Fair request, Bad loans and Provisions
Banks’ request to RBI for extending the application of higher provisioning norms in the present circumstances where the credit off take has not picked up, earnings other than interest are marginal, inter mediation cost is high forcing them to continue to charge higher rates of interest on existing loans, recoveries of loans proving difficult due to recessionary conditions etc appears genuine and needs favorable consideration.
However, the solution in respect of continued persistence of non-performing loans in banking books which cannot be eradicated as long as banks deal in money ,with people and the economy the growth of which itself is dependent on variable factors like fast changing political situation, volatile economic environment, social changes and technological advancements. It is high time the banks and the authorities recognize the festering nature of the problem of non performing loans and their impact on banks balance sheets, the economy in general and the financial system in particular and come out with a practical and permanent solution to contain formation of non performing loans to ensure a strong balance sheet for banks and at the same time minimize the adverse impact of such loans on other stake holders of banks. High bad loans, high interest rates,high provisions towards bad loans,high inter mediation costs, generally affect the credit expansion and banks develop a tendency to resort to lazy banking keeping the borrowers at a distance. To encourage lending liberally and attracting the borrowers in large numbers to banking fold,the problem of non performing loans has to be tackled differently and in a manner acceptable to both banks and borrowers alike. Other stake holders also should welcome the approach of banks in minimising the impact of npls in banks' books.
The only workable way to save the banks,all stake holders including the economy from this vexatious issue of non-performing loans is to bind the borrowers with an obligation to bear the burden of non performing loans. Banks also will have to share the burden to some extent basically to involve themselves and be more vigilant in the over all administration of credit portfolio. The suggested approach is creation of a fund named “Precautionary Margin Reserve” by levying a small percentage ranging between 0.10 percent and 0.75 percent on standard advances of the bank based on certain criterion of the quality of conduct of borrowers’ accounts. The Levy should be in the nature of a guarantee fee from all borrowers and should be maintained with banks themselves . Instead of compelling banks to increase the provisions , they can be asked to contribute a small amount towards this precautionary margin Reserve. The Fund over a period will be more than the bad loans formation and the coverage ratio will be much better than the present loan provisions coverage ratio. In terms quality of advances, profitability of banks, strength of balance sheets of banks, benefits derived to all stakeholders including the Government the suggested levy will prove to be a boon and win-win situation. The Fund also can be treated as tier-2 capital thus helping the banks to have better capital adequacy ratio.
Dr T.V.Gopalakrishnan
Monday, December 7, 2009
Friday, November 20, 2009
Using Forex Inflows
This refers to your editorial "Do away with PNS" (ET,Nov18). As suggested this is the best opportune time to introduce ban on Participatory Notes(PNs) and minimise the problems connected with the excess overflows of foreign exchange .By doing away with PNs, both captal market and forex market can expect some order apart from having some checks on outflows of illegal funds. The forex inflows are welcome for economy's growth,but this should not be a conduit for exploiting loopholes to indulge in illegal transactions.
Some of the approaches to tackle excess inflows can be introduction of forex inflows stabilisation fund wherein excess funds can be contributed by the forex earners provision of incentives to use liberally forex earnings for acquisition of business opportunities abroad, by discouraging flows coming in a camouflaged manner etc. This is also the time to give a boost to the infrastructure development where imports of capital goods and technology are needed.
Dr T.V.Gopalakrishnan
(This appeared in ET 20/11/09)
Some of the approaches to tackle excess inflows can be introduction of forex inflows stabilisation fund wherein excess funds can be contributed by the forex earners provision of incentives to use liberally forex earnings for acquisition of business opportunities abroad, by discouraging flows coming in a camouflaged manner etc. This is also the time to give a boost to the infrastructure development where imports of capital goods and technology are needed.
Dr T.V.Gopalakrishnan
(This appeared in ET 20/11/09)
Monday, November 16, 2009
Forex Inflows
Time has come to have a new approach to manage forex inflows and put them into optimum use and at the same time insulating the economy from inflationary and other adverse consequences.
It is heartening that the economy attracts foreign funds and the flows continue to be increasing day by day although they also bring some adversaries to the economy in general in the form of inflationary conditions and forex market in particular by way of rupee appreciation with attendant consequences upsetting the calculations of exporters, authorities in managing the exchange rate, sudden upsurge in money supply and liquidity, volatility in capital market and build-up of reserves more than the requirements. While there cannot be any dispute on the need to have foreign funds to support the fast growing economy and manage huge fiscal deficit, the fact remains that absorption of huge foreign funds without causing damage to the well controlled inflation, well managed financial system consisting of various types of markets, institutions and instruments and the international image meticulously developed over a period as a comparatively well managed economy, has been and continues to be a challenge.
The forex reserves which stood at less than $1 billion in 1991 and induced introduction of economic liberalization measures, has crossed $280 billion as at end of September 2009 and continue to accumulate further. The excess inflows experienced in 2007 seem to be back again necessitating to review the measures to contain their impact. The influx of funds by way of FDI and portfolio investments alone have exceeded $22 billion dollars this fiscal and rupee has appreciated around more than 12 % as on date. Exports have not picked up and cannot be expected to improve considerably in the context of less than anticipated economic recovery in advanced nations.
Management of capital flows due to unprecedented heavy injection of liquidity by Federal reserves, European Central Bank and bank of England to tide over the global financial crisis has its own impact on various central banks including India forcing them to build up reserves. Capital flight to India due to interest rate differential, stability in the financial system and general confidence in the ability of our economy to perform better will definitely attract funds and will turn out to be a major concern to policy makers.
Flight of capital and accumulation of reserves add money supply in the system and cause inflation and inflationary expectations. While availability of funds for speculative build of assets and investments has to be curbed and at the same time sufficient liquidity to take care of productive investments, consumption needs, payment and settlement system has to be ensured, the challenges faced by the authorities in finding an equilibrium are something formidable.
In this context the approach to the problem of flow of foreign funds beyond the absorbing capacity of the economy needs a re look and traditional way of handling the situation has to be changed. The conventional system of intervening in forex market by RBI and using sterilization method to negate the effects of intervention have their own macro economic costs.
Taking into consideration the vastness of the country, huge population still living below the poverty line, inadequate availability of physical, social and financial infrastructure, aspirations and ability and availability of people to attain any bench mark levels of growth envisaged despite constraints and expectations of international community that this country can be the super economic power in future, the massive flow of funds should be viewed as a God –given opportunity to perform and deliver. No doubt, the real situation will prove to be slightly abnormal and naturally calls for an abnormal solution.
Apart from the normal measures like encouraging outflows of foreign exchange through travels, remittances, imports of goods particularly those which can mitigate inflationary expectations, other measures to contain inflows through some incentives akin to those offered to attract inflows when the situation demanded during forex crisis during 1990s can be considered. Other solution can be in the form of creating a Foreign Exchange Inflows Stabilisation Fund .
As it is, Reserve Bank intervenes in the forex market and effects purchases and sales of foreign exchange to moderate the exchange rate fluctuations. This necessarily involves injection and absorption of rupees to maintain /soften the liquidity. To neutralize the impact of purchase/sale of foreign exchange and consequent money supply and liquidity in the market, sterilization is done using government securities for sale/purchase. The whole exercise involves a cost to the economy and the exchequer and creates an element of uncertainty and speculation in different markets in the financial system. All these can be to a great extent minimized if surplus of foreign exchange or a portion of it can be transferred to an account styled “Exchange Inflows Stabilisation Fund” without involving rupee exchange. The Account can be maintained at RBI.
Banks, exporters, investors, importers and institutional forex earners etc having excess foreign exchange and do not require them urgently can invest such excesses in this fund for a small compensation and incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of sterilization.
For the contributors towards this fund, this can facilitate as a deposit account under their command and funds can be utilized as and when the need arises. This fund kept at the disposal of RBI can be utilized by the Government for exclusive development of infrastructure requiring foreign exchange and the present controversy as to whether the Forex Reserves built up by RBI can be utilized by the Government for developmental purpose can be ended with conviction.
Main advantage of such a fund is that it eliminates rupee supply and consequent ripple effects. The Government can consider compensating by way of suitable incentives to those who contribute towards this fund. The compensation can be paid in Indian rupees or foreign exchange. Exchange rate can be protected through hedging as is done at present in forex transactions.
In case the fund accumulates over a period which is bound to be the case, those who require foreign funds can be allowed as they raise External Commercial Borrowings at a specified exchange and interest rate. The funds can be made available exclusively in forex for development of infrastructure by way of import of technology, skilled manpower, materials research and development.
The costs /sacrifice involved to develop, maintain and manage such a fund may prove to be highly beneficial when compared to the present costs and risks involved to maintain financial stability, exchange rate stability, favorable inflationary conditions and the credibility among the international community to continue to attract investments in India. The fact remains that economy needs billions of dollars for various developmental needs particularly heavy physical infrastructure of international standards to sustain and register further growth of GDP. The momentum now attained and the confidence level built-up both at national and international level have to be maintained at any cost to make the economy really a super power. It may call for some innovative approach and perhaps Foreign Exchange Inflows Stabilisation Fund may be the solution.
It is heartening that the economy attracts foreign funds and the flows continue to be increasing day by day although they also bring some adversaries to the economy in general in the form of inflationary conditions and forex market in particular by way of rupee appreciation with attendant consequences upsetting the calculations of exporters, authorities in managing the exchange rate, sudden upsurge in money supply and liquidity, volatility in capital market and build-up of reserves more than the requirements. While there cannot be any dispute on the need to have foreign funds to support the fast growing economy and manage huge fiscal deficit, the fact remains that absorption of huge foreign funds without causing damage to the well controlled inflation, well managed financial system consisting of various types of markets, institutions and instruments and the international image meticulously developed over a period as a comparatively well managed economy, has been and continues to be a challenge.
The forex reserves which stood at less than $1 billion in 1991 and induced introduction of economic liberalization measures, has crossed $280 billion as at end of September 2009 and continue to accumulate further. The excess inflows experienced in 2007 seem to be back again necessitating to review the measures to contain their impact. The influx of funds by way of FDI and portfolio investments alone have exceeded $22 billion dollars this fiscal and rupee has appreciated around more than 12 % as on date. Exports have not picked up and cannot be expected to improve considerably in the context of less than anticipated economic recovery in advanced nations.
Management of capital flows due to unprecedented heavy injection of liquidity by Federal reserves, European Central Bank and bank of England to tide over the global financial crisis has its own impact on various central banks including India forcing them to build up reserves. Capital flight to India due to interest rate differential, stability in the financial system and general confidence in the ability of our economy to perform better will definitely attract funds and will turn out to be a major concern to policy makers.
Flight of capital and accumulation of reserves add money supply in the system and cause inflation and inflationary expectations. While availability of funds for speculative build of assets and investments has to be curbed and at the same time sufficient liquidity to take care of productive investments, consumption needs, payment and settlement system has to be ensured, the challenges faced by the authorities in finding an equilibrium are something formidable.
In this context the approach to the problem of flow of foreign funds beyond the absorbing capacity of the economy needs a re look and traditional way of handling the situation has to be changed. The conventional system of intervening in forex market by RBI and using sterilization method to negate the effects of intervention have their own macro economic costs.
Taking into consideration the vastness of the country, huge population still living below the poverty line, inadequate availability of physical, social and financial infrastructure, aspirations and ability and availability of people to attain any bench mark levels of growth envisaged despite constraints and expectations of international community that this country can be the super economic power in future, the massive flow of funds should be viewed as a God –given opportunity to perform and deliver. No doubt, the real situation will prove to be slightly abnormal and naturally calls for an abnormal solution.
Apart from the normal measures like encouraging outflows of foreign exchange through travels, remittances, imports of goods particularly those which can mitigate inflationary expectations, other measures to contain inflows through some incentives akin to those offered to attract inflows when the situation demanded during forex crisis during 1990s can be considered. Other solution can be in the form of creating a Foreign Exchange Inflows Stabilisation Fund .
As it is, Reserve Bank intervenes in the forex market and effects purchases and sales of foreign exchange to moderate the exchange rate fluctuations. This necessarily involves injection and absorption of rupees to maintain /soften the liquidity. To neutralize the impact of purchase/sale of foreign exchange and consequent money supply and liquidity in the market, sterilization is done using government securities for sale/purchase. The whole exercise involves a cost to the economy and the exchequer and creates an element of uncertainty and speculation in different markets in the financial system. All these can be to a great extent minimized if surplus of foreign exchange or a portion of it can be transferred to an account styled “Exchange Inflows Stabilisation Fund” without involving rupee exchange. The Account can be maintained at RBI.
Banks, exporters, investors, importers and institutional forex earners etc having excess foreign exchange and do not require them urgently can invest such excesses in this fund for a small compensation and incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of sterilization.
