Paralysis in banking?

The political backlash to the PNB scam is taking its toll on public sector banks (PSBs). The resolution framework proposed by RBI is likely to make matters worse- most default cases will head almost by, well, default, to the NCLT. PSBs are being denied the capital they need and they are likely to be in a state of limbo while private sector banks steal market share from them.

This is happening because policy makers want this outcome. They want to shrink the role of PSBs and increase that of private sector banks. If the present government is returned to power in 2019, it will move to amend the Banking Regulation Act so that the government's share in PSBs can fall below 51%, thus paving the way for privatisation of at least some PSBs. Until then, however, the Indian economy will pay a price for PSBs being frozen where they are.

More in my BS column, The spectre of banking paralysis.

  

Hysteria over PNB fraud

The Rs 11,300 crore fraud has create something hysteria over conditions at PSBs. Make no mistake, the sum involved is large and we should be legitimately concerned. However, to use the fraud to make the point that all PSBs are rotten is quite a leap. It's hard to resist the feeling that the fraud is being used to create a case for eventual privatisation of some PSBs and for shrinking the market share of PSBs.

When it comes to frauds, ownership cannot be said to be the crucial factor- think of the colossal frauds that have felled or battered some of the best known banks in the world. And fraud is just one form of violation of regulations and laws. International banks  have been involved in numerous other violations in recent years- LIBOR rigging, exchange rate manipulation, mis-selling of retail products, etc. Public memory may be short-lived but those with long enough memories will recall that some of the principal players in the securities scam of 1992 in India were foreign banks.

More in my article in The Wire, Public sector banks don't have a monopoly over fraud.

RBI's Resolution Framework for Stressed Assets has serious issues

The RBI's revised framework for stressed asset resolution, released on February 12, has serious issues. The intention is to minimise negotiations between lenders and borrowers and to push most cases to the NCLT. This is, in my view, not the best course to  pursue. A negotiated settlement between lenders and borrowers is the best way to salvage valuable assets. Banks face a lethal combination of higher provisions and low recoveries as a result of the RBI's new framework.

My full article in BS:

Resolution framework will crimp growth

T T Ram Mohan


Enough of crony capitalism — that seems to be the tough message of the Reserve Bank of India’s (RBI’s) Revised Framework for Resolution of Stressed Assets released on February 12.

The RBI has scrapped the various schemes introduced over the years, such as Corporate Debt Restructuring, 5/25 Refinancing of Infrastructure, Strategic Debt Restructuring, and S4A. These were all ways of “kicking the can down the road”, that is, giving more time to promoters to make their companies or projects viable while keeping provisioning costs low for banks. The RBI seems to have concluded that these have not delivered — they only enabled promoters to retain control over assets while imposing heavier costs for banks at a later point.

Under the revised framework, bad loans are to be more quickly recognised and provided for. From March 1, for all loans above ~20 billion, resolution must commence within 180 days of default. Where banks and borrowers cannot agree on a plan within 180 days, resolution will happen under the aegis of the National Company Law Tribunal (NCLT). The defaulting promoters will stripped of ownership and control. Their assets will be sold to the highest bidder or simply liquidated.

The RBI is administering strong medicine to rid the banking system of the non-performing assets (NPAs) problem at one go. This is a laudable objective. However, the RBI must ensure that the medicine does not kill the patient. Resolution is best effected when economic growth is buoyant. Borrowers then have a better chance of returning to health and repaying loans. Lenders are better placed to absorb losses. The revised framework runs the risk of undermining the ongoing economic recovery and hence worsening the NPA problem in the very process of resolving it.

Why so? First, NPAs and provisioning in the banking system are bound to rise as more stringent norms kick in. Most of the ~1.53 trillion that public sector banks (PSBs) will get from the government over two years under the recapitalisation plan could end up being absorbed by provisions — and more may be required. There will be no capital to support credit growth.

Secondly, 180 days is too short a period for achieving resolution. The RBI could argue that banks have had enough time over the past two or three years to achieve resolution. But, then, banks lacked the capital to take the hair cuts on loans required to restore viability to projects. The present bank recapitalisation plan should have happened three years ago. Delayed resolution is largely the result of delayed recapitalisation. After providing capital belatedly, expecting bankers to arrive at resolution in 180 days’ time is a bit thick.

