Sunday, January 27, 2013

Big banks and operational risk

Big banks pose big risks. That has been clear enough in recurring banking crises. But the risks don't relate to credit or market risk alone. Bigness leads to problems with operational risk as well. This is the lesson from the huge finds that banks are paying out for the Libor scandal, money-laundering etc. The underlying reason is the same: lack of incentives to curb violations of law or regulations when you know criminal prosecution will not follow. Just pay out a big fine, which is still small in relation to profit, and move on.

More in my ET column, It's fine to be a big bank.

Cash transfers

There are indications that the government is having second thoughts on cash transfers- it is being restricted to fewer schemes in fewer places. This is appropriate. Without rigorous testing and feedback, the scheme can give rise to serious problems.

There are two issues here. One is the use of cash transfers for existing payments, some of which are made in cash and the rest by cheques. Another is the use of cash transfers in lieu of subsidies.

As for as the first is concerned, transferring directly to bank accounts should be fine in principle. Still, one must question whether such transfers need to be linked to Aadhar at all. Where pensions or loans are concerned, identities of individuals are not an issue. It is not clear why somebody, who has a bank account to which funds are to be transferred, should have an Aadhar identity as well, unless the idea is to give Aadhar itself wider currency. In the case of MNREGA, perhaps, Aadhar may help to avoid duplication of payments to individuals but this has to be clearly established through trials.

Cash transfers in lieu of subsidies built into prices of foodgrains are a different matter altogether. Paying cash may not ensure availability of food; and it is hard to find out what the market price for foodgrain is at a given point in time at a given place and, therefore, whether the cash transfer is adequate to enable purchase of the necessary quantities of foodgrain. Nor can cash transfers mean the dismantling of PDS. If the idea is to plug leakages in PDS, then it is important to take into account the fact that, in several states, leakages have been greatly reduced. These practices must be emulated elsewhere instead of opting for cash transfers to Aadhar accounts.

A letter signed by several economist and social activists in EPW says it all. It should be compulsory reading for those involved in making policy on cash transfers.

Tuesday, January 22, 2013

India's TV channels in crisis

India's TV channels are in the midst of a financial crisis which has serious implications for how report news, argues Sandeep Bhushan in a hard-hitting article in the Hindu. Bhushan points out that major industrial groups, such as Reliance, have acquired significant stakes in TV companies. (Even otherwise, one would think that intense competition for advertising revenues would tend to influence news coverage on TV networks). Bhushan spells out the impact:

The most far-reaching is the redefinition of the role of the editor. Increasingly his/her profile not merely entails leading the pack in the TRP race, but crucially acting as the “front” for the promoter in order to provide an appearance of both credibility and acceptability within the industry. The promoter’s line — his whims and fancies, idiosyncrasies and perhaps, most damagingly his political “preferences” — is increasingly the editorial line. It is not my case that this state of affairs uniformly prevails in all TV broadcast networks. But any “insider” will confirm that this is pretty much the picture by and large. 

This has resulted in growing centralisation of newsgathering operations. Editorial monitoring is closest with regard to “political” reportage because it is here that the government of the day can be really hit hard. In my experience of reporting “political” stories it was virtually impossible to generate a story in the field and hope that it got aired unless it coincided with the editorial “line.” “Political” stories invariably emerged from the “top.” Often a reporter may not even have a say in the particular “angle” of a story to which only he or she has privileged access. This has virtually taken the (political) reporter out of the scheme of things in broadcast journalism. 

It is not just the slant to political and corporate news coverage that is worrying. It is the lack of news coverage in the first place. If you want to know what happened in the country on a given day, you would be hard put to find it on any of the private TV channels. Instead, you get slanging matches performed in the studio, often with the same set of familiar faces. Going out and covering and reporting news is costly; it's much easier to get a bunch of talking heads into the studios.

Bhushan urges better protection of journalists, more professionalisation of management and anti-trust laws to counter the present trends. All this is easier said than done. Perhaps, a simpler way is to strengthen public broadcasting so that it emerges as a serious threat to popular channels. As I noted in my blog sometime ago, Doordarshan has improved in a big way and Lok Sabha and Rajya Sabha TV have some very interesting programmes to offer. This trend must be strengthened so that private TV channels and their owners find that better content is needed to retain and attract viewers and hence advertisers. 


Thursday, January 10, 2013

Peer evaluation for IITs, IIMs

The IIT Council has said that all IITs will be subjected to evaluation by peers every five years, TOI reports. Apparently, the government intends a similar review for IIMs. I welcome the move- I had myself advocated external audit of the IIMs in my book on Ravi Matthai- IIMA, Brick by Red Brick, published in 2011.

An external audit is required for two reasons. One, we do not have sufficient competition for the IITs and IIMs and, therefore, it cannot be left to market forces to arrive at a judgement, reflected in applications for admissions. Given the acute scarcity of quality colleges in engineering and management in relation to demand, the market cannot be expected to deliver judgement. An alternative mechanism would be the Board of Governors of IITs/IIMs but this mechanism has simply not functioned. One reason is that those appointed to these boards have very little stakes in the institutions and cannot be expected to devote the attention necessary to keep management on its toes. Besides, for the Board itself to monitor effectively, an effective market for higher education needs to exist; as mentioned, it does not.

As a result of poor monitoring, the IITs and IIMs today are places where there are few checks and balances on the office of director. The scope for discretion is enormous and there is virtually no accountability. Whether a director performs or not performs, whether he abuses office or not has no bearing on his completing his term and even getting another term.

This is an unhealthy state of affairs. All public institutions should be accountable- in the case of the IITs/ IIMs, directors as well as faculty. And such accountability can be established only through an independent management audit. Indeed, the principle of independent audit needs to be applied to regulators and other public authorities, such as RBI, SEBI, the CAG, CEC, etc. No public institution should be beyond the pale of public scrutiny of their activities, decisions and performance.
The modalities of the independent audit are important. It appears the expert committee will be chosen by the minister of HRD from a panel of 10 names submitted by the Board of Governors of an IIT. This is not the most desirable state of affairs. The Boards cannot provide names for the audit panel because the boards themselves need to be audited. It would be better to create a collegium of distinguished academics (including NRIs) who would propose names to the ministry.

Secondly, the audit must not be based on meetings with top management of IITs/IIMs or on published documents alone. The audit panel must meet all stakeholders: faculty, students, staff, alumni, the corporate world. Not only the actual outcomes (placement, publications, number of doctorates, etc) need to be reviewed but the internal processes and important decisions. It should be open to any faculty member to submit written documents for consideration by the audit panel. It is only by shining the light on the internal processes and governance of these institutions that improvements can be brought about.

Lastly, the audit reports must be placed in the public domain. In today's world, we can expect the reports to be commented on not only in the mainstream media but also in the social media. Audit and disclosure are the keys to accountability at public institutions.

It is striking that the gurus of governance at the IIMs did not think of subjecting themselves to a peer review all these decades; it was left to their bete noire, the ministry, to initiate this proposal. 

Thursday, January 03, 2013

Banking reform must focus on financial inclusion

One gets contradictory messages on banking reform these days. Some talk of consolidation as the need of the hour. This means fewer banks and less competition. Others say net interest margins are too high and we need to drive them down, which would require more competition. And yet others talk of the imperative of financial inclusion- one would imagine this is best done through keeping the existing set of public sector banks with their branch networks instead of opting for consolidation.

Neither consolidation nor lower margins is the need of the hour. India's banking system is not so fragmented as to be unviable and, besides, more concentration means greater systemic risk. If we want to pursue inclusion, we need banks to have reasonable surpluses, so they will need the margins they currently enjoy.

Financial inclusion is what we must focus on. The success of Indian banking in the post-reform period, it is not often realised, is the fruit of the substantial investment in inclusion during the nationalisation period. The branch network created in that period has created the low-cost deposits that form the backbone of Indian banking today and partly account for its financial success in the post-reform period. Inclusion on the asset side helped strengthen agriculture and SMEs and laid the foundation for industry doing well.

There is an opportunity to cash in on inclusion again, thanks partly to the direct cash transfer scheme. This will mean creating millions of new accounts with large cash floats. Whoever can make success of this will getting a hoard of low-cost funds and will also be creating potential borrowers and buyers of financial services a few years down the road.

The issue of licenses for new banks must be linked to financial inclusion targets. With industrial houses, the regulatory issue is not just interconnected lending. Interconnected borrowing is also an issue. A bank set up by an industrial house can easily acquire deposits and salary accounts from other business entities within the house and hence is saved the trouble of having to garner deposits through a large branch network. It is not enough to ask industrial houses to set up branches in under-banked centres. There must be clearly specified quantitative targets for inclusion for each branch. In other words, industrial houses can be allowed into the field, subject to their meeting the basic objective of financial inclusion.

More in my ET column, Banking reform needs focus.