"Indian bankers, don't you carp later"

It’s tough time for banks and borrowers alike. The stiff 5% CRR and 24% SLR leaves banks with no choice but to keep their cost of lending to corporates high. Working Capital has become all the more expensive to businesses at a time when cash flows are squeezed and order inflows have dried up.

I wonder why the banks don’t invest in equities (preferably thro a 100% SPV) of sound companies that come with a Board seat to enable them exercise a closer watch ? Now that equity valuations have come to realistic levels and companies badly need low cost funds to sustain till they get over the recessionary times. For the banks, it would be a great idea to adopt this neo-private equity model because it comes with built in tax benefits since the returns will be in the nature of long term capital gains that are either exempt or are taxable at concessional rates. Since these are in the nature of investments, the SPV’s don’t need any elaborate set-up and can at best be a desk in one corner of its treasury operations wing.

When Henry Kravis comes calling, that’s proof enough that Indian equities are good bets. So bankers, sit up and take notice. Or else, Kravis would have you for lunch and dinner before you say `protection’. Or worse, it could be the turn of J.C.Flowers.

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How fair is Fair Market Value?

The whole world seems to despise Fair Value or Mark-to-Market (M2M) accounting standard that is, what an asset would be expected to fetch right now in a sale. It’s when regulators enforced it, the banks had to expose their ugly underbelly that led to massive write downs. It now stokes a fear that whether the liquidity crisis will eventually lead to a solvency crisis. As holders of mortgage-backed securities (MBS) and the like revalue their assets at fire-sale prices, they are running short of capital—which can lead to further sales and more write-downs. Are the bean counters ensuring a crash? Asks the Economist.

So is historic cost accounting an alternative? Hardly. It could be worse. In a crisis prices fall until bottom-fishers start to buy. Yet when assets were booked at their original price, rather than at market price, banks could delude themselves—and investors—that dross was gold. Look at Japan, where the economy was sunk for most of the 1990s by stagnant loans to “zombie” companies. Historic-cost left investors in the dark about valuations; it was also prone to fraud and fraught with moral hazard, since sloppy lending went unpunished.

It would be perverse to ignore market signals when finance is increasingly based on broad capital markets. Fair-value accounting is indeed flawed. To paraphrase Winston Churchill, it is the worst kind of accounting, except for all the others. But one can be careful on selection of the benchmark.

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Sauce for the goose is (not) sauce for the gander

The Reserve Bank of India (RBI) today barred banks and financial institutions from extending loans to promoters and entrepreneurs, who have siphoned off funds and engaged in frauds for five years to start new ventures.

Farmers?

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Who wants to change...?

Read this.

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Don’t you notice how patient, caring, open and honest our politicians and bureaucrats at RBI and MoF are with this guy, Raghuram Rajan, Finance professor at U/Chicago and till recently, Chief Economist at IMF, despite his absolutely horrible and utterly embarrassing behavior?

Haven’t we heard it – what’s-wrong-with-Indian economy rant – before from others that matter? Jagdish Bhagwati, Amartya Sen and almost every Indian/India born personality that had the view from 30,000 miles up have talked about it. But have we ever changed? Nah… That’s how we maintain our culture and heritage, even at the cost of growth.

We don’t need these guys to tell us how to do things right. We know it all. We are so broad minded that we ask for and accept all in-the-face rip-ins and heed none. That’s our magnanimity, you know. If America is land of the free, we are a land of free-for-all. We would invite people the moment they become famous, occupy the highest seat of a global institution or a corporation and seek out their opinion. How proactive, you see? They come, shower their views, present it all in a platter and we archive them all – religiously. That means it can be opened only on auspicious occasions, after an elaborate puja and tuck it back in to retrieve it only in another auspicious year and hour.

Execution…? Forget it. That’s none of our business. Who wants to rectify the situation and restore the natural order of the universe… Not us, at least…

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Slap on the face of banking reforms

60 years of independence; Even more years of Indian Banking. But reforms have done little to save our folks from the clutches of loan sharks.

Each time a farmer commits suicide, there is the obligatory reference to high interest rates charged by the usurious moneylender. Predictably, two standard courses of action follow. First, public sector banks are asked to increase their footprint (after the usual ex gratia payments are made to the bereaved families) and two, demands are made to monitor (it used to be ‘regulate’) moneylenders and their activities. While the first is a good thing, it is irrelevant in the current context; the second would be disastrous, given how many households in the country are dependent on moneylenders.

IIMS Dataworks’ Invest India Incomes and Savings Survey 2007 throws up some interesting findings in this context. Of every 100 persons who have taken loans in the country over the last two years, 31 per cent have got loans from moneylenders, compared to 20 per cent from banks.

The short point is that, until institutional mechanisms develop to meet the credit needs of people with different needs (including subprime category) the moneylender is meeting very real needs.

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