Thursday, December 23, 2010

Three golden jubilees

Three well-known institutions, IIMA, IIMC and The Economic Times are currently celebrating their golden jubilees. I happen to have been a bit player in all three. I record my impressions of these institutions in my ET column, A tale of three jubilees.

Monday, December 13, 2010

Great Lakes stake sale

Bala Balachandran, founder of Great Lakes School of Management, is in talks to sell 51% of his stake to Tata Foundation and Pirosha Godrej Foundation, BS reports.
“I have 90 per cent stake in my institute. I have decided to give the ownership to somebody who can give me some money to expand. I may offload as much as 51 per cent. The valuation of the institute would be around Rs 220 crore,” Balachandran told Business Standard on the sidelines of an event in Mumbai.
Balachandran would make a cool over Rs 110 crore on his stake sale. Not bad for an investor in a school that has been around for less than 10 years. What was his original investment, I wonder. The money that Balachandran makes would go into his pocket because it arises from sale of his equity, not through additional issue of equity. Presumably, for the expansion, the new investors will provide the additional funding.

Is the original promoter in an educational institution allowed to exit this way, possibly at a profit? I would like to know. The BS report states:
Great Lakes was formed in 2002 as a Section-25 company. Section-25 companies are those formed for the purpose of promoting commerce, art, science, religion, charity or any other deemed “useful object” and whose profits are used solely to further its stated objectives.
Balachandran will be taking over the Mumbai Business School, which will be named Great Lakes, Mumbai. Great Lakes is also venturing into Gurgaon and Orissa. In Gurgaon, it has bought land. In Orissa, the government has given it 100 acres of land on a 99 year lease. I have said this before: we need to review the policy on making government land available to private parties at less than market prices.

Thursday, December 09, 2010

Making a career out of board memberships

An article in the latest HBR proposes a solution today's corporate governance problems: have professional boards. That is, board memberships become something of a career. No professional director will serve on more than two boards. He will be required to spend time at the company other than for board meetings. He will have to be knowledgeable about the sector or products in which the company operates. And, of course, he will be paid more for his exertions.

I doubt that this will work. No matter how knowledgeable about a sector or how much time you spend on it, you can never become as knowledgeable as management. They can always withhold information or pass on information in ways that suit them.

Boards are ineffective not because of lack of knowledge or ability but because independent directors don't have it in them to question and challenge management. It is more rewarding to go along with management than to do otherwise. Remember, directors are beholden to management for giving them lucrative directorships. You can hope to get independence only when other interest groups find a place on the board- institutional investors, employees, minority shareholders.

More in ET column, Board membership as career?

Guru of microfinance under fire

Mohammed Yunus, the Nobel prize winning founder of Grameen Bank and originator of the idea of microfinance, is facing an investigation over alleged diversion of funds given by a European donor from the Bank to an affiliated organisation. He has now come under fire from his PM, Sheikh Hasina Wajed, FT reports.

Wajed is quoted as saying, "Micro-lenders make the people of this country their guinea pig ... They are sucking blood from the poor in the name of poverty alleviation.”

More ammunition for critics of microfinance in this country. Don't expect anything to move until the RBI's Malegam committee submits its report, expected in mid-January.

Friday, December 03, 2010

Does corporate governance matter?

It is assumed that corporate governance defines the health and performance of a company. How true is this? In the Economist, Schumpeter cites a recent study that casts doubt on this view;

The authors conducted a comprehensive study of the performance in 2007-08 of 296 financial institutions with assets of more than $10 billion. They found that none of the tenets of good corporate governance stood up to close examination. Directors who were well informed about finance performed no better than know-nothings. Companies that separated CEOs and chairmen did no better. Far from helping companies to weather the crisis, powerful institutional shareholders and independent directors did worse in terms of shareholder value. Indeed, the proportion of independent directors on the boards was inversely related to companies’ stock returns.
The authors of the study are quick to also point out that in East Asia, external monitoring has led
to better performance. So, maybe, one cannot generalise from banks?

Well, a good way to address the question of whether corporate governance matters is to ask whether management will do without boards at all? Is this desirable? Most people would think not. Some checks, however imperfect, are better than none.

Secondly, we have to look closely into the role and motivation of independent directors. In most cases,' independent' directors are selected by management. Management also pays them well in some cases. It's hard to see these directors taking their role seriously and challenging management. We need to find a different way to select independent directors. Even then, they may be co-opted by management. But it's worth trying something different.

Friday, November 26, 2010

When Ireland rocks the world

Ireland, which accounts for 0.3% of the world GDP, has been sending shock waves through the world economy. Earlier, it was Ireland and Greece. How do contain disruptions of this sort emanating from relatively small economies? I touch upon this in my ET column, Small economies, big headaches.

Tuesday, November 23, 2010

Ratan Tata is angry

About a week ago, I may have been forgiven for getting the impression that the Tatas could not start an airline some years ago because they didn't want to bribe the minister concerned. That is the impression I got from newspaper headlines.

I now learn that it wasn't anything like that. A businessman told Tata that he would be stupid to pass up an chance to start an airline just because it meant paying some minister R 15 crore. Here are the details that I came across at a site on the Internet (and I hope they have reproduced Tata's clarification correctly):

I ( Ratan Tata) happened to be on a flight once, a fellow industrialist sitting on a seat next to me & he said you know I don’t understand, you people are very stupid. You know that the minister wants 15 crore of rupees, why don’t you just pay, you want the airlines. I said you will never understand this; I just want to go to bed at night knowing that I haven’t got the airline by paying for it.”

The company then included a clarification on the following three points, which India Real Time is reproducing verbatim:

–No minister ever asked Mr. Tata for a bribe

–The fellow industrialist expressed his personal view point that some minister (sic) were asking for a bribe

–Mr. Tata in no way was in agreement to the fact that he was asked for bribe by any minister
Business Standard wrote an edit saying that instead of 'whining' about the issue, Tata should name and shame the minister. Tata has written an angry letter to the paper roughly making the same points as above.

Which raises the question: how did so many papers report the news inaccurately?

Thursday, November 18, 2010

Vedanta university - and land grabs of private colleges

The Vedanta group's ambitious plans for a world-class university has suffered a huge setback - and perhaps won't happen now- with the Orissa High Court's adverse ruling in the case related to acquisition of land for the project. FT reports:

The Orissa High Court has ruled that the Orissa government’s acquisition of about 6,500 acres of land – including 500 acres from Puri’s famous Jagannath temple – and the land’s subsequent transfer to Mr Agarwal’s eponymous foundation to build Vedanta University was illegal.

The court has ordered that the land be returned to its original owners. The judgment – in response to a clutch of public interest lawsuits challenging the land acquisition – will bring a formal end to the long-stalled plans for the university, which Vedanta had already concluded was unlikely to ever get off the ground in Orissa.

The ruling has brought to the fore the question of land being acquired for setting up of private universities and colleges. BS has an interesting feature on the subject today. The article notes that the Anil Ambani group has recently been alloted 110 acres by the MP government for its foray into education while ISB got 70 acres of land in Mohali. The land allotment is disproportionate to the requirement in many cases. Where it is made over to private parties, the suspicion of a land grab is bound to be there.

BS notes that a good engineering institute can be set up on 10 acres and a management institute on 5. So why are private institutions asking for and getting so much land? It also notes that Infosys' Mysore training facility is on a 337 acre campus. This is not even a degree-granting facility, it is strictly for a private company. Interestingly, Shiv Nadar and Aziz Premji are acquiring and pay for the land they need for their educational ventures instead of seeking concessional land from the government.

