New sources of financing for microfinance assets

by Nachiket Mor.The problemThe main source of funding for microfinance in India has been through banks, primarily through the forced `priority sector lending'. Over the years, the demand for funds in the microfinance industry has outpaced the growth in investment by banks. In addition, banks are not the ideal place for these assets, given the nature of cashflows and maturity of micro loans. Hence, even though MFI assets are part of priority sector lending, the excessive focus on bank capital has effectively raised the cost of capital for MFIs.The...

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Dubai's great crash

Sheikh Makhtoum won't go to debtor's prison, but short of that, Dubai's all-but-sovereign default is an epochal event in its story. I wrote a column in Financial Express titled Dubai's great crash where I draw on this episode to think more clearly about (a) International financial centres and (b) Puffery. On this subject, also see Reality catches up with the Gulf's model global city by Roula Khalaf in the Financial Times, and 'The Sheikh's New Clothes?' Dubai's Desert Dream Ends by Stanley Reed in Business Week.One hears talk...

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The rise of private sector education service producers in India

In India, in the fields of health and education, an impressive rise of a private ecosystem has come about. In these fields, the State has tried hard to get back in the game, particularly after the UPA won power in 2004. But the unwillingness of the State to undertake deeper reforms has meant that ultimately, government facilities generally work badly. CPI(M) ideologues send their children to private schools.The CMIE Consumer Pyramids data shows the fraction of household expenditure on school/college fees. Households that spend nothing...

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When a currency futures market dominates a currency forward market

by Gurnain Kaur PasrichaIn recent months, a sense has emerged that the exchange-traded currency futures market in India is more liquid than the corresponding contract traded OTC (i.e. the forward market). As an example, we examine a dataset from NSE of 28,797 observations of data - one observation per second - from 3 November 2009, for the November expiry. The effective spread for a transaction of $1 million (i.e. 1000 contracts) is calculated, in the units of paisa. This dataset has the following summary statistics: 5%25%50%75%95% 0.5190.7631.0001.3802.344...

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Working group on foreign investment in India

MOF has setup a working group on foreign investment:To review the existing policy on foreign inflows, other than Foreign Direct Investment (FDI), such as foreign portfolio investments by Foreign institutional investors (FIIs)/ Non Resident Indians (NRIs) and other foreign investments like Foreign Venture Capital Investor (FVCI) and Private equity entities and suggesting rationalisation of the same with a view to encourage foreign investment and reducing policy hurdles in this regard while maintaining the Know Your Customer (KYC) requirements. ...

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Outsized capital inflows?

A lot of people are getting anxious about a scenario with outsized capital inflows hitting India. The historical time-series is illuminating: QuarterBillion USDPercent to GDP12/2004 12.6 7.4 03/2005 8.2 4.6 06/2005 5.8 3.4 09/2005 10.5 6.2 12/2005 0.8 0.4 03/2006 8.4 4.2 06/2006 10.7 5.7 09/2006 7.9 4.2 12/2006 10.8 4.8 03/2007 15.8 6.7 06/2007 17.8 7.4 09/2007 33.2 13.6 12/2007 31.0 10.7 03/2008 26.0 8.7 06/2008 11.1 4.0 09/2008 7.6 2.8 12/2008 -4.3 -1.6 03/2009 -5.3 -2.0 06/2009 6.7 2.7 In the latest quarterly...

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Interesting readings

Tackling systemic risk is no job for the status quo by William Donaldson and Arthur Levitt, in the Financial Times. Short-Selling Bans around the World: Evidence from the 2007-09 Crisis by Alessandro Beber and Marco Pagano. The abstract reads: Most stock exchange regulators around the world reacted to the financial crisis of 2007-2009 by imposing bans or regulatory constraints on short-selling by market participants. We use the large amount of evidence generated by these regime changes...

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The problems of big banks

I wrote an article in Financial Express titled The problem of big banks. On this subject, also see: In the world of banks, bigger can be better, Charles Calomiris in the Wall Street Journal. A three-way split is the most logical, by John Gapper in the Financial Times. Narrow banking is not the answer to systemic fragility by Charles Goodhart. See the section titled Regulatory and legislative reaction and the foreign exchange market in Lessons for the foreign exchange market from the global financial...

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Prescience

Count Sergei Witte was an important figure in czarist Russia in the early 20th century. In October 1905, he wrote a memorandum to the Tsar summarising his view of the political unrest in the aftermath of the Japanese war. In it, he said: The idea of civil freedom will triumph, if not by way of reform then by way of revolution. But in the latter event it will come to life on a thousand years of destroyed history. The Russian rebellion, mindless and pitiless, will sweep everything, turn everything to dust. What kind of Russia will emerge from this...

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Mobile phones and economic development

The CMIE Consumer Pyramids data shows that in all their income categories, more than 50% of households have a mobile phone. It is only in their bottom category `Lower Middle Income - II' that only 37.5% of households have mobile phones. From `Higher Middle Income - III' upwards, the incidence is above 80%. If you had asked anyone in 1999 or 1989 whether this could be done by 2009, the answer would have been in the negative.With broadband Internet, in contrast, India has not got such breakthroughs.The September 2009 issue of Finance...

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East Europe after 1989

I have an article in Financial Express where I look back economic development in Eastern Europe in the last 20 years, and compare and contrast with India.In recent weeks, a lot of very interesting writing, looking back at 1989, has come out. My suggestions for further reading follow. Readers of age 40 and below should try particularly hard to read these and other materials so as to comprehend these earth-shaking events. These events matter because they have had a huge influence on the world that we see today. And, they matter because they help...

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Governments taking over banks

Jerry Caprio and Ila Patnaik, at two ends of the world, on the same subject.The UK Special Resolution Regime has excellent documentation on the web.There is a lot of talk in India about financial stability, where basic ideas are distorted to defend the status quo. Financial stability is, sadly, not interesting to the establishment when achieving it requires undertaking economic reform. One example of this is the problems of closing down failed banks or other financial firms: few things are more important to financial stability...

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Recent RBI moves in finance

On 30 October, I had written a response, in Financial Express to recent RBI moves on financial reform. Here are a few other responses: Anil Padmanabhan in Mint on the big picture. An editorial in Business World, and Tamal Bandyopadhyay in Mint, on the PLR controversy. An editorial in Financial Express, and a blog post by Bagdu, on freedom to open branches. ...

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