The Outlook for MBAs

September 16, 2008

My laziness and writer’s block resulted in Gaurav beating me to it when it came to expressing schadenfreude about all the I-bankers who’re losing their jobs. (I am of course a retail banker of repute and thus less affected.) This is just the beginning, though.  What will MBAs do at placements time when their are no longer any investment banks to lap them up at Slot Zero?

My prediction is that ITC and UB will become the hot new Slot Zero recruiters. Now that we’re in for a depression, vice is where the money is. As this Financial Times article points out, recessions and depressions only have a positive impact on the demand for things like alcohol, tobacco and gambling:

The alcohol, tobacco, gaming, and defense sectors, in aggregate, are defensive in nature and tend to outperform the broad market in periods characterized by relatively low returns and periods with relative stagnancy, or worse, in the U.S. economy.

Tragically, there is no India-specific Vice Fund, or Satan’s Portfolio, or I would be heading over to my bank branch to start my SIPs now.

Microfinance in Pragati

September 2, 2008

I have an article in this month’s Pragati (PDF, 3.8 MB) about microfinance. I’ve written about how there’s more to microfinance than microlending, how broadening access to savings accounts and small insurance is much more important than lending, and how the most significant impact of microfinance so far is not necessarily the financial bits but the organisational bits.

If, as is likely, you find this incredibly dreary and boring, do read the issue anyway for Harsh Gupta’s excellent article on liberal solutions to protests in Kashmir.

More on Finance and Inclusive Growth

June 17, 2008

Suddenly, the idea that financial sophistication leads to inclusive growth seems to have caught on (well, except with the Ministry of Finance, which is actually in a position to do something about it). First there was my Pragati piece. Yesterday, Nivirkar Singh’s column in Mint also touched on this:

Petia Topalova of the International Monetary Fund has recently examined the links between policy and inclusiveness of growth. In particular, she uses variation across states as well as three time periods, spanning 1983 to 2005, to examine these links. Inclusiveness is defined as the difference between the consumption growth rate of the poorest and richest 30% Indians.

First, higher financial development, measured either by real credit per capita or by a larger initial share of agricultural labourers with loans from formal financial institutions, is significantly associated with more inclusive growth.


OK, this is interesting. One of the points the Raghuram Rajan report raises is that access to credit is actually only one leg of financial inclusion, and is the most overused one. The other two legs – access to savings instruments and access to risk management instruments like insurance – have traditionally been missing. So there are two ways to read this:

  1. The correlation between credit and inclusive growth doesn’t mean anything. It’s just a coincidence that this turned up, and might be caused by something else – more urbanisation, say, or might even run in the opposite direction – financial inclusion leads to more demand for credit (though I personally think it’s a positive feedback loop – they cause each other)
  2. The research is right. Credit might be only one leg, but it still has an impact. And we haven’t even seen what would happen once savings and insurance also get taken up. In that case, the gap could close in a stunning way.

Moving on. After Nivirkar Singh’s column, there’s also the cover story in today’s Business Standard the Strategist. It’s about FabIndia, and how they’re encouraging artisan communities to set up private limited companies where the shareholding is split between the artisans themselves, their employees, FabIndia, and outside private investors.

The concept, now a Harvard Business School case study, is simple. A fully-owned subsidiary of FabIndia, Artisans Micro Finance, a venture fund, facilitates the setting up of these companies, which are owned 49 per cent by the fund, 26 per cent by the artisans, 15 per cent by private investors and 10 per cent by the employees of the community-owned company.

The artisans gain in many ways. The value of their shares goes up. They earn dividends when the company is in a position to declare them.

The shares offer the artisans a divisible asset class (land can be divided but its divisions are often disputed and jewellery is largely indivisible) and community-owned companies help convert FabIndia’s artisan base into an asset.

“If he wants to get his daughter married and needs money, he can sell his shares and realise the appreciation. He can also take a loan by offering his shares as collateral,” says Bissell.

(the Strategist)

The article is worth reading even if you aren’t interested in finance, and you’re more interested in social entrepreneurship or marketing or traditional handicrafts. Axshully it is worth reading even if you are a metrosexual and only buy organic muesli as you will get to know about new and exciting opportunities to buy it as FabIndia expands.

