Customer service in Indian banks

I quoted from an ET story sometime back about the poor quality of services in London, including in banking. Why would a competitive, modern banking system deliver shoddy customer service?
You get an answer when you look at the Indian banking system. After having opened up to competition in a big way over a decade and a half ago, we are getting serious complaints.

That's because customer service is not just about speed or promptness, nice-looking branches or even a choice of diverse channels such as ATMs and internet. Pricing and charges are always an issue- and it hurts when you find that the marble interiors in bank branches are being paid for by extortionate lending rates, hidden charges and lack of transparency in pricing.

One other item in customer service that is in the news is the methods used by banks to effect loan recovery. Private banks mostly use recovery agents and these agents do not hestitate to use force and intimidation to effect recovery. Bankers say this is necessary when borrowers wilfully resort to default. But, I argue in my ET column,A fair deal for bank customers, that problems in recovery often have to do with bad lending practices and that tighter regulation is needed. Credit information bureaus and better rules for repossession will also help.

But, under no circumstances can the regulator allow banks to resort to coercion. The ordinary citizen already has a sense of living in a lawless environment where he has little recourse against powerful individuals and institutions. Imagine what would happen as banks fan out further into the smaller cities and towns. The cooption of the underworld into the banking system is the ultimate nightmare.

IIMs through FT's lens

I read the story on IIMs in FT by Della Bradshaw with a sense of disbelief. The FT's correspondent seems to have bought whatever a few people in positions of authority at the IIMs told her especially about lack of autonomy at the IIMs and the government's "counter-productive intervention".

Let me take up some of her key statements one by one:

1.After five years as director of IIM Ahmedabad, in Gujarat, Bakul Dholakia had to step down from the top job, in spite of the hopes of many at the school that this forward-looking figure would be allowed to serve a second five-year term.

It is a time-honoured convention at IIMA for directors to serve only one term. This convention owes to the legendary founder-director of IIMA, Ravi Mathai, who chose to step down after one term after a spectacular record and despite fervent entreaties from the board as well as the IIMA community to stay on. If Prof Dholakia had indeed been given another term, that would have come as a shock to the community. I do not know who the "many at the school" are whom the FT correspondent refers to.

2....under the Indian system of academic appointments, it is the Indian prime minister who decides who will be the next director and the politically controversial Prof Dholakia had spent much of his time in office spearheading the IIM campaign against government dictates.

Only on paper does the PM decide the next director. The choice of director was left to a search committee of which the IIMA Chairman was member. The IIMA Chairman had extensive interactions with IIMA faculty on the basis of which he drew up a three person short-list. The search committee seems to have gone by the short-list given to it by the Chairman and it proposed two IIMA faculty for consideration by the government. It is a travesty of the truth to suggest that it was the PM's office that decided who would succeed Prof Dholakia.

3. On a practical level, it (the method of choosing the director of IIMs) has hampered the IIMs in their efforts to become world-class business schools

Not true. Prof Dholakia himself emerged through the same selection process the last time.

4."We've been arguing - with not much success - that as we don't take money from the government, we should be able to decide salaries," he (Rishikesha Krishnan of IIM Bangalore) says. "What we're hoping for, but seems unlikely to happen, is that we will get more autonomy for deciding salaries."

IIMs are part of a much broader fraternity of government sponsored institutions- and the list includes such heavyweights as SBI, ONGC, BHEL and BSNL- whose salaries are part of the government framework.

There is room for improvement in salaries in these institutions but it is a moot question whether greater autonomy for IIMs will translate into superior salaries. Do IIMs have the capacity to pay a lot more? I am not sure. At IIMA, which leads the others by a wide margin in revenues, there is concern today over the impact of the Sixth Pay Commission, leave aside paying anything more!

5. Trying to attract new faculty is one of the biggest issues affecting the six IIMs - located in Ahmedabad, Calcutta, Bangalore, Lucknow, Indore and Kozhikode. (A seventh IIM has been created in Shillong, near the Chinese and Burmese borders.) And the biggest problem in faculty recruitment is salaries. ......"Attracting international faculty? You can forget it," says Prof Krishnan.