For the contributors towards this fund, this can facilitate as a deposit account under their command and funds can be utilized as and when the need arises. This fund kept at the disposal of RBI can be utilized by the Government for exclusive development of infrastructure requiring foreign exchange and the present controversy as to whether the Forex Reserves built up by RBI can be utilized by the Government for developmental purpose can be ended with conviction.
Main advantage of such a fund is that it eliminates rupee supply and consequent ripple effects. The Government can consider compensating by way of suitable incentives to those who contribute towards this fund. The compensation can be paid in Indian rupees or foreign exchange. Exchange rate can be protected through hedging as is done at present in forex transactions.
In case the fund accumulates over a period which is bound to be the case, those who require foreign funds can be allowed as they raise External Commercial Borrowings at a specified exchange and interest rate. The funds can be made available exclusively in forex for development of infrastructure by way of import of technology, skilled manpower, materials research and development.
The costs /sacrifice involved to develop, maintain and manage such a fund may prove to be highly beneficial when compared to the present costs and risks involved to maintain financial stability, exchange rate stability, favorable inflationary conditions and the credibility among the international community to continue to attract investments in India. The fact remains that economy needs billions of dollars for various developmental needs particularly heavy physical infrastructure of international standards to sustain and register further growth of GDP. The momentum now attained and the confidence level built-up both at national and international level have to be maintained at any cost to make the economy really a super power. It may call for some innovative approach and perhaps Foreign Exchange Inflows Stabilisation Fund may be the solution.
Tuesday, October 13, 2009
World Bank Loan
This is with reference to the article Why India does not need the World Bank loan( Business Line dt 7/10/09). The author has rightly argued why our Public Sector Banks do not require the World Bank Loan. It is true that our Public Sector Banks which have been capitalized more than the regulatory requirements and the international standards( as per Basel II norms) and which are financially sound should not have been clubbed along with India Infrastructure Company Ltd and Power Grid Corporation Of India to justify raising of loans from the world .
To support the economic growth envisaged at around 8 per cent and above, the banking system needs capital base and this has to be and can be easily found internally. As it is, the liquidity is very high in the system and the credit off take has not been at the desired / expected level and banks are finding it difficult to reduce the intake of deposits by reducing interest rates further because of better rates offered under Governments savings schemes. The lending rates have not gone down and are not likely to go down further because of inflation expectations.
Besides, with very high demand for funds from the Government sector owing to huge fiscal deficit the chances of reducing interest rates by banks and creating credit off take are remote. In addition, the level of raising non performing loans will automatically put a check on banks to expand credit.
In this back ground, there is no urgent need for banks to expand their capital base and that too from an outside international agency. There are umpteen ways banks can raise resources from both domestic and international market at very competitive rates on their own merit and strength and that is what the Government should encourage. This is the message we have to give to the International Financial system in general and international financial institutions like The World Bank in particular.
(This appeared in Business Line 13/10/09)
Dr.T.V.Gopalakrishnan
To support the economic growth envisaged at around 8 per cent and above, the banking system needs capital base and this has to be and can be easily found internally. As it is, the liquidity is very high in the system and the credit off take has not been at the desired / expected level and banks are finding it difficult to reduce the intake of deposits by reducing interest rates further because of better rates offered under Governments savings schemes. The lending rates have not gone down and are not likely to go down further because of inflation expectations.
Besides, with very high demand for funds from the Government sector owing to huge fiscal deficit the chances of reducing interest rates by banks and creating credit off take are remote. In addition, the level of raising non performing loans will automatically put a check on banks to expand credit.
In this back ground, there is no urgent need for banks to expand their capital base and that too from an outside international agency. There are umpteen ways banks can raise resources from both domestic and international market at very competitive rates on their own merit and strength and that is what the Government should encourage. This is the message we have to give to the International Financial system in general and international financial institutions like The World Bank in particular.
(This appeared in Business Line 13/10/09)
Dr.T.V.Gopalakrishnan
Monday, October 12, 2009
Forex Inflows
This refers to your edit Its yesterday once more (ET.10/09/09).No doubt our present economic scenario requires huge funds to support economic growth and minimise the consequences of fiscal deficit of very high order.The heavy inflows of forex resources beyond the absorbing capacity of the economy can tilt the calculations and bring disorder in exchange rate stability,inflation control,export, import and management of the economy.
The only way to tackle the influx is to absorb the excess funds without simultaneously creating supply of rupees in a separate account styled Foreign Exchange Inflows Stabilisation Fund with RBI. Banks, exporters, investors who ever have excess forex and do not require urgently can invest such excesses in this Fund for a small compensation and an incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of steririsation etc.
This write-up appeared in ET dt12/10/09.
Dr.T.V.Gopalakrishnan
The only way to tackle the influx is to absorb the excess funds without simultaneously creating supply of rupees in a separate account styled Foreign Exchange Inflows Stabilisation Fund with RBI. Banks, exporters, investors who ever have excess forex and do not require urgently can invest such excesses in this Fund for a small compensation and an incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of steririsation etc.
This write-up appeared in ET dt12/10/09.
Dr.T.V.Gopalakrishnan
Monday, October 5, 2009
Legal Reforms -Long Overdue
Kudos to Law Minister to have come out with plans to introduce legal reform and bring speedy justice for the benefit of public.
This has been long overdue and should have been there along with economic reforms.The full benefit of economic reforms so far introduced have not been reflecting in the economy because of legal hurdles and it is a boon for public that with the announcement of time bound delivery of justice and disposal of pending cases running into crores and for years,things will improve and benefit the economy considerably in all segments particularly in infrastructure, agriculture ,finance and industrial production.
This will give a boost to the sagging morale of entrepreneurs and make them venture into more economic activities. Projects kept pending under various stages because of legal disputes, have affected our economic growth very badly.If the disputes get settled early with this proposed legal reforms, the economy can recover fast and will bring all round confidence and prospirity. Legal reform is one area needing urgent attention and it deserves all support and encouragement from everywhere.
Dr.T.V.Gopalakrishnan
This has been long overdue and should have been there along with economic reforms.The full benefit of economic reforms so far introduced have not been reflecting in the economy because of legal hurdles and it is a boon for public that with the announcement of time bound delivery of justice and disposal of pending cases running into crores and for years,things will improve and benefit the economy considerably in all segments particularly in infrastructure, agriculture ,finance and industrial production.
This will give a boost to the sagging morale of entrepreneurs and make them venture into more economic activities. Projects kept pending under various stages because of legal disputes, have affected our economic growth very badly.If the disputes get settled early with this proposed legal reforms, the economy can recover fast and will bring all round confidence and prospirity. Legal reform is one area needing urgent attention and it deserves all support and encouragement from everywhere.
Dr.T.V.Gopalakrishnan
Wednesday, September 16, 2009
NON-PERFORMING LOANS- A PRACTICAL SOLUTION
Govt Banks and Capital Adequacy
This has reference to the news item 12%by 12: Govt banks lineup for cash-loading(ET dated 14th Sep 2009).It has become a fashion among Govt Banks to look forward to Govt for capital support to maintain the capital adequacy ratio prescribed/expected by the Regulator to ensure soundness of banks' functioning in terms of the risks they build up.
The real risk coverage has to come from within and not by induction of Govt funds ie public money. Banks have to learn to expand business and capital through effective and efficient management of their credit portfolio,investments and off balance sheet items. The very system of subsidizing bad credit by all stakeholders of banks particularly by depositors and shareholders which include Govt has to be necessarily stopped and there should be a way out to take care of formation of non performing loans and to stand on banks own legs without depending on Government or other stakeholders in case a situation of build up of bad loans more than reasonable limits,write off of loans,more provisional requirements and lowering of profits arise due to internal reasons or external factors beyond the control of banks.
Since Non-performing loans are inevitable in banking business,it is better to have a fund mobilised from all borrowers,banks themselves and if unavoidable from Government and RBI by way of small premiums based on certain norms having relevance to healthy and acceptable practices. Dependence by banks on Govt funds to support their capital base only reflects on their inefficiency in running the business.This fund which can be styled as Precautionary Margin Reserve Fund(PMR), on accumulation over a period, can take care of future NPLs,discipline credit portfolio and strengthen the balance sheet. Implementation of this idea will turn out to be a win-win situation for banks,their stakeholders and the government.
Dr.T.V.Gopalakrishnan.
This has reference to the news item 12%by 12: Govt banks lineup for cash-loading(ET dated 14th Sep 2009).It has become a fashion among Govt Banks to look forward to Govt for capital support to maintain the capital adequacy ratio prescribed/expected by the Regulator to ensure soundness of banks' functioning in terms of the risks they build up.
The real risk coverage has to come from within and not by induction of Govt funds ie public money. Banks have to learn to expand business and capital through effective and efficient management of their credit portfolio,investments and off balance sheet items. The very system of subsidizing bad credit by all stakeholders of banks particularly by depositors and shareholders which include Govt has to be necessarily stopped and there should be a way out to take care of formation of non performing loans and to stand on banks own legs without depending on Government or other stakeholders in case a situation of build up of bad loans more than reasonable limits,write off of loans,more provisional requirements and lowering of profits arise due to internal reasons or external factors beyond the control of banks.
Since Non-performing loans are inevitable in banking business,it is better to have a fund mobilised from all borrowers,banks themselves and if unavoidable from Government and RBI by way of small premiums based on certain norms having relevance to healthy and acceptable practices. Dependence by banks on Govt funds to support their capital base only reflects on their inefficiency in running the business.This fund which can be styled as Precautionary Margin Reserve Fund(PMR), on accumulation over a period, can take care of future NPLs,discipline credit portfolio and strengthen the balance sheet. Implementation of this idea will turn out to be a win-win situation for banks,their stakeholders and the government.
Dr.T.V.Gopalakrishnan.
Tuesday, September 15, 2009
Foreign Investors
This refers to your edit 'Attracting foreign investors' (ET,Sept11,2009).
The inflow of foreign funds in manufacturing and infrastructure can be augmented considerably if the Government acts with right earnest in this direction.This requires appropriate environment with friendly rules, regulations,procedures and positive governance,
It is high time the Government set up an International Information centre from where prospective foreign investors can have complete information regarding the economy, the potential areas which require investments, laws to be adhered to, infrastructure available, institutions to be contacted for various types of investments and facilities available to take care of investors various requirements etc.
(This appeared in ET,14/09/09)
Dr.T.V.Gopalakrishnan
The inflow of foreign funds in manufacturing and infrastructure can be augmented considerably if the Government acts with right earnest in this direction.This requires appropriate environment with friendly rules, regulations,procedures and positive governance,
It is high time the Government set up an International Information centre from where prospective foreign investors can have complete information regarding the economy, the potential areas which require investments, laws to be adhered to, infrastructure available, institutions to be contacted for various types of investments and facilities available to take care of investors various requirements etc.
(This appeared in ET,14/09/09)
Dr.T.V.Gopalakrishnan
Thursday, September 10, 2009
Portfolio Inflows
No doubt our economy requires capital flows,but the funds should help to strengthen our capital market and they should not in any way bring in undesirable effects in the money supply,inflation,exchange rates and unmanageable volatility in the capital market.The suggestion to curb portfolio inflows through a staggered programme of phasing out P-Notes in this context is very apt and SEBI Should be in a position to identify the nature and source of funds flowing into the market with appropriate records and procedures.
It is time to curb undue volatility in the market influenced by the strategies of FIIS to exploit and make money taking advantage of our economy's dependence on foreign inflows. What the economy needs is FDI and funds which are of semi permanent nature and definitely not funds which can disturb the stability and order in the stock market.
This appeared in ET, 10/09/09
Dr.T.V.Gopalakrishnan
It is time to curb undue volatility in the market influenced by the strategies of FIIS to exploit and make money taking advantage of our economy's dependence on foreign inflows. What the economy needs is FDI and funds which are of semi permanent nature and definitely not funds which can disturb the stability and order in the stock market.
This appeared in ET, 10/09/09
Dr.T.V.Gopalakrishnan
Saturday, September 5, 2009
Global Banks
There is certain inevitability for Indian Banks to evolve themselves as global banks as soon as possible.it is time now that India has one or two banks in international financial system to benefit out of globalisation of economies and justify its own strength as a fast growing economy in every sense of the term. Indian banking system is very sound and stable and our regulatory system has proved to be the best as per the recent international experience. When our IT can command the world market why not our banking which has strong foundation and history of sound working cannot make its presence in international markets is something surprising and it only indicates that adequate attention has not been given to give a push and thrust towards consolidation of banks to achieve the global standards in terms of size and methods of operation.Since we have large sized public sector banks with reasonable international presence, it is high time Government being the owner takes the initiative and provides the logistical support to merge one or two public sector banks with State Bank of India and develop it as a global bank. Merging subsidiaries with SBI can help only to increase the size of SBI domestically and will not serve the purpose of making SBI a global bank which requires acquistion and mergers of banks which have international presence.
