...What the recent inflation experience suggests is that while the earlier regime of intervention and regulation is criticised for generating a high-cost (and, therefore, a high price) economy, the processes of liberalisation and deregulation are the ones that are creating a high inflation economy......
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Wednesday, August 31, 2011
'Raising capital for the bank would not be a challenge' - Vijay Mahajan, Chairman, BASIX
The Reserve Bank of India’s (RBI) quest for financial inclusion through new banking licences has caught the imagination of social entrepreneur Vijay Mahajan. A day after RBI released the draft guidelines on new bank licences.......
Banking on circumspection
While encouraging new entrants to participate in the sector, the norms aim to prevent private entrants from using banks as ‘private pools' of capital. Quietly yet self-assuredly, the Reserve Bank of India has released its draft guidelines on new bank licences for the private sector after a gap of more than a decade. The guidelines offer a vital clue to the RBI's world-view on the subject: in a word, selectivity. As the RBI warns: “Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform” to the norms but “it may not be possible for the Reserve Bank to issue licences to all the applicants meeting the eligibility criteria…” This is confusing; an eligible applicant is entitled to go ahead unless the RBI explains at the outset why it is “not possible” to let the candidate through the gate. The criteria are severe and represent the concern to safeguard the banking sector from the slings and arrows of private enterprise and foreign majority holding. Only firms with “diversified ownership”, a successful track record of 10 years, owned and controlled by resident Indians, less than 10 per cent exposure to real estate, construction or capital market activities, and able to cough up Rs 500 crore will be permitted to apply through a Non-Operative Holding Company (NOHC) that, for the first five years, will have to hold at least 40 per cent of the paid-up capital; aggregate non-resident ownership in that period will not be allowed to exceed 49 per cent. Bowing to the mantra of financial inclusion, the RBI insists that one in every four branches will have to be set up in rural and semi-urban areas. The guidelines insist, unlike the earlier rules, that new entrants list within two years and that half the directors be independent; this may not necessarily keep promoters' biases at bay but, then, the RBI tries to ring-fence the new entity, especially where “promoter groups” have 40 per cent or more assets or income from non-financial business. In this case, the guidelines insist on aggregate exposure of not more than 20 per cent of paid-up capital and reserves of the bank to any entity “in the promoter group, their business associates, major suppliers and customers”; and all “exposures will have to be approved by the Board and all credit facilities to these entities should have a minimum tangible security cover of 150 per cent”. Last week, Dr Subbarao sounded the tone when he warned of the need to prevent private entrants from using banks as “private pools” of capital. The draft guidelines aim to do just that while giving new entrants enough leeway to participate in an industry bristling with business opportunity.
HBL
Banking on licences
The Reserve Bank of India (RBI) has made it clear that it would like to ensure only the “fit and proper” make the grade when it comes to securing licences to set up private banks. The onerous criteria laid down by the central bank do not explicitly bar firms with an interest in other lines of business activity, outside of real estate and capital market, from securing licences. But to do so these firms have to meet more stringent norms than insisted on ever before. The draft also explicitly refers to the need to prevent “self-dealing” by promoters. Given the mood in the country today, it is just as well that RBI has laid down such tough eligibility criteria. Finally, as in the past, the central bank has said a high-level group will process the applications after due diligence by various regulatory authorities as well as enforcement and investigation agencies. The initial minimum capital requirement of Rs 500 crore is well below the widely expected Rs 1,000 crore and, understandably, above the Rs 200 crore that was specified in 2001 when the last round of issuing licences to private banks was opened, given the new global prudential environment. While Finance Minister Pranab Mukherjee tried to adorn his budgetary initiative of issuing fresh banking licences in the garb of “inclusive growth” by citing the “need to extend the geographic coverage of banks and improve access to banking”, the draft guidelines fix a more modest obligation to open at least 25 per cent of new branches in unbanked rural centres. This should take some sweat off the brow of potential applicants. They can continue to rely on the more lucrative urban and semi-urban areas for most of their business. The second reason cited by Mr Mukherjee was the “need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy”. The financial crisis that hit the world after Lehman Brothers collapsed resulted partly from banks having become too sophisticated for anybody’s good. The RBI guidelines refer to this when they say, “post-crisis, there are concerted moves even internationally to separate banking from proprietary trading”. Currently, there is a feeling that banks should concentrate on their primary task, meet the credit needs of businesses, small and big, and individuals and not get into sophisticated products like complex derivatives. Not only have large companies bypassed banks through disintermediation for some time now, currently the sharp difference between domestic and international lending rates has raised the incentive for those who can bypass banks to borrow abroad. The real gap in banking services in India is inadequate coverage of small and medium businesses, those who are too poor, and those in places too remote to have a bank account. It is not clear how this gap will be addressed by having some more banks of the kind that already exist in plenty. On the other hand, the fact that final guidelines will now take more time to be issued and, more importantly, the fact that applications will only be invited after the Banking Regulation Act has been suitably amended to account for the specified guidelines suggest that RBI is not in a hurry to open doors for new private banks. Such caution is well advised.
