Raghuram Rajan second term: Will change of guard at RBI bring economy crashing down? Financial Express May 31, 2016

The appointment or reappointment of a Governor of RBI should normally be a dignified and silent affair, not an event analogous to the IPL. However, as everyone wants to be asked questions and everyone has an opinion, this issue has grabbed headlines, provoking a lot of conjecture on this decision.
The icing has been added by an eminent personality, who has, as Mark Antony would have said, set ‘Mischief … afoot’ with maverick-like statements, spooking the media as well as the markets. India Inc has been scandalised by such assertions and has pledged support for the incumbent Governor; if a restricted referendum is held today within corporate India, the vote in favour of a reappointment would be almost unanimous.
To add to this rather ‘undignified debate’, it can be said that the logical way of assessing the decision would be to establish if there is an argument for the assertion that has been put forward.
To begin with, it must be stated that there is a right to express an opinion, and issues of likes or dislikes can never be argued with logic because they are driven by emotion. However, if there are any factual inconsistencies in antecedents, there are processes in place that can address them. The points for discussion are two-fold. One, whether or not any incorrect decisions have been taken as has been asserted? Two, whether, as has been emoted by India Inc, the economy would be ruined if a change is considered?
The bone of contention has been interest rates and it is the decision taken to keep them at what has been considered an elevated level which has led to the partial destruction of the economy. Now, given that we do go around saying that ours is the best growing economy—which has been reiterated by the government as well as multilateral agencies—it means that the country has done very well and the conclusion can be refuted on factual grounds.
The issue of interest rates is intriguing. The action of RBI to keep interest rates elevated was purely a logical, theoretical and practical response to what had to be done, given the decision taken by the government. Let us see how this works. RBI had set up an independent committee on monetary policy to arrive at what should be done, and the Urjit Patel committee recommended targeting CPI. It could be argued that most of the CPI components cannot be affected by monetary policy, but aligning interest rates to CPI is correct in terms of protecting real interest rates and hence monetary policy becomes a reaction to inflation. The committee made a suggestion which was accepted by the central bank.
The government then had acquiesced and entered into an agreement with RBI, whereby inflation norms were specified and the central bank perforce would have to target this number. Once this was cast in stone, it means it was a government decision and RBI has to follow the same, which is what has been done. In fact, with CPI inflation remaining elevated at above 5%, one can actually argue saying that RBI has been too liberal with the monetary policy response by lowering rates! Besides, there is little evidence to prove from the past that industry borrows money because it is cheap (as has also been the case with quantitative easing—QE—in the West). The challenge for us is low demand which is reflected by the low average capacity utilisation rates of around 70-72%. Investing in these conditions is just not feasible.
Therefore, the ball is back in the government’s court, which can always change the goal post to GDP growth if the response has to be different—though it will raise conundrums as if we say growth is very high at 7.6% then there can be a weak case for lowering rates further. There is a case of judgement being used where RBI is in a better position to take a call given its apolitical nature. If it is felt that such calls can be taken by other authorities, we can then take a bold decision to remove the powers of interpretation from RBI and pass on the same to the relevant authority; this would be most improper.
The performance of RBI in the last three years or so has been quite remarkable in terms of what was set out to be achieved. The agenda included financial inclusion, new banks, financial markets reforms, Interest Rate Futures, internationalisation of rupee, NPA management, etc. While some of these ideas were already on the ‘to-do list’ of earlier Governors, the incumbent has ensured that all of them have been implemented with a very good modicum of success. Against this background, there is definitely a strong case for arguing for an extension, as the agenda can be taken to its logical end since any change in leadership can mean a new thought process with differing priorities. Also, it is felt that just like governments’ tenures, RBI too should have five years to bring about comprehensive reforms and build systems.
Will a change of guard bring the economy crashing down? This would be an illogical conclusion to draw as the institution is solid and has shown over the tenures of different Governors that it has maintained excellent surveillance systems and guided the economy through difficult times. While the forex swap introduced in 2013 at 3.5% appeared a master stroke, it must be remembered that this concept was preferred to a sovereign bond which the predecessor was thinking of. Even earlier in the 1990s a forex crisis engendered the famous Resurgent India Bonds and India Millennium Deposits in this century. Therefore, the view expressed by some experts that the forex market will crash resides in the nucleus of exaggeration.
At times, it does appear that simple issues are blown up as the scatter points on the graph are forcibly joined through seemingly logical equations. Personal micro views expressed have been pushed into the macro horizon, leading to imaginary Don Quixote-like battles to the extent that everyone believes these tales. The government and RBI have often had differences of opinion on each other’s turfs, but these ideological paradigms have never come in the way of the economy. All RBI Governors have been independent minded insofar as they have batted without political gloves.
Therefore, the conclusions that may be drawn are that RBI has done the right things and not destroyed the economy. Continuity in the realm will be helpful, though change will not be harmful. This could be the view of, what Harry Truman would call, two-handed economists.

Financial Inclusion Growth and Governance book review: Banking for all: Financial Express 29th May 2016

Financial Inclusion Growth and Governance
Deepali Pant Joshi
Gyan Publishing House
Pp 266
R750
FINANCIAL INCLUSION Growth and Governance is probably one of the most comprehensive books on inclusive banking authored by an expert who has not just been with the RBI for several years, but also overseen rural banking operations from different perches. Deepali Pant Joshi has written an excellent book, using sharp judgment to explain not just what has happened, but also what should be done to bring about inclusive growth.
As the title suggests, she believes that while talk of growth and inclusion is fine, the important aspect that has lagged is ‘governance’. There has been considerable enthusiasm shown by banks in meeting quantitative targets, but it appears to have been accomplished more from the point of ‘meeting the target’ rather than bringing about qualitative changes in the lives of groups concerned. This is important even today, as the author subtly points out that the Jan Dhan Scheme has been very aggressive in terms of opening the targeted number of accounts, but the challenge is to make these accounts operative and ensure that people get into the banking habit. This would finally translate into getting loans from formal delivery channels. Presently, these accounts have been linked with the direct benefit transfers programme of the government.
Financial inclusion has always been defined as providing every household access to a savings bank account, an overdraft, remittance facilities and credit products like a kisan credit card. This has been achieved in bits and pieces, as there has never been a conscious effort to deliver the entire product range. It is not surprising that the result has been quite chaotic and, hence, mixed. In fact, financial inclusion also goes a step ahead and talks of access to insurance products at the next stage, to be followed by mutual funds. But this seems to be still some distance away.
There is a reason for the absence of enthusiasm. Banks today do not see this as a profitable venture and, hence, have put in limited effort in dealing with this issue. Today, the success of banks is judged more in terms of profit indicators and returns to shareholders. But we need to have a paradigm shift and also evaluate the returns to various other stakeholders, which is the community at large.
This is where governance comes in, as banks have not worked out appropriate models for this. Meeting social targets has become part of what can be termed as ‘regulatory compliance’ and the intention to make a difference is missing. Here, the author feels that there has to be a change in the mindset of bankers. Governance must not be viewed as a regulator compulsion and we must move over to more of self-regulation. For this, there has to be a bottoms-up regulatory approach with internal checks and controls.
In particular, she emphasises the business correspondent models, which will go a long way in pulling the poor into the financial system. Unfortunately, there are no uniform practices here and her suggestion is that they should all come together and identify the best practices. With a new variety of banks being established, like payments banks and small banks, we can expect to see some traction here.
Interestingly, the author pitches for small banks to work for financial inclusion and suggests greater use of technology to deliver services. It will not be feasible otherwise. But to make it complete, we need to look at inclusion in the boarder sense and also look to include insurance, as well as general health services.
Another important issue she takes up is financial literacy. It is one thing to provide access to banking, but it is also important to educate the masses on these products. For this, she quite cogently links it with the national programme on skill development of the government. Here, she suggests a multi-agency approach to spread literacy and establish financial literacy centres. Banks, especially RRBs, should conduct regular camps, as they are ideally placed to do so given their proximity to the rural population. We also talk a lot on demographic dividend, but to draw it, we must have an educated set of youth that has to be provided financial assistance, which comes under the ambit of financial inclusion.
The author also argues that financial inclusion is not just restricted to rural areas and should be expanded to cover urban areas too in areas of SME finance and micro-finance. Banks must also be educated on the risks involved and should tread carefully. Again, she emphasises on governance for successful implementation. The challenge really is how we put all these pieces together to make a difference.

NDA 2 years: Creditable performance, don’t extrapolate that in numbers just yet: Financial express May 23, 2016

While it has been a creditable performance, we should be cautious in interpretation or extrapolation of the same in numbers, as that may be hasty

Viewed against the enabling environment created and the policies fine-tuned from the existing ones like power sector or urban development, right steps have been taken, which have to be persevered with and not be one-time announcements. The results will show with a lag.

