Friday, March 26, 2010

Who Am I ?

An Indian from the southern part generally has an identity crisis, when it comes to filling up forms etc., Right from our schooldays, we try and maintain our given name. Our full name consists of our given name and the father's name. So, the father's name becomes our "Initial". Many of my fellow tamilians, have grown up with the school recording their father's name as their name and the own given name being reduced to an initial! I have managed to solve most problems on the internet space, by using the initial as the 'First' name and the given name as the 'sur' name (in India) or the 'family' name.
In India, most family names denote their profession( many ancestors ago) or village. The brahmin from the tamil speaking state of TamilNadu, opressed by the politicians in the State since the last six decades, has given up using his community or caste name. So, we generally go through life with several 'identity' crises.
A recent mail from Wall Street Journal, however, takes the cake...

My mail to the Wall Street Journal in response to their mail below:
Dear Sir,
The unfortunate aspect is that you tend to believe that every human being on the earth has a first name, a middle name and a family me.
I happen to be a part of a small universe of Indians, who have only one name. It is the given name. We generally prefix it with an initial, which is the first alphabet of the father's name.
So, as you can see, my name is Balakrishnan. My father's name is Ramasubramani and in my entire life of 55 years and more, I have been known as R.Balakrishnan.

I face this problem almost everywhere and fiercely believe in my identity. I cannot adopt an appendage, merely to get admission in to a spatial community.
I look forward to your response.

With best wishes
Yours truly

R. Balakrishnan

-----Original Message-----
From: Journal Community []
Sent: 26 March 2010 21:02
To: R Balakrishnan
Subject: Re: (KMM23321398I72L0KM)

Dear R Balakrishnan,

Thank you for contacting The Wall Street Journal Online regarding The
Journal Community.

The Journal Community encourages thoughtful dialogue and meaningful
connections between real people. We believe that the quality of
conversations can deteriorate when real identities are not provided. The
Journal Community requires the use of your full name in order to post

Please be advised we cannot accommodate your request to post comments
under with your first name as the initial R. If you would like to
participate in Journal Community respond to this email with your full
name and we will be happy to update your profile and grant you access to
The Journal Community.

Please contact customer service at the
e-mail address below, if additional assistance is required.

Best Regards,

Wall Street Journal Online Customer Support
Please email your comments or questions to:
email address:

Wednesday, March 24, 2010

Unaffordable housing in Mumbai

The above article mentions that 88% households (80% in rural and 97% in urban areas) have a pucca or semi-pucca house in the state. I have not read or heard of a bigger lie in the last 55 years. One has just to walk around Mumbai and will see that a reverse could perhaps be true. Of course, the one fact where I could be totally proved wrong is if the survey does not consider the slum / hutment dwellers as "households". Then of course, their statistics will sound so true.
It is the legislators and the goonlords who permit the slums to come up. The road leading up to my house in Mumbai, sees continuing addition of slums. The interesting thing is that most of them manage to get a 'ration card' in double quick time, so that they can be beneficiaries of any rehab programme.
In Mumbai, you have to be either very rich or very poor. If you are very rich, the costs and prices mean nothing to you. Especially housing. If you are very poor, no issue. Encroach and then get a rehab house, sell it and repeat the process. If you are a middle class person with morals, God help you. Unlike a slum dweller, you cannot be in Central or South Bombay. You have to go as far away as possible, if you want a house at all.
The media also goes gung ho with the term affordable housing, which they now explain as something priced at around three million rupees. How many can afford ? One has to have a family income of at least 100,000 rupees a month to think of one.And three million rupees will get you a 600 sq feet (super built up, with carpet area of 400 sq feet) house in the extended suburbs of what was once NOT Bombay.
If you want a house in the western suburbs ( a two bedroom) then a ten million rupee budget is a must. In fact, if your budget is less than this, you may not even get a broker to serve you.

