Financial Inclusion is an Opportunity: BR Shetty

BKN_0271The Indian banking industry has seen consistent double-digit growth during the last 10 years. But there are several unmet customer needs—including financial inclusion, product innovation, low-cost innovative delivery models, leveraging technology and communication, improving efficiency, building long-term relationships with customers, etc—which the banking industry has to resolve. These challenges make way for opportunities, some of which are easy to capture. But there are many that require significant innovation or specialised skills. Probably this is the space where new players like the UAE Exchange could make a difference. 
I ventured into healthcare way back in 1975 by starting NMC Health, realising that, until then, quality healthcare facilities were unexplored in the UAE. From those early beginnings, NMC Health has now grown into a group with two principal divisions—NMC Healthcare, which is the largest healthcare provider in the private sector with a pan-UAE presence; and NMC Trading, which is a leading pharmaceuticals distribution business in the UAE. This makes it one of the largest integrated private sector healthcare companies in the region. Today, it is listed in the premium segment of the London Stock Exchange (LSE) and is part of FTSE-250 index.
I ventured into remittance and foreign exchange with the UAE Exchange during the 1980s at a time when organised fund transfer mechanisms in the UAE were inadequate to cater to the burgeoning needs of a growing expatriate population and an expanding corporate sector. I felt the need to establish an organised funds transfer facility for expatriate Indians, who were finding it difficult to remit their hard earned money back home, cost effectively, through established banking channels.
For over three decades, we have been a leading brand in the financial realm, specialising in remittances, loans against jewellery, foreign exchange, etc. We have earned the trust of millions of customers by handling their hard-earned money with utmost care. Added to these, our rich infrastructure, technological prowess, branch network and subject expertise make us a strong contender for a banking licence. Above all, (there) is our experience in working closely with the bottom-of-the-economic-pyramid segment, which sends money in the range of Rs 15,000 to Rs 18,000. Working with this segment of customers and bringing them into the formal financial system is our biggest strength.
RBI guidelines stipulate a minimum capital requirement of Rs 500 crore to start with. We have planned much above that. Also, with the kind of network (we have) in India and our global reach, we have good NRI connections, which should enable us to raise a good amount of deposits in all the branches of the bank when we commence operations. Based on a financial plan, our initial capital will be sufficient to meet the SLR/CRR requirement, considering our existing NBFC (non-bank financial company) activity.
The funds will be raised through a combination of offering shares to the public through preferential allotment and from resident entities/relatives of the promoter group. The promoter group is worth Rs 3,800 crore.
We see the challenge of financial inclusion as an opportunity. As a leading global remittance brand, we have been dealing with a huge population, which belongs to the bottom of the economic pyramid. Most of them still go without a bank account. We are good at initiating workshops and other means to create awareness and improve financial literacy in the said population. Once we become a bank, we will work on the same principles. We will be focusing especially on opening branches in unbanked areas and on designing innovative products for this segment.
Also, the branches we set up in these areas will pay special attention to educate people about the need for financial savings and planning, thereby gaining their trust. We have considered commencing ultra small branches to reach out to a wider (population) cost effectively.
Currently, we have strong infrastructure in place with over 330 branches across India, including small towns and rural areas, of which over 145 branches are in Tier 2 to Tier 6 centres. Further, we have good number of branches in the under-banked districts and states.
(As told to Vivek Kaul)
The article originally appeared on www.forbesindia.com on August 5, 2013

 

