Archive for the ‘Financial Markets/ Finance’ Category

How SEBI and FMC’s merger took a dozen years…

June 22, 2016

Superb article by Shaji Vikraman of Indian Express (HT Ajay Shah Blog).

How obvious things take so much time in India:

At an internal meeting in the Department of Economic Affairs in 2002, senior officials were discussing financial market reforms that could potentially follow the good deal of work done on the equity markets front starting from the mid-1990s. Finance Minister Jaswant Singh, who had moved into the Ministry from the External Affairs Ministry that year, was briefed by officials led by Finance Secretary S Narayan on the missing piece in the reforms process: integrating the separate equities and commodities segments of the financial markets. Singh was told that virtually no country had a fragmented market like India with one regulator supervising both segments of the market, except the US where again one regulator had oversight on spot markets, and another for the derivatives segment.

The rationale for a similar integration in India that was put forward was that fragmentation had an impact on costs, economies of scale, and the fact that brokers, investors and other participants were virtually the same. There was also the argument of the capacity of the regulator — in this case the Forward Markets Commission or FMC, which was not an independent regulator — being just an arm of the Department of Consumer Affairs, and without adequate capacity and resources to supervise a growing market segment. S Narayan and Wajahat Habibullah, Secretary in the Department of Consumer Affairs, then discussed this.

In May 2003, Singh wrote to his Cabinet colleague in charge of the Department of Consumer Affairs, Food and Public Distribution, Shanta Kumar, sounding him out on the idea of a convergence of markets, institutions and players in the backdrop of the major changes that were taking place in the Indian securities, and the commodity derivatives markets. That’s when an inter-ministerial group was formed to consider whether India should have a new regulatory architecture related to the financial markets.

A committee headed by Habibullah in its report of September 2003 suggested the possible merger of FMC with SEBI, saying the structure of the FMC, which was formed in 1953, was not fully suited to the challenges of an emerging market and needed to be overhauled. Options outlined by the committee included a unified entity brought about by a merger of SEBI and FMC with two separate divisions to regulate securities and commodities markets.

The committee also said that the Department of Economic Affairs was better equipped to handle this, as it dealt with the securities market — a rare instance of a government department showing a willingness to cede turf. But this would mean a change in business rules by the Cabinet to transfer the administrative responsibility of the FMC from the Ministry of Consumer Affairs to the Finance Ministry. A senior official in Consumer Affairs was assigned the job of working out the operational details of a potential merger, and the roadmap.

The plans of the NDA government went awry with defeat in the May 2004 polls….

Post 2004, the coalition politics took over and the issue was buried. It was revisited and completed only when the same party came which worked on it came to power..

The UPA government decided to pursue the proposal, however, and Finance Minister PChidambaram announced in the July 2004 Budget the decision to take steps to integrate the commodities market with the securities market as part of the initiative to make capital markets strong and attractive. But soon afterward, the proposal ran into huge resistance from Agriculture Minister Sharad Pawar who, at a meeting with the Finance Minister and other officials, made it clear that he thought the time wasn’t opportune. Given the challenge of countering a powerful minister like Pawar, Prime Minister Manmohan Singh asked C Rangarajan, who headed the Prime Minister’s Economic Advisory Council (PMEAC), to suggest a solution.

Rangarajan recommended that status quo should prevail, and the proposal for a unified regulator should be reviewed after three years. Which meant that the FMC would continue to report to the Department of Consumer Affairs. Over the next few years, volumes in the commodities market rose, attracting the attention of many players and investors. But even after three years passed, there wasn’t material difference.

The first trigger for change came in 2011, when during the Cabinet reshuffle, Pawar’s portfolio of Consumer Affairs was handed to a Minister with Independent Charge. The push came a little later, when the NSEL scam hit the headlines, exposing the manipulation in the commodities market, and the associated regulatory inadequacies.

By 2013, the Prime Minister had brought P Chidambaram back to the Finance Ministry and, that September, a decision was taken to transfer the administrative responsibilities relating to the commodities market to the Finance Ministry. Well before that, a committee on the financial sector headed by Justice Srikrishna too had recommended an unified regulator, subsuming the FMC into SEBI, which it said should oversee all financial markets — bonds, equities, commodities, insurance and pensions.