Thursday, November 11, 2010

Microfinance myths

Now that recoveries of microfinance institutions in AP have virtually ground to a halt, what happens to bank exposure to MFIs of some Rs 27,000 crore? I am surprised that the question has not been posed thus far. Under the agreement between the financial services secretary and MFIs, not only MFIs cap their interest rate at 24%, they will now only have monthly repayment with repayments to be made at an approved panchayat council office. The slightest hint of harassment means the recovery agent could end up in jail.

What sort of recovery is possible in these conditions? Certainly not the 100% claimed by MFIs thus far. I would be very surprised if banks did not end up taking a substantial hit. This should prompt some introspection among banks. How did they fall over each other to lend to entitities that were mostly one-person affairs and whose governance left much to be desired? Did they keep track of cumulative bank exposure to a given MFI?

On a broader note, the MFI model itself will have to be revisited. MFIs should now be brought under stringent regulation, of course, but also on-lending of bank funds through MFIs cannot continue as before. Let MFIs garner their own funds either as equity or as deposits (with deposits being linked to net worth). More on this in my ET column, Five myths about microfinance.

Tuesday, November 02, 2010

G 20: putting the pressure on China won't help

The US seems to believe that a revaluation of the yuan holds the key to global imbalances. Of course, the Chinese need to revalue. But they will be more willing to do so when the see the US economy picking up smartly and continuing to generate demand for their exports. That means US has to pep up domestic demand. It's fast becoming apparent that monetary policy alone won't do the trick for the US.

Quantitative easing-II has led to funds flooding into emerging markets and triggering competitive devaluations. It hasn't done much to revive the US economy. Fiscal policy, discredited since the Greek crisis, may have to play its role. More in my ET column, G 20 accord needs US policy shift.

Wednesday, October 27, 2010

Financing higher education

Government universities cannot afford to continue large subsidies to students. They have to raise fees. This is true not just for India but for other countries as well. How to increase fees without undermining accountability? In today's ET, Arvind Panagriya cites the recommendations of a panel on higher education in the UK.

The panel suggests that students not be asked to pay fees upfront. The government should foot the expenditure of 6000 pounds per student. Students should start repaying the fees to the government once their income crosses a certain threshold- say, 21,000 pounds.

I don't know whether such a scheme is enforceable. It means keeping tabs on every graduating student and the income he or she is earning after graduation. But the underlying principle is interesting. The panel has not asked that students simply finance their education costs through loans. It apparently sees education loans as impeding access. It is one thing to repay fees as and when able. It is another to be committed to huge outflows at the point of graduation.

The panel's approach is in refreshing contrast to the approach in India where education loans are seen as the answer to rising fees especially in the professional courses. The IIMs, for instance, have taken this line to justify huge increases in fee in recent years. As HRD minister, Murli Manohar Joshi had opposed high fees at IIMs and other places during the tenure precisely on the ground that it would impede access.

The problem with the IIMs' increasing their fees is that it has led to an across the board increase in fee in business management course. While IIM graduates may be able to repay their loans, students at other b-schools are finding the going rough. Commercialisation of education comes in the way of inclusion. The answer to universities' or schools' need for higher fees has to be some combination of government subsidy, private endownment and loans or, if feasible, pay-as you- earn schemes.

Monday, October 25, 2010

Backdoor privatisation of IIMs?

The report of the second Bhargava committee on governance at the IIMs was made available to the government a few weeks ago. It was discussed at a meeting that Kapil Sibal had with IIM directors recently. (The first Bhargava committee report came out in 2008 and was shelved following objections from the IIM establishment).

I read the report with some dismay. Let me just react to one or two proposals for now. The committee wants the ownership of the IIMs to vest with the Society in which ownership is nominally vested today. It suggests that corporate entities be allowed to become members at a price of Rs 20 crore. For individuals, the price could be Rs 5 crore; for alumni Rs 3 crore. These numbers may be lowered if the IIMs think that is necessary.

What does this mean? That any businessman and his family are associates can garner three or four memberships of the Society for Rs 20 crore or so? Or that any industrial group can pick up two or three seats for Rs 60 crore? And then proceed to call the shots? This strikes me as backdoor privatisation of the IIMs. The worst part of it is that businessmen or affluent individuals would be able to run the IIMs without having to invest a great deal.

At the same time, the committee wants the government to continue to meet capital expenditure for the older IIMs, revenue expenditure as well of the newer IIMs and make contributions towards pension liabilities at the IIMs. Call it PPP if you like- a public private partnership in which the government bears the costs, the private sector calls the shots. It is astonishing that three IIM directors should have been party to this proposal. (The fifth member was an alumnus of IIM-B).

The report says somewhere that ownership should vest in the Society, not in the faculty. That will be news to faculty at least at IIMA where the concept of a 'faculty-governed institute' is sacrosanct and ownership or decision-making is divided amongst the Board, faculty and government.

Monday, October 18, 2010

Microfinance bubble burst?

Many have been warning that the runaway growth in microfinance assets is not sustainable. is the bubble about to burst? Well, the AP government's ordinance is certainly ominous as it requires microfinance institutions to suspend collections until they have registered with local authorities. (see FT report). Banks cannot escape the fall-out as they as the primary funders of MFIs mainly in order to meet priority sector obligations.

A number of practices of MFIs are now coming to light: multiple lending, aggressive marketing of loans to the unwary (much like the sale of credit cards and consumer loans done by foreign and private banks), dubious HR practices (hiring 18 year olds and not issuing any appointment letters), weekly repayments, harsh recovery methods, forming liability groups out of self-help groups created by NABARD and other government agencies.

Some of the arguments for high interest rates charged by MFIs are downright absurd. Eg. The interest rate of 30% if ok as money-lenders charge over 100%. Says who? Besides, money-lenders don't market their loans. They make loans to people who come to them- and strictly against collateral.

It has taken the SKS IPO and a spurt in suicides in AP for people to wake up to what's going on. One thing is certain: microfinance will not be the same again.

Rumblings in NIT system

Directors of two NITs, Warangal and Trichy, have been suspended following various charges against them, IE reported a while ago. The ministry of HRD has sought the approval of the President for the dismissal of the chairman of the board of NIT, Kurukshetra. Apparently in a sign that it is not happy with the state of affairs of NITs, the ministry has commenced the search for various NIT directors a full year before the completion of tenures of the present ones.

I can't comment on the specific cases above. But if the system is acting at all, it is a good sign. One of the sorriest things about our elite institutions is the complete lack of accountability of directors and the boards. If people are being called to account, that is a healthy sign. I also approve of the search process commencing well in advance. Typically, the search starts so late that the incumbent hangs of for several months after his tenure.

Here's a suggestion towards ensuring accountability of directors: there should be a mid-term appraisal of all directors. The appraisal should document what has been accomplished during the director's tenure up to that point and what is proposed to be accomplished in the remaining period of his tenure. This appraisal should be placed in the public domain by being posted at the Institute's website.

Thursday, October 14, 2010

US bail out cost less than 0.5% of GDP!

The US government faced fire for its $700 bn rescue of the financial sector in 2008 which was called Tarp. Surprise, surprise. The final cost is now estimated at less than $50 bn. My latest ET column explains how.

