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ANNUAL ISSUE SHOULD BANKS BE GIVEN MORE AUTONOMY?
MIST vS BRICS INDIAN TAX REFORMS
Analysis of BASEL III Norms
SEPTEMBER 2012THE FINANCE MAGAZINE OF I IFT
MEE T THE TEAMCREDITS
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
2
P I Y U S H M A R WA H A i s a s o f t -
w a r e e n g i n e e r w i t h k e e n i n t e r -
e s t i n f i n a n c e . H e h a s i n t e r n e d
i n Tr i d e n t L i m i t e d i n f o r e x d i v i -
s i o n . H e r e g u l a r l y t r a c k s s t o c k s
a n d c o m m o d i t i e s m a r k e t s .
R I T E S H G U P TA i s s p e c i a l i s i n g i n
f i e l d o f f i n a n c e . H e h a s i n t e r n e d
w i t h R e l i g a r e E n t e r p r i s e s L i m i t e d
in the cor porate ser v ices d iv is ion .
H e p l a n s t o w o r k i n B a n k i n g a n d
f inance . industr y post graduat ion.
S H I L P I G H O S H i s s p e c i a l i z i n g t h e
f ields of marketing and f inance. She
h a s i n t e r n e d w i t h M e r c k S h a r p &
Dohme in the cr i t ica l care div is ion.
She plans to work in the pharmaceu-
t ica l industr y af ter her graduat ion.
R O H I T K H AT TA R i s s p e c i a l i z i n g
i n Fi n a n ce . H e h a s i n te r n e d w i t h
Ta t a C o n s u l t a n c y S e r v i c e s i n i t s
Financia l S olut ions business unit .
Post graduation, he intends to work
in the Financia l S er v ices industr y.
SOURAV DUT TA is a graduate of NIT
D u r g a p u r w i t h d i v e r s i f i e d i n t e r -
e s t s . H e h a s i n t e r n e d w i t h L & T
i n t h e f i e l d o f R i s k M a n a g e m e n t .
E D I TO R - I N - C H I E F
Soumya J yot i S en
E D I TO R I A L B OA R D
Rohit K hattar
Piyush Mar waha
R itesh Gupta
Sourav Dutta
ASSOCIATE EDITORS
Vedik a G aner iwala
Shi lpi Ghosh
CONTRIBUTIONS FROM
Aak anksha Hajela
Bhushan k anathe
Md. Umair Ansar i
Vaibhav G arg
D E S I G N
Team I nFINeet i
F E E D B AC K / q U E R I E S
inf ineet i@i i f t .ac. in
inf ineet i@gmai l .com
P u b l i s h e d b y s t u d e n t s o f I n d i a n Institute of Foreign Trade, New Delhi and Kolk ata
ALL RIGHTS RESER VED
» p.3 » p.11 » p.17
5 DEBT MARKETSAn analys is of the I ndian bond
m a r k e t s a n d t h e c h a l l e n g e s
f a c e d i n t h e I n d i a n s c e n a r i o.
The ar t ic le presents a detai led
v i e w o n t h e n e e d fo r a l i q u i d
debt market and the necessar y
s t e p s t o e n h a n c e l i q u i d i t y i n
I ndian markets.
9 BANKINGBank ing reforms is one of the
m o s t i m p o r t a n t i s s u e s b e i n g
r a i s e d i n t h e g l o b a l f i n a n c i a l
m a r k e t s . W e a n a l y z e t h e
p r o s p e c t s o f b a n k i n g s e c t o r
being more regulated or more
autonomous.
13 TAxATIONT h e i n d i a n e c o n o m y h a s
s t r u g g l e d f o r t h e m o s t
p a r t o f F Y 1 3 . I t h a s l i s t i t s
a t t r a c t i v e n e s s a s a b u s i n e s s
d e s t i n a t i o n . I n d i a i s w o r k i n g
o n t w o m a j o r t a x r e f o r m s .
DTC (Direc t Tax Code) and GST
(Goods and Ser v i ces Tax) . The
ar t ic le presents a v iew on the
need of the tax reforms
17 WORLD ECONOMY Fo r ye a r s , t h e U S d o l l a r h a s
s e v e d a s t h e r e s e r v e c u r -
r e n c y f o r n a t i o n s b u t w i t h
t h e f o c u s s h i f t i n g t o t h e
d e v e l o p i n g c o u n t r i e s i n
As ia , has dol lar lost i ts wor th
a s t h e r e s e r v e c u r r e n c y ?
20 CORPORATE TALK G ain ins ights about the cor-
porate culture and economic
scenario from Barclays Limited
23 ECONOMYT h e i n d i a n g r o w t h s t o r y
h a s h i t a m a j o r r o a d b l o c k .
I s m o n e t a r y p o l i c y t h e
r e a l a n s w e r t o c o n t r o l l i n g
inf lat ion?
27 BANKING NORMSW i t h t h e i n t r o d u c t i o n o f
BASEL I I I norms, the bank ing
i n d u s t r y a c ro s s t h e g l o b e i s
trying to analyze the impact of
the new reforms. We analyze
t h e i m p a c t o f t h e B A S E L I I I
norms on the I ndian bamk ing
industr y.
29 GLOBAL ECONOMY B R I C S , o n e o f t h e m o s t
p r o m i s i n g g r o u p o f c o u n -
t r i e s i s l o s i n g i t s s h e e n .
I s t h i s t h e r i s e o f M I S T ?
32 SUMMER ExPERIENCE
Students from I IFT share their
summer internship experience
34 RISK MANAGEMENT
W i t h t h e r i s i n g i s s u e s i n
w o r l d e c o n o m y, r i s k m a n -
a g e m e n t i n b a n k i n g s e e m s
to b e t t h e n e e d o f t h e h o u r.
H o w w i l l i t b e e f f e c t i v e
i n t h e p r e s e n t l a n d s c a p e ?
REGULARS
37 MONTHLY CHRONICLES
40 FUN WITH FIN
I n t h e c o v e r s t o r y, o u r
e d i t o r i a l t e a m p r e s e n t s
t h e n e w e r a o f r e g u l a -
t ion in bank ing industr y.
The issue ta lks about the
p ro s a n d c o n s o f m o n e -
t a r y p o l i c y i n I n d i a a n d
the ways to enhance l iquidit y in the market .
I t a lso takes a c loser look on the tax reforms
with a focus on dol lar as the wor ld ’s reser ve
currenc y.
T h e b a n k i n g i n d u s t r y a l l o v e r t h e w o r l d i s
s e t to c h a n g e fo r t h e b e t te r. I t i s i m p o r t a nt
to explore the poss ib le long-ter m ef fe c t s of
t h e f a s t - m ov i n g e c o n o m i c c h a n g e s a n d t h e
host of new oppor tunit ies and r isks are being
unleashed. This i ssue t r ies to address a range
of t imely oppor tunit ies and chal lenges spe -
ci f ic to investment community but relevant to
a l l g lobal investors. With a rat ional ist ic com-
parison of MIST vs BRIC, a detai led explanation
of the need of regulat ion in bank ing industr y
has been c lear ly la id out . Fina l ly a long with
the regular columns, a c loser look at the Basel
3 norms and their impac t on I ndian banks has
been analyzed.
A s b a n k s s t r i v e t o e m e r g e f r o m t h e g l o b a l
f inancia l cr is is , they are encounter ing a new
era of bank ing. I t is one marked by continuing
regulator y uncer tainty and economic instabi l-
i t y, which is h inder ing banks’ abi l i t y to move
f o r w a r d . T h e b a n k i n g i n d u s t r y h a s b e e n
f a c i n g l o t s o f u p s a n d d ow n s ove r t h e p a s t
few years . With scandals happening a l l ove r
the wor ld l ike L IBOR rates being r igged, inves-
tors cannot trust even the wor ld ’ s most stable
f inancia l inst i tut ions. This has generated a lot
of d iscuss ion among bank ing industr y exper ts
about the prerequis i tes for the smooth func -
t ioning of the sec tor. S ome has put stress on
severe regulat ions whereas some are in favour
of automation as the need of the hour. To forge
ahead, industr y leaders say banks must inno -
vate whi le apply ing the lessons of the global
f inancial crisis. To do this, banks are encouraged
to e m p l oy “d i s c i p l i n e d i n n ov a t i o n ,” p u r s u i n g
growth through reasonable r isks. This edit ion
mainly revolves around th is i s sue keeping in
mind the several changes incorporated in the
bank ing industr y in the recent past .
Happy Reading! !
With Warm regards,
Team I nFINeet i
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
3 4CONTENTS MESSAGE FROM THE EDITOR-IN- CHIEF
Soumya Sen i s specia l iz ing in f inance and trade. He has
inter ned at ICF I nter nat ional and has deep interests in
cor porate and t rade f inance.Post h is MBA,he wants to
pursue a career in bank ing.
The debt markets lack of l iquid-i t y, which makes investor demand higher y ie lds on these bonds. Thus mak ing these markets uncompetit ive compared to foreign markets.
I ntroduc t ion
W h e n e v e r t h e
Government announces
i t s b o r r o w i n g c a l e n -
d a r, t h e r e i s h a v o c i n
market with Corporates
being pushed out and interest rates r is ing thus
mak ing pr ivate players look for e i ther expen-
s ive bank f inancing or dol lar/euro/yen denom-
inated ECBs (Ex ternal Commercial Borrowings) .
But inspi te of such a huge demand for rupee
denominated markets only ver y few companies
ra ise money in these markets. The problem is
t h e l a c k o f l i q u i d i t y w h i c h m a k e s t h e i nve s -
tors demand higher yields on these bonds, thus
making these markets uncompetit ive compared
t o fo re i g n m a r k e t s e ve n a f t e r t a k i n g c a re o f
t h e exc h a n g e rate h e d gi n g co s t . Th e n e e d o f
the hour is to take steps to increase l iquidit y
in these markets by lay ing down proper regu-
lat ions and also promoting entr y of big foreign
players l ike FI Is and Domestic Players l ike insur-
a n c e c o m p a n i e s , m u t u a l f u n d s e t c . i n o r d e r
to i n c re a s e p a r t i c i p at i o n a n d h e n ce l i q u i d i t y
i n t h e I n d i a n r u p e e c o r p o r a t e d e b t m a r k e t s .
Current Problems
I n d i a’s s o v e r e i g n b o n d m a r k e t s a t i s f i e s t h e
i m m e d i a c y a n d d e p t h c o n d i t i o n s o n l y f o r
“on-the -run” government bonds ( i .e. , the most
recent ly- issued government bond of a speci f ic
matur i t y ) . O ther wise, the domest ic sovereign
b o n d m a r k e t i s l a rg e l y i n e f f i c i e nt . E xce p t fo r
about 8-10 secur i t ies at a t ime for which t wo
way quotes are avai lable in the market , other
p a r t s o f t h e y i e l d c u r ve re p re s e n t s e c u r i t i e s
t h a t a re n o t a c t i ve l y t r a d e d. Ac t i v i t y i s c o n -
centrated in a few secur it ies due to the market
conf idence in them and the abi l i t y to l iquidate
posit ions quick ly for these speci f ic bonds at a
fa i r value. I n the corporate debt market , inves-
t o r b a s e i s m o s t l y c o n f i n e d t o b a n k s , i n s u r -
a n c e c o m p a n i e s , p r o v i d e n t f u n d s , P r i m a r y
D ealers (PDs) and pension funds. O f late, the
retai l investors have been showing interest in
co r p o r a te b o n d s, e s p e c i a l l y b o n d s i s s u e d by
t h e i n f r a s t r u c t u re c o m p a n i e s t h a t e n t a i l t a x
Enhancing Liquidity in the Debt market : A panacea for India
incent ive. Whi le investors are not shy of debts
i ssued by the top rated f i r ms, they are re luc -
t a n t t o s u b s c r i b e t o t h e l o w e r r a t e d i n s t r u -
ments. This i s an anomaly because lower rated
companies do have access to bank f inancing.
C r e d i t e n h a n c e m e n t b y b a n k s c a n p e r h a p s
m a k e s u c h i n s t r u m e n t s a t t r a c t i v e t o i n v e s -
tors. But on the f l ip s ide, credit enhancement
essent ia l ly involves t ransfer of the credit r i sk
t o b a n k s a n d t h i s w i l l n o t o n l y h a m p e r t h e
d e v e l o p m e n t o f c o r p o r a t e b o n d m a r k e t b y
stunt ing the pr ice d iscover y process but a lso
i n c re a s e t h e r i s k i n t h e b a n k i n g s y s t e m . Th e
fo c u s m u s t b e o n d e - r i s k i n g b a n k i n g s ys te m ,
a n d a t t h e s a m e t i m e, b u i l d i n g / e n c o u r a g i n g
inst i tut ions that provide credit enhancement.
T h e p ro b l e m w i t h a n i n e f f i c i e n t a n d i l l i q u i d
d e b t m a r k e t i s t h a t i t m a k e s c o m p a n i e s g o
o u t s i d e to b o r row t h u s i n c re a s i n g t h e e x te r -
nal debt of the countr y ; a lso i t makes the debt
more prone to change in the exchange rates.
An ef f ic ient debt market wi l l a lso open a new
ave n u e fo r i nve s t o r s w h e re t h e y wo u l d h ave
a b e n e f i t o f g e t t i n g h i g h y i e l d s w i t h o u t t h e
o b l i g a t i o n o f h o l d i n g t h e b o n d t o m a t u r i t y.
M arket Struc ture in Developed M arkets
C o r p o r a t e s i n m a n y d e v e l o p e d m a r k e t s –
p re d o m i n a n t l y i n t h e U S a n d i n c re a s i n g l y i n
other jur isdic t ions - have a marked preference
t o t a p t h e b o n d m a r k e t r a t h e r t h a n t o s e e k
bank loans for meet ing their ex ternal f inance
r e q u i r e m e n t s . I n I n d i a , h o w e v e r, c o m p a n i e s
c o n t i n u e t o d e p e n d o n t h e b a n k i n g s y s t e m
f o r f u n d s b e c a u s e o f e a s e o f a v a i l i n g b a n k
f inance, absence of credit r isk mitigation mech-
a n i s m s a n d a h o s t o f o t h e r f a c t o r s , s u c h a s ,
absence of sound bank ruptc y f ramewor k and
l a c k o f a c t i ve i nte re s t o f l o n g - te r m i nve s to r s
l i k e i n s u r a n c e c o m p a n i e s . Co r p o r a t e s p re fe r
r a i s i n g f u n d s t h ro u g h p r i v a t e p l a c e m e n t s a s
against public issuances because of operational
ease of issuance under pr ivate placements with
minimum disc losures, low cost of i ssuance and
the speed of raising funds. The issuance process
is also impacted by costs, such as, stamp duties,
t r a n s fe r c o s t s , e t c . w h i c h n e e d s r a t i o n a l i z a -
t ion. Preference for pr ivate p lacement i s a lso
d i c t a t e d b y t h e p ro f i l e o f i nve s t o r s w h i c h i s
most ly inst i tut ional and a narrow base at that .