I have said this before in my blog: the notion of attracting international faculty on the strength of superior salaries at IIMs is bogus. Universities in Europe, Hong Kong and Canada offer a premium to those in the US and are yet unable to draw the best faculty. The IIMs cannot hope to get anywhere near those packages whatever the improvements they effect. When IIM faculty say, 'please let us make salaries more attractive', they do not seriously mean they can attract better faculty. They mean: let us get richer.

Note, however, that at IIMs salaries for many faculty are only a small part of the total compensation. Dholakia is quoted as saying that his top faculty earn seven or eight times the government stipend. If that is true, them comparing the salary alone with corporate salaries
(the ratio is said to be 1:10) is incorrect. One should compare average total compensation for IIMA faculty with corporate salaries.

6. With India's top business schools eager to establish themselves as leading global brands, government control is hugely restrictive, says Prof Dholakia.

This statement is often made but without substantiation. Government intervention is felt mainly in respect of salaries for faculty. As I have said earlier, this is only notional because it's not clear IIMs have the capacity to pay a great deal more. Other than this, I am not aware of anything the government does that comes in the way of developing a global brand.

Developing such a brand is not just about globe-trotting- pitching a tent in Nigeria or Oman- but developing teaching and research capabilities that can compare with those in the top schools abroad. There are hundreds of business schools in India, including the Indian School of Business, that are free from government interference. Not one of them has been able to attain even the level of the IIMs.

The limitations are inherent in our situation. The top B-schools in the US have had a head-start and their financial and academic strengths today are overwhelming. It makes as much sense to talk of the IIMs catching up with them as it does to talk of India catching up with the US in defence capability- not even China or Russia harbour such a delusion.

FT, I am disappointed, one expects a better critical sense of a world-class daily.

Accountability of the judiciary

How to make the judiciary accountable is undoubtedly one of the most important questions in governance today. Whether it is the media or the IIMs or the medical fraternity or the judiciary, one key principle should be upheld: self-regulation is simply not the answer. The merchant bankers used to say the same thing: leave it to us, we will set standards. Stock exchanges used to say that. Accountants in the US claimed it worked for them. Every body of professionals would rather not have somebody from outside looking closely into what they are upto. Sorry, this cannot be permitted.

In an article in EPW, Prashant Bhushan lays out the case for judicial accountability. Today, the only recourse against an errant judge is the process of impeachment. To initiate this requires the signature of 50 MPs. For this, in turn, to happen, there must be conclusive evidence against a judge; and the evidence must be published so that it assumes the proportions of a scandal. But because the media is afraid of publicising charges against a judge and politicians do not wish to invite the wrath of the judiciary, these conditions are almost impossible to satisfy. Bhushan adds that it is virtually impossible to register an FIR against a sitting judge because, under a 1991 Supreme Court judgement, no judge can be prosecuted without the written consent of the CJI.


On top of this, Bhushant points out, courts have been trying to insulate themselves from the Right to Information Act. The application fee in many courts is Rs 500 instead of the Rs 10 that is normally required. Many courts have framed rules that prohibit the disclosure of information on administrative and financial matters. They have done this in the knowledge that any petition that challenges these rules will have to come up before the judges themselves!

The response to the rising clamour for accountability is the Judges Inquiry Act Amendment Bill 2006 under which an in-house procedure will be created for taking cognisance of charges against errant judges. Bhushan argues this won't work because it requires complainants to disclose the source of information for charges and it also provides for action against complaints that the judges believe are mala fide.

Bhushan argues in favour of a National Judicial Commission. The chairman will be selected by the judges of the Supreme Court. Other members will be selected by each of several groups: judges of high courts; the cabinet; a committee comprising the speaker of the Lok Sabha and the leaders of the Opposition in the two houses of parliament; and a fifth member selected by the chairman of the National Human Rights Commission, the CVC and the CAG.

Curbing ECBs- some new proposals

The hottest topic in policy debate today is curbing capital flows into India. Amazing. Barely five years ago, people were talking about the things we should do to attract capital! One item in capital flows that has ballooned is external commercial borrowings (ECBs), foreign loans obtained by Indian companies. This is worrisome because, given the interest differential between India and the industrial economies, it makes sense for Indian companies to raise loans abroad. The appreciation of the Indian rupee makes this even more attractive.

