Bigger, Better CIRcle

One of the more fulfilling assignments in my career was in a role managing consumer debt in the Indian banking and financial services industry. I had started in mid-2007, when signs of stress were unmistakable in our portfolio, and enough to discern similar trends across the sector. They were the direct consequence of indiscriminate lending and immature borrowing practices that had been rampant earlier in the decade. Naturally, the resultant losses led to tighter credit policies and general housecleaning, with varying degrees of success, across all players.

Though mandarins at FinMin and RBI downplayed it, but this improved hygiene had a major hand in ensuring that our country emerged from GFC 2008 relatively unscathed. Thus, while capital flows and liquidity hit a reset globally, one of its key facets, namely burgeoning consumer debt and subsequent borrower impact, largely gave India a miss. I argued too, with a ringside view, that rise of credit bureaus was one of our most far-reaching gains from this period ("CIRcle of Life"). They emerged from the shadows in those days beset by uncertainty and churn, and have remained a vital cog in the industry’s wheel ever since.

GFC is now but a distant memory (save for some of us). Credit offtake has reached or exceeded pre-crisis levels in most economies globally. Consumer indebtedness is not yet a concern, including in India. Everything points to business-as-usual. Hence, it is vital that we address any gaps in credit management before lessons of 2008 are entirely forgotten.

The most visible of these is our weak credit reporting framework. Despite having moved away from Indian consumer finance (in a work sense) I still hear enough stories around inaccurate reporting of defaults, especially around old write-offs that have simply been mis-recorded. A chunk of these are false positives from identity mix-ups by CIBIL and or the lender in question. Equally, there are instances of bad data like closed credit card annual fees, collection agency fraud, disputed charge write-off etc.

No less worrisome is the imbalance of power that puts the onus for data clean-up entirely on the consumer. Processes to do so in a few banks are reasonably unfriendly too. Most important, though, is the opportunity cost. Almost all cases I know came to light when the consumer has applied for fresh credit, often for big life events like home purchase. In at least a couple of cases (till my advice to the contrary) folks were even willing to honour an incorrect demand in order to get a “clean CIBIL” (motivated by the math of charge being in hundreds versus credit need that is much larger). This is hardly kosher.

It goes without saying that the issue needs a fix at source. Banks must be taken to task for irresponsible reporting, with a threat of monetary compensation to disincentivize laxity. In most mature markets, this is secured by legislation (FCRA. CCA, Privacy Act etc). If needed, the government must consider similar consumer protection laws in India as well.

The other issue with credit reporting is coverage. There is a strong argument to expand consumer behaviour monitoring, in the Indian context, to telecom payments. The rise of wallets and payment solutions are blurring the lines here in any case. Yet, this could well be an apres moi le deluge moment. Dimensionality of credit data would multiply (volume, churn, nature of disputes etc) were this to happen. It makes it incumbent to establish the ground rules now, with a much better defined financial services scope.

Crises, as students of economics know, are cyclical by their very nature. Hence, we must act now, so as to be better prepared when the next unforeseen strikes. Lest history judge us differently.

A House Divided: The Script of AP

Andhra looms large in my Weltanschauung. Notably, I lived in Hyderabad back in 2005-07, making many friends for a lifetime (in one case, hopefully longer) during my sojourn. Scores more over the years have hailed from Telugu-land. Rare among this breed, however, were those who believed possible what shall become a reality later this year (having lived through BR turning BR + JH, I was much more sanguine). Erstwhile AP shall split, and Telangana shall be State #29 of the Union, come June 2!

Much ink has been expended on the why. Of these reasons, none is cited with more vehemence or consistency than historicity. Indeed, the idea harks back to the India of sixteen mahajanapadas in the form of Assaka. Yet, through the Satavahana, Vakataka, Chalukya, Rashtrakuta, and Kakatiya periods, the borderlines remain fluid. Come the Nizams and the 1799 alliance (which gifts Rayalaseema and Coastal Andhra to the British while retaining Telangana within Hyderabad) and the map starts to take shape. Then, of course, comes the Telangana rebellion against the Nizam and the Doras, building the groundswell for Hyderabad's merger with India and culminating in Operation Polo on September 17, 1948.

Enter Potti Sreeramulu. Overcoming Prime Minister Jawaharlal Nehru's long-held opposition, a language-based Andhra state comes into being in October 1953—almost directly in consequence of Amarajeevi's sacrifice—comprising seven Coastal region districts along with four from Rayalaseema (and no Telangana!), with Kurnool as capital. Genie out of the bottle, demands to redraw the map of India on a linguistic-regional basis proliferate across the country, forcing Nehru to appoint a States Re-organisation Commission. This is where it turns into a veritable political thriller.

