will mean that banks will need several billions dollars more in capital to meet and more than a trillion dollars of liquidity to meet the new norms. There are several other regulatory initiatives, which take cumulatively would push any hopes of an economic recovery into oblivion. Some of these are:

· Volker’s Rule or the Dodd-Frank Act

· Vickers Report for UK banks to ring fence retail banks

· Crisis management directive – Resolution Plans or Living Wills

· Centralised Clearing House for swaps

· Significant increase in regulatory reporting requirements

· Retail distribution review

And there are some regulations that have much stronger impact than the others. It’s important for the regulators to prioritise the order in which some of these regulations to take effect to achieve the twin objective of putting the fire out and redesigning the house for the future.

The current penchant for a raft of regulations aimed to minimise risk taking may cumulatively just achieve that, minimal risk taking! As the Chinese saying goes, be careful what you wish for!

Regulators need to be cautious, lest the medicine may become the ‘poison chalice’.

While it is essential to make the banking system safer to avoid future tax payer funded bail-outs, this can be achieved differently. Increasing capital requirements now is akin to designing a new fire resistant house while the current one is on fire! Instead of focusing on putting out the fire first and then rebuilding the house, the regulators are leapfrogging to create a safer banking environment.

Basel 3 is driving banks to conserve capital

The Basel 3 capital requirements raises the core capital requirements to north of 10% (including various buffers) from the current 4% equity and hybrid capital and 8% in total. In practice the impact is far greater when taken together with the regulatory deductions from capital and increase in risk measurements for trading risk and certain types of risks in the portfolio. The cumulative effect of the above is an increase in capital requirements by about 3 to 5 times from existing levels depending on the institutions asset risk profile.

Banks are in the business of taking risk and do this through both credit extension and maturity transformation. By significantly raising the capital requirements, the credit extension is effectively blunted and by stipulating stringent liquidity norms, the maturity transformation is also severely impaired.

This increased requirement is stifling banks from supporting trade and finance. Banks are actively deleveraging in order to meet the new capital requirements. Even as the cost of capital and liquidity have risen resulting in squeezed margins, the business volumes have significantly shrunk resulting in depressed profitability and limited core equity generation.

Why would anyone provide more capital to an industry stuck in a quagmire of regulations, declining earnings, poor returns on equity, uncertain economic climate and an uncertain future?

….It’s the Capital, Stupid

The Central banks’ are too consumed by monetary aggregates and inflation figures. They are busy administering increased liquidity measures through their Asset purchases, Long term repo’s (LTRO’s and Operation Twists) and Quantitative Easing hoping that more liquidity will lead to more lending. Whilst all this is helping liquidity and driving interest rates, it is not providing any impetus to lending. As lending would result in increased capital requirements at a time when capital is scarce, banks are rightly focused on deleveraging.

So, it is important for regulators to appreciate this and sequence the regulatory changes with the foremost objective of boosting lending to support the economy and even while addressing the safety issues.

It is time the central bankers started focusing on addressing capital requirements of banks. No amount of increased liquidity is going to encourage the capital starved banks into lending!

…more capital is not a panacea

More capital will only mean that a bank can lose more money before going broke. Under deployed capital is an equally a bad outcome with cost of credit increasing to ensure adequate returns on capital.

A set of simple regulations with more effective supervision that aims to instill a strong risk culture that curbs excessive risk taking, significant disincentives for senior management failure will be far more desirable.

What can be done?

While Quantitative easing has kept the interest rates low, it could have delivered a far greater impact if the Central Banks created a ‘Special Assets Vehicle’ to buy risk assets off the bank.

Special Assets Vehicle

A vehicle funded by the Central Bank can start buying illiquid assets (not necessarily bad assets) from banks at an ‘arms length’ price. These assets unwind over time as the underlying loans amortise.

This would alleviate both liquidity and capital in banks, thereby creating capacity for new lending. Ultimately, if banks have to get strong, economy has to fire again and if the economy has to fire again, banks have to start lending! The situation now is neither is happening and we are in the danger of getting into a downward spiral loop!