ECBs can become unmanageable if not curbed. The government announced several measures last August, such as limiting the use of such loans in India to $20 mn, the rest of the borrowing having to be spent abroad. The government also has in place a ceiling on the spread over LIBOR that Indian companies can borrow at- this means companies that do not have high ratings will be automatically restricted from raising ECBs.

There is a sense that these measures are not enough and some new proposals have been mooted: auction of ECB loans among corporates and a sterilisation tax that will be borne by companies.The latter is meant to compensate the government for the cost it incurs on sterilising foreign inflows- the government sells securities at Indian interest rates when it sterilises inflows; the foreign exchange that it buys fetches it foreign interest rates. The difference in rates is the cost to the exchequer.

I contributed to a debate in ET on the subject. I don't believe these measures will be effective enough. The government should have a better capacity to sterilise. For this, it needs to have a bigger war chest of market stabilisation bonds and it also needs to bring down domestic rates. It must also act to make returns to investment in India less attractive through, for instance, introducing long-tax capital gains tax on equities.

ICICI Bank cops it again

ICICI Bank has been slapped with a cost of Rs 5.5 mn in a consumer dispute. The Delhi Consumer Commission levied the penalty in a case involving the use of goons to recover a vehicle financed by the bank. As happens often in such cases, the wrong guy got beaten up- not the owner of the vehicle but his friend's son and ended up in hospital.

Only a few weeks ago, ICICI Bank was in the spotlight when a home loan borrower in Mumbai committed suicide- the bank entered into a settlement with the deceased borrower's family on that occasion.

Banks must beware- the RBI has warned that banks that attract strictures from a court will not be allowed to use recovery agents.

Rediff reports:

"No civilised society governed by rule of law can brook such kind of conduct," the Commission's president Justice J D Kapoor said, adding the violent methods adopted by the recovery agents were serious violation of "human rights".

Holding the ICICI Bank guilty of "unfair trade practice," the Commission termed such miscreants as "yahoos" and said they are boorish and a brutal lout, who care a fig for legal and judicial authorities, including the Supreme Court. While taking to task the leading bank, it vented its anger on ICICI for flouting the apex court's direction that restrained all the financial institutions from employing musclemen to recover a loan amount or possession of a vehicle.

The Commission, also comprising member Rumnita Mittal, issued notices to the collection manager of ICICI Bank and the CEO of the recovery agency, seeking their explanations over blatant violation of the direction of the highest court of the nation.

Fear not the Sixth Pay Commission

Some sort of panic has gripped economic commentators as the Sixth Pay Commission award draws nearer. There is talk that this will again deal a crippling blow to public finances.

I don't think so. I think the improvement in both central and state finances has been sufficiently impressive that we can withstand the impact of any SPC award. But, also, as I point out in my
latest ET column, Booming Sensex, smiling GoI, the government could easily mobilise the extra funds needed through disinvestment.

True, the unions and the Left oppose disinvestment. But this opposition can be overcome. I argue, by linking a generous award with: a. approval for disinvestment and b. assurance (if necessary by legislation) that government equity in PSUs will not be allowed to fall below 51% consequent to dinsvestment.

By holding on its to investment in PSUs and public sector banks, the government has ended up a big winner from the rise in the Sensex- and don't forget it was the Left that forced the government to hold on!

A primer on leadership for Wall Street CEOs

Stan O'Neal, CEO of Merrill Lynch, has had to exit his job following huge losses on the sub-prime portfolio. It wasn't just the magnitude of the writedown- $ 8bn- that appalled the board and analysts. O'Neal was seen to have failed to provide the right guidance- the estimate only a few weeks earlier was of $4.5 bn. This was seen as a poor reflection on risk management at the firm.

O'Neal was also faulted for having approached Wachovia Bank for a possible merger without prior discussion with his board.

These are both failures, all right, but are they big enough to cost a CEO his job? Wall Street's standards, you might say, are exacting. You earn big money as the CEO of a Wall Street firm and you must expect the margin for error to be narrow.

However, as former star analyst Abigail Hoffman points out, others have got away with failures of the same order.