Only in black: This example shows all that is wrong with Indian real estate

India-Real-Estate-MarketVivek Kaul
I had an interesting conversation with an relative of mine early last month.
This gentleman had bought a flat in the Delhi sub-city of Dwarka sometime in 2002 at a price of around Rs 25 lakh. The area was totally undeveloped at that point of time and hence property was going cheap.
More than a decade later the flat is now worth something around Rs 2 crore. The flat had been bought as an investment. My relative planned to sell the flat and use the money to meet the expenses of his daughter’s education (she wants to do an MBA/PhD from a good university in the United States) as well as her wedding.
The balance that remained after meeting his daughter’s expenses would go into his retirement fund, given that he has no plans of working beyond the age of 63-64.
During the course of our conversation I suggested to him that it would be a good idea to sell the flat and invest the money into different debt mutual funds. The logic being that Rs 2 crore was more than enough to meet his daughter’s education and wedding expenses and at the same time add to his retirement kitty.
So it made sense to preserve the Rs 2 crore that he had managed to accumulate by investing in the flat, rather than look for more gain. Also, by investing in debt funds, the return that he would earn would be similar to a fixed deposit but the after tax returns would much better given that he could take indexation into account while calculating his taxes. Indexation essentially allows the cost of purchase of a flat to be adjusted for inflation.
The after tax returns would be in the range of 7-8% and he could make a decent Rs 14-16 lakh every year, which would further compound, if he stayed invested.
He liked the idea and decided to sell his flat. Given that the flat was in a good society, he got several good offers. But even one month later he has not been able to sell the flat.
He called me yesterday and told me that he hadn’t been able to implement the plan I had suggested to him, around a month back. The reason for that was very simple. Although he had got offers from several buyers willing to buy the flat at Rs 2 crore, none of them were willing to pay him the entire amount in white, through a cheque. The buyers typically were ready to pay around Rs 80 lakh in cheque and the remaining Rs 1.2 crore in cash.
As mentioned earlier my relative had bought the flat at Rs 25 lakh, most of which was financed through a home loan. The remaining came from the savings he and his wife had put together. So all the money to buy the flat had been paid in ‘white’. He had been lucky given that the builder he had bought the flat from was building his first project and was more interested in offloading what he had built, rather than insist on being paid in black.
The property dealers my relative had been dealing with to sell the flat had clearly told him that if he wanted the entire Rs 2 crore to be paid in cheque, then he could more or less forget about selling the flat. At best, they could get a buyer who would pay upto Rs 1 crore in cheque, the remaining Rs 1 crore would be paid in cash.
For someone who has largely lead an honest life, he couldn’t figure out how would he would go around handling cash to the tune of Rs 1 crore. The brokers had a solution for this as well. They could help him buy gold bars. Or if he was willing to bet his money on real estate again, they could showcase some projects coming up on the outskirts of Gurgaon or on the way to Agra. Maybe he could buy two flats there, they suggested. And if he found all this too risky, he could simply store away the money in a couple of bank lockers. Even that could be arranged for, it was suggested.
My relative’s situation is a very good example of all that is wrong with the Indian estate real system as it has evolved. Since a major part of the transaction is in black, the cash that is thus generated needs to be put to use in some way. Just putting it away in a locker isn’t really a solution.
Money needs to keep growing. The amount paid in black can also be used to buy more real estate. For a flat which costs Rs 80 lakh, half the money i.e. Rs 40 lakh, needs to be paid through a cheque, and the remaining Rs 40 lakh can be paid in cash, brokers suggested to my relative.
This also means that Rs 40 lakh of the Rs 1 crore that my relative had received in white would be put to use and become tax free. The law gives a tax payers two years from the date of the sale to invest in another ‘residential’ property. If the property is under construction, a period of three years is allowed. The amount invested becomes tax free.
As mentioned earlier Rs 40 lakh of the Rs 1 crore received in black, would be utilised to buy a flat. That means Rs 60 lakh would still remain. This can be used to buy gold. Gold can be easily stored and hidden.
The point is if a real estate investor wants to sell his property, he has to be ready to receive payment in black. If he doesn’t want to be paid in black, it will be very difficult for him to sell his property. Once he has sold the property and received the money, he needs to put the ‘black’ money to use again.
This means buying more real estate in an up and coming location, where the prices are low. And so the cycle of black money continues with investors selling to each other, driving up prices and making real estate unaffordable for those who want to buy a ‘home’ to live in.
The article originally appeared on www.firstpost.com on August 2, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