Thirdly, the requirement that all bankers should agree on resolution is unrealistic. The RBI must modify the stipulation to state that banks that account for, say, 75 per cent of the exposure must agree. Else, very little resolution may happen at the bankers’ end.

Fourthly, while banks are now free to do whatever it takes to achieve resolution, the old problem remains. Which public sector banker will take large write-offs of loans and risk investigation after retirement? The framework requires resolution proposals to get at least an investment grade rating from rating agencies. How does a banker decide whether he should get a minimum acceptable rating with a low write-off or a better rating with a high write-off?

The cumulative result of factors two, three, and four above will be that the vast majority of bad loans will head for the NCLT. This is bound to clog up the NCLT system. Besides, the NCLT process is yet to be tested. For the sale of assets to be worthwhile for banks, we need a large number of bidders. That is not the experience we have had in the assets so far put up for sale. There are reports of waning interest amongst foreign bidders.

As more and more assets come up for sale, there is every prospect that bidders will dry up. If there are no bidders, assets would have to be liquidated. This would be a disaster for banks — liquidation will fetch them very little. It would also be a tragedy for the economy — huge infrastructure assets that are stalled will amount to nothing.

Growth is the best elixir for an NPA problem. In the early 2000s, India had an NPA problem that was just as bad. We resolved it by growing our way out of it. Large projects that have been stalled for want of funds are an important factor constraining growth in recent years. So is inadequate growth in credit to the MSME sector.

Bank recapitalisation was supposed to be the key to reviving credit growth. In his Budget speech, Finance Minister Arun Jaitley claimed that the recapitalisation bonds of ~800 billion issued in 2017-18 would lead to additional credit of ~5 trillion. The markets cheered because they thought PSBs would grow credit and profits.

What’s happening on the ground is quite different. Eleven PSBs have come under Prompt Corrective Action (PCA). The finance ministry has given some of the PCA banks targets for <i>shrinking<p> their balance sheets in the next couple of years. The stronger PSBs, including State Bank of India, have already been hit by rising provisions. The RBI’s revised framework spells even higher provisions and poor recovery for banks. Credit growth cannot possibly revive under these conditions.

Over the past two years, demonetisation and the introduction of the goods and services tax created short-term disruption while promising long-term gain. Another policy-induced disruption is the last thing we need in 2018-19. The RBI must re-examine its revised framework. The government must plan for higher capital infusion into PSBs and rethink its idea of shrinking some PSBs.

EPW reviews my book on banking crises

EPW carries a review of my latest book, Towards a safer world of banking: bank regulation after the sub-prime crisis, by Sabri Oncu, a well-known scholar and financial economist.

Stalingrad anniversary

February 2 marked the 75th anniversary of the fall of Stalingrad. This was a big event in Russia, of course, with President Putin flying over to Volgograd (as the city is now named) to commemorate the event. But we heard nothing of this epochal event in India, partly, I guess, on account of the media's preoccupation with trivia.

Stalingrad was, perhaps, the decisive turning point of World War II. It showed that the Wehrmacht, the Germany army, was not invincible and that Hitler's opening an Eastern front could pave the way for his defeat. Following Stalingrad, the Wehrmacht lost the initiative and was mostly on the defensive on the Soviet front.

In Stalingrad, the elite Sixth Army of the Wehrmacht came to be decimated. Of around 300,000 soldiers in the city, 100,000 were captured and only around 9,000 made it back after the end of the war, the majority perishing as prisoners of war.

Much has been written about Hitler's conduct of operations in Stalingrad, whether he was right to take the city in the first place, whether the Sixth Army should have hung on after it was encircled by Soviet troops and so on.

Well, Hitler's plan was to seize the oil riches of the Caucus south of Stalingrad. The city was a key junction and supply point and hence needed to be held in order to safeguard the armies that had ventured south.

Hitler's strategy was right but it came unstuck because he had underestimated the strength of the Soviet Union. Hitler thought that once his armies tore into the Soviet Union, the government and its army would simply collapse. This did not happen. Stalin was able to throw endless numbers of troops at the Germans and Soviet industrial capacity was far greater than German intelligence had supposed.
These fundamentals could not be altered and were bound to assert themselves no matter what particular tactics Hitler followed in respect of operations in Stalingrad. The whole controversy about Hitler's ignoring the advice of his professional generals and allowing the Sixth Army to perish is  secondary to the fundamentals.

Russia Today has an interesting article on the subject.

Robert Parry, peerless journalist

Robert Parry, an outstanding American reporter, who fearlessly exposed the wrongdoings of those in authority, passed away recently. Our media is quite insular, so his passing went largely unreported in the Indian media.

Parry worked for the Associated Press and Newsweek among others. He was the man who uncovered the Iran-Contra affair in Reagan's time. This involved Israel selling arms to Iran in exchange for the release of hostages. Some of the proceeds of the sales would be diverted to the rebels fighting the Nicaraguan government. The US could not sell arms directly to arm as there was an arms embargo on Iran at the time.

Parry also exposed how Nixon had struck a deal with the Vietnamese to prolong the fighting so that Humphrey would not win the Presidential elections against him and how the Reagan administration colluded with drag traffickers (of all people). In recent times, he tenaciously questioned the Russiagate affair seeking to implicate Russia in the last US Presidential polls that saw Trump being elected as President.

Parry found himself marginalised in the mainstream US media, which, as everybody knows, works closely with the US establishment and the intelligence agencies to promote the establishment agenda. He had to start his own website in order to carry on with his work.

Here is one tribute to him and here is another.

One journalist paid him this tribute:

I would suggest that it is [an] underlying devotion to the plight of mankind which allowed Robert Parry to become Robert Parry. It wasn’t his connections, his political opinions, his ideas, or even his raw talent; it was the fact that he cared so much. The fact that he couldn’t dissociate himself from the horrors of this world, the evil things humans are doing to one another and the omnicidal trajectory we appear to be headed along. He saw it all, he felt it all, and he let it move him.

This is not typically what you hear about a journalist- from fellow journalists. 

Budget for 2018-19

The budget represents a setback to the fiscal consolidation process, something in which the NDA government has invested a lot. It isn't the revenue side that is a problem although non-tax revenue (dividends from PSUs, transfer of surplus from RBI) has disappointed. The main problem is on the revenue side. RE expenditure is 2.6% of GDP for 2017-18, higher than the projected 1.9%. Government establishment expenditure (such as pensions) is higher than expected. The compensation to states for GST loss is also imposing a large cost and this is to continue for a five year period.

At the end of the day, we are looking at a combination of  around 7% growth and a fiscal deficit of 3.5% of GDP for a three year period starting 2017-18. Not the happiest of situations to be in for the economy especially given that the world economy is buoyant. The situation could get worse if global economic growth is adversely impacted by a fall in asset markets.

So, what's the way out? Well, the budget papers provide a clue. The tax/GDP ratio of 11.6% in 2017-18 after having stagnated at around 10% of GDP since 2008. It is projected to rise to 12% and above in the coming years. Greater tax revenues provide a hope for a a turnaround in the economy- we can spend more while containing the deficit. And increased tax revenues will come not so much from growth as from tax buoyancy- better compliance, more people coming into the direct and indirect tax net, thanks to demonetisation and GST.

If this is how things play out, Modi will have been proved right in respect of both demonetisation and GST- the long-term benefits of these will have outweighed the short-term costs.

More in my article in the Hindu, Goodbye to fiscal consolidation.

Gujarat polls: BJP win quite remarkable

Yes, the contest has been closer than in 2012. Nevertheless, the BJP's win in Gujarat is remarkable. It comes after 22 years of BJP rule and it happened inspite of the BJP's willingness to steer clear of  assured vote-catchers such as farm loan waiver and quotas for particular groups, both of which the Congress resorted to.

There were reasons for the electorate in Gujarat to be unhappy- farmers, MSMEs, youth and others are unhappy with economic conditions. Nevertheless, they did not think it necessary to disturb the status quo. Gujarat has seen economic progress and the absence of caste and communal strife for over 15 years now, and voters seem to have judged that it's not wise to disturb this state of affairs.

More in my BS column: Gujarat and BJP: why discontent did not spell defeat

Moody's upgrade of India

Most analysts think that Moody's upgrade is merited by the raft of reforms we have seen under the Modi government. I disagree. It's certainly true that the reforms have improved India's economic fundamentals. They have brightened the prospects of India growing at over 7.5%. But, I would argue that, even without the reforms, India's ability to service its debt has not been in doubt. In 2007- 17, which is a period consequent to the global crisis, we have seen a decline in India's debt to GDP ratio in the face of an adverse external environment. I would, therefore, argue, that this record merited an upgrade even without the reforms we have had recently.

More in my BS article, Rating upgrade was long overdue.

Bank recapitalisation is the right fiscal stimulus at the moment

If there is one economic measure which will make a difference to India's growth prospects in the near future, it is the massive bank recapitalisation package. Demonetisation will yield results but only over a long period. GST is hugely positive but only over the medium term. With bank recapitalisation, we can almost see an "announcement effect"- an impact almost immediately after announcement. One obvious impact is the rise in the prices of public sector bank shares. But also, as the package gets finalised, we can see a little more boldness in lending on their part.

The package is indeed massive and it required guts for the Modi government to announce something of this magnitude. My only regret is that it didn't happen much earlier.

More in my article in the Hindu, A bold step in bank reform.

Interview with the Hindu on bank recapitalisation package

I return after a long time... various personal commitments have kept me away from my blog. Hope to be a little more regular hereafter.

The Hindu carried an interview with me on the bank recapitalisation package last Sunday.

Raghuram Rajan back in the news

Raghuram Rajan was in India recently and he hold forth on a wide range of subjects in numerous interviews. Many interviewers tried hard to to get him to say that his differences with the government on demonetisation caused his exit from RBI. Rajan didn't quite oblige.

He was also asked if he would have resigned if demonetisation had been pushed in his time as Governor. He said he could have answered the question only if he had been confronted with the proposition when he was Governor. All he could say now was that if a civil servant did not want to go along with any government measure, the only option was resignation.

I thought his views on the banking sector deserved more coverage than those on demonetisation- he didn't really have much to add to the latter.

My column on this subject in BS is reproduced below:

Rajan in the limelight again
 
T T Ram Mohan
 
Former Reserve Bank of India (RBI) governor Raghuram Rajan came, he saw, he conquered the media. For a year following his exit as RBI governor, Dr Rajan had chosen to maintain silence on the Indian economy. During his recent visit to India, it was hard to open a newspaper or switch on a channel without seeing an interview with him.

The interviews covered pretty much the same ground, with the focus always on demonetisation. Dr Rajan said many things that would have gladdened the hearts of those critical of the initiative. Yes, he had expressed his reservations when the proposal was put to him. And, yes, he thought the short-term costs were steep — he mentioned estimates in the range of 1-2 per cent of the gross domestic product (GDP). And, yes again, he wasn’t sure the long-term benefits justified the costs. It’s fair to say that Dr Rajan hasn’t added anything to the debate on the subject. We do not have a handle yet on either the costs or the benefits of demonetisation.

The focus on demonetisation was a bit unfortunate as it overshadowed some pretty strong remarks Dr Rajan made about the banking system. Dr Rajan expressed reservations about mergers of public sector banks (PSBs). He warned that it would be unwise to attempt mergers at a time when PSBs were weak and wrestling with the problem of high levels of non-performing assets. One hopes the finance ministry is listening.

Dr Rajan was equally forthright on the need to do what it takes to recapitalise PSBs. He went so far as to say that the government should provide the necessary capital to PSBs even if it meant cutting allocations on other heads. The government and the top brass at the RBI have been telling us that some PSBs are so hopelessly deficient in managerial capabilities that putting more capital into them is money down the drain. Rajan clearly doesn’t think so.

We have thus far got banks to clean up their balance sheets without providing them the necessary capital. By many estimates, PSBs would require another ~1 lakh crore in order to meet the regulatory capital requirement. The Budget for this year has provided for just ~20,000 crore. Dr Rajan believes this is a sure recipe for holding up growth in credit and private investment.