This is the best time to acquire some banks abroad with due diligence and expand our banking internationally.
Dr.T.V.Gopalakrishnan
This is the best time to acquire some banks abroad with due diligence and expand our banking internationally.
Dr.T.V.Gopalakrishnan
Friday, August 21, 2009
STT&new code
STT &new code
This refers to “ For Sensible capital gains taxation” appeared ( ET august 19,2009). Proposals in the new direct taxes code are no doubt an improvement over the present taxation policy. But the removal of Securities Transaction Tax (STT) and reintroduction of long term capital gains will prove to be very costly to the exchequer and the revenue loss will be substantial.. Volatility seen in capital market can be contained with suitable modification of STT levies without, however. bringing down either the volume of transactions and revenue collections .
Long term capital gains on the contrary is dependent to a great extent on the declaration of gains and is also subject to adjustment of capital losses if any and there is scope for manipulation. STT needs to be improved upon for greater acceptance and strengthening the capital market.
This appeared in Economic times, 21/08/09.
Dr.T.V.Gopalakrishnan
This refers to “ For Sensible capital gains taxation” appeared ( ET august 19,2009). Proposals in the new direct taxes code are no doubt an improvement over the present taxation policy. But the removal of Securities Transaction Tax (STT) and reintroduction of long term capital gains will prove to be very costly to the exchequer and the revenue loss will be substantial.. Volatility seen in capital market can be contained with suitable modification of STT levies without, however. bringing down either the volume of transactions and revenue collections .
Long term capital gains on the contrary is dependent to a great extent on the declaration of gains and is also subject to adjustment of capital losses if any and there is scope for manipulation. STT needs to be improved upon for greater acceptance and strengthening the capital market.
This appeared in Economic times, 21/08/09.
Dr.T.V.Gopalakrishnan
Wednesday, August 5, 2009
Challenges for the Indian Banking System
Challenges for the Indian Banking system
The Challenges for Indian banking system:
Though Indian Banking system has not been adversely affected because of the global crisis, there should not be any room for complacency as there are several challenges facing the system in the context of very high expectations in supporting the economic growth of the country. Integration of economies and markets, fast evolution of competitive products much ahead of regulatory aspects, high speed with which transactions get effected through out the world because of technological advancement, innovativeness in information management will pose challenges in understanding the risks and successfully surviving in business.
Some of the challenges which the banking system faces in India in the current economic scenario are as under.
Competition:
Competition from different intermediaries through innovative products of assets and liabilities will be a force to be reckoned with. Competition both to mobilize resources and deploy them effectively will be a major challenge. Raising of deposits particularly term deposits will not be as easy as it was, because savers have better avenues to save both in terms of safety and return. Gold, real estate, shares and other forms of deposits with post offices, corporates, investments in mutual funds etc; have been on the increase where the rate of return particularly the real rate of interest is comparatively better. For convenience savings bank deposits will continue to be a preferred mode of savings and that also will be diminishing gradually when the plastic card culture picks up further.
Asset-Liability Mismatch:
The mismatch between deposits liability and advances recovery will be difficult to manage over a period of time. Banks will have more of short term deposits and long term advances as per the present economic scenario. The dynamics in the composition of assets and liabilities will have to be well factored into managing the risks, which in practice will be a difficult task. Banks themselves have admitted after the recent credit policy announcement that one-year deposit is as high as 72% of the total liability, compared to 52% a few years ago --- depositors are not renewing their money with banks.
Similarly advances once they pick up will be more for development of infrastructure which banks cannot afford from the angle of cost and asset-liability mismatch. Besides determining lending rates will be a major task and competition will be fierce to lend at as low a rate as possible. Good borrowers have different sources to tap and banks will have to satisfy with average and below average borrowers exposing themselves to severe credit risk.
In the union budget, Finance Minister had said that IIFCL together with banks will be able to fund the core sector projects involving investments up to Rs 100,000 crore through the take-out financing route. This will create asset liability mismatch and can affect the NIM of the banks adversely.
The aggregate deposits of scheduled commercial banks as on June 5,2009 stood at Rs 39,71,651 crores .The rate of increase in deposits in 2009 is showing a declining trend(22% in 2009 as compared to 23.1%in 2008) Similarly the aggregate bank credit which stood at Rs 27,57,210 crores as on June5,2009 also indicates a declining trend in the rate of growth(15.7%in 2009 as against 26.1%in 2008).Investments in Government securities shows an increasing trend which will have to increase further to meet the governments borrowings proposed around 4,51,000 crores this fiscal. Cash deposit ratio and investment-deposit ratio which stood at 6.04% and 32.10% respectively as on June 2009 only indicates the tendency to move to lazy banking. General increase in NPA levels also discourages further lending.
Asset Liability Management, containment of costs and non-performing loans will be the challenges in the immediate future... It is tough to fund long term assets with short-term liabilities. Further, it is expected that non- performing loans could rise in a few sectors.
Financial Inclusion:
Efforts made so far under Financial Inclusion have met only with limited success. Despite the increase in bank net- work, only 40% of the country’s population has their own bank accounts and the Population covered by a single branch continues to be high. As against 19000 people per branch in 1981, the figure has improved only marginally to 16000 in 2007. The observation as per some estimates that 34.9% of people having annual income less than Rs 50,000 and 5.5% of people earning more than Rs 4,00,000 and above still depend on money lenders for their financial requirements only indicate that the banking system has not fully exploited the business potential. The people excluded from financial inclusion include underprivileged section in rural and urban areas like farmers, small vendors etc, agricultural and industrial labourers, people engaged in un-organised sectors, unemployed people, women, children physically challenged and old people...
With the thrust on social and rural sector advancement in the budget, the need for further penetration of banking to make Financial Inclusion a reality will be insisted upon and the banking system will have to be in readiness to come up to the expectations. It is time to realize the business potential under financial inclusion and translate it into fruition. The task is stupendous and needs a mindset different from what has been demonstrated so far; it requires both business and social acumen. Will the HR and other resources can take up the challenge?
Government Borrowings: In the budget for 2009-10, the fiscal deficit is projected to be at 6.8% and the Government has targeted to borrow to the tune of Rs 451,000crores. This will have some implications in banks’ balance sheet. Interest rates are bound to be high and the valuation of securities will get hit badly. Money for advances will drain and the business of lending will take a beating. Investments in securities will be a trend and to that extent composition of assets and liabilities and income pattern of banks will undergo change. Maintaining Identity of banks as lenders for productive purposes will be a challenge.
Capital Adequacy Requirements:
In tune with the business expansion and expectations of better and stringent regulatory compliance standards in the context of the financial turmoil the world has witnessed recently, the capital of the banking system will have to be augmented considerably. Banks which have international exposure and which have plans to further expand internationally have to find additional capital and other resources.
Consolidation:
Mergers and acquisitions will assume greater importance to meet the challenges of growing competition nationally and internationally. Although there may be space for all banks to operate, situations will arise where consolidation based on specialization of a particular line of business or activity will make more business sense to withstand competition. The concept of universal banking may have to be revisited and changes introduced suitably to get the acceptance of the markets and remain in business successfully.
Competition from international banks can be met only if we have banks of the same size, standing and international experience and expertise. All banks cannot aspire to grow big and it requires capacity and strength to grow organically and inorganically through acquisitions and mergers of banks spread over the international markets. Understanding different financial markets of the world, products, institutions, laws of the land and regulatory requirements can come only over a period of time and it requires lot of planning and careful execution. No doubt some of our banks have to necessarily acquire the status, compete, survive and earn international reputation. The task is really challenging but achievable as has happened in our IT field.
Maintaining NIM at the present level
Banks at present are able to maintain NIM at around 3%. as against international level observed at less than 2%. Will the banking system be able to sustain this in the context of increasing trend in non-performing loans, continuous pressure for reduction of interest rate on advances, declining trend observed in granting advances, higher demand for long term nature of advances under housing and infrastructure segments, competitive rates required for raising deposits, ever increasing operating expenditure etc. is a debatable issue.
Human Resources and Information Technology:
The banking system which was known to have the cream of human resources seems to be losing this status with the emergence of IT and other services segments in the economy. Shortage of staff and demand for emoluments as per the market trends to attract best talents are emerging issues. Succession planning and finding right leaders to run the system professionally may be areas requiring meticulous planning.
Technology has penetrated well into the system but is it adequate to take care of magnitude of financial inclusion envisaged in the coming years will be another issue to be sorted out. Further, containing overall cost for development of sufficient human resources and keeping fast changing technology updated is going to be a very big challenge. Mix of technology and human resources with technological skills and professional knowledge of banking to take care of expansion and future challenges will be a very crucial issue to be seriously taken note of.
Regulatory and supervisory compliance:
The regulatory and supervisory system in India has been observed to be effective and efficient and because of this we have a reasonably safe and sound banking system. As and when the economy expands, markets develop, new institutions come up and varieties of innovative products enter into the system, naturally risk perceptions will change, complexities will evolve and regulatory prescriptions and supervisory standards will get scaled up.
Regulatory cost for the banking system, although has not been exclusively and separately identified so far, it is going to be comparatively high in future and will have to be suitably factored in assessing the overall operating expenditure. Banks vigilance over all products particularly new and innovative products will have to be intensified for which there is a paramount need to equip the human resources with skill and knowledge on an ongoing basis. Frauds which cost the banking system heavily, if not monitored effectively can erode the confidence of all stake holders in the system. Managements will have to be made accountable for all their lapses and failures and expecting the Government to bail out has to go out of the minds of banks boards.
Customer Service:
With the advent of ATMS, internet and phone banking, and POS terminals, the element of human touch in rendering service is virtually given a go bye.
Neither the banks nor the customers seem to be interested in having personal inter-actions. The gap between banks and customers over a period has widened and has been widening further. The relationship is only through documents. The casualty is Loyalty, respect for each other and emotional relationship. Money minded and purely commercial relationship has been emerging at the cost of ethics and values. Can it go on like this? is another issue to be debated seriously. Even from the angle of adhering to KYC norms, it is essential and advisable to have personal rapport once in a while to understand the customer better.
Any bank which cares to maintain personal rapport with customers whether they are deposit customers or advance customers or some casual customers will have an edge over other banks and reap the benefit of enduring relationship in terms of business growth, improving Corporate Governance standards, satisfying social responsibility and enjoying loyalty. Banking business is run on mutual trust and confidence and this can be ensured only through human touch and intelligence.
Dr.T.V. Gopalakrishnan
http:/econo-reflexions.blogspot.com
The Challenges for Indian banking system:
Though Indian Banking system has not been adversely affected because of the global crisis, there should not be any room for complacency as there are several challenges facing the system in the context of very high expectations in supporting the economic growth of the country. Integration of economies and markets, fast evolution of competitive products much ahead of regulatory aspects, high speed with which transactions get effected through out the world because of technological advancement, innovativeness in information management will pose challenges in understanding the risks and successfully surviving in business.
Some of the challenges which the banking system faces in India in the current economic scenario are as under.
Competition:
Competition from different intermediaries through innovative products of assets and liabilities will be a force to be reckoned with. Competition both to mobilize resources and deploy them effectively will be a major challenge. Raising of deposits particularly term deposits will not be as easy as it was, because savers have better avenues to save both in terms of safety and return. Gold, real estate, shares and other forms of deposits with post offices, corporates, investments in mutual funds etc; have been on the increase where the rate of return particularly the real rate of interest is comparatively better. For convenience savings bank deposits will continue to be a preferred mode of savings and that also will be diminishing gradually when the plastic card culture picks up further.
Asset-Liability Mismatch:
The mismatch between deposits liability and advances recovery will be difficult to manage over a period of time. Banks will have more of short term deposits and long term advances as per the present economic scenario. The dynamics in the composition of assets and liabilities will have to be well factored into managing the risks, which in practice will be a difficult task. Banks themselves have admitted after the recent credit policy announcement that one-year deposit is as high as 72% of the total liability, compared to 52% a few years ago --- depositors are not renewing their money with banks.
Similarly advances once they pick up will be more for development of infrastructure which banks cannot afford from the angle of cost and asset-liability mismatch. Besides determining lending rates will be a major task and competition will be fierce to lend at as low a rate as possible. Good borrowers have different sources to tap and banks will have to satisfy with average and below average borrowers exposing themselves to severe credit risk.
In the union budget, Finance Minister had said that IIFCL together with banks will be able to fund the core sector projects involving investments up to Rs 100,000 crore through the take-out financing route. This will create asset liability mismatch and can affect the NIM of the banks adversely.