I find it odd and odious that Mr O’Neal has been hounded from office while other chief executives linger on. At Citi, Mr Prince has presided over third-quarter fixed-income losses and a lacklustre share price performance; Bear Stearns, under James Cayne, has stumbled badly; and Ken Lewis, Bank of America’s chief executive, had the wrong people in charge of the investment banking division, where net income fell by $1.33bn in the third quarter.

Hoffman notes that O'Neal had conspicuous success at Merrill:

Mr O’Neal changed Merrill and, in my opinion, he changed it for the better. He diversified the business away from its traditional retail broking focus and oversaw significant profit growth. Net earnings rose 47 per cent last year to a record $7.5bn.

So, why was O'Neal singled out for heavy punishment? Hoffman says the problem was not the failures he ran up recently. It is just that he antagonised people through his cost-cutting and, more critically, failed to pack the board with supporters. As a CEO, you need to perform, of course, but there are other things you need to keep in mind:

Mr O’Neal’s departure was not inevitable. Nevertheless, this squalid incident has lessons for us all. Chief executives must be careful to keep the board on side. And the maxim: “On your way up, be cautious who you step on because you may meet these people on the way down” remains true.

Service quality in London

London. Financial capital of Europe? Yes. Throbbing metropolis? Yes. Great amenities and services befitting an advanced economy? NO- says Sudeshna Sen in today's ET.

there’s nothing I can do to be politically correct about the fact that average customer service standards in London - across the spectrum from banking, hospitality, utilities, telecoms, retail, internet, IT et al - is, to put it mildly, appalling.

And yes, to make another sweeping generalisation, it’s much worse compared to what you get in urban India today — even more in higher end services like telecom or banking. It can take up to two months to set up a bank account, another three weeks to three months for an internet connection, a week to check a faulty phone line, an hour for an order to be delivered in some of the poshest restaurants.

What could be the reason for such poor quality of services? Sen has her hypotheses:

From what I’m able to make out, it has little to do with employees - more with corporate attitude. Service providers here seem to have business models that are all carved in stone, possibly invented in pre-Thatcherite times, and no real new competitors in decades to drive innovation in any segment. Another reason, I’m told, is the European obsession with employee rights has pushed customer rights completely off the map.

I don't believe this is the whole of the explanation. I think the privatization of key services has been a disaster- government monopolies have given way to quasi-monopolies in the private sector. Whereas there is a certain accountability in government, thanks to parliament and the media, the private sector is free to operate as it pleases. No amount of regulation seems to help.

I shudder to think of what we can expect when we in India too make a wholesale shift from government to the private sector in respect of education, health, telecom, banking and the rest.

No certitudes in bank regulation

In today's BS, Shankar Acharya has an article that shows how the certitudes underlying bank regulation in industrial economies have been shaken by recent events. The certitudes were:

first, a nation’s central bank should be accorded statutory independence from government; second, the central bank should be charged with the single (or primary) target of keeping inflation low; and third, all financial trading and intermediaries should be brought under a separate single regulator.

Following the collapse of Northern Rock in UK, the Bank of England could not fend off pressures from government to effect a rescue of depositors. This was after all the tough talk from Bank of England Governor Mervyn King. So much for central bank independence.

As for focusing on inflation alone, the US Fed found itself obliged to cut interest rates in order to maintain financial stability. As for having a single regulator, Acharya rightly points out that there cannot be a uniform prescription for all contexts- you have to see what will work in a given context.

Acharya has some kind words to say about the criticism that RBI has attracted for its efforts to contain rupee appreciation:

Against this background it should be easier to sympathise with the Indian authorities’ recent and somewhat untidy efforts to grapple with the unprecedented surge in foreign capital inflows and their destabilising consequences. The shrill and simplistic critiques of over-zealous “market fundamentalists” are not very helpful. Nor, of course, is blind defence of any and all public regulatory interventions.

A swipe at risk management techniques

Naseem Talib, a former trader, is something of a maverick when it comes to risk management. He has produced articles and books that question the value of many modern tools of risk management. In FT, he takes another swipe at these:

MPT (Modern Portfolio Theory) produces measures such as “sigmas”, “betas”, “Sharpe ratios”, “correlation”, “value at risk”, “optimal portfolios” and “capital asset pricing model” that are incompatible with the possibility of those consequential rare events I call “black swans” (owing to their rarity, as most swans are white). So my problem is that the prize is not just an insult to science; it has been putting the financial system at risk of blow-ups.