The final merger of FMC and SEBI came when Finance Minister Arun Jaitley announced it in his 2015 Budget. And though a grand plan worked out by the Finance Ministry during Secretary Rajiv Mehrishi’s time to ensure the transfer of the public debt management function from the RBI to the government, regulation of the bond markets by SEBI, and a unified regulator for commodities and equities through the Finance Bill, didn’t quite work out, the merger did happen. SEBI Chairman U K Sinha and FMC Chairman Ramesh Abhishek and their teams then worked on the last mile implementation, with a formal merger coming through in September 2015, 12 years after it was first proposed — a reflection both of the pace at which some of these changes happen, as well as of continuity.

Superb reading all the way.

These aspects of economics and finance are barely taught or discussed anywhere. If SEBI has been a silent performer, FMC is nowhere in the picture. The blogger recalls hearing FMC’s chairperson earlier who pointed on how they operated without any staff at all and keep getting inferior treatment from the polity but they kept doing its work.

How do we look at the institutional design of capital and commodity markets? The two baskets are inherently different given how each commodity has its own cycle. We always had trading in these markets historically but was more local and commodity specific. As things moved to exchanges we started to see different commodities influencing each other. Then with non-commodity players like banks etc entering the commodity market as well treating as an investment basket, the commodity market also began to be influenced by capital markets and vice-versa. A sudden failure of a crop/commodity led to volatility in not just the commodity market but also in stocks linked to the commodities as well.

This ongoing synergy required the commodity and capital market regulation space to be synergised as well. So the discussion which started 12 years ago has finally seen its completionall behind the scenes. If similar merger was done by the big brother we would be sick of reading it. But there is hardly anything on this which is quite important in its own ways.

Infact given how the global crisis has shows why all things moving together is dangerous, we should question the ongoing synergisation between commodity and capital markets. Perhaps we should look at continued dangers of such integration.

More research and discussion is needed on this fascinating topic..

A common central bank and finocracy tool to make one obey their orders : Fear Mongering

June 21, 2016

We were told all hells will break lose on Indian markets last Saturday. But nothing of this sort happened. It does not require a lot of economics education to realise that most investors do not have any other place to dump their money but India. But fears have to be raised as that is how central banks and its team of finocrats make us believe.

Tho Bishop has a piece on how central banks have been using the tool of fear mongering to push things their way: (more…)

How interesting exchanges between Jack Treynor and Fischer Black shaped finance..

June 21, 2016

A superb piece by Perry Mehrling of INET.

He pays tribute to Jack Treynor, the forgotten man who helped shape much of finance theories as we know today. Treynor discussed  much of his ideas with Black and amidst all this the revolutionary idea of finance i.e pricing of options was taking place:

Jack has never been easy,” wrote Charles D. Ellis in 1981 as Jack stepped down from his position as editor of the Financial Analysts Journal which he had held since 1969. In Jack’s own departing words in the same issue of the FAJ, he described a “guerilla war” between black hats and white hats, whose “outcome is still in doubt”.

In retrospect, the years of Jack’s editorship more or less coincided with a most remarkable period in American history when what I have called the revolutionary idea of finance took hold and transformed financial institutions and financial practices utterly. Jack was in the middle of it all, pushing against the resistance of the Old Guard in his attempt to professionalize the job of financial analyst, but also pushing against the New Guard whose almost religious belief in market efficiency led them to disregard the importance of that very same job.

Here he is, in 1979, retrospectively characterizing the middle ground he was trying to occupy:

I believe in a third view of market efficiency, which holds that the securities market will not always be either quick or accurate in processing new information so that, contrary to the academic view of market efficiency, opportunities to trade profitably against the market consensus exist. According to this view, however, it is not easy to transform research advantage into superior portfolio performance. Unless the investor understands what really goes on in securities transactions, he can easily convert even superior research information into the kind of performance that will drive his clients to the poorhouse.

“Trading Cost and Active Investing”, eventually published in FAJ 1981 as “What Does it Take to Win the Trading Game?”

To help him keep his balance on that shifting middle ground, he brought onto the board of FAJ his friend Fischer Black, who himself would spend more or less the same crucial formative years hanging out in academia, first at the University of Chicago and then MIT. The result was a remarkably productive collaboration in which Treynor, taking advantage of his greater closeness to the world of practical experience, produced a series of “ideas in the rough” that Fischer then picked up, reworked, and smoothed out.

