Streamlining Financial Sector -Biggest Stumbling Bloc are Players

         
 Business Economics & Services team (BEST)



                    Streamlining Financial Sector -Biggest Stumbling Bloc are Players


 At least, regulators are taking cognizance of some of the anomalies in the financial system in the country, which is a good augury. The foremost is the report that capital market regulator - SEBI-  is proposing to bring down cost of investing in mutual funds. It is reliably known that the market regulator is toying with the idea of capping cost of asset under management (AUM) managed by a mutual fund to 1.5%,. Presently, mutual funds are allowed to charge upto 2.5%, which is steep as compared to existing rate prevalent in the developed markets. The advisory committee set up by SEBI has recommended that the total expense ceiling should be reduced to 1.5% of daily net assets in case of equity oriented schemes and in case of closed-ended schemes the cap  should be at 1.5% with an extra 30 basis points for inflows flows from beyond tier 2 and tier 3 cities.
Another important development in the financial sector is the norms evolved by the Banking Codes and Standard Board of India (BCSBI), which has made the onus of proof on the banks to prove e-frauds, which was earlier cast on the customers. BCSBI is an autonomous institution set up by the RBI in 2008 to evolve codes and standards for banking operations in the country.
Both these developments have created consternation among mutual funds and banks. The mutual funds feel that cap in the administrative expenses will hit them badly. According to them, many mutual funds are loss making ones and with the cap on expenses, many will have to fold up their operations. But what is forgotten is the likely impact the norm will have on the retail investors, who are still shying away from the capital market, after they have burnt their fingers during the capital market crises that had happened at regaualr intervals. While some of  the large mutual funds are seemingly hopeful of a revival of  interest by the retial investors, many do not think so. The small mutual funds operators feel that with the capping of the expense, they will not be able to sell mutual fund products in tier 2 and tier 3 cities, where they have to spend more for capturing the market by gigging attractive doles to distributors.
However, retail investors are happy about the development. If the proposal is implemented, they feel that it will rein in funds from charging exorbitant expenses. Fixation of 1.5 % as the cap, thy point out is in tune with the cap prevalent in other countries. In many situations, they point out that mutual funds rake in a lot of money of the customers as expenses towards cost of management. They also want the  SEBI to come out with norms for more disclosures by the mutual funds, since many of them hide the facts from customers, particularly, commissions paid to the distributors. it may be noted that high commission paid to the agent was a bone of contention in the insurance industry. For some of the schemes like unit linked insurance, the percentage of commission was high as 40%. Now, that system has been replaced and the agent has to get the commission from the customer.
Significantly, banks through their lobby organization Indian Bank Association (IBA) has voiced their concern about the BCSBI norm. They want the earlier regime should continue so that teh onus of proof of any e-frauds should lie with the customer. There is an argument is that many of the frauds are happening with the complicit understanding of the customers and they share  their password   with the fraudsters and once the fraud happens they try to pose as innocents. It may be noted that the new norms will be applicable only to cases where the amount involved is Rs 10,000. For amounts, higher than this, the onus is still on the customer.
It is a good augury that the government and the regulators are taking cognizance of these anomalies in the financial sector. Undoubtedly, this will shore up the confidence of the people in the system, which will have many positive spin offs.          

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Are You taken for a Ride by Bankers while Availing Housing Loans?

  Are You taken for  a Ride by Bankers while Availing Housing Loans?