The aggregate deposits of scheduled commercial banks as on June 5,2009 stood at Rs 39,71,651 crores .The rate of increase in deposits in 2009 is showing a declining trend(22% in 2009 as compared to 23.1%in 2008) Similarly the aggregate bank credit which stood at Rs 27,57,210 crores as on June5,2009 also indicates a declining trend in the rate of growth(15.7%in 2009 as against 26.1%in 2008).Investments in Government securities shows an increasing trend which will have to increase further to meet the governments borrowings proposed around 4,51,000 crores this fiscal. Cash deposit ratio and investment-deposit ratio which stood at 6.04% and 32.10% respectively as on June 2009 only indicates the tendency to move to lazy banking. General increase in NPA levels also discourages further lending.
Asset Liability Management, containment of costs and non-performing loans will be the challenges in the immediate future... It is tough to fund long term assets with short-term liabilities. Further, it is expected that non- performing loans could rise in a few sectors.
Financial Inclusion:
Efforts made so far under Financial Inclusion have met only with limited success. Despite the increase in bank net- work, only 40% of the country’s population has their own bank accounts and the Population covered by a single branch continues to be high. As against 19000 people per branch in 1981, the figure has improved only marginally to 16000 in 2007. The observation as per some estimates that 34.9% of people having annual income less than Rs 50,000 and 5.5% of people earning more than Rs 4,00,000 and above still depend on money lenders for their financial requirements only indicate that the banking system has not fully exploited the business potential. The people excluded from financial inclusion include underprivileged section in rural and urban areas like farmers, small vendors etc, agricultural and industrial labourers, people engaged in un-organised sectors, unemployed people, women, children physically challenged and old people...
With the thrust on social and rural sector advancement in the budget, the need for further penetration of banking to make Financial Inclusion a reality will be insisted upon and the banking system will have to be in readiness to come up to the expectations. It is time to realize the business potential under financial inclusion and translate it into fruition. The task is stupendous and needs a mindset different from what has been demonstrated so far; it requires both business and social acumen. Will the HR and other resources can take up the challenge?
Government Borrowings: In the budget for 2009-10, the fiscal deficit is projected to be at 6.8% and the Government has targeted to borrow to the tune of Rs 451,000crores. This will have some implications in banks’ balance sheet. Interest rates are bound to be high and the valuation of securities will get hit badly. Money for advances will drain and the business of lending will take a beating. Investments in securities will be a trend and to that extent composition of assets and liabilities and income pattern of banks will undergo change. Maintaining Identity of banks as lenders for productive purposes will be a challenge.
Capital Adequacy Requirements:
In tune with the business expansion and expectations of better and stringent regulatory compliance standards in the context of the financial turmoil the world has witnessed recently, the capital of the banking system will have to be augmented considerably. Banks which have international exposure and which have plans to further expand internationally have to find additional capital and other resources.
Consolidation:
Mergers and acquisitions will assume greater importance to meet the challenges of growing competition nationally and internationally. Although there may be space for all banks to operate, situations will arise where consolidation based on specialization of a particular line of business or activity will make more business sense to withstand competition. The concept of universal banking may have to be revisited and changes introduced suitably to get the acceptance of the markets and remain in business successfully.
Competition from international banks can be met only if we have banks of the same size, standing and international experience and expertise. All banks cannot aspire to grow big and it requires capacity and strength to grow organically and inorganically through acquisitions and mergers of banks spread over the international markets. Understanding different financial markets of the world, products, institutions, laws of the land and regulatory requirements can come only over a period of time and it requires lot of planning and careful execution. No doubt some of our banks have to necessarily acquire the status, compete, survive and earn international reputation. The task is really challenging but achievable as has happened in our IT field.
Maintaining NIM at the present level
Banks at present are able to maintain NIM at around 3%. as against international level observed at less than 2%. Will the banking system be able to sustain this in the context of increasing trend in non-performing loans, continuous pressure for reduction of interest rate on advances, declining trend observed in granting advances, higher demand for long term nature of advances under housing and infrastructure segments, competitive rates required for raising deposits, ever increasing operating expenditure etc. is a debatable issue.
Human Resources and Information Technology:
The banking system which was known to have the cream of human resources seems to be losing this status with the emergence of IT and other services segments in the economy. Shortage of staff and demand for emoluments as per the market trends to attract best talents are emerging issues. Succession planning and finding right leaders to run the system professionally may be areas requiring meticulous planning.
Technology has penetrated well into the system but is it adequate to take care of magnitude of financial inclusion envisaged in the coming years will be another issue to be sorted out. Further, containing overall cost for development of sufficient human resources and keeping fast changing technology updated is going to be a very big challenge. Mix of technology and human resources with technological skills and professional knowledge of banking to take care of expansion and future challenges will be a very crucial issue to be seriously taken note of.
Regulatory and supervisory compliance:
The regulatory and supervisory system in India has been observed to be effective and efficient and because of this we have a reasonably safe and sound banking system. As and when the economy expands, markets develop, new institutions come up and varieties of innovative products enter into the system, naturally risk perceptions will change, complexities will evolve and regulatory prescriptions and supervisory standards will get scaled up.
Regulatory cost for the banking system, although has not been exclusively and separately identified so far, it is going to be comparatively high in future and will have to be suitably factored in assessing the overall operating expenditure. Banks vigilance over all products particularly new and innovative products will have to be intensified for which there is a paramount need to equip the human resources with skill and knowledge on an ongoing basis. Frauds which cost the banking system heavily, if not monitored effectively can erode the confidence of all stake holders in the system. Managements will have to be made accountable for all their lapses and failures and expecting the Government to bail out has to go out of the minds of banks boards.
Customer Service:
With the advent of ATMS, internet and phone banking, and POS terminals, the element of human touch in rendering service is virtually given a go bye.
Neither the banks nor the customers seem to be interested in having personal inter-actions. The gap between banks and customers over a period has widened and has been widening further. The relationship is only through documents. The casualty is Loyalty, respect for each other and emotional relationship. Money minded and purely commercial relationship has been emerging at the cost of ethics and values. Can it go on like this? is another issue to be debated seriously. Even from the angle of adhering to KYC norms, it is essential and advisable to have personal rapport once in a while to understand the customer better.
Any bank which cares to maintain personal rapport with customers whether they are deposit customers or advance customers or some casual customers will have an edge over other banks and reap the benefit of enduring relationship in terms of business growth, improving Corporate Governance standards, satisfying social responsibility and enjoying loyalty. Banking business is run on mutual trust and confidence and this can be ensured only through human touch and intelligence.
Dr.T.V. Gopalakrishnan
http:/econo-reflexions.blogspot.com
Wednesday, July 29, 2009
Need for a Benchmark Rate of Interest
Need For A Bench Mark Rate of Interest for entire economy
What is the real rate of interest? and what is the average cost of funds in our economy? Is it the whole sale price index or the consumer price index to be reckoned to assess the real rate of interest by investors and savers ? What is the central rate which influence various other rates? These are some of the questions lingering in the minds of many associated with the economy and finance.
The major problem faced by Indian Financial System is that there is nothing called Bench Mark Rate of Interest/Prime rate which can influence liquidity in various markets like Money Market, Forex Market, Securities Market, Credit Market, etc. Like wise, it is also difficult to identify the average cost of funds in the economy which basically determines investments, production, exports, imports, supply and demand for goods and services. The cost of funds in any economy has to be necessarily linked to inflation index whether it is WPI or CPI so that one can assess the real rate of interest and take investment decisions. At present there are several rates operating in the economy without having much of relevance to inflation, real rate of interest and any sort of alignment to each other. Banks offer uniform savings rate at 3.5% fixed decades back without having any link to inflation rates i.e. -1.3% or their own cost of funds ranging between 5% and 6%. The rates offered by the Government on PPFs or savings deposits with post offices or rates offered by banks on their fixed deposits or the yield on government securities have no relationship with each other and are not linked to any benchmark rate. Similarly there are other interest rates like Bank Rate, different Prime Lending Rates of various commercial banks, Treasury bill Rates, Government of India Securities Rate, General Provident Fund Rate, Repo and Reverse Repo Rate, Call Money Rates, Commercial Paper and Certificate of Deposits rates, Mumbai Inter-bank Offered Rates, Corporate Bonds and Debentures Rates etc; operating in the system. In the absence of a central rate to which other rates can hover around depending on the dynamics of various markets, there is some ambiguity in arriving at the cost of funds in the economy in general and banks’ inability to arrive at their own cost of funds and lending rates on a scientific basis in particular.
In a growing economy, particularly where fiscal deficit and revenue deficit are on the high side and Government resorts to heavy market borrowings at market determined rates of interest crowding out private investments, the interest rates are bound to increase and the cost of funds will naturally be high. This year, the fiscal deficit is projected to be at 6.8% of GDP and the borrowings are estimated to be at Rs 4, 51000 crores.
Rate of interest in an economy has to necessarily influence savings and encourage investment in the productive sector. From this point of view, the rates of interest prevalent at present cannot be said to be doing justice both to savings and investment. Very fact that despite inflation at an unimaginably low level and a very large bout of stimulus packages both from Fiscal and Monetary segments, the lending rates, borrowings and investments have not moved favorably should vouch for this. Comparatively, Rate of Savings particularly in banks continues to be high for want of better alternatives. However, there seems to be an inherent weakness other than the recessionary trend influencing savings and investments. Real rate of interest has never been real is a fact which cannot be ignored for long, and the existence of parallel economy which inhibits smooth transmission of monetary policy has to be recognized fast.
The following table would indicate the rate of inflation and various rates in the financial system.
INFLATION: _1.55% as of June 2009.
Interest Rates in the Financial System
(Per cent per annum)Week ended June 12, 2009
Bank Rate 6.00
I.D.B.I.(1) 10.25
Prime Lending Rate(2) 11.00 – 12.25
Deposit Rate(3) 6.50 - 8.25
Call Money Rate (Low/High)(4)
- Borrowings 2.20 – 3.30
- Lendings 2.20 – 3.30
Savings Bank Rate 3.50
Public Provident Fund 8.00
Employees Provident Fund 8.50
Certificate of Deposit 3.75 – 11.50 in 2009
Commercial Paper 2.83 - 14.00 in 2009
Repo Rate 4.75
Reverse Repo Rate 3.25
(1) Minimum Term Lending Rate (MTLR)
(2) Prime Lending Rate relates to five major banks.
(3) Deposit Rate relates to major Banks for term deposits of more than one year
maturity.
(4) Data cover 90-95 per cent of total transactions reported by participants.
Source: Reserve Bank of India Bulletin- Weekly Statistical Statement, June 26, 2009
It may be observed from the table that interest rates both on savings and lendings have no bearing with inflation rate. There should be some relationship among the interest rates and inflation rate although rates may vary based on competition and market dynamics. Average cost of funds in an economy and average cost of funds of intermediaries should move around Savings rate, Real rate of interest i.e. after adjustment for inflation and average lending rate. Banks’ lending at rates below their cost of funds and very much above the cost of funds is something fishy. Herein lies the need for having a bench market rate of interest to which all rates whether it is average cost of funds, savings rate, borrowing rate and lending rate should be linked. The Bench Mark Rate of Interest has to be arrived at on a scientific basis reflecting on the threshold rate of inflation, GDP growth, Fiscal deficit, Borrowings, and Current Account Deficit. This rate should be evolved as a reference rate for all purposes and different rates presently operating in the economy should necessarily be linked to this rate of interest. Such an arrangement will facilitate smooth transmission of monetary policies and prove to be a boon to the economy in understanding the dynamics of interest rates and arriving at appropriate macro level policy decisions. The fact that interest rates in the system have apparently no alignment whatsoever and operate in a disjointed manner can affect the cost of funds and distort the whole gamut of funds related assessments in the economy. Ignoring this fact does not change the fact has to be recognized?
Bank rate which has been inactive or ineffective in influencing various other rates prevalent in the market can perhaps be developed as a reference and benchmark rate of interest. Such a rate if evolved may turn out to be beneficial to the economy in the long run in implementing both monetary and fiscal policy. There will be better coordination in framing fiscal and monetary policies and taming inflation both WPI and CPI apart from influencing liquidity, investment and production. The real strength of the economy lies in lowering the average cost of funds and making it affordable and available for investments. This is possible only if there is a Bench Mark Rate of Interest for the entire economy.
Dr.T.V.Gopalakrishnan
What is the real rate of interest? and what is the average cost of funds in our economy? Is it the whole sale price index or the consumer price index to be reckoned to assess the real rate of interest by investors and savers ? What is the central rate which influence various other rates? These are some of the questions lingering in the minds of many associated with the economy and finance.