Dr Rajan’s views on reform of governance at PSBs are rather more debatable. He wants the Banks Board Bureau (BBB) to have greater autonomy from the government. He would like the Department of Financial Services (DFS), whose job is to monitor PSBs, to be closed down. He wants PSBs to be monitored entirely by independent boards, presumably appointed by a truly independent BBB.

These views have wide currency today. However, the notion that PSBs should be freed from the supposed tyranny of the DFS is conceptually flawed. It overlooks a crucial fact about the governance model that obtains in India: Ownership of enterprises, whether in the public sector or the private sector, is not widely dispersed, as it is in the Anglo-Saxon model. We have instead a dominant owner in either the government or in industrial houses.

Where there is a dominant owner, the role of the board is rather more limited than in cases where ownership is widely dispersed. It is natural for the dominant owner to call the shots. The government cannot be expected to adopt a hands-off policy towards PSBs any more than Tata, Birla or Ambani can in their enterprises.

Moreover, it is possible to overstate the effectiveness of “independent” boards. Boards the world over are notoriously ineffective, which is why corporate governance is still work in progress more than two decades after the movement began. Those familiar with the working of PSBs would know that it is the government director and the RBI director who often make the most meaningful interventions.

Leaving matters at PSBs entirely to independent directors could, therefore, create a dangerous governance vacuum. There remains a case for the DFS to play a monitoring role. What is undesirable is that the DFS should issue directives to the CEOs of PSBs. Instead, the DFS should communicate its views through its nominee directors on boards, thereby strengthening the effectiveness of boards.

What Dr Rajan did not say is also significant. Dr Rajan is no foe of the private sector. Yet he made no mention of privatising any of the PSBs. Dr Rajan’s silence on privatisation at a time when “strategic sale” is the buzzword should make the finance ministry sit up and take note.

Foreign trained economists

Newly appointed chief of Niti Aayog Rajiv Kumar's article about foreign-trained economists exiting their plum posts in the Indian government one by one has sparked a controversy. Kumar wrote:

A key transformation taking place on the policy front in the current central government led by Narendra Modi, is that the colour of foreign influence, especially Anglo-American, on the Indian policy making establishment that came in the last few decades, is fading away. Raghuram Rajan has already left. Now, Arvind Panagariya has also announced his resignation from his post ahead of his term being completed. If Lutyen’s Delhi rumours are to be believed, more such resignations can come. In their place, we may see experts being posted who understand India’s ground realities in a much better manner, and who can commit to stay and work till their term ends.

I guess the point is not just about whether those parachuted into top positions from abroad understand the Indian ground reality well enough. There's also the question of whether they can work with the bureaucracy and Indian businesses to produce acceptable solutions to problems. Another issue is whether they have the commitment to complete their tenure. Panagariya has quite after two years because he doesn't want to lose his tenure at  Columbia. Did he not think of this when he accepted the assignment?

The problem is not confined to economists. Former IIM Bangalore director Sushil Vachani quit two years into his job when he found the ministry was not willing to relax the retirement age of 65 for him. Those hiring from abroad should make one thing clear to prospective hires: if you don't have it in you to complete your tenure, please do not accept the position.

The best part of the controversy is that it has spawned some excellent versification:

Bibek Debroy: “The foreign influence wanes, So read the weather vanes. Filthy lucre of a foreign land/ Has sullied many a hand/ And fogged the brains,” 

Sadanand Dhume: “All this is very well/ But it’s hard to sell/ Cambridge as a native school/ Oxford as a gurukul/ How some manage, pray tell.”

Author Ravi Mantha, “Rushed back from distant shores / to join the rushing tide./ Stepped into manure for an uncertain tenure./ But luckily kept our foreign sinecure.”