Evaluating the performance of a government is a tough job, because rarely can the relation between action and result be quantified by an equation. Often, actions taken today are manifested in outcomes with a lag. Hence, drawing econometric relations and trying to understand the cause and effect is almost impossible as governments often change every five years, obfuscating further these relations.
Serendipity plays a role in getting good outcomes and what economists often refer to as the ‘base effects’ can work marvels. How, then, can one evaluate the performance of the NDA government in the last two years? This has become fashionable of late with media attention that it merits an opinion. But one should bear judgement here. Just like how one cannot say that RBI is responsible for high NPAs in banks, the same should be the case with the government and, say, inflation.
Any attempt at evaluation depends to a large extent on the premise of what we expect from the government. Often, we link GDP growth to performance; however, the government’s actions contribute to, but do not decide, the course of movement. Both the government and the critics go to the extremes—the government takes credit for GDP growth moving from 7.2% to 7.6%, while critics will say that it is still lower than a trend growth of 8-8.5% or that the numbers are not right. The truth is that GDP growth is affected by various factors over which the government may have no control—exports, private investment decisions, consumer spending, etc. As long as it does what it has promised to do, the government would have redeemed itself.
The view here is that the government affects us in two ways. The first is in creating an enabling environment to do our business. The second is the direct contribution made to the growth process. It can be said upfront that the government has delivered well on both these scores within the constraints which exist.
On the policy front, the NDA government has put in place several measures to plug loopholes and enhance growth prospects. But any critique would always throw up ambivalence.
First, the doing business environment has improved, but this cannot result in miracles. Investment flows in only when there is opportunity.
Second, stalled projects have been cleared, but for them to resume, we need to have other requisites in place such as consumer demand, cost of funds, financial viability, etc. While the first has been done, the second would take time.
Third, foreign investment norms have been eased, which has been positive in terms of response—though we should be careful while eulogising the same, as one is not certain if what has come in is the backlog or net new flows. The issue with foreign investment is that it rarely moves in a linear fashion and often comes in spurts and jerks.
Fourth, the Jan-Dhan initiative has been a major success for financial inclusion, which is quite remarkable.
However, it remains to be seen as to how the households utilise this benefit.
Fifth, power sector reforms have been put in place, with several states joining the UDAY (Ujwal Discom Assurance Yojana) scheme. This looks promising, but time will tell if it works out the way the architect visualised the same. We have had the financial restructuring programme (FRP) earlier, which did not deliver results as the discoms did not keep their part of the deal.
Sixth, the smart city concept, which is analogous to the JNNURM (Jawaharlal Nehru National Urban Renewal Mission), has started on the right note. The JNNURM ran into problems like funding and interest shown by the entities. Dedicated effort is required from the Centre, states and local bodies for fructification.
Hence, the government has done well in starting an all-round campaign for bringing about growth. The challenge for such programmes is that they have to be sustained and as governments reach the time for the next election, compromises are made. We have had a rather confused history of starting off well on various initiatives and then losing the plot. So, an objective evaluation can be made only after five years. Carrying this forward, it can also be said that planning for a period beyond five years is an academic exercise, as in this volatile world one finds it hard to predict even the performance in the next year.
A lot of housekeeping has been enabled through serendipity, which has provided a good cushion. Low crude prices has been the single most important factor that happened at the same time as the government came to power, which has improved the current account deficit as well as fiscal balances through savings in subsidy. Inflation—something over which neither RBI nor the government has control over—has come down from the double-digit mark, though there have been hiccups along the way. Households will tend to disagree with inflation coming down as home budgets have been hit hard cumulatively, thus choking spending power. A high statistical base has made the numbers look good. Prices have come down, but it is only the rate of increase which has come down; this still hurts.
The government is committed to walk the path of fiscal prudence, which is good in so far as that discipline will be maintained. Within this constraint, the government for the first time managed to stick to its capex of Rs 1.3 lakh crore for FY16.
Viewed against the enabling environment created and the policies fine-tuned from the existing ones like power sector or urban development, the right steps have been taken, which have to be persevered with and not be one-time announcements. The results will show with a lag. Often, when there are fiscal constraints, these programmes are given a miss, which should be eschewed.
There are other issues where one can be judgemental, where Parliamentary action is required. But that would not be justified as these externalities have become quite prevalent of late that there is constant opposition and stalling of discussion just for the sake of it. So, land reforms and GST would take their own course, and singling them out would not be fair considering that even the earlier government could do no better.
On the whole, it has been a creditable performance by the NDA government. However, we should be careful in interpretation or extrapolation of the same in numbers, as it may be hasty.

Thrown off guard by monetary policy? Financial Express May 16, 2016

Fooling markets can help central banks achieve economic goals, as markets tend to ‘factor in’ what is expected

A question worth asking is: How predictable should monetary policy be? If one looks at the Federal Reserve providing direction, it is clear that rates will only go up, and the scope for conjecture is restricted to the ‘when’ of it. In fact, indications are that the quantum or rise would also be gradual — 25 bps at a time.

The European Central Bank (ECB) says that it will do everything to provide liquidity to the system, and one can be sure that rates will remain where they are. In our case, the Reserve Bank of India has blown hot and cold at different times, taking different actions under similar underlying conditions. Is there a theory behind these actions?

Friedman and after

The estern world follows the monetarist school propagated by Milton Friedman, who argued that inflation everywhere was a monetary phenomenon. Hence, if inflation had to be controlled, then monetary policy would have to be circumspect.

The movement in the inflation rate juxtaposed against the target stated by the central bank would provide a clue as to whether or not there would be rate action. The Fed’s lower bound of 2 per cent for inflation has become important today.

A corollary to this monetarist tenet is that monetary policy cannot really bring about growth, which in a way is true. Even with the world bringing interest rates close to zero or even negative as in the case of the ECB, growth has not picked up.

An explanation for this is the famous liquidity trap, where demand for money has declined to such an extent that lowering rates or even providing liquidity has not helped except at the margin.

The excess liquidity has flowed into emerging markets as foreign portfolio flows. This has generated volatility in emerging market currencies, requiring remedial action from the respective monetary authorities.

Friedman spoke of the natural rate of unemployment, which ranges between 4-6 per cent in the western world.

 The Indian path appears to tilt more towards the ‘rational expectations’ hypothesis made popular by John Muth and later by Robert Lucas and Thomas Sargent. They argued that monetary policy cannot influence economic activity if the goals are stated clearly and the central bank pursues them to the hilt. This, in their view, also holds true for fiscal policy.

The only way it can work effectively is when the central bank manages to successfully ‘fool’ the market. By ‘fooling’ the market it means that if the central bank says one thing and does another, it can have an economic impact.

This is because economic agents would have acted on the basis of the central bank’s statements.

Indian context

In simple terms, if an impression is given that the RBI is going to lower rates, or such a perception builds up, then the RBI can be effective by not lowering rates, thus bringing about the desired change, that is, quelling inflationary expectations. 

In the last three policies of the RBI in 2015-16, interest rates were lowered once and left unchanged on two occasions. The factors that could have influenced monetary policy did not change: low current inflation, higher inflationary expectations, uncertain rupee, ambivalence regarding Fed rate hike and global volatility. Yet, the response was different.

 Whenever a policy review comes up, the market develops an expectation on what the RBI will do, and it is said that 25 bps or 50 bps cut has been ‘buffered in’.

This really means that from the market perspective, this quantum of cut does not matter and hence, the G-sec yields begin moving downward in anticipation.

However, if this rate cut is not invoked, the market is shaken and rates start moving in the opposite direction. In such a situation, the central bank would be justified in not doing anything. If it did, it would not have mattered as the market would have been ahead of the curve, anyway.

The related  ‘efficient market hypothesis’ says that markets are efficient in case all participants have access to the same information and make their conjectures accordingly, which leads to an optimal solution. But in this case, the market while trying to guess the central bank’s action would tend to lose out when the RBI does not act according to expectations.

The RBI’s call

Therefore, a call has to be taken by the central bank on which approach is more acceptable. Providing certainty helps investors take decisions, but this can create macroeconomic distortions. But markets will be less volatile in this scenario. Keeping the markets guessing is effective, but statements made by the central bank are critical as every word is interpreted by economic agents.

They are constantly on the lookout for forward guidance and would expect the central bank to adhere to the same. It’s a question of how the central bank plays its cards.

 For the central bank, it would be more effective to surprise the market with action that may not be consistent with the impression created.

This stance is different from the monetarist approach. But it would be congruent with what Keynes is supposed to have said: “When the facts change, I change my mind. What do you do, sir?”

Out of the box: Financial Express May 15th 2016

 The three box solution: Vijay Govindarajan

To strengthen your existing business, you need to innovate for the future. This book tells you how


THE THREE Box Solution comes with the following suffix: ‘A Strategy for Leading Innovation’. Books discussing this topic have become quite common of late, with experts telling corporates how they should strategise and what they should do to move ahead. Thankfully, The Three Box Solution by Vijay Govindarajan has a different approach. In the book, Govindarajan says companies need to absorb three basic tenets called ‘boxes’: strengthen your existing business (box one); forget about the past (box two); and look at cutting-edge innovation for the future (box three). On the face of it, this is logical advice, as companies that continue to believe in successful strategies of the past aren’t able to adapt to changing trends and tend to fail. Also, linear thinking might not be adequate to bring about positive change. What’s needed is to take risks and innovate for the future.
The author quotes an interesting analogy from Hindu mythology involving the trinity of Brahma, Vishnu and Shiva. He says we need Brahma to bring about creation, a proxy for innovation and charting the course of the future. We need Vishnu, the preserver, because one is never sure if Brahma’s new creation will work or not. Last, Shiva is needed to get rid of the past and all the old theories that go with it, so that the company is able to think differently.
As is the case with most such treatises, there are several examples given in the book of companies that followed this path and did well, as well as those that didn’t and hence stumbled. Tata Consultancy Services, for instance, gave up the call service business because it didn’t see a future in it even though it did well in terms of the balance sheet. With changing times, it was required to move on. Similarly, Procter & Gamble went in for divestitures of 43 of its beauty brands in 2015, which was considered quite revolutionary.
The problem with the corporate mindset is the assumption that what worked in the past would work in the future as well. Here, the author explains the three ‘traps’ that companies fall into: complacency, cannibalisation and competency. Being in the comfort zone is one sure way of not making progress, as ‘complacency’ sets in. Further, when companies think of new products or services, there is the fear that they might ‘cannibalise’ a current successful product and this deters them from going in for change. ‘Competence’ is the ability to think and do things differently, which can keep companies happy in their comfort zone, as there is the lurking fear of the unknown. Creating a future is painstaking, as you do not know what will work. Here, one might have to think of forging alliances with partners to succeed. The author’s advice is to first place small bets and experiment before going full on.
There is nothing really new here, as it’s well known what one should do to enhance the existing business. It is more about enhancing every aspect of this approach, starting from the board and management to all the levels of employment down below. This is a pre-requisite for jumping to box three. While there are several successful stories in box one, it is the other two boxes that really test one’s skills. There’s a need to balance the three. The main issue with books on strategy is that they extol the success stories of companies which did well by following these three boxes, but what about those which tried but didn’t succeed? The second issue is that this can’t be done at an advisory level, as no one is willing to believe that they lack these insights. This is one reason for failure. Maybe this is why management consultants provide such advice in general when asked to comment on restructuring business for any company.

