Takeover of Private Sector Banks

It is expected that post March 2009 the RBI will permit foreign banks to takeover Indian private sector banks. However, restrictions on expansion by foreign banks may not be relaxed concomitantly. This has already led private sector banks valuations to reflect some kind of a takeover premium. One analyst had in an interview mentioned that the value of a mere licence (no branches) would not be less than US $ 500 million.

If indeed the RBI does permit takeovers the shareholders will enjoy windfall gains – gains in the nature of rents rather then a return on efficiency or profitability. Since a bank and branch licences have been made a scarce resource by the authorities it is not clear why shareholders of banks lucky enough to hold licences should enjoy such gains.

So either the RBI should permit free entry with few restrictions. Or it should sell or auction banking or branch licences. The prices and modalities are matters of details that can easily be worked out.

The several billion dollars that can potentially be earned from this exercise rightly belong to the people of India and not a few shareholders. Even so private bank may be taken over but that will be for their assets or branch network, not the scarcity value of a licence.

Priority Sector Lending

With the recent changes to the category of "weaker sections" (priority sector lending), loans doled out to Azim Premji in Bangalore and Sharukh Khan in Mumbai would be classified as such since they belong to the minority community.

As the list of priority sector lending is expanding (diluting?), soon it will cease to mean anything. That is the silver lining though banks will continue to suffer administrative costs of maintaining and showing compliance.

Tata’s small car vs. the autorickshaw

According to reports, the one lakh (100,000) rupees car due in 2008 will have a diesel engine, seat 5 including the driver and meet current safety and emission norms.

Analysts have trying to ascertain its possible impact on the demand for the current leaders in the small car segment and for motorcycles.

However, no one has tried to gauge what it could do to the autorickshaw. The latter seats 4 including the driver. It is also open from the sides and is likely to be less comfortable and safe than the car though cheaper to run.

But if the Tata’s can hold the price and get it approved as a taxi we may have a very interesting battle on the cards.

Another take on Suicides by Farmers

Suicides by farmers are said to be indicators of general agricultural distress. P Sainath has written extensively on the matter (recent articles are here and here). He estimates 100,000 suicides over the past 14 years. Ajit Balakrishnan too wrote a column, based on a book he had read. I was unable to acquire the book so will rely on his column.

Based on the writing of these two authors and other media reports one can attempt to reconstruct the profile of the farmers who took their lives. What we can gather is that they were land owners (not landless), had frequently leased-in additional land, invested in irrigation and had borrowed sums which by Indian standards were not inconsiderable – several lakhs of rupees in many (most?) cases. The farmers didn’t fall into penury immediately either - they did make money and used it for consumption and to increase their scale of operations.

So what goes wrong? At some stage income suffers due to production declines (pests, water scarcity) or adverse price movements. Or expenses mount due to marriage or illness. There is little cushion and an inability to meet interest and principal repayments or even lease amounts.

This, harsh as it may read is the world of the aggressive farmer-entrepreneur. A risk taker whose calculations can and do go wrong. Unfortunately the leveraged nature of the enterprise leaves little room for tidying over or recovery. Not that only farmers are prone to this. Large sections of the corporate sector periodically go through the same. And this is a familiar tale in financial markets where over-leverage has led to the downfall of many a trader including Nobel prize winners but seldom with such tragic endings.

Note also that it is not agricultural labourers or the truly marginal farmers who commit suicide though they suffer endemic hunger and acute destitution. It is the farmers who are better endowed. Further, the phenomenon seems to be largely prevalent in select, not all parts of Andhra Pradesh, Karnakata and Maharashtra. By no means are these the poorest parts of India.

Why distress leads to suicide is the other part of the puzzle. This author can add precious little to that discussion except refer to a fascinating discussion on the subject in The Tipping Point by Malcolm Gladwell.

The intention of this note is not to blame the victim but to try and understand the genesis of the problem. Only then can we find a proper solution and avoid potential problems as with micro-financing, now very much a rage in India.

In search of the aam admi

Mani Shankar Aiyar’s is annoyed with the UPA for neglecting the aam admi (common man). He fears the party may lose their support if the economic policies of the government are not corrected. So what could the government do? Here is a suggestion. Follow its Tamil Nadu ally - the DMK.

Recently, on completing one year in power, the DMK government took out an advertisement detailing its “innumerable achievements”.

No. 4 on the list is “Free colour television sets for all needy families”.

Let’s not get cynical now. If the aam admi is being provided free TVs it may say something, maybe a great deal about poverty in the country. And even a free TV needs electricity and a cable connection or an antenna to work.

In a post Dr. Ajay Shah has expressed his dissatisfaction with the official statistical system and in particular the measurement of poverty. He also suggests measuring the number of non-poor and does so using ownership of telephones. However, converting the total number of telephones into the number of non-deprived households/people requires making several assumptions at various stages.

Here are 2 simpler and direct proxies.

One, the National Readership Survey (NRS 2006) estimates that 110 of the 220 million households in India have TV sets. And about 70 million of them have cable or satellite connections. Two, the number of LPG connections as of March 2006 was nearly 90 million.

These two measures are more direct and don’t require any adjustments except for a minor one to account for non-household LPG connections.

So using Ajay Shah’s figure of 5 members per household (though Census 2001 is closer to 5.5) and adjusting for growth over the year would suggest non-deprived population of 600 million (TVs) and 500 million (LPG). Ajay’s estimate is 566 million.

These are levels. What of growth? Clearly mobiles, now increasing by 6-7 million new connections per month outpace the other two. However, 10 million or more TVs are sold every year and LPG connections are five times what they were 15 years ago and the double-digit rate of growth continues.

So who is the aam admi? Clearly the top 20-25 % of the population doesn’t qualify and by the same logic nor does the bottom fifth. So the common person (?) must be the in middle 40-50% of the population. She is likely to savour instant noodles cooked on the LPG stove as she SMSes her vote on her favourite character in the latest TV serial. I wonder if Mr. Aiyar had this notion in mind.