N e e d s fo r a n e f f i c i e nt l i q u i d d e b t m a r k e t in I ndia :
a) Ensur ing f inancia l system stabi l i t y :
A l iquid corporate bond market can play a cr i t-
ica l ro le because i t supplements the bank ing
s ys te m to m e e t t h e re q u i re m e n t s o f t h e co r -
porate sec tor for long-term capita l investment
a n d a s s e t c r e a t i o n . B a n k i n g s y s t e m s c a n n o t
b e t h e s o l e s o u r c e o f l o n g - t e r m i nv e s t m e n t
c a p i t a l w i t h o u t m a k i n g a n e co n o my v u l n e ra -
b l e t o e x t e r n a l s h o c k s . H i s t o r i c a l a n d c ro s s -
sec t ional exper ience has shown that systemic
p r o b l e m s i n t h e b a n k i n g s e c t o r c a n i n t e r -
r u p t t h e f l o w o f f u n d s f ro m s a ve r s t o i nve s -
t o r s f o r a d a n g e r o u s l y l o n g p e r i o d o f t i m e .
I n d e e d , o n e o f t h e l e s s o n s f r o m t h e 1 9 9 7
A s i a n f i n a n c i a l c r i s i s h a s b e e n t h e i m p o r -
t a n c e o f h a v i n g n o n - b a n k f u n d i n g c h a n -
n e l s o p e n . I n t h e a f t e r m a t h o f t h i s c r i s i s , a
n u m b e r o f co u nt r i e s i n t h e re gi o n , i n c l u d i n g
K o r e a , M a l a y s i a , S i n g a p o r e a n d H o n g K o n g,
h a v e m a d e p r o g r e s s i n b u i l d i n g t h e i r o w n
c o r p o r a t e d e b t m a r k e t s . S p r e a d i n g c r e d i t
r i s k f ro m b a n k s b a l a n ce s h e e t s m o re b ro a d l y
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
5 6 INDIAN ECONOMY INDIAN ECONOMY
t h r o u g h t h e f i n a n c i a l s y s t e m w o u l d l o w e r
t h e r i s k s t o f i n a n c i a l s t a b i l i t y. B o n d f i n a n c -
i n g r e d u c e s m a c r o e c o n o m i c v u l n e r a b i l i t y
t o s h o c k s a n d s y s t e m i c r i s k t h r o u g h d i v e r -
s i f i c a t i o n o f c r e d i t a n d i n v e s t m e n t r i s k .
b ) E n a b l i n g m e a n i n g f u l cove r a g e o f re a l sec tor needs:
The f inancia l sec tor in I ndia is much too smal l
to cater to the needs of the rea l economy. A
c o m p a r i s o n o f t h e a s s e t s i z e o f t h e t o p t e n
Corporates and that of the top f ive banks (as
shown in Figure 1 below) reveals that banks in
I ndia are unable to meet the scale or sophis-
t i c a t i o n o f t h e n e e d s o f c o r p o r a t e I n d i a .
N e e d l e s s t o s a y, t h e f i n a n c i a l s y s t e m i s n o t
b i g e n o u g h t o m e e t t h e n e e d s o f s m a l l a n d
medium-sized enterpr ises e i ther. Whi le these
are pointers to the fact that the banking sector
i n I n d i a n e e d s t o b e l a r g e r t h a n i t s c u r r e n t
s i z e , t h e y a re a l s o c l e a r i n d i c a t o r s t h a t d e b t
markets need to grow manifold to ensure that
the f inancia l sec tor becomes adequate for an
economy as large and as ambit ious as I ndia’s .
c ) Creat ing new c lasses of investors :
C o m m e r c i a l b a n k s f a c e a s s e t - l i a b i l i t y m i s -
m a t c h i s s u e s i n p r o v i d i n g l o n g e r - m a t u -
r i t y credi t . D e velopment of a cor porate debt
market wi l l enable par t ic ipat ion f rom inst i tu-
t i o n s t h a t h ave t h e c a p a c i t y a s we l l a s a p t i -
tude for longer matur i t y exposures. Financia l
i n s t i t u t i o n s l i k e i n s u r a n c e c o m p a n i e s a n d
provident funds have long-term l iabi l i t ies and
d o n o t h ave a cce s s to a d e q u ate h i gh qual i t y
long-term assets to match them. Creat ion of a
deep corporate bond market can enable them
t o i nv e s t i n l o n g - t e r m c o r p o r a t e d e b t , t h u s
ser ving the twin goals of diversifying corporate
INDIAN ECONOMY
r i s k a c ro s s t h e f i n a n c i a l s e c to r a n d e n a b l i n g
these inst i tut ions to access high qual i t y long-
t e r m a s s e t s . T h u s , a c c e s s t o l o n g - t e r m d e b t
opens up the market to new classes of investors
with an appetite for longer matur ity assets and
t h e re b y h e l p s p re ve n t m a t u r i t y m i s m a t c h e s .
d) Reduced currenc y mismatches :
T h e d e v e l o p m e n t o f l o c a l c u r r e n c y b o n d
m a r k e t s h a s b e e n s e e n a s a w a y t o a v o i d
cr is is , not only by supplementing bank credit
b u t a l s o b e c a u s e t h e s e m a r k e t s h e l p re d u c e
p o t e n t i a l c u r re n c y m i s m a t c h e s i n t h e f i n a n -
c i a l s y s t e m . C u r r e n c y m i s m a t c h e s c a n b e
a v o i d e d b y i s s u i n g l o c a l c u r r e n c y b o n d s .
Thus, wel l - developed and l iquid bond markets
c a n h e l p f i r m s r e d u c e t h e i r o v e r a l l c o s t o f
capi ta l by a l lowing them to ta i lor the i r asset
a n d l i a b i l i t y p r o f i l e s t o r e d u c e t h e r i s k o f
b o t h m a t u r i t y a n d c u r r e n c y m i s m a t c h e s .
e ) Te r m s t r u c t u re a n d e f fe c t i ve t ra n s m i s -s ion of monetar y pol ic y :
T h e c re a t i o n o f l o n g - t e r m d e b t m a r k e t s w i l l
a lso enable the generat ion of market interest
rates at the long end of the y ie ld cur ve – thus
f a c i l i t a t i n g t h e d e ve l o p m e n t o f a m o re co m -
plete term structure of interest rates. A deeper,
more responsive interest rate market would in
turn provide the central bank with a mechanism
for ef fec t ive t ransmiss ion of monetar y pol ic y.
Conclus ion
T h e i m p l e m e n t a t i o n o f v a r i o u s m e a s u re s fo r
i n c re a s i n g t h e e f f i c i e n c y a n d l i q u i d i t y o f t h e
INDIAN ECONOMY
Panel A : Assets of top 10 Cor porates (2011) Panel B : Capita l funds and exposure l imits of top 15
banks (2011)
d e b t m a r k e t s w i l l h e l p t o m a i n t a i n f i n a n -
c i a l s t a b i l i t y a n d p r o v i d e a m o r e o p t i m a l
w a y f o r C o r p o r a t e s t o r a i s e a n d i n v e s t o r s
t o i nve s t m o n e y t h e re b y b e n e f i t i n g t h e re a l
s e c t o r w h i l e a l s o i m p r o v i n g t h e t r a n s m i s -
s i o n o f m o n e t a r y p o l i c y i n t h e e c o n o m y.
R ahul Bakshi-The author is a student of I IM- I ndore
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
7 8
regulat ion of the f inancia l system. The recent
developments raise debates about the need for
improved regulat ion of bank ac t ivity for f inan-
c ia l s tabi l i t y.
The recent histor y of regulator y reform in Bank ing
T h e d i m i n i s h i n g e f fe c t i ve n e s s o f t r a d i t i o n a l
controls due to f inancia l innovat ion and rapid
technological development, the development
of regulator y avoidance, competit ion between
international f inancial centers are some reasons
why reform was needed.
U n t i l e a r l y 1 9 7 0 ’s t h e B a n k i n g s y s t e m c o n -
t r o l l e d t h e
pr ices, quan-
t it ies of busi-
n e s s c o n -
d u c t e d a n d
t h e m a r k e t
a c c e s s . B u t
s i n c e m i d
1 9 7 0 ’s t h e r e
i s a s i g n i f i -
c a n t p ro c e s s
of regulator y
r e f o r m i n
m o s t c o u n -
t r i e s a n d a
shi f t towards
m o r e m a r k e t - o r i e n t e d f o r m s o f r e g u l a t i o n -
L i b e r a l i ze d I n te re s t R a te , I nve s t m e n t s , L i n e -
of-business, ownership l ink ages and entr y of
B a n k i n g i s a m o n g t h e
wor ld ’s most t ight ly re g u-
lated businesses. But most
of the economic problems
i n t h e p a s t t w o h u n d r e d
years were caused by banks
and speculators . Af ter the
g r e a t d e p r e s s i o n , s o u n d
bank ing reforms ensured economic stabi l i t y
and prosperity for many years. Post sub-prime
cr is is , the Banks are re luc tant to implement
the regulator y reforms saying it inhibits inno-
v a t i o n a n d r a i s e s b a r r i e r s to e n t r y. Ca n we
t rust the Banks to regulate themselve s ?The
re c e n t t i m e s re ve a l m a ny f i n a n c i a l i n s t i t u -
t ions fa i l ing. I n this ar t ic le we deal with the
b e n e f i t s a n d co s t
a s s o c i a t e d w i t h
the bank ing regu-
lation, how auton-
o my c a n h e l p t h e
b a n k s a n d w h a t
i s r e a l l y n e e d e d
c o n s i d e r i n g t h e
c u r r e n t f i n a n c i a l
s i tuat ion.
I ntroduc t ion
T h e r e c e n t
h o u s i n g b o o m ,
bust , the f inancial
cr is is and severe recession that fol lowed, con-
t inue to af fec t us. These events have shaped
the economic recover y and transformed the
S h o u l d b a n k s w o r l d w i d e b e g i v e n m o r e autonomy- the need of the hour?
foreign f inancia l inst i tut ions. Bank branching
restr ictions were phased out and in a number of
European countries by the early 1990s.Breaking
down the barr iers imposed by the (1933) Glass-
Steagal l Ac t , the Gramm-Leach-Bl i ley Financial
S er v ice M oder nizat ion Ac t of 1999 per mitted
f inancia l holding company.
Benef i ts
Some benef i ts are :
1.Freedom to adopt the most eff icient practices
& develop new produc ts and ser v ices.
2.Competit ion-forcing the exit or consolidation
of re lat ively inef f ic ient f i rms.
3 . I m p r o v e m e n t s i n t h e q u a l i t y, v a r i e t y a n d
access to new f inancia l instruments &ser vices.
4 . I mproved wor ld a l locat ion of resources due
to the removal of the barr iers to internat ional
capita l f lows.
Regulator y reform and competit ion expanded
the reach of bank ing to the under pr iv i leged.
R e g u l a t i o n i s e s s e n t i a l b e c a u s e t h e l i q u i d i t y
of bank l iabi l i t ies i s a publ ic good. The uncer-
ta int y is an unquant i f iable r isk- a learning gap
w h i c h c a n n e v e r b e c l o s e d . B a n k i n g r e g u l a -
t ion & super vis ion suppor ts the evolut ion of a
bank ing system which produces money as an
asset to hold in t imes of par t icular uncer tainty.
The struc ture of the f inancia l system has been
u n d e r g o i n g m a j o r c h a n g e , w h i c h c e r t a i n l y
involves a major rethink about regulat ion.
Free banker ’s cr t iques
They say that the uncer tainty can be el iminated
and f inancia l assets can be valued in the same
w ay a s g o o d s, s o t h a t t h e re i s n o re a s o n fo r
banks to be regulated. I nstabi l i t y i s a result of
unwise por tfolio decision. In the absence of reg-
ulat ion, the market disc ipl ine banks adopting
prudent por tfol ios.Free bankers argue that the
r isk of contagion does not just i fy the need for
regulat ion.They say that deposits could s imply
be t ransferred f rom banks with unsound por t-
fol io to banks with sounder por t fol ios thereby
having sound por tfol io management.
Co n t ra r y a rg u m e n t : As s e t v a l u e s c a n b e p re -
d i c t e d , b u t v a l u a t i o n s a r e c o n t i n g e n t o n
a r a n g e o f u n k n o w n s. I t i s d i f f i c u l t e ve n fo r
centra l bankers to deter mine whether a bank
h a s a l i q u i d i t y / s o l v e n c y p r o b l e m . I f t a c t i c s
l ike deposit insurance and lender- of- last-resor t
faci l it ies were applied successfully, banks could
b e p r o t e c t e d f r o m f a i l u r e i n a f r e e b a n k i n g
system but that i s a far cr y and the f ree bank-
er ’s argument ignores the potential for systemic
instabi l i t y.
Why regulate stable, d ivers i f ied banks?
Autonomy entai ls operational f reedom. I t faci l -
i tates pr ice and f inancia l sec tor stabi l i t y that
are impor tant for achieving sustainable growth.
BANKING
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9 10 BANKING
M o n e t a r y p o l i c y i s s u p e r e s s e nt i a l fo r w h i c h
the bank should be given some AUTONOMOUS
p o we r. A s o u n d a n d s t a b l e f i n a n c i a l s y s t e m
including an ef f ic ient payment system is a lso
impor tant for a market economy to real ize i ts
ful l potential. Accountabil ity, transparency and
good governance should be present .
Fi t c h R a t i n g s r e c e n t l y s a i d t h a t t h e c a p i t a l
r e q u i r e m e n t s a s p e r B A S E L I I I w i l l i n c r e a s e
t h e l e n d i n g r a t e , i m p a c t t h e e c o n o m i c
output thereby ex tend the current recess ion.
Fur thermore, in Europe the government bonds’
y i e l d i s i n c re a s i n g, t h a t i s , t h e b o n d s a re n o
more attrac t ive. This in turn wi l l squeeze the
m a r k e t t h a t b a n k s c a n u s e t o m e e t t h e n e w
capita l requirements.
Government and tax payers are not at the r isk
for bai l ing out the depositors i f insured banks
f a i l b e c a u s e , t h e y j u s t h a ve t o m a k e u p t h e
di f ference when the loss exceeds the amount
accumulated through premiums.