….some immediate priorities

Instead of spending endless hours to debate and construct a comprehensive regulatory regime that is leading to more uncertainty stifling new capital for banks, it would be far more beneficial if the immediate focus was on the following:

· set up a special assets vehicle and buy illiquid assets off banks using quantitative easing (can set strict credit criteria for loans to be bought);

· enforce a risk culture and ensure Boards of Banks are represented adequately by risk professionals who can set and monitor risk appetite;

· hold senior management accountable for failure;

· levy stiffer penalties including criminal prosecution in case of fraud and systematic abuse like money laundering or mis-selling;

· set prudent guidelines on executive compensation that does not encourage excessive risk taking and has a sufficiently large deferred component that is linked to long term performance;

· have claw back provisions for failure including docking of pensions;

· leave the quantum capital at a level of 8% and focus on quality of capital i.e. equity;

· enforce robust resolution plans including setting sufficient bail-in’able debt to cushion losses;

· use macro prudential filters to curb excessive risk than stipulating higher capital minimums for all banks… a one size fit all approach is counterproductive.

Having prudent compensation guidelines and strict rules to curb gaming of tax, accounting and regulations alone would have more salutary effect than oodles of regulation!

And once the dust settles, that would be time to revisit and design a more robust financial framework. The aim should be to have a financial sector that ring fences activities that are raison d’être of banks i.e. of providing payment services, savings and lending products to clients and customers. And a framework where customers have a choice! A call for back to simplicity!

The law makers should then take steps to dismantle the ‘too big to manage’ and ‘too big to fail’ institutions that may eventually address the big goal of ‘taming the banks’!

As Gertrude Jekyll, a British horticulturist once said, “There is no spot of ground, however arid, bare or ugly, that cannot be tamed into such a state as may give an impression of beauty and delight.”

She certainly wasn’t thinking of banks!

Leadership Series - Part 3

2012-04-06T21:15:00.001+01:00

The Five levels of Leadership

John C Maxwell wrote on the Five levels of leadership explaining the source of a leaders following. From a base level of power lead followership to the more evolved level of inspired followership, leaders operate at different levels.

I shall briefly cover the five levels of leadership and also discuss how to become a Level 6 leader.

Level 1 – Position (Rights)

At the base level of leadership, the key is the position; at this level people follow because they have to follow, because the leader is the ‘boss’. The Level one of leadership derives followership because of the authority that is given to the leader and the position, without which the person can’t lead. This level of leadership is essentially hierarchical and often prevalent in the bureaucracy, defense forces and political parties.

Level 2 – Permission (Relationship)

The leader operating at this level focuses on building relationship with the people. In order to enhance their leadership they strive to develop a relationship and this often results in people wanting to follow. Leader likes the people and the people begin to like the leader and are ready to move the next mile. So in this level leader’s ability to connect with people is very important.

Level 3 – Production (Results)

Leaders who drive results develop following because they ooze confidence and positivity. In this level the people follow because of the leader’s outstanding contribution to the organisation. They start to talk about the leader in term of the organization’s results. In Level 3 the leader starts to taste the feeling of success and a winning atmosphere and is seen as a person who can make things happen. Leader’s in commercial organisations enjoy this form of followership when the results of the entity are in a continuous uptrend.

Level 4 – People Development (Reproduction)

At this level, people follow because of what the leader has done for them, they love to follow the leader because of the interest the leader takes in developing them and the leader is feeling happy because the people are doing better, and become loyal to the leader and gives the leader the credit. This form of leadership is prevalent in academia.

Level 5 – Pinnacle (Respect)

At this level, people follow you because who you are and what you represent, it's the personhood level. The level-five leader, the Builder, strives not to reach a goal but to build an institution. Builders are legendary leaders such as IBM's Tom Watson Jr., Apple’s Steve Jobs, GM's Alfred P. Sloan, and Harpo's Oprah Winfrey. These people serve their institutions by managing for the long term and not allowing themselves to be seduced by the twin mirages of short-term profit or stock market valuations. They have a grand vision for the future of their organizations, and they infect others with their energy, enthusiasm, and integrity. These are the leaders we write books about, study, try to understand, and lionize.

