Negative rates again, this is starting to get too common

I have written about them before here and here, and they are back...negative repo rates in US Treasuries.
Supply demand one thing, this monetary experimentation in US is causing a lot of issues for the whole world.

Waking up to the Insider trading reality

There are certain markets where insider trading laws are strong. There are some where such laws are strictly enforced. I was uncertain that India was one of either or had a chance of getting there anytime soon, however SEBI's suo moto action of probing for possible breach of insider trading rules or hammering by a bear cartel of the SKS shares last week is a ray of hope.

There was a steep plunge of 20% in SKS Microfinance shares, hours ahead of its fourth quarter results on Friday. Any casual market observer would have guessed that it cannot happen without some form of bear cartel hammering due to confirmed news anticipation of news of its losses.

Ofcourse, the mere fact that it is being probed is not even a indication that the guilty will be bought to book, but the fact that the probe started so quickly gives hope, especially since it is SEBI. Lets keep our fingers crossed

Many scams, not enough anger

I was looking at the Corruption Perceptions ranking of countries
published by Transparency International. Guess where India is? right below Morocco...Not kidding. We have Albania, Liberia and Jamaica to give us company at rank 87 and places like Colombia, Trinidad and Tobago, Romania, Cuba, Slovakia, Namibia, Kuwait, Bahrain, Oman, Bhutan and United Arab Emirates (in reverse order) are ranked better than us.

Since childhood I have been hearing and experiencing corruption in India. The thing is, it is accepted as part of life here to such an extent that it sometimes makes me wonder where did we go so horribly wrong.

Corruption, like a terrible infection, if not treated in time will lead to damage to all vital organs and eventual death. No other place stands so much a testimony to this fact as Russia. Mind you this was a country that put the first man in space, and was at the cutting edge of technology. Such a great power to be humbled to such an extent that, by some estimates, more than 50% of the women in the country have to resort to prostitution for a living is a testimony of how vital it is to protect our institutions from corruption.

We as Indians need to search within us as to why we accept corruption? why don't we have a civil unrest in a country where 35% of the population lives below poverty line and top 3% throw money away on out sized houses? I thought we as a people were enlightened enough to understand that beyond a point hoarding more money is pointless, then why scams of such mammoth proportions? where did we go wrong?

Defaulting Central Bank

I am planning a trip to Moscow soon and hence was running through the news wires of russia and some others. Came across this interesting report by a paper in Belarus. Apparently, central banks, like any other bank, are at a risk of a bank run.

April 15, National Bank of Belarus has suspended the sale of bars of precious metals (gold, silver, platinum) for Belarusian rubles. The National Bank has explained that currently the precious metals can only be bought for dollars. At the same time, the redemption of bars is made in Belarusian rubles.

so in effect a central bank induced slow-dollarisation. Interesting.....

Economic Growth as the Great Equalizer?

A very interesting video by Hans Rosling on how the worlds 200 countries have moved over the last 200 years to higher prosperity and life expectancy. The only issue is that many in the middle are averages, as he points out about china, and its really a straight line if you do finer subdivisions and the whole world will take another couple of centuries to reach the highs enjoyed by the western world today by which time the western world would have moved far far ahead.

I think the promise can only be delivered by technology. If technology can help bring down cost of medication and improve productivity of farms in the world, that will bring everyone up to almost the same level of health and on the basis of essential commodities PPP, also of wealth. My bet is on Technology as the great equalizer.

Money Supply - The Perpetual Problem

It is interesting, this contrast between monetary policy in the west and in the East(Chindia). Probably a very good time for everyone to learn about the fine balance that the Central Bankers need to manage while walking in the dark. And its not like this job became difficult in the last few years, it has been as difficult for centuries.

I've been reading some Roman history, and recently found an interesting passage in Will Durant's classic "Caesar and Christ: A History of Roman Civilization and Christianity from the beginnings to A.D. 325".

The famous “panic” of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.

The resulting dearth of circulating medium was made worse by the drain of money eastward in exchange for luxuries. Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and money-lending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash, and the crisis rose. When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply with the new law, the firm announced its bankruptcy.

At the same time the failure of an Alexandrian firm, Seuthes and Son due to their loss of three ships laden with costly spices and the collapse of the great dyeing concern of Malchus at Tyre, led to rumors that the Roman banking house of Maximus and Vibo would be broken by their extensive loans to these firms. When its depositors began a “run” on this bank it shut its doors, and later on that day a larger bank, of the Brothers Pettius, also suspended payment. Almost simultaneously came news that great banking establishments had failed in Lyons, Carthage, Corinth, and Byzantium. One after another the banks of Rome closed. Money could be borrowed only at rates far above the legal limit. Tiberius finally met the crisis by suspending the land-investment act and distributing 100,000,000 sesterces to the banks, to be lent without interest for three years on the security of realty. Private lenders were thereby constrained to lower their interest rates, money came out of hiding, and confidence slowly returned.

Ownership Structure and cost of Debt Capital

There have been many studies in the past which have focused on the impact of ownership structure and corporate governance on the cost of capital, both equity as well as debt.

Another paper by Harvard professors have again come to similar conclusions after looking at the data in East Asian and Western European countries during the period from 1996 to 2008. Hopefully the owners will start to realize the economic costs born by their companies due to the ownership structure, corporate governance & transparency issues and proactively and diligently work towards avoiding them.