Flaw in the f inancia l regulat ion system
Some macrolevel shor tcomings were:
•No attent ion to the stabi l i t y of the f inancia l
system as a whole.
•No measurement of the degree to which the
turmoi l in the f inancia l system can af fec t the
economy.
• I nadequate concentrat ion on the safet y and
soundness of individual depositor y institutions
in an age of g lobal interdependenc y.
We ex p e r i e n ce d t h e co l l a p s e o f b a n k i n g a n d
s av i n g s - a n d - l o a n i n d u s t r i e s , w i t h h u g e co s t s
t o t a x p a y e r s a n d t h e e c o n o my. T h e f a c t t h a t
this happened to heavi ly regulated industr ies
makes us think whether regulat ion does more
harm than good?
The reason for moral hazard is the absence of
market disc ipl ine because of government reg-
ulator y pol ic ies . D epositors and shareholders
we re lu l le d by pre v ious ac t ions of regulators
into bel ieving that even i f the inst itution fai led
they would somehow be protec ted.
Cost of bank ing regulat ion
Bank ing regulation curbs the abi l i ty of bank ing
houses to move out of recess ion and re -boot
t h e e c o n o my. A n e x a m p l e o f re s t r i c t i n g a n d
costly bank ing regulat ion is Obama’s trenchant
and restr ic t ive Dodd-Franck ac t .
The ‘quasi-nationalization’ of the banking sector
through a policy that combines a high degree of
regulat ion and bai louts wi l l d isrupt long-term
economic growth. Apar t f rom restr ic t ing credit
through profit loss on regulator y compliance, it
may result in the shi f t of r i sk to general credit
t ra n s a c t i o n s. O n t h e b a c k o f t h e J . P. M o rg a n’s
b i l l i o n d o l l a r l o s s e s , t h e re i s n o w a t e m p t a -
t ion in the EU to pass a measure s imi lar to the
Volcker rule in the U.S Dodd’s-Franck Ac t .
Wh a t m a k e s u s re a l i s e t h e i m p o r t a n ce o f regulat ion?
I n 1970,the debt cr is is i l lustrated the need for
centra l bank ing func t ions that natural ly ar ise
i n a d e r e g u l a t e d e nv i r o n m e n t . W h a t m o s t o f
u s d i d n’t k n ow b e fo re 2 0 0 7 w a s e x a c t l y h ow
they made prof i ts . But the banks over-reached
themselves. They expanded too rapidly. In 2007
a n d 2 0 0 8 , t h e i r s c h e m e s b e g a n t o u n r a v e l .
We l e a r n t a b o u t s u b - p r i m e m o r t g a g e s , l i a r s ’
loans, and derivatives where loans were repack-
aged, sold and re -sold so that any connec t ion
b e t w e e n b o r r o w e r a n d t h e f i n a l l e n d e r w a s
broken.
The recent a l legat ions were Barc lays -M ar ket
interest rate manipulation, HSBC-Mexican drug
m o n e y l a u n d e r i n g a n d S t a n d a r d C h a r t e r e d -
Iranian oil money laundering.The culture began
in 1986, when Margaret Thatcher ’s government
i n t r o d u c e d t h e “ B I G B A N G ” D E R E G U L AT I O N
that introduced the culture of r isk-tak ing, b ig
bonuses and a focus on shor t-term returns.The
f inancia l instruments are so complex i t of ten
takes months to f igure out how much was lost
and where the money went .Banks used higher
leverage to maximize prof i ts f rom D er ivat ive
produc ts. One example is the recent col lapse
of MF Global .
Dodd-Frank has tr ied to reduce the costs asso -
ciated with the regulation by focusing on inst i-
tut ions whose operat ions bear most cr i t ica l ly
o n t h e s t a b i l i t y o f t h e f i n a n c i a l s y s t e m a s a
whole. I t addressed the too -big-to -fai l problem
by a l l ow i n g t ro u b l e d s y s te m i c a l l y i m p o r t a n t
f inancia l inst i tut ions to be shuttered.
T h e b a n k i n g s e c t o r h a s u n d e r g o n e m a j o r
c h a n g e s ove r t h e l a s t fe w ye a r s . Th e re g u l a -
t ion rests on economic role of money andun-
cer ta int y.This uncer ta int y in turn renders f ree
b a n k i n g u nwo r k a b l e . R a t h e r t h a n s ay i n g re g -
ulat ion i s unnecessar y, the more appropr iate
response is to consider how to improve the reg-
ulat ion. Good regulator y pol ic y should take a
broad view of the way rules affect economy and
s o c i e t y, w h i l e m a i n t a i n i n g a s u i t a b l e d e g re e
o f h u m i l i t y a b o u t t h e a b i l i t y t o a c c u r a t e l y
q u a nt i f y t h e re l e va nt b e n e f i t s a n d co s t s . Th e
bank ing industr y should have ef fec t ive chan-
n e l s f o r v o i c i n g c o n c e r n s a b o u t b u r d e n o r
about lack of c lar ity regarding regulator y stan -
dards and super visor y expec tat ions.A for ward-
look ing macro prudent ia l approach must con-
sider how the f inancial system is l ikely to evolve
over t ime. For example, what systemic i ssues
are ra ised by new f inancia l produc ts , such as
complex derivatives? We want a dist inct regime
for systemical ly impor tant inst i tut ions.
S o w r i r a j a n S a n d R a m a n a i d u D. S . T-T h e a u t h o r s a r e
s t u d e n t s o f I n s t i t u e f o r F i n a n c i a l M a n a g e m e n t a n d
Reseacrh,Chennai
BANKING BANKING
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11 12
GOVERNMENT AND TAxES
Tax Reforms:An I ndian Perspec t ive
I n order to make i tse l f an
a t t r a c t i ve b u s i n e s s d e s t i -
nat ion and to increase tax
receipts, India is working on
two major tax reforms. DTC
(Direc t Tax Code) and GST
(G o o d s a n d S e r v i ce s Ta x ) .
Let ’s look at the trend in combined tax receipts
for Union and the States.The trend looks hear t-
e n i n g . I n f a c t t h e r a t e o f g r o w t h h a s o u t -
paced the GDP growth rate by a huge margin.
B u t , i f w e l o o k a t t h i s w i t h a b a c k d r o p o f
t h e p i l i n g f i s c a l d e f i c i t , p l u m m e t i n g i n v e s -
t o r c o n f i d e n c e a n d w i d e n i n g t r a d e d e f i c i t
we’ l l u n d e r s t a n d w hy t h e f i n a n ce m i n i s t r y i s
busy look ing for avenues to increase receipts.
The broad struc ture of the tax system and the
associated tax reforms are shown in the f igure
Direc t Tax
DTC i s s a i d t o r e p l a c e t h e e x i s t i n g I n d i a n
I ncome Tax Ac t , 1961. I t seeks to consol idate
a n d a m e n d t h e l aw s u n d e r I T Ac t a n d f a c i l i -
tate voluntar y compliance to help increase the
t a x- G D P r a t i o. Le t ’s fo c u s o n t h e t a x re fo r m s
I ncome Tax
What percentage of over 1 .21 bi l l ion popula-
t ion of the countr y pays income tax?
J u s t a b o u t 2 . 8 % ! C o m p a r e t h i s w i t h o v e r
4 5 % f o r U S A . T h u s t h e r e i s a n e e d t o b r i n g
m o re p e o p l e u n d e r t h e a m b i t o f t h e I n c o m e
Ta x . DTC i s p r o p o s e d t o a c h i e v e t h i s g o a l .
S o m e o f i t s s a l i e n t fe a t u re s a re a b o l i t i o n o f
s u r c h a r g e , e d u c a t i o n c e s s a n d L e a v e Tr a v e l
Al lowance. Deduc t ions up to 1 .5 lak hs, under
‘S ec 80C ’, to be a l lowed. No d i f ference in tax
slabs for male and females and many more. These
changes a im to increase the compl iance base
and thus increase the Tax receipts. The changes
are being implemented step by step ever y year.
Corporate Tax
I n d i a h a s e n t e r e d i n t o D o u b l e Ta x a t i o n
A v o i d a n c e A g r e e m e n t ( D TA A ) ; w i t h d i f f e r -
ent countr ies . S ome mult inat ional companies
operat ing in I ndia exploit the loopholes in the
DTAA by rout ing their investment through the
countr ies I ndia has DTAA with . Whi le there i s
no wrong in having a holding company there,
i t o f t e n t u r n s o u t t o b e a s h e l l c o m p a n y.
T h u s , t o t a x s u c h t r a n s a c t i o n s , G A A R
( G e n e r a l A n t i A v o i d a n c e R u l e s ) w a s i n t r o -
d u c e d i n t h e U n i o n B u d g e t o f 2 0 1 2 - 1 3 .
B u t , i t w a s r e c e i v e d w i t h a p p r e h e n s i o n
b e c a u s e o f l a c k o f c l a r i t y a n d c e r t a i n p r o -
v i s i o n s r e l a t e d t o i t s r e t r o s p e c t i v e n a t u r e .
The investor conf idence took a dip and the F I I
inflows took a U-turn. In contrast to high invest-
ment in stock market in the Jan-Mar quar ter, FI I
inf lows were negat ive for the month of Apr i l .
The stock market saw a gradual fa l l f rom about
1 7 5 0 0 p o i n t s i n M a r c h e n d t o a b o u t 1 6 0 0 0
points in May end. Thus to boost investor confi-
dence CBDT, in May, formed a s ix-member com-
mittee to draf t guidel ines for enforc ing GAAR.
GOVERNMENT AND TAxES
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13 14
D r a f t g u i d e l i n e s r e l e a s e d i n
J u n e e n d m a j o r l y i n c l u d e d -
1 . The tax rules wi l l apply to income accruing
only on or after April 1, 2013 and that a monetary
threshold is a must for invoking GAAR provisions.
2 . G A A R w i l l b e i n v o k e d o n l y i f a n
F I I t a k e s t h e b e n e f i t o f a n y D T A A .
3 . G A A R p r o v i s i o n s w i l l n o t a p p l y i n c a s e s
where tax t reat y agreements are not invoked.
4 . S e t t i n g u p a n a p p r o v i n g p a n e l
o f n o t l e s s t h a n t h r e e m e m b e r s .
I t a l s o p ro v i d e d a n i n d i c a t i ve l i s t o f d e a l s /
t r a n s a c t i o n s / a r r a n g e m e n t w h e r e G A A R w i l l
be invoked. Whi le tax mit igat ion us ing avai l -
a b l e p r o v i s i o n s i n t h e l a w i s a l l o w e d , i t
i s t a x a v o i d a n c e t h a t G A A R w a s t o d e t e r.
These new guidel ines too did not go wel l with
all the stake holders.Thus, PM Manmohan Singh,
in charge of the f inance por t fol io in June, set
up a committee to begin the process of con -
s u l t at i o n s w i t h va r i o u s s t a k e h o l d e r s i n a b i d
to f i n e - t u n e w h a t h a d h i t h e r to b e e n v i e we d
as controvers ia l provis ions and usher in more
clar ity and transparency in the draft guidelines.
T h e o v e r a l l s e n t i m e n t s i n c e t h e n h a s
b e e n p o s i t i v e a n d t h e r e t u r n o f c o n f i -
d e n c e i s e v i d e n t b y t h e r a l l y a t t h e s t o c k
m a r k e t s f r o m a l o w a b o u t 1 6 t h o u s a n d
points in M ay end to about 17500 in August .
I ndirec t Tax
GST (Goods & Ser vices Tax) is an ambitious prop-
osit ion to create a seamless nat ional common
market, by subsuming most of the indirect taxes
i m p o s e d b y t h e s t a t e a n d t h e g o v e r n m e n t .
Indirect taxes are a hotch-potch of Union Excise
Duty, State Excise Duty, Addit ional Excise Duty,
S e r v i c e Ta x , S a l e s Ta x , C u s t o m s , A d d i t i o n a l
Customs Duty, Special Additional Duty, VAT etc.
Viewed through a f iscal lens, the countr y is not
one market, but 28 states, each with its own tax-
raising powers, which they are not afraid to use.
Compl icated laws, cascading, squabbl ing over
what constitutes a good and what is a service etc are
some major issues with the present web of taxes.
T h i s m u l t i p l e t a x r e g i m e a c r o s s s e c t o r s o f
p r o d u c t i o n a n d s t a t e s l e a d s t o d i s t o r t i o n s
i n a l l o c a t i o n o f r e s o u r c e s t h u s i n t r o d u c -
i n g i n e f f i c i e n c i e s i n d o m e s t i c p r o d u c t i o n .
O n ce G S T i s i m p l e m e nte d a p a r t f ro m m a k i n g
l i f e e a s y f o r l o c a l i n d u s t r i e s , i t w i l l a t t r a c t
fo re i gn f u n d f l ows. Acco rd i n g to e s t i m ate s i t
wi l l lead to an increase in GDP of 0 .7% to 1 .7%.
O n e o f t h e m a j o r c h a l l e n g e s i n i m p l e m e n t -
i n g G S T i s a r r i v i n g at a re ve n u e n e u t ra l rate .
A revenue -neutra l rate is one at which a state
would not record any gain or loss af ter switch-
ing to GST. The higher a state’s revenue -neutral
rate, the more compensation it would seek from
t h e Ce n t re . O t h e r c h a l l e n g e s i n c l u d e i m p l e -
mentat ion of IT I nf rastruc ture, Const i tut ional
A m e n d m e n t , D i s p u t e r e s o l u t i o n m e c h a -
n i s m a n d c r e d i t m e c h a n i s m b e t w e e n s t a t e s .
S er vice Tax Regime
S h a r e o f s e r v i c e s e c t o r i n c o u n t r y ’s G D P
h a s r i s e n f ro m 5 0 . 4 % i n 2 0 0 0 - 0 1 t o 5 9 . 0 % i n
2 0 1 1 - 1 2 . B u t , s h a re o f S e r v i c e Ta x i s a l i t t l e
m o r e t h a n 1 % o f t h e G D P. We h a v e c o m e a
l o n g w a y s i n c e 1 9 9 4 w h e n t h e s e r v i c e t a x
w a s i n t r o d u c e d . S i n c e t h e n a p o s i t i v e l i s t
approach. i .e . ser v ices included in the l i s t wi l l
h a v e t o p a y s e r v i c e t a x , h a s b e e n fo l l o w e d .
There is an alternate concept of international ly
followed negative list according to which the ser-
vices included in the negative list will be exempt,
rest al l ser vices wil l have to pay the ser vice tax.