Useful discussion on history of financial thought which obviously is never taught. What matters more is how finance shapes society and not just trading profits:

The revolutionary idea of finance transformed the practice of finance, and in time it also transformed academic understanding of finance. Indeed, both transformations continue to this day; I tell all my students that financial globalization, and the resultant integration of money markets and capital markets, is the defining fact of our age. But I think there is another, even slower, transformation under way as well, a cultural transformation in how we think about risk and time in our own lives, both as individuals and as collectivities.

Treynor’s thoughts on how to trade profitably against the market consensus amount also to a kind of life philosophy, a way to confront what Keynes called “the dark forces of time and ignorance”. In the long run, more important than the transformation of financial institutions, or of academic theory, is the way that a changed understanding of risk and time allows people to live different kinds of lives, by freeing them from the superstition that guides action wherever science has yet to penetrate. And even more important is the way that a changed understanding of risk and time allows people to live different collective lives, by understanding better the larger society of which they are a part, and their place in it.

That cultural revolution is of course still very much unfinished business. Jack Treynor, by placing himself in the middle of the central transformational event of his generation, was a pioneer not only in the art of investment but also in the art of living.

Nice bit..

Finance finance everywhere but not a drop to drink

June 20, 2016

Barry Eichengreen has just rephrased Samuel Taylor Coleridge’s poem on water:

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What would Brexit mean for London as a financial centre?

June 20, 2016

Patrick Jenkins has a superb article wondering role of London as a financial centre post Brexit (HT: MR blog).

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How a Chinese P2P lending platform use nudes as collateral..

June 16, 2016

Crazy bit of news.

 

Shylock demanded a pound of flesh if loan was not repaid and today’s banks/lenders use force to get back their loans. Shame has also been used as a collateral in the past where those who do not pay back the loan are not seen kindly in the society. But now a Chinese lender is using different kind of shame to get back its loans:

Many Chinese university students were found to have used their nude pictures as IOUs onsome online lending platforms, putting themselves at the risks of having everybody –including their parents – see them naked.

Such risky methods of IOU is found usable on several online lending platforms, but it is usually more often accepted within the QQ group chats connected to such platforms.Borrowers are also required to upload pictures of their ID cards and report their family information, including their address and cell phone numbers.

Once a clear photo of a naked borrower holding his or her ID card is uploaded to lenders,he or she can get up to 15,000 yuan ($2,277) credit with a maximum of 36 month installments, the Nandu Daily reported. The credit varies based on the borrower’s education background. Usually an undergraduate student can receive 15,000 yuan in credit, while those studying at famous universities as well as doctorate students can receive even larger loans.

What comes with the seemingly easy business transaction is costly overdue repayment.

According to a self-claimed former borrower Li Li (pseudonym), the weekly interest ratewas 30 percent for her 500 yuan borrowed from an online platform in February. As she kept failing to pay back on set payment due dates, she borrowed more money from the platform with the same weekly interest rate until the overdue payment grew to 55,000 yuan, which then led to a threat with her naked pictures, the Nandu Daily reported.

Not sure how to react to such developments..

 

How Mututal Funds own most big U.S. Banks leading to less competition..

June 15, 2016

Martin Schamlz of Ross Business School has this interesting bit of research.

He says the top American banks are basically owned by top Mutual Funds. This is leading to these MFs grouping together and minimizing competition:

A century ago, J.P. Morgan made a fortune by buying up shares of competing railroad companies with other people’s money. He used cash from savers and financiers to buy shares in competitors. Then Morgan forced those competitors to cooperate. Similarly, Gilded Age “voting trusts” pooled money from individuals to buy shares in competing companies. Then the trusts used shareholder voting rights to restrict competition

These schemes handed their investors huge profits. Yet the unfortunate side effect of uncompetitive markets is that consumers pay higher prices. Given limited budgets, they buy fewer things. Macroeconomic output drops; people become unemployed; and political unrest ensues.

Could something similar to these 19th Century voting trusts be happening today? New research from my coauthors and me suggests that the answer is yes – and that your retirement savings are part of the problem.

Basically, a handful of asset management firms have become the most powerful shareholders of the nation’s largest banks. These mutual fund companies collect cash from retirement savers like you and me. They buy shares with it on our behalf, and vote these shares, usually with one voice. In these key aspects, large mutual fund firms resemble the voting trusts of J.P. Morgan’s time.

