LPG, Reforms and Management Education!

India, embarked on republic status and planned era immediately after independence in 1947.  Constitution was well drafted by the elders and brought into implementation in 1950-51. Socialistic pattern was also adopted while focussing simultaneously on Agriculture (Primary Sector), Industry (Manugacturing-Secondary Sector) and Services (Tertiary Sector) through the Five Year Plans. Areas were clearly demarcated between Center and State Governments.  Of course, the Constitution was amended about one hundred times in last sixty years for social or political reasons.  Banks and Financial Institutions were either set up or nationalised with a view to take the developmental efforts to the grass roots; but there has been urban and rural divide.

Education is stated to be a State subject.  However, Centre also keeps involving in evolving policies, in particular when concerned about setting up IITs, IIMs, NITs and Central Universities.  In the recent era of reforms in the name of Liberalisation, Privatisation and Globalisation several changes are taking place in the Education sector.  The extent of proliferation of Engineering Colleges needs to be discussed because the Degree Colleges for Arts, Sciences and Commerce have almost been eased out.  Whether we have good infrastructure or qualified teaching fraternity, these mushrooming Engineering Colleges have been started by politicians or ex-people's representatives as an money making mechanism.  And then Government also opened up to set up more and more IIMs, IITs, Private Universities, Deemed Universities in recent years. 

In the space of Management Education, thanks to increasing privatisation there has been uncontrollable proliferation of MBA colleges (or PGDM Institutions) under University System, as also as autonomous colleges.  The regulator has been very liberal (!) in allowing more and more such institutions because private sector has been growing steadily during reforms era and absorbing these management graduates but the question again whether even these institutions have adequate infrastructure like libraries, class rooms, computer laboratories let alone qualified teaching personnel.  Of late, more than twenty business magazines and market research organisations have been carrying out ranking and playing havoc with the aspirants.

And very recently there seem to be some developments that the regulator is toying with the idea of streamlining the large size of MBA colleges or PGDM Institutions particularly those in private hands under the so called autonomous system.  A notification appeared recently that there would be standard duration of 24 months, Admissions procedure, fee structure curriculum, evaluation, etc to be decided by the State Governments concerned or the regulator in the immediate months.  We have got to see how the field shapes up.  All in the name of Reforms!

RBI's policy of allowing New Private Banks in India

http://www.thehindubusinessline.com/2010/12/24/stories/2010122454210600.htm

It is very interesting that after having allowed twice, RBI is acting choosy and careful in allowing new private banks on the Indian scene.  Immediately after introducing economic and financial reforms in early nineties, RBI went on permitting new private banks while simultaneously reforming the public sector banks and old private banks besides of course inviting new foreign banks for a level playing field in India. 

The industry witnessed founding of HDFC Bank, ICICI Bank, IDBI Bank, Times Bank, Global Trust Bank, UTI Bank, Bank of Punjab, Centurion Bank and Development Credit Bank (converted from a Coop Bank), in the first phase with a minimum capital requirement of Rs. 100 crores.  However, very soon Times, BoP and Centurion got merged into HDFC Bank for some strategic reasons besides ICICI and IDBI went ahead with reverse mergers.  GTB got force-merged with OCB (public sector) while in the second phase, YES Bank and Kotak Mahindra Bank were born with a capital requirement of Rs. 300 crores. 

In as much as about two decades time, almost all the PSBs (including SBI group) got revamped and well capitalised to meet the global standard CAR of 8% and above in a phased manner.  Foreign Banks of course, some how did not take the advantage of the RBI's invitation to expand, may be primarily due to the rigid monetary mechanism and compliances.  And today, in its third phase, RBI is dilly-dallying its well announced policy of allowing more private banks.  The objections raised by the PSBs not to allow too many private banks (conceding some NBFCs and MFIs) with a capital of Rs. 50 crores or promoted by Corporates which is against the basic philosophy of two nationalisations in 1969 and 1980 earlier. 

Interest Rate War again?

In the pre-reforms era, it was a regulated, administered and directed regime.  RBI used to fix up the interest rates - be it for deposits or advances and advise the bankers (public, private or foreign) to follow.  All the lending also was at the directions of the regulator or government and the banks has almost least opportunity to choose their customers. Come reforms, out of the several changes introduced, deregulation of interest rates on deposits (except Savings Bank a/cs) and loans (above Rs. 2 lacs and DRI scheme loans) have been left to the market forces and banks were given free hand to decide and earn profits.  Simultaneously several other accounting changes like shift from accrual basis of interest calculation to actual method were introduced.  In the process, a competitive scenario set in and there was a level playing field in the industry.

A new concept called Prime Lending Rate (later Benchmark Prime Lending Rate) mechanism was introduced.  Banks were closely revieing the market conditions, their own Assets and Liabilities in the Balance Sheet on almost daily basis and offer new products and services as also price them very scientifically. This year, there is again a departure in the Interest Rate mechanism.  A Committee recommended to bring in Base Rate of Interest policy in place of BPLR.  Any bank, in order to earn profits and sustain, has to recover its cost of funds (deposits and borrowings), administrative expenses and allow for a decent profit margin (Net Interest Margin) and then fix its lending rates.  They have obligation to comply with the 40% Priority Sector Lending to Agriculture and Small & Medium Industries / business too.  Similar offer to be given to Exporters and others.  So, they have got to follow differential pricing catering to different types of customers in their portfolio. 

SBI announced its Base Rate at 7.5%.  http://www.thehindubusinessline.com/2010/06/30/stories/2010063053890100.htm Other banks were waiting but hoping to fix this rate at around at least 8 to 8.5% pa.  Syndicate Bank, PNB and some more are likely to announce their rates today because the effective date for Base Rate implementation is July 01, 2010 (it was already postponed from April 01, 2010).  It is likely that a scenario of interest rate was is going to emerge in the coming fortnight because every bank would like to comfort its borrowing customers as also the depositors.  RBI Monetary Policy review is going to be held on July 27, 2010.  Inflation is at double digits.  Banks' profits can not be squeezed with a trend of increasing Non Performing Assets in general.  We need to wait and watch the happenings now.