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.

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

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.

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.

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.

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.

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%

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.

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.

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.

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.

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.

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.

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

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.

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:

......my 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”.

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:
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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.