UDAY: Financial engineering at its best: Financial Express May 9, 2016

If we want to clean up the public sector mess, schemes such as UDAY should be applied to all sectors under both the central and state govts


The UDAY scheme—Ujwal Discom Assurance Yojana—is probably one of the largest financial engineering schemes that have been undertaken in India, that too by the government. It’s an attempt at disciplining electricity distribution companies (Discoms) that have built up large amount of debt, partly due to their inefficiencies as well as policies pursued by state governments. By transferring the onus on to the states, they have made them responsible for future reforms in the system.
Two issues come up, however. The first relates to a moral hazard, which all such schemes involve where there is restructuring of debt. Will there be an incentive to continue doing what they are doing, knowing fully well that there will be a resuscitation package awaiting them at some point of time? The second is whether the same should be extended elsewhere, because what works well for Discoms should work well for other such enterprises also.
In brief, UDAY works this way. There is an outstanding liability of Rs 4.3 lakh crore for all Discoms put together.
Assuming all states accept this scheme, 75% of this amount will move over to state governments’ books in two years, FY16 and FY17. The balance 25% will be restructured by banks, with a guarantee being given by the state. Future losses will have to be progressively taken on by the state, which is a punitive action for not pursuing reforms. States now become responsible for the actions or rather inaction of their Discoms. Hence, Discoms have to necessarily become efficient and cut down on their transmission and distribution (T&D) losses and revise tariffs.
As far as restructuring is concerned, the so-called ‘mother of all financial engineering’ takes place. For every Rs 100 of debt that is passed on to the government by the bank, a fresh bond is issued at a lower rate of, say, 8%, instead of 12-14% that the bank was receiving as interest on the loan from a Discom. Banks and insurance companies will subscribe to these bonds and give money to respective state governments, which will be used to repay the bank the loan of a Discom for Rs 100. Hence, it would be an accounting entry if both the parties are banks.
If the buyer is an insurance or pension company, then there would be different parties involved. Banks who purchase these bonds can sell them in the market, obtain liquidity and ease their balance sheets. Insurance companies and pension funds would be interested in such long-term paper which yields a satisfactory interest rate. The same for loans would be difficult. Hence, the entire process is part of the accounting theatre involving alchemy, where low-quality debt gets converted into high-performing bonds as they come from governments, which never default.
As it involves the government, there is zero risk in the exercise, unlike the CDOs or ABS that ruled in the US when similar engineering took place. But such a situation cannot be without a catch, as even though new money is not being moved, at the end of the day someone is paying for the same. In this case, it is the banks that bear the cost on their books, as they will now receive a lower interest of 4-6% for having their loans converted to bonds. The government takes on the debt and is exempted from FRBM for two years, but has to service the debt for the next 10 years with the issuance of new bonds. Those buying them would do so as a private placement arrangement and would not need to do any mark to market. Hence, both the debt market and banking system have also become major partners in this exercise.
The first issue is whether this creates a moral hazard? It does, because while Discoms pass on the debt to the state budget, there is no punitive action if reforms do not take place. The FRP (Financial Restructuring Plan) also tried the same, but with limited success, as states which went in for restructuring passed on part of their debt but did not invoke reforms. The current scheme plugs this loophole by asking the state to bear future losses to ensure that it will bring in this discipline. But often states which own Discoms loathe increasing tariffs because of political compulsions. Therefore, there is still the risk that the second part of the equation will not be fulfilled. While asking states to bear the losses makes imminent sense, the state government could just decide to compromise on the capex or discretionary expenditure in order to meet the fiscal deficit target of 3% and soak in the losses of Discoms. This possibility cannot be ruled out.
The other issue which can be put on the table is that if UDAY works for, say, state governments, the same can also be done at other levels. Sick and loss-making central PSUs have accumulated losses of R60,000 crore as of FY15. Using the same logic, the central government can take on the loans associated with these losses in a similar manner. BSNL, Air India, MTNL, Hindustan Photo Films and Mangalore Refinery are the largest loss-making central PSUs. By transferring these loans to the budget, a similar clean-up of these enterprises could be done. Also, Air India can be made to turn around with the losses being cleared by the Centre and the company being given a chance to start afresh.
UDAY has been a very innovative project undertaken to address a growing problem which has so far not been an NPA but could be any day, given that there is not much being done to address the core issue of efficiency and professionalism. It is similar to the CDR cases that were addressed by banks through a restructuring package with tenure and terms of loans being altered suitably. As governments are involved, there is zero risk and that’s what makes this move tenable.
If we are looking to clean up the public sector mess, the same should be applied to all sectors under both the central and state governments. The advantage will be that by bringing in a professional approach, we can dispense with the old baggage, which will also make them suitable candidates for disinvestment at a later date, as it is high on the central government’s agenda in the coming years.

The Leadership Sutra book review: Mythology & management: Financial Express May 8th 2016: Book review

The Leadership Sutra: An Indian Approach to Power
Devdutt Pattanaik
Aleph
Pp 133
R399
WHEN YOU pick up a book by Devdutt Pattanaik, you know what to expect. His interpretation of stories in Indian mythology into business situations is now legendary, as he has made a niche for himself in this area. In The Leadership Sutra, he deals with the issue of ‘power’. At the start, he distinguishes between the ‘power’ we are born with (inner strength), which he calls ‘Shakti’, and that which we want to acquire called ‘Durga’. The rest of the book is a series of stories that swing between these two concepts.
There are several stories in Indian mythology that Pattanaik applies to corporate situations. Let us sample some of them. Bahubali, the stronger, but younger brother of Bharat, fights with him for power, but as he can’t hit him out of respect, he loses. As a consequence, he pulls out his hair and becomes a Jain monk. In this situation, he automatically becomes subservient to his brother. Pattanaik uses this to represent hierarchy in organisations, where you have to follow the leader without contesting. He also uses the Hanuman-Ravana encounter to show how hierarchy matters. When Hanuman isn’t given a place to sit in Ravana’s palace in Lanka, he grows his tail to such an extent that he creates his own throne, one bigger and taller than the king’s, which infuriates the latter. This is the situation in all organisations, too, where we have to respect hierarchy.
In another example, when Dasharath is on the verge of dying, he expresses to his wife his concern about the fate of Ayodhya post his death. She tells him that things will go on as usual. This analogy can be carried over to organisations, where we often wonder about the consequences of a leader or CEO leaving. But just like Ayodhya, nothing much changes and business goes on as usual.
On brand value, Pattnaik has an interesting take. When Krishna’s wives are asked to evaluate the value of their husband, one brings all her material belongings, while another puts her respect and devotion on the scales. Pattanaik interprets this act as the ‘brand value’, which is more important than physical or monetary aspects. Hence, products can have a low cost of production, but one can command higher premium due to brand value.
The book carries on in this vein with similar narratives, with a short corporate analogy and an illustration with each. Following principles is another contentious issue. The ‘bell curve’ can put some people out of favour when employees are evaluated. The corporate rule is that once you have such a system, you have to follow it. If someone is unhappy, you have to let them go. Rama always followed the highest morals, so when someone points a finger at Sita’s chastity, he banishes her even though he knows she is pure. The reader may find that this analogy is not too appropriate—as is the case with other such narratives as well—but the author makes an attempt nevertheless.
What happens when you lose a job? You can sulk, get angry and think of revenge. Or you could move on. Both Rama and the Pandavas lost their kingdoms, but their reactions were different. While Rama didn’t let it affect him much, the Pandavas could never get over it. It is at times like these that the links in the book seem too contrived and forced.
Pattanaik also gives the case of Garuda, a slave of the Nagas, who had to steal nectar and give it to them for his freedom. After he steals the nectar from Indra, he meets Vishnu, who gives him an honourable solution. The suggestion is that he should give the nectar to the Nagas, but ask them to have a bath before having it. The deal is that once the nectar has been delivered, he would be free. But while the Nagas are taking a bath, Indra would come and take the nectar back. After getting his freedom, Garuda becomes loyal to Vishnu. Pattanaik now draws a parallel with a worker who comes to office early and puts in long hours, but once the company introduces a swipe card system to track attendance, he resents it, feeling the organisation no longer trusts him. He starts coming and leaving on time. In the process, the company loses out on the value he generated by working longer hours.
The book is quite enjoyable, as it takes you through Indian mythology and the parallels it has with corporate life. You might not agree with the connections at times, but the interpretations are still noteworthy. This is definitely another book to be added to your library.