Thursday, March 18, 2010

Believe It or Not

This story should surely be an eye opener to all the HR guys who think that they know everything.
A friend of mine, who is in the business of ‘collecting’ overdue personal loans, has his offices at several locations. He uses it to advantage. For instance, if a defaulter at Mumbai cannot be traced, he passes it on to his other offices, to try and see if something matches. Once, his Ahmednagar ( a small town near Pune) branch got a list from Mumbai about a large loan outstanding from a gentleman, whom we shall call “Gupta”. Something about the details in the file rang a bell. He knew a Gupta, who was branch manager of a private bank in Ahmednagar. After matching more details and the photograph, it was confirmed that it was indeed the same person.
A fascinating story emerged.
Gupta had submitted a fake resume about his qualifications and experience and got a job as an officer with a private bank, at Panjim, Goa. At Goa, he used his position and salary slip to considerable advantage, borrowing moneys from other private banks and finance companies. After a year or so, he just upped it and went to Mumbai. There he fudged his resume yet again, landed a job with a foreign bank and went through the same process. After a year, he could no longer face the heat of the overdues at Mumbai and decided to leave for greener pastures. He landed at Pune where he conned yet another private bank with his prize winning resume. At Pune, he spent a good year, raising a lot of personal loans. Needless to mention, he enjoyed all good things in life and the liberal lenders kept his lifestyle going.
Soon, he decided to leave Pune. He now went to Ahmednagar and joined another private bank, using the same method. He was in his third month at Ahmednagar, when my friend’s network caught up with him. The remarkable thing is that he got the job at Ahmednagar, with the same bank that he quit at Panjim!
This story is interesting. Banks, in prosperous times, are short of people with experience. So much that they do not bother to verify the antecedents. And another remarkable feature was that Mr Gupta used the same name and his PAN number etc in this merry go round! All he did was to fabricate a new experience background each time! It was sheer chance that he got caught!
His former employers are too embarrassed to pursue him. He has no money left with him and the loans are beyond recovery. The banks have hopefully learnt a lesson. All they need is for the HR to keep a database on employees who leave (or are sacked) and cross check. Surely, when a borrower applies, they check with some database. In fact, I always felt that every HR should not only have this data handy, but also a name/PAN number kind of database of people who apply for jobs and are not employed.
(Gupta is a name of convenience. No offence meant to any Gupta. City names have been changed. Fact or fiction.. I leave it to the reader and to the many private banks who rush in to fill vacancies)

Saturday, March 13, 2010

LIC - The knight to the rescue...

The government has shown who is the boss. When it comes to raising money by selling shares in PSU undertakings to the 'public', no stone is left unturned.
The retail generally ducks these issues, because there is no merchant banker or broker telling them to invest.
The merchant banker does not tell them to invest because he gets peanut shells for managing the issue. All he does is try and fix some FII's in to applying. For the HNI's there is always the window of 'Loan Against Shares' available.
However,the government gets retail money in huge chunks.

LIC, PSU Banks and some other PSU's are arm twisted in to putting in large cheques for overpriced issues.

No one protests, least of all the dummies at LIC. They know which side their butter is hidden. No one is going to hang them for applying in PSU IPO/FPO's after pressure from the ministry. If they do not, they can be punished or harassed. So, the babu at LIC will take the easy way out and screw the policyholders.

So, the government is serious about raising money through the so called 'dis-investment' route and none of us should doubt it.

Pumping up bank profits- Shattered Accounting

Accounting standards in Indian banking has been relaxed, at best of times. The regulator also steps in from time to time and helps out the banks.
Let us look at the PSU banks. Their asset quality, at most times, is as close to junk as possible. The SME sector to which they lend, informally accounts the bank loans as their 'income'!

I have seen virtually over a hundred types of accounting inventions used by banks. The latest one, though, seems worth a 'honorable' mention.

A couple of PSU banks applied for 'tax free' bonds, in a big way. Tax free bonds yield around 6 percent and the interest income is tax free. Surely a better proposition than lending to SME. However, should banks be investing in these kind of paper at all? Was having a debate on that with a friend. He said that the reason is something different.

Apparently, the bonds are 'marked to market'. Pray, what is wrong??
The story now gets interesting.

These bonds are 'grossed' up to arrive at a 'pre-tax' yield. For instance, a sixpercent tax free becomes around nine percent 'gross'. So, what this bank does is that it takes the future ten years to maturity on these bonds, discounts the gross yield (that is the notional three percent extra percentage points) and 'increases' teh fair value of these bonds! For instance, a 100 rupee tax free bond would be valued at around 106 or so!!
Now, when it is finally sold, the actual realisation would be only 100. The 6 bucks would have to be written off.
However, there is a ten year lag between the mark up and the write off. By then, the present chairman would have gone away, having delivered handsome profits now!
Of course, the RBI will do nothing. This is because someone has to 'bring it to their notice'. And of auditors, less said the better. you can bet, that they will sign on the dotted line. After all, the chairman sanctions loans, which I take to the bank as a broker. Why upset the apple cart??

Saturday, March 6, 2010

Future of Futures in the Indian bourses..

The above article is very interesting. It documents the emergence of Single Stock Futures in the USA. It is interesting to note that Single Stock Futures were introduced in the US only as late as 2002. Three exchanges were permitted and only two (Nasdaq Life market and OneChicago) opted to go ahead. I leave it to you to see which large exchanges have not opted for it.
Indian exchanges rushed to introduce them. Alas, the Futures market in the NSE / BSE that deals in Single Stocks, is not a future trade at all. It is merely options. And the stock selection in the F&O segment, is a joke. There is no rationale behind adding a stock. Often, IPO’s get listed on to the F&O segment ! Closely held, illiquid stocks are also included in this list! This gives a manipulative push to the stocks concerned.
In India, the “Futures” in single stocks are settled in cash! This imparts a new meaning to ‘Futures’. Of course, the exchange makes good money on the turnover. In 1994, the FII’s, along with a couple of large influential and mindless brokers, persuaded the regulator to ban the “badla” system, which was far more advanced than any F&O market in the world. Not a single rupee has been lost due to any flaw in the system. Unfortunately, the foreigners did not understand them and in those days, there were a couple of large brokers who were aiming at selling out to foreigners who toed their line. They abused their proximity to the corridors of power and banned badla.
Now, badla gave way to the Indian style “F&O” market which enables manipulation in prices. No physical settlement is enforceable in the present system.
Now, SEBI has voiced a view of bringing in ‘physical’ settlement in the Futures segment. Once this comes, it will be interesting to see. If the free float is low, then it is great for the promoters to ramp up the prices. If there is decent free float, then it will become interesting. Money bags will hold the balance of power. Fundamental views will have nothing to do with the prices!
Watch the fun as it unfolds..

Thursday, March 4, 2010

Who will regulate the regulators??
A government appointed panel, wants SEBI to be a super regulator. Given the fact that SEBI has now started 'compounding' offences at a fee, it is akin to admitting that they are incapable of pursuing a case to its logical end. When you impose a 'fine' for doing a sin, the act ceases to be a sin. It legitimizes sin.

As regards rating agencies, only India can let them proliferate by the dozen, encouraging 'rating shopping'. This alone is enough to kill credit rating.

Conflict of interest in consulting is indeed a genuine problem. The best way to do it is to let the rating agencies promote subsidiaries with not more than 50% ownership. Consulting is a natural progression for a rating analyst.
What I dislike seeing is rating agencies get in to the space of 'rating' equities. That is a classic case of conflict. I clearly recall that in my days at CRISIL, we fought tooth and nail to stay away from 'rating' equity IPO's. It is like rating a business plan on a drawing board. Today, thanks to regulators wanting to apportion blame on someone else for their inability to supervise companies, the rating agencies have got in to this business. That is a tragedy.
The committee goes on to say that ownership should be 'dispersed'. Wonder how they will see subsidiaries of S&P or Moodys or Fitch, which themselves are widely held, with no dominant owner.
It is best that the regulator refrains from inspecting the rating agencies. They neither have the competence nor the resources to do so. The regulators think that rating is a cut and dried scoring system. It is not possible to go in to subjective opinions, which is what rating symbols denote.
Strange that a regulator wants to 'regulate' "Opinions".
The regulators seem to think that a mere inspection will cure everything.
A better thing is to let rating agencies free and let the investor decide.
The thing to focus on is the area of structured finance and derivatives. That is where the problems lie.

Tuesday, March 2, 2010

Private bank licenses- An afterthought

In the last round of giving licenses to private players, the outcome was a disaster.
Times Bank, Centurion and Global Trust Bank do not exist today. Only Kotak Bank thrives. The others, i.e. ICICI, Axis, IDBI were institution backed.
In this round, I shudder when I see the names of the hopefuls.
Another point is that none of the new banks seem to expand the banking reach. They will all remain focused on the metro centers and fight for the same pie.
I would rather that Peerless and Sahara get a banking licese. This way, they will survive, have branches where no bank dares to be in. Another advantage is that these two entities today have nearly 95% of deposit liabilities in G Secs etc., Their transition to banks would be the easiest. With RBI supervision and adherence to KYC and Money Laundering legislations, this should be the logical choice of the regulators. Two banks, with rural reach as well as regulatory oversight.
I heard IFCI (the largest failure in financial services, to my mind) spokesperson saying that they will access 'cheaper' money through deposits etc., Obviously, the gentleman forgot the SLR requirements and presumed that the lending style will continue unchanged. IFCI recently was in the news for lending money to the Suris of Morepen (

License for more banks- The darker side

The budget talks about re-opening the window for letting more private banks in play. Most market participants and commentators have welcomed the move. I have some reservations on this. Of the many hopefuls who the market thinks should be interested, how many are fit to run a bank ethically and professionally without a conflict of interest? Very few names will actually pass muster. Reading the market commentaries, I shudder when I see some names being put forward. Especially in the context of the fact that the RBI never lets any bank go bust, but encourages bank delinquencies by arranging for subsequent adoption and marriage.
If market gossip is to be believed, a couple of industrial houses already own substantial stakes in a couple of small private banks. Whilst the shareholding is not fully transparent yet, management control is apparently with the hidden owners. The informed gossip is that this budget has re-opened the window of giving more licenses, specially, to enable these houses to legitimise their holdings.
India is a large country. Every bank does not have to be pan India in nature. The regional banks can thrive. It may be a good idea for the government to actually permit take-over of such regional banks by foreign banks, with the proviso that they have to remain listed entities. This would enable infusion of capital and technology in to these banks and also increase domestic shareholder wealth. Let the government permit one or two banks in each region to be acquired by foreign banks like HSBC or Standard Chartered. They can increase their coverage and the regional banks can benefit with better management and technology.
The PSU banks are surely headed for disaster. It is a matter of time. Consolidation or mergers between two bad apples will not produce one good apple. Also, I have always maintained the view that creating a large balance sheet merely by merger, will not lead to credit expansion. A better idea would be to offer PSU banks to be taken over by larger private banks or foreign banks. That can enhance the quality of banking sector and also stem the rot of poor quality lending from the domestic banks. Of course, the government will not permit this, since it would mean an end to the business of loan melas and loan waiver melas. The political agenda of the government is systematically destroying the fabric of banking. Look at the latest attempt by the government to define the lending rate. It is ludicrous and whilst every PSU banker talks against it in private, none have the gumption to even write a ‘letter to the editor’.
Coming back to the budget, the move to permit more private licenses is being seen by a few as a resumption of economic liberalisation. I hope they are right. To me, it seems more a case of political expediency to accommodate a few. In the process, a few bad banks will get created and will have to be bailed out in the future. The other favourable spin off is that it more private banks will bring in lots more FDI (if foreign investment is liberally permitted) and FII investments, which is always good for the markets.