Saturday, September 19, 2020

The university after the pandemic

 Is the residential university soon going to be a thing of the past? Will online learning displace it in  a big way? Will young people opt not to go the universities?

No, no, no, going by article in the FT on the future of the university. 

The pandemic has forced a lot of experimentation and improvisation. Blended learning- a combination of online and classroom learning- is pretty much the norm. Alternatives to the 2-3 hour exam are being explored. Online exams through special proctoring mechanisms have come into vogue.

At the end of the day, however, the university will not go away and the residential university will remain dominant. As everybody knows, there is more to the university than classroom learning- the social interactions on campus and group learning have their place. And online learning, many students seem think, is not the real thing.

The most striking fact in the article is that the flow of UK students this year is undiminished, with some universities, such as Cambridge, even seeing a small rise. (Although the experience in the US and Australia seems to be different). That's again because students do not see online as an alternative to the residential university.

What is more likely is that online education will supplement, not supplant, the residential university. It will be an useful aid to classroom learning. And universities will use their learning from the online model to offer it to those who can't make it to university. That will boost revenues at universities- and it will also result in greater inclusion.

Friday, September 18, 2020

Standoff with China: India's options limited

 The government's critics accuse it of meekness in the face of China's land grab in Ladakh. The fact of the matter, as many security experts have testified, is that China has appropriated chunks of Indian territory. What is not stated as explicitly is that India's military and diplomatic options in responding to Chinese belligerence are limited, as an article in The Wire makes clear, citing a recent paper by two US analysts.

There are three options. One, take on the Chinese and throw them out before they consolidate. This is a huge challenge in the Himalayan heights given that defenders have an enormous advantage. Two, seize Chinese territory that can then be exchanged for ours. We haven't quite attempted this: the territory we have moved into at Pangong is our own. The third is to accept the fait accompli. This would mean more Chinese aggression down the road.

It does appear that, faced with a superior economic and military power, our options are limited. Some hawks says we should make it costly for China to embark on such adventures by mobilising in a big way along the border. But this raises costs for us too- and China can outlast us, given the strength of their economy.

Any suggestions, anybody?

(Thanks to SM Deshpande for the pointer to the Wire article)

Depsang is a headache for India

 The present standoff with China in Ladakh has had one positive: the large number of insightful military analyses it has spawned.

India has been on the defensive in Ladakh ever since China upped its belligerence a few months ago. There is an impression that our moves in the southern part of Pangong lake have changed the scenario and China is seriously rattled.

It may be that the Pangong thrust has moved things to our advantage in that area. But the real problem for us is Depsang where, as military analyst Sushant Singh points out, China blocks access to 900 sq kms of our territory. That blockage is a real headache because it could limit India's access to Siachen Glacier and give Pakistan a chance to mount an attack on it. As Singh points out, it is not that the PLA and the Pakistani army can link up. However, acting in collusion, they can pose a serious threat to our positions. Singh notes that the defence minister was conspicuously silent on Depsang in his recent speech to Parliament.

Tuesday, September 15, 2020

RBI's loan restructuring scheme has a good chance of success

The RBI's loan restructuring scheme is now on. It is only for corporates. For SMEs, there is a separate scheme that was unveiled in 2019. 

Restructuring will become imperative with the ending of the six month interest moratorium on August 31, 2020. Unfortunately, it is not ended as yet because a petition on chargeability of interest in the moratorium period is pending before the Supreme Court. 

There is an issue of whether interest can be charged at all; there is a further issue of whether interest on interest can be charged, that is, whether the interest during the moratorium period can be capitalised and added to the outstanding loan as on August 31. 

The Supreme Court will hear the matter again on September 28 after  the government submits an affidavit outlining its position on the petition before the SC. A three member committee under former CAG, Rajiv Mehrishi, has been set up to define the government's position.