Making the national farm market work: Business Line May 4, 2016

The weak areas are: product standardisation, delivery systems and integration of farmers with the banking system

The NDA government has shown a lot of resolution in getting things done; Jan Dhan is an example of a scheme being implemented with a fairly good degree of success. While banks kept toying with the idea of spreading financial inclusion, in a single stroke, the government has managed to get 215 million accounts opened. However, the use of these accounts in a continuous manner would be validated only with time.

The National Agricultural Market (NAM) is another government initiative to introduce transparency and flexibility in the trading of farm products. When such an initiative is taken, the choice is between creating the infrastructure first before the system; or setting up the system and then working towards creating structures.

Working approach

Both approaches have their risks. Creating the infrastructure first could take a lot of time, which can be self-defeating. On the other hand, having a system without the infrastructure can be a losing proposition to begin with, if access is not possible.

Ideally, the system should mimic the present one on a different delivery mode to work well. The government has pitched for creating systems first and then working towards the development of the infrastructure, which it assumes will evolve over time.

Currently, farmers have to sell produce in the mandis in their vicinity and hence cannot sell at a higher price to buyers from other States, even if there are offers at the first stage of sale. This is because the buyer has to pay a mandi fee which is revenue for the agricultural produce market committee (APMC).

By having a national market, a farmer can offer to sell in Nashik while the buyer can be from say, Surat. This provides a wider market for the farmer, and as it is electronic the settlement is seamless with the APMC also getting its fee.

This model looks very neat. But the reality is complex. The small farmer often is located several miles away from the mandi. He does not have access to credit channels and depends on the intermediate adathiya (commission agent).

The adathiya, contrary to the impression created, has an important function. He advises the farmer, provides credit, sells seeds, and most importantly has a buyback facility from him so that the farmer is assured of sale at a predetermined price which could be lower than the market price.

But the adathiya takes the onus of price risk and has to transport the same to the mandi for sale and take control of the other related expenses of packing, carriage, carrying cost etc. Unless we are able to provide roads and transport facilities from the interiors to the mandi, the farmer will always have problem of access and stick to the regular channels. Alternatively, all villages should have connectivity and electricity.

Standards and regulations

Next, once the farmer enters the mandi, there is the issue of grading of the commodity. Today, the grading is mostly done through physical inspection where the experts literally put their hand inside and judge the quality.

We still do not have uniform standards to classify commodities as several grades are available for different commodities. There are about 50-70 grades of rice and wheat which come in different forms. The products here cannot be standardised, which poses challenges.

Third, a uniform system of weighing is required, which though now prevalent has to be regulated well as any incorrect delivery could lead to litigation. As of today, the deal takes place in the mandi and hence both the buyer and seller see each other and the quantity that is weighed.

The moment it becomes anonymous when the trading is electronic, disputes would arise that have to be resolved. Therefore, a dispute resolution mechanism has to exist.

Fourth, the most important factor that will determine the success of this system is warehousing. When the farmer sells to a party outside the mandi locality there would be a time lag between the sale and the pick-up.

This requires robust delivery systems which are certified and have all the requisites required for storage. The issue of co-mingling has to be addressed or else the buyer may not get what he thought he would get when the deal was struck. Do we have these many warehouses?

Further, the warehouses must have adequate safeguards against rodent attacks as well as pilferage. Unless this system is perfect there will be several disputes.

Fifth, the farmer who sells goods has to be paid on time. Therefore the settlement process is important. The margining system used in the case of futures trading can run into rough weather, in case there are defaults. At the same time taking full payment upfront can lead to buyer dissatisfaction in case the product falls short of expectations. Alternatively, the NAM needs to have systems that provide refunds across the country in case the deal is rejected.

Need more awareness

Currently, the farmer gets the money once the deal is struck. In the electronic form the money will come with a lag into a bank account which means that unless such an account exists, the seller is out of the system.

Therefore, having a Jan Dhan account is necessary. The level of awareness is still low and ground level reports indicate that while accounts have been opened the deposit holders often do not have a clue as to what they are. The spread of payments banks and small finance banks should help.

The idea of a national market is alluring as it resembles seamless trading just like retail e-commerce. But agriculture is complex and unorganised and, hence, while we can be sure of what, say, a Big Basket delivers the same may not be the case if we buy rice from a distant location. This is due to the absence of standardisation.

NCDEX today runs a very vibrant spot exchange and future evolution of NAM should be borrowed from this model, which corporate buyers find useful. However, when it comes to individual wholesalers, it would still be an enigma which will be tested over time. This initiative is commendable and we have to give it time to work. Awareness is important; if we look at the futures market, which is electronic, farmers are not into trading on account of absence of knowledge.

They operate within traditional system of the ‘adathiya’, which is hard to dislodge. Therefore, the development of the NAM will be a gradual process, though the effort should be continuous and enthusiasm should not slacken.

State-run banks’ recap plan faces rough weather: Economic Times 4th May 2016

The cleaning up of the balance sheets of public sector banks (PSBs) and the subsequent support being provided by the government does raise several conundrums.

In FY14 and FY15, net profits of the 21 PSBs, including SBI, were around Rs 35,000 crore, down fromRs 49,000 crore in FY13.
Typically, these banks had an average dividend payout ratio of 20% in these three years, which meant transfer ofRs 27,000-28,000 crore to the reserves, which is reckoned for the purpose of capital. The government would have providedRs 25,000 crore of capital in FY16 and will be putting the same amount in FY17, too.
For the first nine months of FY16, the net profits of these banks have declined from Rs 26,500 crore in FY15 to around Rs 4,100 crore. One is not sure of what will happen in the fourth quarter. Assuming status quo, this will mean that around Rs 4,000 crore could pass on to the reserves or capital and not Rs 27,000 crore. Hence, the infusion of Rs 25,000 crore through the Budget would have just about sustained the lending activities by negating this shortfall.
There are two implications here: First, the banks will have to strive hard to protect their balance sheets. Second, the capital infusion becomes ‘maintenance capital’ for sustenance, which cannot bring about accelerated growth.

Hence, for FY17, it would be necessary for net profit to increase to the same extent as in FY14 or FY15, else the fresh infusion will not provide a ‘delta’ to the system’s lending capacity.
A second consequence of low net profit is the impact on government revenue. The government, on an average, holds 66%, or 2/3, of the shares of all these banks put together. In FY15, around Rs 4,600 crore would have accrued to the government on a profit of Rs 36,000 crore and a dividend payout of Rs 6,800 crore.
In FY16, even if the Rs 14,100 crore of profit earned in the first nine months does not turn negative, it is unlikely that there would be any significant dividend paid, which will also put pressure on the revenue. The same will hold true next year as well.
Third, the issue of divestment in PSBs has been on the discussion table for long. While everyone has been speaking of divestment up to 51%, where there is no difference of opinion, no decision has been taken as yet. This is surprising because such divestment gets in money for recapitalisation of banks and goes beyond the Rs 70,000 crore infusion through the budget in the next three years.
A back-of-the-envelope calculation shows that if the government had actually brought down its share to 51% in all these banks, it would have gotten Rs 75,000 crore as of March; if it made the divestment last year, ie, March 2015, the receipts would have been Rs 95,000 crore. Hence, if done in FY16, there would have been a loss. Are we sure that this trend will not continue if done next year, considering that these banks are unlikely to recover any time soon and it would be a gradual process?
A sale in FY17, when the prices could be much lower, would mean a presumptive loss if it is less than say the level of March 2015. The PSB resuscitation scheme has spoken of three sources of financing of capital — through capital infusion by the government through the budget route, ploughing back of profit by banks and sale of equity. All three are going to face rough weather going ahead.
Budgetary support is committed, but if the other two do not fructify, then such infusion will at best help banks to maintain their lending but not augment scale.
Profits will be under pressure as long as the problem of non-performing assets is not fully addressed and while several banks have assured that Q4-FY16 would be the last of the cleaning up phases, one cannot be too sure.
Divesting equity would entail two problems: The timing will be critical and valuations will be contingent on how the other two processes progress – capital infusion by the government and quality of assets. These are necessary conditions for better valuation.
Second, the government presently appears to be unsure of how to go about the disinvestment process after the strong resistance to the full disinvestment of IDBI Bank. Addressing these is not easy, but has to be done as there is no alternative.

Inside Unreal Estate book review: Realty check: May 1 2016

INSIDE UNREAL Estate is a very timely book, written on a subject that has always been an enigma, as we all have our own pre-conceived notions of the sector without commensurate...