The losses in the financial sector across the world too were exaggerated by estimates made in a time of panic. Financial institutions hold mark to market securities whose prices are heavily depressed in times of panic. No point in estimating losses at these prices and the costs of a rescue. Governments will be frozen when they see the numbers. Just go out and save the large banks. Markets will bounce back and the costs will be far less than thought earlier. That's the lesson from the Tarp experience.

Thursday, September 30, 2010

Khandelwal report on HR in banks

The report on HR in banks, prepared by a committee headed by A K Khandelwal, former Chairman of Bank of Baroda, came out in June. It wasn't made public. I happened to get a copy of it last week. I am concerned about the focus on variable pay in the report. As I argue in my ET column, HRD in banks is more than just pay, I have serious concerns about whether such schemes can work in the public sector.

There is much talk about the public sector losing talent because of poor pay relative to the private sector. The IAS wanted a huge job in salary to make jobs comparable to the private sector. The army, as I recall, wanted the Chief of staff, to paid Rs 1 crore. IIT faculty agitated for pay superior to what the Pay Commission wanted. The IIMs grumble about pay. And, of course, all PSUs would like pay to be benchmarked to the private sector.

In many ways, pay in academics is a lot better than it has ever been before - and there is no indication that it is drawing in superior talent. Nor are there signs of the opposite kind, that the talent coming into IAS, for example, is poorer than in the past. Senior IAS officers have told me that the composition of probationary officers is changing- more come from lower middle class and rural families and they may lack polish but they are very bright and committted. Competition for the administrative services remains fierce- as fierce as that for IITs and IIMs.

So, we should not make the mistake of seeking parity in pay across the public and private sectors. The two offer different career choices and different lifestyles. This goes for public sector banks as well. They need to improve pay but not catch up with private sector either in what they pay or how they pay (fixed pay or variable pay).

Thursday, September 16, 2010

Limit IIT directors to one term

I wrote in my last post about the increase in the retirement age of IIT directors from 65 to 70. I said I did not favour the idea. Some people wrote in saying that they would like to see cogent reasoning for my position, apart from the fact that youth is to be preferred.

Well, the main reason is that in our institutions of higher education, we do not have a system of accountability for the director. So, we lack a proper basis for extending the director beyond 65 or giving him a second or third term. The decision would become subject to the whims of government or the Board.

The IIMs have long had a convention of a single term for the director and this has served them well. It was convention put in place by IIMA's legendary Ravi Matthai. I elaborate on this in my ET column, Let IIT directors retire at 65.

Friday, September 10, 2010

IITs allowed to raised retirement age to 70

The ministry of HRD has allowed the IITs to raise the retirement age for faculty to 70, according to the Hindustan Times. The retirement age of IIT directors can also be raised to 70, which would allow several directors to stay on for a second term. This is a bad idea.

Letting IIT directors stay on for until 70 is bad not just for the reason mentioned in the report, namely , that it will render IIT directors vulnerable to outside pressures. We need younger people at the top, not older ones. And, believe me, there is plenty of talent in the IIT system and outside the country that can be tapped.

Ditto with faculty. Since extensions will, in effect, be at the discretion of the director, this will render faculty totally subservient to the director. It is also not good for faculty to hang around an IIT or IIM for too long- not good for them, not good for the institution. Even as it is, faculty stay on for 30-35 years. I shudder to think of having faculty around for, say, 45 years. Faculty must be extended beyond 65, if at all, provided they have not spent more than 25 years at the institution.

I sincerely hope this does not get extended to the IIMs. The IIMs, by and large, have followed the principle of a single term for the director although, regrettably, this healthy principle was not followed in the recent past in the case of the directors of IIM Calcutta and IIM Lucknow. There is very little accountability among IIT and IIM directors and allowing them to reign for 10 years risks causing serious damage.

Thursday, September 02, 2010

Basle 3 doesn't look promising

The BIS will soon unveil proposals for bank capital under Basel 3. From what has been revealed so far, these won't be tough enough on banks. The new capital requirements will be phased in over a longish period. Regulators are worried that tougher requirements will impact on the weak global recovery but this is not supported by BIS research on the impact of additional capital.

I'm afraid it doesn't look as though policy-makers are serious about preventing recurring banking crises. Maybe they just want to shrug these off as part of the ups and downs of capitalist economies?

More in my ET column, Banks, relax- until the next crisis.

Wednesday, August 25, 2010

Another committee on IIM autonomy

Yet another committee will go into the issue of autonomy for central universities, IITs and IIMs, TOI reports:

The HRD ministry has set up a high-power committee, under noted legal expert N R Madhava Menon, to come with a comprehensive policy on the issue of autonomy for higher educational institutions like central universities, IITs and IIMs.

The six-member committee, which also has three additional special invitees, has been asked to review the state of institutional autonomy in central universities, IITs and IIMs in academic governance and financial matters.

The panel will recommend mechanism for norm-based funding of central educational institutions for development and maintenance, with an aim to enhance their financial autonomy.

It will examine the decentralisation of autonomy within central universities, IITs,IIMs and suggest measures by which institutional autonomy can percolate to governance structure within the university and to the teacher.
An IIM review committee under R C Bhargava had submitted a report on governance of IIMs in 2008. Another committee under the same Bhargava is currently looking at governance issues and its report is awaited. What would be the rationale for another committee on autonomy and accountability and covering the IIMs again?

Monday, August 23, 2010

Paid news

In the last elections, several newspapers are said to have covered election campaigns for a price. This phenomenon of 'paid news' was exposed by P Sainath of the Hindu following which the Press council of India (PCI) constituted a sub-committee to go into the matter.

The sub-committee confirmed that news had indeed been paid for and furnished whatever information it had been able to gather in a report submitted to PCI. Following this, the PCI decided, by a narrow majority, not to make the report public. Mitali Saran has some strong words on the subject in her column in BS:

Concerned journalists on the panel called the PCI a ‘toothless tiger’. They talked about how in the 1980s and 1990s, regional newspapers didn’t pay their reporters a salary, but gave them a commission on any ads they brought in; how corporate management is increasingly sidelining editors; how journalists are given lists of subjects to cover in a target number of column inches.

The PCI sub-committee report, the burial of that report, and the media’s lack of interest in the topic points to a complicity so deep that nobody can afford to turn the lens on themselves. It takes the idea that there are always a few rotten apples in the barrel, and shows that the one you bite into every morning is ridden with maggots. There’s no better reason for you to care.

I have long maintained that two of the pillars of the fourth estate that need strengthening are the judiciary and the media. There are signs of greater accountability being brought into the judiciary. When will the media's turn come?

Sunday, August 22, 2010

Land for institutions of higher education

The Punjab government has given ISB 100 acres of land in Mohali. BS is critical of institutions of higher education appropriating vast tracts of land:

Why do India’s institutions need so much land, and that too subsidised by the taxpayer? In an increasingly urbanising India, with land costs going up, the idea of large campuses, and of ones far away from city centres, should be discouraged. Some of the world’s best educational institutions function out of tall buildings in city centres. The only purpose large campuses serve is to preserve greenery and forest cover! If private institutions wish to acquire land, they should pay for it, more so if these are institutions that charge hefty fees and have well-heeled trustees, like the ISB does.

Why would they want 100 acres to build a business school that houses 500-odd students? Government-run universities and colleges, which cater to thousands of students and offer training in a number of disciplines, often operate from much less land. Is it any wonder that people whose land is acquired by the government and given out free to others feel the way they do?

