Saturday, February 27, 2010

Why more banks are not welcome

In the previous post it was stated that allowing more players in the banking field is an avoidable risk. Let us see the reason given by Pranabda for laying a green carpet for more banks. The budget speech said " The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform that the RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI's eligibility criteria."

Herein lie the seeds of a possible financial crisis. Is the honourable minister feeling sorry that our banking system has emerged unscathed from the crisis ? The minister's stated objectives, namely system's growth in size and sophistication and larger geographic coverage of banking industry ensuring more inclusiveness, are unexceptionable. His solution however contradicts these goals

There are enough players in the banking system who can ensure the system's growth. You cannot expect better sophistication (in terms of technology) from NBFC than from presently established banks. Technology is no more any bank's exclusive competitive advantage. It is illusory to suppose that private sector players will extend the geographic reach. It is easier to enable the public sector banks to open branches in unbanked areas by providing suitable incentives. Access to banking services especially in urban areas is already comprehensive. In essence, there is no need for additional players in urban areas. New players will not be interested in rural areas. QED.

Budget 2010-11 : First impressions

Pranabda is skillful in presentation of budgets. It is not surprising that his 2010-11 budget has won kudos from various quarters. Unavoidably, the brickbats from the opposition parties have been sharp and vociferous. Widening of income tax slabs and consequent reduction in IT for "the middle class" was an unexpected gift. However there are some worrisome factors which cloud the initial euphoria.

Much of the fiscal deficit arises from revenue deficit. Revenue deficit is budgeted at 73% of total fiscal deficit for 2010-11.Government borrowings therefore will be utilised mainly for revenue expenditure. This means that "borrowings" will not produce further wealth. This tendency leads to spiral borrowings to repay past debt.

Proportion of gross domestic debt to gross national product is a figure that is receiving attention from economists in various economies because of evolving crisis of possible sovereign default in Greece. Finance minister has stated that as part of the fiscal consolidation process, the government would target an explicit reduction in its domestic public debt to GDP ratio. Instead of sharing the present ratio with the budget listeners, he has only expressed his intention to to bring out within six months a status paper giving a detailed analysis of the situation and a road map for curtailing the overall public debt. At present, we can only hope that this ratio is not in the anxiety-causing range of 90% plus. American economists Carmen Reinhart and Kenneth Rogoff have spotted evidence that once a country's debt to GDP ratio crosses 90%, growth declines by atleast 1% a year.

Another negative of the budget is that tax rate reductions have occurred predominantly in direct taxes and hikes in indirect taxes. By definition, this is regressive. This does not do justice to the aam aadmi.

The budget also opens the gates for entry of more private sector players and the dreaded NBFC into banking. This is fraught with avoidable risk. The Finance Minister should not have forgotten the Global Trust Bank experience so soon.

Wednesday, February 24, 2010

More on Jairam Ramesh

The previous post dealt with team dynamics and the counter-productiveness of arrogance. ET dated 25th Feb quotes Jairam Ramesh as saying that the working style of Shyam Saran did not match his style. Inability to cope with a different working style of a colleague is an invitation to sub-optimal results.

Mr.Ramesh has described the prime minister as his only supporter in the cabinet. The minister claims, "At times I feel I am fighting a lonely battle. The odds are so stacked up against anybody saying or doing the right and rational thing". If he feels that he is the only rational thinker in the cabinet, is he not hinting that the prime minister has not chosen his team properly?

Psychologists say that arrogance is very often a mask for feelings of inadequacy.

Friday, February 19, 2010

Climate Change and Team Dynamics

Politics of climate change continues to produce unexpected events. Early this week, Mr.Yvo de Boer, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC) announced his resignation from the UN body and his intention to join KPMG. Later in the week, Mr.Shyam Saran, Special Envoy of the Prime Minister on climate change  broke the news that he is quitting the government.

Last December, the Philippinnes government sacked its chief negotiator on climate change ahead of the Copenhagen summit. Why is climate change causing so many political and administrative changes? It is apparent that we suffer from an inability to take in contrarian views and are too much obsessed with unanimity. This rigidity is very deleterious in the long run. Any successful team needs the benefit of access to divergent views; presence of any boorish bully who has no patience for a differing viewpoint is toxic to progress.