Inside Unreal Estate
Sushil Kumar Sayal
Penguin
Pp 212
R499
INSIDE UNREAL Estate is a very timely book, written on a subject that has always been an enigma, as we all have our own pre-conceived notions of the sector without commensurate knowledge of the ‘why’ of these underlying beliefs. Author Sushil Kumar Sayal writes from experience, having worked in the real estate sector, and presents a balanced picture in this book.
Sayal has made the book partly autobiographical, as he takes the reader through his experiences in different organisations. In India, real estate, gold and stocks are the three most fascinating investment options, with each one having its own share of scepticism, as the full story is rarely known. By taking us through the labyrinth of the real estate sector, Sayal lays before us the machinations that characterise its operations, making some very interesting revelations.
First, while real estate is definitely the most valuable asset for anyone, it has several pitfalls that buyers realise once they are into a transaction. Hence, there are precautions to be taken, as this sector does not operate in a transparent manner. For instance, bureaucrats play a major role in fostering corruption by delaying clearances. Further, as most sales are based on cash, the same malaise trickles into the sale of housing property, which portrays the builders in a poor light.
Second, related to the first, is the issue of black money. We have to pay partly in cash because the builder has done the same to acquire the land, which includes some bit of transitivity in reasoning, as everyone in the chain is indulging in such acts. Hence, when we hear of scams, the plot thickens and we can see the links between various parties that invariably involve government and bureaucracy.
The writer also explains how the infamous Campa Cola housing case was one where the developers, municipal authorities and bureaucrats were all involved. But ultimately, with the courts intervening, the buyers had to take the rap, as the demolitions proceeded and no punitive action was taken against any officials.
Third, the pricing issues are well elucidated here. The author explains the present situation where there is excess supply of flats that cannot be sold. In 2014, unsold stocks in Mumbai would have taken seven years to exhaust. The same for Delhi or Chennai would be around four years. Surprisingly, when supply overshoots demand, prices do not come down to the same extent that they had increased to when the projects were conceived.
The genesis of this mismatch can be traced to the financial crisis, even though we were not affected directly. In this period, as funds moved out of the stock market, money flowed to real estate, which caused major appreciation in property prices. But when interest rates were increased and salary income stagnated, demand fell. While cases of default were few, demand slack led to the build-up of a large inventory, which, in turn, led to higher cost financing that affected the solvency of the real estate companies.
The existence of this excess supply has other implications, as it has hit the industry quite hard and led to bank defaults or rollover of loans from banks to NBFCs to keep the account in order where higher rates are paid.
Four, Sayal warns us of the pitfalls when buying a house. The fine print is important and one should be careful of the size of the unit, as builders do deceive with different concepts like carpet area, built-up area, etc.
Fifth concerns the issue of delays, which is a common complaint, as customers face delays in procuring possession of their units. Delays are endemic and cannot be helped, as it takes time to get permissions and clearances from the state authorities even after paying bribes.
Interestingly, this is the starting point for malfeasance. Often, the builder buys at a high cost, and then collects money from the buyers. This way, they are able to match their purchase with sale to the customer. The problem comes on the buyer’s side, with the delays hurting them, as they have borrowed funds. When the builders are unable to match their purchase costs, they tend to flout rules and go for higher-than-permitted construction limits. Or they sell basement parking to offices or create space for shops in violation of rules, as was the case with the infamous Uphaar tragedy in New Delhi.
Sixth, all is not dark here and the author is positive about two aspects. The first is that when corporates are involved, business is more structured and clean. Here, he presents his own experiences in GE Shipping, where the company never compromised on bribes. The same holds for Godrej properties or Tata Housing. This has changed the perception of buyers who are now veering towards these names.
The second is that on the regulatory front, the real estate Bill, which has now been passed, will provide enough safeguards to the buyer. Also, the concept of REITs provides enough clean funding opportunities for companies, and the combination could help to make this business less murky.
His advice is to look at the background of the builder, the contract content in detail and check if the construction is smart. His preference is for corporate real estate projects, as they would tend to be more transparent. But in this opaque business, one still has to be doubly careful.

The perils of negative interest rates: April 26 2016

Low interest rates and relentless infusion of liquidity has been a path chosen by several countries to revive their economies.

Low rates in the West—which have been forced downwards to encourage borrowing in the face of limited demand—have raised some apprehensions in the minds of analysts. In such conditions, funds may flow to riskier ventures; this can create challenges when rates move up or currencies depreciate.

Low interest rates and relentless infusion of liquidity has been a path chosen by several countries to revive their economies. These measures, however, have had limited impact in terms of bringing about a major turnaround. Japan continues to be in a recession for over two decades, while the US may be just about struggling to stay above the line. The euro region is still down, with little signs of an imminent recovery, even as Mario Draghi has promised to do everything possible—meaning thereby provide more liquidity. This has also inspired several central banks to look at lowering interest rates to revive demand. Are there any warnings to take away from such measures?
Negative interest rates have pervaded countries which account for almost 25% of world GDP, and if close-to-zero rates are added, it would touch 56%. Hence any repercussion has the potential to impact the world economy quite decisively, given the quantum of output that potentially becomes vulnerable.
Low interest rates can definitely not be the precondition for growth, as no one borrows unless there is use for the same. But it can create a bubble, as was the case with the mortgage system in the US when cheap loans pushed up demand. In this economic euphoria, lending institutions were not thorough with due diligence as they repackaged and sold the same loans to unsuspecting investors. The consequences were severe when the system crashed. Not surprisingly, the Federal Reserve had played the role twice—the first time when it lowered rates to make borrowing reckless and subsequently increased rates thus unleashing a backlash. This is probably one of the first risks associated with cheap money, as it does create a wave, which, if unchecked, can potentially trigger other problems at a later date.
In fact, the surplus liquidity generated through quantitative easing has found less use in the countries of origin and has flowed to the emerging economies, thus boosting stock markets. A reversal of such policies starting with the tapering and conclusion of the QE programme followed by a rate hike has created turmoil in the recipient countries as well as currency markets.
The second issue is that low interest rates or negative rates lead to greater holding of cash. Households and corporates would prefer to hold cash once interest rates turn negative, thus increasing the demand for money. This creates challenges in countries which are vulnerable to the creation of a grey economy, as such usage cannot be tracked.
Third, low interest rates make it worthwhile to look at other investments. While financial savings definitely gets affected, there is a bigger risk of migration of investments to physical instruments such as gold. This can create an upsurge in the bullion market, and one reason for the recent revival in gold price has been higher demand on account of absence of other investible avenues.
Property could be an alternative, but the shadow of the financial crisis will lurk quite closely. Currently, we are giving a lot of incentives to housing, and this is probably the only segment which is doing well in terms of credit growth. While a crash is not expected as financial engineering has made limited inroads through securitisation, the fall in evaluation standards cannot be ruled out.
Fourth, low interest rates also affect bank profitability, as there could be a tendency for spreads to be pressurised when rates come to low levels. They would be less willing to lend under these circumstances, as lower lending rates may not be matched by lower deposit rates because the latter would dissuade households from providing the funds. This problem is already visible in case of American and European banks where lowering of rates has impacted their profit and loss accounts. In case of India too, we may have just about reached a situation where deposit rates cannot be lowered further, but the marginal costing method for reckoning base rate could pressurise banks, provided all lending rates come down commensurately.
Fifth, a major problem is for corporates once the cycle turns around. Normally, large sums are borrowed when interest rates are low and employed in riskier ventures. In India, for instance, we have seen companies go out and acquire other companies to expand their operations. However, once things turn around and interest rates move up—which has to happen once the cycle changes—the corporate debt levels would increase putting not just their own profitability under strain as their debt servicing ability comes down, but also the financial system becomes vulnerable to the buildup of NPAs. A large part of the problem in India concerning NPAs has been also due to this phenomenon. While business plans going awry is the major cause for such slippages, the turning point is almost always when interest rates are increased.
Sixth, low interest rates can affect businesses like pensions and insurance where these players do implicitly assure certain returns. As most of their investments are in fixed income instruments, any fall in rates affects their ability to service their customers. In addition, households become reluctant to invest in these instruments and could prefer to move to the riskier stock markets or property; this will choke the supply of funds which are used often for servicing the existing customers. Hence, the entire business chain gets affected when interest rates become negative or extremely low.
Seventh, chaotic situations arise when emerging economies borrow from developed countries in large quantities due to the interest rate differential. This has already been witnessed where developing countries’ indebtedness has increased. As rates are fixed with LIBOR, any increase in policy rates is first seen in repricing of all such loans, putting pressure on companies and hence the countries. The problem emerges once currencies depreciate, which has been witnessed in the recent past, thus creating debt challenges for countries and the world economy.
Given these possibilities, it is necessary to move cautiously with interest rates in the downward direction. Low rates in the West have raised some apprehension in the minds of analysts. This is more so because rates have been forced downwards to encourage borrowing in the face of limited demand. In such conditions, funds may flow to riskier ventures, which, in turn, can create future challenges when rates move up or currencies depreciate.

Rate cut gains are not guaranteed : Business Line April 19 2016

Despite efforts to improve transmission, there can be no getting away from tepid deposit and credit growth

The monetary scene in 2015-16 has been far from satisfactory. There is some euphoria over the rate cuts invoked by the Reserve Bank of India and the new method of calculating the base rate based on the marginal cost of funds; it is believed that this will improve the transmission mechanism. However, overall conditions do not look very encouraging.

The RBI has lowered the repo rate by 75 bps in FY16. Deposit rates have been lowered with alacrity and have fallen by about 110 bps, which is higher than the change in the repo rate. The lending rate, as indicated by the base rate, is down by around 60 bps which is less than the decline in the repo rate, which has, in turn, fostered the debate over the transmission mechanism.

Lag effect

However, this lag is inescapable. If banks follow suit when the RBI lowers rates, only incremental deposits get priced at the new rate while in the case of lending almost all loans have to go at the new rate. Therefore, this lag, in effect, can be explained and it is not really right to focus too much on transmission.

Other interest rates have shown a mixed picture. The 10-year G sec rate was down by 20 bps but this was more on account of tight liquidity conditions brought about largely by the sluggish growth in deposits, even though growth in credit was weak. It looked almost that the central bank was pushing interest rates down against the market forces. The forward premium on the dollar, however, was more responsive with a decline of 120 bps on the six-month contract.

The major impact of rates is on credit and deposits, and this relation needs some analysis in terms of how they have reacted to lower interest rates. The demand for credit is the main issue. Growth in credit has been quite sluggish for the second successive year. RBI data for the last year reveals an increase of 11.3 per cent as against 9 per cent. However, this is misleading as in March 2015 (one fortnight after the last reporting fortnight), there was an upsurge in the growth in credit on account of the borrowing for the spectrum purchase which, combined with the year-end phenomenon, resulted in an increase of nearly ₹3 lakh crore.