BS
Banking on RBI
...Beyond this, however, is a leap of faith and a lot depends on how RBI ups its supervisory game—as RBI said in the discussion paper, it is very difficult to detect rotation of funds by corporate houses on a 24x7 basis......
Read..........
Keep banks and industry separate
...It’s good to see the Reserve Bank of India (RBI) assert itself. It seemed, for a while, that the central bank was giving the finance ministry’s views way too much weightage but the draft guidelines for new banking licences are evidence that RBI is not about to do what it does not believe in. If the discussion paper on new bank licences, put out in August last year, showed how diffident the central bank was about allowing large industrial houses into the banking space, the draft guidelines reaffirm that it remains so............
Read....................
Make the new banks go rural
One of the stated policy objectives of allowing industrial houses to set up banks is to enhance financial inclusion. Therefore, the grant of a licence should be subject to a commitment to set up more rural branches.....
Read.....................
Meeting new bank licensing norms tough for most MFIs
Barring a few top players, banking is likely to be a distant dream for most microfinance institutions in the country. This is because the draft norms on foreign shareholding, minimum capital requirement and diversified ownership structure would prevent micro-lenders from entering the banking space. Spandana Sphoorty Financial, a Hyderabad-based microfinance institution promoted by Padmaja Reddy, had earlier expressed interest in setting up a micro-bank. While Reddy said the company was still reviewing the guidelines, she added meeting the minimum capital requirements would be difficult for cash-strapped Spandana Sphoorty. “We are reviewing the guidelines. No decision has been taken yet. We are not ruling it out. But raising Rs 500-crore capital in the current environment looks challenging because our own capital base has been depleted by the crisis in the microfinance sector,” Reddy told Business Standard. RBI has mandated the minimum capital requirement for new banks at Rs 500 crore. Spandana Sphoorty's local rival, Trident Microfin, has already shelved its plans to open a bank. “Raising capital for the bank will not be possible because of the 49 per cent cap on foreign shareholding. Given what has happened in the microfinance sector in India, fund raising would be extremely difficult locally,” said Trident's chief executive, Kishore Kumar Puli. Industry analysts said micro-lenders like Kolkata-based Bandhan and Chennai-based Madura Micro Finance were unlikely to secure licences despite relatively better financial positions, as they don't have a track record of over 10 years. However, for large players like SKS Microfinance and Bhartiya Samruddhi Finance, the draft guidelines have opened doors of opportunity in the banking space. SKS, the only listed microfinance institution in India, already conforms to most of the norms proposed in the draft guidelines. “The thrust of the draft guidelines of new bank licensing is on financial inclusion, which we welcome. We are reviewing the guidelines. The strategic decision on whether to apply for a banking licence would be taken by the board. We are not ruling it out,” said Chief Financial Officer S Dilli Raj. SKS’ net worth is estimated at Rs 1,563 crore. The firm has 95 per cent of its branches in rural and under-banked areas, against RBI's proposal of having 25 per cent of the new bank branches in these regions. About 50 per cent of the company's board comprises independent directors, and this is in accordance with the proposed guidelines. Bhartiya Samruddhi Finance, promoted by social entrepreneur Vijay Mahajan, has also firmed up plans to apply for a new banking licence. Analysts said while microfinance institutions claim they have relevant experience in financial inclusion programmes, the recent crisis in the sector would make RBI cautious in offering banking licences to microfinance firms. “RBI will be very selective in offering new licences. Microfinance institutions may not be at the top of RBI’s list,” said an analyst with a domestic brokerage, on the condition of anonymity.
BS
India Inc gears up for bank licence battle
Indian corporate houses, eager to enter the banking sector, are gearing up to battle for the few licences that the Reserve Bank of India (RBI) is likely to issue. Analysts and industry players expect the RBI to issue two to five new licences, meaning most of the more than 10 corporate groups that have expressed interest in setting up a bank may be disappointed. India has not issued a new banking licence since 2004 and has said it will only issue a few new licenses. The RBI is looking to expand access to banking services in a country where more than half of families are outside the formal financial sector.