The SRC, headed by the PM's beloved Fazl Ali (and including the venerable KM Panikkar, HN Kunzru et al), recommends in 1955 the formation of separate Andhra and Hyderabad states, considering economic disparity and relative misalignment in public opinion with respect to unification. Note that this is entirely in line with Nehru's concerns around the “tint of expansionist imperialism” in the Telangana-Andhra merger, with the PM going so far as to compare it to a matrimonial alliance needing “provisions for divorce” if the partners cannot get on well. At the very least, the SRC indicates a five-to-six-year cooling period before considering Vishalandhra. In a strange u-turn, a forever-sceptical PM now overrides his own SRC, not to mention earlier JVP and Dar commissions, to deliver a unified Andhra Pradesh in 1956!

Much has been speculated about Nehru's rather uncharacteristic volte-face—whether driven by blackmail by Andhra elites, the spectre of a communist Telangana, threat of royalist-Muslim revival of Azad Hyderabad dream, or a Soviet-influenced vision of mega-states. Or, perhaps more characteristically, the idealist in him was taken in by the 'Gentlemen’s Agreement' (in the main for political power sharing with a CM/Deputy CM split, a 60:40 Cabinet composition, job protections via Mulki rules, no revenue surplus diversion, and oversight via a Regional Committee as a special legislative body). Regardless, Nehru wilted, and in so doing, virtually wrote the exact script of the subsequent movement and eventual division.

Of course, in the typical arc of history, it took a few years for the union to entirely unravel. The Agreement itself was violated almost at once: Deputy CM post frequently left vacant or abolished; job quotas bypassed; Telangana surplus diverted to fund major irrigation projects in coastal Andhra etc. The ground continued to simmer: over 350 students lost their lives in 1969's First Telangana Movement; TPS won 10 of 14 seats in 1971 only to be co-opted into the Congress ranks in true Indira style; the 1973 Jai Andhra counter-movement that led to abolition of Mulki protection; and NTR's 1985 Government Order 610 to repatriate non-local appointments etc. Much was promised, little delivered, and for an illusory period of peace, it appeared that the demand for separate Telangana had petered out.

Cut to 2000. Chandrababu Naidu was at the peak of his political prowess. Having secured a crushing victory to enter his second term in 1999 and deeply allied with the ruling NDA at the center, he was internationally celebrated as a tech-savvy "CEO" Chief Minister. The Congress, led by the feisty Y.S. Rajasekhara Reddy, was entirely unable to breach Naidu’s development-focused narrative. Against this backdrop, a certain K. Chandrashekar Rao, then Deputy Speaker of the Assembly and disgruntled at being denied a cabinet post, sensed a massive blind spot in Naidu's Vision-2020 plan: the severe agrarian distress and deep feelings of neglect in the Telangana region. He walked out of the TDP and formed the Telangana Rashtra Samithi. There has been no looking back since, and in just over a decade, the statehood demand has fructified.

Naturally, as clear catalysts, KCR-TRS are being feted for their contribution toward the realization of the Telangana dream. What is less obvious, and arguably more pivotal, has been the Congress's strategic role. India's GOP may or may not have orchestrated his exit from the TDP, but they intentionally elevated KCR to legitimacy, forming an alliance in 2004, and including a promise for the reorganisation of states in their common manifesto. With this, they fractured TDP’s Telangana vote bank, sending Naidu into political wilderness for the last decade. What's more, when in power, the Congress carefully sustained the Telangana issue on a slow burner to keep the TDP perpetually at loggerheads internally, utilizing this friction to encourage a steady stream of desertions that have severely hollowed out Naidu’s regional leadership. For now, at least in Telangana, it appears bye-bye TDP.

Where does that leave the Congress? The bifurcation has obviously been inspired by massive anti-incumbency both nationally and regionally. Fact is that much of their woes are the outcome of a sense of entitlement and being too smart for their own good. This move appears no different. Thus, in the Congress high command's calculation, the division finishes Naidu off forever, checkmates a rising Jagan Mohan Reddy, and hopefully gains KCR as a long-term ally (for an eventual merger). I would be surprised by either outcome. Naidu will now double down on residual Andhra, and it is likely to be a two-way fight between him and Jagan for the foreseeable future. And KCR is unlikely to share power when he can reign absolutely. Eventually, the plan backfires on the Congress itself.