Jairam Ramesh seems to have hijacked the climate change space in India. An articulate IIT-ian characterised by obvious self-confidence / hubris, his potential for leadership is enormous. A touch of humility will ensure that his career does not get derailed.

Supreme Court on arrogance

As widely reported in the media, a Bench of Justices Dalveer Bhandari and A.K.Patnaik of the Supreme Court has spoken against arrogance in official duty. The Court said, "People in power and authority should not easily lose equanimity, composure and appreciation of the problems of the lesser mortals."

Every culture of every age condemns arrogance. An Arabian proverb says, "Arrogance diminishes wisdom." Mark Twain calls arrogance, pride, vanity and ostentation as the offspring of riches.

Nietzsche was his usual enigmatic self when he opined that "arrogance on the part of the meritorious is even more offensive to us than the arrogance of those without nerit as merit itself is offensive". Frank Lloyd Wright had to choose between honest arrogance and hypocritical humility and he chose the former.

Bhagavad Gita enumerates in Chapter XII, slokas 13 to 19 the qualities necessary for practitioners of Karma Yoga. They are : absence of hatred, freedom from egotism, even-mindedness towards pleasures and pain, contentment, mind-control, freedom from exultation, intolerance, consternation and repulsion, non-abhorrence of people, purity and efficiency, absence of grief and longings, desirelessness for home and lands, equanimity of mind etc.

If only we were able to follow such noble ideas !

Tuesday, February 16, 2010

Limits to managerial control

Man's ingenuity to circumvent rules and regulations is unlimited. Correspondingly, managerial control exercised in corporates is quite limited. This truth is brought out frequently by what is disclosed by companies. There are ofcourse many more instances of failure of control which are not brought to light.

Wipro, the third largest software exporter in India, has now admitted that an employee has been embezzling the company's funds for the last three years by misusing / stealing others' passwords. (The employee whose name is not disclosed has since committed suicide.) Loss to the company is around Rs.20 crore. (I wonder why the company refers to the loss in terms of dollars only : $4 million. The fraudster was working in company's headquarters in a department called "Controllership" ! Good control !) The company claims it has recovered nearly half the defalcated amount as if recovery attenuates the seriousness of control failure.

Wipro is not an isolated example. We know what happened to Barings courtesy a rogue trader called Nick Leeson way back in 1995. More recently, in January 2008, the French bank , Societe Generale, was put to immense loss by another rogue trader named Jerome Kerviel. The irony here was that this bank is supposed to be very strong in risk management practices. There are countless examples of employee frauds, minor and major, in Indian banks as well.

We will be scared to death if we realise the potential for frauds in our banks. It is not rare to find officers in a typical Indian bank sharing details of their password with their colleagues in order not to inconvenience customer transactions when they are momentarily away from the branch for whatever reason. Most employees are oblivious of possible disastrous consequences of this (mal)practice.

Not infrequently, we come across instances where safety locker lessees in banks complain of loss of articles from the lockers. There have been cases of dishonest employees keeping duplicates of customer keys. Again, the control system is not foolproof. Given the massive potential for such mishaps, it is indeed surprising that frauds are not more common.

Friday, February 12, 2010

Madras High Court

While laying down office as the Chief Justice of the Delhi High Court, Justice A.P.Shah who was earlier the Chief Justice of the Madras High Court said the work culture in the latter institution is marred by casteism and clashes among members of the Bar.

Casteism continues to afflict TamilNadu state in myriad ways. In this "progressive state", even national institutions like the State Bank of India is torn asunder by existence of lobbies for various castes like Brahmins, Mudaliyars etc. The casteist scourge is so well-entrenched (ill-entrenched?) in the state that elections are normally fought on caste identities.

It is good that Justice Shah has felt it important to express his views on this nagging issue. It is unfortunate that though highly respected in legal circles, he was overlooked by the Supreme Court collegium for elevation to the supreme court. Could it be that he is too objective and fair-minded to dispense justice from the highest court?

