'Small ticket' reform is key to India's success

There is a continuous clamour for 'big ticket' reform. This will be heightened in the week of the coming budget. I never ceased to be surprised about this. The success of the Indian economy, I argue in my ET column, is all about 'small ticket' reform.

'Big ticket' reform in a democracy can spell popular unrest. One example of such reform that has remained in abeyance is 'reform' of labour laws ( a euphemism for hire-and-fire in the organised sector.) 'Small ticket' reform is all about gradualism, of waiting and judging the results before proceeding further.

The best example of 'small ticket' reform is disinvestment of PSUs. Thanks to phased disinvestment, the government is sitting on a gold mine in listed PSUs and PSBs. Had they been sold off at one go, the exchequer would have lost heavily. The 'presumptive losses' from 'strategic sale' of PSUs, which Arun Shourie attempted, would have been far higher than in the sale of 2G spectrum.

Had this gone through, Shourie would today be facing the CBI not just for his actions as minister of telecom but as minister of disinvestment as well!

Western dean for Chinese B-school

John Quelch, a former dean of the London Business School, is set to take over as dean of the China Europe International Business School (CEIBS), the Economist reports. Quelch is a former faculty of HBS, where he was a 'star professor' of marketing. CEIBS is said to be a partnership between the European Commission and the Shanghai Jiao Tong University.

The news is interesting for several reasons. For one thing, China appears to have opened its higher education doors to foreigners, even if it requires a partnership with a local entity. Secondly, it is willing to import a dean for one of its top institutions. This is not just a matter of paying top dollar. It is a matter of being open to a foreigner as a leader. Is there a single institution in India that has a foreigner as dean or director? For that matter, is it possible even for an NRI to become the director of any of the IIMs?

The IIMs preach the virtues of an open economy and globalisation to their students but they operate a closed shop when it comes to manning leadership positions. For the older IIMs, it is inconceivable that there can be a director from outside the IIM system. At IIMA, it is inconceivable that the director can be anybody from outside IIMA itself!

Until recently, IIM directors were chosen by their boards and through a process of nomination by eminent persons, a process that restricted the pool of talent to choose from. Lately, the ministry has required the positions to be advertised but even the top IIMs do not advertise internationally.

Education in China, like other spheres, is still controlled. Business schools are still in their infancy. Yet, when it comes to getting talent for leadership positions, China seems capable of greater boldness than an open society such as India. Makes you wonder whether democracy necessarily scores on every count. You can have a democratic society with some of the most closed minds.

No fee hike for IITs

The decision of the IIT Council to reject the Anil Kakodkar committee's recommendation for a fee hike has not received the attention it deserves. The Kakodkar committee wanted the IITs to raise the annual fee from Rs 50,000 to Rs 2.5 lakh so that they could generate more funds on their own. The IIT Council, headed by HRD minister, Kapil Sibal, has shot down the proposal, India Today reports:

HRD minister Kapil Sibal, who chaired the IIT council meeting to discuss the report on Friday, said: "This fee hike would act as a deterrent to IIT aspirants." The IIT council also left the decision on increasing hostel fees to the respective board of governors in each institute. An HRD ministry official said: "The mathematical model proposed by the committee has to be reworked. The committee will now take a month to submit its report after considering the feedback and the response of the IIT council, which comprises the directors of all IITs."

The IIT Council's stand is commendable. It clearly does not accept the position that because IIT students can get loans and they can get jobs that can enable them to service those loans, students must pay a higher fee. A high fee and large loans are a deterrent to aspiring students. But how come this logic has not be applied to the IIMs and the IIMs have raise their fee at will in recent years? The HRD ministry needs to be consistent in its approach to commercialisation of education.

More on Malegam committee

I commented yesterday on the Malegam report on microfinance. A couple of other observations.
The RBI needs to bestow greater thought to the composition of its committees. The Malegam committee, with due respect to the eminence of some of its members, does not have much expertise either on the rural economy or on banking. True, the RBI committees have the benefit of RBI's expertise but simply having people of eminence on such committees does not suffice.

A more serious problem is the presence of two members of the RBI Board, Y H Malegam and Kumaramangalam Birla. It is not a good idea for Board members to take on operational roles. It cannot be that, as members of a committee, they make recommendations and, then, as members of the Board, they sit in judgement on those very recommendations or the actions taken based on these. There is a clear conflict of interest. Surely, this country has enough expertise for committees outside the Board of RBI.

Malegam committee on microfinance

The Malegam committee's report on MFIs came out a while ago. The intention is good: they want to rein in MFIs and subject micro-credit to norms and disciplines. But micro-management of the microcredit by the RBI, which is what the recommendations amount to, is not the right approach. It will be difficult for the regulator to ensure that not more than two MFIs lend to one borrower, that the total sum borrowed does not exceed Rs 25,000 or that the cap on interest rate is always observed.

My solution: put the onus of credit discipline by banks. The way to do this is to subject all lending by banks to MFIs to a consortium. Then, it will be up to the banks to see what limits they want to impose on borrowers, what the interest rate caps should be, etc. The banks will also be obliged to monitor the end-use of funds and they will be able to ensure that runaway lending by MFIs does not happen. More on this in my ET column, MFIs: Malegam misses the point.

Incidentally, on the very day the Malegam report came out, the RBI decided to allow banks to restructure loans made to MFIs. This display of regulatory forbearance was uncalled for. Clearly, the attempt is to sweep under the carpet the losses to banks on account of loans to MFIs. But does the RBI believe that, after restructuring loans made to MFIs, banks will be in a mood to resume lending in a big way? There is not the ghost of a chance.

Debt restructuring the only option for EU

The EU is planning to top up its rescue fund and improve the quality of funding by way of reassuring the markets. These are cosmetics. They just won't work. The EU has to act collectively to get investors (creditors) to restructure. Either that or you will have serial defaults down the road.

Sovereign default is regarded as taboo, as something that countries must avoid at all costs. But countries that have defaulted haven't done badly at all. More on this in in ET column, Who says it doesn't pay to default?

Forecast for India in 2011

Growth will match or exceed 8.5-9% projected in 2010; the EU will hold together despite crises, so we need not fear disruption of financial flows; inflation rate will stay high, perhaps 7-8%; the UPA government will survive and very little of the mud flung at it on account of 2 G sales will stick.

More in ET column, What lies in store for India in 2011?

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.