RBI paper on banking structure

The RBI came out with a discussion paper on banking structure last August. It outlines the RBI's thinking on issues such as bank consolidation, differentiated licensing, continuous authorisation and the role of small banks.

I'm afraid I find myself in disagreement with the RBI's position on these issues. Consolidation of public sector banks is a bad idea because it poses managerial challenges that public sector banks are not equal to. It will result in paralysing large banks as they go through the merger process. If the problem is funding the weaker PSBs, then adopt a two-pronged approach. Accept that government can no longer support the weaker PSBs and let them fund themselves in the market. This, of course, means letting government stakes in these banks fall below 51%. Then, government can focus on strengthening the better PSBs. Consolidation of the strong with the weak will end up weakening the entire PSB system.

Differentiated licenses- giving licenses for banks that cater to niches such as infrastructure or only wholesale or retail banking appears attractive in principle. But it won't work without special regulatory dispensations for such players. That would mean turning the clock back on the idea of a level playing field for all banks, which was the rationale for asking long-term financial institutions to become banks in the first place.

Continuous authorisation of bank licenses seems very reformist. Anybody can apply for a license any time. But you can't have bank licenses available on tap. In banking, you have to limit entry for a variety of reasons. After pausing to take stock, you decide when to let in players, once you have a view on whether there is enough competition or not, whether regulatory capacity is adequate or not and so on. Let us not get carried away by tokenism in one form or another.

As for small banks, these have proved not viable in general. Whether it is regional rural banks or the cooperative banking system, small banks have proved a headache because governance is an issue in these banks. Individual small banks may not pose systemic risk; in the aggregate, they can. Monitoring a host of weakly governed small banks is a big regulatory challenge.

Yes, we need some things to change in Indian banking. But it would be unwise to push through change for change's sake.

More in EPW article on the subject.

Buddhism and management? Gimme a break...

It had to happen and it has. After the Gita and management and lessons in leadership from Gandhi, Buddhism and management could not have been far off. Schumpeter reports that the Buddhist focus on "mindfulness" is gaining adherents in the management fraternity.

It is not entirely correct to suggest that "mindfulness" is a unique Buddhist contribution. 'Know thyself' is prescribed in the Hindu scriptures and, perhaps, other scriptures as well. The Buddha did emphasise the importance of "awareness"; J Krishnamurthi, the famous Indian guru, spoke of "choiceless awareness". The broad idea is that by simply watching the flow of one's thoughts, by being aware of one's surroundings, one can gain a better understanding of oneself.

What does this have to do with management, especially with producing better results? Self-awareness, no doubt, makes for better relationships. It may also contribute to a certain equanimity which helps one cope with the daily stresses of a managerial position.

The problem arises when one views awareness not as an end in itself but as a means to producing better results or, bluntly, higher profits. Relating religious or spiritual injunctions to commercial performance is a bad idea. It could well be that heightened awareness makes one question what is going inside one's company. It may mean questioning things going in society at large. It may mean having to challenge the assumptions on which business is built. This sort of questioning, which is a whole-hearted questioning that arises from deep awareness, could end up being inimical to business performance. Such performance, you could say, depends at least partly on your being blind to many things that are going on around you.

Business performance may have very little to do with spiritual development. On the contrary, it may call for a degree of ruthlessness and disregard for values that are contrary to the tenets of religion and spirituality. Mixing the two may well cause those in managerial jobs to fall between two stools- they mess up performance and they mess up their inner worlds as well. Schumpeter ends up posing the right questions:

The biggest problem with mindfulness is that it is becoming part of the self-help movement—and hence part of the disease that it is supposed to cure. Gurus talk about “the competitive advantage of meditation”. Pupils come to see it as a way to get ahead in life. And the point of the whole exercise is lost. What has parading around in pricey lululemon outfits got to do with the Buddhist ethic of non-attachment to material goods? And what has staring at a computer-generated dot got to do with the ancient art of meditation?

Larry Summers thinks a strong recovery is unlikely

The Fed is poised to withdraw QE following signs of recovery in the US economy. Larry Summers, writing in FT, thinks a return to full employment and strong growth is difficult without "unconventional policy support".

He gives four reasons:

First, even though financial repair had largely taken place four years ago, recovery has only kept up with population growth and normal productivity growth in the US, and has been worse elsewhere in the industrial world.

Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth. Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.
Fourth, in such situations falling wages and prices or lower-than-expected are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.

The Fed has said that a return to normal interest rates would be contingent on the unemployment rate falling to 6.5%. Summers argues that, at the interest rates that were earlier regarded as the norm, aggregate expenditure will be lower than before. Again, he provides a number of reasons:

Investment demand may have been reduced due to slower growth of the labour force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year. Lower inflation means any interest rate translates into a higher after-tax rate than it did when inflation rates were higher;

If Summers is right, it is bad news for emerging markets, including India. Export growth will not be strong given a weak global recovery. At the same time, tapering of QE means capital inflows to finance India's CAD may not be adquate.

