Archive for March 28th, 2016

Cholamandalam abandons its payments bank plans..

March 28, 2016

This banking development happened on last Wednesday just ahead of the long weekend. As a result, not much has been written.

Cholamandalam has surrendered its in principal approval of starting a payment bank:

Cholamandalam Investment and Finance Company has decided to abandon its plans to set up a payments bank. A company spokesperson said: “It is a decision by the board considering competition and other factors including long gestation period (for payments banks to become profitable).” The Murugappa Group company was one of the 11 firms that got in-principle approval from the Reserve Bank of India (RBI) to set up payments banks in the country.

According to Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services LLP, only those with strong backing of telecom bandwidth and technology would be able to sustain and survive in the payments bank space. There would be consolidation in the space over the next five years with only about five players staying in the field, he added.

Expressing surprise at the decision to pull out, a member of the RBI panel that picked players said a lot of thought had gone into the assessment of players. The prospective players had projected loss at least for five years.

Licences were given to players expecting losses for five years?

In times, when we are questioning all these losses of old banks, we are creating new banks knowing they will be loss making for atleast five years.  What if losses are for more years which can easily happen once interest rate cycle goes up. As the assets of these banks will be mainly invested in government securities, one could have large losses once rates go up.

In a way these banks will be like those infrastructure companies which have gestation periods. But these were expected to be smaller niche entities which should not have any such losses to begin with. There has been a lot of opaqueness towards allocation of these licences and one does not know the basis for allocations.

Firstly the idea is hardly anything new. Banks in early form were payment aggregators.  In India, the so called indigenous bankers were actually payment banks which facilitated payments across India using their hundi instrument. Most of these indigenous banks actually gave limited credit just like we expect from payment banks. The credit was restricted to big family banks which mostly gave loans to treasury of kingdoms.  The globally, as trade picked up one had multiple currencies/coins. A payment facility was needed to exchange all these multiple currencies and facilitate payments across trading networks. Bank of Amsterdam one of the earliest banks was started for the same purpose in early 17th century.

Second, these indigenised payment banks eventually lost business as British adopted universal coinage across the country in 1823. Then eventually joint stock banks came up with deeper capital which provided both credit and payments sidelining all these indigenous banks. Though, in rural  India these indigeneous banks and money lenders remained prominent as joint stock banks remained in top cities and locations.This was something which nationalisation attempted to change.

So now we see these payment banks making a reentry to plug that very financial inclusion gap which they were seen incapable of filling. These banks were seen as smaller players with low capital base. Earlier there were talks of integrating these indigeneous banks with the larger credit system of joint stock banks and cooperative banks. But this mission could barely succeed as the policy focus shifted towards banks to achieve social goals.

Then, earlier payment banks were mostly owned by families and ran operations via social networks. There was hardly anything like quarterly capitalism and non-stop reporting, The transaction costs were much lower and they could function much easily. They also were not supposed to invest in government bonds and so on. They ran the show mainly via their capital and took very little deposits.

This isn’t the case anymore. Today’s payment banks are seen as these niche players but regulators are going to treat them just like other big banks. They will have to pay off deposit liabilities and be mindful of asset base which will depend on all kinds of govt. policies. Then, they will be expected to do all kinds of reporting and monitoring which other big banks do as well.

Overall, it will be interesting to see how this idea from the past pans out in its new avatar. It might not be surprising to see them eventually being merged and then taken over by the same banks which they are expected to compete against..



What is it with Kerala and its lottery industry?

March 28, 2016

How history plays out for years/decades/centuries is just amazing. This is true even in things like finance. Historically, the region of Kerala has been famous for chit funds, which was nothing but a mutual lottery system. In this people would contribute a certain sum to a fund. The fund would then be lent out to a subscriber (or subscribers depending on the design of the fund) at some interest rate. The selection of the subscriber was mostly based on a lottery system.

This has been a way of financial intermediation in the region for ages. Even banks that came up in the region in 20th century offered these chit funds as a main way of business. They would mention the same in their Memorandum of Association. It took intervention from the regulator asking banks to stop chit fund activity. But chit fund activity continues to thrive in the region.

This chit fund activity has eventually shaped the lottery market in the state as well. This is a superb article by Arun Janardhanan on the thriving lottery industry in the state:


Ricardian equivalence and Fisher effect are actually misnomers..

March 28, 2016

This is a very important post  by Thorvaldur Gylfason, Helgi Tomasson and Gylfi Zoega. It is another strong reminder of what omitting history of economic thought has done to economics students. We are just being made to use certain terms without knowing whether they are actually true. Quite a few economics terms/relationships are actually weak when tested empirically. So, one should always be careful while stating them as some theory or facts which we often do.

The authors point to two such highly popular terms used by both econs and wannabe econs across the world- Ricardian equivalence and Fisher effect. In both these, even the authors on whom they are named had cautioned on the relationship. But, over time like we see in game of Chinese  whispers, these ideas have become distorted. The weak relationships showed by these two have become a matter of fact leading to all kinds of wrong policies:


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