I was a trader and risk manager for almost 20 years (before experiencing battle fatigue). There is no way my and my colleagues’ accumulated knowledge of market risks can be passed on to the next generation. Business schools block the transmission of our practical know-how and empirical tricks and the knowledge dies with us. We learn from crisis to crisis that MPT has the empirical and scientific validity of astrology (without the aesthetics), yet the lessons are ignored in what is taught to 150,000 business school students worldwide.

.......The environment in financial economics is reminiscent of medieval medicine, which refused to incorporate the observations and experiences of the plebeian barbers and surgeons. Medicine used to kill more patients than it saved – just as financial economics endangers the system by creating, not reducing, risk

Caste discrimination in Indian industry

Indian industry claims it has no caste bias and that its hiring policies are entirely meritocratic. It uses this claim to oppose caste-based job quotas. The Economist had a feature on the subject largely supporting industry's contention and arguing that quotas would hurt industry while doing little for the underprivileged. Much of the discrimination, the feature suggests, may have to do with class rather than caste:

There is no strong evidence that companies discriminate against low-caste job applicants. Upper-class Indians, who tend also to be high-caste Hindus, can be disparaging about their low-caste compatriots. “Once a thicky, always a thicky,” is how a rich businessman describes Ms Mayawati. Yet this at least partly reflects the fact that low-caste Hindus tend also to be low class; and in India, as in many countries, class prejudice is profound.

Two academics, Paul Atwell, Professor of sociology at City University of New York and Katherine Newman, Professor of sociology at Princeton, contest these claims in a letter to the editor. Their empirical study bears out what those who favour quotas have been saying: caste discrimination may not be overt but it exists and improving the educational credentials of lower castes alone will not be enough.

Our two-year study, which we will soon present, found widespread discrimination against highly qualified low-caste individuals. We sent out 4,800 applications in response to advertisements for graduate jobs in Indian and multinational companies. These applicants bore distinctively upper-caste names, Muslim names and dalit surnames, but were otherwise identical in educational qualifications and work experience.

The odds of a dalit being invited for an interview were about two-thirds of the odds of a high-caste applicant with the same qualifications. The odds of a Muslim applicant being invited to an interview were even worse: only one-third as often as the high-caste Hindu counterpart.

The evidence is solid. Serious policies, coupled with an overhaul of India's education system, a required to overcome this pernicious form of social exclusion. Maybe then the widespread relegation to the bottom of the barrel of India's poorest castes will begin to diminish.

The difficulty I see with quotas in industry is that they will be hard to implement- bureaucrats and politicians alike will be bought off by businessmen and anybody who leans too hard on industry will find it hard to survive in politics- he or she will not be able to access the kind of funds that political surivival requires these days.

A more stable world economy

The world economy is more stable today in the past, it is growing faster than at any time except the 1960s, deep recessions have disappeared in the industrial economies and emerging markets have grown stronger since the east Asian crisis. Facts worth emphasising when there are long faces over the sub-prime crisis in the US and its possible impact on the world economy.

The IMF's World Economic Outlook makes the point that better economic management has helped in a big way- monetary management especially, based on the insights developed in monetary theory, has had huge pay-offs. The WEO does not mention the role of central bank coordination in dealing with economic crises- I believe this too has been a big factor. As a result, central banks are better placed today to deal with the fallout of crises in financial markets of the sort we are facing now and to limit their impact on the real economy.

More on this in my ET column, Good times last longer.

Craze for emerging markets

Investors have rediscovered emerging markets after being burnt in the east Asian crisis. But net inflows into emerging markets as a whole are still lower than their historical highs. That is because the rise in gross inflows has been matched by outflows from emerging markets into other economies.

That was the position until last year. Things may have changed dramatically after the sub-prime crisis. Money is flooding the emerging markets on an unbelievable scale. FT reports:

Brad Durham of EPFR Global, which tracks fund flows, says that of the $29bn (£14bn, €20bn) in net inflows to emerging markets so far this year, 82 per cent has arrived over the past seven weeks, “which is astounding”.

