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At cross purposes: FM Chidambaram
(left) and RBI's Reddy |
Is it just another procedural wrangle
or is it an indication of the growing rift between the Ministry
of Finance (MoF) and the Reserve Bank of India (RBI)? There have
been far too many runs-in between the department run by P. Chidambaram
and the organisation headed by Y.V. Reddy for this to be dismissed
as a coincidence.
The latest? A disagreement, or, shall we say, policy debate,
over easing remittances for the purchase of trademarks or franchises.
In a move to give more autonomy to commercial banks, the MoF,
on July 11, 2006, issued a notification omitting Entry 16 of Schedule
III of the FEMA Current Account Rules, which requires prior RBI
approval for remittances on account of purchase of trademarks
or franchises. Such notifications are followed by an RBI circular
to all the head offices of authorised foreign exchange dealers
within 15 days of operationalising the same. It has been two months
now, but the RBI is still to release the Authorised Personal Directives
(circulars)-without which dealers aren't authorised to give effect
to the notification-to banks. In fact, the notification is not
even posted on the RBI website. When contacted, RBI spokesperson
Alpana Killawala, initially said the circulars had been sent to
the banks, but clarified later that they "will be sent within
a couple of days". The ministry, though, is blisfully unaware
of what's going on. "This matter hasn't come to our notice.
We will investigate it," says Vinod Rai, Special Secretary,
Banking and Finance.
This is not the first time MoF and RBI have
pulled in opposite directions. The two have clashed over the latter's
efforts at "tightening money supply". The central bank
has already raised the reverse-repo rate three times this year,
taking it to 6 per cent, even as the Finance Minister went on
record saying: "There is ample liquidity in the market and,
therefore, I would be happy if interest rates do not harden."
It is well known that Chidambaram and Reddy do not see eye to
eye on Participatory Notes, which the latter wants to ban because
of their potential for misuse. RBI's main contention is that P-notes
are out of sync with the needs of modern, transparent financial
markets. The ministry, on the other hand, favours constructive
use of P-notes subject to stringent regulation and is firm that
the present status quo will continue. By the looks of how things
are progressing, this round seems to be going Chidambaram's way.
Rupee convertibility is another point of friction between the
two. The Finance Minister is keen on attracting greater foreign
direct investment inflows on the basis of a freer rupee. But RBI
wants to move towards this goal slowly and cautiously. The second
Tarapore Committee report, which favoured freeing the rupee progressively
over five years, seems to toe Reddy's line.
The apex bank and the MoF differed yet again with regard to
FDI in asset reconstruction companies (ARCs). The FDI limit in
arcs is currently at 49 per cent. The Finance Ministry favours
an aggregate FDI cap of 74 per cent in arcs with a sub-cap of
49 per cent for individual holdings. RBI, on the other hand, wants
the status quo to continue. It is still not clear which way the
issue will go, but some indications have emerged to show that
Chidambaram may get his way on these.
Incidentally, State Bank of India CMD O.P. Bhatt recently joked
about the alleged differences between his two bosses. Indian officialdom
is not known for its sense of humour. It will be interesting to
watch how the dramatis personae deal with the matter.
-Pallavi Srivastava
Ready
For The World
Smaller firms are also getting themselves
rated.
Bankers
are chasing medium-scale enterprises with a vengeance; and such
companies, on their part, are literally hounding the credit rating
agencies. The reason: they want to get themselves rated. The benefits
are very tangible and go far beyond getting easier access to bank
loans and better interest rates, resulting in a lower cost of
funds. A good investment grade rating can help these companies
attract equity partners and even raise external commercial borrowings
(ECBs). Most of these companies have turnovers ranging from Rs
50 crore to Rs 500 crore and investment in plant and machinery
is anywhere between Rs 5 crore and 25 crore.
The S&P-owned CRISIL says hundreds of SMEs are lining up
to get themselves rated. care, another rating agency, too, corroborates
this trend. Says Rajesh Mokashi, Executive Director, care: "As
the business grows, there is a need for an independent opinion."