A s a m o v e t o w a r d s i m p l e m e n t i n g t h e G S T,
s e r v i c e t a x r e g i m e b a s e d o n n e g a t i v e l i s t
w a s i m p l e m e n t e d f r o m J u l y 1 s t . , 2 0 1 2
St ate s h ave ra i s e d co n ce r n s to ce r t a i n i te m s,
w h i c h t h e y s a y a r e l e a d i n g t o d o u b l e t a x a -
t ion. As of now some of these i tems have been
added to the negative l ist and a consensus wi l l
b e re a c h e d w h e n t h e G S T g e t s i m p l e m e nte d.
Conclus ion
These tax reforms would def in i te ly help us in
substant iat ing our stance and would strongly
portray our image of being the – ‘Incredible India’ .
G aurav Tiwar i -The author is a student of I IFT
GOVERNMENT AND TAxES GOVERNMENT AND TAxES
26328
35228
1792
-4896
3222 1180
-10000
0
10000
20000
30000
40000
Jan Feb Mar Apr May Jun
FII Investment
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15 16
I s i t t h e e n d o f D o l l a r a s Wo r l d ’s r e s e r v e Currenc y?
A Br ief H istor y of the US
Dol lar
The dol lar was chosen as
t h e c u r r e n c y o f U n i t e d
S t a t e s b y t h e p a s s a g e
o f t h e C o i n a g e A c t o f
1 7 9 2 , r e c o m m e n d e d b y
A l e x a n d e r H a m i l t o n , t h e t r e a s u r y s e c r e t a r y
t h e n . M a n y t h e o r i e s e x i s t o n t h e o r i g i n o f
t h e s y m b o l o f t h e d o l l a r ( $ ) s u c h a s Th e Pe s o
Abbreviat ion Theor y(the most widely accepted
theor y now) , The US Abbreviat ion Theor y, The
S h i l l i n g A b b r e v i a t i o n T h e o r y, e t c . T h e Pe s o
Abbreviat ion Theor y puts for ward the fac t that
the dol lar symbol is der ived f rom the Spanish
Peso.
Dol lar izat ion
I t was in 1944 the US dol lar replaced the UK ’s
Po u n d S t e r l i n g a s t h e wo r l d ’s re fe re n c e c u r-
renc y. This was agreed af ter the Bretton Woods
Conference of 1944 ,when the exchange rates
were pegged against the US Dollar which could
be exchanged for a f ixed amount of gold thereby
strengthening the posit ion of US Dol lar as the
wor ld currenc y. The col lapse of the USSR re in-
forced the predominance of dol lar as a wor ld
currency. Stabil ity has been a key factor for the
adopt ion of US D ol lar as of f ic ia l cur renc y by
several countr ies. Devaluat ion has never hap -
pened with the US Dollar. The emergence of the
Japanese Yen in 1980’s posed a ser ious threat
to the Dol lar as wor ld currenc y but thanks to
the recess ion in Japan in 1990’s aver ted that
threat . The arr ival of the Euro had a lso posed
a threat to the Dol lar as wor ld currenc y.
Threat to the Dol lar ?
T h e s h i f t i n t h e e c o n o m i c p o w e r f r o m t h e
western hemisphere to the eastern hemisphere
i s t h e e m i n e n t d a n g e r t h a t l u r k s o v e r t h e
supremac y of the US Dollar. A study conducted
by IMF has projec ted the sh i f t in Purchas ing
Power Par i t y of the wor ld f rom the west to the
east within a t ime span of 18 years .The most
l ikely contender to substitute the Dollar would
be the Chinese Yuan. The growth tra jec tor y of
China shows that it would over take the US to be
the world’s largest economy by 2020(Economic
Times Repor t) . Some of the banks have already
star ted given a higher impor tance to the Yuan
i n co m p a r i s o n to t h e U S D o l l a r by a d o p t i n g
Yuan as the S ett lement Currenc y.
From the forecast above , the emphasis should
be la id on the emergence of 2 new economic
superpowers – China & I ndia . The role played
by the t radit ional economic powerhouses l ike
J a p a n & G e r m a ny a l o n g w i t h t h e U S w i l l b e
The US Abbreviation Theory states that the dollar sign has been derived from the initials of the US
Unofficial Dollarization might lead to inability of local governments to control inflation & fiscal policy
s i d e l i n e d l e a d i n g t o a s h i f t i n t h e e c o n o m i c
power balance as stated ear l ier.
The future of the present ly a i l ing US economy
w o u l d b e i n f l u e n c e d g r e a t l y b y s h o r t t e r m
g l o b a l f a c t o r s l i k e a n o i l s h o c k o r a n a t u r a l
d isaster ,etc. The sustenance of the US Dol lar
h e g e m o n y w o u l d d e p e n d u p o n t h e p e r f o r -
mance of the US Economy. A potent ia l threat
to t h e U S e co n o my co u l d b e t h e o p e n i n g u p
of another war f ront in a place l ike I ran/Syr ia .
The fai lure of a couple of Major US banks could
p l u n g e t h e U S e co n o my i nto a d e e p e r a bys s .
These are some of the major fac tors that could
affec t the US economy thereby having a poten-
t ia l to inf l ic t severe damage on the s tatus of
the US Dollar as the world’s reference currenc y.
The present economic cr is is has also led the US
Government to reduce the interest rates to the
minimum possible so as to stimulate investment
in the economy. However, th is move wi l l be a
d e t e r re n t fo r t h e O P E C n a t i o n s ( b a r r i n g I r a n
) to co n d u c t O i l Tra n s a c t i o n s i n D o l l a r s . Th i s
i s because the petrodol lar system wi l l be less
a l lur ing to them on account of the lower inter -
est rates that the US Secur i t ies would provide
them. This wi l l lead to the shi f t ing away of the
O P E C co u n t r i e s f ro m t h e Pe t ro d o l l a r s y s te m .
I n such a scenar io , petro leum being a major
commodity transacted in the world market, wil l
c a u s e t h e b r e a k d o w n o f d o l l a r a s t h e w o r l d
reference cur renc y as major i t y of the nat ions
would not purchase Petroleum from the OPEC
countr ies us ing Dol lars but by some other cur-
renc y that gives better returns.
A Wor ld without Dol lar ?
This could be a real i t y within a generat ion. I f
at a l l the Dol lar i s ousted as the reference cur-
renc y and i f there is no currenc y to occupy that
p o s i t i o n , t h e n g l o b a l i n f l at i o n wo u l d r i s e a s
impor tant commodities l ike oi l ,precious metals
& a gr i c u l t u ra l g o o d s wo u l d r i s e s u b s t a nt i a l l y
to compensate for the same. This wi l l h i t the
emerging markets l ike China, I ndia ,etc.
H owe ve r, we s h o u l d a l s o a n a l y ze t h e s u b s t i -
t u te s av a i l a b l e , o t h e r t h a n t h e C h i n e s e Yu a n
which has been discussed ear l ier. Let us look
at the some of the different possible substitues
1.Euro - I f we look at the European Union now ,
what is visible is that there are a large number of
countr ies that are fac ing sovereign debt cr is is .
Some of them are tr ying to distance themselves
from the Euro. This is primari ly due to the differ-
ent growth rates of countries that have adopted
a s ingle currenc y, Euro. I t becomes di f f icult to
maintain the same interest rate throughout a l l
the member countr ies because of the var y ing
growth rates. Hence the inherent instabi l i t y in
the Euro Zone deems the Euro unf i t to replace
the Dol lar as a wor ld reference currenc y.
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17 18 WORLD ECONOMY WORLD ECONOMY
2.Japanese Yen- The locat ion of Japan in “ The
R i n g o f Fi re” w i l l n e ve r e n s u re t h e s t a b i l i t y
of the Yen as the countr y wi l l be f reque nt ly
h i t by n a t u r a l d i s a s te r s w h i c h i n t u r n wo u l d
a f fe c t t h e s to c k m a r k e t s a s we l l a s t h e c u r-
rency of the concerned countr y as we had seen
subsequent to occurrences of ear thquakes in
Japan. Hence the this inval idates the compe -
t i t ion posed by Yen.
3 . Gold- Though gold is one among the oldest
fo r m s o f m o n e y , t h e co s t i nvo l ve d i n u s i n g
gold in t ransac t ions a long with the integr i t y
o f t h o s e t r a n s a c t i o n s re n d e r s g o l d a c o s t l y
replacement for dol lar as a wor ld currenc y.
The Euro is adopted by top performing economies like Germany & France as well as by faltering economies like Greece & Spain.
M r. S i d d h a r t h K u m a r - A s s i s t a n t V i c e President, Investment Bank ing, Barclays
Capita l
q uest ion: You have had an
e x p e r i e n c e o f w o r k i n g i n
the I ndian Capita l Markets,
especia l ly the debt market ,
fo r a s p a n o f 5 ye a r s . H ow
has your ent i re exper ience
o f wo r k i n g i n t h i s p a r t i c u -
lar market been?
Answer : The Indian Debt Capital Market is quite
a c t i ve. Wh e n I j o i n e d, t h e I n d i a n m a r k e t wa s
not real ly in i ts formative phase; rather, i t had
developed to quite an ex tent . Speak ing of the
n a t u re o f t h e m a r k e t , i t d o e s n o t h ave m u c h
s i m i l a r i t y w i t h t h e m a r k e t s i n t h e d e ve l o p e d
world. So, to an extent, a niche market is devel-
oping in I ndia .
The exper ience, as such, has been ver y enr ich-
ing, given the fac t that the scenar io of a c lass-
room is ver y dif ferent from that of a work place.
I t feels good to be in the middle of ac t ion.
question: Given the current context, do you see
a major t rend developing in this market?
A n s w e r : C o n s i d e r i n g a t i m e f r a m e o f 1 2 - 1 8
months, the trend wil l l ikely be of more domes-
t ic ac t iv i t y in the mar kets . This i s mainly due
to the fac t that there is lack of fa i th of foreign
investors in the Indian capital markets, coupled
with the fac t that capr ic ious pol ic y mak ing by
the government has put barr iers for their entr y.
q u e s t i o n : A re ce n t re p o r t s t a te d t h a t 1 0 . 6 %
o f t h e G D P o f C h i n a i s f u n d e d b y Co r p o r a t e
Bonds, whi le for Japan this stat ist ic goes up to
40%. So, can we conclude that there is a corre -
lat ion bet ween a countr y ’s economic develop -
ment and the evolut ion of i ts debt market? Or
should we say that i t i s just another stat ist ic?
Answer : As the economies develop, the evolu-
t i o n o f c a p i t a l m a r k e t s i s a n at u ra l o u tco m e,
r e g a r d l e s s o f w h e t h e r t h e m a r k e t i s d o m i -
n a t e d b y d e b t i n s t r u m e n t s o r e q u i t y i n s t r u -
m e n t s . S o, o n e c a n s ay t h a t t h e re i s a co r re -
l a t i o n t o t h e e x t e n t t h a t a s e c o n o m i e s g row
and progress , bor rowing and lending tend to
i nc re as e. Howe ve r, on e c an n ot co n cl u de t h at
o n e p a r t i c u l a r p a r a m e t e r w i l l i n f l u e n c e t h e
other parameter.
q u e s t i o n : I s l a m i c b o n d s t o o k o f p r e t t y w e l l
in 2007. S o, ta lk ing of them along with other
S h a r i a t c o m p l i a n t p r o d u c t s , d o t h e y h a v e a
future, i f launched in I ndia?
Answer : Wel l to be honest , speak ing of I s lamic
b o n d s a n d o t h e r S h a r i at co m p l a i nt p ro d u c t s ,
I do not see them having much of a future in
I ndia . The spi r i t and or igin of I s lamic f inance
is f rom countr ies where i t i s regarded a taboo
t o c h a rg e i n te re s t . S o, i n t h i s g i ve n co n te x t ,
consider ing that I ndia is essent ia l ly a democ-
rac y, i t won’t be feas ible for I s lamic bonds to
be launched in I ndia .
H e n c e , w h a t i s e v i d e n t i s t h a t t h o u g h t h e
dol lar is in a danger zone , but with no suitable
replacement to being seen to be around and the
gold standard being brought again to be ver y
unl ikely in the nex t t wo decades, dol lar would
st i l l cont inue to be the exchange currenc y of
the wor ld for at least a couple of decades.
Sanoop Sreedhar-The author is a student of FMS ,Delhi
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19 20 WORLD ECONOMY CORPORATE TALK
question: Recently the FI I l imit has been raised
by U S D 5 B i l l i o n . A l s o, a n e w s e t o f re fo r m s
are tak ing place. I n this scenar io what reforms
t h a t y o u t h i n k w i l l h e l p i n d e v e l o p i n g t h e
debt market and help the changing c l imate of
capita l in I ndia?
Answer : The government increas ing the l imit
by 5 b i l l i o n f ro m 2 0 b i l l i o n to 2 5 b i l l i o n i s a
reform that i s not going to make a great deal
of change.For instance, the tax on offshore bor-
rowing has been reduced f rom 20% to 5%. But
instruments l ike credit default swaps have not
re a l l y t a k e n o f f. I n a l l , t h e o n e s i m p l e t h i n g
that the government can do is to be more con-
s istent with their pol ic y mak ing. The pol ic ies
should not be such that the gover nment can
claw back money that the investors have made
on their investment.
O ther than that , I ndia is coming up with sov-
ereign bonds could draw more attention to the
countr y. This may enable investors from Europe
and United States to become more open about
enter ing the I ndian market .
question: Given the current economic outlook ,
do you think i t i s ac tual ly correc t for I ndia to
come up with sovereign bonds?
Answer : Wel l , in the coming year or so, i f the
government is able to show some progress with
respec t to pol ic y a long with reforms then they
should come up with that .The RBI has a cap on
how much I ndian companies are permitted in
the form of ECB from offshore markets, mak ing
i t a lmost imposs ible for I ndian companies to
tap capita l f rom the of fshore markets. Hence,
increasing the cap put on the Indian companies
would a lso be benef ic ia l . 1
question: How the various experiences you had
in your 2 years of MBA from I IFT has helped you
in your career?
Answer : Wel l , I IFT is the place where I had my
f i rst exposure to Finance as a domain. I had a
good internship with Adit ya Bir la Group, so my
i nte re s t i n f i n a n ce s t a r te d f ro m t h e re. I n t h e
2nd year, we had some ver y good professors ,
who helped in nur tur ing my interest in f inance.
Also, the batch that I was a par t of had a set of
co m m o n i nte re s t s , w h i c h we s h a re d amongst
ourselves. Hence, the two years of MBA gave me
a hol ist ic development f rom al l aspec ts.
q u e s t i o n : W h a t a c c o rd i n g t o yo u s h o u l d t h e
col lege do to engage more a lumnis?
Answer : The col lege should look to being more
proac t ive in reaching out to the a lumni , bas i -
c a l l y h av i n g a n ‘ i n yo u r f a ce a p p ro a c h’. I fe e l
t h at e ve r y a l u m n u s o f t h e co l l e g e d o e s h ave
some feeling of aff i l iation to his alma mater and
wa nt s to co nt r i b u te to t h e co l l e g e. H owe ve r,
due to var ious reasons, they are not able to do
so. The basic fac t is that you have to be in their
face. They may ignore you, but they won’t turn
you down.
M r. S i d d h a r t h K u m a r i s t h e A s s i s t a n t V i c e Pre s ide nt of the I nves tment Bank ing d iv is ion at t B a rc l ays Ca p i t a l . Pr i o r to j o i n i n g B a rc l ays Capital, he worked as the manager of the global invetment banking division at ICICI bank. He has a total exper ience of more than 5 years in the bank ing and f inance industr y. His area of inter-est inc ludes Struc tured Finance, D ebt Capita l M arkets, Syndicated Loans, S ecur i t izat ionThe views expressed above are of the author and in no way reflect the opinion of the firm
D o e s t h i s h o l d t r u e i n
t o d a y ’s s c e n a r i o ? C a n
this be sa id for the coun-
tr ies i r respec t ive of their
e c o n o m i c s t r u c t u r e ?
I n f l a t i o n r e p r e s e n t s a n
i n c re a s e i n t h e p r i c e l e ve l o f t h e g o o d s a n d
ser v ices in the economy as a whole. I nf lat ion
rate refers to a general r i se in pr ices measured
against a standard level of purchasing power.
T h e m o s t w e l l k n o w n m e a s u r e s o f I n f l a t i o n
are the CPI which measures consumer pr ices ,
a n d t h e G D P d e f l a t o r, w h i c h m e a s u re s i n f l a -
t i o n i n t h e w h o l e o f t h e d o m e s t i c e c o n o my.
India faced a high of 14.97% (CPI) inflation rate in
FY09; RBI was par tial ly able to control the inf la -
t ion rate and has brought i t down to 6 .87% in
July ’12. China raised interest rates for the fourth
t ime s ince the end of the global f inancial cr is is
to restra in inf lat ion and l imit the r isk of asset
bubbles in the fastest-growing major economy.
I n f l a t i o n a f fe c t s t h e d i f fe re n t s e c t o r s o f t h e
economy and i f kept unchecked can shake the
e c o n o m i c s t a b i l i t y o f a n a t i o n . Fo r i n s t a n c e,
Zimbabwe’s hyper- Inf lat ion of 24,000% in 2009
was par t ia l ly a result of the monetar y author-
i t y i r re s p o n s i b l y b o r row i n g m o n e y to p ay a l l
i ts expenses and funding quasi - f iscal ac t iv i t ies
(which are normally left to Central Government).
I s Monetar y Pol ic y the best answer we have for I nf lat ion?
“I nf lat ion is a lways and ever y where a monetar y phenomenon.”-M i l ton Fr iedman
F e w o f t h e p r o m i n e n t
e f f e c t s o f i n f l a t i o n c a n
b e j o t t e d d o w n a s u n d e r
1.Buying power of the cur-
renc y is eroded
2.Real wage rate decreases
3.Real rate of return for debt holders decreases
4. I nstead of saving, consumers may star t bor-
row i n g. Co n s u m e r s te n d to b o r row m o re a n d
spend even more.
5 . I nf lat ion causes uncer ta int y which increases
r isk . Higher r isk means businesses are less l ikely
to invest .
6 . B u s i n e s s c o s t s r i s e s a s i n p u t p r i c e s ( r a w
m a t e r i a l s , w a g e s a n d s u p p l i e s ) r i s e . Wa g e s
are of ten the largest business cost , and there
could be a danger of a ‘wage -price’ spiral where
r i s i n g c o s t s l e a d s t o h i g h e r p r i c e s , w o r k e r s
a s k fo r a p a y r i s e i n c o m p e n s a t i o n , s o c o s t s
r i s e a g a i n , s o p r i c e s r i s e a g a i n , a n d s o o n .
To get to the crux of i t , we need to understand
the bas ics of inf lat ion and fac tors giv ing r i se
to i t . There is no s ingle cause which is agreed
u p o n by a l l , b u t t h e re a re a t l e a s t t wo t h e o -
r ies which are general ly accepted: Demand-Pull
I nf lat ion Theor y & Cost-Push I nf lat ion Theor y
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21 22 CORPORATE TALK INDIAN ECONOMY
Th e s e c a n b e e x p l a i n e d i n te r m s o f i n te r s e c-
t ion of shor t run aggregate supply (SRAS) and
a g g r e g a t e d e m a n d c u r v e s a s s h o w n i n t h e
f i g u re . I n a s h o r t t i m e s p a n Lo n g r u n a g g re -
g a t e s u p p l y ( L R A S ) c u r v e i s a s s u m e d c o n -
s t a n t a n d i s t h e l e ve l o f G D P a t e q u i l i b r i u m .
D e m a n d P u l l : W h e n S R A S b e c o m e s i n e l a s -
t ic and there is fu l l employment of resources,
a n i n c r e a s e i n d e m a n d l e a d s t o i n c r e a s e o f
pr ices. This increase in demand may be due to:-
1 .A reduc t ion in di rec t or indirec t taxat ion
2.The rapid growth of the money supply
3 .A depreciat ion of the exchange rate
T h i s e f f e c t i s e x p l a i n e d i n t h e d i a g r a m .
H e r e i n c r e a s e i n d e m a n d h a s c a u s e d
p r i c e s o f g o o d s i n e c o n o m y t o i n c r e a s e .
C o s t P u s h I n f l a t i o n : O n t h e o t h e r h a n d ,
C o s t - P u s h I n f l a t i o n o c c u r s w h e n t h e p r i c e s
i n c r e a s e d u e t o r i s i n g p r o d u c t i o n c o s t s ,
i n o r d e r t o m a i n t a i n t h e i r p r o f i t m a r g i n s .
I n c r e a s e i n c o s t m a y h a p p e n d u e t o :
1 .R is ing impor ted raw mater ia ls costs
2 .R is ing labour costs
3 . H i g h e r i n d i r e c t t a x e s i m p o s e d b y t h e
government
Co s t - p u s h i n f l a t i o n c a n b e i l l u s t r a t e d b y a n
inward shi f t of the shor t run aggregate supply
curve. This is shown in the diagram below. A fall in
SRAS causes a contraction of real national output
together with a r ise in the general level of prices.
Fo r ye a r s n ow, t h e m o s t co m m o n
t o o l w h i c h c e n t r a l b a n k e r s h a v e
in their hand to control the inf la-
t ion is temper ing with the money
s u p p l y. I d e a b e h i n d i t b e i n g t h at
money supply controls the growth
o f d e m a n d t h r o u g h a n i n c r e a s e
i n i n t e r e s t r a t e s a n d a c o n t r a c -
t i o n i n t h e r e a l m o n e y s u p p l y.
Few of the measures adopted are : -
Bank rate pol ic y : Dur ing inf lat ion i t i s seen as
a ver y crucia l instrument of monetar y control .
The increase in bank rate increases the cost of
INDIAN ECONOMY
b o r row i n g w h i c h re d u c e s c o m m e rc i a l b a n k s’
b o r ro w i n g f ro m t h e c e n t r a l b a n k . T h i s l e a d s
in reduc t ion of cash f low from the commercia l
banks to the public. Thus, inflation is controlled
t o a n e x t e n t i t ’s c a u s e d b y t h e b a n k c r e d i t .
Ca s h R e s e r ve R at i o (C R R ) : B y ra i s i n g t h e C R R
central bank tr ies to reduce the lending capac-
i t y of the commerc ia l banks, so as to contro l
i n f l a t i o n . T h i s l e a d s i n r e d u c t i o n o f c a s h
f l o w f ro m c o m m e rc i a l b a n k s t o p u b l i c . T h i s ,
c o n t r o l l i n g t h e r i s e i n p r i c e s t o t h e e x t e n t
i t i s c a u s e d b y b a n k s c r e d i t s t o t h e p u b l i c .
O p e n M a r k e t O p e rat i o n s : O p e n m a r k e t o p e r -
a t i o n s re fe r to s a l e a n d p u rc h a s e o f g ove r n -
m e n t s e c u r i t i e s a n d b o n d s b y t h e c e n t r a l
bank . Centra l bank sel ls the government secu-
r i t i e s to t h e p u b l i c t h ro u g h t h e b a n k s re s u l -
t i n i n t r a n s fe r o f a p a r t o f b a n k d e p o s i t s t o
centra l bank account and reduces credi t c re -
a t i o n c a p a c i t y o f t h e c o m m e r c i a l b a n k s .
But are such monetar y pol ic ies the only source
of inf lat ion control? Or are they enough con-
s ider ing the current wor ld scenar io where a l l
e co n o m i e s a re m u c h m o re co m p l i c a te d t h a n
ever before? Effect ive pol ic ies to control inf la-
t i o n n e e d to fo c u s o n t h e u n d e r l y i n g c a u s e s
of inf lat ion in the economy. I f cost-push inf la-
t ion is the root cause, produc t ion costs need
to be control led for the problem to be reduced.
To ser ve this purpose var ious methods can be
a d o p te d fo r s h o r t te r m o r l o n g te r m e f fe c t s .
S h o r t - t e r m p o l i c i e s . A n a p p r e c i a t i o n o f t h e
exchange rate
There are several impac ts at enterpr ise level of
appreciation of the domestic exchange rates. I t
should make expor ts more expensive and thus
reduce the volume of expor ts. As a result f i rms
f ind them in a posit ion where they have to keep
thei r cost down to remain compet i t ive in the
world market. Also a stronger currenc y reduces
impor t pr ices and this makes f i rms’ raw mater i -
als and components cheaper, therefore helping
them control costs.
T h e r e a r e s e v e r a l m e c h a n i s m s fo r e xc h a n g e
r a t e a p p r e c i a t i o n w h i c h c a n b e e m p l o y e d .
S o m e o f t h e m a re : i n c re a s e i n t h e re a l i nte r -
e s t o f t h e e c o n o m y ; o p e n m a r k e t o p e r -
a t i o n s b y c e n t r a l b a n k i n f o r e x m a r k e t s .
Direc t wage controls - incomes pol ic ies
A d i r e c t w a g e c o n t r o l l i m i t s t h e r a t e o f
g r o w t h o f n o m i n a l w a g e s a n d t h u s h a s t h e
p o t e n t i a l t o r e d u c e c o s t i n f l a t i o n . T h o u g h
n o t b e i n g u s e d f r e q u e n t l y i n c u r r e n t t i m e s ,
t h i s p o l i c y s t i l l t r y t o l i m i t w a g e g r o w t h b y
r e s t r i c t i n g p a y r i s e s i n t h e p u b l i c s e c t o r.
Long-term pol ic ies.
Fiscal Pol ic y
1.H igher di rec t taxes (causing a fa l l in dispos-
able income)
2. Lower Government spending
3 . A reduc t ion in the amount the government
sec tor borrows each year
T h e s e f i s c a l p o l i c i e s l i m i t t h e c i r c u l a r f l o w
o f m o n e y a n d r e d u c e f u r t h e r i n j e c t i o n s
i n t o t h e f l o w o f i n c o m e . T h i s i s a i m e d t o
r e d u c e d e m a n d p u l l i n f l a t i o n a n d a t t h e
c o s t o f s l o w e r g r o w t h a n d u n e m p l o y m e n t .
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
23 24 INDIAN ECONOMY
INDIAN ECONOMY
Labour market reforms
Over a period of t ime depletion of power vested
i n t ra d e u n i o n s, t h e grow t h o f p a r t - t i m e a n d
temporar y wor k ing a long with the expansion
o f f l e x i b l e w o r k i n g h o u r s h a v e r e s u l t e d i n
increased f lex ibi l i t y in the labour market . This
a l l ows f i r m s to co n t ro l t h e i r l a b o u r co s t a n d
t h u s re d u c e c o s t p u s h i n f l a t i o n a r y p re s s u re .
I n re ce n t ye a r s t h e U K a n d G e r m a n e co n o my
h a s n o t s e e n t h e a c c e l e r a t i o n i n w a g e i n f l a -
t ion normal ly associated with several years of
s u s t a i n e d e co n o m i c grow t h a n d f a l l i n g i n f l a -
t ion. This can be attr ibuted to shif t ing of power
a w a y f r o m e m p l o y e e s t o w a r d s e m p l o y e r s .
Supply-s ide reforms
To a c h i e v e s u s t a i n e d e c o n o m i c g r o w t h
without worr y ing for inf lat ion, greater output
i s r e q u i r e d t o b e p r o d u c e d a t a l o w e r c o s t
p e r u n i t . A l o n g te r m s u s t a i n a b l e i n c re a s e i n
a g g re g a t e s u p p l y ( p o t e n t i a l G D P ) i s t h e k e y
o b j e c t i ve o f a g o ve r n m e n t e c o n o m i c p o l i c y.
A c l a s s i c e x a m p l e i s o f Tu r k e y ’s c e n t r a l
b a n k r e d u c i n g i n t e r e s t r a t e s t o s h i e l d t h e
e c o n o m y f r o m t h e i m p a c t o f t h e E u r o p e a n
d e b t c r i s i s a n d s l o w i n g g r o w t h i n t h e U. S .
Supply side reforms aim to enhance the produc-
tivity of the economy over a long run and increase
the t rend rate of growth of fac tor of produc-
t ions i .e. labour and total factor productivity. A
number of supply-side policies have been intro-
duced into the Brit ish economy in recent years. .
C l e a r l y i t c a n b e s e e n t h a t i n f l a t i o n c u r b i n g
t o d a y n e e d s m u c h m o re t h a n j u s t m o n e t a r y
p o l i c i e s a n d t h e k e y t o c o n t ro l l i n g i n f l a t i o n
i n t h e l o n g r u n i s fo r t h e a u t h o r i t i e s to k e e p
control of aggregate demand (through fiscal and
monetar y pol ic y) and at the same t ime seek to
achieve improvements to the supply s ide of the
economy. The credibil ity of inflation control pol-
ic ies can a lso be enhanced by the introduc t ion
of inf lat ion targets which should be met with .
H imanshu Kundoo and Palnik a Hemnani-The authors are
students of I IFT
BANKING
Impact of BASEL I I I norms on Indian Banking Sec tor
“ W hatever was on the
le f t -hand s ide ( l iabi l i t ies )
w a s n o t r i g h t a n d w h a t -
ever was on the r ight-hand
s ide (assets) was not lef t ”-
T h i s q u o t e c h a r a c t e r i z e d
the world’s bank ing system during ear ly 2008
and ushered in the global f inancial cr is is that
sent tremors across economies the world over.
