DARE - Because Entrepreneurs Do

Banks in India, particularly the foreign banks, at the moment need permission from RBI to open every branch and every ATM. Indian banks have been getting permission in 'bulk' to open the branches. What it essentially means is that RBI allows a particular (Indian) bank to open a certain number of branches at one time, and the bank opens these branches one by one without going to the Central Bank again and again. But this is not the case with foreign banks.

 Foreign Banks need to seek fresh permission from the RBI every time to open every branch and every ATM. RBI is more or less guided by the principle of reciprocity in case of foreign banks. How many branches a foreign bank can open is linked to similar openings by Indian banks in the country from where that bank comes.

This policy needs a change on urgent basis, particularly considering economy is reeling under credit crunch. Indian companies are struggling to raise money through traditional means, and Indian banks are shy of extending the support they were extending during normal times. RBI has allowed the companies to raise resources through external commercial borrowings, but even this seems not working well enough.

RBI and the Indian government should take a clue, and use this condition to give foreign banks free hand in opening branches and ATMs. This will ensure an infusion of investment into the country, even though situation is not so bright. There are many banks, particulalry Japanese, Arabian and some European, which have dep pockets. They have always been willing to enter into India, but their plans were stumped by the rigid RBI policies. I myself know of a bank from Qatar (Qatar National Bank) which is willing to open braanches in India. They do not want to get restricted to just one pocket of the country though.

Besides the FDI which these banks will bring even during these hours, another advantage attached to the move would be that the Indian business will probably get plenty of credit. Since these banks would be new entrants they would be more forthcoming in extending credit to the businesses in the country.

This was more or less emphasized in the reports of a committee headed by Raghuram Rajan, a US-based academic and former chief economist of the International Monetary Fund. The committe had called for immediate delicensing of branch opening process, and treating foreign banks on par with Indian counterparts. 

 Even going by simple logic of business, why the banks should not allowed to have control over how many banks and ATMs they want, when a supermarket player like Big Bazar can do so without hiccups. Banks should be allowed the same within the jurisdiction of RBI regulation.

A distinct advantage India can achieve by allowing banks free hand in opening branches and ATMs is that India can aspire to become a global hub of financial institutions and banks, something Dubai and London are aspiring to achieve. Comapred to these two, India has better chances of emerging as such a hub.

Merely by allowing free hand to banks, a number of job opportunities would be created not only in the banking sector, but even in other sectors. After all, better availability of finances will trigger faster growth in the economy, as better finances would move the entire auto and other consumer sector, which, in turn, can spark growth in steel, cement and other industries.

RBI can, however, retain the right to impose restrictions on the growth of certain banks for prudential reasons, as even the Raghuram committee had observed.

Finance Ministry seems mulling over the committee's recommendations. One can hope this turns into reality pretty soon, particularly during these stress times when India is facing a slowdown, which may get murkier next year.

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Is India really affected by the slowdown bug? Does not seem so if one looks at the foreign direct investment figures released on Wednesday (26th November). Official figures reveal that India managed to attract FDI worth $17.21 billion between April and September this fiscal. This is hefty 137 percent growth over the same period last fiscal.

 

India received FDI worth $32.44 billion last year. This year it is expected to rise to $40 billion. And, the government is all set to further liberalise the norms for FDI, the industry secretary Ajay Shankar said. He is optimistic the auto majors GM, Toyota, Volkswagen and others would go ahead with their plans to invest in India.

Expectation are not just a rhetoric of a government official. This optimism seems to be based on some sound economic base. These major companies cannot afford to invest in their base countries - US, Japan and Germany - or, in Europe and other developed countries. Almost all are in recession, not just slowdown. These countries, particularly the US, are coming out with huge bailout packages. The packages may sound good, and perhaps can be described as necessary, at the moment, but these will have wider ramifications post recession as well. Inflationary pressure is all certain to loom large over government post recession in the countries announcing big bailout packages. This will have spiralling impact on the economy and interest rate can rise again, affecting the auto sales. Thus, hopes of registering significant increase in auto sales seem at these places for quite a long time seem a far car. Ray of hope in these hours of  doom obviously comes from India (and China), which has anyway been attractive for the auto majors.