"We have got close to 500 rating requests from relatively
smaller companies and more than a hundred are in the pipeline,"
adds D. Thyagarajan, Director (SME Ratings) at CRISIL. The company
has now gone one step further and has signed Memoranda of Understanding
(MOUs) with close to a dozen banks, like State Bank of India,
Bank of Baroda, UCO Bank, Corporation Bank and Canara Bank, for
rating their SME customers. "Our ratings give banks a credible
third-party credit opinion. This helps them take credit decisions,
cuts down the time and resources they spend on credit evaluation
and reduces their transaction costs," says Thyagarajan.
Several of these companies have successfully raised money abroad
through ECBs, though no credible data is available. "Raising
money abroad is not very difficult these days for SMEs,"
says G. Nagada, Financial Advisor at Vidyut Metallics, which recently
borrowed through the ECB route.
"SMEs that have foreign currency earnings through exports
have a natural hedge against foreign exchange risk and can consider
ECBs," says Thyagarajan. "Today, quality-conscious SMEs
are doing business overseas and raising ECBs is a natural progression
for them if cheap funds are available," says Mokashi.
Incidentally, the rating mechanism, the parameters and the standards
for these smaller companies are the same stringent ones used for
larger companies. Consequently, several of them do not make the
grade. Only about 10-20 per cent of the companies that get themselves
rated actually walk out with ratings that can be termed investment
grade.
-Anand Adhikari
WOOING
THE RUSSIAN TOURIST
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Tourism target: From Russia with Love |
The Indian hospitality industry
is looking at a new milch cow: the rich in Russia and other constituents
of the Confederation of Independent States (CIS). "There
is a paradigm change in the expectations of tourists. Earlier,
they were happy with 'sand, sun and sea' tourism, but they are
now looking for experiential tourism," says Amitabh Kant,
Joint Secretary, Tourism. The Incredible India campaign will soon
be launched in Russia-where a holiday in India is usually equated
with a visit to Goa and Kerala-and is expected to attract greater
numbers to options like heritage tourism, wildlife tourism and
medical tourism in India.
"Tourism here is not only about monuments; it is the culture,
theme, magic and the soul of India," says Subhash Goyal,
Chairman, STIC travels. Hotel chains like Leelaventure and Bharat
Hotels will be part of the campaign. "We see progressively
higher numbers of tourists from CIS countries during November-March
every year and the campaign will help create awareness among more
people," says Lalit Suri, CMD, Bharat Hotels. Tourist arrivals
from CIS countries have been growing from 38,526 in 2003 to 61,187
in 2004 to 76,000 in 2005. The target for this year: 25 per cent
more than the previous year.
-Pallavi Srivastava
The
Yo-Yo Effect
What goes up must come down. But does it also
apply to interest rates?
Which way are interest rates headed?
If one looks at the global cues (plunging crude oil prices and
the falling us Fed rate), RBI Governor Y.V. Reddy has little choice
but to kick-start a benign interest rate regime once again in
the coming October policy review.
But Reddy's task is not as easy as it looks. The mandarins on
Mint Street are closely monitoring the potential lag effects of
crude and commodity prices, domestic liquidity position and the
strong overall credit demand-though a few sub-segments, like real
estate and personal loans, are exhibiting signs of tapering off.
The prime lending rates (PLRs) of public and private sector
banks indicate that there has been a quarter to one percentage
point rise in interest rates over a one-year period.
In the Indian context, the inflation monster is still around
to play spoilsport and mar the prospects of a decline in interest
rates. The inflationary expectations emanate from an overall strong
year-on-year domestic credit growth of 32 per cent (against a
widely held misperception of a slowdown) and a 19 per cent growth
in money supply against the projected figure of 15 per cent for
2006-07. These two will need careful watching in the months to
come. If interest rates are lowered, it will almost certainly
lead to an explosion in demand, which, in turn, will result in
demand pull inflation. And the RBI, obviously, wants to avoid
such a situation. The silver lining: the inflation rate itself
is currently at 4.91 per cent, comfortably below the RBI's projection
of 5-5.5 per cent.