This was in spite of the protective safeguards
of the BASEL I I norms and has led the Basel
Committee on Bank ing Super vis ion (BCBS) to
co m e o u t w i t h t h e B A S E L I I I n o r m s p rov i d -
ing a broadened f ramework of t ighter regu-
lat ions a imed at st rengthening both s ides of
the balance sheet for banks around the world.
The Basel I I I guidel ines envisage increase in
capital and l iquidity requirements worldwide.
I n e a r l y M a y 2 0 1 2 , R B I a n n o u n c e d n e w
n o r m s f o r t h e I n d i a n b a n k i n g s e c t o r w i t h
s t r i c t e r r e g u l a t i o n s t h a n t h e B A S E L I I I t o
be ef fec ted in a phased manner with in f ive
f i s c a l y e a r s s t a r t i n g f r o m J a n u a r y, 2 0 1 3 .
L e t u s l o o k a t t h e s e n o r m s a n d t h e i r
p r o b a b l e i m p a c t o n t h e I n d i a n B a n k s .
The rules can be broadly classif ied as bellow :-
• T h e c a p i t a l r e q u i r e m e n t s f o r t h e i m p l e -
m e n t a t i o n o f B a s e l I I I g u i d e l i n e s m a y
b e l o w e r d u r i n g t h e i n i t i a l p e r i o d s
a n d h i g h e r d u r i n g t h e l a t e r y e a r s .
• T h e g u i d e l i n e s r e q u i r e
b a n k s t o m a i n t a i n a
minimum tota l capi ta l o f
9 p e r c e n t a g a i n s t 8 p e r
c e n t p r e s c r i b e d b y t h e
B a s e l c o m m i t t e e o f t o t a l
r i s k w e i g h t e d a s s e t s .
•Common Equity Tier 1 (CET1) capital must be at
least 5.5 per cent of RWA’s. (Risk Weighted Assets)
U n d e r t h e s e n o r m s b a n k s w i l l h ave t o m a i n -
t a i n t h e i r t o t a l c a p i t a l r a t i o a t 9 % , h i g h e r
t h a n t h e m i n i m u m r e c o m m e n d e d r e q u i r e -
m e n t o f 8 % u n d e r t h e B a s e l I I I n o r m s . T h e
n o r m s a l s o r e q u i r e b a n k s t o m a i n t a i n T i e r
I c a p i t a l a t 7 % o f r i s k w e i g h t e d a s s e t s .
F o l l o w i n g i s t h e s u m m a r y o f t h e r u l e s
p e r t a i n i n g t o t h e I n d i a n s c e n a r i o : -
2 0 1 3 M i n i m u m c a p i t a l r e q u i r e m e n t s :
S t a r t o f t h e g r a d u a l p h a s i n g - i n o f t h e
h i g h e r m i n i m u m c a p i t a l r e q u i r e m e n t s .
2 0 1 5 M i n i m u m c a p i t a l r e q u i r e m e n t s :
H i g h e r m i n i m u m c a p i t a l r e q u i r e -
m e n t s t o b e f u l l y i m p l e m e n t e d .
2 0 1 6 C o n s e r v a t i o n b u f f e r : I n i t i a t i o n o f t h e
gradual phasing- in of the conser vat ion buffer.
2 0 1 9 Cy c l i c a l C o n s e r v a t i o n b u f fe r : T h e c o n -
s e r v a t i o n b u f f e r t o b e f u l l y i m p l e m e n t e d .
2 0 1 1 S u p e r v i s o r y m o n i t o r i n g : D e v e l o p i n g
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
25 26
t e m p l a t e s t o t r a c k t h e l e v e r a g e r a t i o
a n d t h e u n d e r l y i n g c o m p o n e n t s .
2 0 1 3 Pa r a l l e l r u n I : T h e l e v e r a g e r a t i o a n d
i t s co m p o n e n t s to b e t ra c k e d by s u p e r v i s o r s
w h i c h a r e n e i t h e r d i s c l o s e d n o r m a n d a t o r y.
2 0 1 5 P a r a l l e l r u n I I : T h e l e v e r a g e r a t i o
a n d i t s c o m p o n e n t s t o b e t r a c k e d w h i c h
a r e n e i t h e r d i s c l o s e d n o r m a n d a t o r y .
2 0 1 7 Fi n a l a d j u s t m e nt s : B a s e d o n t h e re s u l t s
o f t h e p a r a l l e l r u n p e r i o d , a ny f i n a l a d j u s t -
m e n t s t o t h e l e v e r a g e r a t i o t o b e m a d e .
2018 Mandatory requirement: The leverage ratio to
become a mandatory part of Basel III requirements.
The I ndian regulator has been more str ingent .
For I ndian banks, common equit y should be at
least 5.5% of the asset base, whereas the interna-
tional norm suggests 4.5%.Tier I capital, or core
capital, includes a bank ’s equity capital and dis-
c losed reser ves. Capital rat io is the percentage
of a bank ’s capita l to i ts r i sk-weighted assets.
I mpac t
Given that the regulat ions set by RBI on capital
adequacy are already str ingent the Indian banks
should f ind i t re lat ively eas ier to adhere to the
capital requirement norms as most of the Indian
banks have maintained their capital wel l above
the minimum requirements. The only concern is
the requirement of capital adequacy may create
p re s s u re o n P S U s w h o a re i n a c re d i t c r u n c h
s i t u a t i o n d u e t o t h e i n c re a s i n g o f N PA s. Th e
str icter norm of Tier 1 capital would l ikely result
in an increase in the cost of lending result ing
i n l o a n s b e c o m i n g m o re e x p e n s i ve . I t wo u l d
a lso lead to a lower ing of the return on equit y.
The capita l conser vat ion and counter c yc l ica l
buffers look to put a check on the di f ferent ia l
amounts of lending at t imes of ups and downs
in the business c ycles, thus helping to keep the
r isk bui ld-up of banks at stable levels through-
o u t a l l b u s i n e s s c y c l e s . H o w e v e r l o o k i n g a t
t h e f a c t t h a t I n d i a h a s u n d e r g o n e m o d e r a t e
c ycles, th is norm could be a dampener result-
ing in reduced lending and lesser percentage of
sanc t ions than in normal condit ions. The rules
would make systems more robust and centra l -
i ze d a n d gi ve n t h e c h a l l e n g e f a ce d by b a n k s
o f g e t t i n g t i m e l y a n d a c c u r a t e d a t a f r o m a
myr iad of systems, i t would prove to be a great
c o n t r i b u t o r t o w a r d s a m o r e r o b u s t b a n k i n g
s ys te m . O n e o f t h e m o s t i m p o r t a n t n e e d s o f
s t andardizat ion of re por t ing s t r uc ture across
braches would a lso be ser ved by these norms.
Th e re fo re i t c a n b e co n c l u d e d t h a t B A S E L I I I
would usher in a wholly new era of banking regu-
lation with centralized and standardized repor t-
ing systems which is an imperative to withstand
stress events in an ever changing world economy.
However the capita l requirements seem di f f i -
cult to maintain and could have an impac t on
the growth of the Indian economy which needs
b a n k i n g s u p p o r t to b o o s t i t s grow t h . H e n ce,
t h e re i s a n e e d to b a l a n ce b e t we e n f i n a n c i a l
s tabi l i t y and the real i t y that f inancia l ser v ices
are essent ia l for economic growth. Whether
I n d i a e n d s u p w i t h t h e fo r m e r, t h e l a t t e r o r
both is a quest ion that only t ime can answer ! ! !
Soumya Sen and Sourav Dutta-The authors are students
of I IFT
BANKING
MIST or BRICS-Who wi l l win the growth batt le?
J i m O ’ N e i l l , c h a i r m a n o f
G o l d m a n S a c h s u s h e r e d
i n a d e c a d e - l o n g i n v e s t -
m e n t b o o m i n 2 0 0 1 w h e n
h e c o i n e d t h e t e r m B R I C
f o r t h e l a r g e s t e m e r g i n g
m a r k e t s . I n 2 0 1 0 , S o u t h
Afr ica began ef for ts to jo in
t h e B R I C g ro u p i n g. Th i s ye a r, a l e s s e r - k n ow n
acronym that the Goldman Sachs chairman has
coined is catching fast . The term MIST has been
coined to descr ibe the next t ier of large emerg -
ing economies - Mexico, Indonesia, South Korea
and Turkey. They are the new oppor tunit ies. Al l
fo u r h ave i n co m m o n
a n u m b e r o f f a c t o r s :
a l a r g e p o p u l a t i o n
a n d m a r k e t , a b i g
economy at about 1%
o f g l o b a l G D P e a c h ,
a n d a l l a r e m e m b e r s
o f t h e G 2 0 . T h e y a r e
termed as new oppor-
t u n i t i e s a s g ro w t h i n
B R I C S c o u n t r i e s h a s
s l o w e d r e c e n t l y . L e t
us compare these t wo
groups :
C o m p a r i n g M I S T
against BRICS
1.Economic potent ia l
The MIST economies more than doubled in s ize
in the past decade. I n Mexico, Lat in Amer ica’s
second-biggest economy, record auto expor ts
are helping growth outpace Brazil ’s for a second
year amid waning Chinese demand for the South
A m e r i c a n n a t i o n’s c o m m o d i t i e s . I n d o n e s i a’s
domest ic spending and investment helped the
nation’s economic growth accelerate to 6.37 per
cent in the second quar ter, surpr is ing econo-
mists who forecast a s lowdown. For most poor
countr ies, South Korea is a model of growth, a
better exemplar than China, which is too vast to
copy, and better, too, than Taiwan, Singapore or
Hong Kong. Al l three are r icher than Korea but
al l are, in dif ferent ways, exceptions: Singapore
and Hong Kong are c i t y states, whi le Taiwan's
d i s p u t e d
sovereignt y
m a k e s i t
su i gener is .
A c c o r d i n g
t o t h e
World Bank ,
T u r k e y ’ s
rate of 11%
e c o n o m i c
g r o w t h l e d
the world in
2 0 1 1 . G D P
p e r c a p i t a
i s $ 1 2 , 3 0 0 ,
b e l o w
E u r o p e a n
l e v e l s , b u t
ahead of most emerging markets, including the
BRICs (exc luding Russ ia ) . But BRICS countr ies
represent 3 bi l l ion people with combined GDP
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
27 28 WORLD ECONOMY
o f 1 3 . 7 $ t r i l l i o n a n d h a s h i g h e r ave ra g e G D P
grow t h o f 5 . 8 % co m p a re d w i t h M I S T ave ra g e
of 5 .6% in 2011. So, st i l l there is much to cover
for MIST countr ies to takeover BRICS.
2 . Credit rat ings
BRICS credit rat ings
are going south-
wards due to global
s i tuat ion whi le MIST
cont inues to remain
stable dest inat ion
for rat ing agencies.
That is the reason for
the upbeat forecast
by Goldman Sachs.
3 . Balance of Payments
Comparing the Balance of payment data for last
4 m o n t h s g i ve s b e t te r p i c t u re fo r M I S T co u n
tries as BRICS deficit is widening. India’s current
account def ic i t has shot up to21.2$ bn due to
r i s e i n i m p o r t b i l l . Cu r re nt a cco u nt d e f i c i t o f
Brazi l is l 5 .4$ bn which has widened from 3.59$
bi l l ion last year. Russ ia on the other hand has
s u r p l u s o f 4 2 $ b n w h i c h h a s a l s o d e c re a s e d.
C h i n a’s S u r p l u s i s 5 9 $ b n a d e c re a s e o f 1 4 %
f r o m l a s t y e a r. S o u t h A f r i c a r e c o r d e d h u g e
def ic i t of 152.6$ bn .M exico’s current account
def ic i t i s 3 .5$ bn which is a decrease f rom last
year 5.7$ bn. Indonesia’s current account deficit
o f 1 . 8 $ b n
h i g h e s t i n
r e c e n t
y e a r s .
S o u t h
K o r e a
r e c o r d e d
c u r r e n t
a c c o u n t
s u r p l u s o f
5 . 8 4 $ b n
u p f r o m
3 . 5 7 $ b n l a s t y e a r. Tu r k e y ’s c u r r e n t a c c o u n t
def ic i t narrows to 5$ bn f rom 7.7$ bn last year.
4 . Foreign Reser ves
The combine foreign reser ves
of BRICS stand at 4 .25$ tr i l l ion which accounts
for more than 42% of wor ld ’s reser ves. China’s
fore ign reser ves are the h ighest among them
a t 3 . 2 $ t r i l l i o n . Th e re s e r ve s o f B r a z i l s t a n d s
a r o u n d 3 6 5 $ b i l l i o n , R u s s i a a t 5 1 3 $ b i l l i o n ,
I n d i a a t 2 8 6 $ b i l l i o n . D u e to n e g a t i ve g l o b a l
mar kets reser ves have decreased in inf low of
funds in BRICS countr ies
The foreign reser ves of MIST countr ies stand at
655$ bil l ion. South Korea accounts for maximum
reser ves of 312$ bi l l ion. The reser ves of Mexico
stands around 190$ bi l l ion, Indonesia’s around
1 0 6 $ b i l l i o n a n d t u r k e y ’s a ro u n d 8 7 $ b i l l i o n .
Reserves for most MIST countries have increased
or remained stable.
5 . Pol i t ica l Scenar io
C h i n a a n d R u s s i a a re a u t h o r i t a r i a n s w h e re a s
Braz i l and I ndia are democracies. Among MIST
a l l countr ies are democrac y. Decis ion mak ing
i s f a s t i n C h i n a a n d R u s s i a a s c o m p a r e d t o
I ndia and Braz i l . A lot of cor rupt ion scandals
has af fec ted I ndian pol i t ica l image in a nega-
t ive way. Braz i l has been recent ly in news for
corruption in adver t is ing budgets and pension
funds.
M e x i c o p r ox i m i t y t o t h e U S , a n d l i n k s w i t h
Centra l and S outh Amer ican mar kets , as wel l
a s i t s H i s p a n i c c u l t u r e , u n d e r p i n s i n t e r n a -
t i o n a l i nve s t o r s ' a n d m u l t i n a t i o n a l c o r p o r a -
t ions ' choice of M exico as a s t rategic invest -
ment locat ion. I ndonesia , the most populous
Musl im nation in the world, is one of the r is ing
s t a r s i n t h e g l o b a l e c o n o my S o u t h K o r e a i s
n o to r i o u s l y u n p re d i c t a b l e i n p o l i t i c a l te r m s.