In summary, yes, one must justifiably expect celebrations galore in Telangana and KCR-mahal come June 2. And yet again, the fortunes of the country and its states have been held hostage to the Congress's partisan machinations and short-termist outlook. Chacha Nehru then, Sonia Gandhi now. Here's to hoping that this script changes nationally soon...

Inflation Bonds: Flatter to Deceive

Months in the making, the Reserve Bank of India has finally launched consumer inflation linked bonds. Going under the moniker of 'Inflation Indexed National Saving Securities - Cumulative' (a mouthful, if ever), these bonds had been the subject of much anticipation. Alas, the fine print finds them come up woefully short.

The biggest stumbling block is tax treatment. In most countries with such bonds, the formulation goes broadly thus: pay the investor a nominal interest rate on face value while letting the FV float in line the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are accounted as capital gains from the taxman's lens.

To take a line from the fabled Maggi sauce commercial, the IINSS is different. It has been structured as a bond paying interest, the rate of which is pegged to the Consumer Price Inflation index. By implication, the entire interest earned qualifies as income, to be taxed at the marginal rate. To be fair, if only the inflation-compensating portion been subject to capital gains, it could have benefited from indexation. Clearly Fin Min and or RBI thought otherwise.

Several sticky points other than taxation come up too. The typical desi fixed-income investor, mostly given to income, may not line up in droves for the compulsorily cumulative IINSS. To boot, the lock-in period itself is rather long at 10 years. Such an extended tenor may only accentuate inflation and interest rate uncertainties that scare away investors. Early exit is possiblle, but only after 3 years, and with a penalty. Finally, there is an unfathomable 500K investment cap. All told, I don't see investors being inexorably drawn to IIMSS (versus, say, infrastructure bonds with friendlier format and better post-tax return.)

Be those as they may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be activey sold (occasionally with little correlation to merit, ULIP being case in point). I wouldn't hold my breath for this though: these bonds are to be sold only via banks, and their low commission structure is unlikely to be incentive enough there.

Perhaps I am being overly cynical. Maybe IINSS is a step forward, but it could have been so much more. Certainly, days into his tenure, our rockstar RBI Governor had himself talked the big game as to it's market-making potential. At least on that count, if not more, this is an ahem.

Raja Beta Banega Neta!

No, this is not a rant against dynastic politics. Only an ostrich, or your Congressi blessed with archetypal thick skin, would have missed its disastrous limitations. Fact is that India of the present pretty much makes the case for misfortunes that result when power is thrust in the hands of those with credentials mostly limited to parentage. Thankfully, though General Elections are a year away, but the writing seems to be on the wall for sundry dynasts and their brazen sense of entitlement.

My pitch today is almost the opposite. For our polity to step up, more of our bright young things ought to be encouraged to don the political mantle. This, however, is a long walk from current reality. Quiz any Indian schoolgoing child about career ambitions, and it would be difficult to transcend familiar doctor-engineer-civil servant territory. Yes, MBA has gained some coinage as a livelihood option in the last decade or so; and there will the occasional interest in bijness (often running in the family); but you can bet the barn against finding anything more than the odd aspirant for public life.

Yet, at many levels, politics is the top of the pyramid. Take a country like ours, and it is easy to argue that professionals of all ilk actually have to defer to the neta class more often than any other. Apart from an undeniable power to do good, it is not as if there is no economic upside either (and that is without perforce resorting to UPA my-kursi-is-my-ATM style moral degeneracy). Despite this, politics as a career somehow continues to be considered lowly and fit only for 'the scoundrel'.

Of course, this is in stark contrast to democracies housed in the more developed nations of the West. Politics is right up there with Medicine and Law as career choices for the nation's bright minds. Sure, there are jokes on the neta as much as, say, on a banker, lawyer, movie star, or any other. However, there is no sustained scorn or uniform vilification of the kind we see locally. Thus, talent does enter, and often from the unlikeliest of quarters. In the US, for instance, from a Lincoln to an Obama, politics has accorded means for the the proverbial outsider to rise to the very top by dint of merit (and some timing; but such is true in all walks of life). Must we be so very different?

The mostly commonly profferred hypothesis for this dichotomy seems to be the vintage of those democracies. Somehow, barriers to entry are lowered as the democratic model matures over time; and (eventually) the cesspool of politics becomes less murky. However, in this respect, our record of the last few years has been rather uninspiring. One does not have to look farther than the principles that were IAC, to the compromise that is Kejriwal, in order to understand this gap.

Thus, the AAP's apparent descent from the promise of breathtaking change may have ramifications beyond the obvious. Will similar future efforts be equally torn asunder by the fallibility of a few? Were they felled in trying to do much too soon; and is that all we must guard against? Or must we be willing to tread the longer path by galvanizing from within, centred around the two national parties? With the Congress seemingly intent on self-destruction, at least part of the answer is clear. That time is now.