By contrast, during the same period, US equity funds tracked by the group saw outflows of $6.3bn, European equity funds (excluding east European funds) surrendered $6.9bn and Japanese equity funds gave up $3.9bn.

There you have it. Funds are being switched out of industrial economies and into emerging markets. As a result, the price-earnings ratio in emerging markets is at a small premium to that in industrial economies. Macroeconomic conditions in emerging markets are today seen as sounder than before- growth is strong, 50% of global growth was contributed last year by China, India and Russia and foreign exchange reserves of emerging economies exceed inflows into emerging markets, making these economies net creditors for a change.

India is particularly favoured among emerging markets and that must explain the dizzying rise in the Sensex in recent weeks.

Restrictions on capital flows- Sebi proposals

Not to sound boastful but I wasn't perturbed at all when I learnt this morning that trading had been halted after a steep fall in stock prices triggered the circuit breaker. I was awaiting "clarifications" from official sources that would calm the markets. That's exactly what happened. After the PM and the SEBI chairman came on the air, the market recovered to end the day around 400 points lower- a considerable recovery from the fall of 1700 points earlier.

The draft regulations circulated by Sebi, which will become law with or without some minor modifications by October 20, are intended to curb capital inflows into the country. It will do so by curbing the volume of Overseas Derivative Instruments (Participatory Notes), instruments through which foreign investors can invest in India even if they are not registered as Foreign Institutional Investors.

PNs constituted 51.6% of Assets under Custody (AUC) in August 2007, 30% of which had derivatives as the underlying. The RBI has long been in favour of phasing out PNs but the finance ministry was resisting because it didn't want the stock market run to stop. With the kind of rise in the Sensex we have seen in recent weeks, the ministry, no doubt, reckons that a correction is affordable.

Sebi's proposals are as follows:

1) FIIs and their sub-accounts shall not issue/renew ODIs with underlying as derivatives with immediate effect. They are required to wind up the current position over 18 months, during which period SEBI will review the position from time to time.
2) Further issuance of ODIs by the sub-accounts of FIIs will be discontinued with immediate effect. They will be required to wind up the current position over 18 months, during which period SEBI will review the position from time to time.
3) The FIIs who are currently issuing ODIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of less than 40% shall be allowed to issue further ODIs only at the incremental rate of 5% of their AUC in India.
4) Those FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40% shall issue PNs only against cancellation / redemption / closing out of the existing PNs of at least equivalent amount.

So, the idea clearly is to limit investment in the Indian market through PNs. There has always been a problem about the identity of investors holdings PNs. For that reason alone, restrictions on PNs are welcome. But will it help meet the objective of curbing capital inflows? In the short run, yes. In the long run, no, for the simple reason that the volumes waiting to enter India are enormous. Once PNs are barred, we should see an increase in those wanting to register as FIIs.

I am sure the finance ministry and Sebi recognise this. But a breather on the capital inflows is welcome- and the present proposals will provide just that. JP Morgan estimates that the ouflows on account of the unwinding of PNs with derivatives as underlying could be $4-7 bn; the unwinding on account of PNs issued by sub-accounts of FIIs will be even larger. Of course, all this will happen over a 18 month time horizon although it may not be evenly spaced out over that period.

Forex additions this year have been $50 bn- the addition considered comfortable was around $25 bn. In relation to overall capital inflows, the outflows that will be triggered by the Sebi move
will be a minor speed-breaker. International factors remaining the same, it will slow the rise in the Sensex over the next few months. But it does provide some breathing space for RBI in terms of managing the exchange rate- the way things were going, it appeared the rupee would soon touch Rs 35 to the dollar.

In macroeconomic terms, the Sebi move does not amount to much over the long term. It does little to alter the trend towards rupee appreciation. But, as I said, it gives a little time for adjustment to appreciation- and that is exactly what Indian industry needs and can expect at best. Rupee appreciation can be managed, not eliminated.

The combination of a rising stock market and rupee appreciation would have meant capital inflows on an uncontrollable scale. That would have had a severe impact on the Indian economy. The speed-breaker imposed by Sebi is good for the economy. It is also good for the stock market. I think the market will recognise this - and continue its climb.