Much more than systematically important

The size of MFI business in India is some 30,000 cr, that's one STFC/LICHF. Big, but by no means too big to impact the system. In the context of the financial market today, this is literally small change. Of this some 10,000 cr is in Andhra which was almost dead, so one can understand why form a financial market integrity perspective the RBI is not concerned and hence deafeningly silent on the issue. But the MFI business is much more than a business, there was a reason why Andhra started using the SHG model to lend out money at 3% pa in the first place.

According to the Oxford Poverty and Human Development Initiative, more people live in poverty in eight Indian states than in 26 of sub-Saharan Africa’s poorest countries. While incomes are rising in India, human development indicators measuring health and nutrition are not to the same degree and remain some of the world’s worst. India has the world’s largest population of poor people. The solution for coming out of poverty is the same which everyone from them to Mukesh Ambani uses, which is save/borrow, invest for productive purposes which generates a surplus after paying all the economic charges and repeat the cycle. While the MFI industry did not go beyond loans, they did reach a surprisingly large number with loans. The people who they reached are the ones who were paying super high rates to moneylenders and in some cases absolutely unable to borrow, these guys have been given a hope by the industry and this fact should not be forgotten under the influence of SKS's IPO.

This industry did a lot of things that the government after 60 years could not. The benefits of this industry must be looked at holistically and not only from a financial market and profitability perspective.

Am I right or am I right?

Not to blow my own trumpet, but my prediction of Gold over 1300 given in November 2009 has happened and Gold has stayed above $1300 for quite some time now. I still believe QE2 will take Gold, Silver, Oil and all other commodities along with real estate even higher. Big mistake to not be invested in these.

Indian Banks grappling with online frauds.,

Of late, I have heard about a number of cases of online frauds in India. I would attribute this trend to two primary reasons. One, the widespread acceptance of online banking in India and two, the growth of higher income bracket salary class in India. The fact that it is the latter which has the highest acceptance of online and phone banking as a way of life is adding fuel to the fire. Regular readers will recall the reported sophistication that online fraudsters have attained in their trade.


Recently I came across a case involving Axis, here are a few clips (click to expand)
To an unsuspecting non-net savvy account holder (you won't believe the number out there) this will look like a genuine mail from the bank. Even the email id is very convincing.

Now if you click on "view", this is what you see (I didn't download it)




I am assuming after you have given all your details, the downloaded file will connect to some server out of Russia or something, the info will be stolen and your credit card, bank account etc all will be swiped clean.

I obviously was not going to sit quietly and let this happen, so I contacted Advocate Purvi Shah to help me take these guys to task. What she revealed was a shocking state of affairs for banks online services. She has dealt with many similar cases, the list of banks being targeted seemed endless. There was a copy of Axis bank site, ICICI bank site, SBI site, Income tax departments site and what not. She showed me a live example where the mail claimed to be from the Income Tax department about an incometax refund, the amount mentioned was some 3,500 rupees to make it sound convincing. Once you open the mail, it asked you to click on a link to claim the refund, this action took you to a website which was an exact replica of the Income tax department's website and asked you to fill in your bank account details for any of the banks listed. I was shocked to see the list. It had some 7 banks listed including biggest PSU and Private sector banks and each had a connected site which was an exact replica of the actual bank's website. With such an elaborate scheme, it is very likely that many people are getting defrauded every day.

I asked her what can citizens about this? the answer is not much besides may be reporting to the police and this being most likely an international operation, it is very difficult for even the police to catch such criminals. For the Income Tax department website case mentioned earlier, she has taken the case up with Mumbai police's cyber crime branch on her own, however she thinks there are many cases which do not get reported by internet savvy customers who, after realizing it to be a fraud, will simply close the browser instead of reporting the case to proper authorities. At least there is some hope if authorities keep getting information as soon as possible about such sites.

While this was one aspect of online frauds, in our conversation she revealed many cases where the information was never stolen online. It was in the offline world that the actual fraud occurred, online gateways were only the means of transferring money from your account to other accounts. And if you are a bank customer with an active online banking facility, you are basically on a weak wicket if money is stolen using correct passwords. She revealed cases where allegedly the passwords etc were provided by close associates of the customer or bank employees who were hand in glove with the criminals.

These cases raise many questions about risk management framework, especially operational risk pillar that the BASEL committees have been emphasizing so much on, in Indian banks. Particularly the gravity of the risk of employees defrauding the customer needs to be appreciated by top managements as it brings with it reputational risks. While banks are trying to balance the need for security with convenience of use for the customer, the growing number of cases should make them more vigilant for the sake of their customer as well as their own. The fact remains that irrespective of what information the criminals posses, they need to go through the real websites/POS machines to get the money out of your bank account/Credit Cards and the banks must work out solutions to stop them. The first step for this are dynamic passwords and issuing only photo cards along with active mitigation, intelligence and counter attack strategies. That these websites are still in existence is a failure not only of the police department but of the risk control and mitigation departments of the banks themselves. (ever heard of DDoS attack?)

We are lucky to have a very sensible regulator in RBI and am sure in some time the banks hand will be forced. Lets just hope banks don't wait for that long and act now to save their customers the harassment and suffering.

If you come across something like this, please report it to either the cyber crime branch of your local police or if you are not sure what to do, get in touch with Purvi for guidance.