The major problem faced by Indian Financial System is that there is nothing called Bench Mark Rate of Interest/Prime rate which can influence liquidity in various markets like Money Market, Forex Market, Securities Market, Credit Market, etc. Like wise, it is also difficult to identify the average cost of funds in the economy which basically determines investments, production, exports, imports, supply and demand for goods and services. The cost of funds in any economy has to be necessarily linked to inflation index whether it is WPI or CPI so that one can assess the real rate of interest and take investment decisions. At present there are several rates operating in the economy without having much of relevance to inflation, real rate of interest and any sort of alignment to each other. Banks offer uniform savings rate at 3.5% fixed decades back without having any link to inflation rates i.e. -1.3% or their own cost of funds ranging between 5% and 6%. The rates offered by the Government on PPFs or savings deposits with post offices or rates offered by banks on their fixed deposits or the yield on government securities have no relationship with each other and are not linked to any benchmark rate. Similarly there are other interest rates like Bank Rate, different Prime Lending Rates of various commercial banks, Treasury bill Rates, Government of India Securities Rate, General Provident Fund Rate, Repo and Reverse Repo Rate, Call Money Rates, Commercial Paper and Certificate of Deposits rates, Mumbai Inter-bank Offered Rates, Corporate Bonds and Debentures Rates etc; operating in the system. In the absence of a central rate to which other rates can hover around depending on the dynamics of various markets, there is some ambiguity in arriving at the cost of funds in the economy in general and banks’ inability to arrive at their own cost of funds and lending rates on a scientific basis in particular.
In a growing economy, particularly where fiscal deficit and revenue deficit are on the high side and Government resorts to heavy market borrowings at market determined rates of interest crowding out private investments, the interest rates are bound to increase and the cost of funds will naturally be high. This year, the fiscal deficit is projected to be at 6.8% of GDP and the borrowings are estimated to be at Rs 4, 51000 crores.
Rate of interest in an economy has to necessarily influence savings and encourage investment in the productive sector. From this point of view, the rates of interest prevalent at present cannot be said to be doing justice both to savings and investment. Very fact that despite inflation at an unimaginably low level and a very large bout of stimulus packages both from Fiscal and Monetary segments, the lending rates, borrowings and investments have not moved favorably should vouch for this. Comparatively, Rate of Savings particularly in banks continues to be high for want of better alternatives. However, there seems to be an inherent weakness other than the recessionary trend influencing savings and investments. Real rate of interest has never been real is a fact which cannot be ignored for long, and the existence of parallel economy which inhibits smooth transmission of monetary policy has to be recognized fast.
The following table would indicate the rate of inflation and various rates in the financial system.
INFLATION: _1.55% as of June 2009.
Interest Rates in the Financial System
(Per cent per annum)Week ended June 12, 2009
Bank Rate 6.00
I.D.B.I.(1) 10.25
Prime Lending Rate(2) 11.00 – 12.25
Deposit Rate(3) 6.50 - 8.25
Call Money Rate (Low/High)(4)
- Borrowings 2.20 – 3.30
- Lendings 2.20 – 3.30
Savings Bank Rate 3.50
Public Provident Fund 8.00
Employees Provident Fund 8.50
Certificate of Deposit 3.75 – 11.50 in 2009
Commercial Paper 2.83 - 14.00 in 2009
Repo Rate 4.75
Reverse Repo Rate 3.25
(1) Minimum Term Lending Rate (MTLR)
(2) Prime Lending Rate relates to five major banks.
(3) Deposit Rate relates to major Banks for term deposits of more than one year
maturity.
(4) Data cover 90-95 per cent of total transactions reported by participants.
Source: Reserve Bank of India Bulletin- Weekly Statistical Statement, June 26, 2009
It may be observed from the table that interest rates both on savings and lendings have no bearing with inflation rate. There should be some relationship among the interest rates and inflation rate although rates may vary based on competition and market dynamics. Average cost of funds in an economy and average cost of funds of intermediaries should move around Savings rate, Real rate of interest i.e. after adjustment for inflation and average lending rate. Banks’ lending at rates below their cost of funds and very much above the cost of funds is something fishy. Herein lies the need for having a bench market rate of interest to which all rates whether it is average cost of funds, savings rate, borrowing rate and lending rate should be linked. The Bench Mark Rate of Interest has to be arrived at on a scientific basis reflecting on the threshold rate of inflation, GDP growth, Fiscal deficit, Borrowings, and Current Account Deficit. This rate should be evolved as a reference rate for all purposes and different rates presently operating in the economy should necessarily be linked to this rate of interest. Such an arrangement will facilitate smooth transmission of monetary policies and prove to be a boon to the economy in understanding the dynamics of interest rates and arriving at appropriate macro level policy decisions. The fact that interest rates in the system have apparently no alignment whatsoever and operate in a disjointed manner can affect the cost of funds and distort the whole gamut of funds related assessments in the economy. Ignoring this fact does not change the fact has to be recognized?
Bank rate which has been inactive or ineffective in influencing various other rates prevalent in the market can perhaps be developed as a reference and benchmark rate of interest. Such a rate if evolved may turn out to be beneficial to the economy in the long run in implementing both monetary and fiscal policy. There will be better coordination in framing fiscal and monetary policies and taming inflation both WPI and CPI apart from influencing liquidity, investment and production. The real strength of the economy lies in lowering the average cost of funds and making it affordable and available for investments. This is possible only if there is a Bench Mark Rate of Interest for the entire economy.
Dr.T.V.Gopalakrishnan
Tuesday, July 21, 2009
Deficit and Disinvestment
Deficit and disinvestment
This refers to your editorial on the captioned topic( Business line,July!7,2009).
The approach of the Finance Minister to tap the disinvestment route to partly make up the borrowings Rs 400,000 envisaged in the budget is welcome. It is also heartening to observe that SBI capital could manage to tie up more than Rs 70000 crores through debt syndication and structured finance in the first quarter itself indicating a shift in investment climate to high gear.
These are only indications that there are resources in the economy and the government and other intermediaries have to initiate appropriate measures to tap the resources .
There are umpteen ways for the Government to raise resources from both domestic and external market. The measures include well planned and scheduled disinvestment of capital of Public Sector Undertakings, leasing out waste lands belonging to Government, encouraging Public Private Partnership with built in incentives to attract private capital, resorting to massive external borrowings on the present and future strength of the economy and encouraging FDI in areas where investment is badly needed and not so far allowed on some technical grounds.
Prudence in Fiscal Management should continue to be the policy of the Government All said, the proposed borrowing will have its adverse effect in the economy in the form of higher interest rate, inflation and less money for private investment.
(This appeared in Business Line on 20/07/09.
Dr.T.V.Gopalakrishnan
This refers to your editorial on the captioned topic( Business line,July!7,2009).
The approach of the Finance Minister to tap the disinvestment route to partly make up the borrowings Rs 400,000 envisaged in the budget is welcome. It is also heartening to observe that SBI capital could manage to tie up more than Rs 70000 crores through debt syndication and structured finance in the first quarter itself indicating a shift in investment climate to high gear.
These are only indications that there are resources in the economy and the government and other intermediaries have to initiate appropriate measures to tap the resources .
There are umpteen ways for the Government to raise resources from both domestic and external market. The measures include well planned and scheduled disinvestment of capital of Public Sector Undertakings, leasing out waste lands belonging to Government, encouraging Public Private Partnership with built in incentives to attract private capital, resorting to massive external borrowings on the present and future strength of the economy and encouraging FDI in areas where investment is badly needed and not so far allowed on some technical grounds.
Prudence in Fiscal Management should continue to be the policy of the Government All said, the proposed borrowing will have its adverse effect in the economy in the form of higher interest rate, inflation and less money for private investment.
(This appeared in Business Line on 20/07/09.
Dr.T.V.Gopalakrishnan
Wednesday, July 15, 2009
IS IIP growth sustainable?
This refers to your edit ‘Recovery Round the corner’ (ET,july13).The growth in IIP at 2.7%is encouraging, but will it sustain and grow further in the context of poor monsoon observed so far and not so encouraging budget is a major question. The borrowings of the government projected at Rs 4,51,000 crores will have adverse implications on private investments, interest rates and inflationary conditions. The time lag involved between investment and production also needs to be factored in for arriving at the IIP. To what extent the spending by the government on infrastructure, farm and social sector will create demand for industrial products is again dependent on several variables like employment generation, availability of credit at affordable rates etc. Besides domestic consumption and demand alone cannot contribute for enhanced IIP which require exports and imports to pick up considerably.
(Appeared in Economic Times 15 July,2009)
Dr.T.V.Gopalakrishnan
(Appeared in Economic Times 15 July,2009)
Dr.T.V.Gopalakrishnan
Saturday, July 11, 2009
Interest Rate and Monetary Policy
Interest Rate and Monetary Policy
There is a paramount need to reduce the interest rates of bank loans and reduce the cost of funds in the economy to boost investment and production, but the fact remains that banks are not in position to effect any reduction in interest rates due to some compelling reasons.
Their Net Interest Margin hovers around 3% which they do not want to touch what ever may be the compulsions.
Historically, banks get subsidized by depositors and the government and the borrowers get subsidized by all stake holders.
The Prime lending rates and Bench Mark Prime Lending rates do not seem to have been arrived at on scientific basis and their alignment with Whole Sale Price Index and Consumer Price Index is a far cry.
There is a close correlation between high interest rates and Non Performing Advances. The good borrowers have to necessarily take care of the losses arising from out of bad loans. Monetary policy has its own limitations to reflect on the lending rates of banks due to various reasons, the prominent among them being prevalence of administered interest rates in respect of certain segments and the inability of depositors to find alternative avenues of investment.
(This write-up appeared in Business Line on 3rd July 2009)
Dr.T.V.Gopalakrishnan
There is a paramount need to reduce the interest rates of bank loans and reduce the cost of funds in the economy to boost investment and production, but the fact remains that banks are not in position to effect any reduction in interest rates due to some compelling reasons.
Their Net Interest Margin hovers around 3% which they do not want to touch what ever may be the compulsions.
Historically, banks get subsidized by depositors and the government and the borrowers get subsidized by all stake holders.
The Prime lending rates and Bench Mark Prime Lending rates do not seem to have been arrived at on scientific basis and their alignment with Whole Sale Price Index and Consumer Price Index is a far cry.
There is a close correlation between high interest rates and Non Performing Advances. The good borrowers have to necessarily take care of the losses arising from out of bad loans. Monetary policy has its own limitations to reflect on the lending rates of banks due to various reasons, the prominent among them being prevalence of administered interest rates in respect of certain segments and the inability of depositors to find alternative avenues of investment.
(This write-up appeared in Business Line on 3rd July 2009)
Dr.T.V.Gopalakrishnan
Friday, July 10, 2009
Monetary Policy at the crossroads
Monetary Policy at the crossroads
“Monetary policy at the crossroads”(Business Line,July2) brought out some stark realities on issues inhibiting the influence of monetary policy on determining the interest rates on bank loans. The wholesale price index and consumer price index do not move in tandem .
Monetary policy which aims at facilitating economic growth and maintaining price stability often tends to ignore retail prices perhaps expecting the consumer price index to fall in line with the whole price index. This seldom happens as the variables influencing WPI and CPI are at total variance.
The factors influencing CPI have to be identified and need to be suitably factored into the monetary policy. Expecting bankers to take into account the divergence between WPI and CPI while reducing interest rates is neither feasible nor practicable.
The fact that depositors and not the shareholders are the real owners of the banks is well illustrated. That depositors subsidise the borrowers and good borrowers subsidise the bad borrowers are ground realities and it is time the rates on deposits and lending are arrived at on a realistic basis .
The system of making banks lend at concessional rates to exporters and small enterprises irrespective of their earning potential and profitability makes the fixation of BPLR rates unrealistic.
It is also necessary to have a bench mark rate of interest in the economy to influence various other rates. Monetary policy has to necessarily recognize the inhibitions prevailing in the economy and the banking system for its effectiveness in influencing economic growth and price stability .
( This has appeared in Business Line on 4th July , 2009).
Dr.T.V.Gopalakrishnan
“Monetary policy at the crossroads”(Business Line,July2) brought out some stark realities on issues inhibiting the influence of monetary policy on determining the interest rates on bank loans. The wholesale price index and consumer price index do not move in tandem .
Monetary policy which aims at facilitating economic growth and maintaining price stability often tends to ignore retail prices perhaps expecting the consumer price index to fall in line with the whole price index. This seldom happens as the variables influencing WPI and CPI are at total variance.
The factors influencing CPI have to be identified and need to be suitably factored into the monetary policy. Expecting bankers to take into account the divergence between WPI and CPI while reducing interest rates is neither feasible nor practicable.
The fact that depositors and not the shareholders are the real owners of the banks is well illustrated. That depositors subsidise the borrowers and good borrowers subsidise the bad borrowers are ground realities and it is time the rates on deposits and lending are arrived at on a realistic basis .