And yes, large-scale common ownership nowadays also appears to thwart competition. In “Ultimate Ownership and Bank Competition,” José Azar, Sahil Raina, and I looked at banks across different parts of the United States. We observed a big difference in competitive outcomes between counties where banks are more commonly owned by the same set of investors and counties where they’re not. In counties where common ownership increases, banks raise fees for deposit accounts and lower savings interest rates.

Today’s large-scale common ownership is probably not a deliberate action by a lone capitalist out to throttle competition. It may be more of an accident. Partly due to the decline of corporate pension plans, mutual funds have grown widely popular and commonplace. Index funds have given millions of people relatively low-cost access to the stock market.

How the finance world have come around. At sometime MFs were basically sponsored/supported by banks (directly or indirectly). Now, they own these very banks. All pretty complicated game of ownership…

CFA exam’s toughest question: What’s the payoff of the course?

June 10, 2016

One was just having a discussion with a friend over this issue of payoff from education. Being a purist the blog tend to argue that oen should just see payoffs from education. After all there are many education streams which may not lead to immediate payoffs like say arts etc. But then given today’s discourse anything and everything is seen from a payoff. Let everything else be damned.

So this bit on questioning payoffs of CFA (Chartered Financial Analyst) program is interesting. I mean questioning payoffs of say a history/liberal arts course is hardly a question to ask. But to see this question being posed of a finance program that too CFA is something. The turnaround of finance in the last 50 odd years as a supreme choice of profession is perhaps as big a story as any. So, one would imagine that a finance training program as globally recognised as CFA should be seen as a big positive payoyff.

Not really as this piece argues:

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Could a leap year matter so much to GDP accounting?

June 9, 2016

My good friend Vipul Mathur has finally started blogging. This is like inviting competition for oneself and threaten yourself to oblivion.

His first post is on this leap year effect on Japan’s GDP:

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Can teaching of philosophy/ethics stop future bankers from stealing?

June 8, 2016

Prof Edward Kane of Harvard has written a recent research paper titled – Ethics vs. Ethos in US and UK Megabanking. Ethics in finance? That sounds like a  sure joke to most. Banking histories across most parts of the world tell you that early form of banks and their bankers were highly despised.  No one liked them on both religious grounds (as in Islamic countries) and general livelihood grounds (too high interest rates, pests etc). How a profession has changed from being an unethical sector to a highly wanted one is quite a story by all means.

And now we have come to a different extreme where all sins of bankers are just laughed away. Despite seeing it in so many crisis recently, banking  remains a coveted job. The kind of greed the sector has shown and the way we celebrate it will even surprise likes of Gordon Gekko. I am a banker is said with a huge pride leaving others to guess the kind of salaries the banker would be making.

Here Prof Kane discusses the broad findings. He starts with he most obvious question – why do bankers get away?

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The political economy of deposit insurance and why did deposit insurance pick up?

June 6, 2016

Nice piece by Charles Calomiris and Matthew Jaremski.

Many of us might no know that India was the second country after US to introduce deposit insurance. US introduced it in 1934 and India in 1961. In both countries, central banks primarily came up to look at the banking crises. Paradoxically, bank failures only grew post central banks coming up int eh two countries. It actually boiled down to introducing this deposit insurance scheme which stabilised the system and prevented bank runs.

One can always argue over costs and benefits of deposit insurance. But the kind of drama we have over central banks role in financial stability, much credit goes to these deposit insurance schemes as well. Though, this insurance bit has obviously interfered with market mechanisms. Earlier depositors had atleast some incentives to try and figure good banks from bad ones. There was some process for that weeding to happen. Now there is no such incentive as you know govt will give back your deposits via this deposit insurance scheme. It is also true that banks do not promise to pay back all your deposits in case of a crash. The insured amount is only RS 1 lakh and anything more you will lose that money. But as this  has barely happened, so depositors given their savings fully confident that 100% money will come back. All banks have become too big to fail no matter how small they are in the scheme of  things.

Coming to the topic. The authors say it is really surprising that the world took so long to introduce this facility after US introduced it in 1934. What triggered the rise? Politics of course:

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Profound changes in economics have made left vs. right debates irrelevant..

June 2, 2016

Eric Beinhocker has a long piece on how economics can become a better subject.  He says we need to make economics more realistic and that should be a good thing.

The idea is to move from the traditional camp based thinking to new thinking which is more flexible.

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Minsky moment for Australian banking?