Business Standard reviews my book on bank regulation

BS carries a review today of my book, Towards a safer world of banking: bank regulation after the sub-prime crisis

Options on the future of banking
Book review of 'Towards a Safer World of Banking'
Udit Misra July 04, 2017 Last Updated at 22:41 IST
Towards a Safer World of Banking
Bank Regulations after the Subprime Crisis
T T Ram Mohan
Business Expert Press
149 pages; Rs 2,396

Towards a Safer World of Banking by T T Ram Mohan, who is a professor of finance and economics at the Indian Institute of Management, Ahmedabad, is a nifty little book aimed at students of business management and bank executives. It makes sense to take a relook at the world of banking since it is almost a decade since some of the biggest banks in the financial world such as the Bank of America, the Royal Bank of Scotland, the Citigroup as well investments banks such as Bear Stearns and Lehman Brothers either failed or nearly did. Since then, governments and taxpayers have been bailing out the troubled banks in the hope that doing so would be, in the long run, cheaper than the cost of letting such entities sink. But this process has been arduous, with massive and unsavoury political and social repercussions. Not surprisingly, there is considerable interest in ensuring that
such a contagion does not recur. This book, then, is an appropriate read for anyone wanting to understand whether we have done enough to ensure that.

The book is divided into five chapters. In the first two, the author discusses the financial and banking crisis that started in 2007 and the causes for the subprime crisis. Now, there is no dearth of reasons advanced for the meltdown. In fact, depending on who you might have read and what you do for a living, you could choose from the long list of causes and not be entirely wrong. This is known as the “MurderontheOrientExpress” theory of the crisis. But therein lies a problem. Unless one can zero in on the exact problem you cannot even begin to provide a lasting policy solution. So the author helps the reader tussle with questions such as: Does an economic contraction cause a banking crisis or the other way round?

Similarly, the author analyses each of the 12 broad reasons given for the subprime crisis, such as the existence of  a housing bubble in the US and elsewhere, loose monetary policies, greedy consumers, excessive financialisation or the global macroeconomic imbalances, to name a few. But many of these factors existed in the past and in other places without causing a global crisis. For instance, there have been periods of low and falling interest rates or instances of housing bubbles in several other countries. In the end, though, the author settles for “regulatory failure” as the principal culprit. According to him, there were “serious failures in relation to banks” such as lowering of loan writing standards, a focus on trading income by holding securitised assets and low amount of equity capital in relation to assets and so on. The author takes into account the analysis by Atif Mian and Amir Sufi in their book, A House of Debt, which gives primacy to the excessive buildup of
private debt. But Professor Mohan Ram argues that this, too, only shows that the ambit of regulation should have been much broader.

The third chapter focusses on regulatory reforms since the crisis. Much has been done, from increased capital  requirements and far more stringent norms for liquidity to tighter norms for securitisation and macroprudential regulations. This has yielded results. As of 2015, in the US, for instance, the top five banks had a common equity Tier 1 ratio that was higher than that specified by Basel III and all but one bank surpassed higher  requirements imposed by the US Federal Reserve. There have been similar improvements in the Europe as well. And yet, chapter four argues, not enough has been done to deal with the key problem that still exists: Banks being too big to fail. There is growing concentration in the banking sector, which, in turn, makes the whole sector more vulnerable.

Chapter five is about solutions. The author is among those who thinks that radical and outofthebox
ideas are needed to disasterproof the banking system. Some of the ideas discussed include the “sharedresponsibility mortgages” proposed by Messrs Mian and Sufi. In such a mortgage, the lender offers downside protection to the borrower while the borrower agrees to give 5 per cent capital gain to the lender on the upside. Also discussed is the chairman of the Institute for New Economic Thinking Adair Turner’s even more radical suggestion to limit the amount of debt creation itself.

But perhaps the most unusual solution is the one proposed by the author: India’s experience with public sector banks (PSBs). These last 10 pages of the book are likely to elicit far more interest among the Indian readers who  are at present witnessing an embarrassing bloodletting in India’s PSBs. The author argues that the Indian experience, where PSBs account for 70 per cent of the banking system, as well as the Chinese setup, where similar entities account for 90 per cent of the system, are responsible for these countries being the world’s fastest growing economies.