The system of making banks lend at concessional rates to exporters and small enterprises irrespective of their earning potential and profitability makes the fixation of BPLR rates unrealistic.
It is also necessary to have a bench mark rate of interest in the economy to influence various other rates. Monetary policy has to necessarily recognize the inhibitions prevailing in the economy and the banking system for its effectiveness in influencing economic growth and price stability .
( This has appeared in Business Line on 4th July , 2009).
Dr.T.V.Gopalakrishnan
Thursday, May 28, 2009
BUDGET 2009
Budget 2009
The budget 2009 is very special. It is from a new government which has a backing from parties which cannot dictate terms. It is coming at a time when the economy is having problems both from domestic and international scenario. The world is in financial turmoil and economies particularly advanced economies are struggling to put up a brave show to survive the crisis without adequate success despite resorting to conventional and un conventional measures. The expectations are very high from all sides and there are severe constraints to present a budget satisfying every one. Fiscal deficit is mounting and has surpassed the tolerance limit prescribed under the FRBM ACT because of liberal measures announced with all justification by the previous government to withstand the shocks arising from global economic crisis. General confidence level on the performance of the economy needs to be considerably improved and the general budget is only the way out for the same. This is going to be a major task for the new Finance Minister .Economy has to grow at least at 7% if not more to sustain the confidence level and the other macro economic conditions on an acceptable level.
Although FM has limited avenues to raise revenue for the present, but he has umpteen ways to raise resources for investments to raise revenues for the future. He has only to be innovative in his approach. Some of the areas where innovation is possible perhaps and some areas where a little bit of tinkering can be attempted are as under.
Real Estate Transactions:
This is an area where maximum black money is generated. Land mafias and black money thrive in real estate. Speculation as in capital market although well known and not desirable ethically has been the order of the day in land deals and it needs to be curbed in the interests of the society and the economy. Similarly purchases of flats and buildings taking advantages of tax incentives and interest rate concessions genuinely meant for providing shelter for those who do not have one are on the increase and create inequality in society, help generate black money, evade taxes, use scarce resources unjustifiably and straining government resources. More than the revenue loss to the government, the system in vogue to have the transactions is questionable and unethical. The deals in land and buildings need to be thoroughly reviewed and streamlined. The easiest way is to link the transactions and tie up with banks ,Registration authorities, Governments and Income Tax authorities through IT. This way, the strength of the Indian IT sector can be well encashed and an excellent data base with regard to land deals, money transfers, revenue collections for the Governments can be created with an eye on future policy formulation. A small percentage say 0.05% of high value real transactions taking place in any part of the country can go to Central Government Kitty under a special head which can be used for providing subsidy for poor people to acquire land.
FM can consider to have a fund opened exclusively to attract black money by paying 5% interest and offer some tax incentives on interest earned for two or three years .This tap can be kept open for a few years till Government get a feeling that substantial portion of black money has come to Government's kitty. The subscribers to this fund should also be linked separately to the data base created under land deals.
Transaction Tax:
The securities transaction Tax now in vogue needs to be reviewed and rationalized. In order to broad base the holding of shares among the retail investors and reduce the volatility in share market prices, transactions by individual shareholders should be exempt from this tax or the rates should be the bare minimum. The STT in respect of companies where share holding by retail investors are more than 50%, should be comparatively low. Such a measure will help to broad base the share holding pattern and bring down the frequent speculative nature of transactions. The objective of capital market inter-alia is to find resources and provide liquidity. STT should emerge as a tool to help capital formation, restrict volatility and speculation in the capital market. STT FOR RETAILERS AND INSTITUTIONS should also be at different rates. Instead of having a uniform rate of STT irrespective of the volume and value of transactions ,different rates linked to volume and value also can be thought of.
The concept of transactions tax can be gradually extended to other markets like commodities like gold, silver, currencies, real estates and futures market. In the long run STT should replace capital gains tax both short term and long term in respect of all transactions.STT is administratively convenient and devoid of any possible irregularities. Revenue earning potential is very high through STT.
Income Tax:
The present approach treating individuals and institutions alike for income tax needs a relook. Even among individuals, Tax rates for ordinary citizens earning only salaries and pensions and industrialists, businessmen earning in crores of rupees are the same. The inequity in the rates does not stand justice or reason. An individual earning a salary of Rs 15000 per month has to pay a tax @10% ,where as an individual who earns crores o f Rs as dividend need not pay any tax. An individual’s family budget gets seriously affected when even a Rs 100 is deducted towards tax, where as in the case of another individual having different sources of income is not affected even he is asked to pay a few Rs more towards tax. All are equal before law, but acceptance of law should stand justice, prudence, rationale and reason. Broader shoulders should carry heavier weight is the basic canon of income tax and this seems to have been ignored in our approach to income tax. There should be visible difference in income tax rates for individuals having only salary/pension as income and individuals having income from different sources. The potential to enhance the income and the capacity to spend should also be be the criterions in deciding the tax rates.
Institutions have to be brought under a separate treatment. Small cap, midcap and large cap companies have to be brought under different tax rates. Companies having larger share of retail investors with more than 50% capital holding should be given tax incentives. Companies earning beyond a cut off limit and having retail share holding pattern less than 50% of capital should attract comparatively higher rate of income tax. Regular payment of dividend, Percentage of retail share holding, transparency in accounting standards, corporate governance standards, compliance to regulatory requirements, standards of corporate social responsibility etc should attract tax incentives and also help to improve capital formation, develop healthy capital market and overall improvement of revenues based on principles of equity, justice, financial discipline and prudence.
Dr.T.V.G.krishnan
Although FM has limited avenues to raise revenue for the present, but he has umpteen ways to raise resources for investments to raise revenues for the future. He has only to be innovative in his approach. Some of the areas where innovation is possible perhaps and some areas where a little bit of tinkering can be attempted are as under.
Real Estate Transactions:
This is an area where maximum black money is generated. Land mafias and black money thrive in real estate. Speculation as in capital market although well known and not desirable ethically has been the order of the day in land deals and it needs to be curbed in the interests of the society and the economy. Similarly purchases of flats and buildings taking advantages of tax incentives and interest rate concessions genuinely meant for providing shelter for those who do not have one are on the increase and create inequality in society, help generate black money, evade taxes, use scarce resources unjustifiably and straining government resources. More than the revenue loss to the government, the system in vogue to have the transactions is questionable and unethical. The deals in land and buildings need to be thoroughly reviewed and streamlined. The easiest way is to link the transactions and tie up with banks ,Registration authorities, Governments and Income Tax authorities through IT. This way, the strength of the Indian IT sector can be well encashed and an excellent data base with regard to land deals, money transfers, revenue collections for the Governments can be created with an eye on future policy formulation. A small percentage say 0.05% of high value real transactions taking place in any part of the country can go to Central Government Kitty under a special head which can be used for providing subsidy for poor people to acquire land.
FM can consider to have a fund opened exclusively to attract black money by paying 5% interest and offer some tax incentives on interest earned for two or three years .This tap can be kept open for a few years till Government get a feeling that substantial portion of black money has come to Government's kitty. The subscribers to this fund should also be linked separately to the data base created under land deals.
Transaction Tax:
The securities transaction Tax now in vogue needs to be reviewed and rationalized. In order to broad base the holding of shares among the retail investors and reduce the volatility in share market prices, transactions by individual shareholders should be exempt from this tax or the rates should be the bare minimum. The STT in respect of companies where share holding by retail investors are more than 50%, should be comparatively low. Such a measure will help to broad base the share holding pattern and bring down the frequent speculative nature of transactions. The objective of capital market inter-alia is to find resources and provide liquidity. STT should emerge as a tool to help capital formation, restrict volatility and speculation in the capital market. STT FOR RETAILERS AND INSTITUTIONS should also be at different rates. Instead of having a uniform rate of STT irrespective of the volume and value of transactions ,different rates linked to volume and value also can be thought of.
The concept of transactions tax can be gradually extended to other markets like commodities like gold, silver, currencies, real estates and futures market. In the long run STT should replace capital gains tax both short term and long term in respect of all transactions.STT is administratively convenient and devoid of any possible irregularities. Revenue earning potential is very high through STT.
Income Tax:
The present approach treating individuals and institutions alike for income tax needs a relook. Even among individuals, Tax rates for ordinary citizens earning only salaries and pensions and industrialists, businessmen earning in crores of rupees are the same. The inequity in the rates does not stand justice or reason. An individual earning a salary of Rs 15000 per month has to pay a tax @10% ,where as an individual who earns crores o f Rs as dividend need not pay any tax. An individual’s family budget gets seriously affected when even a Rs 100 is deducted towards tax, where as in the case of another individual having different sources of income is not affected even he is asked to pay a few Rs more towards tax. All are equal before law, but acceptance of law should stand justice, prudence, rationale and reason. Broader shoulders should carry heavier weight is the basic canon of income tax and this seems to have been ignored in our approach to income tax. There should be visible difference in income tax rates for individuals having only salary/pension as income and individuals having income from different sources. The potential to enhance the income and the capacity to spend should also be be the criterions in deciding the tax rates.
Institutions have to be brought under a separate treatment. Small cap, midcap and large cap companies have to be brought under different tax rates. Companies having larger share of retail investors with more than 50% capital holding should be given tax incentives. Companies earning beyond a cut off limit and having retail share holding pattern less than 50% of capital should attract comparatively higher rate of income tax. Regular payment of dividend, Percentage of retail share holding, transparency in accounting standards, corporate governance standards, compliance to regulatory requirements, standards of corporate social responsibility etc should attract tax incentives and also help to improve capital formation, develop healthy capital market and overall improvement of revenues based on principles of equity, justice, financial discipline and prudence.
Dr.T.V.G.krishnan
Thursday, April 23, 2009
Balance sheet Risk
Balance sheet Risk.
Balance sheet of a bank carries many risks and one of the major risks not discussed or figuring in the regulatory and supervisory system presently in vogue is the total disconnect between equity or pure capital and intangibles expanded in the form of toxic assets. There does not exist an ideal or acceptable ratio between equity and intangibles. The formation of intangibles particularly in the form of exotic products unfortunately in the garb of better risk management brings in more hidden risks in balance sheet without being managed and without adequate coverage and accountability.
Initial Capital of a bank is generally decided based on ownership and area of operation. Capital is the base based on which business expansion generally takes place, but banks enjoy a special status and are allowed to expand their business without any linkage to the initial capital . They derive business through raising of deposits and creating advances out of such deposits and because of this they are known as derivative institutions. This exclusive privilege of banks to raise deposits repayable on demand and creation of advances out of deposit funds freely allows them to intermediate between savers and borrowers in an economy and they have over a period achieved the status as major intermediaries enjoying the confidence of public and authorities as well. They have graduated themselves as providers of the support system for economic development and occupy a very key and sensitive position interlinking various markets within and outside economies of different countries. It is important to note that under liberalization and economic integration, forms of banking have undergone sea changes and many innovative products have been introduced to meet the demands of fast changing dynamics of the economy.
Maintenance of adequate capital on a continuous basis is an exercise by itself and expansion of business operations is dependent on the extent of capital adequacy position. Banks maintain capital as per basel i and basel ii guidelines depending on their risk perception, risk formation, risk assessment and management capabilities. Expectation is that capital as per Basel II will enable banks to cover risks of exposure in terms of advances and other balance sheet and off balance sheet items in a more meaningful manner factoring there in all market realities and fluctuations. Greater transparency of risk management will be the end result.
Although the initial capital gets increased over a period with retention of profits, it is a matter of serious concern that the size of equity or Pure Capital excluding the retained portion of profit and reserves and surpluses ie only capital contribution by promoters of any bank compared to its total balance sheet size is literally not significant. The position is still worse when this capital is linked to off balance sheet figures which have a direct bearing on balance sheet figures. Pure Capital as a percentage of balance sheet and off balance sheet figures is something negligible and this should be construed as a major risk investors have to worry about. Financial stability in any economy is the major casualty in the absence of adequate pure capital in Financial institutions and banks. In these days of close integration of different economies financial stability is sine qua non and instability through weak banks is something undesirable and totally unacceptable . The present financial crisis the world is experiencing is on account of inadequate pure capital. The capital adequacy ratio presently in vogue based on either BaseI or Basel II requirements ie taking into consideration the reserves and surpluses as part of capital is therefore inadequate and to that extent risk management through capital adequacy ratio cannot said to be reliable /acceptable in the interest of strong banking for economy and financial stability. This has been more than proved in the financial melt down and failure of many banks the world over. Re capitalization of banks is one of the solutions suggested and implemented. Bringing in the concept of only Pure capital ratio to intangibles, total balance sheet, off balance sheet and balance sheet plus off balance sheet items will prove to be a better approach with more accountability, commitment and involvement on the part of both management and regulator. This should be in addition to the present system of arriving at the capital adequacy to risk weighted assets ratio. Expansion of balance sheet and off balance sheet without relating to pure capital ( ie. excluding reserves and surpluses )can only lead to disaster over a period of time and owner stakeholders in particular are allowed to escape from their responsibility. Reserves and surpluses which get added to capital to arrive at the prescribed capital adequacy ratio, come out of accounting practices followed and the authenticity of these figures is subjected to so many ifs and buts . These reserves and surpluses include high profits earned from toxic assets and may carry hidden risk of additional provisions to be provided for bad debts. In the absence of acceptance of international accounting standards uniformly through out the world and implementation of corporate Governance standards in letter and spirit the figures reported under capital ,reserves and surpluses cannot and should not be taken at face value. Further, the Competence of top management, executive level management, genuineness and effectiveness of auditing and accounting practices in vogue , integrity of data collection, analysis and interpretation of data, reporting of information and transparency standards adopted, effectiveness of regulatory requirements and supervisory and follow-up methods vary from country to country and bank to bank and the figures of reserves and surpluses which are in a way derived have to be discounted and should not be linked to leveraging business too much. In the present system of leveraging business without having any link to pure capital, there is a disconnect between owners whether it is government, public or private and top management. In other words, involvement commitment and accountability which are the basic ingredients of ownership management are virtually missing in the present system of capital adequacy ratio.
