Big banks : Bigger caution

Bank consolidation has again come to the fore with recent initiatives of finance ministry for new banking licenses and renewed discussion on India’s diminutive banking. India is the country of spate of small banks and a handful number of big-banks. Amalgamation of these small and big public sector banks is imperative otherwise it would badly lag behind in global banking system. However, large-size banks aren't immune to risk. Massive bank failures in USA and Euro zone are a loud word of caution for big banking operations.

It is a coincidence that USA and Europe are now trying to bring global banks under tight regulation while India is looking for a Desi model of global banking. Finance minister P.Chidambaram has expressed the need for India to have world-size banks to meet the requirements of India’s growing economy. USA and EU markets are a frightening tale of big banks. Risk inclined, greedy and casual approach of big banks had led  to the  toxic securities and real estate investments. This has resulted into the collapse of Lehman brothers and quite a few big banks across the USA and EU.  EU and USA regulators are trying to ring-fence the banks and pushing them for a separation of core banking (deposit and lending) and investment operations.

Merger of small banks with big banks is necessary for the country if it is to create its international footing. The present scenario of Indian banking is not conducive to vie globally. According to ASSOCHAM chief, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital and in terms of assets, India’s largest bank SBI is world’s 70^th largest bank and India’s largest private sector lender ICICI Bank Ltd. stands at 148^th position. None of the other Indian banks features among the top 200 banks in the world-in terms of size of assets. Many Indian banks, especially public sector banks, cooperative banks and regional rural banks are unprepared for the implementation of Basel norms due to capital inadequacy. These norms demand capital allocation for operational risks in addition to credit and market risk. With this view, small banks must go ahead with consolidation in order to achieve capital adequacy.

Apart from this, India is not well penetrated with banking. A good chunk of areas are still under-banked, even non-banked. Merger of two banks with the prospect of targeting far off places would flourish the banking system in India internally. Indian Govt. is going to launch the system of giving subsidies through cash transfer which can only be possible if banking reaches to the grassroots of India . Large size banks  can feasibly take their business to remote areas devoid of banking.  

Chidambaram did advocate banking consolidation but did not come up with the process as to how and under which rules and laws it should be done. Merging two banks is not an easy step. Most of the Indian banks are at the different stages of technology implementation.  Technology platforms, system platforms, network architecture, database vendors etc are usually different in different banks, which must be made compatible before merging the two. Heterogeneous culture of the two banks must also be critically considered. Staff of both the banks must be taken into confidence so that they can accommodate well in changing work-place environment. Regulatory norms must also be paid due attention.

India is in the dire need of large-banks in order to go with the international banking standard but it must not forget what had happened in USA and EU. When A developed country like USA could not yet recuperate from the economic crisis its banks had led it into how a developing country like India would handle the situation if at all its banks falter. Therefore proper procedures of merger and acquisition and the safeguards in the event of mishap must be well-crafted and documented beforehand if banking consolidation is to be done. Large-banks are not a panacea. It has its own side effects. Indian banks must always be vigilant towards the fact that Lehman Brothers was too big to fail but actually it did.   

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Tangled telecom

India’s most celebrated success story, telecom revolution, turning into a tragic tale of ambiguity and disputes. The failed auction of 2G spectrum is yet another illustration of the fact that India’s fastest growing sector is a clear victim of policy deficit, corruption, short-term policies and disconnect with market realities.

The just concluded rather aborted 2G spectrum auction is a result of chain of inconsistent government decisions. The reason for the failure of 2G auction lies in the fact that reserve price determined by it was quite high, in the wake of which hardly any telecom operator turned up to bid and only 9,407 crore could be earned against the anticipation of Govt. of 40,000 crore. Exceptionally higher scale of erudition was not needed to comprehend the market realities of the day. TRAI and Government have already been cautioned by the experts that  a high reserve price may  be a dampener in the given situation. It was entirely nonsensical to put up the reserve price so high when profit-making potential of telcos is already going down. They could have bought the spectrum on the same price back in 2008 but then it was allowed to have been sold nearly for free. Now when many telecom circles are in the stage of saturation, how the Govt. can expect the telecom operators to invest such huge amount of money on buying spectrum. It is worth to mention that elevated bids for acquiring 3G spectrum had resulted in bleeding the reserves and squeezing bottom lines of all major telecom companies.   

Indian telecom sector is losing its sheen in the eyes of investor on one hand while tariffs are rising for subscribers on the other. The most serious fact is that growth of new mobile connections has tanked in recent month because of a policy disputes and uncertainties.  For instance, in the reign of Raja, 2G spectrum was allocated on first-cum-first-served basis. As no viable rules were there he could readily distribute the spectrum voluntarily exploiting the Govt. property considering it as his own. The episode resulted into one of the biggest scam in the country and Supreme Court had to cancel all the licenses awarded by him in 2008. Bearing it in mind, next time the Govt. resorted to the system of auction for the sale of 3G spectrum in 2010. The same method it repeated recently in the allocation of 2G spectrum as well, the denouement of which is not unknown to anyone.  

The Govt. now intends to re-auction unsold spectrum in the month of March and still hopes to reach the budgeted target of 40,000 crore. Again a faulty decision! There is no rocket science into understanding that the reserve price will be brought down in the next auction. What wrong did the companies, which purchased the spectrum in the current auction do that they are liable to pay more for the same spectrum the other companies might be getting in lower prices in re-auctioning? If it happens those companies will definitely move the court of law and the growth of telecom sector will again be stuck due to another controversy.