June 2, 2016

The usual thing is to make hay when sun is shining. But this does not seem to work in banking/finance. It is when sun is shining that risks emerge. This is also what we also call as Minsky moment.

Satyajit Das has a piece on Australia and says all that glitters is not gold: (more…)

Why monetary economics and financial economics are taught in silos?

June 1, 2016

This blog has always believed (along with few others) that for economics to go forward we need to really sort out our economics education. This crisis is about fixing our econ education as much as it is about fixing all the jazz like macro policy, financial institutions etc. If we  don’t fix the former and jus keep the focus on latter as is the case, it will just be a ban aid solution, True, education will not ensure that there will be no crisis in future but it will just make us realise that economics is hardly a linear subject and needs to be studied with other disciplines.

What we have instead is highly siloisation of economics where you just study standard stuff without any politics, history, society etc meshed in the curriculum. Even worse is siolisation within economics. One is just a macro person, other is just a micro person, yet another is a finance person and so on. One may not need to know anything about the other. This blogger too has been a victim of this siloisation, a huge limitation which does not just go away thanks to years wasted in silos.

Ironically, this silo creation is one of the crucial reasons behind the crisis and acts as a hindrance to solve the issues. This silo is between monetary economics persons and finance persons. How do you fix the issues going forward without understanding the linkages. This blog has written about this silo issue earlier as well.

In a recent post, Prof Peter Mehrling mentions how attempts are being made to limit this bifurcation:

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Should US opt for longer term bonds of say 50 year and more?

May 24, 2016

The term premium to hold long bonds is in negative and lowest since JFK era.

Barry Ritholtz makes a case for US issuing 50 year treasuries. One can always debate pros and cons of ultra low rates. But the least US govt could have done is to take advantage of these low rates and issue much longer term bonds. Currently it stops at 30 years whereas so many countries have issued 50 year ones:

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What is it like to be the first US bank to do business in Cuba?

May 24, 2016

Here is an interview of David Seleski, CEO of Stonegate Bank which became first such bank. The interview reveals how a bank both gets trapped in bad relationships between two countries and also shapes them:

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How Financialisation is destroying US economy (how far is India from it?)

May 23, 2016

Rana Fourhar of Time Magazine has penned a new book on how Financialisation is destroying US economy. INET has an interview and here is a brief overview of the book by the author herself (thanks to Gulzar for the last link).

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Greece in a monetary union: Lessons from 100 years of exchange rate experience, 1841-1939

May 17, 2016

Greece’s troubles on economic front are hardly anything new. They are as old as it gets.

Matthias Morys sums up the experiences of 100 years since 1841-1939.

Culture in financial services..a much neglected and a very important domain

May 17, 2016

One has been trying to read as much financial history as possible across countries. It is all fascinating to read through accounts of ways things were financed back then and the hardships faced. One also comes across how financial innovations of today were used historically and there is hardly anything modern or innovative about them.

Another thing which emerged is strong cultural and trust values in banking firms. Firms that instilled these values early on and remained committed survived much longer than their peers. Leave all balance sheet analysis and financials aside. It is this cultural aspect which matters as greatly for both survival and growth of a banking firm. This applies to most firms but much more to banks for whom gaining trust and maintaining it is really central to everything.

The crisis of 2008 is leading all these lost values to come back.  Regulators stinged by the crisis despite all the fancy financing techniques and Basel norms, now realise culture of a firm is what matters at the end of the day.

In this speech, Andrew Bailey of Bank of England sums up the issues:

There is a reasonable debate about what is culture, but that is not a debate about whether it is important.  In my view, culture is a product of a wide range of contributory forces:  the stance and effectiveness of management and governance, including that well used phrase “the tone from the top”; the structure of remuneration and the incentives it creates; the quality and effectiveness of risk management; and as important as tone from the top, the willingness of people throughout the organisation to enthusiastically adopt and adhere to that tone.  Out of this comes an overall culture.  It is not something that has a tangible form.  As supervisors, we cannot go into a firm and say “show us your culture”.  But we can, and do, tackle firms on all the elements that contribute to defining culture, and from that we build a picture of the culture and its determinants.
 