There are answers to the questions raised here. Renting apartments is not as easy or inexpensive as it is in the US and elsewhere- a new batch of 500 or 1000 students will not find it easy to find rental accommodation in the vicinity of a college. Housing faculty and students on a campus makes for smooth functioning of the institutions round the year despite dislocations in the cities in which they operate. Campus accommodation is one of the few attractions of an academic position at IIT or IIM and it remains one of the very few means of attracting Indian faculty from abroad.

That said, questions may be asked as to why ISB needs so much land when it uses a visiting faculty model. We also need to push the IITs and IIMs to scale up their capacities on the land they occupy.

Thursday, August 19, 2010

Licensing new private banks

The RBI has come out with a detailed discussion paper on the licensing of new private banks. The paper documents the Indian experience with new private banks and also provides information on regulations in other countries.

Prime candidates for new banks are industrial houses and NBFCs. The latter are regulated and the RBI will know whom to let in and whom not to. Industrial houses setting up banks is a dicier proposition. I discuss the issues in my ET column, Tread warily on new private banks.

My bottomline: let us make a modest start with allowing industrial houses to set up exclusively rural banks. That is where we need initiative and capital. The urban crowd and industry are well taken care of. Let us watch the performance of industrial houses for a few years and then take a view on whether they should be allowed to spread their wings.

Wednesday, August 18, 2010

India decoupled from the world now?

India is eyeing 9% growth when growth prospecs in the US and other advanced economies are uncertain. Fiscal and monetary policies have been tightened over the past several months in India. In the advanced economies, the stimulus vs austerity debate has not died down. Is India getting decoupled in the present situation? Maybe. We got couple in 2009 because of panic outflows of capital. In today's uncertain condition, the same sort of capital outflow appears unlikely. So we may steam ahead regardless of what happens in the advanced economies.

More on this in my last ET column, The world falters, India booms

Tuesday, August 17, 2010

India and China

One of the tantalising questions in economic debate is who will win the economic race in the coming years: India or China? Until recently, there was not much to debate. Everybody knew it would be China. But, in the last year or so, one notices a shift. India has a better demographic profile. China's currency is set to appreciate which will drag down export growth, so the contention goes. India will move into double digits. China will drop into a single digit.

Arvind Subramaniam wades into this debate and he favours China. He sees corruption, insurgency and poor governance in general as going against India.

Long-run growth depends on the quality of supporting public institutions. True, the India of today is less of a regulatory nightmare than before the opening-up in 1991. Some institutions – those that hold elections, preserve financial stability and regulate telecommunications, for example – have worked well. But these exceptions apart, the state is weak and fraying. Policy reforms do not deserve the spectacular acceleration in growth that the economy has delivered.

Well, then you have to explain why economic growth has improved in recent years. There is more corruption. Is there more insurgency? We may hear more about the Naxalite problem but that does not mean there we have no faced insurgency earlier- we have had enormous problems in the North- East, some of which continues. Is governance worse? There are some areas- such as tax services- where one sees an improvement. Telecom has seen a revolution. The RTI is a big change. I am not sure governance is worse than it was ten years ago.

The explanations for improved growth that Subramaniam provides- more entrepreneurship, bigger role for the private sector, competition among states- are not the whole story. The solid underpinning comes from higher savings and investment. If these continue to rise, why should governance problems hold up growth?

Incidentally, Morgan Stanley is willing to bet on India, a rather surprising forecast coming from a firm that was quite bearish about India's growth prospects some time ago.

Monday, August 09, 2010

HP boss pays for an indiscretion

HP boss Mark Hurd's ouster as CEO is a case of a board setting unusually high standards. In an earlier era, these standards may even have been regarded as puritanical.

Hurd was ousted by the board for what appears to be a minor indiscretion, according to an FT report. Hurd was accused of sexual harassment by a woman contractor. To his credit, Hurd promptly handed over the letter to the company's general counsel who took it to the board. The board's investigation found no evidence of sexual harassment but believed that Hurd had fiddled with expense statements to conceal his meetings with the contractor.

The amount involved was $20,000 over a two year period. This was considered a sufficiently serious ethical lapse to fire one of America's best-performing CEOs. Of course, it is possible that the board also believed that if it dug deeper, it might uncover worse.

Hats off to the board of HP- not many boards would have taken such a tough line. Partly, the tough line shows the extent to which boards themselves are under close scrutiny in the US.

IIT Kharagpur had quotas for faculty's children!

For over 40 years, IIT Kharagpur kept aside seats for children of faculty and staff, letting in students who had failed to secure admission through the JEE. This sensational disclosure appears in HT which procured the details under the RTI Act (for the nth time, one marvels at the wonders of this great piece of legislation):

Documents accessed by HT using the RTI Act show the country’s oldest IIT — started in 1951 — blocked 25 per cent of its seats in popular five-year integrated science courses (up to M.Sc level) for handpicked nominees, even as students from the rest of India had to clear the IIT-JEE for admission.

IIT wards merely needed 60 per cent marks in their Class XII Board examination and should have appeared in the IIT-JEE to be eligible for the quota seats, doled out at the institute director’s discretion.

Between 2003 and 2005, those who got in through this illegal quota didn’t even need to appear for the entrance exam.

The secret quota was suspended in 2005, the year the RTI Act was launched, and was abandoned in 2006 under pressure from the Joint Admission Board of all IITs, which organises entrance examination.......

The IIT admitted 88 students through the secret quota bet-ween 1998 and 2005, including 50 in 2003 and 2004, documents reveal. The quota was never disclosed in admission brochures — unlike all other reservations for backward communities that the IITs have.

Among the beneficiaries was the ward of the chairman of the IIT-JEE in 2006. One ex-director calls it a 'shameful chapter' and claims he did his best to stop it but could not convince his colleagues. Sorry, that's a lame excuse. The right thing to do would have been to take the matter to the Board and the ministry and to have gone public with the facts. The Board of IIT-Kgp must have the matter thoroughly investigated and documented and place the full record in the public domain.

Business Standard has a scathing edit on the subject. As the edit points out, these are the same characters who have opposed quotas on the ground that these dilute quality.

I may mention here that early in IIMA's history an attempt was made to introduce similar quotas. A senior professor made the request to Ravi Matthai, the legendary first full-time director of IIMA. Matthai took the proposal to the faculty where it was promptly shot down as Matthai must have known it would.

Tuesday, July 20, 2010

Management gurus and b-schools

I have been extremely preoccupied in recent weeks, hence this long lay off from my blog. I hope to be more regular starting next week.

What exactly is the link between b-schools and good management? Can good management be taught the way it is done at b-schools? These are questions that have vexed people for long and we don't have good answers. Of course, many successful managers have come out to b-schools but that's because b-schools simply get the brightest. And we have lots of successful entrepreneurs and managers who never touched a book on management.

Incidentally, Ravi Matthai, the first full-time director of IIMA, had no academic background in management. He was a BA (Hons) from Oxford and had been a chief executive at a firm in Calcutta before he moved into academics. He went on to become a pioneer in management education.

To return to my questions, law journals contribute to lawyers' effective practice. Doctors benefit by reading medical journals. Scholarly management journals are read only by academics so that they can produce more papers that other academics can read. HBR is, perhaps, the one management journal that executives read- and it would not help an academic make tenure in most places.

I had a chance to read Michael Stewart's The Management Myth and write an op-ed piece based on it, Begone, management gurus! Stewart skewers the OB and strategy stuff but there is more to management than that- finance and the quantitative sciences have applicable stuff that is based on sound theory. But I would go along with Stewart's proposal for a remake of the MBA programme by including a heavy dose of the classical liberal arts education.