It is claimed that the banking sector is regulated and controlled by RBI. But how far that control is effective is a question being asked by many. RBI has come out with a dictum that no bank can charge per-payment penalty for early repayment of housing loans. Banks claim that they have adhered to the terse warning by the regulator. But reality is different. They may not be charging a  pre-payment penalty and the procedure for extracting money from the customers are packaged in different forms and hues. I shall explain a few situations, where customers are taken for granted.
Situation one.
One is availing a loan at a specific rate of interest, say 10%. The interest rate falls and the bank announces that the lending rate for housing loans have been brought down to say 9%. Many innocent customers, who must have availed the loan either would not have seen the report or must have thought that it is an automatic process, wherein banks will slash the rate of interest chargeable on the housing loan. To his or her great surprise, the banks continue to charge the same interest rate.
Situation 2
The customer goes to the bank and complain that he is not been given the benefit of reduction in interest rate. He or she is been told that unless they ask for the reduction in writing and signed by the loanee, such requests cannot be acceded to. When the customer asks why, the stock answer is that it is in the contract signed. It is true that such clauses are tucked in some corners, which the borrower overlooks at the time of  contracting the loan. His main concern at that point is to get the loan sanctioned since he must have already paid advance to the builder.
Situation 3  
The borrower applies for the change in interest rate in writing.  He goes by the presumption that there is no  charge payable. He is wrong. The bank charges an amount, which is calculated on the basis of a table and the borrower can switch over to the new rate only after payment of that one time charge, which varies in accordance with your outstanding loan amount. If you argue with the banker, stock comes the answer that it is a part of the contract. Mind you, this amount you have to pay every time you move from one interest regime to the other. On the other hand, if the interest rate goes up, banks without informing you will raise the interest rate.  And if we have to move into a new interest regime, a new contract is signed. I still do not understand why then we have the fixed  and moving rates and options are sought from the customers.
Situation 4
Have you ever calculated how the banks calculate the   equated monthly installments (EMI). You will be in for a heart attack. Of course, the EMI amount is depending on the loan amount and the length of the repayment period. How it is calculated is the most surprising factor. Assuming that you have taken loan of Rs 30 lakhs for 20 years and you are happily paying the monthly installments without default. After an year or so, you may like to check as to how much capital you have paid off. To your surprise, you find that your capital amount has diminished by a fraction. You might ask the banker why it is  so? He will explain how that has happened. The initial years installments component is heavily tilted towards the quantum of interest. To put in simple language, the banks would have realized their interest component in less than  10 years if the your loan repayment period is 20 years.
Situation 5
Irked by the high handedness of the bank, you raise some money to repay the loan amount either in part or in full. There also you will not have an easy walk. You have to do some paper work. The banks will have to know from where you have mobilized the fund. You have to give your pass book photostat copies and an application for reapayment. Also, the amount has to go from the same account of the loanee. On the top of t, the banks charge an amount which they say to cover up the interest rate for a period if the repayment is partial. Assuming that you are repaying the amount on 8th of a particular month, banks will calculate the interest falling due between 1  and  8 of the said moth. I am not sure what will await a person who wants to repay in full. There may be some charges levied by the banks, as it was the case earlier.
Situation 6
Any mistake on your part either due to cheque  bouncing or any other technical error is penalized by charging more from you. Even if the mistake has happened on account of the goofing up of bank officials, you have to bear the brunt. And with every passing day, you have to pay more penalty.

Hello, is the regulator hearing all these? Bankers have their lobby to take up the issues such as Indian Banks Association (IBA), which is presently resisting the norms issued by the Banking Codes and Standard Board of India  (BCSBI) putting  the  onus on   banks to prove e-frauds. Earlier, the onus of proof was on the customers. They want the status quo to follow and harass the customers for the omissions and commissions  committed by them or their staff in complicity with the fraudsters.
When we are talking about shunning corruption, it also takes in its fold corrupt practices, which have been created to protect some interests at the cost of others. Banks should be the center of focus for our drive to banish corruption.        

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It is Time for Modi to be Firm on Development Agenda

Business Economics & Services Team (BEST)


                            It is Time for Modi to be Firm on Development Agenda

Modi Administration is making the right noises both in India and abroad. But the trillion dollar question is whether it will help fructifying the results. Admittedly, the administration's effort is to make India a happening place and is going all out to launch a host of programs, policies and legislation to convey that message loud and clear. Those who are criticizing the government that there is no original thinking  in its polices should admit that Modi administration has succeeded in sending strong message to the bureaucracy that it should shun lethargy and delay tactics  and getting on to its business. At least, the signals that are coming from the corridors of power stand testimony to that. Not many officials are on junket abroad so also the ministers who in the earlier dispensations used to travel abroad and that too  in chartered aircraft. They used to take plane loads of journalists along with them in a surrogate manner, seeking the help of business associations to foot their bill and later reimbursed to them much more than the expenses incurred by them. Also, the lower bureaucracy is dot on time to the office  to mark their attendance and shun taking French leaves for fear of being caught.

These are cosmetic changes and often dubbed as the handiwork of a headstrong headmaster, who knows how to control the pupils at the tip of a cane. It will be a good augury if the bureaucracy develops a new mindset and should make 'work hard' as a habit and not when they are compelled to that. But what they are doing during the work hours are not known much. Many corporate honchos privately confide that not much has changed in the way in which the government decisions are taken. They complain that  even some of the senior ministers  are scary of taking decisions since they feel that they are often upstaged by PMO or being questioned by them even for minor decisions that are taken. Their interactions with media and the stakeholders like industry, pressure groups etc are infrequent and they often try to evade important questions posed to them. Those ministers who spoke out of turn and without being circumspect are pulled up.