Thursday, February 11, 2010

Toyota in trouble

The "Toyota Way" is no more the Holy Grail of automobile industry. Toyota is well on its way to set up a new record in the number of cars recalled for repairs. It is displacing Ford from this dubious position. Problems with accelerator pedals and floor mats have resulted in more than 8 million cars being recalled. Electronic systems also seem to be suspect.

Toyota has long been known for kaizen and quality. Why did Homer nod and Toyota recall? It has recently overtaken General Motors as the largest producer of automobiles. Focus on the topline seems to have diverted top management's attention from quality. The problem of sticking pedals has been aggravated by severity of cold conditions in the U S.

Spate of customer complaints is a new experience for Toyota and its CEO,Toyoda. It remains to be seen how the Japanese manufacturer will come out of this crisis. Japanese are infamous for their slow and studied response. They cannot afford that luxury now. American auto-makers are waiting on their wings to bounce back.

Tuesday, February 09, 2010

"PIGS" to keep recovery at 'bay' ?

PIGS is a pejorative acronym for the countries which are likely to pose the next round of challenges in the ongoing economic crisis. PIGS stands for Portugal, Ireland, Greece and Spain. Of these economies, Greece is already a full blown threat. This country has the dubious distinction of restating its accounts a la corporates. In October 2009, a new government was elected. Upon investigations, the new government found out that its predecessor had indulged in Enron-style accounting sleight of hand to grossly understate deficit figures. Consequently, deficits for 2008 and 2009 were restated from 5% and 3.7% of GDP to 7.7% and 12.7% respectively. It is now feared that Greece is likely to default on sovereign bonds. Sovereign default is the ultimate disaster for risk managers.

Any such default will have contagion effect. In addition, market sentiments will turn more bearish. Its ripple effects will postpone return to economic recovery by a few months.

Monday, February 08, 2010

Subir Raha

Subir Raha, a former Chairman of ONGC passed away recently. A stickler for perfection and tireless hard work, he was unparalleled in his devotion to duty. (I was reporting to him when I had a brief stint at IOC). He was fearless and was never in the habit of mincing words. Naturally, he antagonised ministers and bureaucrats with extreme felicity ! May his tribe increase !

Saturday, February 06, 2010

Multiple Identities

The following was written a couple of months back when Sachin Tendulkar came under attack for prioritising his national identity over his parochial one. Now Sha Rukh Khan is facing fire for viewing sport aside from national animosity.

Sachin Tendulkar recently made what prima facie appeared to be an innocuous statement. He told a television channel, "I am a Maharashtrian. I am extremely proud of that. But I am an Indian first." He also proclaimed "Mumbai belongs to India." The Shiv Sena leader Bal Thackeray was touched to the quick and he responded vitriolically advising the sportsman to stay away from politics. He fumed: "You are free to hit fours and sixers on the cricket field, but keep off the political pitch. With that one statement, you became 'run out' in the pitch of Marathi minds".

What is the reason for this acerbic reaction of Bal Thackeray? Why did he lash out at the cricketing maestro who is perhaps the most popular contemporary Maharashtrian? The Shiv Sena leader evidently overlooked the fact that each one of us has multiple identities and very often there is no conflict among these identities. (A recent tragic case of conflictual identities is discussed later in this article.) There is no denying the fact that a Maharashtrian ipso facto is an Indian too. How a person prioritises one's identities is best left to oneself. In developmental psychology, a person becomes more mature as one begins to appreciate the coexistence of a plurality of identities within oneself. An integrated personality is the wholesome result when these identities coalesce in a seamless manner.

An identity crisis is caused when a person struggles in the face of seeming contradictions among one's various identities. In every mythology there are descriptions of many such crises which are immensely educative. In Indian mythology, for example, a classic case of identity crisis is provided by Arjuna in the battle field at Kurukshetra. He was a warrior and therefore he must have been unfazed by the logistics and consequences of the battle. But he also had an identity as a loyal student of teachers like Drona and Bheeshma. He was also a cousin of the Kauravas. His warrior-identity propelled him to fight whereas his student / relative - identity tempted him to flee from the battle. Lord Krishna had to sermonise him with metaphysical teachings in order to resolve his identity crisis.