It is advisable to bring in additional contribution of pure capital as and when balance sheet size and off balance sheet size crosses certain limits. There should be clear cut linkage between Pure capital and business expansion particularly in the form of toxic assets. There should also be an acceptable ratio between equity and intangible assets. The present Capital adequacy ratio which includes profit derived from toxic assets linked to the risk assessment based on certain models alone has not proved to be fully successful although the overall efficiency of the banking system has improved. The realizable value of assets and erosion of capital excluding reserves and surpluses if any need to be introduced in the regulatory frame work to strengthen the the banking system.
Dr.T.V.Gopalakrishnan
Initial Capital of a bank is generally decided based on ownership and area of operation. Capital is the base based on which business expansion generally takes place, but banks enjoy a special status and are allowed to expand their business without any linkage to the initial capital . They derive business through raising of deposits and creating advances out of such deposits and because of this they are known as derivative institutions. This exclusive privilege of banks to raise deposits repayable on demand and creation of advances out of deposit funds freely allows them to intermediate between savers and borrowers in an economy and they have over a period achieved the status as major intermediaries enjoying the confidence of public and authorities as well. They have graduated themselves as providers of the support system for economic development and occupy a very key and sensitive position interlinking various markets within and outside economies of different countries. It is important to note that under liberalization and economic integration, forms of banking have undergone sea changes and many innovative products have been introduced to meet the demands of fast changing dynamics of the economy.
Maintenance of adequate capital on a continuous basis is an exercise by itself and expansion of business operations is dependent on the extent of capital adequacy position. Banks maintain capital as per basel i and basel ii guidelines depending on their risk perception, risk formation, risk assessment and management capabilities. Expectation is that capital as per Basel II will enable banks to cover risks of exposure in terms of advances and other balance sheet and off balance sheet items in a more meaningful manner factoring there in all market realities and fluctuations. Greater transparency of risk management will be the end result.
Although the initial capital gets increased over a period with retention of profits, it is a matter of serious concern that the size of equity or Pure Capital excluding the retained portion of profit and reserves and surpluses ie only capital contribution by promoters of any bank compared to its total balance sheet size is literally not significant. The position is still worse when this capital is linked to off balance sheet figures which have a direct bearing on balance sheet figures. Pure Capital as a percentage of balance sheet and off balance sheet figures is something negligible and this should be construed as a major risk investors have to worry about. Financial stability in any economy is the major casualty in the absence of adequate pure capital in Financial institutions and banks. In these days of close integration of different economies financial stability is sine qua non and instability through weak banks is something undesirable and totally unacceptable . The present financial crisis the world is experiencing is on account of inadequate pure capital. The capital adequacy ratio presently in vogue based on either BaseI or Basel II requirements ie taking into consideration the reserves and surpluses as part of capital is therefore inadequate and to that extent risk management through capital adequacy ratio cannot said to be reliable /acceptable in the interest of strong banking for economy and financial stability. This has been more than proved in the financial melt down and failure of many banks the world over. Re capitalization of banks is one of the solutions suggested and implemented. Bringing in the concept of only Pure capital ratio to intangibles, total balance sheet, off balance sheet and balance sheet plus off balance sheet items will prove to be a better approach with more accountability, commitment and involvement on the part of both management and regulator. This should be in addition to the present system of arriving at the capital adequacy to risk weighted assets ratio. Expansion of balance sheet and off balance sheet without relating to pure capital ( ie. excluding reserves and surpluses )can only lead to disaster over a period of time and owner stakeholders in particular are allowed to escape from their responsibility. Reserves and surpluses which get added to capital to arrive at the prescribed capital adequacy ratio, come out of accounting practices followed and the authenticity of these figures is subjected to so many ifs and buts . These reserves and surpluses include high profits earned from toxic assets and may carry hidden risk of additional provisions to be provided for bad debts. In the absence of acceptance of international accounting standards uniformly through out the world and implementation of corporate Governance standards in letter and spirit the figures reported under capital ,reserves and surpluses cannot and should not be taken at face value. Further, the Competence of top management, executive level management, genuineness and effectiveness of auditing and accounting practices in vogue , integrity of data collection, analysis and interpretation of data, reporting of information and transparency standards adopted, effectiveness of regulatory requirements and supervisory and follow-up methods vary from country to country and bank to bank and the figures of reserves and surpluses which are in a way derived have to be discounted and should not be linked to leveraging business too much. In the present system of leveraging business without having any link to pure capital, there is a disconnect between owners whether it is government, public or private and top management. In other words, involvement commitment and accountability which are the basic ingredients of ownership management are virtually missing in the present system of capital adequacy ratio.
It is advisable to bring in additional contribution of pure capital as and when balance sheet size and off balance sheet size crosses certain limits. There should be clear cut linkage between Pure capital and business expansion particularly in the form of toxic assets. There should also be an acceptable ratio between equity and intangible assets. The present Capital adequacy ratio which includes profit derived from toxic assets linked to the risk assessment based on certain models alone has not proved to be fully successful although the overall efficiency of the banking system has improved. The realizable value of assets and erosion of capital excluding reserves and surpluses if any need to be introduced in the regulatory frame work to strengthen the the banking system.
Dr.T.V.Gopalakrishnan
Monday, March 16, 2009
The global financial crisis –best opportunity to bring world economies closer
The present global financial crisis, which emanated from the failure of financial system in US and spread to developed and developing economies alike thanks to inter -linkages of economies under liberalization, is threatening the very stability of the world economy. Seemingly, a Great Recession if not a repetition of 1930’s Depression is gathering momentum. As per the IMF the world will likely contract this year in a great recession. It expects global growth to slow below zero this year, the worst performance in most of our life times. Although the conditions of economies in 1930 and now differ widely due to substantial changes witnessed in political, economic, social and technological scenario over the last eight decades, the solution so far tried by various countries through fiscal and monetary polices, more or less on the same pattern adopted in the 30s, has not met with the desired success. There is a pall of gloom and crisis of confidence everywhere. IMF MD told financial leaders recently that “continued deleveraging by world financial institutions combined with a collapse in consumer and business confidence is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled.”
The present crisis needs a different approach altogether. It requires a socio economic- educational and cultural approach involving government, financial, social, educational institutions and cultural organizations. The problem can to a great extent be tackled culturally and socially by encouraging tourism both domestic and international. The maxim ‘demand creates supply’ has to be recognized and adopted for implementation by all economies in letter and spirit. Tourism industry can create all round demand and supply will have to be necessarily met.
Tourism can be at local, regional, state and international levels depending on the profile of people. Economies have to be actively proactive in encouraging and supporting each other in developing both national and international tourism. Educational tours, social, cultural and business visits, travels for the purpose of basic and advanced learning in different areas of science, technology and humanities within and outside countries will create demand for all sorts of goods and services. This is the time to organize both at national and international levels seminars, workshops, symposiums etal to understand in depth the causes that led to this deep crisis, the extend of damages inflicted in different economies and arrive at solutions which are easy to implement. The miserable failure of risk management so far understood and practiced need to be revisited, redefined and replaced with simple measures which are intelligible and implementable and finally capable of de- risking institutions and economies.
Domestic tourism subsidized and induced by the governments by offering incentives will encourage travel creating demand for infrastructure like roads,transports, communication, hotels, motels and entertainments. This is the time for Corporates and all types of large scale organizations all over the world toincentivize tours and travels through innovative compensation packages. This will also help inter-alia improve productivity within the organization.
Economies have to open up socially and culturally paving way for economic development. International tourism is the way out. Since exotic financial products introduced have ruined the financial system in many countries starting with US and brought disaster to the real economies through out the world shaking the confidence of people every where, the only pragmatic way to revive the confidence and bring back the people to active and constructive economic activities is through educational tours, social and cultural visits and that is possible only by way of induced international tourism. Understanding the socio, economic. cultural political conditions of different economies by people belonging to different classes / groups will also go a long way in framing and implementing economic and fiscal policies for the future which can minimize damage and maximize gains. People around the world need worldly exposure in these days of global integration and this can be achieved only by encouraging international tourism.
Though the idea may not look impressive and appealing in the present scenario of all round crises, it can turn out to be successful and turn around the economies if implemented with commitment and sincerity. It is comparatively inexpensive, easily implementable and definitely result oriented. Risk if any, is bearable and manageable. Supplies to meet the varieties of demands of tourists which include among other things food, shelter and clothing apart from transportation will automatically give a boost to varieties of economic activities including services. Timing of tourism and meticulous implementation of incentive package will do the trick. The direct and indirect benefits that accrue to the economies out of well managed tourism will be substantial and will turn out to be a boon particularly for real economies consisting of agriculture, manufacturing, exports, imports and services.
The confidence lost has to be regained and for that measures other than fiscal and monetary measures have also to be seriously considered and implemented. The ultimate objective is to achieve economic recovery for the whole world and the activation of tourism industry both domestic and international can be one of the easy options towards this end and it should form part of the stimulus package.
Dr.T.V.G.Krishnan
Saturday, February 21, 2009
Can Gold Reserves Rescue the World?
As per the data at the end of 2004, Central Banks and official organizations held 19% of US $ 4.39 trillion of gold ever mined as a reserve asset (http://en.wikipedia.org/wiki/official_gold_reserves). This is the time for Central Bankers to come together and do an introspection on the need to keep so much of gold reserves when the real economies are in doldrums and are badly in need of liquidity for both short and long term investments. No doubt gold serves as a hedge against high inflation and other intangible assets but too much of attachment to gold in these times of crises is neither economically desirable nor socially acceptable. These investments in gold by those who can afford help only to widen the chasm between the haves and have nots. Unfortunately even the poorer countries try to amass gold at any cost irrespective of their capacity and the need for the same from the economic, social and cultural angle. The love for gold needs to be reviewed and it is time for all central bankers to review their gold reserves and liquidate part of the reserves and improve monetary liquidity in the system. The heavy fiscal deficit incurred by various Governments and monetary concessions offered by Central bankers can be to a great extent offset / adjusted by liquidating part of the gold. Gold reserves any where should be viewed on par with Non Performing assets as far as the economies are concerned and there should be a prudential limit fixed on such assets. The approach of countries, their central banks, IMF and the World Bank should be to review the position of Gold in the fast changing global scenario and take away the excess glitter it enjoys and use it to provide the much sought after happiness and welfare in society through creation of employment opportunities.
What the world requires badly today is a golden age and not gold reserves. The build-up of gold needs to be discouraged and concerted efforts have to be put to convert gold into liquid monetary resources and utilize them for productive investments in avenues capable of creating massive employment leading to massive consumption. It is time for various governments and central bank authorities to think differently in respect of investments in gold and initiate appropriate measures to liquidate part of the gold, improve liquidity in the system and encourage productive investments. What the world is facing today is an unusual situation and this has to be countered only with an unusual solution. May be the gold reserves can rescue the situation. International Monetary Fund can take the initiative in the matter. The wisdom lies in converting the gold reserves into social good for the welfare of humanity.