The other important stumbling bloc that Modi administration is facing is the lack of cohesiveness in its articualtion. While the prime minsters office and council of ministers, barring a few, are trying their best  to put across development before all other goals, the splinter groups within the party are creating a well orchestrated campaign to downplay the development agenda. They are ferreting out all issues except the development ones and trying to taking the country back to the 18th century. Many feel that the development agenda will be de railed when there is a preponderance of social unrest, law and order problems and insecurity among various sections of the society. For instance, they feel that  the perceived or alleged stand against  Muslims and Christians can send wrong signals to the Middle East and the developed world, which can considerably affect the flow of investments and businesses from these regions, which are rich in capital. For instance, they point out that despite the forward looking polices of the government in many areas, there has not been any appreciable flow of investment, during th last months or so. On the other hand, there has been drop in investment from countries like Japan, which are  taking a wait and watch approach before committing  their funds. Also, the investment by FIIs and private equity funds can take a negative turn once the interest rate in the US  increases, which is quite possible in the coming  days.

Not that Modi Administration is not aware of these developments. But it is buying time to use the stick against these sections within its party fold. Now it is time to take the inevitable step since the next election to the assembly is in 2016, except that in Delhi, where such forces cannot upset the election calculations. Even if Delhi elections adversely affect its election prospects, it should act fast, for lack of action will be interpreted as thumps down to  development agenda, a plank on which the Modi government has been elected to the office.         

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The Great Indian Digital Divide

Business Economics & Services Team (BEST)



                                           The Great Indian Digital Divide

Earlier Indian society was divided  on two counts: haves and have nots.  Presently, the division is more in terms of those who are net connected and not. In a way these two divisions are  curiously linked. The net users are mainly those who are aligned with the mainstream. And the penetration of net and telephony is relatively low among those who are underprivileged and off the mainstream.

Will India  tackle this isue in the near future? Admittedly there are various schemes to connect India launched long back. At least 10 years back, a massive drive was  started to connect the district headquarters with the states and Center administrative apparatuses. Also,  a massive scheme was launched to connect courts, universities, research laboratories, colleges, schools, Panchayats etc. There has been progress towards that but not commensurate with the desired goals. In India, there is no district or Panchayat, which can claim cent percent connectivity. It is a laborious process especially when it comes to digitizing land records since many such records are caught up in disputes. The next impossible task is digitizing court records. Though India  is the most litigant country, the money spent on courts at various layers are hardly 4% of the gross domestic product. A massive modernization of justice delivery system needs outlays much more than that. The result is that undue delays take place in getting the justice,sometimes the cases are  dragged  for some 50 years or so, causing great hardships to the people.

The next area that needs close attention is education. many grant schemes are drawn up for connecting universities, colleges and schools, many such schemes are still in paper. The main reason pointed is the lack of finance to funds such schemes. There was a talk about outsourcing such projects to highest bidders. Many  large corporations from India and abroad have shown interest in undertaking such schemes. But the problem pointed out was the security concerns , since some of the technologies and gadgets may contain malware and spyware.
The recently launched schemes are mostly net based such as financial inclusion scheme, clean India, direct transfer of subsidies etc. But it has to be seen how soon such  schemes  can be  introduced since the backbone on which such schemes can work is Adhar, the digital account of each citizen and household. Unfortunately, the exercise to complete the project is still on and it is lingering on for quite sometime.

One has to introspect why India is lagging behind in connecting domestically despite its head start  in the ICT sector. The reasons are not far to seek. India has put its best efforts to cater to the digital needs of other countries, ignoring the domestic segment. That too it happened in an unplanned manner. Even the government sources admit that ICT sector in India has grown despite government support. The only aim till date is to maximize its export to bridge the gap in the merchandize exports and imports. Whereas China, the next door neighbor focused first on the domestic connectivity rather than exporting its products and solutions. That enabled the country to modernize its manufacturing sector. Whereas, in India manufacturing and agriculture sectors are not in sync with its capabilities in the ICT.
The future lies in focusing on ICT applications in the domestic sector. That is possible only when a strong digital backbone is created to spread the infrastructure to areas, regions and people who are bypassed by digital era. That is the basic objective of Digitizing India. But it is to be seen how far India will succeed in that in the near future since the priorities of the government is shifting from development agenda to vote bank politics. That is the least expected from the new dispensation, which has come into power on its development manifesto.     

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Indo-US Trade War Hots Up Before Obama Visit

Business Economics & Services Team (BEST)


                                   Indo-US Trade War Hots Up Before Obama Visit

One month before the visit of President Obama to India, the US Inc. has upped its charter of demand to gain market access to India and suggested ways to clean up India's  system to attract more investment. The report prepared by US International trade Commission (USITC) has flag marked several grey areas that India should conform to to better its economic relations with the US.