Thursday, July 01, 2010

Trends in consulting

With big cuts in government spending, consulting firms face the heat all over the world. Talk of merger between two leading firms, A T Kearney and Booz and Co, underlines the need for consolidation in the industry.

But the shake-out won't disturb the dominance of the top three, McKinsey, BCG and Bain, argues Stefan Stern in the FT. Much of consulting firm, he points out, focuses not on glamorous things like strategy but on more mundane things such as efficiency and cost reduction.

Still, with some many MBAs out there in industry, it's a bit of surprise that there is still so much need for consulting firms. One reason is that the top firms do invest in knowledge and they have sought to broaden their services by hiring doctorates, lawyers, even musicians. Another is that in the corporate world, people lack time to sit down and think, to collect and analyse data. Consultants serve as auxiliary staff- no need for a full-time strategy or planning department, just call in the consultant when required.

Saturday, June 26, 2010

9% growth is within sight

It looks as though we will touch 9% growth this year itself, assuming the monsoons don't disappoint. Earlier, most forecasts suggested that growth would touch 9% only in 2011-12. If we do touch 9% this year, it will be in the face of a still incomplete global recovery. Conclusion: our growth of 9% is not entirely contingent on a global boom, as some commentators had claimed.

The challenge is to insulate 9% growth from the vagaries of the world economy. More on this in my ET column, Boom or no boom, India can grow at 9%

Tuesday, June 22, 2010

Tribunal for educational institutions

The foreign universities' bill has attracted much comment. But another important piece of legislation has gone unnoticed. This is a bill to set up tribunals at the National as well as state levels for educational instititions.

The Hindu reports:

The Educational Tribunals Bill, 2010, provides for the establishment of the State Educational Tribunals and the National Education Tribunal. The tribunals will exercise power and authority on service matters of any teacher or any other employee of a higher educational institution, on matters relating to affiliation of any higher educational institution (not being an University) with the affiliating University, on matters relating to unfair practices by any higher educational institution and matters that might be assigned to them by any other law for the time being in force.

This is a long overdue step. Teachers in educational institutions have little recourse against arbitary actions of management and the judicial processes are too slow to provide relief. Many of the reputed educational institutions, including the IIMs, have not thought it necessary to have an appropriate Grievance Redressal Mechanism or Appellate Authority, something one would regard as an elementary requirement of good governance.

New IITs - plenty of action

State governments have been generous in allocating land to the new IITs, reports BS. Most will have more land than the older ones. IIT Mandi in HP will have 513 acres; IIT Hyderabad 531 acres; IIT Gandhinagar 385 acres; IIT Ropar 500 acres; IIT Bhubaneswar gets 936 acres intended for 1100 faculty and 11,000 students- talk about thinking big!

Some are already operating from makeshift premises. Others plan to use research scholars for teaching until a core faculty of adequate size is in place. The build up of faculty strength so far is impressive. IIT Hyderabad already has 40 faculty.

I have never subscribed to the talk of 'faculty shortage' at the IITs and IIMs. There are ways and ways of getting faculty and I believe the newer IITs and IIMs will do a better job than the older ones because of the compulsion to deliver. Besides, there is virtue in newness- new leadership, a new campus, new ways of doing things. I believe the setting up of new IITs and IIMs is one of the best things to have happened in higher education.

Friday, June 18, 2010

Emerging market banks- home bias is best

Emerging market banks have done much better in the crisis than their counterparts in the west, especially banks in India and China. Return on assets in the crisis years, one finds, was higher than in the pre-crisis years! With loan growth poised to boom, many of the banks in emerging markets will soon catch up with western banks in terms of market cap.

They should not, however, develop global ambitions. The western banks have not succeeded, by and large, on the global stage except for three banks that have been global for a long time now (Citi, HSBC and Stanchart). Home bias is a better prescription for emerging market banks. More in my last ET column, Grow, but don't try to rule the world.

Saturday, June 05, 2010

Basel III will be delayed further

Tougher capital and other rules for banks are likely to be held back for longer than thought earlier, FT reports. The UK and the US believe that delay in implementation is preferable to diluting the norms.

The Basel rules were originally expected to be phased in by the end of 2012, but sources familiar with the discussions said that the latest idea was that the new rules were likely to be put in place between 2014 and 2016.

Another G20 source said that the transition period did not matter much because once the new regulations were agreed, banks would come under enormous pressure to meet them quickly or explain why they could not, even if the formal transition was much longer.

Tuesday, June 01, 2010

US bank reform

A mountain of labour producing a mouse. That's my judgement on the Senate bill on US bank reform. It's meant to convey to the public that Congressmen are being tough on banks without changing anything substantial on the ground. One of the things about the bill is that the details have to be filled in by the regulators later.

I wrote about this in my ET column but didn't get a chance to provide the link.

Prescriptions for the world economy

Not many expected sovereign debt to spook the recovery to the extent it has following the Greek/EU crisis. Deleveraging of private sector and household debt has proceeded apace. Now, there is pressure to deleverage government debt as well.

Nouriel Roubini and Arnab Das propose the following:

First, the eurozone must get its act together. It must deregulate, liberalise, reform the south and stoke demand in the north to restore dynamism and growth; ease monetary policy to prevent deflation and boost competitiveness; implement sovereign debt restructuring mechanisms to limit moral hazard from bail-outs; and put expansion of the eurozone on ice.

Second, creditors need to take a hit, and debtors adjust. This is a solvency problem, demanding a grand work-out. ....

Third, it is time for radical reform of finance. The majority of proposals on the table are inadequate or irrelevant. Large financial institutions must be unbundled; they are too big, interconnected and complex to manage. Investors and customers can find all the traditional banking, investment banking, hedge fund, mutual fund and insurance services they need in specialised firms. We need to go back to Glass-Steagal on steroids.

Last, the global economy must be rebalanced....
All but the third are unexceptionable. Going back to Glass-Steagal, to my mind, is infeasible and also inappropriate. Size is the problem; not scope.

Monday, May 24, 2010

Winners' curse in India's 3G auctions

I had meant to flag this article earlier but it escaped me. There is great jubilation over the Rs 70,000 crore the government is set to rake in from 3G auctions. Some people even think this makes amends for the telecom minister not having earned enough from the award of telecom licenses earlier.

Sumit Majumdar, writing in TOI, highlights the downside. One, the firms may go broke after having paid through the nose, so we will not see enough investmen in 3G infrastructure. Two, the firms that have bid may forfeit their security deposits and walk away from 3G in which we will need a fresh round of bidding. Three, the companies may be forced to charge consumers steep prices. He sums up the implications:
The diffusion of a 21century radical infrastructure which could be both a positive and disruptive influence for propelling Indias badly-needed knowledge revolution for the masses will not happen.Since the impact of general-purpose technologies at the individual level is profound,because of changes in the organisation of activities,the diffusion of a general-purpose technology such as 3G could have raised the return to cognitive skills and education.
The ability of 3G as a generalpurpose technology to have a phenomenal capacity to transform Indian society can be on hold.India can lose a golden opportunity to transform its society via a knowledge revolution using 3G technology.Indias 3G spectrum auction is fantastic for the exchequer but a fiasco for the common man.

Monday, May 17, 2010

A first for an Indian lady academic

Gita Gopinath becomes the first Indian lady to become a full professor at Harvard's Economics department, ET reports:

Before joining Harvard in 2005, she was an Assistant Professor of Economics at the University of Chicago's Graduate School of Business.