The leader at level 6 – Transcendental

Making a difference

Builders are few and far between, but there is an even rarer type of leader who transcends the Builder: the Transcendent. Level-six leaders transcend their political party, their ethnic or racial group, and even their institutions. They focus on how to benefit all of society and are "global citizens,".

Leaders at this level are motivated by the need to make a difference to the world. They’re interested in creating mutually beneficial partnerships and strategic alliances with other individuals or groups who share the same goals. They will work with customers and suppliers and produce win-win situations.

They are active in the local community, building relationships that create goodwill. They know how important it is to look after the environment, going beyond mere compliance to operate in an ethical and environmentally-friendly manner. They also recognise and demonstrate inclusiveness in all their work.

When dealing with people, they display empathy, and actively find ways to help their staff find personal fulfilment in their work. They create a nurturing working environment where people can excel, mentoring and coaching staff, to build a pool of talent for the organisation. Their values are so embedded in their personalities that they make decisions intuitively. Level 6 leaders are at the top of their game. They are true servant leaders.

There is no better example of what it really takes to be a Transcendent than the first black president of South Africa, Nelson Mandela. He was able to soar above hatred for his white jailers, the political tug of the African National Congress, the pull of his racial and tribal group, and the rejection by the Afrikaners to build a South Africa for all South Africans. Now in his 90s, he is perhaps the world's greatest living leader. Nelson Mandela’s leadership is so beautifully captured in the movie ‘Invictus’ where Morgan Freeman brings it out so powerfully.

The Dalai Lama, another Transcendent, mentioned that the first thing he does in the morning after he finishes his prayers is to ask himself, "How can I help to make the world better today?"

Imagine if our senior political and business leaders started their day by asking that question and acting on the answer. The world would be a much better place!

Leadership Series - Part 2

2012-01-27T22:40:00.000+00:00

This Part of the series will explore the different leadership styles and their respective effectiveness in a given situation. As I had emphasised in Part 1, leadership is situational and it is important to understand that leaders should be able to:

recognise the different demands of each situation;
develop flexibility to be able to draw on the style that is most appropriate for the situation; and
adapt frequently and meet one’s own needs.

The main leadership challenge that arises is in adapting the natural leadership style to a different one based on the demands of the situation while maintaining a balance with one's own needs.

This is none more obvious than in the situation of coalition politics where the demands of the situation is conflicted with one’s own needs or preference.

It is, therefore, essential to anwer these questions:

What is your natural leadership style?
What leadership style does the situation demand?
What do you have to do to be a successful leader?

Leadership demands finding the right balance between both your natural leadership style and the style demanded by the situation. Not only do you need to recognise your own strengths and exploit them, but you also have to adapt your style to different situations frequently in order to be effective.

Leadership Styles

There are many classifications of leadership styles but they can be broadly categorised into the following:

1. Authoritarian, Dictatorial, Autocratic

2. Participative, Consultative, Democratic

3. Delegative, Laissez Faire, Collaborative

4. Bureaucratic, Rule bound, Process focussed

5. Charismatic, Transformational, Inspirational

Authoritarian, Dictatorial , Autocratic

The leaders tell their employees what they want done and how they want it accomplished, without getting the advice of their followers. Some of the appropriate conditions to use this style is when you have all the information to solve the problem, you are short on time, and your employees are well motivated. This style is also well suited in dealing with emergencies or crisis or in conflicts where the leader has to direct actions.

Some people tend to think of this style as a vehicle for yelling, using demeaning language, intimidating the team, using their administrative authority to harass the staff, leading by threats and abusing their power.

This is not the authoritarian style, rather it is an abusive, unprofessional and unethical style also called “bossing people around.” It has no place in a leader's repertoire and is often resorted to by some to neurotic or insecure managers.

