Archive for March 17th, 2017

Towards bank cartelization in India?

March 17, 2017

Prof JR Varma had earlier written a post on asking India to become less dependent on bank finances.

In another post, he says Indian banks have formed a kind of cartel towards non-performance. The demonetisation has furthered the process:

I have begun to wonder whether Indian banks have stopped competing aggressively with each other and have started forming an implicit cartel. Rising non performing assets have reduced the appetite for bank lending to a level even lower than the severely depressed demand for bank credit. Obviously, banks do not need to raise much deposits if they are not lending much. It is easier (at least in the short run) to try and charge higher fees from a smaller depositor base than to spend time and money acquiring and retaining customers. And that is what we are seeing. More ominously, some of the attempts to raise fees and user charges seem to a casual observer to be coordinated across banks. If that is the case, then of course these are serious issues for the Competition Commission.

I think demonetization has played some role in this for multiple reasons. First, it boosted the liquidity of the banks virtually overnight and accelerated trends that had been building up slowly over several months. Second, demonetization turned banks into an extended arm of the state: bank officers became quasi government officials with substantial powers. Long after that stage passed, many banks have not gone back to being service organizations again. Anecdotal evidence suggests that this transformation from customer service to bureaucratic conduct has happened in the private sector banks to the same if not a greater extent.

In the long run, this change in the behaviour of the management and employees of the banks would be disastrous for the banking system. On the deposit side, payment banks and mutual funds might find a once in a lifetime opportunity to disrupt banking. On the advances side, non bank finance companies have gained valuable customers turned away by the banks. In the long run, the bond markets could also take business away from the banks.

The first 25 years of economic reforms saw the banking system grow to dominate the financial system previously dominated by the development financial institutions. Shortsighted management and staff could erode this dominance very quickly.

One hopes Indian banks especially the private ones wake up.

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Post Charolette Hogg Resignation: Thinking about senior central bank appointments

March 17, 2017

I had blogged about the recent case of Ms. Charolette Hogg who had to resign from Deputy Governorship of Bank of England. It is not any simple resignation with many lessons on central bank governorship. It should be discussed much widely.

CroakingCassandra  Blog, the goto blog on NZ economy and central banking issues thankfully has a post on the issue. He draws lessons for Reserve Bank of New Zealand and quite a bit applies to Reserve Bank of India as well (barring lack of female participation at top central bank roles. Unlike RBNZ, RBI has had females at the helm, though much more needs to be done.)

 

How should we classify mutual funds?

March 17, 2017

Nice story on valuresearch.

They say amidst complexity of so many MFs, we need to classify for simplicity and clarity:

The first thing to understand about fund classification is that it is almost entirely about dividing the entire risk-return continuum into bands of roughly equal return and risk expectations. This makes the real task, that of identifying funds that are likely to generate higher returns at lower risk, easier.

At the broadest level, funds are classified according to the ratio of equity and debt investments in their portfolios. There are pure equity funds, debt funds and hybrids that have both. Their relative return vs risk levels are obvious. Within this first level of classification, the primary way of classifying equity funds is by the size of the companies they invest in. There are funds that focus mostly on large companies or medium-sized or small companies and there are those that keep their assets distributed among all these in some ratio. There are other axes along which equity funds can be classified, for example, which sector or industry they would invest in.

In the accompanying infographic, this classification is depicted as a tree. The root of the tree is all mutual funds. The first level of branches is the basic asset types. These are equity and debt (fixed income). There’s also an others category in which we have placed gold funds since it doesn’t fall in any of the other categories. Equity and fixed income funds are further sub-divided into smaller categories based on other characteristics.

And if you go by how fund companies describe their funds, you will end up with a large number of funds that appear to be unique or near-unique. You may feel there aren’t too many other funds like them. However, this apparent uniqueness is a marketing imperative. It is something that has been invented by fund companies in order to appear different and not have to be compared with too many other funds from other fund companies.

However, an investor’s interest is best served by keeping things simple. There are a few long-term investment needs that cannot be met by investing in a balance of funds that are mostly large-cap equity along with a little bit of mid-caps.

The best thing about having a good classification system for funds is to realise that making a choice is actually quite simple and a vast majority of funds can simply be ignored.

 

Karnataka caps cinema ticket prices at Rs 200..

March 17, 2017

After much demand and discussion, Karnataka govt in its recent budget capped the cinema tickets at Rs 200:

Movie tickets in Karnataka will now cost no more than Rs 200, the Karnataka government announced in the state budget on Wednesday.

The move comes as part of the state government’s attempts to develop the film industry in Karnataka. Along with the cap on tickets, the state has also announced that a film city will be set up in Mysuru for the development of Kannada film industry.

The Chief Minister announced a “policy for implementation of uniform admission fee in all cinema theatres, including multiplexes, in the State,” and said that the maximum admission fee will be Rs 200.

One just recalled a previous post which discussed what economics has to say about these caps? Ideally these caps are inefficient and cinema halls should have done something. THere is little dount that cinema viewing has become way too costly and there seems to be a cartel amidst competing halls.
They have not taken any measures to lower prices despite repeated requests. Could there have been better measures like incentivizing low cost cinemas to enter the market?

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