Prior to that she completed her Ph.D. in Economics from Princeton University.

Born in Calcutta, Gopinath has studied at the University of Delhi.

Thursday, May 13, 2010

Greek rescue: It's the banks, stupid

The Greek rescue is more about rescuing foreign banks with exposure to Greece than about rescuing Greece itself. Foreign banks' exposure to Greece is estimated at 76 bn Euro. A Greek default would mean a loss of upto 70% or 53 bn Euro. If other countries such as Spain and Portugal were to default, banks' losses would increase.

The 750 bn Euro rescue package is intended to shock and awe. But this is hardly the 'cost' of the rescue. The cost of the rescue, assuming the guarantees in the package are all invoked, would be the difference in the market rate of interest and the rate of interest charged on the package- approximately 4%. This amounts to 30 bn Euro, which is less than what banks would lose on Greek debt alone. That's the maximum cost that taxpayers outside Greece will pick up.

As for Greece and other troubled economies, there will be huge adjustment costs. For Greece, fiscal consolidation of 11% over a three year period. Thus, the so-called rescue places the burden of adjustment overwhemlingly on Greece and other economies. Why? So that again there can be a massive bail-out of private banks using public money. The markets don't think will work because they don't think this sort of burden will be acceptable to the people of those countries.

The more sensible course would be to restructure debt and accept losses on bank exposure to government debt. Some of these losses could be made good by the governments concerned. This course would distribute losses more evenly and make for smoother adjustment.

More on this in my ET column, Why the Greek rescue won't work

Wednesday, May 12, 2010

Why single out Goldman?

My earlier post on the fraud case against Goldman has drawn some strong responses. I can understand the anger against firms such as Goldman. But it cannot be that Goldman becomes a target because it has been more successful than others. The case against the integrated investment banking model, with its potential conflicts of interest, has not yet been made.

An article in FT points out the pervasiveness of the practices that form the basis for the present against Goldman.

Of the banks that dominated the market a few years ago, why would the government target the only one to survive the crisis financially intact? It is not because Goldman was unique. In Abacus 2007-AC1, Paulson & Co, a hedge fund, suggested securities for the deal and also bet against it in a swap with Goldman. That feature is not uncommon. According to a recent report from ProPublica, there were 26 deals in which Magnetar, a hedge fund, both sponsored CDOs and bet against them. (Magnetar says these deals were perfectly legal.) They were arranged by Citigroup, Credit Agricole, Deutsche Bank, JPMorgan Chase, Lehman Brothers, Merrill Lynch, UBS and others (not Goldman). There are hundreds of non-Goldman CDOs that no one has yet investigated.

.....More fundamentally, if the other big investment banks had made similar “net short” trades in 2007, there would not have been a financial crisis. Bear Stearns, Lehman Brothers and Merrill Lynch collapsed because they took massive positions in the opposite direction. Given the cost of government bail-outs, why chastise the only prudent investment bank?
I am no unabashed admirer of Goldman. But it is hard to resist the impression that Goldman is being targeted because it survived and remains profitable. That is quite ridiculous.

Sunday, May 09, 2010

Goldman in the cross-hairs

I can't comment about the merits of the particular case in which SEC has brought allegations of fraud against Goldman. But the broad case about investment banks having to make disclosures of all kinds of positions- their own and their clients- is, I am afraid, rather weak.

I would go along with Blankfein that when Goldman sells a package of securities to qualified investors, it is for them to take a view on the attendant risk. What view Goldman or any other clients should not be of interest to them.

I dilate on the Goldman case in my last ET column, Gunning for Goldman.

I find my sentiments echoed in an FT piece. The author suggests Goldman is becoming a scapegoat for others' failures: unease has to do with the possibility that Goldman has become a scapegoat for millions of homeowners and investors psychologically unable to admit at least partial fault for succumbing to the madness of crowds and lure of easy money. The one investment bank that hedged appropriately and enjoyed a hugely profitable rebound is an obvious target. “The idea that Wall Street came out of this thing just fine, thank you, is something that just grates on people,” said Senator Ted Kaufman. Goldman may or may not have done anything illegal, but most Americans do not give them the benefit of the doubt.
Interestingly, the author asks whether the firm's Jewishness is stoking prejudice:
In Goldman’s case, some even wonder whether the group’s perceived Jewishness has infected legitimate criticism of it with centuries-old prejudices against a group with a long history of being scapegoated. Michael Kinsley, writing in AtlanticWire, cites echoes of the infamous blood libel. New York Times columnist Maureen Dowd earned rebukes from theologians after writing that “blood-sucking banks” like “Goldmine Sachs” were “the same self-interested sorts Jesus threw out of the temple”.

Thursday, May 06, 2010

Nitin Nohria, HBS Dean-designate

The process adopted for the selection of Nohria as Dean, HBS, is interesting. Harvard President Drew Faust consulted a 12-member advisory committee of faculty from HBS and three other academics from Harvard. Around 30 other members of HBS also shared their views with her. Faust also spoke to Harvard alumni and figures from the world of business. It is interesting that faculty at HBS itself had a dominant say in the selection of the Dean.

I have wondered why it is that academics, who are employees of an institution, are consulted when it comes to selecting a leader. In the corporate world, you don't select a CEO by soliciting the preferences of VPs and GMs. I guess the reason is that academics are best motivated only when they have a clear sense of ownership in the institution. They can't be given this sense through stock options. Instead, they are giving a say in decision-making in administrative as well as academic matters.

Stefan Stern, writing in the FT blog, thinks that Nohria's appointment may have to do with his focus on ethics and his questioning the traditional b-school focus on shareholder value:
Together with his colleague Rakesh Khurana, Prof Nohria has challenged the orthodoxy that claimed there was little wrong with the conventional MBA syllabus or with the approach taken by the élite business schools. Both of these things played a part in contributing to the over-confident mentality which dominated business and finance, and which led to the great financial crisis. By appointing Prof Nohria, Harvard University has signalled that it is not frightened of debate, or reform - indeed, it wants to play a leading role in both these activities.
Along with Khurana, Nohria has championed the equivalent of the Hippocratic oath for MBAs, whereby they pledge to commit themselves to a code of ethics. I don't see that the Hippocratic oath has done a great deal for standards of doctors, especially those who have invested heavily in capitation fees. So, I am not sure what such an oath will do for corporate managers.

I do believe that the MBA curriculum needs big changes. But not quite in the way it is suggested above. I cannot see much purpose in loading it with ethics courses- and, certainly, I would question the presumption that faculty teaching such courses are any more 'ethical' than others. My own preference is for introducing more liberal arts courses and downgrading the repetition of 'hard' courses in accounting, finance, operations, etc

It will be interesting to see what changes Nohria rings in. As the FT blog points out, his expertise in organisational behaviour should be useful- there's a lot of 'behaviour' from colleagues he will have to take in his stride.

Wednesday, April 21, 2010

C K Prahalad

The business community in India was effusive in its praise for C K Prahalad. So were some commentators in the media. That Prof Prahalad, an alumnus and former faculty member of IIMA achieved fame and recognition, is something we should all be proud of. But what one missed was a serious and critical evaluation of his contribution.