T h e r e a r e i s s u e s o f m i l i t a r y i n t e r v e n t i o n i n
Turkey polit ics which saw many fai led attempts
coup plots. Things have improved but there are
i s s u e s re l ate d to n e w co n s t i t u t i o n fo r m at i o n
that are st i l l need to be worked out .
6 . Future prospec ts
The BRIC countr ies – Braz i l , Russ ia , I ndian and
China – have been dar l ings of pr ivate equit y
investors for some t ime. Now another group of
e m e rgi n g e co n o m i e s m ay b e u p a n d co m i n g,
sa id p lacement agenc y Probitas Par tners in a
recent repor t . Mexico, I ndonesia , South Korea
and Turkey – the MIST countr ies – are attrac t-
i n g i n c r e a s i n g a t t e n t i o n f r o m i n s t i t u t i o n a l
i nv e s t o r s , a c c o r d i n g t o t h e r e p o r t b a s e d o n
a Pro b i t a s s u r ve y i n l a t e 2 0 1 0 o f 1 8 0 g l o b a l
investors. The MIST countr ies stand out, in par t
because of their comparat ively high per- capita
income. The per capita gross domest ic produc t
of South Korea, for instance, is forecasted to be
t h e s e co n d l a rg e s t i n t h e wo r l d, n ex t to t h at
of the U.S . , by 2050, with Mexico expec ted to
re a c h 9 t h p l a ce by t h a t t i m e, a cc o rd i n g t o a
Goldman Sachs forecast .
Conclus ion
To be sure, the BRICS nat ions won’t fade away
fo r s o m e t i m e. C h i n a , B ra z i l , I n d i a a n d S o u t h
Afr ica st i l l top the l ist of most attractive emerg-
ing markets, according to sur vey respondents
asked about their out look for 2011. Whi le out-
per forming them in growth this year, the MIST
nat ions don’t approach the BRICs in economic
o u t p u t o r p o p u l a t i o n . I n f l a t i o n r i s k i s a l s o a
concern for investors in MIST countr ies. Turkey
is having highest among them, at 9 .07% CPI as
per latest data . But MIST countr ies of fer newer
oppor tunit ies for investors. The MIST countr ies
a re l i k e l y t o b e t h e n e x t g ro u p o f e m e r g i n g
market targets af ter the BRICS.
Vik as Gupta-The Author is a student of I IFT
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
29 30 WORLD ECONOMY WORLD ECONOMY
INTERNSHIP ExPERIENCE
L i fe in Goldman Sachs
q . W h a t s k i l l s d i d y o u
d e v e l o p w h i l e w o r k i n g a t
G o l d m a n S a c h s t h a t y o u
bel ieve wil l be useful in your
future career?
A . D u r i n g t h e c o u r s e o f
m y s u m m e r i n t e r n s h i p a t
Goldman Sachs, I developed the sk i l ls of tak ing
a hol ist ic v iew of any problem and work ing in
v i r tual teams. I lear nt the impor tance of net -
work ing and of having a profess ional att i tude
towards work- the impor tance & ser iousness of
the word "deadl ines". Finding t ime to unwind-
' Wor k hard, par t y harder ' i s just not a phrase
here but a way of l i fe.
quest ion. Descr ibe a t ypical day for an intern
at Goldman Sachs
Answer. 10 am: Repor t ing to work
1 0 a m - 1 1 a m : C h e c k i n g e - m a i l s , c o m p l e t i n g
last day's left over work approaching deadlines,
sur f ing f inancial websites t i l l the mentor or the
work arr ives
1 1 - 1 2 n o o n : Tr a i n i n g s e s s i o n s , o c c a s i o n a l
Speaker sessions & HR sessions involving inter-
ac t ions with company heads
12-2 pm: Check ing e -mai ls , wor k ass igned by
your mentor, receiv ing comments on the work
done ear l ier, mak ing edits and re -work ing on
the pitch books, f inding t ime to catch lunch
2-8 pm: Check ing e -mai ls , receiv ing new dead-
l ines, reading repor ts, work ing on excel models
& pitch books requiring work or re -work, attend-
ing c l ient team- cal ls
9 p m : Fi n d i n g t i m e t o w o r k o n t h e S u m m e r -
I nter n group projec ts - S earching for re levant
repor ts, bui lding excel models, gett ing freaked
out by other teams' progress
12-Depending how luck y your day is : Check ing
e -mai ls , Receiv ing new deadl ines and heading
home f inal ly
The day might be as eventful as this or lesser (or
more) , but at the end of the day you real ise that
the learning you gained today could not have
been achieved in any 20-hour credit course of
col lege.
quest ion: What chal lenges did you encounter
dur ing the course of the projec t? How did you
tack le them?
Answer : Being a f resher, I had no pr ior under-
standing of the 'corporate culture '. The di f fer-
e n c e s i n t h e t h e o re t i c a l a n d p r a c t i c a l a p p l i -
c a t i o n o f f i n a n c i a l c o n c e p t s , d y n a m i s m o f
t h e i n d u s t r y a n d m a i nt a i n i n g t h e m o t i vat i o n
throughout the long work ing hours were some
of the chal lenges I faced at Goldman Sachs.
What helped along was the fr iendly and always-
ready-to -help att i tude of ever yone on the IBD
f loor and the bri l l iant guidance at ever y step by
12-Depending how luck y your day is : Check ing
e -mai ls , Receiv ing new deadl ines and heading
home f inal ly
The day might be as eventful as this or lesser (or
more) , but at the end of the day you real ise that
the learning you gained today could not have
been achieved in any 20-hour credit course of
col lege.
quest ion: What chal lenges did you encounter
dur ing the course of the projec t? How did you
tack le them?
Answer : Being a f resher, I had no pr ior under-
standing of the 'corporate culture '. The di f fer-
e n c e s i n t h e t h e o re t i c a l a n d p r a c t i c a l a p p l i -
c a t i o n o f f i n a n c i a l c o n c e p t s , d y n a m i s m o f
t h e i n d u s t r y a n d m a i nt a i n i n g t h e m o t i vat i o n
throughout the long work ing hours were some
of the chal lenges I faced at Goldman Sachs.
What helped along was the fr iendly and always-
ready-to -help att i tude of ever yone on the IBD
f loor and the bri l l iant guidance at ever y step by
my mentor and the whole TMT-EMEA team I was
associated with. Financial & other tra ining ses -
sions conducted by Goldman Sachs in the star t-
ing week of the internship and the ver y dedi-
cated HR depar tment of the company holding
bi -week ly catch-ups to address any of our con-
cerns helped me encounter the chal lenges I ini-
t ia l ly faced.
q u e s t i o n : Te l l u s s o m e t h i n g n e w t h a t y o u
l e a r n e d a b o u t t h e c o m p a ny w h i l e y o u w e r e
work ing there.
A n s w e r : T h e i n v e s t m e n t t h e y m a k e i n t h e i r
e m p l oye e s a n d h ow t h e y t re a t t h e m a s t h e i r
INTERNSHIP ExPERIENCE
real assets- ref lec ted in the t ra ining sess ions,
social get-togethers, speaker sess ions with the
whose -who of the company. The socia l aware -
n e s s p r o g r a m o f t h e c o m p a n y, C o m m u n i t y
Teamwor ks, i s a g lobal volunteer in i t iat ive of
G o l d m a n S a c h s t h a t a l l o w s i t s e m p l o ye e s t o
take a day out of the of f ice volunteer ing with
loca l non-prof i t organizat ions. Ever y summer
intern was a lso supposed to par t ic ipate in this
i n i t i a t i ve a n d l e a r n f ro m t h e c ro s s d i v i s i o n a l
team-based socia l projec ts.
q u e s t i o n : Wh at we re t h e ex p e c t at i o n s o f t h e
company f rom you?
Answer: At Goldman Sachs, they expect a ‘Ready
to l e a r n at t i t u d e’ a n d at te nt i o n - to - d e t a i l s by
t h e i r i n t e r n s . B e i n g h i g h l y m o t i v a t e d a t a l l
t imes is what helps sa i l through smoothly.
Sakshi G arg- Student of I IFT. She has done her internship
at Goldman Sachs. Here she enumerates her t wo months
of exper ience in the company.
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
31 32
R isk management is at
the core of ever y f inan-
cial institution to ensure
i ts abi l i t y to conduc t i ts
o n g o i n g b u s i n e s s a n d
t a k e b e n e f i t o f o p p o r -
t u n i t i e s t o e n h a n c e i t s
business. I t is impor tant
to note that r isk
management as
c o m m o n l y p e r -
ceived does not
m e a n m i n i m i z -
i n g r i s k , r a t h e r
i t m e a n s o p t i -
miz ing the r isk-
r e w a r d t r a d e -
o f f . I n t o d a y ’s
s i tuat ion where
t h e w o r l d i s
b r i d l e d w i t h
t h e e c o n o m i c
cr is is, banks wil l
need to manage
r i s k m o r e c a r e -
f u l l y, n o t w i t h s t a n d i n g t h e f a c t t h a t t h e y a re
in the business of tak ing r isk . I t appears that
t h e s t a g g e r i n g l o s s e s f a ce d d u e to t h e c r i s i s
w o u l d d e c r e a s e b a n k s ’ a p p e t i t e s f o r r i s k ,
but the ba i louts that have helped to pre ve nt
fur ther meltdown could lessen the avers ion to
r i sk . I n any case, a bank ’s abi l i t y to me a s u re,
m o n i t o r a n d s t e e r r i s k s i n a c o m p r e h e n s i v e
fashion i s becoming increas ingly dec is ive for
i ts st rategic posit ioning. Let us take a look at
w h a t l i e s a t t h e h e a r t o f e f fe c t i ve r i s k m a n -
a g e m e n t f o r b a n k s a n d t h e t r e n d s t h a t w e
a r e l i k e l y t o s e e i n t h e c o m i n g f e w y e a r s .
The research of top g lobal management con-
s u l t i n g f i r m s i n d i c a t e s t h a t t h e c u l p r i t s
b e h i n d t h e l o s s e s f a c e d b y b a n k s d u r i n g
t h e c r i s i s w e r e b a d g o v e r n a n c e , b a d i n c e n -
t i ve s ys te m s a n d p o o r r i s k m a n a g e m e n t . Th e
current s i tuat ion demands that the best prac-
t i ce s f ro m r i s k m a n a g e m e nt b e i m p l e m e nte d
a t t h e e a r l i e s t t o b r i n g s t a b i l i t y t o b a n k s .
T h e o v e r a l l r e s p o n s i b i l i t y o f r i s k m a n a g e -
ment rests with the B oard of Di rec tors which
needs to understand, def ine and manage the
R i s k M a n a g e m e n t m e a s u r e s i n t h i s e v e r c h a n g i n g c o m p e t i t i v e b a n k i n g l a n d s c a p e
o rg a n i z a t i o n’s r i s k a p p e t i te u s i n g t h e i r b u s i -
ness and r isk exper t ise. The pol ic ies that they
formulate set the strategic di rec t ion in which
the senior management needs to steer the orga-
nizat ion through proper execut ion and imple -
mentat ion of pol ic ies. A ver y impor tant aspec t
of the implementat ion of the pol ic ies i s ensur-
ing that they are embedded in the ver y culture
o f t h e o rg a n i z a t i o n . N o t a l l r i s k s a re q u a n t i -
f i a b l e. H e n ce, i t i s i m p o r t a nt t h at q u a l i t at i ve
r i s k s c a n b e c o m m u -
n i c ate d a s g u i d e l i n e s
a n d c a n b e i n f e r r e d
f r o m m a n a g e m e n t
bus iness dec is ions. I t
i s a lso impor tant that
s e n i o r m a n a g e m e n t
o f f i c i a l s a r e i n s y n c
w i t h e a c h o t h e r t o
ensure smooth execu-
t i o n o f t h e v i s i o n s e t
by the board. There is
of ten a lack of consis-
t e n c y b e t w e e n C R O s
and CFOs across processes, systems and data .
C o n f l i c t i n g p r i o r i t i e s a n d m e s s a g e s c r e a t e d
unintentionally by the two sides talk ing a differ-
ent language, leads to chal lenges for the orga-
nizat ion . I t i s imperat ive that there i s t ighter
a l ignment and col laborat ion bet ween the CRO
a n d C F O a n d t h u s , m o r e c o n s i s t e n c y a c r o s s
f inance and r isk . The CRO and the Chief Human
Resource O ff icer should determine the proper
t ra in ing needed to ensure that a l l employees
understand their ro le in managing r isk at the
organizat ion. R isk management must be per va-
s ive to the organizat ion’s cul ture, and not be
the responsibil ity of just the r isk function alone.
Long-s ightedness is another key to proper r isk
m a n a g e m e n t . D i s c u s s i o n s a b o u t n e w p r o d -
u c t s , e x i s t i n g a n d n e w p o s i t i o n s a n d o t h e r
i s s u e s m u s t b e b r o a d a n d n o t l i m i t e d t o
meet ing quar ter ly targets or any other shor t-
ter m goals . B oth the f ront of f ice and the top
m a n a g e m e n t m u s t h a ve re l i a b l e a n d c o n s i s -
tent information with respec t to the posit ions
and the r isks they are tak ing. L imit sett ing and
l i m i t m o n i to r i n g m u s t b e d o n e a n d s e gre g a -
t i o n o f d u t i e s s h o u l d b e c l e a r a n d e n fo rc e d.
A s i g n i f i c a n t
c h a l l e n g e
f a c i n g v i r t u -
a l l y a l l b a n k s
i s t h e n e e d
t o i n t e g r a t e
a n d h a r n e s s
t h e t e c h n o l o -
g i e s i n a w a y
w h i c h w i l l
b e t t e r s e r v e
t h e b u s i n e s s
a n d d e l i v e r
the outputs required to outpace the competi -
t ion. O ver the years, data volumes a long with
r e g u l a t o r y a n d b u s i n e s s r e q u i r e m e n t s h a v e
dr iven banks to take a leading posit ion in tech-
nology, developing new automated solut ions,
and developing more complexity covering more
c o u n t r i e s a n d b u s i n e s s a c t i v i t i e s . H o w e v e r,
t h e s e r e q u i r e m e n t s h a v e p r o g r e s s i v e l y c o n -
t r ibu ted to a d ramat i c inc rease in IT costs as
demands have become more complex and the
r e s u l t i n g s y s t e m s m o r e d i v e r s e . O n e i m p o r -
t a n t te c h n o l o gi c a l c h a n g e d e s i gn e d to m e e t
the increas ing demands is in the way that the
appl icat ion architec ture is bui l t . Tradit ional ly,
t h e a p p l i c a t i o n l a n d s c a p e w a s b u i l t l a y e r
upon hor izontal layer. So each layer carr ied a
I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2 I n F I N e e t i A n n u a l I s s u e | S e p t e m b e r 2 0 1 2
33 34 R ISK MANAGMENT RISK MANAGMENT
func t ion and inter faced with the other layers
t h ro u g h t r a n s fo r m a t i o n a l r u l e s , l e a d t i m e s ,
shor t cuts, complex repor ting rules, and so on.