"Overpaid" US executives

Many think US executives are overpaid but not many would expect the executives to say so. Well, in a poll carried out by the National Association of Corporate Directors, four out of six CEOs or presidents polled acknowledged this was the case, FT reports.

Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.

Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”.

Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD.

The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.

Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits.

This is not a problem that can be addressed by "restraint" among corporate executives- I can't see these guys practising self-denial. It cannot also be solved by boards of directors as they are constituted at present.

There is a fundamental problem with corporate boards- and this includes corporate boards. The "independent" directors are, in fact, chosen by CEOs and are beholden to them for the fat fee and commissions they get these days- in the US, $100,000 is pretty common. The figures I have seen in the papers for Indian boards are an average of Rs 9- 10 lakh. A CEO requests you to join the board and he pays you Rs 10 lakh - do you think many people would question the CEO or oppose the CEO in the knowledge that that would be the end of the goodies they get? Not a chance!

We will have truly "independent" directors only when institutional shareholders get to nominating directors on boards. Then, we will have directors independent of management. Today, the word "independent" is construed to mean anybody who does not have a pecuniary relationship with management. That's not enough- to be independent, a director must not owe his job to management.

A peep into IIM-C's board room

Ajit Balakrishnan, Chairman of IIMC's board, has a piece about a recent board meeting. The board was reviewing proposals for a revamp of the PGP course curriculum.

The interesting thing to me is that not the comments made at the meeting. It is that Balakrishnan has thought fit to share some of the proceedings with his readers. This is hardly typical of boards. The agenda item itself would be "secret". The proceedings would be "confidential". So much that even at supposedly "faculty-governed" academic institutions, faculty have little clue as to what is discussed in their own boards. True, there are faculty nominees on these boards but try eliciting information from them!

I concede that not all matters discussed in the board of an IIM can be shared with a wider audience. But many matters can. And matters related to the strategic direction of the Institute certainly should be shared.

Changes in MBA curricula are a matter of intense discussion worldwide. What IIMC board members and what IIMC faculty have to say on the subject is certainly a matter of public interest. Balakrishnan has rendered a valuable service by giving us a peep into IIMC's board room. Congrats, Balakrishnan- and more power to those who favour greater disclosure rather than less.

Lack of Ph Ds threat to IT industry

Microsoft MD Ravi Venkatesan thinks the shortage of computer science Ph Ds threatens the future of the IT industry, FT reports. I was taken aback at the figure mentioned in the report- just 35 Phds in a year in India compared to 1000 in the US !

“It’s an incredibly urgent and important issue,” Ravi Venkatesan told the Financial Times. “It affects the pipeline of future talent because the teaching institutions aren’t getting enough qualified faculty and, of course, if you really want to do cutting edge innovation in computer science, you’re restricted by the pool of talent out there.”

While Indian companies have until now relied on the difference between Indian wages and those in developed markets to attract business, the strategy is not sustainable, Mr Venkatesan said.

“It’s inevitably a matter of time before these wage disparities disappear and the only thing that’s going to matter is the quality of ideas coming out of an employee,” Mr Venkatesan said.

Fashions in bank regulation

Until the other day, the ruling wisdom was that it makes sense to separate the conduct of monetary policy from bank supervision. Combining the two roles, as the RBI does, is folly, we were told - among other things, there could be lack of focus and conflict of interest in doing so. The British separation of the Financial Services Authority from the Bank of England was held up a role model and the RBI was portrayed as being cussed in resisting any separation of roles.

That wisdowm is being turned on its head in the wake of the collapse of the British bank, Northern Rock. Now, we are told that the collapse could have been averted but for the fact that three players were involved- the UK Treasury, the BoE and the FSA- and none of them regarded as its primarily responsibility to avert disaster. Here is a sample from a comment in FT

It is, incidentally, worth noting that compared with the problems of mounting and co-ordinating a last resort lending operation to a big multinational bank, a Northern Rock bail-out should have been child’s play. But the tripartite division of responsibility between the Treasury, the Bank of England and the FSA has become the Bermuda triangle of the British financial system.

Evidently, fashions in bank regulation keep changing as they do elsewhere.