Today's Business Standard editorial makes up for what was missing elsewhere. The edit makes three important points:
  • Prahalad was good at articulating existing practices rather than predicting future trends. 'Core competence' had come into being at many MNCs long before Prahalad wrote about it. This stands to reason. That is what the case method that Prahalad was raised on at IIMA and HBS is all about.
  • Co-opetition, taking the customer into account in designing products, is elementary marketing
  • Bottom of the pyramid, his most famous theory, is not about making money from the poor, it is more about designing products for the lower middle class in the rural areas.
Let me add: BoP has little to do with poverty alleviation. Companies do little to alleviate poverty when they address the mass market, they only take care of their own shareholders. You alleviate poverty not by viewing the poor as customers but viewing them as producers and giving them purchasing power, a point that Aneel Karnani, Prahalad's colleague at Michigan, made in his devastating critique of the BoP thesis a few years ago.

The idea that we can leave it to companies to alleviate poverty can be dangerous because it provides another argument for government to vacate the space, something that neo-liberals would pounce on. Thank God, we are thinking in terms of right to education and right to food instead of embracing the BoP thesis.

The BS edit has a scathing finale:
Perhaps the best commentary on its (BoP's ) efficacy came from Praja, the BOP company Prahalad co-founded to provide a platform for common people to personalise their own experiences on the Internet. In 2002, the company was sold having made a $55 million loss and laid off one-third of its staff!
Must people abandon their critical sense in paying tributes to the departed? Whatever Prahalad's gifts of exposition, comparing him with Peter Drucker was quite a stretch.

Thursday, April 15, 2010

Foreign universities' bill to bar for-profits

The foreign universities' bill to be introduced in parliament soon will bar non-profits, TOI reports.

This fine-print is the third restrictive clause the Union Human Resources Development (HRD) ministry has introduced in the Foreign Education Providers’ Bill, which aims to allow international universities to set up campuses in the country. The other two conditions include forbidding foreign universities from repatriating funds to their home country and setting up a minimum corpus of US $11 million.

I am not very sure that this is desirable. Agreed, one associates quality in education with non-profits. But, in India, we have a huge number of for-profits in various fields, notably engineering, management and medicine, which are non-profit on paper- these are the ones that charge exorbitant sums as capitation fee. Would it not be better to have a system where for-profits from abroad, with a transparent fee system, take on the covert for-profits in India?

Again, there are many institutions that generate substantial profit through hefty fees but plough them back into the institution. They are non-profits on paper since they are registered as Charitable Trusts. No point claiming the high moral ground when it comes to for-profit institutions from abroad.

Air India's woes

To many, Air India (which now encompasses the erstwhile Air India as well as Indian Airlines) sums up all that is bad about commercial enterprises run by government. It has made huge losses and people would say that is very typical of the public sector.

I argue in my ET column, Why Air India is in trouble, that this explanation does not hold nor is it true that Air India's losses are the result of the troubled merger between Air India and Indian Airlines.

The two basic reasons for Air India's mounting losses are huge investment in fleet expansion and high leverage arising from the failure to strengthen the two airlines' equity base before exposing them to greater competition. Needless to say, in government there are huge incentives for signing contracts for the purchase of aircraft.

There was talk of bringing on board some luminary from the private sector who would wave away Air India's problems. Now, the government has settled for high-profile businessmen and a foreign COO. Neither can make a big difference- N Vaghul, formerly of ICICI, was on the board of Air India for many years until it ran into its present crisis.

Wednesday, April 14, 2010

Tackling the Naxal problem

Congress General Secretary Divijay Singh has written the most insightful piece on the Naxal problem that I have come across so far. He is critical of home minister Chidambaram's approach and doesn't mince words saying as much.Which makes me wonder whether this is an attempt on the part of the party to rein in Chidambaram when he seems to have the overt support of the PM.

Singh's main points are:
  • The Naxals cannot truly claim to espouse the cause of the tribals. They have had no difficulty making peace with businessmen and politicians- for a price. Even the mining interests, which are said to disrupt tribal life, have continued unhindered in Naxal areas
  • Chidambaram is wrong in treating the Naxal problem entirely as a law and order problem- tribal issues need to be addressed
  • We need to learn from the AP model of tackling Naxalism: development plus police action
Singh is spot on. Chidambaram has created a massive problem where none existed by setting an artificial deadline for solving the Naxal problem: two or three years. Setting such a deadline spells trouble because it means use of massive force with all its consequences- such as the recent killing of 76 CRPR jawans.

Why do we need to solve the Naxal problem in two or three years? There is nothing to suggest that the problem is of alarming proportions or is disruptive in any way. If that were so, it would have been reflected in national or regional economic growth. It hasn't.

In the urban areas, the mafia coexists with the forces of law and order. An equilibrium is established in which the mafia flourishes without in any way impinging on economic activity or even orderly life. The Naxals are a form of mafia in the tribal areas. We have put up with insurgency in the North-East for over 50 years. Where is the urgency to end the Naxal problem? Patience and perseverance are required, not trigger-happy solutions.

Chidambaram may be right in refusing to talk to the Naxals. But why is the government not talking to the tribals? We need to enter into a dialogue with them as to how they can participate in decisions that afffect their lives, whether it is mining or timber, and what is required by way of development assistance.

The use of massive force is misguided and it is bound to be counter-productive. Sending the CRPF or the army will only bring recruits from the tribals to the Naxals. The answer to insurgency within the country (as distinct from insurgency in border areas) is sustained police action. That is the lesson from AP. It was AP' s success that drove the Naxal leaders into Chhattisgarh and other parts of the country.

Some of these states are new and the police force may be underdeveloped. We need to enhance their capabilities. In AP, police officials were given huge war chests for developing informers. Intelligence was used to target the Naxal leaders. This method produced dramatic results. The Indian state has developed its own recipe for dealing with internal terrorism: encounter killings.

It defies imagination as to how an outside force, such as the CRPF, can tackle the Naxals. You need local contacts, you need to know the local language and you need to understand the terrain.

Chidambaram's technocratic approach is seriously flawed. Development and police action are the best answer to the Naxal problem, not overwhelming use of force. Patience is required. We must be willing to put in ten years of low key effort. This won't make for sound bytes on TV but it will produce results.

Finally, thank God, the suggestion to use the army and the air force has been shot down. Had it been accepted, that would have ended all our hopes of winning over the tribals and brought the Naxal problem into the cities.

Monday, April 12, 2010

Basel talks on bank capital

The one thing that is certain about international bank regulation is that capital requirements for banks will go up. The uncertainties are two: how much and over what time? We should have some idea by the end of this week when the Basel committee on banking superivsion meets representatives of banks to discuss possibilities.

One key item is the core capital requirement, currently pegged at 8%. In the wake of the financial crisis, one proposal was that tier I (which is half of core capital) should itself be 8%. This looks unlikely now given the resistance from banks.

Another item relates to liquidity. On this item, FT reports:

The liquidity proposals come in two parts: one, known as the Bear Stearns rule, requires banks to have enough liquid assets on hand to survive a 30-day crisis, while the other, nicknamed the Northern Rock rule, requires banks to have stable long-term funding, favouring deposits and heavily disfavouring wholesale sources. It is the latter rule that has attracted most criticism.
Good banks today operate with capital of 12-13%. We should expect this to rise to 15-16%. By what date? The earlier deadline for introduction of higher capital norms was end 2012. This may be pushed back or the introduction of new norms may be calibrated over time.

Sonia's tough line on RTI amendments

Sonia Gandhi has indicated her opposition to some of the amendments to RTI that the government is contemplating, TOI reports.

"It is important, therefore, that we adhere strictly to its original aims and refrain from accepting or introducing changes in the legislation or the way it is implemented that would dilute its purpose. In my opinion, there is no need for changes or amendments. The only exceptions permitted, such as national security, are already well taken care of in the legislation," she said.