For a long time, the US has been complaining about the balance of trade which is in favor of India by about US$ 17 billion or so. But India's position is that one should not attach too much importance to balance of trade since the bilateral trade volume is only US$ 62 billion, which pales into insignificance going by the volume of trade turnover with China and the EU. In its assertion, India has maintained that  once the bilateral trade volume picks up, the US exports to India  also will go up significantly, an argument that did not cut ice with the US. The other assertion is that balance of payments, which is the aggregation of all fund flows between the two countries should be the barometer to assess the position, which is reportedly is in favor of the US. In this category, one has to take into account major heads like defense imports, services exports, royalty, tourism, medical, education expenses etc.

The US argument is that unreasonably high tariff coupled with customs procedures  that India has, considerably affected its exports to India for items like food products, certain manufactured products etc. Over 60% of the US companies which are doing business with India have to make strategic changes and diverted their business including investment  from India, the US trade body alleges. It maintains that it is in the interest of India to make changes in its tariff policy to attract more investment.
The rest of the concerns expressed by the US trade body seems to be a reaffirmation of whatever they have been airing for long such as weak protection of intellectual property rights, such a stiff rules for local value addition, indigenization clause, compulsory licensing etc.
Importantly, India is in a precarious position to respond to some of these concerns. For instance, some of these decisions are not administrative and stem from judicial pronouncements, such as the recent one Bayer, which the Supreme Court of India has upheld the decisions of the lower courts to compulsorily license its products sold in India for kidney and cancer ailments. Also, the US has to bear in mind  that there is a strong public opinion building in India against hike in medicines and higher treatment charges. This can disrupt as a strong public outcry that will affect the image of the government. In a country, where medical insurance covers barely 6 to 7 % of population any increase in prices of medicines will have  political backlash. 

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Will India Pip China?

Business Economics & Services Team (BEST)



                                                      Will India Pip China?
There is an undercurrent of competition between India and China in many fronts. The competition is hotting up with every passing year. To a discerning watcher, China is far ahead of India in many fronts. It has  had the advantage of a sustained higher growth for almost more than a decade, that has transformed its economic landscape considerably and no country in the recent history can match up with that pace of development it has achieved. It has it gradually grown from a communist country to one that heeded to market forces, from  a closed economy to  an open one attracting investment from all corners of the world,  from averse to investment abroad to one looking for all opportunities to spread its foothold everywhere. On a macro-scale, these are remarkable feats.
India could have a head-start in liberalization, but it was slow in implementing them from a policy perspective. India had a ticking private sector, though it was in the  back burner in a mixed economy which kept its policy framework in an equivocal manner.  It never swayed from one extreme to the other with the accompaniment merits and demerits. Therefore, its growth might not been spectacular but more balanced. The strong democratic institutions, it has built over the years, might have slowed down the decision making, but did not give powers in a platter to anyone. There were checks and balances and inefficiencies and corruptions were dealt more democratically in the  vote bank politics and not through any bloody upheavals. Even the most dictatorial regime during the emergency days was defeated only through   a democratic process and not otherwise. Even the switch over to market economy was more through consensus and not through a top down process of imposition.  Every important legislation however trivial or important they may be was implemented through a democratic process and that trend is still continuing.

For the developed western economies, both India and China  are important since both the continental economies can make or break the world economy. Along with the combined population of close to over three billion, the combined economies can overshadow the rest of the economies put together. Also, these are the two countries where people with aspirations, drive and entrepreneurship live. Of course gaining market access  is one thing and more importantly the gains that these countries can lend to every country for absorbing their technologies, funding their investment and also to a very great extent gainfully absorbing their investments and cash flows is another one.
While the rest of the world is clamoring to keep their foot both  with  India and China for their economic ends, a silent competition is breaking open between the two largest and most populous countries. What are the dynamics of that competition? Both China and India want to check each others growth prospects. For instance, China is far ahead of India in manufacturing, infrastructure and agriculture. India wants to close the ranks with China by embarking massive focus on manufacturing through its Make in India. India is ahead of china in IT segment and it wants to close the ranks with India by indulging in a panoply of tricks and manoeuvrings including sending large number of students to the US for picking up English and getting themselves oriented to the technology developed there. It is also investing heavily in research and development (R&D). It is also carefully nurturing world class ICT companies such as Xiaomi, Huweai and Heir. These are reckoned as world class companies. Importantly, these companies are mostly workers cooperatives unlike companies elsewhere in the world.
Unfortunately,   India lags behind in many such areas. Till date, it has not evolved a single world class company or brand as powerful as any developed by China. Its investment in R&D is deplorably low so also its type of management control. Almost all its well known companies are either with multinationals or private sector. Workers cooperatives are laggards in India with some exceptions like Amul. Also, being a democratic country, decision making in India is slow and lethargic. Any attempt to streamline them meet with stiff resistance. So also is corruption, which is deeply rooted in Indian psyche.
Now the question of India piping China to the number one slot among the comity of nations, it is something that has to wait and see. Perhaps,  the advantage is now with China.                     