This gets counted as credit in FY16 as the financial year for the banking sector officially ended on March 20 which was the last reporting fortnight. If the same adjustment is made, then growth this year over April would be just 6.5 per cent with the comparable number for last year being 7.7 per cent. Therefore, growth in credit has been lower than that in FY15 if looked at in this manner.

Further, it appears there has been limited demand for credit which can be attributed to the slow pace of growth in industry in particular with industrial growth for the first 11 months of the year amounting to just 2.6 per cent. For the same period, RBI data for sectoral distribution of credit reveals that manufacturing and services were under-performers. Growth in credit to manufacturing was 3.3 per cent as against 3.5 per cent last year, while that to services was 5.9 per cent versus 3 per cent.

Sluggish credit growth

Growth has been brought about more by retail credit which increased by 17.9 per cent (14.2 per cent) and agriculture 11.8 per cent (13.3 per cent). Therefore, quite clearly, the demand side of the story has been ignored even as there is a clamour, which goes overboard at times, for lowering of interest rates. Nobody borrows just because funds are cheaper and with RBI data on capacity utilisation for Q3-FY16 still being in the 70-72 per cent range, there is less incentive to invest more.

The higher growth in retail credit may be attributed to the relatively better responsiveness of the banks to interest rates in this area as the delinquency levels are lower. This brings to the fore the issue of willingness to lend on the supply side.

While lower demand for credit has been working towards lower growth, banks too have been withdrawing from lending especially for long-term purposes given the build-up of NPAs. This has been compounded by the challenge of capital availability for some of the public sector banks. Any which way, there are considerations on the supply side too.

A worry is the composition of credit in industry. In FY16, the highest growth rates were witnessed in steel 9.2 per cent (2.9 per cent), mining 9 per cent (1.5 per cent) and infrastructure 7.6 per cent (9 per cent). This is a concern because these three sectors have been identified by the RBI as those which are prone to becoming NPAs along with textiles and aviation. While banks have managed to lower their exposure to textiles, the other three remain vulnerable to delinquency.

Tepid deposit growth

The other aspect of banking on the liabilities side are deposits, which have been impacted sharply after several years. The growth in deposits has slowed down to 9.9 per cent from 10.7 per cent last year. The deposit growth rate has been moving down which is a result of both higher consumption due to high food inflation as well as lower financials savings with deposit rates going down. With an average rate of 7.25 per cent being offered on deposits with tenure of more than one year, this avenue is extremely unattractive and compares unfavourably with small savings as well as fixed maturity plans of mutual funds which offer higher rates with the possibility of lower tax rates under certain conditions.

Hence, the basic signals emanating from developments in the banking field besides the NPA overhang and capital issues for PSBs are far from encouraging. With both credit and deposits slowing down for the second successive year, the growth story of the Indian economy, which appears to be better than that of most countries, looks less luminous. This is because both of them are representative of two crucial aspects of the economy, that is, investment and savings, which finally will also get reflected in the current account deficit once the former picks up.

Banking on peer-to-peer lending Financial Express 18th April 2016

It is not uncommon for us to lend money to our domestic help. And normally, there is a low risk of default associated as we know the person concerned and there is no interest payment involved. Transpose this scenario to one involving a money-lender, an informal, unregistered source of finance. Here, loans are given against a security and are taken with a high interest cost. The lending is normally to someone known and if there is a default, the security, which is usually gold, can be sold off.
If these two situations are combined and formalised on a trading platform, we have a peer-to-peer (P2P) lending model, a form of crowd-funding even. An individual seeking a loan fills in details on a platform, which is processed within seconds after ‘due diligence’ is done and the request is matched with people with surplus funds keen to lend at an interest rate that is linked with the credit score. An internet platform, thus, brings both potential borrowers and lenders together with no intermediary. Hence, the bank or financial institution is kept out and costs are lowered. It is analogous to going to the capital market and issuing a bond. But when the requirement is very low which does not tally with, say, even the SME platform, then this P2P model makes a lot of sense.
RBI is set to bring out guidelines on this mode of finance. At present, deposit-holders feel short-changed getting low interest rates, and would look for better avenues. Borrowers complain about high base rates and premium above this benchmark. If one is not a top-rated company and, say, a venture capitalist, the cost would keep increasing. These two parties would like to deal with one another and keep the banker out. This way, the saver gets a higher interest rate and the borrower a lower cost. This is truly a win-win situation.
There are two uncertainties in this mode. The first relates to the evaluation of the potential borrower. Banks normally have the expertise required and further diversify risk by lending to several entities. In the case of P2P lending, the platform provides a credit score and basic details of the potential borrower which can be used to take a decision. Just like a bank, the lender can lend to several borrowers and thus diversify risk.
The second relates to default. In case of a bank, the defaults are absorbed on the balance sheet and the deposit-holder is protected. In a P2P model, there is no cover as a default would mean loss of money. But the duty of the platform is to ensure that payments are made, and hence there is some cover provided to the lender. For this, a safety fund is created from where there can be draws in case of a default.
The P2P model looks alluring, especially for the small saver and borrower. In today’s context, where the focus is on small enterprise with various programmes on start-ups, this mode of finance makes a lot of sense. The trick is to have credit scores which are presently not available for the common-man; this has to be arranged by the P2P company/platform. How this differs from a bank transaction is that the saver can actually choose which borrowers would be a part of the individual’s lending portfolio.
P2P platforms are just about a decade old, but have proliferated in the US and the UK with fairly large volumes. Names like Zopa and Prosper are ofttold success stories. The default rates have been low and the models have worked well. PwC has estimated a size of $150 billion for this industry by 2025.
What must be done before embarking on this venture? First, the P2P player or platform has to be registered. This is so because besides being a platform supplier, the company has to also provide the credit scores and take the responsibility of filtering the borrowers. The challenge is that if left unchecked, everyone will flock to this market as there is limited recourse for savers. A rating of these P2P companies will be in order.
Second, we need to develop scores for each person that is borrowing in the market. This will mean going to the micro-level. An individual may not have a default but have limited ability to service the loan. How would such a person be scored? Information on income provided may not be accurate. Therefore, there needs to be an agency which collects and stores such information that can be verified.
Third, the potential savers have to be registered with the platform with KYC norms just like deposit-holders of a bank. This becomes important because in the current situation where black money and overseas accounts have surfaced, there could be a lot of such money coming into the lending space. Further, if loans that are disbursed have the option for conversion into equity (especially if the borrower is a start-up), then ownership becomes dodgy if such funds flow in.
Fourth, a question that needs asking pertains to interest rates. While this would be outside the banking field, the case of MFIs is relevant. In this case, the borrowers never minded paying 30%, but the adverse consequences made us sit up and regulate the structure. What should be the ideal rate here? If a borrower is paying say 15% today, he would be happy with 12-13%, while the saver will jump at this number considering that the banks are giving only 7-8%. If such activity proliferates, then it can skew the financial system; and banks at the margin will have a problem, especially where small customers are concerned.
Fifth, if these loans are to make sense, then they should be made tradeable. This will provide an exit route for the sell side of the loan. Hence, a trading platform should ideally develop simultaneously so that this option is provided to the customer.
Last, it needs to be cleared whether there is a need for a cap on the amount that can be borrowed, given mid-size units could also access this market even as banks may like to step in as suppliers of funds.
P2P lending has opened the doors for a new dimension in the financial system. We only need to ensure that we have the structures and regulation in place given the potential for this business.

Misbehaving book review: Irrational economics: Financial Express April 3, 2016

Misbehaving
Richard H Thaler
Allen Lane
Pp415
Rs 999
MISBEHAVING IS quite an interesting autobiography of Richard H Thaler, who has established his credentials in the field of behavioural economics. In fact, it has become fairly popular for economists to gravitate towards the behavioural aspect of the subject and move away from the conventional assumption of ‘rationality’ in the textbook.
Human beings behave in a seemingly irrational manner, which helps others get them do what they want. Thaler starts with a rudimentary example of how students argued when they scored 72 out of 100, but were happy with a score of 96 out of 137, which shows that we are not always rational. Similarly, we are eager to contribute to the medical expenses of a six-year-old girl with brown hair, but will not bother about contributing to the foundation of a cancer hospital. We prefer an identified life to a statistical one.
Here are some of the seemingly irrational things explained in the book: when we have free tickets, we might feel convinced to go for the show even in a snowstorm just to realise the value of the tickets. Or we might not buy something expensive for ourselves, but if the spouse buys it from the same household budget, we are thrilled. Hence, our behaviour generally seems to be quite warped. Therefore, the title of Misbehaving.
Thaler also introduces the concept of ‘sunk costs’, which means we should ignore and not brood over an expense once incurred. This holds for club membership, which when paid for and rarely used is not a concern, as it is a sunk cost.
Quite interestingly, Thaler points out that the concept of behavioural economics had its genesis in the works of Adam Smith. In his book, The Theory of Moral Sentiments, Smith spoke of the struggle between our passions and what he called the ‘impartial spectator’. This is why we treasure the present more than the future and can be allured quite easily by market spaces. This is a blow to the concept of rationality, which is expounded in almost all economic theories. It was also implicit in the theories of John Keynes when he spoke of the concept of marginal propensity to consume, Franco Modigliani’s concept of lifecycle hypothesis and Milton Friedman’s permanent income hypothesis.
The most fascinating part of the book is where the author talks about the efficient markets hypothesis, which assumes that the market price is the right price if it takes in all the information that the market has to offer. The two assumptions made—‘prices are rational’ and ‘we cannot beat the market’—are tackled well. Thaler argues that if this were so then no one should be logically gaining, as the intrinsic value of the stock is imbibed in the price. This holds for mutual funds too, when the market price differs from the net asset value.
Thaler also goes beyond economics and gets into areas like education. How do we improve student performance? One way is to reward inputs rather than output. So the homework done by students should be rewarded more than, say, their exam results. Another way is to provide bonuses to teachers based on some performance indicators. Automatically, there is an incentive to do well.
Misbehaving holds in all fields where human beings are involved, as we all tend to behave in a way different from what textbooks describe. Being in the realm of behavioural economics, this book will be exciting for students, as the names of Daniel Kahneman, Robert Shiller and Jean Tirole will resonate often—the author has colluded or collided with their views on several occasions. This is definitely a book worth keeping on the shelf.