By the way, William Bissel mentions in the article that the co-operative system imposes too many restrictions on the artisan and the private limited company makes more sense. This is a massive understatement. The legal and accounting procedures for co-operatives in India are so totally broken that co-ops inevitably end up in the hands of regional politicians. That, however, is the subject of another post, and by someone else.

In Pragati

June 4, 2008

I have an article on how finance is actually infrastructure and financial sector reforms out in this month’s edition of Pragati. The link to the article gives you an excerpt and you’ll have to download the PDF version (slightly less than 2 MB) to read the full thing.

The article had a checkered history. I had almost finished researching it when I suddenly had to dash to Delhi. When I returned to Bangalore I fell sick and told Ravikiran and Nitin I wouldn’t be able to write it after all. The fact that I had no furniture in this point and writing would have to be done propped up against a wall may have contributed. Then I came to Bombay where I had a guesthouse with a dsek, and called up and offered to write it after all.

By this time I was five days over deadline and had to write it in a mad rush between ten and two in the morning at my guesthouse. The next day I had to check out of the guesthouse and didn’t have a new one to shift to, so I finished the article between noon and three in the afternoon while squatting in an unoccupied cabin next to an FX dealing room. Sadly, I had finished the bit about currency markets and was writing about financial inclusion and regulation by then.

Anyway, the result of all this was that I wrote the article in practically stream-of-consciousness style. As a result, not only was it a week over deadline, it was 1200 words over the word limit. It is a tribute to Ravikiran’s mad editing skillz that the article is now within the limit and still readable.

More on the Debt Waiver

March 1, 2008

Since I’ve already expressed dismay and bad language about the debt waiver, let me expand a little.

(Writing this in a rush, so it won’t be entirely accessible to lay readers. Sorry about that. If you’re interested but confused, ask, and I’ll try to explain in the comments.)

For now, let’s ignore the fact that this rewards farmers who took bad decisions and punishes the farmers who’ve actually been diligent about repaying their loans, and so it’s set up all sorts of moral hazard. Let’s accept that indebtedness is making the poor suffer, that ending suffering is of prime importance, and that the ends justify the means.

There are problems with that at many levels. First, Ajay Shah points out, this will write off the debt of people who own land,  while the poorest of the poor don’t own land. This is helping the not-quite-rich, not the poor.

Over and above that, Business Standard had a report (not linking it, because it’ll disappear in a few weeks anyway) on how this doesn’t help the most heavily indebted farmers, because their landholdings are so small they can’t get bank loans, and have to rely on moneylenders.  This whole waiver is only going to end up benefiting large landholding farmers – not very well off, but certainly not the poorest of the poor, and the ones who’re suffering the most.

(Of course, all this assumes that the money allocated will actually go completely towards writeoffs. I’m not even sure where the 60,000 crore rupee figure came from.)

The second shady thing about the waiver is that there are no details on how the mechanics of it are going to work out. I think O P Bhat or someone has said that the loans are going to be swapped with government securities.

If this is true, it presumably means that a 60,000 crore rupee provision for credit losses spread across the banking system is magically going to turn into 60,000 crore rupees of capital. In effect, SBI and other PSU banks (or as Percy Mistry calls them, SOBs) are having their balance sheets recapitalised. And this is not being done through the capital markets, but by soaking the taxpayers. Nice.

I’ve just talked to Skimpy about this, and he’s pointed out that there are flaws in the details:

  1. Chidambaram might not give 60,000 crore rupees of G-secs for 60,000 crore rupees of bad debts. So the net worth could still fall.
  2. Against 60,000 crore rupees of bad loans, the actual provisioning might not actually be 60,000 crore rupees. I’m not sure about the current RBI rules for provisioning. I am tempted to leave this as ‘an exercise for the reader’, since I’m still too busy at work for the next month or so to devote time to finding out how much you have to provision, and what various swap ratios would be like. On the other hand, if the loan waiver is against provisions and not actual bad loans, then my point still holds.
  3. Chidambaram has apparently said that the waiver will be carried out over the next three years. So there may not be a waiver after all.

Fine. Readers, I leave it as an exercise to you, since I will be busy with mobile handset distributors and telecom switch importers and generic drug manufacturers over the next month.

But if my fundaes are correct, the loan waiver is stunning. If the government divests its stake in SOBs after doing this, it’s basically going to get a better valuation, which the taxpayers have funded. So the public at large will pay to get a better performing bank, when the risk should really have been taken up by people like ARCIL. Very, very shady.

Yep. We’re fucked.