About the restructuring scheme, there are doubters. Many see the scheme as yet another attempt to kick the can down the road. Precisely because the market is sceptical, the scheme has a better chance of success. Banks will want to keep the proportion of restructured loans down to the minimum if they don't want their valuations driven down. 

Secondly, provision coverage ratios at banks are higher than in the past, so they don't have to worry about recognising bad loans as much as before. 

Thirdly, the RBI and the KV Kamath committee have laid down fairly stringent norms for restructuring. The tenure of a loan can't be extended by more than two years, for instance, and for 26 sectors, thresholds in respect of key financial parameters have to be observed.

So there's reason to believe that this restructuring exercise won't go the way of earlier ones.

The practical problem for banks is how to decide the extent of restructuring given the uncertainties about the growth outlook. I believe it makes sense to wait for a month or two and gauge the strength of the recovery before rushing into restructuring plans (except where default is imminent). They must also put in provisions for an upside to repayments that is linked to cash flows.

A good bit of non-restructured loans will have to be provided for. There will also be slippages in respect of loans that meet the requirement that no default should have occurred more than 30 days prior to March 31, 2020 (which requirement is laid down to ensure that the restructuring covers only covid 19-induced stress). Banks, especially public sector banks, will need capital. Unless adequate capital is forthcoming, the objective in cleaning up bank balance sheets, which is to ensure higher credit flows down the road, will not be met.

More in article in BS, Loan restructuring: this time is different

Wednesday, August 26, 2020

How not to reform the IAS

Today's TOI carries an article by two ISB profs on reforming the IAS. Frankly, I find the proposals impracticable.

The authors propose that at the end of seven years, IAS officers be given the following options;

Continuation in the service at a prestigious senior position for which the officer may have to compete with other experts from outside the service who could be inducted laterally (something that Prime Minister Narendra Modi has espoused).

A fully paid scholarship to any PhD, MBA, or other top professional programmes in the world (eg Harvard MBA, Princeton Masters in Public Policy, or a PhD at the University of Chicago) into which the officer can get admission based on his or her merit.

  A Rs 1 crore seed capital from a capital fund run by professional venture capitalists to begin an entrepreneurial startup venture
Those who can compete with. Others will try to upgrade themselves with higher studies. Those who want out can be turn entrepreneurs.
Well, it's not clear that the alternative to being in the IAS is becoming an entrepreneur. But even if some want to take the plunge, the government cannot, by any stretch of imagination, lavish Rs 1 crore on anybody who wants it. How do you ensure accountability of the money spent?

As for the second option, it is already being exercised.  Many go for higher studies, a few quit thereafter.

It is also not possible to get IAS officers to compete with outside experts for all positions. This can happen only for a few positions that require technical expertise.For the vast majority of generalist positions, outsiders can't fit in- the IAS training and background are indispensable.

The authors also propose that the government recruit from professional courses even at the entry level. That would completely undermine the IAS exam. Today, IITians and IIM students appear for the IAS exam. The authors are saying they- and others from professional courses- could be hired from campuses, as  happens with corporates. This overlooks the fact that the IAS written exams plus interviews look for qualities other than mere technical competence. That is what gives the IAS exam its cachet and ensures high quality of recruits.
 By and large, the IAS at the centre remains meritocratic above the joint secretary level. And the pressure to perform is pretty intense. The problem is at the states. That has to do, not just with the motivation and incentives of IAS officers, it has to do with the way politicians run the system. That calls for reform of a different character from what the IBS profs propose.

Sunday, August 23, 2020

RBI, financial stability and central bank independence

 Viral Acharya, the distinguished academic who served as Deputy Governor of RBI from December 2016 to June 2019,  has been vocal on the subject of financial stability over the past several weeks.  

In several interviews and webinars following the publication of his book, Quest for financial stability in India, Acharya has said that lack of concern for financial stability on the part of successive governments has led to recurring problems in the banking system. This, in turn, has resulted to growth getting stalled time and again. 

