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.