Many of us suffer from a misconception that there is an inherent and unavoidable conflict among atleast some of our identities. On deeper analysis, we will understand that it is not the identities which are in conflict but it is our perception about these identities which engenders friction and sometimes mental aberrations. The recent macabre incident involving an American Army major is an eye-opening example. According to some preliminary reports, Nidal Malik Hasan prioritised his identity as a Muslim over his identity as an American. This by itself would not have caused a crisis. When he was about to be deployed to Afghanistan or Iraq, what provoked him to go berserk, shoot and kill his own colleagues was his misperception that soldiers who fought against people belonging to his religion were his enemies. Obtaining exemption from deployment to Afghanistan and Iraq for reasons of conscience would have been a saner solution to his identity crisis. A different person in similar circumstances might even have rationalised his military involvement as a call of duty to one's motherland. Either way, the tragedy in America's largest military base could have been avoided.

No single identity will define a person completely. One's personality is a combination of a large number of identities. One is liked or disliked by others depending on which particular identity gains the attention of others. Some identities strengthen each other. For instance, an economist who is also a mathematician will find that he becomes a better economist because of his ability to quantify. Some people have apparently antithetical identities which call for sustained balancing efforts from them so that cognitive dissonance is avoided.

Power of identity has been ably demonstrated by Amartya Sen who argues convincingly in his book 'Identity and Violence' as follows: "The increasing tendency to overlook the many identities that any human being has and to try to classify individuals according to a single allegedly pre-eminent religious identity is an intellectual confusion that can animate dangerous divisiveness. The world is made much more incendiary by the advocacy and popularity of single-dimensional categorisation of human beings, which combines haziness of vision with increased scope for the exploitation of that haze by the champions of violence". Let us not reduce any person to a single identity.

Challenges in 2010

Thomas Friedman, the American columnist says that there are three main challenges facing the world in the year 2010. The typically U S -centric list consists of regulation of banks, China- Google relationship and nuclear ambitions of recalcitrant Iran. The underlying theme in all these issues is ethics.

Banks in the U S and because of them the American financial system got trapped in a crisis on account of absence of ethics among the bankers who did not think twice about misselling their products, the credit rating agencies which readily rated and alchemised the investment options which they themselves scarcely understood, the regulatory agencies which turned a blind eye to the developing miasma, the Fedbank that kept the interest rate at perniciously low levels for too long and the hedonistic American public that was only too eager to grab any loan offer unmindful of repayment requirements.

Google whose much-vaunted motto is "Don't be evil" seems to have realised that Chinese censorship and cyber-espionage borders on evil and therefore not consistent with Google's business philosophy (one cannot so confidently say business practices). Though it remains to be seen who loses more - Google or the Chinese- in this imbroglio, one thing is certain. It is unethical to deny a vast section of humanity the benefits of digital progress by succumbing to the autocratic policy of a paranoid government.

American government considers Iran's nuclear threat as an unethical exercise of an "evil state". But Obama should know better than his predecessor that it is never too late to negotiate any hostile country into a dialogue of reason and fairness. Threats and counter-threats only lead to a more vicious environment.

Though these three are major challenges as of now, power of uncertainty is so colossal that we may be drawn into a more intractable , and as yet little understood, challenge before the year draws to a close.

Monday, February 01, 2010

Academic hubris

We had earlier highlighted the lack of responsible behaviour on the part of IIMs in the conduct of entrance exam in the digital mode. The second phase of CAT 2009 involving facility for the wronged candidates is now over.

Listen to what Prof.Satish Deodhar says with unrepentant hubris: "With the conclusion of second phase, it seems that it was a minuscule segment of students who made large noises about the technical glitches." Can one be more insensitive than this?

Contrast the professor's present uppity statement from his obsessive 'empathy' noted in the posting dated 2nd December, 2009. This is transcendental hypocrisy.