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Central banks alone cannot resolve all the challenges of global economy

The Group of Thirty (G30), established in 1978, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers. A report by G30 warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures. In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system. Reuters commented that seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy. A lasting recovery requires governments to shoulder more responsibility and undertake the fiscal, regulatory and other structural reforms needed to support economic growth, instead of relying so heavily on monetary policy. As some major central banks prepare to end this extraordinary period of near-zero interest rates, while others might still expand further, the need for governments to adopt other policy instruments grows ever more pressing. G30 has said that the flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. The prevailing high degree of indebtedness in the various economies reduces the effectiveness […]

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Being Digital

That day, there was a discussion on our friends’ forum on being digital. There is a huge thrust and campaign by Indian Prime Minister Narendra Modi for transforming India to ‘Digital India.’ Everyone wants to go digital. For some, it’s about technology. For others, digital is a new way of engaging with customers. And for others still, it represents an entirely new way of doing business. Being digital requires being open to re-examining our entire way of doing business and understanding where the new frontiers of value are. Unlocking value from emerging growth sectors requires a commitment to understanding the implications of developments in the marketplace and evaluating how they may present opportunities or threats. The Internet of Things, for example, is starting to open opportunities for disrupters to use unprecedented levels of data precision to identify flaws in existing value chains. Digitalisation offers substantial challenges and opportunities at the same time. At the same time, being digital means being closely attuned to how customer decision journeys are evolving in the broadest sense. That means understanding how customer behaviors and expectations are developing inside and outside the business, as well as outside the sector, which is crucial to getting ahead of trends that can deliver or destroy value. Critically, digital isn’t about just working to deliver a one-off customer journey. It’s about implementing a cyclical dynamic, where processes and capabilities are constantly evolving based on inputs from the customer, fostering […]

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Dancing traffic lights for safety

Waiting at a traffic light to cross the street is boring and annoying, especially when there are no cars and you’re in a rush. Pedestrians often ignore the “red man” at pedestrian lights in order to cross the road sooner. We’ve all done it while waiting for a traffic light to turn although it’s not the safest move. Unfortunately, this sometime leads to accidents. Yesterday, I got the below video on my WhatsApp sent by one of my friends. I liked the concept and so googled to know more about it. The Smart company invented an innovative way to keep the would-be scofflaw pedestrians of the world safely entertained while they wait to cross the street: a dancing traffic light. The company built and installed a “dancing traffic light” at an intersection in Lisbon, Portugal this summer. The traffic light projected a red-figure dancing to music rather than the standard static figure. The figure is a low-res representation of people dancing in a nearby booth. The dancing figure was conceived as a means of keeping pedestrians entertained while they waited to cross the road. An element of gamification was introduced to the concept by allowing people to be the dancing figure and thereby contribute to the project. The company reported that 81 percent more people stopped at the red light when it danced. May be in future, we will see “red man” dancing at all traffic signals if it adds to road safety. A nice […]

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Alternate credit-risk models for the unbanked

In developing markets, credit assessment of individuals unknown to a lender is often subjective, time-consuming and expensive, potentially involving home visits by loan officers to interview applicants and their neighbours. Credit bureau coverage may be patchy or non-existent, reflective of the fact that many consumers in these markets have little or no history with financial institutions. Lending to lower-income households and small and informal enterprises is challenging. Many of these customers have limited familiarity with formal financial services, which inhibits their ability to make good decisions about the responsible and appropriate use of credit. And lenders often have little to none of the data they might traditionally use to make sound lending decisions e.g. official proof of income and a credit history. In such environments, many lenders instead focus on cross-selling to existing customers or catering to those for whom credit history information is more readily accessible (typically, the more affluent or the salaried people). As a result, non-customers may be shut off from credit or face higher than necessary borrowing costs as lender costs are passed along to borrowers in the form of higher interest rates and fees. The main alternative for most in such circumstances is to borrow from friends and family or from private money-lenders at an exorbitant rate. The underwriting processes in both high income and developing markets rely heavily on financial data inputs for the consumer. For many individuals globally, these “traditional data” inputs are simply […]

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A 367-year old bond still paying interest

Image Credit: Lekdijk Bovendams Source: Beinecke Library/Yale University

I read an article yesterday on Bloomberg: “Yale to Be Paid Interest on Dutch Water Authority Bond From 1648.” That’s amazing! Twelve years ago, Yale University’s rare books and manuscripts library purchased a bond issued by a Dutch water authority in 1648 to fund the construction of a small pier in the Netherlands’s Lek river. The thing is, the bond […]

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RBI base rate guidelines will impact bank profits