Karnataka 2013: What Next?

It may not have made a monumental difference to its result. Yet, I did not enjoy being forced to watch the recent state elections in Karnataka entirely from the sidelines. I had little choice though. Our move to India's IT Capital was far too recent for us to have a vote, and I got a taste of what it would feel to be among the disenfranchised.

As it turned out, the contest was even more one-sided than expected. The incumbent BJP dispensation, battling misgovernance and corruption charges as much as a widely perceived disconnect with the electorate, was always faced with an uphill task. Perhaps it would have weathered the storm better. However, a three-way split in its vote left it with no chance. A beleaguered Congress, stung nationally by a second summer of scandal (and intervening winter of discontent), had some reason to cheer with a clear mandate in the state.

I don't know if many in the BJP were surprised by the result. Sure, India's principal Opposition party would have been happier if not pipped to #2 status by an HDK led JD-S. Equally, they rightly worry about the ground ceded, not only to a resurgent Congress but even the JD-S, in the usually more discerning urban vote. Yet, the saffron dream had gone sour in their fabled 'Gateway to the South' a lot earlier. Naturally, their spokespersons tried their feisty best to minimize airtime on Karnataka results, and focus debate in national media on the scam-battered Centre. (That a bumbling UPA-2 continues to provide grist to these windmills, has more to it than meets the eye perhaps; but that is another story.)

Does the Congress have enough to rejoice in its Vidhan Soudha victory? I would call it a mixed bag. Faced with a possibile rout in Andhra and expected reverses in TN, the UPA is desperately looking at states to make up its losses. As things stand, it comes up woefully short. That, incidentally is the reason behind the unashamed wooing of a Nitish in Bihar despite a 'committed' Laloo ji who remains Barkis-is-willin'. One hears of a personal subtext too in Shri Chidambaram's new-found bonhomie with the Bihar CM; a fact that Congress High Command may be unwilling to admit publicly. At any rate, gains in Karnataka help, but must be seen in context of its relatively small 28 MP size in Lok Sabha arithmetic.

How does that leave the BJP (in itself a complicated call; it seems too much to prognosticate on the NDA overall) in 2014 battle stakes? It is clear that they have their work cut out. For starters, the fixation with the leadership question is almost reminiscent of the erstwhile Janata party; as if the electoral contest was in the bag and this was the only issue left to be resolved.

At one level, the BJP's predicament is understandable. It is difficult to see the party cross 200 minus Narendra Modi at the helm (so the cadre believes). Truly, no figure polarizes the debate in India today more than he. That so few folks in our polity tread the middle ground when it comes to NaMo, must count as a significant achievement of post-2002 Congress strategy. Of course, a wide section of the media sympathetic either directly to it, or to the 'secular' cause, has willingly played ball. The last word on this remains to be said though; I am sure this will occupy centrestage over the next few months.

Coming back to Karnataka, it is do-or-die for the new regime to consolidate the vote ahead of LS elections next year. Fact is that 2014 remains a tough call. Can the UPA get its governance mechanism back enough to perform an unlikley hat-trick? Shall the BJP and-or NDA get its house in order, politically and electorally, to get third time lucky? Or will an unfortunate nation be subject to a post-poll Third Front-led ragtag coalition as many pundits currently postulate? Lets keep watching.

Corruption: Obelix and the Magic Potion

There is much in R-Day celebrations to tug at the heartstrings. Its crowning moment is the parade: rich in nationalistic appeal, celebration of valour, and pride in the achievements of a republic but a few score years old, and culture thousdands of years young.

In addition to patriotic fervour, R-Day is also just occasion for solenn contemplation. In thus ruminating over the state of the nation, one can't help but rue as to what ails its fortunes. Today, the most prominent such malaise is corruption. The affliction is hardly new, but has become so endmeic at the top, so brazen in its extent, that it has become morale-sapping and threatens the very fabric of our motherland.

This is not scare-mongering. Take black money, which has a deeply symbiotic relationship with corrpution. A few years ago, the Swiss Banking Association reported that banks in Switzerland had around $1.5 trillion in deposits from Indian nationals. Compare this illicit stash to the size of our formal economy, especially one that is strapped for investment to spur growth, and you wonder at the possibilities.