Participative, Consultative, Democratic

This style involves the leader including employees in the decision making process (determining what to do and how to do it). However, the leader maintains the final decision making authority. This not only increases job satisfaction by involving team members, but it also helps to develop people's skills. Team members feel in control of their own destiny, so they're motivated to work hard by more than just a financial reward. Using this style is of mutual benefit — it allows them to become part of the team and allows you to make better decisions.

Because participation takes time, this approach can take longer, but often the end result is better. The approach can be most suitable when working as a team is essential, and when quality is more important than speed to market, or productivity.

Delegative, Mentoring or Laissez faire

In this style, the leader allows the employees to make the decisions. However, the leader is still responsible for the decisions that are made. This is used when employees are able to analyze the situation and determine what needs to be done and how to do it. The leader sets the priorities, milestones and takes on a monitoring / mentoring role.

This style is adopted in highly creative organisations or functions and is very effective. Organisations in the IT sector, media, advertising etc. predominantly apply this style.

Delegation does not mean that the leader is absolved of the responsibility nor can the leader blame others when things go wrong. Rather this is a style to be used when the leader has full trust and confidence in the team. The leader continues to be responsible for the actions and hence it is important that interim milestones are established to ensure that the program or task is on course.

Most often, laissez-faire leadership is effective when individual team members are very experienced and skilled self-starters.

Bureaucratic leadership

This style is often associated with red tape or civil service. Believe you me, even this style has a place and relevance!

Bureaucratic leaders work "by the book”. They follow rules rigorously, and ensure that their employees follow the procedures precisely. This is a very appropriate style for work involving serious safety risks (such as working with machinery, with toxic substances, or at dangerous heights) or chemical plants, Inland Revenue etc.

Charismatic leadership

A charismatic leadership style can seem similar to transformational leadership, because these leaders inspire lots of enthusiasm in their teams and are very energetic in driving others forward. However, charismatic leaders can tend to believe more in themselves than in their teams, can act like control freaks and this creates a risk that a project, or even an entire organization, might collapse if the leader leaves. In the eyes of the followers, success is directly connected to the presence of the charismatic leader. As such, charismatic leadership carries great responsibility, and it needs a long-term commitment from the leader.

People with this leadership style are leaders who inspire their teams constantly with a shared vision of the future. While this leader's enthusiasm is often passed onto the team, he or she can need to be supported by "detail people”. That's why, in many organizations, both transactional and transformational leadership are needed. The transactional leaders (or managers) ensure that routine work is done reliably (lime Tim Cook of Apple Inc), while the transformational leaders look after initiatives that add new value.

Transformational leaders create something new by changing the basic political and cultural systems. This differs from transactional managers who make adjustments to the organizational mission, structure, and human resources.

Transformational leadership accomplishes this by challenging and transforming individuals' emotions, values, ethics, standards, and long-term goals through the process of charismatic and visionary leadership. On the other hand, transactional leaders engage with their followers to create a connection that raises the level of motivation and morality in not only the followers, but also the leaders themselves.

In some situations, a leader will be required to use multiple styles of leadership. For example:

Telling your employees that a procedure is not working correctly or performance is below par and a new approach must be established (Authoritarian).
Asking for their ideas and input on creating a new approach (Participative).
Delegating tasks in order to implement the new approach (Delegative).

So, how does one determine the appropriate style of leadership for a situation?

Some of the factors that one should consider before choosing a specific leadership style would be:

What is the issue at hand? If it big goals setting or creating a vision for the future?
Is it a major crisis or a disaster scenario?
Does it entail significant change to the organisation?
Type of task: Is it structured, unstructured, complicated, or simple?
Are relationships based on respect and trust or on disrespect?
Who has the information — you, your employees, or both?
How well your employees are trained and how well you know the challenges of the task?
Are there Internal conflicts?
Level of staff morale
How much time do you have to make an impact?

To sum up, an effective leader has to be able to adapt his style to the needs of the situation and balance it with one’s personal needs.

The next part of the series will cover the five levels of leadership and what does it take to become a Level 6 leader!!