Summers does not spell our what "unconventional policy support" he has in mind. Does he think QE should continue? And what measures would he want on the fiscal side given the difficulties President Obama has faced in dealing with the Republicans in Congress? 

How to spot a dysfunctional CEO

CEOs, many think, are crucial to corporate performance. Get the right CEO and you get results. Equally, as Schumpeter points out, the wrong CEO or a CEO gone wrong can wreak havoc on a company. Think World Com, Enron, RBS and Lehman Brothers. Boards spend a lot of time bringing on board somebody who they think can deliver. Somewhere along the line, however, the CEO loses the plot. Can we pick up signs of dysfunction early on? Schumpeter gives some pointers:

An obvious sign of a boss breaking bad is grandiosity. He attributes the company’s success wholly to himself, indulges in endless self-promotion or demands ever more extravagant rewards.... One study shows that chief executives who appear on the covers of business magazines are more likely to make foolish acquisitions. A second sign is over-control. The boss surrounds himself with yes-men and crushes dissent. He tries to control every detail of corporate life rather than building a strong executive team. A third sign is distorted decision-making. The chief conflates personal and corporate assets, is obsessed with buying other companies, or focuses on bizarre details....A chief executive becomes likelier to succumb to these vanities the longer he stays in the job. He gets used to people fawning over him...... A boss may think himself so brilliant he refuses to plan for his eventual departure or undermines possible successors.

Yes, every one of these is an indicator of trouble ahead. Schumpeter quotes a consulting firm as suggesting that boards should monitor "behavioural risk", perhaps, by talking to senior management from time to time. Schumpeter himself suggests introspection and timely self-correction on the part of CEOs themselves.

Alas, neither will work. Boards are incapable of having frank chats with senior management and senior managers incapable of speaking their minds to the board. Megalomania in CEOs and introspection simply won't go together.

So, are we powerless to prevent implosions of companies at the hands of self-destructive CEOs? It seems to me that part of the answer lies in devaluing the post of CEO itself. It is the concentration of power in the hands of the CEO itself that is the root of the problem. I am constantly reminded of Peter Drucker's characterisation of the CEO: not an individual but a team of three. Only the diffusion of power in a company, the democratisation of organisations can provide a health check on the havoc wrong by dysfunctional CEOs.

Is this another impossible solution I am proposing? It's difficult, given the stranglehold of vested interest but not impossible. Boards will not do this on their own. Institutional investors and regulators must push for reform of the post of the CEO itself, ensuring that top management is truly a team and not one person.

How do online courses compare with a full time MBA?

MOOCs are in vogue and they are catching on, even if in a small way. One important question is : do they pose a serious challenge to the high-profile, full MBA programs? The answer would determine how the great names in management education need to respond.

Philips Delves- Broughton, himself an MBA from Harvard and author of a best-selling book on his experience there, sat in on some MOOC management courses to check them out. His experiences, he says, were mixed.

What struck me immediately is that the free online MBA is still in its Precambrian stage. What few courses there are range wildly in quality. Open, online learning offers a dif­fer­ent set of opportunities and challenges to classroom teaching. And clearly not all universities or professors know what to do about it. Some are simply dumping their classroom lectures and course materials online. Others are really engaging with the vast new audiences out there.

The more important point is that, to my knowledge, none of the better-known schools is offering the entire suite of MBA courses online. They have a sample or teasers. It would appear that the intent is to market themselves, not to educate people without cost. (Why would they want to do that? It would seriously threaten their business model). What we need is a good quality online that is reasonably priced, say,  a fourth of the price of an IIM MBA or around Rs 3 lakh. Are there any out there?

I would go along with a point the author makes. It's not necessary to match the quality of the top schools. Just offer something that's reasonably good and at a very low price- or completely free. That would not unsettle the top schools but it would provide enough to get people jobs.

Modi versus Kejriwal? Not quite.....

AAP is the flavour of the day, having made a terrific showing in Delhi. The party makes no bones about its national aspirations. It plans to contest Lok Sabha seats. There are those who think it has the potential to replicate its success in Delhi at the national level. Sections of the media are euphoric about the outcome and think a new dawn has emerged in Indian politics.

Opinion polls conducted during the Delhi elections suggest other wise. A large number of those who voted for AAP said they would vote for Modi in the general elections. Surjit Bhalla, in his article,provides an even more interesting statistic: only six out of every 100 BJP voters voted for the AAP, but six times as many (36 out of 100) Congress voters did so. If this is replicated elsewhere, it is the Congress vote that will get split and the BJP stands to romp home. (Here, of course, we are ignoring powerful regional players in UP, Bihar, Orissa and elsewhere). Bhalla believes there was a strong Modi wave in both Rajasthan and Madhya Pradesh, otherwise it is hard to explain the margin of victory. 