"Going by the history, I don't think the RBI will issue more than four or at most five licences this time. There will be a lot of filtering, it's going to be stringent," Pradeep Agarwal, analyst with Emkay Broking, said. Corporate groups including the Tata group and billionaire Anil Ambani's Reliance Capital, which both operate non-banking finance companies (NBFCs), are among those interested in seeking banking licences in a country where lending is growing at about 20 percent a year. Religare Enterprises, Bajaj Finserv, Aditya Birla group and Mahindra Finance, among others, are also keen to enter the segment.
Religare, controlled by billionaire brothers Malvinder and Shivinder Singh, said on Tuesday it has set up an advisory panel that would help it apply for a licence and is also open to partnership with global lenders. The Reserve Bank of India's draft guidelines limit foreign shareholdings in start-up banks to 49 percent for the first five years and allow no single foreign owner to hold more than 5 percent. New licence-holders would also be required to list their banks on the stock market within two years. "They only want serious players who seriously view this business and understand the economics of it over a long period of time," Religare Chief Executive Sachindra Nath told Reuters. The RBI in its draft guidelines issued on Monday said that it will consider granting licences to private firms with successful track records of at least 10 years and with low exposure to the real estate, construction and broking businesses.
"From a long-term perspective one can grow through banks. Your customer base in a bank is much more diversified, you can sell much more products to your customers, and obviously your funding is easier," said Sam Ghosh, chief executive officer of Reliance Capital. He said Reliance Capital meets the RBI guidelines and will need to set up a non-operating holding company to seek a licence. Many firms planning to apply for banking licences already operate non-banking finance companies, which provide mostly small loans to consumers and businesses.
Reuters
RBI lists 'necessary' terms for new bank licences
The Reserve Bank of India (RBI) has taken the next step towards delivering on the assurance contained in its January 2001 guidelines that it would consider licensing more banks three years later, after a review of the working of private sector banks. The new draft guidelines released on Monday take into account both the experience of banks licensed under the 1993 and 2001 guidelines and the feedback to its August 2010 Discussion Paper and are a vast improvement over the earlier guidelines. Thus, the minimum capital requirement has been raised to 500 crore (as against 200 crore earlier) and the capital adequacy ratio increased to 12% (9% for existing banks). New banks will have to ensure that 25% of their branches are located in rural areas. Foreign shareholding has been capped at 49% for the first five years, as against 74% at present. While the entry of corporates has not been banned, per se, a number of safeguards have been incorporated. Importantly, the Bank has incorporated certain vital caveats that were missing in the earlier guidelines. Key among these is the amendment to the Banking Regulation Act, 1949 to remove the restriction on voting rights while concurrently empowering the RBI to approve acquisition of shares and/or voting rights of 5% or more in a bank to persons who are 'fit and proper'; empowering the RBI to supersede the bank's board of directors to protect depositors' interest; and facilitating consolidated supervision. Insistence that the new bank be set up only through a wholly owned non-operative holding company is an additional safeguard that was missing earlier. This will ring-fence the bank (and depositors' money) from problems in related entities. Compulsory listing within two years of licensing will ensure diversified shareholding, reducing the scope for promoter-groups to indulge in questionable lending. The most important, of course, is the warning that 'it may not be possible for the RBI to issue licences to all applicants meeting eligibility criteria'. To use the jargon of economists, these are necessary, but not sufficient conditions to get a bank licence. The decision on that will rest, rightly, with an RBI-appointed expert committee.
ET
NBFCs soar on hopes of getting banking licence
Investors lapped up NBFC stocks in Monday's strong market, although the broking community remained divided on the Reserve Bank of India's draft guidelines on new banking licenses because of restrictions imposed on it in getting a licence.
Asset financing NBFCs unhappy with RBI’s risk weightage norms
The RBI working group’s recommendations on the NBFC sector has failed to acknowledge the consistency shown by asset financing NBFCs in lowering credit losses and maintaining healthy retail portfolio, feel companies in the business........
Read.............