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Indian Growth Story -Upside and Downside

Business Economics & Services Team (BEST)

              Indian Growth Story -Upside and Downside

It is a mental game for economists and policy makers to debate on future contours of growth. They can throw up all types of opinions and perceived rationales to drive home their points of view. Some three years back, in the peak of slow down, we heard from the top government functionaries, acclaimed analysts and newspaper editors and columnists   that  slow down would  get bottomed  out by early 2014 and the growth will be stabilized and consolidated by the end 2014. But such predictions still remains as wishful thinking as the economies around the world are trying to come out of the low growth trend even now.

Yesterday, the union fiance minister said that the government will take all efforts to go beyond the growth of 5% to keep the economy rolling, even while some of the opposition parties are alleging that the finance minister is frustrated. I think it is too early for him to get frustrated since he is there only for the last six months or so. His frustration can be there or even more pronounced, if the economy refuses to budge and continues to falter on one count or the other.

That is possible looking at the scenario he is confronted with. First, the governance apparatus is slowly loosing sight on the prime minister's mantra-vikas (growth). The reason is that a cohesive approach eludes the ruling party. Exhortations made by the prime minister and responsible ministers in his council either directly or indirectly, for shunning the path of confrontation as far as the non-developmental issues are concerted, are falling on deaf ear. Let the left hand know what  the right hand is doing. The prime minister and the party apparatus should convince the people across that development is the only issue before them and that is the basic agenda that r runs across its  manifesto. Anything other than that can lead to an implosion and the party will not be able to resurrect from that.
Secondly, the government should introspect on the real progress that it has made so far. Doling out schemes with grat fanfare  may get media headlines  but that also will hike up the expectations from the government. Delay or non-fulfillment of promises will slowly get convoluted into a negative syndrome. That is a universal phenomenon.  In that case, should the government contemplate setting aside the number game? Whatever growth or inflation figures that are coming out from the government, people are increasingly getting aware are because of the base effect. To put in a layman's language, it  means that if the growth figures for a quarter of the year is high, it can so happen that   the related figures for the same period in the last year can be very low. That also can happen to rate of inflation. You can have inflation at zero level and still have a higher absolute  price level, even higher than the prices in the previous quarter. The policy makers tout these figures to suit their  conveneince.
Also, it can happen that the growth figures can be misleading. Sometimes, higher growth may not get translated into higher employment and income. Especially in the case of manufacturing, higher growth does not lead to higher employment and income since whatever investment that goes into the manufacturing sector is mostly in capital and many such capital investment   can replace  labor.
Therefore, the growth strategy should not be denominated in terms of investment, capital and money disbursed. It should audit the real life situations. There should be a monitoring system to gauge the effectiveness of schemes at the grass roots level. Whatever initiatives started by the previous regimes should not be discarded purely on account of the political reasons. There are merits in programs like NRECA, self-employment schemes etc. They have to be implemented more intensely and wahtever pitfalls they have suffered earlier should be plugged.
Also, the government should not expect the good auguries to last long. For example, the sharp decline in the oil prices. It is mostly on account of the oil politics played out by certain vested interests. Somewhere down the line, the oil politics may get subdued or totally eclipsed, then the prices of oil will start rolling up. That will have manydeleterious impact  on an oil importing country like India. The recent spurt in import of gold and other luxurious items have to be curbed. A strong monitoring authority should be set up to weed out de-merit imports, to save the precious foreign exchange. Also, the decline in oil prices should not be an alibi to reduce the intensity of oil exploration and tapping alternative sources of energy.
Exports have to receive more importance. The reasons behind the fall in exports have to be analyzed. Also, service exports have to be stepped up since the foreign exchange outgo on account of services is almost nil or minimal unlike items in merchandize exports like gems and jewelery, where most of the imports are for re-export purposes with value addition, threshold limit of  value addition has been incrementally brought down. Equally significant  are the steps fro augmenting electronics production in the country since estimates do indicate that foreign exchange outgo  in terms of electronics imports is going to vault to US$ 400 billion in the foreseeable future,surpassing the oil import bill. Atleat the domestic production has to be somewhere in the region of US$ 100 billion to partially offset the huge imports that will be necessitated.          

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