The ball is back in RBI’s court: Financial Express March 31, 2016

It seems almost a certainty that RBI will lower rates on April 5, the first policy review for the new fiscal. The reason is quite straight forward.


It seems almost a certainty that RBI will lower rates on April 5, the first policy review for the new fiscal. The reason is quite straight forward. The government had asked RBI in form of ‘advice’, to lower rates after the Budget where the net borrowing programme projected was lower than that of last year. Also RBI had mentioned in February policy that it would be looking closely at the impact of the budget, especially the borrowing programme before taking a call on interest rates and the government has addressed this issue adequately.
Second, inflation is within RBI’s range of 6% in January 2016 and 5% in FY17. The number of 5.2% which is down from 5.7% in January can be interpreted either ways with a tilt to decrease rates to spur the economy. Third, the central bank has been arguing that there was a dichotomy in interest rates on small savings and bank deposits which made monetary policy transmission weak. This too has been addressed by the government recently and hence a window has opened once again to further the case for a rate cut.
Fourth, the corporate sector has been asking for rates to be brought down as investment decisions have been deferred on this score. Fifth, the market wants rates to come down, which has become more of a habit now. In fact, to drive home the point, the market is talking of 50 bps cut, hoping that at least 25 bps will materialise. Therefore, there is strong case for conjectures to point in this direction.
At present, the debate is on the quantum of rate cut. Anything less than 50 bps will be a disappointment as it will be considered to be ineffective. A curious development is that this year, while central government borrowing will be under check, state government’s borrowings can be the joker in the pack as the UDAY scheme could entail additional state development loans (SDL) entering the market which can cause interest rates to move up. Intuitively, more paper in the market increase supply and lowers prices which translates to higher yields. Given that they are offering higher rates, there could be a temptation as these securities can come under held-to-maturity (HTM) category. Therefore, the course taken by the securities market will be interesting this year.
Given that interest rates will be reduced, the next question is what will be the impact. The transmission issue has probably been addressed by the soon to be introduced marginal costing method. Assuming this transpires, base lending rates will come down while deposit rates would most certainly be reduced immediately. This time lag is understandable as deposits get re-priced on incremental basis while all lending gets re-priced at lower rates, which affects bank earnings.
Two issues stand out. The first is whether banks will be keen to lower rates on lending or lend more funds. At present, they operate with a spread of 3-4% which is one of the highest in the world and banks may prefer to maintain it. Further, the PSBs are inundated with NPAs ,mainly in the sectors that are looking for funding like infrastructure and manufacturing. Unlike the PSBs, the private banks have a different profile with more focus on retail and services sectors. Hence, the question raised is whether these banks will be willing to get into the riskier ventures and concomitantly, whether the PSBs will continue lending to them. Now, most certainly, the lending rates may not come down as long as the credit risk perception and premium is high. Therefore, willingness to lend will be an issue for banks. Add to this the fact that these banks are challenged for capital and there will be further hesitation in lending.
Second, the more important issue is the demand for credit, a factor which has been ignored in this argument for lower rates. While there have been phases when corporates have sought commercial paper or bonds when the transmission was tardy, in general, demand has been low from manufacturing and non-financial services. This being the case, demand can be an issue, especially during the first half of the year, considered a lean or slack season. Also, the latest RBI data shows that the capacity utilisation rates around 70% are still quite low and may not generate any urgency on part of corporates to borrow funds.
Therefore, the demand for funds may be sluggish with supply also trickling especially from the PSBs. Banks could just pitch for more government securities and add to the excess SLR.This has been the problem even in developed economies that have pursued aggressive policies of keeping interest rates close to zero for long as well as supplying large doses of liquidity. Demand for funds did not pick up given sluggish economic conditions. Under these conditions the elasticity of demand for funds would tend to be very low, which appears to be the case in India. Thus, while government has cleared several projects, they have not taken off in a big way to pressurise the financial system.
One repercussion of rate cuts however would be on savings. RBI has spoken of a real interest rate of 1.5-2%. At present, it appears that the differential between repo rate and inflation is 1.75% and if inflation remains unchanged, any reduction in repo rate will bring real rates down further. The impact on savings will be perceptible given that returns will be falling on all instruments now. A possible consequence can be movement to real estate which will be useful at macro level; or gold which can create problems. The gold bond scheme has not quite enthused households.
RBI decision on interest rates becomes more important today given these conflicting emotions. The question is whether or not RBI will move towards placating the corporate sector and markets and hence lay the ground for further cuts in future when demand for funds picks up. The answer looks to be in the affirmative. Will this lead to an increase in credit offtake? The answer, at best, is a shrug as banks may not be too willing while demand may also be subdued. The only reason for a contrary decision, i.e., to take a pause is the news of unseasonal rains harming the rabi crop. But that would only mean deferring a decision rather than taking a stance.

The Age of Stagnation book review: Dark & stormy: Financial Express March 27, 2016

The Age of Stagnation: Why Perpetual Growth is Unattainable and the Global Economy is in Peril
Satyajit Das
Tranquebar
Pp346
R699
THE AGE of Stagnation is a book of gloom that promises little hope for us even as various economists and policy makers are charting out new growth paradigms for all the nations. Satyajit Das, the author, is quite blunt in stating that the way we have progressed, we are moving towards deep stagnation with little chance of revival. More importantly, we have reached the limit of growth and all that our economic theory books have spoken of this limit being boundless are, in fact, incorrect.
His starting point is the financial crisis, which has not just dealt a body blow to the world economy, but also sown the seeds of deep-rooted stagnation. While a large number of experts believe that tackling the financial crisis and getting it out of the abyss was good enough, the author argues this may not necessarily be so.
The main challenges are growth, productivity, innovation, employment, work force, resources, environment, etc. All these factors, which have been assumed to be given with the trajectory being upwards, are not necessarily true as we have reached barriers. He points towards two specific anomalies. One is on the exchange rate front and the other on interest rates, where countries have followed the policy of ‘beggar my neighbor’ by bringing about competitive policies, which, in turn, has enhanced volatility in the markets. Easy money has impacted economies and led to enhanced debt at a time when companies are less than profitable. This process hence has sown the seeds of future crises of indebtedness, especially since revenue growth is not keeping pace with the debt servicing requirements.
If we put things in perspective, he points out four reasons for the financial crisis. First there was great dependence on borrowing to create economic activity through the NINJA loans. Second, there were imbalances in consumption, investment and savings, leading to over investment and debt. Third, rapid financialisation added to the woes as it was an area that was alluring but less understood. With rapid growth in financial engineering, the crisis was deepened. Last, several governments followed large entitlement programmes and hence broke economic rules of prudence. The question we naturally need to ask is whether or not we are doing the same now also, with the liberal dose of QE across major economic blocks being the starting point. This is because it was the prevalence of similar policies of easy money which led to the creation of the crisis.
Now let us look at some specifics that make Das believe there will be more stagnation. He quotes John Hicks, who said that true growth is the amount that can be withdrawn without affecting the ability to produce more growth in future. Otherwise, growth today is at the expense of future growth. Here we have not succeeded. There is a shortage of resources and our tryst to push up farm output has actually over exploited land with higher doses of irrigation, seeds, fertilisers and pesticides.
Second, there is reverse globalisation in action. The flow of funds from developed countries to emerging markets, which spawned high growth, has moved in the reverse. Regulation, which is a masquerade for protection, is the rule, with all countries trying to protect their turfs.
Third, the emerging markets that were to be the bastion of growth have slowed down in this process. Chinese slowdown, which has made headlines in recent times, will be a drag on the world economy.
Fourth, Das highlights the bane of inequality, which has grown over time and quotes from Thomas Piketty. This entire episode of financial crisis and its resolution was all about bailing out the rich.
Fifth, he laments quite forcefully the democratic deficit that has emerged, with US and Europe still dominating institutions like the IMF and World Bank that were to help the developing countries. It is not surprising that all over, households have shifted from financial investments and savings to gold and land as policies appear to be skewed in favour of the rich.
Last, Das speaks of the loss of jobs and stagnant wages for the majority that will push growth downwards.
Two things stand out in this book. The first is that while he is quite forthright with his views, the author does not provide any solutions. The second is whether or not it is really doomsday, or has the author gone overboard when interpreting the business cycle which is natural in the Schumpeterian world of creative destruction?
Most of what the author has said is true but has probably been looked at from one side of the prism and the positives have not been considered. This is important because when we had the boom just before the crisis set in, which was called the Great Moderation, no one expected a collapse, which did take place. In hindsight, it is easier to be wise. Similarly, presently, while conditions do not appear too bright, would it be right to assume that the direction is only downwards? This is where the reader should draw her own inferences.

