Friday, May 26, 2017

STORM SIGNALS IN THE BANKING SECTOR

The banking industry in India today presents a confused picture. On the one hand, super regulator Reserve Bank of India has granted bank licenses to 23 fresh applicants such as Aditya Birla Neo more, Reliance Industries, Tech Mahindra, Vodafone Mpesa, Paytm and Airtel. These corporates have to invest Rs. 100 crore each to gain entry into the banking sector.  And on the other, legacy banks, who constitute the majority seem to be on their last leg.

Ironically, the banking companies in the public sector, who constitute more than 70% of its turnover are in dire straits. Reason: unimaginable NPA burden. This ailment is has crippled almost all of the public sector banks. It is estimated that PSU banks have run up an NPA position of Rs. 6, 11, 607 crore as on March 31, 2016. According to a Credit, Suisse estimate, there could be a default on 16-17 per cent of total bank loans by March 31, 2018. Presently, the food and non-food credit stand set Rs. 75, 20, 30 crore. This would add up to about Rs.12 lakh crore of humungous NPAs.

It is in the above context that we have to examine the recent Banking Regulation (Amendment) Ordinance of May 4, 2017, which authorizes the RBI to take decisions on the settlement of NPAs and a consequent cleaning up of bank balance sheets-part of the twin balance sheet problem raised by the government’s Chief Economic Advisor, Dr. Arvind Subramanian.

It is ironical that in the bank boardd which sanctioned such gargantuan loans to corporates like those of Malya and other defaulters, there was a full-fledged representative of the RBI present on all such occasions. Neither the government nor the RBI is talking about what action would be taken against such board members who sanctioned these unviable loans. A colossal failure of good governance.

As a matter of fact, the issue is the parlous nature of India’s corporate debt, as they rely on banks for their main source of funds. 65.7 % of the Indian corporate debt is funded by banks. Large borrowers account for 56% of bank debt and 88% of their NPAs. Of this, 40% of debt lies with companies with an interest coverage ratio of less than one. Almost over half of the debt is owned by firms whose debt equity ratio is more than 150%.

This mess is because of the sanction of loans to corporates who lacked capital as well as expertise, besides of course politically directed instructions.  If the writing off of Rs. 36, 359 crore worth agricultural loans in Uttar Pradesh was bad economics, then the waiving of corporate NPAs would be worse. It looks like that the public sector banks are on a course to self – distraction over a time period with the cycle of continuous re-capitalization and self – perpetuating defaults. This is indeed a sad outcome brought about by greed of capitalists, collusion of the bureaucracy and criminal negligence in supervision  on the part of RBI and the Ministry of Finance. It would appear that we’ve perpetuated a self-serving system of socialization of losses and privatization of gains!

Will this cycle be broken and health restored to the banking system? As of now, the light at the end of the tunnel seems to be that of the oncoming train………..

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Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology

Friday, May 12, 2017

IS DATA NEW OIL?

The first industrial revolution ram on coal and steam. The second and third were fuelled by oil and computer chips. The forth industrial revolution, experts tell us, will run on data. In anticipation, one wit coined this aphorism: “In God we trust, but others must carry data!”

It is common when a particular commodity becomes very profitable generating a growing industry antitrust regulators step in to control the players. The titans of data such as Alphabet, Amazon, Apple, Facebook and Microsoft will be facing restrictions of some kind of the other, sooner or later. Many feel that they can’t live without Google or Facebook or Microsoft. Looking at this, the regimes in different countries are planning to impose restrictions. Unlike oil companies, these data firms do not seem to be alarmed by this. Old ways of thinking about competition, finalized in the days of oil, will not work now in the ‘data economy’

What has changed?

Smartphones and the internet have led to data riches, making these companies more valuable. Virtually, every activity from the morning jog to TV watching, sitting in traffic can create a digital trace, generating more raw materials for these very same data behemoths. Artificial Intelligence (AI) techniques such as machine learning do data mining effectively to extract value from data. We have been reading about algorithms which can predict when a person is ready to buy, or about a car needs servicing or about warning a person that he is at risk from a disease in the future. Legendry companies like GE and Siemens now project themselves as data firms. The benefits from data usages to customer are real.

The data giants offer “God’s eye view” of activities in their own markets and beyond. They can sense when a new product or services gain traction them to copy it or simply buy the startup which makes it before it grows up to be a threat. Potential rivals thus get eliminated by such “shooting acquisitions”.

The earlier remedy was breaking up the giants as they did with Bell, ATT etc. In mergers, whereas in the past the regulators used size to determine when to intervene, but now they need to take into account the extent of firm’s data assets. The purchaser may be trying to eliminate a nascent threat by buying an incumbent. This explains the astronomical sum paid by Facebook for WhatsApp.

Regulators could insist on more transparency. Governments could encourage the rise of new services by opening up more of their own data banks or managing important parts of the data economy as public infrastructure – just like India’s Aadhaar. Europe is taking an approach of sharing of certain kinds of data with user’s consent. 

Rebooting antitrust for the information edge will be difficult.  It may lead to new risks: more data sharing could threaten privacy. The regulators will have to act wisely and with balance.

[Influenced by a recent article in the Economist]

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Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology

Wednesday, May 3, 2017

A NATIONAL RESOURCE GROSSLY UNDERUTILIZED

Recently, there was this news item stating that the Government of India has directed all IITs to increase the number of female students to a significant level. The measure has been widely welcomed. Also for the reason that this can dispel the notion girls are not interested in STEM (science, technology, engineering and mathematics) subjects.  Like in the calculation of GDP or in the political decision making level, women’s contribution are either not included or their dues denied.

A recent contribution by columnist Mr. Siddharth Pai in the Mint comes up with lot of interesting data on the contribution that woman technologists are making even in areas like code writing and other branches of technology.

Three women, Beth Holmes, Farah Housion and Michelle Riggen-Ransom, all with liberal arts backgrounds, have been named by Wired as among the 20 technology visionaries who are creating the future. These three women are the brains behind the personality of Amazon inc.’s Alexa, which is an artificial intelligence device already used by millions of customers of the technology behemoth. In fact, Alexa was one of the most popular gifts last Christmas season, and continues to sell heavily.

Wired’s citation includes a brief background on the three women: Riggen-Ransom, who holds Master of Fine-Arts in creative writing composes Alexa’s r aw responses. She leads a group of playwrights, poets, fiction authors, and musicians who complete weekly writing exercises that are incorporated into Alexa’s persona. Housion, a psychology graduate specializing in personality science, ensures that those responses fit customer expectations. Holmes, a mathematician with expertise in natural language processing, decides which current events are women into Alexa’s vocabulary, from current sporting league championships such a the Indian Premier League to the Oscars. The common thread is that all three women have been writers.

Look at our own ISRO and the space programme. Lady scientists and engineers have been carrying our very vital functions and duties. As a matter of fact the project director for the Mars project was a woman scientist, Seetha Somasundarm. Some eight brilliant scientists are powering ISRO. They are Minal Sampath, Anuradha TK, Moumita Dutta, Nandini Harinath, Ritu Karidhal, Kriti Faujdar, N Valarmathi and Tessy Thomas. Hail our women scientist.

BIMTECH, I am happy to state has been enjoying a reasonably good male-female ratio among students. It is hovering around 35 per cent which is way higher than many of the IIMs. Another happy fact is that our top merit positions in all streams have been going to girl students over the years. Glad to state that more or less the same male-female ratio prevails in faculty strength. We hope to improve on the ratios to improve our outcomes.

In the land of Rani Laxmi Bai, Sarojni Naidu and Indira Gandhi we should be doing even better!

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Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology