Philosophical about PPP

PPP in the subject header stands for Public Private Partnerships. Gulzar has a terrific post on that, in the context of the privatisation of utilities and the railway network in the UK. A great summary.

He should link this to the post (another terrific one) on corporate ethics in India. What is the difference? May be, one is too sophisticated and one is not. But, does that matter to the outcomes?

He should also link this post to the NYT page link he had given in one of his ‘Weekend Reading Links’.

Now, let us get philosophical.

How do we solve this? If governments are captured, how do you expect the government to extricate itself out of it? It is now powerless. Ex-ante, it had. Now, it does not. It is captured.

The only way is to wait for change agents to come when a crisis presents itself. Over time, the change agents are captured too and we wait for newer change agents! It is an unending struggle between power and people.

Lot of permanent fodder for bloggers 🙂

Punarapi Jananam; Punarapi Maranam. Endless cycle.

Two examples:

(1) Differentiated banking – inefficient – one size – one umbrella – scale – exploitation – conflict of interest – opacity – management bandwidth – households hit – fat bonuses – trim banks – back to differentiated banking.

(2) Higher taxes cripple private incentives – lower taxes – system gamed – business concentration – capital income rises faster than labour income – raise taxes.

The lesson for policymakers and critics is that: solutions will keep coming back in cycles because contexts keep changing or keep going and coming around in circles.

So, there is no permanent pro-market; no permanent pro-government attitude; no permanent fixation on low taxes or high taxes. No permanent commitment to fiscal policy solutions or monetary policy solutions. No permanent commitment to re-distribution nor to economic growth.

That is a bit like Hinduism of yore. Everything goes. Contexts dictates the prescriptions just as occasions dictate the dress we choose from the wardrobe. Even Dharma was and is context-specific in Hinduism.

But, that is too demanding, even of intellectuals. A permanent state of abstraction or being unsettled is not easy to handle. Clear and ‘black or white’ demarcations appeal to our bounded rationality. We like things to be settled. ‘Happily ever after’ appeals to us for we do not like to revisit the stories and find that our heroes and heroines were back to a different set of griefs and challenges afterwards.

So, we are going to live with religions and philosophies and economic and social dogmas that claim to be universal, permanent, absolute and all-weather prescriptions.

Once this path is fixed, the powerful know how and when to game the system. The rest of us will be happy for smaller mercies, miracles and good luck. Those who can blog, can keep blogging!

What can break this cycle? Some loud thinking here:

Without a spiritual outlook and detachment on the part of the rulers – they minimise the risk and incidence of capture – the cycle of capture and release and capture will be endless.

Some change agents come with their own agendas. For example, is Trump draining the swamp? I doubt because he has just received a certificate from Lloyd Blankfein of Goldman Sachs. That says it all.

Now, if and when he finally goes, after one term or two terms or whenever, the old elites will be back in the saddle – the elites who gave us financial de-regulation, Public-Private Partnerships, etc.

But, amidst all this, some good have happened. Millions of Chinese workers and their families have had better lives than they would have. Few millions of Indian software workers and their families benefited from globalisation. The Philippines and Mexico workers have benefited.

So, amidst the capture, let us count the small blessings because ‘WE (the World Economy) are like this only’.


What is RBI’s role in PNB?

Someone who read my blog post called me and told me to consider the following:

If a fraud in any company occurs, it is the problem for the management, the Board and the owner, in that order.

In this instance, can the regulator change the owner? No. The Board? – No. The owner appoints them. Can the regulator order the CEO replaced? No! The owner does not need the regulator’s approval for public sector banks to appoint CEOs whereas private sector banks do need the regulator’s approval.

The regulator is responsible for financial stability and consumer protection.

Now, Tamal Bandyopadhyay in his piece for MINT says that RBI insists on reconciliation of Nostro accounts:

Finally, RBI is very particular in keeping a tab on all transactions in banks’ Nostro accounts and it always insists on timely reconciliation of such accounts. How could the rapid rise in transactions in PNB’s Nostro account escape the regulator’s eye?

I understand RBI sent a note to all banks in the first week of February, asking them to reconcile all Nostro accounts.

What if banks tell the RBI they have done so, without doing so? What can the regulator do, in such situations? Have the bank’s internal auditors and statutory auditors failed here?

From Tamal:

Concurrent auditors in bank branches are assigned the job of transaction verification. There could be delay, but I wonder how the concurrent auditors failed in tracing out the full chain. Ditto about the statutory auditors. They are supposed to check customer-wise transaction register, along with sanctions /approvals for authenticating the true state of the books of accounts and establish the amount of bank’s contingent liabilities on the date of book closure. Similarly, the internal auditors are expected to verify client files, outstanding transactions, approvals and transaction registers. Besides, RBI auditors conduct the annual financial review.

But, Tamal also added this:

Besides, RBI auditors conduct the annual financial review.

What is the depth and breadth of this review? So, is the regulator really free of lapses here?

A much scarier thought

On this Punjab National Bank scandal, it does seem simple enough to understand what happened. But, that is worrying. If it was reasonably simple, why did it go undetected? It is not unreasonable to assume that several could be on the take – cutting across banks, auditors, the regulator, governments, etc. We live in a cynical world.

But, that is low probability because it is risky to involve too many stakeholders. Someone could spill the beans, if not out of altruism and morality but out of pique, let us say, because the spoils were not shared ‘fairly’. Yes, there could be moral considerations in immorality!

A scarier thought – scarier than the possibility of multiple layers and cross-sections of involvement – is that simply no one bothered to notice or do their job. The mind-numbing possibility is one of pervasive and deeply ingrained indifference and sloppiness. In other words, no one cared or cares any more!

Hence, it was scary to read that someone actually mentioned this as the possible reason for the scandal remaining undetected:

The accounts given by current and former executives who spoke to Reuters suggest an answer as simple as it is alarming: no one was paying attention. [Link]

This does not augur well for the integrity and unity of the country at all because it could be pervasive – yes, not within the banking system alone. Why should other sectors be different?

[Postscript: If the bank issued LoU to foreign banks (or, foreign branches of Indian banks, I presume that they would credit PNB’s Nostro account held with them before PNB credits the account of the borrower with the money. If I am right, why did the audit of PNB’s Nostro Accounts not spot the ‘unusual’ transactions? Why did anyone not raise a flag? Are these stupid questions? Perhaps.]

Problem disguised as solution!

A very ‘clever’ piece of writing by Ajay Shah on the Punjab National Bank scandal and the need for strengthening capabilities of the regulator, the Reserve Bank of India. Nothing wrong with the principle. But, really the devil is in the details.

In a country that does not know how to regulate banks, we should systematically reduce the size of banking relative to GDP. We should foster non-bank financing, and block the nominal growth of banking until we get to a minimum level of capabilities at the RBI.

That is the ‘clever’ bit, kept for the last.

What is the logic behind the assumption that non-banking sources of finance – i.e., capital markets – are exempt from scams, scandals and frauds? What about the capital market regulator, SEBI? Has India done enough to strengthen it with capabilities? Has India’s stock market been free of scandals and scams? Three, what about mis-selling of capital market products to retail investors if capital market financing becomes the route for Indian businesses? Yes, the Indian Financial Code (IFC) might have consumer protection clauses. But, they too require a regulator to implement. What is the guarantee that they will be born with those capabilities straightaway, in the Indian context? Four, reliance on capital markets means that savings are not pre-empted by a large State through the banking system. That is not the case in India, yet.

If we do not grow the banking system, will the public save more through small savings schemes? That carries a much higher interest burden and with tax exemptions, the effective cost to the borrower (the State) is even higher. The government will rely on it even more for covering its spending, if the banking system is ‘not allowed to grow’ until the regulator is strengthened, as the author says.

That will effectively raise the government’s interest burden and hence the deficit. Higher benchmark bond yields will follow and higher cost of capital for corporate borrowers. They will not want to tap capital markets and if, in the meantime, banks are not allowed to grow, what happens to capital formation in the economy?

If more domestic savings are either pre-empted by the government or is directed towards small savings, then for capital market, it means greater reliance on foreign savings for non-bank sources of financing to become more dominant. Is that desirable? Will that not have other consequences? Or, is there any basis to believe that foreign sources of savings are untainted and exempt from bad behaviour?

It does not make much sense to propose solutions that open a new can of worms and which, arguably or potentially, could be more destabilising.

From loans to assets

Corporate Credit Growth muted due to:

– Strategy to grow in Better Rated Corporates; restricting growth in stressed sectors

– Movement of exposure from loan book to Investment Book; Commercial Paper plus Corporate Bonds portfolio grew 25.2% YoY adding 317 bps to our market share for the same. [Link]

I found that in SBI’s third quarter analyst presentation. It is an interesting story of bank balance sheet transformation. It is good in one sense because bank credit growth need not be the only indicator of underlying economic activity. Market provision of funds is assuming importance. I had indicated this in my piece on the jobs study by Ghosh & Ghosh.

But, equally interestingly, this does obviously change the asset side of the balance sheets of banks. If there is market exposure rather than credit exposure, who is the appropriate regulator?

I will add two caveats: These are still very early days; on regulation, there is no need to answer the above question in a binary manner. It need not be EITHER/OR.

But, interesting to watch the space, as they say.

Postscript: In the second quarter, SBI had mentioned the Gross NPA + Restructured Assets Ratio. In the third quarter analyst presentation, it merely presented the ‘Gross NPA ratio’. Wonder….

Same ol’, same ol’

I was neither amused nor pained nor disappointed with the stories that an insider/whistle-blower has claimed that VIX has been manipulated. There is a resigned sense of apathy, indifference and cynicism – not very different from the attitudes of Indian voters to political scandals, corruption, etc.  See stories here and here.

My friend and co-author, Gulzar Natarajan, shared this link. This too must be unsurprising.  The only thing I would object to in that article, is this sentence:

Common to all the papers is the recognition that the public markets are, as conspiracy theorists have long argued, not truly public at all. [Link]

That was nothing conspiratorial at all about it. Just based on observing market trends. Even now, notice how stock indices are rising in the last one hour of trading.

Second, the article fails to connect these with the work of Cieslak
and Vissing-Jorgensen on the Federal Reserve monetary policy, governance and stock markets. May be, the papers do.

On reading these stories, I was reminded of the scene from the Tamil movie, ‘Indian’ featuring Kamal Hasan and ‘Nizhalgal’ Ravi. Ravi plays the role of a doctor who refused to treat Kamal’s daughter with burn injuries, in the movie. She dies. He expected to be bribed to do so. ‘Indian’ proceeds to execute him LIVE on TV.  Ravi offers to bribe him now, to be allowed to live! ‘Indian’ says that these guys never really repent or change and proceeds to execute him.

I suppose there is a lesson here.

This is also an opportunity to remind ourselves that the history of derivatives induced instability is too recent to be forgotten.