The book is a collection of speeches Acharya made as Deputy Governor. The highlight is a lengthy introduction that Acharya has written in which he expatiates on the importance of financial stability. Acharya says that during Urjit Patel's tenure as Governor, the RBI made a valiant attempt to defend financial stability but, ultimately, could not stem pressures in favour of faster credit growth at the expense of stability. He suggests that both Patel and he had to quit as they could not reconcile their stand on financial stability with that of the government.

Acharya contends that the root cause of financial stability is what he calls 'fiscal dominance', that is, the imperative of governments having to spend in order to boost growth, no matter what the implications for the fiscal deficit. After a point this becomes untenable.Governments then lean on the central bank to facilitate faster growth through credit expansion. 

This invariably involves sacrificing financial stability in a number of ways- by not recognising bad loans and the associated losses, not recapitalising public sector banks as required, manipulating the yield curve to keep interest rates low so that governments can borrow cheaply, etc. Compromises on financial stability result in banking crises and weak growth down the road. 

The answer, Acharya suggests, is first to ensure that fiscal discipline is practised. Secondly, to ensure that the RBI enjoys greater independence, preferably conferred by law, so that it can resist pressures to compromise financial stability.

There are problems with the thesis. First, it is not true that credit booms and financial crises result exclusively or mainly from fiscal dominance. The global financial crisis of 2007 as well as multiple bank crises in numerous economies in the past several decades did not flow from fiscal dominance.

Secondly, financial stability can result from excessive concern with financial stability at the expense of growth. If you are too focused on inflation and allow growth to weaken, that itself can cause financial stability. If you are not willing to relax regulations in unusual times, such as the pandemic, and insist that defaults should automatically result in loans being categorised as non-performing assets, you are going to create a major banking crisis here and now- in the cause of financial stability. Find me one banker who thinks that the loan restructuring scheme announced recently by RBI is not desirable and that we should accept Urjit Patel's contention that a restructured standard asset is an oxymoron.

Thirdly, conferring independence on the RBI by law is a bad idea. Matters of monetary policy and regulation cannot be decided by technocrats alone. It is the elected government that is accountable to the people for its decisions that must have the final say. This is because monetary policy and regulation involve choices about trade-offs between growth and stability and they have distributional implications. These choices cannot be made by technocrats sitting in Mint Street. If central bankers are not to accountable to the government, how will make them accountable? We need a vibrant media, swift judicial redress and a culture of peer pressure that will ensure accountability once central banks are given independence by law. Those conditions are not satisfied in India today.

Fourthly, it's extremely naive to think that governments make "political" choices while technocrats are utterly apolitical or detached in their approach to questions of public policy. All public policy choices are overtly or implicitly political in nature and central bankers are political animals in their own ways. We know central bankers are not unworldly in their outlook: many have the happy gift on landing juicy positions with private banks after they have demitted office. 

We have to accept that those elected to office have the right to decide matters of public policy. If they make mistakes, the electorate has the choice of voting them out the next time. Pitting the saintly technocrat against the diabolical politician can only undermine democracy and pave the way for the technocracy known as dictatorship. 

More in my column in BS, Technocrats versus politicians

Tuesday, March 17, 2020

World’s top banks grapple with CEO succession

There is much speculation about who will succeed Aditya Puri as CEO of HDFC Bank. the search for a successor has commenced just about eight months before Puri is due to leave. If it’s any consolation, it’s not the only leading bank that’s trying to ensure a smooth succession. Some of the world’s top banks are grappling with the same problem- and the circumstances at those places are far more challenging.

The CEO of UK’s Barclays Bank, Jes Staley, announced last month that he would step down in about a year’s time. Staley had to quit after financial regulators announced a probe into his links with Jeffrey Epstein, the billionaire who died in jail while facing charges of paedophilia.
Two years, Staley had faced a storm when it was disclosed that he had tried to uncover the identity of a whistle blower who had written to the board of Barclays with complaints about him. The board let Staley keep his job but he had to pay a fine of £640,000 levied by the regulators. 