"How various domestic factors like money supply and credit
growth pan out going forward holds the key to the direction of
interest rates," says B. Sambamurthy, Chairman of the public
sector Corporation Bank. K.V. Kamath, Managing Director &
CEO of ICICI Bank, is also very cautious. "I'd rather wait
and watch," he says. Only K.S. Harshan, Executive Director,
Federal Bank, sticks out his neck by saying: "There is still
an upward bias in interest rates."
In fact, the only pointer to a softer interest rate regime seems
to have come from Punjab National Bank, which announced a 9 per
cent floating home loan rate, down from 9.25 per cent, ahead of
the festival season. No other big player has followed this lead.
Bankers say credit demand in the domestic market will continue
unabated as interest rates are still reasonably low and affordable.
"And, so far, there is no major threat of non-performing
assets (NPAs) at the retail level," they say.
What does all this mean for interest rates? Domestic and international
factors seem to be pulling in different directions and are sending
out contradictory signals on the subject. Reddy will have to find
a way to square this circle. As of now, bankers are preferring
to wait and watch rather than take any call on the matter.
A related issue: will the credit growth continue at the same
pace? "Personal and home loans are two segments where the
banks are turning a bit cautious," says Sambamurthy of Corporation
Bank. The implication: there could be some slowing down in the
two segments. Harshan of Federal Bank disagrees. "In an economy
growing at over 8 per cent, demand for credit will continue to
grow." Here, too, there is no consensus. We'll have to wait
for Reddy himself to give the cue.
-Anand Adhikari
Mind
Over Matter
Intellectual Capital rating is gaining ground.
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Edvinsson speak: IC is critical
to an organisation's future |
In December last year, some 30 employees
of Bangalore-based MindTree Consulting spent three months getting
an Intellectual Capital (IC) Rating. Tangible corporate assets
have been measured and assessed for many years, but it's only
now that companies have started assessing their people and their
intellects. "Businesses are beginning to recognise the value
of the intellectual capital hidden within companies," says
Leif Edvinsson, founder of Intellectual Capital, a firm specialising
in this field and the man who invented the system of intellectual
capital audits. According to him, the tangible assets of any company
form just 20 per cent of its value while the intangible ones (branding,
people, etc.) make up an overwhelming 80 per cent. "But organisations
are only just beginning to realise the value of nurturing these
assets," he says.
"Intellectual capital is the factor of production that
does not show in the traditional balance sheet, but is, nevertheless,
critical to an organisation's future," explains Edvinsson.
To nurture this and to encourage innovation, which is critical
for survival, companies need to reorganise themselves around people
and take cognizance of a younger and more creative workforce.
This is especially true in the Indian context," says Edvinsson.
Companies like e4e Financial Services, Bhoruka Power and Conzerv
Systems have or are in the process of getting their IC rated by
Bizworth, the Indian partner of Edvinsson's Intellectual Capital.
-Rahul Sachitanand
Q&A
"Stop Talking"
John Ralston Saul stirs up many
hot debates with his radical ideas of "dying" globalisation,
ineffective privatisation and bureaucratic transnationals corporations.
He spoke to BT's Shalini S. Dagar on
some of them. Excerpts:
You say globalisation is dying. On what basis are your making
this statement?
Yes, globalisation is collapsing, because in the past three to
four years, the West has realised that the theory can be as easily
or more easily run from India and China as it can be from the
West. What the West had believed in was not globalisation but
an international economic theory run from the West. So, in the
last six months there has been a return of the old-fashioned economic
nationalism. And it will only grow.
Has trade liberalisation not helped at all?
World trade has increased some 22 times in 30-odd years, but
economic growth around the world during this time has been average
to mediocre. And in the same period, there has been this astonishing
increase in disparities. One of the reasons is that nearly half
of this trade comes without wealth creation and from the movement
of goods across borders within transnational corporations-a lot
like the British East India Co.
So what is the solution?
The answer is to stop talking ideology, and to stop talking of
globalisation, deregulation and liberalisation as a religion.
You have very strong views on privatisation...
The essence of the private sector is profit-making. If it is
applied to an area where competitive principles do not work, say
water supplies, it does not make sense. Public sector bodies,
on the other hand, work only when they are led by strong political
leadership and strong policy ideas. The solution is not deregulation
or government ownership. Maybe, non-profit regional bodies could
work in some cases.
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