The draft guidelines on computation of base rate released by the Reserve Bank of India (RBI) on 1 September 2015 will significantly impact profitability of banks. The RBI had stated in its First Bi-monthly Monetary Policy Statement 2015-16 that for monetary transmission to occur, lending rates have to be sensitive to the policy rate. The RBI has now brought out draft guidelines for banks adopting marginal cost of funds methodology for calculating base rates from 1 April 2016 to ensure faster monetary transmission. With the introduction of the base rate on 1 July 2010 banks could set their actual lending rates on loans and advances with reference to the base rate. At present, banks are following different methodologies in computing their base rate – on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). Crisil Ltd. estimates that the change in methodology can lower banking system base rates by approximately 50 basis points (bps) from current levels. Crucially, it will reduce banking sector profitability because return on assets will fall by 20 bps in fiscal 2017. Further, for every subsequent 25 bps cut in the deposit rate, profits will be impacted by Rs 5,000 crore (US$ 755 million) in a year from the rate cut. Moody’s have commented that India’s draft rules for lending rates are credit negative for lenders.  Yields of banks that lend mostly on a floating rate basis will […]

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Interfere vs Intervene

Today, I received an email wherein the sender was requesting for prompt interference in some matter, which would be highly appreciated. I was wondering how could anyone appreciate interference by someone else. Maybe, intervention was intended in that email! These two words are similar and yet so different. Both start with ‘inter-‘, meaning ‘between’. The difference is in the connotations of the two words. Interfere has a negative connotation. When you interfere in something, you are poking your nose into other people’s business. You are meddling. The word carries with it the sense of obstruction or getting in the way of something. When I say to someone: “Stop interfering” — I mean that what I am doing is none of his/her business. Intervene has got more positive connotations; it has the connotation of wanting to improve a situation, change things for the better. This probably explains why the Americans talk about their intervention in Iraq, rather than interference. There’s a thin line between interference and intervention. Often, an act of intervention is seen as an act of interference as the connotation is blurred, the intent is not clear. And so, may we continue to navigate that narrow space between interference and intervention.

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Dust storm again today

A thick layer of dust blanketed Baghdad today. The sky turned an ominous orange as sand from the surrounding desert blew into the Iraqi capital. The dust cover that enveloped Baghdad is not unusual. Baghdad is shielded from the desert by a thin strip of arable land between the Tigris and Euphrates rivers. Baghdad lies in the center of Iraq along […]

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Caste-based reservation — affirmative action or discriminatory?

Affirmative action and discriminatory measures are complex and controversial issues. The purpose of affirmative action is to speed up the establishment of a representative and unprejudiced workforce in addition to assist those who were in the past deprived by unfair discrimination to fulfil their highest potential. Reservations has encouraged an ongoing debate regarding the legal, moral and economic questions arising from the preferential treatment of certain groups of people in society. Underlying this debate are various concerns about the notion of reverse discrimination or unfairly disadvantaging individuals who bear no responsibility for past or present discrimination practised by others. Caste has developed in India out of a system of many-layered social hierarchy that became a norm or way of life over several thousands of years. In the preamble to the Constitution of India, negative public discrimination on the basis of caste is forbidden. The problem with the caste-based reservation system is that the higher caste communities feel discriminated against by the government’s policy of reserving positions for the backward classes. A large number of members belonging to the higher castes contend for the small number of places reserved for them, while the members of the backward classes do not have to compete at all because of the large number of reserved places for them compared with the small number of candidates. This reservation system in favour of the backward classes seems to be leading to a situation of unfair reverse […]

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Peeche Dekho, Aage Barho

Around three decades ago, I was a fresh recruit — a probationary officer in a public sector bank in India. Many of my seniors spoke about the critical importance of adhering to the PDAB principle in bank. What I was explained was the principle of “Peeche Dekho, Aage Barho” (पीछे देखो,आगे बढ़ो), which in English means “Look Back and Move Forward”. It was an instruction, I discovered, that pervades all decision-making in bank. Whenever in doubt, just look back and then move forward accordingly. What is even worse is that I later found that PDAB did not pervade only in my bank, other banks were also following the PDAB principle. A precedent is the strongest support for any decision especially because it makes the decision-maker safe from any future questioning and vigilance inquiry. Well, there is no harm to take advantage of the wisdom of past experience. Many times it provides us useful lessons, too. I noticed that whenever there is a change of incumbent, the new incumbent blames his/her predecessor and generally expresses him/her as a duffer. I wondered, how pertinent is it to follow PDAB? This question was recently asked to me by one of my friends. He is going to head a branch soon. He also said that he asked many of his seniors who preached him the principle of PDAB, but he hasn’t got any response from them. I have never fully subscribed to this principle. […]

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