Thursday, November 30, 2006

Why financial inclusion makes commercial sense

Talk of 'financial inclusion'and many people will start yawning. 'Inclusive growth' is something of a buzzword now and many might be forgiven for supposing that it's one of those expresssions politicians love to include in their speeches. Makes growth look so much more respectable.

Yet, financial inclusion is not something to bracketed with, say, the employment guarantee scheme. I argue in my latest ET column that banks should go for it because it makes excellent commercial sense. Banks have a problem accessing deposits. Reaching out to under-banked areas would help them get low-cost, stable deposits. It would also help them make loans with higher yields than what they can charge corporates today.

Banks have had a cosy time these past few years because of the surge in liquidity and because savers have been wary of the capital market. On the asset side, top borrowers' demand for funds has diminished but banks have substituted them with retail assets. As a result, banks have been able to maintain their net interest margin, the difference between interest income and interest expense as a proportion of assets.

This run of luck won't continue. Banks' net interest margin is bound to come under pressure as savings seek out higher returns in the capital markets and elsewhere and the best borrowers continue to exit the banking system. Financial inclusion could be an excellent bet for banks in commercial terms.

The trick is to get banks to put systems in place to measure risk-adjusted return on capital (Raroc). Thanks to Basel II, banks will know the capital allocated, the denominator in Raroc. They need to get a handle on the numerator as well, the return adjusted for risk. When Raroc is measured and monitored, banks will get their pricing right. And the key to taking risks is largely pricing risk correctly. So, more than re-working priority sector loans, the RBI must push banks towards using Raroc.

Read my ET column.

Tuesday, November 07, 2006

India and China: the 1962 war revisited

China's President Hu Jintao is due to make a four-day visit to India starting November 20.There has been some comment on the seeming lack of enthusiasm on the Indian side. Where are Sino-Indian relations headed? I address this question obliquely in my recent column in the Economic Times on the occasion of the 44th anniversary of the Sino-Indian border conflict.

China's growing economic and military power has translated into greater Chinese assertiveness in South Asia. China has followed a policy of 'strategic encirclement' in South Asia: it has forged greater economic and military links with India's neighbours with the objective of ensuring that India is confined to the south Asian space. It has also worked hard for the creation of a south Asian nuclear free zone so that, again, India stays put as a sub-regional power. China justified its relationships with south Asian countries by invoking Panch Sheel. It says it has every right to develop whatever relationship it likes with other sovereign countries.

Fair enough. But how does China justify its clandestine support to Pakistan's nuclear weapons programme all these years? More help on the nuclear front is on the agenda when Hu visits Pakistan before he arrives here.

It is the China factor, more than any other consideration, that explains India's gradual drift towards a closer relationship with the US, a process started by the NDA government and carried forward by the UPA government. That is what explains Manmohan Singh's single-minded pursuit of the Indo-US nuclear in the face of considerable scepticism within the country and at the risk of alientating some of India's friends in the non-aligned and Muslim world.

China's attempts at 'strategic encirclement' will now be countered by India becoming a partner in American attempts at containing China, an exercise in which Japan, the east Asian countreis and some of the central Asian republics will be the other partners.

Read my full article in ET here.

Incidentally, I had promised people that this blog would not be just about banking and the Indian economy. I have been true to my word!