At the national level, voters are bound to ask whether the AAP has anything more to offer than an anti-corruption plank (which often amounts to no more than saying, "We should have no evil in this world"). The middle class enthusiasm for Kejriwal& Co is understandable, given its moral outrage over corruption. But businessmen rooting for AAP is astonishing. The AAP is, perhaps, to the left of not only the Congress but even the CPI (M) in its last years in West Bengal. Bhalla writes:

Economic policy according to the AAP/ Kejriwal should be as follows (obtained from interviews, manifestos, etc): "GDP growth should be directly related to the lives of the people, but such growth affects very few people.... The AAP opposes privatisation, wants government in oil extraction (and much else), recommends an increase in effective taxes on the middle class and supports increases in fuel and electricity subsidies. The AAP would take measures to ensure basic facilities, for example electricity expense reduction of 50 per cent and 700 litres of free water. Further, the AAP believes in government provision of high-quality education and health, regulation of fee of private schools, implementation of minimum wage, etc." 

The markets don't appear to have taken the AAP seriously so far, otherwise they would have tanked by now. Should the AAP come to power as part of any coalition, the chances of a rating downgrade by the rating agencies must be reckoned to be pretty high.

What of the AAP's prospects in the future? We need to ask whether a crusade against corruption suffices for a party to govern or even to sustain itself. Several anti-corruption movements have erupted from time to time- the Andolan in Gujarat in the time of Chimanbhai Patel, the JP movement, the Hazare campaign- but they tend to fizzle out. For a party to maintain its image in the grime of electoral politics is not easy: in the Delhi polls itself, the party drew serious allegations which voters seem to have overlooked for now.

The AAP faces a huge challenge in building the organisational infrastructure and creating the leaders in order to make a national impact- Kejriwal's call to 'good people' from other parties to join him already points to a measure of desperation. Not least, should  a party become serious about rooting out corruption, the entire weight of important interests- the corporate world, the political class, the bureaucracy- will be brought to bear on suppressing it. That is the grim reality of politics today. 

In sum, AAP looks poised to act as a spoiler for the Congress and thus boost the BJP's chances. The idea that Kejriwal is a challenge to Modi does not appear plausible at the moment.

A somewhat contrarian view on Nelson Mandela

The distinguished British journalist, John Pilger, has a rather different view of the Mandela legacy, whatever the heroism Mandela may have displayed in fighting apartheid.

In an article he wrote for the New Statesman, he suggests that the arrangement that Mandel arrived at with the Afrikaner regime, in effect, allowed the Afrikaner elite to continue their domination of the economy while coopting the black elite into it. For the vast majority of blacks, the transfer of power didn't add up to much:

With democratic elections in 1994, racial apartheid was ended, and economic apartheid had a new face. During the 1980s, the Botha regime had offered black businessmen generous loans, allowing them set up companies outside the Bantustans. A new black bourgeoisie emerged quickly, along with a rampant cronyism. ANC chieftains moved into mansions in "golf and country estates". As disparities between white and black narrowed, they widened between black and black.

The familiar refrain that the new wealth would "trickle down" and "create jobs" was lost in dodgy merger deals and "restructuring" that cost jobs. For foreign companies, a black face on the board often ensured that nothing had changed. In 2001, George Soros told the Davos Economic Forum, "South Africa is in the hands of international capital."

Something to chew over as the world mourns the passing of Mandela. 

America Inc dominates the world

America in decline? Certainly not true if you look at the world's leading corporations. Nine of the top most valuable corporations in the world today are American, the Economist reports. This is a significant increase from the figure of three in 2009. Post-crisis, it is American firms that have come out smiling. One reason is that the problems in the Eurozone have meant that the challenge from Europe has dimmed. The Economist lists other factors at work in driving the American resurgence:

Two deeper factors are also at play, though. First, America’s mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century—Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a world-beater. Success has been anything but parochial. Six of the nine biggest firms sell more abroad than at home.

Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world’s ten biggest state firms in 2009 have lost $2.2 trillion of value, or 60%, from their peaks. Lower commodity prices are only partly to blame. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, versus Exxon’s multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China’s hottest corporate property is Alibaba, a private internet firm plotting a huge flotation.

The point about American capitalism being vibrant is well taken. But it would be too early to write off  state-owned firms. The problem with many state-owned firms is not state ownership per se but lack of exposure to competition and lack of stock market discipline. Combine the two and state ownership is seen to do much better. It is useful also to build in incentives for management and workers. State-owned firms can have some advantages: no accounting jugglery, changes in top management from time to time, and a long-term view. Combine all this and you may still not be able to match the best in the private sector. But you can certainly do better than the average.

The Economist takes note of some signs of change:

Petrobras has allowed minority investors to appoint a director to its board. Maria das Graças Foster, its newish boss, has indicated it will be more careful with its investments. Russia’s government has talked about making state firms pay higher dividends, in part to force greater discipline upon them. China’s reformers signal that they would like to confront its mighty industrial lobby. A 2012 semi-official report called “China 2030”, written in conjunction with the World Bank, says that allowing state firms to act in a more commercial manner is a key objective. The hybrid model which makes firms answerable to both investors and politicians may never be satisfactory, but it can be improved.