Leadership Series - Part 1

2012-01-13T17:29:00.000+00:00

Leadership is a huge subject that cannot be covered in one article…and hence, this is first part in a three part series on leadership.

Let's deal with key questions up front:

· What is leadership? and

· What makes a good leader?

Leadership is a term that we often associate with leaders, but most leaders lack leadership.

What is leadership?

When we pose this question, the usual explanations are about styles of leadership or qualities one expects in a leader.

Leadership entails:

· Inspiring people to take action;

· Doing the right thing for the right reason;

· taking tough decisions in the face of adversity without trying to be populist;

· having the humility and the courage to accept that they do not have all the answers;

· helping others to succeed

Leadership is NOT about:

· the Leader

· being the most popular or trying to win popularity contest; (the more one tries to be populist, the more the alienate themselves!)

· your business title or size of your office;

· seniority or power or having answer for everything

So having defined leadership as what it is and what is not, let’s examine what makes a good leader and the typical qualities one looks up to in a leader.

So what makes a good leader?

What makes a good leader largely depends on the degrees to which an individual’s qualities match the demands of the situation / context. More importantly, the leader should be able to adapt his style to the nature of the demands of the times and inspire people into action. They should be able to make the people feel that they are very core to the task and each one of them makes a difference to the success of the enterprise. The greatest myth is that the leaders are born. Most leaders have emerged because of the circumstances and their courage.

A very good example that comes to mind is Winston Churchill and his inexorable attitude during WW II. A sense of urgency was created in the course of very few days and no delays were condoned; telephone switchboards quadrupled their efficiency; the Chiefs of Staff and the Joint Planning Staff were in almost constant session; regular office hours ceased to exist and weekends disappeared with them.

Churchill’s robust optimism is excellently showcased in a speech he made in the House of Commons on June 4, 1940, when he spoke these famous words:

“We shall go on to the end. We shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our island, whatever the cost may be. We shall fight on beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender.”

Yet, he steadfastly refused to take the credit for the victory. When commended for the victory, he responded, “I have never accepted what many people have kindly said, namely that I inspired the nation. It was a nation and race dwelling all round that had the lion heart. I had the luck to be called upon to give the roar.”

There were many great leaders in the 20^th century who inspired people to give everything for the cause, viz. Gandhi, MLK Jr,, Mother Teresa, Swami Vivekananda, Florence Nightingale, Nelson Mandela, Mikhail Gorbachev and many more…

…core qualities that makes a good leader…

No matter what, there are some leadership qualities that are context-independent, that is essential to be a good leader. Some of these qualities that a good leader to have would be:

Vision	Capability	Courageous	Consistent
Collaborative	Creative	Respect	Caring
Cooperative	Innovative	Act with Integrity	Fairness
Honest	Listener	Knowledge	Understanding
Above all have a good sense of humour

In Summary

Leadership is situational and a good leader is one who can adapt himself to the demands of the situation.

We shall explore more on leadership styles and its effectiveness to a given situation in my next part…

The Euro Drama

2011-12-18T17:12:00.000+00:00

After several false starts, Europe’s leaders failed, yet again, to come up with credible steps to solve the euro crisis. The markets are getting weary and as investors lose faith and patience, the task of saving the single currency will become a lost cause. Sooner or later, the euro will be beyond saving. The way things are headed; this may be sooner than most people think!

In the run up to the Summit, the ECB has been extending its support to euro-zone banks—in effect lending them unlimited cheap money. That will help the banks and might in theory feed the demand for euro-zone sovereign debt. But it hardly counts as the “big bazooka” investors want, if only because the banks are wary of taking losses on ever larger stashes of government debt. What is required is not more liquidity but more capital for the banks. Further, the ECB cannot intervene as the lender of last resort to euro-zone sovereigns.

In light of the above, the main objective in Brussels was to draw up a plan to save the euro. Governments needed to commit to credible fiscal rules that provided incentives for good fiscal governance. In return, the solution was expected to be in the form of joint liability for debts, with only the conforming countries benefiting from the purported Eurobonds. The European Central Bank (ECB) was to support to all solvent members. In addition to that the government’s were expected to announce measures to strengthen the banks and plans to drive economic growth.