Why fret over small savings rates? Business Line 25th March 2016

It is hard to believe that these schemes — just 7 per cent of bank deposits — restrain banks from lowering rates

The decision to lower the interest rates on small savings is curious not so much because it was considered to be the order of the day, but because it has been put forward as a solution to the problem of low transmission of interest rates in the banking system.

By linking this rate to market movements of G-Sec yields on a quarterly basis one can guess the final direction of these returns, which could reach a new low over a period of time. Numerically, however, this does not sound convincing.

Higher rates

Outstanding small savings were around ₹6.41 lakh crore as of August 2015, while bank deposits were about ₹90 lakh crore. With small savings being just about 7 per cent of bank deposits it is hard to believe that banks are not in a position to lower interest rates because small savings returns are higher and that there will be a migration.

In fact, within small savings, deposits account for around 64 per cent of total, followed by certificates with 30 per cent and PPF with 7 per cent. If at all there is competition between these forms of savings it would be with post office deposits which would account for just about 4.5 per cent of bank deposits.

Hence, to argue that a savings avenue like post office term deposits, which is less than 5 per cent of the banking system deposits, is potent enough to erode the funds base of banks can be questioned. Within small savings, certificates are contracted savings which have a fixed return when purchased. Here it will be the only incremental certificates that will carry a lower interest rate.

PPF would be the biggest beneficiary for the government as the existing deposits would also get re-priced at the new interest rate structure. PPFs have the advantage of being immobile as the motivation is different, and one keeps putting in the amount of up to ₹150,000 irrespective of the interest rate due to tax benefits. It becomes almost committed — much like the EPF schemes.

Also, there is a limit that cannot be breached and hence household surpluses would have to be invested in either the capital market or bank deposits.

Hence, the argument that small savings can substitute bank deposits may be a bit exaggerated. Further, on an annual basis small savings increase by roughly ₹20,000 crore which is very small compared to bank deposits which would be increasing by between ₹12-14 lakh crore.

More importantly, though it sounds logical to see some substitution between bank and post office deposits, it actually does not happen. One of the reasons is the class of customers tends to be different. Just as how customers do not move out of one bank to another due to the differentials in interest rates on deposits, the same holds even more so in the case of post offices, as the classes involved are different.

Matter of experience

Small savings were meant more for the lower income groups and were targeted at the non-metropolitan level to help in financial inclusion. Therefore, schemes such as monthly income deposits or recurring deposits came into the picture as they appealed to these groups.

Hence, data also reveal that while there are gross receipts coming in, albeit in small quantities, the net incremental savings remains small as there are continuous withdrawals. The small savings schemes have hence not been very appealing to the urban household, which typically is the big saver using bank deposits as the major avenue.

Besides, the customer normally has a complete relation with a bank like access to cards, loans, online facilities, etc. and would feel less inclined to shift to a post office term deposit.

Also the approach to customer service is different in case of post offices and one may not relish the idea of standing in queues to make such deposits.

Lowering of rates is more likely to benefit the government as the lower cost on such instruments means less payout. Based on an increment of ₹20,000 crore, the cost savings for the government at 60 bps cut would be savings of ₹120 crore as interest payments. As a part of this goes to the state governments, this will help reduce the outflow on this score.

Add to this the PPF which gets re-priced immediately, which is a round ₹55,000 crore, and the savings increases by ₹330 crore. The amounts are not really significant for the government.

There are two points here. The first: there is a desperate attempt being made to have interest rates lowered by banks. It started off with the argument that the transmission from RBI policy to banks was sluggish and investment was affected. It was followed with suasion and then was followed by the proposed marginal cost pricing of base rate.

However, banks have been quick to lower deposit rates at a faster pace than the policy rate. While repo came down by 75 bps in FY16, the average deposit rate declined by 92.5 bps. But lending rates came down by just 62.5 bps.

Therefore, the problem has not been so much on banks not being able to lower their deposit rate but reluctance to bring down their base rates. This may be attributed to the present environment of NPA issues as well as higher credit risk perception. It is also true that the non-AAA rated companies continue to pay a much higher mark-up on the base rate due to this reason.

Do we need them?

The second issue relates to the high spreads in the system. The Indian banking system continues to reap one of the highest interest rate spread of around 3.5 per cent (return on advances – cost of deposits) while net interest margin (NII/total assets) is around 2.75 per cent.

Quite clearly, the RBI should also be pressuring banks to be more efficient and reduce these spreads which are sub-optimal and being earned due to oligopolistic power being exerted by the system.

At an ideological level we can pose the question as to whether or not we really require small savings. This is so as most States feel this cost is much higher than the market rates. Deposits can be shifted directly to commercial banks or the new small and payments banks. Certificates can go as long term papers issued by banks.

PPF serves just as an addendum to the existing EPF and VPF with a different interest rate, but serving the same purpose for those who are not salaried. With Post office Bank coming up, this issue would have to be tackled anyway. We do need to think on these lines.

A case against bank mergers: Financial Express March 21, 2016

The merger of public sector banks (PSBs) is now the war-cry because everyone believes that it is a panacea—or at least a part of the solution—for the problems which confront them. Management consultants argued for this over a decade back, based on what has happened in other emerging markets. The FM spoke of it recently and RBI reiterated the same; hence, it is not surprising that the subject has come to the discussion board. But, have we stopped to think about the feasibility of the same?
Mathematically, merging a weak bank with a strong one can’t be disputed as the final result will look better than the current scenario. At the limit, the aggregate picture of all PSBs put together enhances overall performance. By merging a weak bank with high NPAs and negative net worth with a better performing one (invariably, SBI will be expected to carry this cross), the sum looks better in all respects. But, break it up into the component banks, and the cracks become visible.
Two sets of issues come up. The first is the feasibility of such mergers at a pragmatic level and the second concerns ideology. Looking at feasibility, some practical questions can be posed. First, what do we do with the multiple branches, as all banks have several branches in all important centres? The top 100 centres would have multiple branches of almost all banks, as this is where business lies. Sitting in an arm-chair, it is easy to say that we can close down the one which does less business or sell the property or close the lease. But, is this really possible?
Second, there is the issue of staff. In nationalised banks, typically 50% of the total employees consist of support staff, while for the SBI group, it is closer to 60%. To top it all, the staff is unionised and has to be taken along if such mergers are to work. This situation is hence different from the mergers we have witnessed in the case of private sector banks, where pink-slips are handed over under the guise of voluntary retirement schemes and there is no recourse available to the employees. This is a hard call, given the number involved is nearly 8 lakh employees.
Third, there are challenges at the higher echelon levels too as there will be duplication of positions. There will be multiple CMDs and MDs and EDs who have to be sifted, and this will entail a lot of pain as some may have to leave.
Further, several departments have to be realigned or closed, such as treasuries and risk management, as these activities are really scalable where volumes growth does not justify commensurate increase in This has been relatively easier when two private banks have merged or a bank bought over. The private sector is ruthless and the higher pay scales carry an unemployment trade-off as they use euphemisms such as shareholder value for downsizing. This is not the case with the public sector where there is surety of tenure even as compensation is substantially lower—the earnings of a private sector chief could be 25 times that of a PSB head. Interestingly, it has been argued in some quarters that if the same logic were to be applied to, say, the government where there are multiple ministries that can be potentially merged (i.e. steel, textiles, commerce and industry, SMEs, the bureaucracy would become less heavy). As a corollary, it has been asked whether we are prepared to do the same rationalisation for secretaries and their ilk in the government.
Fourth, there are cultural issues and while we do tend to paint them with the same brush, the approach to banking, work culture, customer centricity varies between North-based banks and South-based ones. How do we resolve this conundrum?
Fifth, the orientation of banks is different. Some are more into rural banking while others have a strong industrial or infrastructure proclivity. Hence, besides looking at performance indicators, the business blend of such mergers has to be judicious, else, we will be concentrating risk in some areas.
Last, the issue of technology is also important which has to be resolved before any action is taken. While most could be using similar platforms, they have to be compatible. But this may be the least of all the worries,
At the ideological level, interesting questions pop up. First, by going in for such mergers we would be creating huge oligopolistic structures which may not be desirable. This is so because at some time they will be privatised which in turn will make them different entities. In every industry, we are trying to induce competition, while in banking we are reducing this level by design.
Second, the whole idea of multiplying the system with small and payments banks appears to be against the ethos of creating such big structures. We need to ask ourselves as to whether or not there is a contradiction here. At a later stage, will we opt for merger of these small banks and payments banks, because they would also be facing similar challenges as size will matter?
The point really is that we are missing out on addressing the core issue and going around the periphery to address the problem. We have to identify the motivations for such mergers and address them appropriately like strong credit processes, governance, non-interference, competence, etc. Merging banks will serve little purpose if we have fewer structures with the same blemishes.
If government interference is the reason, it should move away from running banks. If there are governance issues, they should be addressed forthrightly. If there is absence of talent and the decisions taken are out of incompetence, then we need to get the right people. If there is no incentive structure, it should be brought in. There is no point in PSBs earning profits and paying the government a dividend if it has to come back to recapitalise them. Instead, if pay scales are made attractive, there would be the right talent.
Merging PSBs may be myopic in nature when alternatives exist to strengthen them. Decentralisation has been the buzz word when we talk of the rest of banking or even geographic demarcation of our states as they work better. Weak banks can walk the road of narrow banking until such time their books are clean, which is preferable to doing things in a hurry as it sounds neat today. For sure, we should think deeper.