Tuesday, February 17, 2009
Fraud Mitigation Fund
Some of the major frauds detected during the last two decades and the amount involved roughly are given under.
| Scamster | Year | Amount (Rs Crores) |
| Harshad Mehta | 1992 | 4000 |
| Bhansali | 1995 | 900 |
| Dinesh Dalmia | ---- | 595 |
| Abdul Karim Telgi | 2000 | 171 |
| Ketan Pareikh | 2001 | 1500 |
| Ramalinga Raju | 2008 | 8000 |
Apart from these few detected frauds, there are several other irregularities which go unnoticed. Institutions also had to be closed down/forcefully merged with some healthy institutions to save deposits/investments of public and restore the confidence level in the system. They include Global Trust Bank Ltd, Madhavapura Coop Bank, United western bank Ltd, Lord Krishna Bank Ltd and several small and medium sized cooperative banks and financial companies. There are several instances of companies which have raised huge funds from capital market and were allowed to be liquidated, vanished. Public have lost heavily and the economy has suffered very badly. SEBI should be having the list of companies which have raised capital and vanished subsequently without compensating the gullible public who were lured to invest in capital market through IPOS. The overall loss, on account of scams, frauds, irregularities and fudging of accounts with the knowledge and without the knowledge of the authorities, to the exchequer and ultimately to the public runs into thousands of crores directly and indirectly.
Unless and until some very concrete measures are in force to compensate the innocent shareholders / investors / depositors who become victims of frauds perpetrated by promoters of companies such as Satyam, they will not have confidence in capital market. Investors are often taken for a ride by promoters, market operators and even by regulators by either not adhering to the regulatory prescriptions or taking advantage of the loopholes in the supervisory system. Apart from compensating the share holders for their losses on account of frauds committed by promoters, there should be severe penalty for any irregularity observed in capital market related transactions and it is advisable in this regard for SEBI to have a separate FUND mobilized from all listed companies / those connected with companies and market operations. Promoters, Board of Directors, Accountants, Auditors, Bankers and others including Regulators who are party to any irregularity should be made to compulsorily contribute towards this fund. Penalties should be imposed depending on the magnitude of irregularities / loss to the exchequer. SEBI should maintain this fund and make it transparent for public to see. The size of the fund over a period will turn out to be a good indicator for all to see to what extent the listed companies adhere to the regulations and what type of irregularities are being committed / detected. This will prove to be a mechanism to discipline accountants, auditors, bankers and all connected with the companies' operations. The fund can also be utilized to meet the expenditures connected with detection of fraud or subsequent investigations and finally to compensate the investors... This will go a long way to restore the much needed confidence in capital market.
Public investors need compensation in the form of money and that alone will satisfy them. This requires a fund and it should come from the perpetrators of fraud and not from the Government. The Message should be very clear to promoters of companies, Board of Directors, top executives, accountants, auditors, bankers, regulators and who ever is connected with the affairs of the companies. This is the social responsibility of the Government and part of the corporate governance of the companies.
Dr.T.V.G.Krishnan
Tuesday, February 3, 2009
World Financial Crisis, Global Recession and the role of Twin institutions viz; The World Bank and the IMF.
World Financial Crisis, Global Recession and the role of Twin institutions viz; The World Bank and the IMF.
The world is in financial turmoil and the global economy is in recession. Economic slowdown, Unemployment, Loss of income, Erosion of confidence in the leadership and regulatory system are the results. Because of the inter-linkages of various economies, the contagion effect is faster and the resilience of individual economies has limitations. This has adversely affected both the developed and developing economies. In US and other developed countries the financial sector crisis got passed on to real sector and in some developing countries like India the real sector crisis gets passed on to the financial sector. Fiscal and monetary measures taken by various Governments and Central banks of different countries have not helped to tide over the crisis. Situation is worsening day by day and the fear of facing a depression comparable to that of 1930 world depression is being talked around. Is it so bad and really unmanageable as is made out to be? The conditions in 1930 and the present conditions have no comparison what so ever taking into consideration the developments witnessed in the world’s political, economic, social and technological scenario particularly during the last four decades.
The present days problems are basically man made and have come out of greed. The financial system which is to provide only a supportive role to the real sector is unfortunately allowed to take a lead and the result is there for all to see and experience now. In the name of innovations under the guise of Risk Management several exotic financial products were introduced and encouraged without examining the essentiality of such products and ensuring adequate regulatory system so that the products really served to support the real sector and emerged as something to be proud of. On the contrary the so called innovative financial products vanished from the scene without any trace leaving the real sector in doll rums .The problem in the real sector is a reality now and nobody knows how to come out of it. The reasons for 1930 depression and present day recession are therefore strictly not comparable although the results are more or less same.
The failure of regulatory system and the lack of initiatives from the world renowned institutions like the Word bank and the IMF who have played a key role in reconstructing the world economy from the devastations of the 1930 depression and the world war, have in a way contributed to the present state of affairs. The twin institutions with their expertise and knowledge of the economic and various other conditions of different countries could have visualized the dangers the world was facing the moment symptoms appeared in the US and come out with some concrete measures to prevent the present world crisis. They could and should have played a pro active role and initiated measures to sustain the growth momentum in some of the developing countries particularly the BRIC group which has the potential to support the world economy in its present crisis. Billions and billions of dollars have been spent and earmarked by various central banks and governments to bail out their respective economies and financial systems, but there are no indications of any tangible outcome as production of real goods and related services have come to a stand still or declined considerably may be due to lack of effective demand from developed countries in particular. There is basically crisis of confidence every where and this is where these two institutions have to take the lead and resolve the crisis. This is the time for these world level institutions to muster resources, identify the gaps and potentials for real sector development taking the positive sides of linkages of integrated economies. This is the best opportune moment to transfer technology and technocrats from advanced countries to developing and underdeveloped countries to develop the very essential infrastructure in these countries which can sub serve the needs of even the developed countries. Such a measure will help to solve the unemployment problem in the developed countries and at the same time take care of employment of huge human resources scattered all over the world. Some of the specific areas where these twin institutions have to seriously think and be pragmatic in solving the present global crisis are as under.
Physical infrastructure.
Development, upkeep and modernization of infrastructure like public transport system i.e; land, air and water particularly in underdeveloped regions, developing nations and including developed nations should be taken up on top priority basis seeking cooperation of all. Similarly other infrastructure like generation of electricity, provision of shelter and clean drinking water to the whole population of the world irrespective of the region where they belong to will go a very long way in arriving at some solution for the present crisis and the whole world would become a lovely place to live and enjoy. There are about 185 countries in the world and they are in different stages of economic development and some countries for no fault of theirs suffer for want of some basic needs for their human race to survive. This is the best opportune moment for all to join together and come to the rescue of the human race who suffers for no reason of their own. Development of all possible physical infrastructure will automatically increase the demand for money, men and materials and help transfer of best technology of the world to places where they are needed. Monetary resources have to be found from through out the world and this is not the time to be commercial minded and self centered. World Bank and IMF can take the lead and with the cooperation of all countries, the present crisis can/should be easily overcome for the benefit of mankind in any part of the world.
Social infrastructure:
This is another area, where world attention is called for. Education, health, general living standards, social systems, customs, civilization, culture, ethics and values etc vary from country to country impeding the economic progress. World Bank and IMF can take some initiatives to identify the problems in different countries and take some pro active measures to improve the living standards particularly in developing and undeveloped regions. This step alone will increase the demand for social goods and help the nations to prosper. These two institutions have to take a lead to think out of the box and come out with really innovative measures in all areas of social development without leaving any scope for greed and exploitation. This is the time for these institutions to have more of a philosophical approach rather than purely commercial to overcome the present crisis. The result will be tremendous bringing economic prosperity every where.
Ups and downs are natural and the present crisis should be taken as a god given opportunity to bring all nations together irrespective of their economic, social and political status and work for the welfare of humanity as a whole irrespective of their religion, caste and creed. These twin institutions with their experience, expertise and knowledge of the economic social, political and technological conditions of each and every country can do wonders and once again prove their mettle in saving the entire world from the present crisis. Technology particularly information technology should be put into optimum use to save the whole world from the present rut. Human welfare through out the world should be the long term vision and getting out of the present global crisis as early as possible should be the short term mission of these world class institutions.
Dr.T.V.G.Krishnan
The world is in financial turmoil and the global economy is in recession. Economic slowdown, Unemployment, Loss of income, Erosion of confidence in the leadership and regulatory system are the results. Because of the inter-linkages of various economies, the contagion effect is faster and the resilience of individual economies has limitations. This has adversely affected both the developed and developing economies. In US and other developed countries the financial sector crisis got passed on to real sector and in some developing countries like India the real sector crisis gets passed on to the financial sector. Fiscal and monetary measures taken by various Governments and Central banks of different countries have not helped to tide over the crisis. Situation is worsening day by day and the fear of facing a depression comparable to that of 1930 world depression is being talked around. Is it so bad and really unmanageable as is made out to be? The conditions in 1930 and the present conditions have no comparison what so ever taking into consideration the developments witnessed in the world’s political, economic, social and technological scenario particularly during the last four decades.
The present days problems are basically man made and have come out of greed. The financial system which is to provide only a supportive role to the real sector is unfortunately allowed to take a lead and the result is there for all to see and experience now. In the name of innovations under the guise of Risk Management several exotic financial products were introduced and encouraged without examining the essentiality of such products and ensuring adequate regulatory system so that the products really served to support the real sector and emerged as something to be proud of. On the contrary the so called innovative financial products vanished from the scene without any trace leaving the real sector in doll rums .The problem in the real sector is a reality now and nobody knows how to come out of it. The reasons for 1930 depression and present day recession are therefore strictly not comparable although the results are more or less same.
The failure of regulatory system and the lack of initiatives from the world renowned institutions like the Word bank and the IMF who have played a key role in reconstructing the world economy from the devastations of the 1930 depression and the world war, have in a way contributed to the present state of affairs. The twin institutions with their expertise and knowledge of the economic and various other conditions of different countries could have visualized the dangers the world was facing the moment symptoms appeared in the US and come out with some concrete measures to prevent the present world crisis. They could and should have played a pro active role and initiated measures to sustain the growth momentum in some of the developing countries particularly the BRIC group which has the potential to support the world economy in its present crisis. Billions and billions of dollars have been spent and earmarked by various central banks and governments to bail out their respective economies and financial systems, but there are no indications of any tangible outcome as production of real goods and related services have come to a stand still or declined considerably may be due to lack of effective demand from developed countries in particular. There is basically crisis of confidence every where and this is where these two institutions have to take the lead and resolve the crisis. This is the time for these world level institutions to muster resources, identify the gaps and potentials for real sector development taking the positive sides of linkages of integrated economies. This is the best opportune moment to transfer technology and technocrats from advanced countries to developing and underdeveloped countries to develop the very essential infrastructure in these countries which can sub serve the needs of even the developed countries. Such a measure will help to solve the unemployment problem in the developed countries and at the same time take care of employment of huge human resources scattered all over the world. Some of the specific areas where these twin institutions have to seriously think and be pragmatic in solving the present global crisis are as under.
Physical infrastructure.
Development, upkeep and modernization of infrastructure like public transport system i.e; land, air and water particularly in underdeveloped regions, developing nations and including developed nations should be taken up on top priority basis seeking cooperation of all. Similarly other infrastructure like generation of electricity, provision of shelter and clean drinking water to the whole population of the world irrespective of the region where they belong to will go a very long way in arriving at some solution for the present crisis and the whole world would become a lovely place to live and enjoy. There are about 185 countries in the world and they are in different stages of economic development and some countries for no fault of theirs suffer for want of some basic needs for their human race to survive. This is the best opportune moment for all to join together and come to the rescue of the human race who suffers for no reason of their own. Development of all possible physical infrastructure will automatically increase the demand for money, men and materials and help transfer of best technology of the world to places where they are needed. Monetary resources have to be found from through out the world and this is not the time to be commercial minded and self centered. World Bank and IMF can take the lead and with the cooperation of all countries, the present crisis can/should be easily overcome for the benefit of mankind in any part of the world.
Social infrastructure:
This is another area, where world attention is called for. Education, health, general living standards, social systems, customs, civilization, culture, ethics and values etc vary from country to country impeding the economic progress. World Bank and IMF can take some initiatives to identify the problems in different countries and take some pro active measures to improve the living standards particularly in developing and undeveloped regions. This step alone will increase the demand for social goods and help the nations to prosper. These two institutions have to take a lead to think out of the box and come out with really innovative measures in all areas of social development without leaving any scope for greed and exploitation. This is the time for these institutions to have more of a philosophical approach rather than purely commercial to overcome the present crisis. The result will be tremendous bringing economic prosperity every where.
Ups and downs are natural and the present crisis should be taken as a god given opportunity to bring all nations together irrespective of their economic, social and political status and work for the welfare of humanity as a whole irrespective of their religion, caste and creed. These twin institutions with their experience, expertise and knowledge of the economic social, political and technological conditions of each and every country can do wonders and once again prove their mettle in saving the entire world from the present crisis. Technology particularly information technology should be put into optimum use to save the whole world from the present rut. Human welfare through out the world should be the long term vision and getting out of the present global crisis as early as possible should be the short term mission of these world class institutions.
Dr.T.V.G.Krishnan
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