GM, which is trying desparately to win a handsome bailout package from the government to tide over crisis arising out of drastic downfall in sales of its cars, has no other option.  It has brushed aside speculation to file for bankruptcy. Fate of the company winning over a package hangs with a thread. It largely depends on its determination to stick to its projected growth plan. It cannot afford to go off the trajectory in any case.As far as Toyota is concerned, it is anyway committed to India, slowdown or no slowdown.

Shankar's optimisim is thus quite understandable. This also reaffirms that India should come out of its skirmishes with slowdown without many hiccups.

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Banks after banks have collapsed in the US, and now there are rumors Citibank, one of the biggest and most diversified of the American Banks, can be the latest casualty. 

Lehman Brothers is already a history, and so are many others. The Federal government has stepped up its efforts to save the mega players in trouble. Other players are reported not to have responded positively to the calls for buying Citibank. It is now widely expected government may take over this banking giant as well.

Perhaps similar stories may keep coming for some more time. A few leading players like Barclays adopted a different path to keep themselves. Instead of towing government lines, Barclays opted to sail through the crisis raising $12 billion from the Arab investors, where sovereign wealth funds are flush with oil money.

Are you wondering where does India fit in this set up? India should take hints from the Arab wealth funds and reap benefits of the recession. One's crisis, after all, is always an opportunity for others. India should realise this, and harp on the sagging banks like never before. How?

 India should form one or more wealth funds with combined corpus of around $100 billion. Despite adverse exchange rates for some time, India has over $250 billion in its foreign exchange reserves. Some $150 billion left in the foreign reserves will still be enough to tide India over the crisis period, which is expected to linger till third or fourth quarter 2010.

A team of professionals should be entrusted to manage India owned wealth funds. The motive should be clear - to buy stakes or even completely take over banking giants like Citibabnk or Barclays, or any MNCs in trouble. Due digilence should be doen to judge whether there are chances of these companies to reurn to black once crisis is over. 

There may be problematic assets now, but with prudent management India can expect to sail over the trouble times. Once this period is over, these funds can sell their stakes in the open market, preferably to the Indian companies and institutions. It will always be a welcome sign to see Indian representatives on the board of directors of some of the biggest MNCs and banking heavy weights.

 ICICI bank's MD & CEO, K V Kamath, said  in an interview with a television channel that Indian banks do not have deep pockets to buy the American banks going bust, admitting indirectly it's a good opportunity for those having cash on hand.  India owned funds, if created, can do this. And, with a corpus of $100 billion, India can buy just anything coming its way. Biggest deals even in boom times have hardly been of over $10-50 billion. 

India is still expected to grow over 7 percent in 2008-09, and over 6.5% in 2009-10. This is better than many other countries. India can thus easily be expected to tide over the problems arising out of slowdown. 

India will not be alone in this pursuit. Besides the Arab countries, Norway, and Singapore maintain their own wealth funds. China is indulged in doing this directly or indirectly.  They would reap dividends once crisis is over. India should not be left behind. India can gain heavily 2011 onwards if it decides to act decisively and show business acumen of highest order.

Indian government should, however, ensure full transparency in the process, so that the process does not get entangled in political quagmire.

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Aviation sector worldwide is going through a rough phase, and India is no exception. The losses Indian aviation sector is expected to incur this year is expected to be in excess of Rs10,oo0 crore, second only to the US aviation sector.

Oil prices have weakened a little in the last few weeks, but airline companies are struggling to tide over the crisis, with the number of passengers falling on regular basis. Kingfisher has taken a lead in asking the government to allow the Indian carriers to sell their equities (up to 26%) to their foreign countetrparts. According to news paper reports, the company is already in talks with some of the players for offloading 26% stake. The government, however, seems reluctant to do so, says the newspaper reports.