Culture has a major influence on the outcomes that matter to us as regulators.  My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top.  Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel. We talk often about credit risk, market risk, liquidity risk, conduct risk in it’s several forms. You can add to that, hubris risk, the risk of blinding over-confidence.  If I may say so, it is a risk that can be magnified by broader social attitudes.  Ten years ago there was considerable reverence towards, and little questioning of, the ability of banks and bankers to make money or of whether boards demonstrated a sufficient diversity of view and outlook to sustain challenge.  How things have changed.  Healthy scepticism channelled into intelligent and forceful questioning of the self-confident can be a good thing.  In turn, culture matters to us as financial regulators because it can, left alone, tend to shape and encourage bad outcomes, but it doesn’t have to do that.
Happy revisiting history.
So what can regulators do and not do?
What can we do therefore as regulators to shape and influence better outcomes on a more consistent basis?  Let me start with one thing that we cannot do.  As regulators, we are not able, and should not try, to determine the culture of firms.  We cannot write a regulatory rule that settles culture.  Rather, it is the product of many things, which regulators can influence, but much more directly which firms themselves can shape.  We seek to ensure that firms have robust governance, which includes appropriate challenge from all levels of the organisation; and promote the acceptance that not all news can be good and the willingness to act on and respond promptly to bad news.  We insist that remuneration is structured to ensure that individuals have skin in the game, namely that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge.  We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls.  All of this is important and central to what we do as regulators, but let me reinforce the point that culture begins and lives, and I am afraid dies, at home, with firms.
 
It is not for us as regulators to prescribe culture, that would not work.  Firms and their management have to want good culture.  But we can have a lot of influence here. 
Then he sums up the steps taken by BoE to try and influence culture:
In the last few months we have taken a very important step here by introducing for banks the Senior Managers and Certification Regime, as proposed by the Parliamentary  Commission on Banking Standards.  It replaces the Approved Persons Regime, and in time it will be implemented across the regulated financial services sector.
 
There is, let me be clear, no magic bullet to change culture, but the new regime is a big step forward in my view.  This is because at its heart it embeds the notion of personal responsibility for the affairs of the firm at the level of senior management.  The Approved Persons Regime did not do this, and in practice it focused on a notion of culpability not responsibility.  These two notions are different.  I have said many times, but will keep doing so, that senior managers cannot delegate responsibility.  To be fair, many have said to me over the last few years that this change does not make a difference for them as they always thought they were responsible.  Good.  But, set this against other conversations I have had which have doubted the enforceability of this notion of responsibility.  This has concerned, but not distracted me.  So, to be clear, responsibility is the central plank of the new Senior Managers Regime.  We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation.  In this respect culture is no different to strategy; where are we today, where do we aspire to be tomorrow, how will we get there and what risks must we mitigate along the way.
 
Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed.  But, let me reiterate that it is not the job of regulators to enforce culture and to change culture.  If we have to step in, and occasionally we do, the overriding conclusion is that management has failed.

Alas, none of these measures are likely to work much. These things are pretty much inbuilt and historical. Moreover, there is no guarantee that once culture is set, it will continue. Change of senior management who do not believe in culture and history undo all the goods of the past and then sow the seeds for eventual destruction of the firm..

Peer to peer lending: Old wine in a new bottle..

May 12, 2016

If one gets an idea to write on, he/she should write/blog about it immediately. Else, someone will write about it soon. This is one such article.

There has been a lot of noise about this word P2P  (peer to peer) in financial world recently. What was essentially a term used in tech industry for sharing music, movies etc pioneered by likes of Napster, has come to hit the world of banking/finance.

What does P2P banking mean? Like in tech world, where a person creates a music file and shares it with others via a tech platform, same is the case with P2P banking as well. Some person with funds lends it to others via a tech platform as well. Important to note the role of individuals here. Unlike a music firm or a banking company this time the distribution of music/funds done by individuals. Just like tech made it easier for people to share music, same tech helping to make it easier for people to lend funds.

Sounds exciting? Yes it does but we know what happened with all these P2P music/video platforms. Eventually, the big firms lobbied to throw these guys out of business. One could expect banks to retaliate in similar fashion as well in future.

But the point is even deeper than this. P2P banking is hardly anything new. It is perhaps the oldest form of banking when people lent funds to others as there were hardly any organised form like a bank of today. In India, there were several such forms of P2P banking which British together called as indigenous banks. Within these indigenous banks, there were nidhis, chit funds etc which were nothing but P2P forms of lending. Group of persons came together to lend funds to each other minus all the tech of today. Infact, the tech then was trust, social networks, peer pressure etc.

This is what Mr Rajwade also says in this article:

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