Sonia Gandhi said the problem with the RTI Act is about "public lack of awareness of the RTI and the harassment of applicants" and "these problems need to be addressed."
Mrs Gandhi is right. One amendment that has been causing concern is giving the public information office the right not to respond to what he regards as "frivolous" applications. Another relates to keeping the higher judiciary out of the purview of the Act. The RTI Act is also in danger of being undermined by rising delays in disposal of appeals to the CIC. This needs to be addressed because information delayed is often information denied.

The RTI Act is revolutionary in its thinking and scope and will go down as one of the great achievements of UPA-I. The right to education and the right to food, now under consideration, will further bolster UPA's claim to standing up for the aam admi. In defending the RTI Act and in pushing for rights in other areas, Mrs Gandhi has displayed uncanny political instinct.

Thursday, April 01, 2010

Foreign Universities: mentoring a better entry route

I said in an earlier post that I was sceptical about quality, foreign universities setting up full-fledged campuses in India. that is because the economics of higher education militates against their entry.

Quality comes from putting together the best faculty, infrastructure and students. If foreign universities are to maintain their standards in India, they will have to send some of their faculty to India. That would mean huge faculty costs. Quality infrastructure would also be expensive.

Put the two together and you have a high fee. If an MBA costs Rs 45 lakh in the US, it would cost around Rs 25-30 lakh here. If you spend Rs 45 lakh in the US, you can hope to recoup it in reasonable time because you will be earning in dollars. Recouping Rs 25-30 lakh in India is not as easy. So, a fee of this order will shut out the mass market and the best students. Schools charging such fees will be rich kids' schools. Then, you don't get a high quality of output.

It makes more sense for foreign universities to go down the mentoring route. I read that this is proposed for Yale's association with the 14 innovation universities planned. There are precedents for this- the setting up of IITs and IIMs.

IIMA benefited from a collaboration with HBS, the expenses being underwritten by the Ford Foundation. HBS faculty came in batches of about three at a time for about five years. The big gain was IIMA faculty being sent in batches of about six to the International Teachers' Programme at HBS for a nine-month stint. It got faculty who had joined from diverse backgrounds to get quickly acquainted with the course contents and pedagogy of a top b-school and it also made for a certain common approach and camaraderie amongst the early faculty. This is one reason why IIMA made a quick mark as an institution of excellence.

Faculty exchanges, help with the curriculum, governance structures and norms- these are areas where mentoring would make differenc. Foreign universities can earn fees and they have an opportunity to carry out India-related research. This makes more sense than foreign universities coming in.

More in my ET column, Foreign varsities as mentors.

Monday, March 29, 2010

Foreign bank licenses

Credit Suisse and ANZ have been given banking licenses, FT reports. The report also says that eight more banking licenses are to be awarded shortly, including to corporate groups, such as Reliance and Tatas, although a report in today's Economic Times discounts this possibility.

My own view is that both foreign banks and corporate groups can be licensed more freely for exclusively rural ventures. This mitigates regulatory problems and dovetails nicely with the overriding objective of achieving greater financial inclusion. More on this in my ET column, Let foreign banks into rural areas.

Sunday, March 21, 2010

Foreign Universities' Bill

There are two issues about the Foreign Universities' Bill. Will it cause an influx of quality institutions from abroad? And should foreign universities be subject to quotas and other norms applicable to government institutions?

On the first issue, I agree with what many others have said. It is unlikely that we will have full-fledged universities with campuses set up by quality institutions. The economics militates against this possibility. Ours is a cost-sensitive market as so many foreign firms have discovered. Today, foreign car manufacturers all want to get into the small car segment. Volkswagen, Skoda, Ford all have launched small cars. Carlos Ghosn of Nissan says he would like to introduce a car that is even cheaper than Nano!

The same applies to education. To succeed, you need to be able to tap the mass market. I would say this is even more true of education than of manufacturing. Because you get the talent only if you tap the mass market. The secret of the success of IITs and IIMs is that they attract the very best- and they do so because they are affordable, despite the steep increase in fee at the IIMs in recent years. A high quality US school coming into the Indian market would be viable only at a steep cost. I would assume that an MBA fee would somewhere between the Rs 20 lakh that ISB charges and the Rs 45 lakh at a US school- say, Rs 35 lakh.

Now, somebody who can afford Rs 35 lakh will also be able to Rs 45 lakh and would prefer to go abroad and get the broader international exposure. Secondly, a price tag of that order automatically screens out the best talent in India. It will be a rich kids' school, which means its products will not be highly valued by the market.

It is striking that foreign universities have not taken off even in more affluent markets than ours- such as Singapore, China and Israel, as a very good story in today's TOI points out:

Singapore can justifiably boast about attracting some top-notch institutes — the University of Chicago, INSEAD, Tisch School of Arts, DigiPen Institute of Technology — but even today, the sector is undeveloped. .... This, despite the manner in which the country “courts the universities: the EDB played up Singapore’s cosmopolitan nature, and then used tangible material resources in the form of financial and other incentives,’’ observes Kristopher Olds, a professor at the University of Wisconsin-Madison who’s taught at the NUS for six years.

....The University of New South Wales (UNSW) also benefited from subsidies upwards of $80 million. Even so, within months of being set up, UNSW folded up citing its “unsuitable financial model’’. Three years ago, the John Hopkins Centre, which received $52 million in funding since its 1998 arrival in Singapore, also closed down as it did not meet the performance benchmark. And the UK’s Warwick University, which was to set up a full campus in the real sense of the term, backed out at the last minute.
The two universities that China can boast of are Nottingham and Liverpool - no great shakes, by world standards- and both have local partners, as required by law. Even Israel, with all its close links to the US, managed to attract only the low-grade institutions. We have to face up to the fact that no country has developed a great university sytem through imports. All great universities are home grown.

As for foreign universities being subject to quotas, well, since private universities in India are not subject to these, it's hard to see how we can impose these on foreign universities. Will the IITs and IIMs suffer as a result? Well, they haven't lost out in any way to domestic private institutions on this account, so quotas certainly won't be the reason for losing out to quality institutions from abroad- assume these come in in the first.

Friday, March 12, 2010

Shrinking CITI

Vikram Pandit told the US Congress that he expected to see Citigroup return to profit of around $20 bn by the end of 2011. He also proposes to sell 40% of Citi. In other words,Citigroup will shrink quite a bit even as it turns profitable. This is an acknowledgement that Citigroup is too big to be profitable, quite a reversal from the earlier credo that it could become more and more profitable through mergers and acquisitions.

Citigroup will be a leading case of a bank relinquishing size even without regulatory norms requiring them to do so- the proposed norms that would link bank capital to size have yet to be announced.

Separately, in an interview with FT, Pandit has spelt out what the focus of the restructured Citi would be:

The US consumer business is among Mr Pandit’s four priorities for investments once Citi stops losing money. The others are retail banks in emerging markets, the cash management unit and equities and commodities in the investment bank.

There is a bit of eastern philosophy in the interview for those interested:
"Doing the right thing for all our stakeholders – our clients, our shareholders but also other parts of society. We need to understand and embrace the responsibility that is put on banks by the general public

This belief was shaped by my Eastern upbringing, the belief that if you don’t do right now you will pay in the next life, and the importance I attach to reputation and credibility".
Pandit's remarks require a little tweaking. If he doesn't do the right thing, he and Citigroup will pay in this life, not the next.