But it is all too clear that Indian PSBs are holding back growth instead of delivering it. The author offers a spirited defence for the PSB functioning — but stops at 2013-14. That is exactly the point at which the problems starting showing up. The author’s argument that PSBs’ troubles in the past two or three years are the result of structural failings of a developing country (such as the lack of a well developed bond market) is not entirely convincing. The truth is that the deep rot in Indian PSBs highlights the risks associated with government ownership of banks.

Banking fragility remains an issue

A certain complacency seems to have set into the banking sector following the reforms put in place after the financial crisis of 2007. Bank managers especially think that banks are safe now, thanks to the combination of higher capital requirements and living wills. Jamie Dimon, chairman of J P Morgan Chase, typies this point of view.

I am among those who would beg to defer. Banks may be better placed than before but banking systems remains fragile. Regulators need to raise the capital requirements even further. The minimum leverage ratio (the ratio of equity to assets) for banks is general is 3%; for systemically important banks, it's 5-6%. The US Congress has a proposal which would give banks a choice of going with Basel 3 and the Dodd-Frank provisions or having a leverage ratio of 10%. The latter is indeed the way to go.

More in my EPW article, Are banks safer today than before the crisis.

Watch it: the wrong joke could cost your your job

A joke deemed sexist has cost a board member of Uber his place on the board, FT reports. Board member David Bonderman, had to quit after he interrupted Ms Arian Huffington, fellow member on the board, with a remark that was considered inappropriate:

As Ms Huffington was telling staff that research showed boards with one female director were more likely to appoint a second, Mr Bonderman interjected: “Actually what it shows is that it’s much more likely to be more talking.”
Ms Huffington laughed awkwardly and said it would be his turn to talk soon. After the meeting, Mr Bonderman emailed Uber employees to apologise — and later announced he was resigning from the board. 

The problem, of course, is that the remark could not have been made at a worse time. The board of Uber is dealing with serious cultural issues, including issues of harassment, highlighted by a report commissioned by the board. The report has led to the exit of several senior executives and the founder and CEO, Travis Kalanick, has proceeded on indefinite leave, although it appears he will still be involved in strategic decisions and key leadership appointments.

The refreshing takeaway from the turmoil at Uber is that the world is no longer going to accept a firm just because it has a great valuation. Culture matters. Which means how you create value is also important. It's hard to beat a quote the FT carries on the subject:

“The spoiled brats of Silicon Valley don’t know the basics,” said Vivek Wadhwa, a fellow at the Rock Center of Corporate Governance and author. “It is a revelation for Silicon Valley: ‘duh, you have to have HR people, you can’t sleep with each other . . . you have to be respectful’.”

 

Tech firms' cash pile

Infosys, TCS, Cognizant and other Indian IT firms have had to take tough questions from investors on the cash pile they have been sitting on for years. This pile produces low returns from investment in bank deposits and the rest. Investors think if the firms have no investment avenues for the pile, they should return much of it to investors. At long last, the tech firms have said yes.

Huge cash piles are not limited to Indian tech firms.Schumpeter points out that the top five tech firms of the world- Apple, Alphabet, Microsoft, Amazon and Facebook- are sitting on a net cash (cash minus debt) pile of $330 bn, twice their gross cash flow. This is set to touch $ 680 bn by 2020, three times their cash flow.

One reason for the cash pile is that much of it is stashed away abroad and not brought back to the US in order to avoid tax. But the tax bill by itself does not justify the cash hoard. Another reason is having to making large investments in R&D. The five tech firms spent $100 bn on investment last year. For them not to grow their cash pile, Schumpeter estimates that investment would have to rise to $300 bn. That is a staggering figure by any reckoning:

That is over twice what the global venture-capital industry spends each year. It is 51 times the annual cash burned up by Netflix, Uber and Tesla, three firms famous for being cash hungry. And it is 37 times the average annual amount of cash the five firms have in total spent on acquisitions to gain new technologies and products, such as Facebook’s $19bn purchase of WhatsApp, a messaging service in 2014, or Google’s $3.1bn acquisition of DoubleClick, an advertising firm, in 2007.

What could be the reason then for the cash pile? Schumpeter reckons that uncertainty about future profit could be a factor. The tech firms probably reckon that the cash pile may not grow as much as projected now, given that various threats could emerge. But if they do manage to add on to their cash they may diversity in a big way into cars, media or hardware firms. 