What we can learn from Chidambaram's turkey problem

turkeyVivek Kaul

The rupee depreciation of June, July was quite unexpected,” said finance minister P Chidambaram on August 1, 2013.
What does Chidambaram mean here? He probably means that the government was caught unaware on the depreciation of the rupee against the dollar over the last two months. They were not prepared for it.
And if the government had realised that the rupee would lose value against the dollar as fast as it has, then it would have done a few things to control it, like it is trying to do now.
When one looks at the economic reasons behind the rupee’s fall against the dollar they were as valid then, as they are now. 
The current account deficit for the period of 12 months ending March 31, 2013, had stood at 4.8% of the GDP or $87.8 billion. The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
During the period of twelve months ending December 31, 2012, the current account deficit of India had stood at $93 billion. In absolute terms this was only second to the United States.
As Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point out in a report titled 
Don’t Take Your Eye of the Ball “At $93billion, India’s current account deficit in 2012 was second only to the US in absolute terms, and higher than the UK, Canada and France.”
A high current account deficit meant that India’s demand for dollars to pay for imports should have been higher than the supply. The dollars that India earned through exports and the dollars that were being remitted into India were not enough to pay for the imports.
Hence, this meant that the rupee should have lost value against the dollar. But that did not happen because foreign investors kept bringing dollars into to invest in stocks and bonds in India. At the same time Indian corporates were borrowing in dollars abroad and kept bringing that money back to India. The Non Resident Indians were also bringing dollars into India and converting them into rupees to invest in bank deposits in India because interest rates on offer in India were higher.
All this effectively ensured that there was a good supply of dollars. This in turn meant that the rupee did not lose value against the dollar, even though the current account deficit had gone through the roof.
But a high current account deficit should have been warning enough for the government that rupee could snap against the dollar, at any point of time. The dollars coming in through foreign investors in bonds and stocks and NRIs deposits, could go back at any point of time. Also, money being borrowed by the Indian companies in dollars, would have to be repaid. And this would add to the demand for dollars.
Hence, steps should have been taken to control the high current account deficit by controlling imports. And at the same time steps should have been taken to ensure that dollars kept flowing into India. The government got active on this front only after the rupee started to lose value against the dollar since the end of May, 2013.
But why did the government and the finance minister not figure out what sounds a tad obvious with the benefit of hindsight? As I have explained 
hereherehere,here and here, most of the factors that have led to the rupee depreciating against the dollar, did not appear overnight. They have been work-in-process for a while now.
So why did Chidambaram find the rapid depreciation of the rupee against the dollar “unexpected”? The basic reason for this is the fact that 
between January and May rupee moved against the dollar in the range of 54-55. It was only towards the end of May that the rupee started rapidly losing value against the dollar.
Chidambaram and others who had thought that the rupee will continue to hold strong against the dollar had become of what Nassim Nicholas Taleb calls the 
turkey problem. As Taleb writes in his latest book Anti Fragile “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So, with the butcher surprising it, the turkey will have a revision of belief—right when its confidence in the statement that the butcher loves turkeys is maximal … the key here is such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.”
Chidambaram expected the trend ‘of a stable rupee’ to continue. What was true for the first five months of the year was expected to be true for the remaining part of the year as well. But sadly things did not turn out like that, and the rupee like Taleb’s turkey got butchered.
By May end, foreign investors were falling over one another to withdraw money from the Indian bond market. When they sold out on bonds, they were paid in rupees. Once they started converting these rupees into dollars, the demand for dollars went up. As a result the rupee rapidly lost value against the dollar, and only then did the government wake up.
As Taleb writes “We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that tends to prevail in intellectual circles.”
Just because something is not happening at the present time, people tend to assume that it will never happen. Or as Taleb puts it, an absence of evidence becomes an evidence of absence. Chidambaram was a victim of this as well.
There is a bigger lesson to learn here. People expect any trend to continue ad infinitum. For example, before the financial crisis broke out in late 2008, Americans expected that housing prices will keep increasing for the years to come. In a survey of home buyers carried out in Los Angeles in 2005, the prevailing belief was that prices will keep growing at the rate of 22% every year over the next 10 years. This meant that a house which cost a million dollars in 2005 would cost around $7.3million by 2015. This faith came from the fact that housing prices had not fallen in the recent past and everyone expected that trend to continue.
The same phenomenon was visible during the dotcom bubble of the 1990s. Every one expected the prices of dotcom companies which barely made any profits, to keep increasing forever. The great investor Warren Buffett stayed away from dotcom stocks and was written off for a while when the prices of dotcom stocks rose at a much faster pace than the value of investments that he had made. But we all know who had the last laugh in the end.
The Japanese stock market and real estate bubble of the 1980s was also expected to continue forever. A similar thing has happened with gold investors this year. Just because gold prices had rallied for more than 10 years at a stretch, investors assumed that the rally will continue even in 2013. But it did not.
Hence, it is important to remember that just because a negative event hasn’t happened in the recent past, that doesn’t mean it will never happen in the time to come. In India, currently there is a great belief that real estate prices will continue to go up forever. Is that the next ‘big’ turkey waiting to be slaughtered?

The article originally appeared on www.firstpost.com with a different headline on August 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)