March 1, 2008

Then I started hunting through the budget papers looking for a bulky entry of Rs.60,000 crore for the debt waiver. This is 1.1% of GDP. It isn’t there. So there’s another 1.1% of GDP that’s off balance sheet. Why isn’t it there? I suspect it was a last minute addition to the budget speech.

We’re then in the worst of all worlds. If these calculations are correct, we’re down to a central gross fiscal deficit of 4.6%. In other words, we failed to harness the great business cycle upturn of the recent years to do the fiscal consolidation in these good times. And, we did this in the worst possible way: by setting up a new level of mistrust of Indian public finance data.

(Ajay Shah)

Read the whole thing.

Ah, the Sweet Smell of Validation

February 29, 2008

Two years ago, when wondering why there are so few small cars in China, I hypothesized:

Chinese banks are not particularly customer focused, and are reluctant to give car loans to anybody whose income level is not high enough to make a midsize car affordable. Chinese banks would have little or no experience with consumer finance, and without competition from foreign banks, they would have no incentive to create consumer finance products either. That makes life difficult for anybody who wants to upgrade from a motorcycle to a small car.

And this year, Andy Mukherjee writes:

The problem of financial underdevelopment isn’t restricted to home loans. Since credit checks are perfunctory, cards come with low spending limits and have lukewarm acceptance. Auto finance is still in its infancy. A survey conducted in April last year by consulting firm KPMG LLP and Taylor Nelson Sofres Plc, a market researcher, showed that while 25 percent of car buyers in China had access to finance, few actually opted for it.

A warm fuzzy feeling pervades. This still doesn’t prove that the lack of small cars in Qingdao is because there are no auto finance companies there, but it strengthens my hypothesis. Such joy. Such joy.

Making Roads and Mortgaging Farmland

February 4, 2008

Four months ago, I wrote a post on how allowing the free sale of agricultural land for any use was the best possible move against agricultural distress. My logic in that post was:

  1. Allowing the free and easy conversion of agricultural land for residential, commercial, or industrial purposes creates a liquid market for agricultural land.
  2. The liquid market for agricultural land makes it more acceptable as collateral for lending.
  3. The existence of the liquid market also makes agricultural land more valuable.
  4. Point 2 and Point 3 combine to drive down interest rates and increase the loan amount a farmer can get against his land.
  5. This means that being indebted is not such a problem for farmers.

I now worry that I gave the impression back in October that allowing the sale and conversion of agricultural land was a magic bullet, and that once this happened we would enter a happy agricultural paradise. It isn’t. It’s necessary, but not sufficient. You need other things too. The three most important ones I can think of are:

  1. Farmers actually knowing that they can sell and mortgage their property legally, and knowing what the market rate is. Currently, anybody who wants to buy agricultural land to put up flats or a factory bribes the collector to change the land usage, buys it at a bargain basement rate from the farmer, and then goes ahead and develops it. If land sale is legalised, but the farmer doesn’t know about how much more valuable this makes the land, all that changes is that the developer no longer has to pay a bribe (or as much of one). As I mentioned in the October post, auction sales are a good mechanism to prevent this happening.
  2. Competition in the market for lending. Which means multiple banks lending to rural areas. As things currently stand, I think each Regional Rural Bank has a geographical monopoly on rural banking in its particular region. Discussing how to create viable and competitive rural banking is a blogpost in itself – many blogposts axshully. Maybe later.
  3. The agricultural land needs to be well-connected enough to urban centres that there’s demand for it. Which in turn means rural roads. Rural roads also have the advantage that they make it easier for banks to reach farmers (fulfilling Point 2), and make it easier for multiple land developers to court farmers for their land (fulfilling Point 1).

Happily, this week’s Swaminomics (h/t: Ravikiran) is all about rural roads. Key excerpts:

For every million rupees spent, roads raised 335 people above the poverty line, and R&D 323. Every million rupees spent on education reduced poverty by 109 people, and on irrigation by 67 people. The lowest returns came from subsidies that are the most popular with politicians – subsidies on credit (42 people), power (27 people) and fertilisers (24 people).

For decades, rural roads in India were neglected by most states. Besides, rural employment schemes, starting with Maharashtra’s Employment Guarantee Scheme in the 1970s, created the illusion that durable rural roads could be built with labour-intensive techniques. In practice labour-intensive roads proved not durable at all, and those built in the dry season vanished in the monsoons.

The posts on rural banking and agricultural finance will happen sometime in the future. Work is horrible this month.

The Importance of Cities

January 22, 2008

This Indian Express anchor story on how Bihari migrants send 18 crore (180 million) rupees home through money orders every year gives me a warm fuzzy feeling. The money (heh!) quotes:

Noida’s post offices send out over Rs 36 crore a year through nearly 3.65 lakh money orders.

The rise in money orders shows the growth of Noida and its migrant population. Officials say migrant workers send 95 per cent of these.

Santosh Pradhan, who runs a paan shop in Sector 33, has been sending Rs 5,000 home every month. Noida has been good to Pradhan who has to look after a family of eight.

For a saada-paan I would get just a rupee in Bihar, whereas I sell it for Rs 4 here. The profit is more and that’s the reason my whole family is doing well now,” (emphasis mine – Aadisht) he says. Pradhan claims he has been able to repay all debts in his village and is now planning to buy some land there.

When he came to the city eight years ago, he could send only Rs 10,000 a year. Two years ago, he brought his wife and two children to the big city so that “they get better education and learn English and Maths and study among the children of rich people.”


Arising out of this:

  1. This is yet more real evidence against the widespread subconscious illusion that ‘India lives in her villages.’ The problem with that is that India makes a living in her cities, and most villagers would rather live in the cities.

  2. On that note, an Urbanisation Feeds poster on the lines of Samizdata’s Socialism Kills poster would be fun.

  3. And arising out of point 1, the whole motivation behind the National Rural Employment Guarantee Act is flawed, forget the structure and the implementation. It’s easier to generate wealth in cities and then send it to villages – so what public policy should be doing is creating cities – as Atanu Dey has repeatedly been pointing out.

  4. 1.8 crore commission on 36 crores of money orders works out to 5%. SBI charges 30 rupees on a demand draft, and 0.15% on electronics funds transfer (with a minimum of Rs. 100). According to the Boston Globe article I linked yesterday, Basix charges 2%. The post office is ripping people off, but that’s because they have to cover the costs of their brick-and-mortar infrastructure. In Basix’ case, they aren’t dragging overheads around. Mobile banking matters.


Innovation in the Third World

January 21, 2008

This Boston Globe oped (free registration might be required) is astonishing. The author, somebody named Jeremy Kahn, has violated the Sominism-cheat-sheet and Neelakantan’s guide to writing about India left, right, and centre. He appears to have actually understood the nuances of what he’s writing about! And he doesn’t mention caste, growing inequality, pollution, or elephants on the road even once!

OK, that’s the sarcasm out of the way. Seriously, the oped is a very good read. It’s about how Third World conditions are forcing cellphone companies, banks, and Tata Motors to innovate and come up with low-cost technology, and how this means that design and innovation is now splitting up and being driven by two different things: luxury in the First World, and productivity and low costs in the Third World. In the bargain, First World and Third World innovation are both leading to high technology, and the Third World is now actually in a position to export technology to the First World.


This might seem like a classic example of the Third World struggling to catch up with the First. After all, people in the United States and Europe have been using ATM cards and the Internet for years to perform the simple banking tasks Das is only now able to do. But look again: The technology used to bring slum-dwellers like Das their first bank accounts is so advanced that it isn’t available to even the most tech-savvy Americans – at least not yet.

This represents a stunning reversal of the traditional flow of innovation. Until recently, consumers in the Third World also had to tolerate third-rate technology. Africa, India, and Latin America were dumping grounds for antiquated products and services. In a market in which some people still rode camels, a 50-year-old car engine was good enough. Innovation remained the exclusive domain of the developed world. Everyone else got hand-me-downs.

And as they do, companies are confronting the unique challenge of making high-tech products cheaply enough to make a profit. In some cases, this means shifting jobs for talented designers and engineers to the developing world – not just to save labor costs, but in order to better understand the markets they are now trying to reach.

“Developing markets offer the best opportunity for global firms to discover what is likely to be ‘next practice,’ as contrasted with today’s best practice,” Prahalad has written. “The low end is a new source of innovation.”

In a globalized world, people in emerging markets want first-class products – but at prices they can afford. Meeting that demand, particularly in countries where basic infrastructure is weak, requires more creativity than designing a product for a more advanced, affluent market.

Read, read. It’s worth the two-minutes it takes to register.