Tuesday, October 25, 2005

Deve Gowda on Infosys

It is obvious that there is a political agenda behind Gowda's attack on Infosys.But,his reference to the company's penchant for owning land and buildings is worth analysing.

In 2004-05,the company spent more on capex than on R&D.

It is food for thought that no IT company so far has bagged the TERI corporate social responsibility award.

Sunday, October 16, 2005

Article in The Hindu

Date:16/10/2005 URL: http://www.thehindu.com/thehindu/op/2005/10/16/stories/2005101600051400.htm
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Are small banks viable?
AN INTENSE debate is now on in our country regarding the desirability of allowing small banks (either in the private or public sector) to continue as independent entities. Finance Minister P. Chidambaram has been advising the banks to aim at 3-Cs, namely consolidation, competition and convergence.
The basic premise of those arguing for the merger of small banks with large ones is that small ones per se are not potentially viable. It is contended that margins/spreads in banking business keep narrowing and therefore banking has become a "volumes game." Only the big players can survive; smaller banks have either to become big (organically or through mergers) or to go out of the scene.
The counter-argument is that the sustainability of the banking business depends on efficiency and governance; size is not the deciding factor. Banks have gone under not because they were small, but because they were ill-governed. Barings Bank, by no means a small one, collapsed because its systems were leaky and the camouflage of one person (Nick Leeson) was enough to undo a banking behemoth. Nearer home, GTB bit the dust owing to gross irregularities in management. New Bank of India and Nedungadi Bank lost their identity on account of lack of good governance.
There is always some inherent merit and some innate demerit in size. Big banks like State Bank of India and ICICI Bank are certainly able to take advantage of economies of scale, garner low-cost deposits and offer low-interest credit products. They can easily afford to put in place effective risk management systems and thereby avoid, at least theoretically, accumulation of distressed loans. Some large banks are alert enough to securitise and sell their potentially non-performing assets well in advance. It is another debate altogether whether these are desirable or sharp practices.
Empirical evidence
Size, however, is not a guarantee against judgmental errors. Empirical evidence suggests that the proportion of contaminated assets among larger loans is higher. The advantage of large-sized banks is that they can weather the shocks of large loan losses with less strain than the smaller ones. In this context, it is interesting to note that "small versus big banks" debate is taking place in many countries now. For example, Judy Wasylycia-Leis, an MP belonging to the New Democratic Party of Canada, has written to Canada's Minister of Finance, in a letter dated August 12, 2005, as follows: "We do not believe that large size of banks — resulting from bank mergers — improves our economy. Few benefit from Canadian banks such as CIBC losing billions on unproven investments such as Enron, yet permitting more Enron activities abroad is the central goal of current merger talks." This may be an ideologically loaded statement, but this also shows that bigness is not a panacea.
Small banks, on the other hand, ensure `financial inclusion.' They take care of financial needs of many small customers who may get marginalised by larger banks. Social desirability of this aspect is also stressed by Federal Reserve Bank of Chicago in its 2004 annual report. To quote: "On a dollar-for-dollar basis, community banks make nearly three times as many small business loans as the typical large banking company, and they rely more than twice as much on small deposit accounts for funding. These are long-run economic relationships — community banks do not sell off the loans they make to local businesses, and they consider their depositors to be permanent customers, not just sources of funds."
Size is crucial especially in capital-intensive industries. Surprisingly, despite the much talked-about Basel norms, banking is not equity intensive. Public deposits, which are basically debts for the banks, are typically more than ten times as much as the owned funds of banks. With such a high leverage, bigger banks obviously pose a much higher systemic risk. Hence, size can be counter-productive.
© Copyright 2000 - 2005 The Hindu

Wednesday, October 05, 2005

Manmohan Singh and Bhagavad Gita

Justifying India's vote on the Iran issue at theInternational Atomic Energy Agency (IAEA),ManmohanSingh has sought to draw support from the BhagavadGita.He is supposed to have said "One has to do one'sduty unmindful of the consequences" as reported in TheHindu dated 2nd October.Has the prime ministermisinterpreted the 47th stanza of second chapter ofthe Gita? "Karmanyevaadhikaaraste maa phalesu kadaachana" isprobably the most quoted phrase of Bhagavad Gita.Itmeans:"Your right is to work only;but never to thefruits thereof."This does not mean that one must beblind to consequences of one's actions.This stanzaonly exhorts us not to be disappointed in case theexpected results fail to materialise.The Gita does notnegate the Newtonian logic that every action has anequal and opposite reaction.If one desires to preventa particular reaction,one should avoid the action thatleads to that reaction. The next stanza further elaborates the theme ofnon-attachment to rewards (as against'non-consideration of consequences').It says,"Performactions,abandoning attachment,remaining unconcerned asregards success or failure.This evenness of mind isknown as yoga.'Samatvam yoga ucyate'"(2.48)The Gitadoes not preclude consideration of possibleconsequences before commitment of action. The 50th stanza shows how misconceived Manmohan'sinterpretation is."Yogah karmasu kausalam."Thatis,"Yoga is efficiency in action."We can improveefficiency by increasing output or improving outcomefor the same level of input.Our action is theinput.Consequence or outcome is the output.The Gita'smessage is that through yoga,one can maximise outputor rather the expected output.In case the actualoutput is less than the expected output,we should notfeel disheartened,but should carry onnevertheless.Unless we make an upfront appraisal ofpossible outcomes of our various options regardingaction,we cannot improve ourefficiency.Therefore,Bhagavad Gita certainly enjoinsus to weigh,in advance,the consequences of our actionor 'look before we leap'.There is also the ethicalimperative that in case the consequences of our actionare harmful or unwelcome,we are not supposed toindulge in that action.The Gita does not advocatereckless action unmindful of consequences.Through yogawhich is defined as 'equanimity of mind' and'efficiency in action',we can ensure that ourbehaviour is positive and conducive to growth. Unless we are mindful of the likelyconsequences,our actions are likely to bevitiated.Acting unmindful of the consequences isirresponsible;on the other hand,acting without an eyeon the rewards is yogic.The two are worlds apart.Howcan one be mistaken for the other? Performance of duty oblivious of its consequencesis oxymoronic.Voluntary action that heraldsdeleterious consequences cannot be glorified asduty.Such an action is anarchic and cannot attract anyscriptural approval.It is foolhardy to suppose thatdisregard for consequences will result in righteousaction.One only hopes that Manmohan Singh did not meanwhat he said.The prime minister is expected to explainthe justification for our stand in IAEA instead ofdrawing a red herring through a sophisticmisinterpretation of Lord Krishna's utterances.