Of course corruption is hardly the preserve of those with access to Confoederatio Helvetica (or Bahamas, the Caymans, BVI, or other similar global money-laundering havens). Enough exists around us, in form of the friendly neighbourhood policeman, sarkari babu, driving licence agent, and so on. However, when the Central Govt gets as mired in it as UPA-2 has, then the nation starts to lose its moral compass. After all, what deterrence is to be expected when not a day goes by without headlines screaming obscene amounts and prominent names neck deep in graft. It appears almost no part of Dilli sarkar is left untouched.

With the stench in Raisina Hill reaching unimaginable proportions, one looks for answers. The mind goes back to a UPA-2 corruption headline of a different kind. A year or so ago, then CEA Kaushik Basu, had offered a striking formulation (endorsed amongst others, interestingly, by INFY co-founder Narayana Murthy). Shri Basu spoke of legalizing bribe-giving so as to encourage reporting, thereby improving incidence capture.

As solutions go, perhaps we need something similarly drastic to shake us off our slumber. This idea though, however innovative, is a slippery slope. It can easily degenerate from honest reporting, to wilful entrapment (lessons from news channel sting operations that have bred their own format of corruption). Stretch the point and one could start offering bribes by default. If caught, you are protected since it was only civic duty, trying to unearth the corrupt. Rinse, repeat, till a pliable babu is found. Voila.

My other bone with such legalization is how it shifts the onus of catching the corrupt to whistleblowers, thereby diluting the ownership of the relevant authorities. Like it or not, it is the government's job to identify and nab the dishonest. Outsourcing it to sundry 'citizen journalists' of potentially dubious intent and zero oversight, sounds ominous to say the least.

Much as the heart would wish otherwise, but there is no magical solution. Very little in the proclivities of the current government thus far suggest that a different, deep-rooted attempt to counter corruoption is likely to be made soon. It may take a regime change for the requisite political will to surface, and perhaps thats what one must pin hopes on, this 26-Jan.

Shape-shifting Monster

Being a toddler-parent means toys of assorted shapes and sizes are an inveterate part of existence. I have one of either gender, and would like to believe that neither is overly pampered. Yet, there moments when I am at wit's end as to how so many trinkets make their way into the house (my childhood benchmarks clearly don't apply, outnumbered 1:16 or so). At the same time, I cannot but marvel at the ingenuity and imagination that powers many of these. Colour-changing cars and shape-shifting beasts fall in this category.

It was such an object of fantasy that offered the perfect metaphor during a fevered discussion the other day. The conversation went somewhat like this: my friend, part of the domestic Insurance industry, was trying to argue for more instiutional indulgence (government, courts, banks etc) to support the fledgeling sector. At some point in the evening, the conversation went to ULIP, one of my pet peeves, (as I have written earlier), thereby prompting the monster reference. I don't know how the tete-a-tete ended (some Dalmore was involved!); but perhaps a few notes from it bear repitition.

In a nutshell, that India is under-insured is in no doubt, but there's more to the picture. We ought to know too that, other than bank deposits, Insurance is the most popular financial product in town. It has a legacy that goes back decades: LIC in its present avatar itself is about 60 years old; National started in 1906; and there were companies in this business in most of the 1800's. So the industry is no babe in the woods.

Cut to the present as well and data shows 20% of household savings going into insurance (all of Equity including MF is at a paltry 5%). Likewise, take AUM: Insurance is 10X of equity MF, with ULIP alone being more than double of Equity MF at last count. Insurance, therefore, can hardly claim not to have felt the love.

This brings us back to the point on ULIP. Just the last 10 years have seen the industry peddle them aggressively to a gullible public, with disingenuous advertising and aggressive distributor incentives. The opaque nature of ULIP performance reporting and high exit costs were common knowledge, perhaps even deliberate. Certainly they did not speak to any genuine effort to serve the Great Unwashed.

The IRDA did (belatedly; and perhaps only driven by turf war) attempt to rein in the monster. Fee structures as well as rudimentary visibility levels were mandated. Yet, even after 2010, the most notable message we heard was ‘new, improved’ plans accompanied by significant switching cost. Shape-shifting right there!

In truth, glancing beyond ULIP at traditional plans too show up the industry as pretty lazy. Despite lofty goals of under-insured India etc, these products (term cover is a particularly glaring need) are sold with terms mired in complicated legalese, unfriendly surrender and claims processes and overly high sales commissions. Once again the IRDA has attemped some fixes, but these are arguably half-hearted or too late.

Summarizing, it is not difficult to posit that the Insurance industry has itself to blame for much of its ills. If only the Indian investor was a tad more discerning (and not perplexedly averse to equity), the heat on them could, in fact, have been worse. For now though, the monster lives to see another day.