Harvard Business School sources of funds

Schumpeter, writing in the Economist, gives an interesting breakdown of the sources of funds for HBS: tuition fee (17%), executive education (23%), publishing (29%) and endowments (31%). The IIMs and other business schools should compare their own funding pattern with that of HBS and see how they stack up. The crucial thing to note is that tuition accounts for only a sixth of revenues.

The break-up for IIMA in 2013-14 (the last year for which the annual report is available) is: tuition fee (43%), consulting (22%), interest income (21%) and others (14%). It should be clear that tuition bears a much bigger chunk of the burden of generating funds at IIMA than at HBS.

Compelling case for the RBI to cut its policy rate

I argue in the Hindu today that the case for a rate cut is quite compelling. It's not just that CPI inflation is below the RBI target of 4%. The strengthening rupee and strong capital inflows address a concern RBI would have had even a few months ago: lowering the gap between Indian and dollar yields would cause an exodus of funds and destabilise the rupee. We don't have to worry that much about the Fed stance at the moment.

A rate cut will not just boost growth, it will help the bottom lines of banks and that of corporates- it would help address the "twin balance" sheet problem. The problem, as I see it, is that the RBI committed itself to a 4 per cent inflation target when the government gave it a flexible band of 4 plus or minus 2 per cent. Now, that's called being overzealous.

By the way, Surjit  Bhalla flays the MPC today for getting its inflation forecasts hopelessly wrong:

At its first demonetisation meeting on December 7, the MPC concluded that demonetisation was temporary and so, it should look through its effects on dampening inflation and growth. It expected inflation and GDP growth to hustle up in a “V-shaped” pattern. The reality — GDP growth has been flat at 7 per cent, inflation has followed just the first half of the V. The MPC’s post-demonetisation short-term three-month forward forecast for March 2017 was 5 per cent with an upside bias. Actual March 2017 CPI inflation — a low 3.5 per cent! Actual April CPI inflation — 3 per cent. I have searched far and wide but not found any central bank, or even an amateur economist, with such a large forecast error for a three-month projection. These forecast errors are liable to get worse.

He also points out that the RBI has moved deftly from targeting headline inflation to what he calls a "false" measure of inflation:

First, the MPC broadly hinted that it was going against its own mandate of targeting headline inflation and was now considering targeting core inflation. But most brazenly, it chose to emphasise false core inflation as its target, that is, core inflation including petrol. No central bank in the world targets false core; it seems the RBI felt it was appropriate to do so because oil prices were hovering round $55/barrel and domestic petrol prices were inflating at 18 per cent per annum. So false core was sticky at 5 per cent, as the MPC “rightly” concluded. However, no sooner had the MPC penned this excuse that oil prices (internationally and domestically) began to fall. And, along with it, false core inflation. The April CPI data, released just days after the MPC excuses on April 7, now showed even false core hovering around 4.4 per cent, having declined from 5 per cent a month earlier.
True core inflation — CPI minus food minus energy minus petrol — meanwhile continued its downward trend, 5.3 per cent in April 2016; April 2017, it registered 4.2 per cent.

That's a pretty strong indictment. It's necessary to require the MPC to publish its forecasting record- forecast inflation versus actual - every time it meets. There is a fundamental problem with the MPC mandate: the MPC has to explain if inflation exceeds six per cent but not if inflation falls below 4 per cent (unless it dips below 2 per cent which is a remote possibility). Put differently, the MPC is accountable for inflation but not for growth. There has to be a way to address this issue. A good starting point is to publish the MPC's forecasting record.

My latest book- on bank regulation- is out

Friends,

Happy to share with you that my latest book is out. It's titled Towards a Safer World of Banking: Bank Regulation after the sub-prime crisis and is published by Business Expert Press in New York.

The book reviews the record of financial crises in the past and the changes to bank regulation since the sub-prime crisis. It argues that these changes are inadequate. It contends that we need to think of some of the out-of-the-box solutions proposed and it also suggests that regulators elsewhere may have something to learn from the experience of the Indian banking sector.

Here's the link to the book website.