However, that horizontal structure is changing
to become much more ver t ical . Consequently,
indiv idual p ieces of information wi l l be gath-
ered from the bottom up, elevating the repor t-
ing l ines and data governance where necessar y.
Given the level of complexit y faced by banks,
they wil l have to par tner with tradit ional com-
p e t i t o r s a n d p e e r s a n d I T a n d c h a n g e s p e -
c i a l i s t s i n f u t u re to m a n a g e t h e i r r i s k e f fe c -
t i v e l y. C R O s w i l l h a v e t o d e m o n s t r a t e t h e
b e n e f i t s a n d t i e t h e o u t c o m e s o f r i s k m a n -
a g e m e n t p r o j e c t s m o r e d i r e c t l y t o b u s i -
ness outcomes and tangible cost reduc t ions.
I n o r d e r t o a c h i e v e t h i s , o r g a n i z a t i o n s w i l l
h a v e t o s e e k c o l l a b o r a t i o n s i n n e w w a y s .
One of the most impor tant aspects in r isk man-
agement philosophy is to make sure that those
who take or accept r isk on behal f of the inst i -
tut ion are not the ones who measure, monitor
and evaluate the r isks. The manager ia l s t ruc -
ture and hierarchy of r isk review func tion may
var y across banks depending upon their s ize
and nature of the business, but the key is inde -
pendence. To be effective, the review functions
should have suff ic ient author it y, exper t ise and
corporate stature so that the identif icat ion and
repor ting of their f indings can be accomplished
w i t h o u t a ny h i n d r a n ce. Th e f i n d i n g s o f t h e i r
reviews should be repor ted to business units ,
senior management and if required, to the Board.
Audit teams must per form a comprehensive crit-
ical review of potential weak nesses in addit ion
to e n s u r i n g t h at t h e p o l i c i e s a n d p ro ce d u re s
approved by the Board are being fol lowed. They
must be empowered to enforce their f indings.
B a n k m a n a g e r s n e e d t o e s t a b l i s h a s t r o n g
r i s k m a n a g e m e n t c u l t u r e t h a t p e r v a d e s t h e
e n t i r e o r g a n i z a t i o n . A l o n g s i d e t h e d e v e l o p -
ment of the sc ient i f ic and technical aspec ts of
r i sk management , i t i s impor tant to establ ish
good governance and a healthy r isk culture to
g i ve b a n k s a s t a b l e fo u n d a t i o n to re s t u p o n .
Shi lpi Ghosh-The author is a student of I IFT
R ISK MANAGMENT
MONTHLY CHRONICLE
Standard Char tered and JPM organ to manage
a share f lotat ion for i ts te lecoms tower unit to
ra ise more than $750 mi l l ion.
T h e b i g g e s t I n d i a n
m o b i l e p h o n e c a r r i e r
h a s a l s o s h o r t l i s t e d
Bank of America Merr i l l
Ly n c h , H S B C , U B S a n d
K o t a k M a h i n d r a f o r
the in i t ia l publ ic share
offer ( IPO) . Bhar t i may f i le a prospec tus for the
IPO with the market regulator SEBI next month.
The unit , Bhar t i I nfrate l , i s eyeing a l i s t ing in
the f i rst hal f of 2013. I t has more than 33,000
m o b i l e p h o n e m a s t s , a n d a l s o h o l d s a 4 2 %
s t a k e i n j o i nt ve nt u re I n d u s Towe r s , w h i c h i s
t h e wo r l d ’s b i g g e s t t e l e c o m s m a s t c o m p a ny,
w i t h a b o u t 1 1 0 , 0 0 0 m a s t s . B h a r t i A i r t e l h a d
ear l ier sa id i t was consider ing a sa le of up to
10 percent of I nfratel in the IPO.
B h a r t i h a s re p o r t e d 1 0 c o n s e c u t i ve q u a r t e r s
o f p ro f i t d e c l i n e, w i t h s h a re s d ow n a b o u t 2 8
percent so far th is year, underper forming the
broader market that is up more than 16 percent.
B a n k s n e e d R s 5 l a k h c r to m e e t B a s e l - I I I norms: RBI
I ndian banks would need about Rs 5 lak h crore
of additional capital to meet the Basel-I I I norms,
the Reser ve Bank of India (RBI) said in its annual
repor t for 2011-12. State -run banks would need
a majority of these funds — Rs 1.4-1.5 lakh crore
Government to not i fy the rules foradvance pr ic ing ar rangement soon
Mult inat ionals wi l l
soon be able to nego -
t iate with I ndian
tax author i t ies their
p o t e n t i a l t a x l i a b i l i -
l t y in respec t of thei r t ransac t ions with their
local arms or the local company deal ing with
i t s p a r e n t , h e l p i n g a v o i d f r e q u e n t t r a n s f e r
pr ic ing l i t igat ion with foreign companies that
has soured investment sent iment .
I ndia wi l l not i fy the rules for Advance Pr ic ing
Agreements (APA) that s ignal a shif t away from
aggressive tax approach that resulted in trans-
fe r p r i c i n g a d j u s t m e n t s a s h i g h a s ove r R s 1
lak h crore in the last t wo f inancia l years. “Al l
m a c h i n e r y h a s b e e n p u t i n p l a ce. G u i d e l i n e s
s h o u l d b e n o t i f i e d s o o n ,” s a i d a n i n co m e t a x
depar tment of f ic ia l .
An APA is an agreement bet ween the taxpayer
and the tax author i t ies that a l lows both to set
out in advance, the method of determining the
transfer pricing for inter-company transactions,
helping avoid post t ransac t ion disputes apar t
giv ing mult inat ionals cer tainty about their tax
l iabi l i t y.
B h a r t i A i r t e l s h o r t l i s t s b a n k s fo r I n f r a t e l IPO
B h a r t i A i r te l h a s s h o r t l i s te d b a n k s i n c l u d i n g
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35 36REGULARS
of common equit y and Rs 2 .65-2 .75 lak h crore
of non- equit y capita l .
As m a j o r i t y s h a re h o l d e r i n t h e p u b l i c s e c to r
banks, the Centre would have to infuse a s ig-
ni f icant amount i f i t wants to reta in i ts 58 per
cent stake — the government ’s stated pol ic y.
Pr i v a t e s e c t o r b a n k s wo u l d n e e d R s 7 0 , 0 0 0 -
85,000 crore to meet the new capital adequac y
norms. O f th is , Rs 20 ,000-25,000 crore would
be common equit y. RBI sa id these projec t ions
were based on a conser vat ive assumption of
uni form annual growth of 20 per cent in r isk-
w e i g h t e d a s s e t s fo r e a c h b a n k . T h e c e n t r a l
bank a lso fac tored in lenders’ assessme nt of
their internal accruals .
C o n c e r n w a s r a i s e d o n w h e t h e r t h e C e n t r e
m i g h t f i n d i t d i f f i c u l t t o c a p i t a l i s e p u b l i c
s e c t o r b a n k s , o w i n g t o t h e w i d e n i n g f i s c a l
deficit . Recently, RBI Governor D Subbarao had
expressed doubts on whether the government
could infuse this amount of capita l .
A c c o r d i n g t o B a s e l - I I I n o r m s , I n d i a n b a n k s
have to maintain a capita l adequac y rat io of
at least n ine per cent , in addit ion to a capita l
c o n s e r v a t i o n b u f fe r, w h i c h wo u l d b e i n t h e
f o r m o f c o m m o n e q u i t y o f 2 . 5 p e r c e n t o f
r i s k-we i g hte d a s s e t s . I n o t h e r wo rd s, b a n k s’
m i n i m u m c a p i t a l a d e q u a c y r a t i o s h o u l d b e
11.5 per cent . Current ly, I ndian banks have to
maintain a capita l adequac y rat io of at least
n ine per cent .
Smal l mutual funds unhappy over S ebi ’s new rules
O f f i c i a l s o f s m a l l e r m u t u a l f u n d s h a v e
expressed disappointment over Sebi ’s decis ion
last week to a l low the industr y to col lec t ex tra
charges wi l l benef i t their larger peers.
Th e m a r k e t re g u l a to r, i n a p re s s re l e a s e s a i d
mutual funds can charge an extra 30 basis points
(0 .3%) above the exist ing fee of 2 .25% i f they
ra ised 30% of the inf lows f rom places outs ide
the top 15 cit ies. Pr ima facie, the step appeared
to be almost in l ine with what the industr y was
expecting, but the f ine print revealed the norms
have a windfal l in store for the larger mutual
f u n d s . Th e a d d i t i o n a l 3 0 b a s i s - p o i n t fe e w i l l
be charged on the ent i re fund, not just on new
i nve s to r s , re s u l t i n g i n e x i s t i n g i nve s to r s a n d
investors residing in top cit ies subsidis ing new
investors f rom the hinter lands.
A back- of-the - envelope calculat ion shows that
the industr y, hypothet ical ly, wi l l pocket c lose
t o R s 5 8 3 c ro re i f i t c h a r g e s 3 0 b a s i s p o i n t s
o n t h e e x i s t i n g e q u i t y a s s e t b a s e ( co m b i n e d
AUM of equit y, balanced and ELSS funds) of Rs
1 ,94,320 crore. The industr y had a total AUM of
Rs 7 ,30,000 crore on July 30.
O ut of the tota l Rs 583 crore, at least 80% of
the addit ional fee wi l l be pocketed by the top
f ive fund houses including HDFC Mutual Fund,
Rel iance Mutual Fund, IC ICI Prudent ia l Mutual
Fund, UTI Mutual Fund and Bir la Sun Life Mutual.
Another point of discontent among small mutual
funds is the way exit loads can be charged. Sebi
sa id funds wi l l have to plough back the ent i re
e x i t l o a d - t h e fe e i t c h a r g e s fo r p r e m a t u r e
investor exi t - into the schemes. Fund houses
do not have any restr ic t ions on how much they
charge as exit load, but they usual ly charge 2%
of which 1% is pocketed by them.
Now on, fund houses wi l l have to br ing back
the entire exit load back to the fund. However,
f u n d s h ave b e e n a l l owe d to c h a rg e a n a d d i -
t i o n a l e x p e n s e ra t i o o f 2 0 b a s i s p o i n t s f ro m
the overal l fund i r respec t ive of the total ex i t
load col lec ted.
Vedanta may up offer for HZL, Balco stakes by 25%
Vedanta Group may shel l out Rs 21,635 crore,
up to 25 per cent more than previously offered,
for buying the government ’s remaining stakes
in Hindustan Zinc and Balco as its ear l ier offers
have not been accepted so far.
Ve d a nt a h a s c a l l e d s h a re h o l d e r s m e e t i n g o n
A u g u s t 2 8 i n L o n d o n , a l o n g s i d e i t s a n n u a l
g e n e ra l m e e t i n g, to s e e k n o d fo r t h e s we e t-
ening its offers in the two f irms, but a company
spokesperson sa id that i t i s just an “enabl ing
provision” and no new offer has been made yet
to the government.
I f i t goes through, this deal a lone could meet
over 72 per cent of the government ’s disinvest-
ment target of Rs 30,000 crore for this year.
Lo n d o n S t o c k E xc h a n g e - l i s t e d Ve d a n t a h a d
a c q u i re d 5 1 p e r c e n t s t a k e i n B a l c o i n 2 0 0 1
and 64.9 per cent stake in H industan Zinc Ltd
(HZL) dur ing 2002-2003. I n Januar y, the group
had offered Rs 15,493 crore for buying 29.5 per
cent in HZL, and Rs 1 ,782 crore for 49 per cent
res idual holding in Balco.
After shareholders approval, the company board
would have the powers to ra ise the of fer pr ice
up to Rs 18,606.10 crore (USD 3.378 bi l l ion) for
HZL, and up to Rs 3,028.78 crore ($ 550 mil l ion)
for Balco.
The 15 per cent increase in the previous of fer
of $ 2 .938 bi l l ion (Rs 15 ,493 crore) , for which
s h a re h o l d e r s ’ n o d h a s b e e n s o u g ht , a m o u nt s
to $ 3 .378 bi l l ion (about Rs 18,606 crore at the
dol lar - rupee exchange rate taken by Vedanta
on August 7) .
Contr ibuted by-Rohit K hattar
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37 38REGULARS
REGULARS
1) Identify the picture below, which represents the most basic form of many f inancial instruments.
2) This indiv idual ’s idea that h is company “didn’t real ly need any assets”, heralded aggress ive
investment by this company, and led to him being declared CEO of this company, before spec-
tacular ly later that year, the company foundered. Which indiv idual are we ta lk ing about?
3) Af ter this documentar y came out , a Hong Kong based merchant banker obser ved, “For a boy
f rom Watford to br ing a grand f i rm down, I mean i t was a socia l insult as wel l .” Who is the “boy
f rom Watford”, and what is the “grand f i rm” a reference to?
4) The company which had this logo has the c la im to fame for br inging out something for the
f i rst t ime in the wor ld, which a l l companies star ted to do s ince then. Ident i fy the company.
5) This par t icular bank is rooted in the ideas of Fr iedr ich Wi lhelm R ai fe issen, a founder of the
cooperat ive movement who created the f i rst farmers’ bank in Germany in 1864. One of h is fo l -
lowers, a c lergyman by the name of Ger lacus van den E lsen, stood at the bas is of local farmers’
unions in another countr y. This bank is st i l l deeply rooted in agr iculture, and the centra l orga-
nizat ion is the daughter organizat ion of the local branches, rather than the other way round.
FUN WITH FINWhich bank has this unique histor y and hierarchy?
6) Ident i fy this logo of a ver y famous company, a behemoth in i ts f ie ld.
7) Who was the f i rst Finance M inister of independent I ndia?
8) Connec t the fol lowing: a mathematical game of strategy, a type of ser ver, and a per formance
measure for f inancia l inst i tut ions.
9) Which f inancia l instrument, k nown to be pr incipal protec ted, can be thought of as a combi-
nat ion of a zero - coupon bond and an equit y opt ion?
10) Which was the wor ld ’s f i rst commodit y futures market?
Solut ion to last edit ion’s crossword: Contr ibuted by-J R ahul
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39 40
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