India’s tele density hovers around 60%, hence there is still enough potential  of growth of voice telephony via 2G while offering a high speed mobile data service to the urban middle class though the 3G platforms. It is too difficult to understand why Govt. fails to take prudent decisions and behave so nonsensically. Too painful it is to see the demise of the growth of most thriving business in India which still possesses enormous potential to prosper further. 

USA: Political cliff to fiscal abyss

A creaking siren on an unprecedented fiscal crisis has rung in the United States of America just the next day of the re-election of Barak Obama for four more years to US presidency. Three days after his victory speech, President Barak Obama rendered his first public comments giving birth to the pending debate over looming fiscal cliff. The debate is divided as usual. Obama reiterated his stance to not budge on Republicans’ demand of keeping taxes alike for all and sacrificing social expenditure. He is still of the view that people making more than $250,000 a year must pay more taxes which he says is acceptable to the vast populace of America as is validated by him achieving four more years. This is likely to start a new phase of political wrangling over sensitive fiscal issues, that will keep the whole financial world on cliff of uncertainty for weeks to come.

The beginning of the New Year sees the deadly combination of automatic tax increases and spending cuts that economists predict could push the US back into recession. In order to prevent its occurrence, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of moderate cut in spending cuts and while steep increase in taxes.

Americans have long been pampered with low tax rates. Apart from this, colossal public spending on education, health care, infrastructure and technology has led to the current crisis of higher fiscal deficit in the US economy. America has to resort to tax increases and spending cuts at the sunset of this year to fix this deficit crisis. US Congressional Budget Office (CBO) estimates that this combination of lower spending and higher taxes is expected to conglomerate about $600 billion from the economy but at the same time would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). It also predicts that unemployment would rise by almost a full percentage point reaching to 9.1 percent range, with a loss of about two million jobs. Due to the expected negative impact of fiscal cliff, the American lawmakers are in a tizzy whether or not raise the taxes and reduce spending.

Obama is ready to compromise to some extent but vehemently refuses to agree on  Republicans’ demand of annulling tax hikes for affluent. Exit polls of voters released Tuesday showed that 47% of Americans supported Obama's proposal to raise tax rates on income above $250,000 for couples. In addition, 13% said everyone should pay more in taxes, while 35% were against any tax increases. On the other hand Republicans who are in majority in the House of representatives, the lower  house, avert to go along with the President on the ground that it would cripple the growth of small businesses those are still struggling hard to overcome the repercussions of earlier recession. Republican House Speaker John Boehner said he remains unwilling to raise tax rates on upper-income earners. But he left open the possibility of balancing spending cuts with new revenue that could be achieved by revising the tax code to lower rates but also eliminate some tax breaks. Hence it is a tough call for Obama to reach an agreement in the Congress.

 Obama and speaker Boehner in their respective speech seemed to put the burden of averting fiscal cliff on each other while the whole world expected prudent answers from them. The vicious altercation between democrats and republicans over the issue of debt-ceiling in 2011 is well known. It led to an unprecedented downgrade of the US credit rating BY S&P. Hence, if the deadlock between both the parties still persists and no legislation passes before the year-end the US economy will be badly affected resulting into an economic disaster worldwide. Is the world going to view another round of brinkmanship in US politics ? … Clock is ticking for America. 

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Business of bottlenecks

Despite economic openness of two decades, India still remains one of the  most  difficult places to do business in the world.The new IFC and World Bank Report, ranked India 132nd among 185 countries in terms of ease of doing business. The report is an upsetting critique of the state of affairs in the Indian legislative and bureaucratic system. In spite of 22 years of economic reforms, India is still grappling with archaic and cumbersome laws and procedures. It appears that not by default but by design the system deters the local and foreign investors to do business in the country.

 India is the lowest ranked among BRIC nations. Brazil (130th), Russia (112nd), China (91th) and 'Taiwan, China" (16th) and is also below neighboring Pakistan (107th) and Nepal (108th). As per the IFC and World Bank report, in the past eight years, India did implement a total of 17 institutional or regulatory reforms making it easier for local entrepreneurs to do business here  than any other economy in South Asia since 2005. It has focused mostly on simplifying and reducing the cost of regulatory processes in key areas such as starting a business, paying taxes, and trading across borders but it did not improve at all rather slipped on six parameters among ten on which the countries were ranked.

 India’s oppressive bureaucracy and immeasurable red tape is a nightmare for small business.   The report -Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises by International Finance Corporation and World Bank which is the 10^th edition of their Doing Business series- states that It also takes one of the longest time (1420 days) required to enforce a business contract in Indian system. Also areas such as starting business, getting electricity, protecting investors and resolving insolvency have seen a further  degradation   as compared to last year. 

Outdated laws are the crux of the problem. Old procedures and lack of computerization in several departments makes it even worse.  India is in dire need of judicial reforms as well. The time taken to fight a dispute in Indian courts is roughly three times more than that in OECD countries. Dual bureaucracy (center & state) is a double whammy which makes the policy-implementation way harder. Recently Finance Minister P. Chidambaram pointed out that almost 700 projects with investments of Rs 7,500 crore are stuck due to delays caused by the absence of regulatory approvals. A deep rooted corruption which is highly pervasive across the system forces businesses to become corrupt to survive. In its 2008 study, Transparency International reports about 40% of Indians had first-hand experience of paying bribes or using a contact to get a job done in public offices.

On the name of reforms India is opening its doors again for foreign investment but it’d do no good as long as it doesn't pay heed to the core i.e.  the efficiency of government systems. India is a growing market therefore investment may come, But the fact remains that fresh investment will increase the corruption potential thanks to the everlasting bottlenecks. Ease of doing business is the fundamental reform that must be taken at the earliest to make India’s growth story clean, not tainted with graft and corruption.