Staley has been CEO for five years. The board has said it will look outside for a CEO. That says something about succession planning at UK’s second largest bank. If nobody inside measures up, the board should have made the assessment long back. It would then have had time to induct an outsider and groom him or her for the top job.

Things are not much better at HSBC. Its CEO, John Flint, had to step down last August on grounds of under-performance after just 18 months into his job. The board has opted to name an interim CEO which meant that it was keeping its options wide open in respect of the appointment. If that wasn’t bad enough, last month the interim CEO chose to announce a restructuring that would involve shedding 35,000 jobs over the next three years.  What CEO want to own a radical restructuring initiated by somebody else? 

At Swiss giant Credit Suisse, the CEO, Tidjane Thiam, the first black chief of a top European bank, was somewhat abruptly shown the door last month following unsavoury revelations. Last September, a detective from a private agency was caught tailing a former senior executive of Credit Suisse. It turned out that agency had been hired by the Chief Operating Officer of Credit Suisse.

The COO was fired and the board sought to distance Thiam from the affair. However, the plot thickened. Credit Suisse, it was revealed, had also spied on its former head of human resources! To its credit, the board has been quick to name an insider and bank veteran as CEO.   But the perception that the bank’s culture is flawed will not go away quickly

At J P Morgan Chase, Jamie Dimon reigns supreme after more than 14 years as CEO. Last January, Dimon declared blithely that he had not set a retirement date for himself. There is no obvious successor in sight. Naturally. Several potential successors have left to take up CEO positions elsewhere. J P Morgan Chase is a star performer. However, performance does not exempt an organisation from the requirement of succession planning.  

Boards must have a set of two or three potential successors at any given point, with the choice narrowing to one over time. Goldman Sachs is a good example. More than a year before Lloyd Blankfein stepped down as CEO, the bank named two co-chief operating officers. A year later, one of them got the job. At GE under the late Jack Welch, three insiders were marked for succession several years before Welch’s retirement. Jeff Immelt got the job. 

A G Lafley, a former CEO of Proctor & Gamble, has written about how he started work on succession planning virtually from day one.  “Many CEOs,” he wrote in an article in the Harvard Business Review, “don’t push their boards to discuss what might happen when they leave because they don’t want to think about it…”  This was said in 2011. It seems not much has changed since. The upheavals caused by the global financial crisis of 2007 have evidently done little to change governance and culture at private banks. 

Friday, March 13, 2020

Can SBI's rescue attempt save Yes Bank?

Well, it's a long shot. First, the capital infusion may prove inadequate and the non-SBI investors may not have the appetite for investing more. Secondly, a bank cannot be run for too long with deposits from public sector banks (the amount of deposits being talked about is Rs 30,000 crore). A public-private partnership to save a private bank is a first of sorts. The outcome will be awaited with interest.

In 1998, a consortium of banks and brokerages rescued Long Term Capital Management (LTCM) by infusing capital on which they later made a modest profit. But LTCM was a hedge fund,  not  a bank. Here SBI and some private banks will be rescuing a bank that has been a competitor and will remain one if turned around. That's a big difference.

Questions have been raised about regulation and supervision, following the Yes Bank failure. I have not come across any specific lapse that people have ascribed to RBI. They simply presume that if a bank fails, there must be a failure on the part of the regulator. To my mind, the failure happened in September 2018 when IL&FS was allowed to fail. The shocks created then are continuing to take a toll on the financial sector and the economy. In a way, the Yes Bank collapse is the result of the worsening conditions in the economy and in the financial sector consequent to the failure of IL&FS.

More in my article in BS, Question Marks Remain about Yes Bank Rescue.  I also joined the Hindu Parley on the subject with Prof Ananth Narayan of SPJIMR