But none of that happened. Instead what we got was a British veto to a plan for ‘a plan’! The proposal was to write fiscal discipline into national constitutions and enable the EU’s institutions to punish profligate countries and enforce fiscal discipline. The package focussed too much on austerity, and too little on economic growth.

Clearly, the leaders were hurtling down the wrong path. Forcing further austerity measures would further aggravate the recession and potential cause further civil disorder in most countries. Besides, this could prompt a downgrade of most of the Eurozone’s credit ratings and cause economies to miss their deficit targets, increase borrowing costs — triggering still more austerity or sovereign default. A downward spiral in the making!

Although the plan was greeted as a demonstration of European solidarity, it is more likely to provoke conflict. The summit rejected the idea of Eurobonds, in which all members would share some or all of the troubled economies’ debt burden. Instead the pain is being imposed almost entirely on deficit countries, making it a bitter pill to swallow. If further austerity measures stir up civil unrest, the external enforcers from the EU will become a target for popular rage.

Already governments that agreed to the idea are warning that its ratification depends upon the detail and some countries may be pressured to hold a referendum. France and Germany, two of the major orchestrators can’t agree on the way to resolve the crisis, with France backing the Eurobonds idea while Germany is opposed to it.

Meanwhile the British government, having fallen out with its EU partners after exercising the veto, is promising that it will remain a central part of the union—and that London will remain Europe’s financial capital. It must be conceded that an EU without Britain would be less liberal and Germany (and some of the smaller Eurozone members) recognises the importance Britain can play within the EU.

What is the hullaballoo about Britain’s veto

David Cameron’s plan was to seek safeguards for the financial sector and to subject some parts of financial regulation to unanimous approval, in exchange for backing a new treaty. When he failed to get what he wanted, he withheld his support.

Britain has real cause to worry about financial regulation. London is host to by far the biggest financial-services industry in Europe—in some areas it has as much as 90% of the EU’s business. The European Commission, encouraged by the French and others, has produced many ill thought out proposals to regulate it, as well as suggesting a financial-transactions tax a.k.a. ‘Tobin Tax’ named after the Nobel laureate economist James Tobin.

Mr Cameron’s veto was if anything symbolic as it fails to serve much more. He may have briefly basked in glory for his bold stance but if his aim was to protect the City and the single market, he has failed. Both are threatened more by Britain’s absence from the summits of up to 26 leaders that will now take place than by Britain’s participation in a treaty of 27 that placed no constraints on it. Britain could have achieved more by staying inside the tent that being outside. After all, Britain has not been outvoted on a serious piece of financial-services legislation.

What next?

Germany has played down the significance of Britain’s veto and expects Britain to play an important role within the EU. As the balance of power shifts in Europe, there will be opportunities to mend the fences. A compromise that gives Britain some reassurance about the financial sector and would let Britain return to the table may still be possible.

Ultimately, the euro zone faces tough choices. Its members could agree to deploy the ECB’s balance-sheet (much like the FED) and issue some form of Eurobond in exchange for fiscal integration. The question is not whether they can save the currency but whether some of them are prepared to pay the price for the profligate ones. This summit suggests not and it remains to be seen whether there will be a change of approach. Given the cultural, historical, political and historical divergences, this will remain a pipe dream.

It is more likely that some of the profligate countries may be forced out of the Euro and may only be readmitted post the criteria for fiscal rules are properly met.

But one thing is certain that this is not the last of the Euro Drama. Most certainly not! In the coming weeks we will witness many more episodes of this epic!!!

What does this mean for global economy?

The unravelling of the Euro would impact the West severely denting growth and most definitely throwing the West into recession. Already Europe is likely to face recession and the US would suffer recession should some of the Euro economies were to default given large exposure of US banks to Europe sovereign debt.

Rest of the world will experience a significant slowdown and overall global growth will falter.

While the drama plays itself out, in the interim brace for increased market volatility, further aggravating the poor economic outlook.