Lean times for Indian economy gurus

Swaminathan Aiyar has a piece in today's ET on how the mystery underlying the growth of the Indian economy. He says it is not clear why India should be growing at an average rate of 8.6% in recent years when there are still so many negatives in the scenario.

A different way of putting this would be to say-as I have been saying for long- that economic pundits have simply been wrong about the Indian economy. They warned us that there was no way the Indian economy could grow at 8% plus without "reforms". Many of these reforms have not been implemented or implemented in full. But that has not kept the economy from growing.

Aiyar mentions several hypotheses that attempt to explain the Indian economy's performance- "tipping point" or the cumulative effect of past reforms, steady improvement concealed by external shocks such as the east Asian crisis or the IT bus, the revival of manufacturing, the global boom. He is not sure they adequately explain the outcome. In particular, governance remains weak and the fiscal deficit is disconcertingly high.

I have never bought the governance thesis- that shifting coalitions or even political instability can be a growth inhibiting factor. Look around and you will find countries wracked by insurgencies doing quite well in terms of economic growth- Sri Lanka is a striking example. The fiscal deficit may be high in absolute terms but the trend towards improvement is unmistakeable.

I happen to think that the biggest factor in the improved performance of the Indian economy is the increase in savings and investment rates. The savings rate has risen by nearly 10 percentage points over the past decade. Fiscal improvement has been an important factor underlying the increase in the savings rate. Fiscal improvement, in turn, has been made possible by falling interest rates. And lower interest rates are the result of huge foreign inflows.

Why have foreign inflows risen so fast? Remittances have risen sharply after the exchange rate became market determined and hence it made sense to remit money through official channels and not through the havala route. FII flows have shot up as the stock market was modernised and foreigners realised that here was an economy that had grown at over 6% for two decades and would grow even faster. FDI has risen for the same reason. Falling interest rates have also boosted corporate profitability and corporate savings.

When an economy of India's size shows sustained growth, it becomes a magnet for global savings. Once the savings start pouring it, domestic savings rise because of the impact on the fisc and corporates of falling interest rates. The momentum imparted to the economy is sufficiently strong that it does not require "second generation" reforms. That's bad for economic pundits- they are left with little to preach. But it's just fine for the economy.

Would we have been even better off with a further dose of reforms? No- and here I think the political class got it right in preferring to move gradually. More reforms would have been socially disruptive- vocal segments would have been alienated and that would have created serious governance issues. The trick was to recognise the trend towards improvement and let the economy be. In this the politicians were right, the pundits wrong.

I have said this before: the performance of the Indian economy is ultimately a tribute to the democractic process and a warning against setting too much store by experets.

Why can't the media get its facts right?

Today's Indian Express carries an interview with outgoing IIMA director Bakul Dholakia. The report carries the following item in a box:

No three-month extension for Bakul

IIM-A directors have always been given three-month extension after the expiry of their term. This was done to facilitate the handing over of the charge process to the next director, as the selection process for the same is a time-taking affair. For Prof Bakul Dholakia, however, October 9 is the last day of his term as also his last day in office. Sources in IIM-A said the chairman of the governing body of IIM-A, DrVijaypat Singhaniya, had written to Union HRD Ministry seeking an extension of Bakul's term until the next director is appointed.

It has been learnt that an "explicit" communiqué has been issued to Dholakia to hand over the charges on the last day of his term

The report is factually incorrect. In 2002, the then outgoing director too was asked to hand over charge the day his term expired. If the suggestion is that Prof Dholakia is being single out for special treatment by the MHRD, that is completely erroneous.

In previous rounds, yes, there were occasions when the director's term had got extended until the appointment of his successor but not all the time.

Leaving aside the historical record for the moment, isn't it a good idea to have fixed terms for such positions? Is it not a healthy practice for the director to step down when his term expires and for somebody else to hold temporary charge till the new director takes over? IIMA and its governing council should have instituted this practice on their own in the interests of good governance- that is the least one expects of the nation's top business school, many of whose faculty have made careers out of preaching governance to the rest of the world.

If they failed to do so and if the MHRD has now instituted an altogether healthy practice- of adhering strictly to the a director's term limit- then the ministry surely deserves bouquets, not brickbats.