Should the government relent and allow Kingfisher and other willing companies to go ahead and finalise best possible deals for themselves?

Indian FDI rules regarding this sector is already benign, compared to even the most developed countries like the US and Canada, where foreign ownership is restricted to 26%. India allows up to 49% foreign ownership, but debars foreign carriers. India, however, allows foreign carriers to buy up to 74% stake in cargo airlines.

Trade experts say the time is not ripe to sell the stakes. They are of the opinion that companies should stretch themselves through the difficult phase somehow, and then sell their stakes (expecting government would allow to do so then). This would fetch them better price for offloading their stakes, they say.

The situation is, however, not that simple. Some foreign carriers are exploring franchise agreements with the Indian ones. This would allow their Indian partners to carry their codes and livery, while retianing management control. One such franchise agreement is already in the offering between British Airways and Go Air. Interestingly, India doesnot have any regulations on franchisee agreemnets between international and domestic airlines.

Franchisee agreemnents would mean backdoor entry for the foreign carriers without making any investment domestically. Solution perhaps lies in letting the private carriers sell their stakes. Would it make a real difference if Kingfisher sells its stake to British Airways, and not to some Kerkorian, William Ross, or Warren Buffet? 

And, private carriers are their own masters, within the ambit of few regulations. They would know better how much to disinvest, and how they would survive. It's better to ensure some invetsments, rather than let things out of hand by letting franchise agreements become order of the day. After all, domestic carriers are hell bent on cost cutting, and they would not mind hopping on to anything which gives them even a slight glimmer of hope.

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Looking at the newspapers today (18th November, 2008), I came across three news stories - "Citigroup plans to make deep job cuts" (Mint's main story), "NRIs trust desi banks, deposit $513 million in Sept" (ET story on main page) and "Goldman Sachs CEO decide not to take 2008 bonus" (Business Standard). 

Do these stories have bigger lessons than what they appear in the first look?

The Western banks and financial institutions, led by the American ones, are in mess. Plausible reasons may be floated to explain why the American banks plunged, and why the credit crisis took place, without realising the institutions were slipping into pit. What were the various central banks doing in these countries when this was slowly creeping in? After all, crisis did not grip the sector all of a sudden.

Lehman Brothers, Citi Bank, Goldman Sachs, Society Generale, Morgan Stanley - name any bank and you will find them being already sold, or surviving courtesy bailout packages. Governments may be justified in trying to save these institutions. Had they decided not to do so, the situation could have turned into utter chaos. But what about the regulators and the banking models? How could the most highly paid banking experts did not know they were overleveraging their institutions? How could the insurance companies insure such bad home loans based sub-collaterals offered by the banking mamoths?

The experts may and will still find reasons to justify their deeds, but bottomline is that the crisis took place there - in countries, which dictate the developing world banks how to run the show all the time.

Goldman Sachs CEO might have decided to not to take bonus this year (it seems he has done great favour!), but according to an AP report, the salary he took last year was whopping $54 million, more than the turnover of many Indian mid-sized companies. But what did he get this salary for? Definitely not to let the bank drift towards a crisis!

Contrast this with India - Reserve Bank of India deserve all kudos to ensure Indian banking sector does not fall in trap and go the way the Iceland banks did by blindly trusting their American counterparts. K V Kamath, MD & CEO, was right when he said (at the India Economic Summit) there was no place in the entire world where 34% of the bank's assets were parked with the central bank as cushion to tide over difficult times like this.

No wonder the Indians living abroad have found it better to park their moneys with the Indian banks, and not with the local banks.

With sustained efforts from the regulator and the governments Indian banks should tide over the difficulties, they are encountering in the face of looming crisis world over, without major hiccups.

One should  wonder whether it's high time the management schools, based in the US and other Western countries, change their curricula and embrace Indian and Chinese models of managing economies.

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