MF industry not over-regulated
A regulator’s prime responsibility is to come up with guidelines that will ensure an orderly development of the market and that risks associated with the industry do not become systemic risks. The journey of Securities and Exchange Board of India (Sebi) with regard to the regulation of the Indian financial markets started in 1996, with a basic regulatory framework. Most industry players had to interpret and apply the regulations according to the situation. Since 1996, with the introduction of various capital market products like derivatives, swaps, etc, regulations have had to keep pace with these developments. The growth of the financial services industry has attracted retail investors in greater numbers, many of whom invest their life savings in the markets or are saving for their future, retirement, etc. Financial markets are dynamic and it is difficult for anyone to predict the outcome. Hence the need for greater investor awareness and information. In addition, financial literacy among investors about mutual funds is quite low. The regulator has rightly built safeguards, ensuring greater transparency and disclosures from industry players, so that the investor has enough awareness to make an informed decision. The primary objective of regulation is to encourage greater retail participation in the capital markets, and channelise household savings via mutual funds. Several regulatory measures have been consistently introduced to protect the interests of the small investor. Implementation of Prevention of Money Laundering (PMLA) Rules, Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT), Know Your Customer (KYC), Know Your Distributor (KYD)were some of the key regulations that SEBI has implemented. Part of the problem in the 2008 financial crisis was also due to the fact that hedge funds were not regulated. I do not believe mutual fund industry is over-regulated. It is a very young industry, with tremendous potential for growth. As the markets mature, so will the participants and regulations. Over time, this will stabilise and balance out. In a growing economy and market, regulations move like a pendulum and at times it may seem that Sebi is trying to ‘micro-manage’ the industry. However, it is doing a commendable job in ensuring that regulations keep pace with the dynamic financial markets. What is required is constructive dialogue between industry stakeholders and the regulator, so that there is ease of implementation of regulations.
BS
NBFCs can breathe easy
RBI’s silence on new branch opening, lending rate caps and cash transactions is a big positive. Non-banking financial companies (NBFCs) can rejoice, as the Usha Thorat committee report has taken the middle path and chosen not to impose stringent regulations on the sector. The report has few negatives for the sector as a whole, such as enhanced capital adequacy, tighter norms for non-performing loan accrual, higher provisioning requirements, maintenance of minimum liquidity and accounting convergence with that of banks. While some of these would result in lowering the sector’s ability to navigate, the downside is broadly restricted, believe most analysts. Interestingly, the central bank has refrained from taking an aggressive stance on plugging regulatory arbitrage between banks and NBFCs in terms of reserve requirements, branch opening, end-use/KYC norms, cash transactions, bank lending limitations and lending rate caps (as was expected for gold loan companies). Instead the RBI has chosen a middle path of calibrated use of measures, to lower the regulatory arbitrage between banks and NBFCs. However, for gold loan players like Manappuram Finance, analysts think the negatives are largely immaterial, though the requirement of accounting convergence with reference to revenue recognition, NPA accrual and provisioning can be open to interpretation, which remains a key risk.
CURRENT SCENARIO | ||
NBFCs | NPLrecognition norm | General Provisioning |
Shriram Transport | 180 days for on-book AUMs and 90 days for off-book AUMs | 0.25% |
Mahindra Finance | 5 months | 0.25% |
Manappuram Fin | 18 months | 0.25% |
Kotak Mahindra Prime | 180 days | 0.25% |
Shriram City Union Fin | 180 days | 0.25% |
Power Finance | 18 months | NIL |
REC | 18 months | NIL |
IDFC | 180 days | 70-80 bps |
So, how will life change for this sector? From here on, NBFCs will have to realign non-performing loans (NPL) provisioning with banks. For this, they will be given time. Currently, NBFCs follow either 180 days or six quarters of non-repayment of loan, as against the 90 days followed by banks. This will increase delinquencies for NBFCs, but will not impact the actual credit loss, says Edelweiss Capital. Analysts say managements are expected to accelerate their collection/recovery procedure. Also, NBFCs will now have to increase standard provisioning from 25 basis points to 40 basis points. So, if an NBFC has a loan book of Rs 1,000 crore, it will need to have a standard provision of Rs 40 crore, as against Rs 25 crore. Also, government-owned NBFCs like Rural Electrification Corporation and Power Finance Corporation will come under the ambit of this regulation. Analysts say every 10 basis points change in credit cost will impact their profit before tax by two-three per cent.
BS
Fake notes on the rise in India, says RBI
Fake notes are steadily making their presence felt in the Indian monetary system, thanks to the rise in currency circulation. The number of fake notes in India grew by 9% to 435,607 in 2010-11 from 401,476 in 2009-10, according to data by the Reserve Bank of India (RBI). During the same period, total banknotes in circulation grew by 14% to 64,577 million from 56,549. "Counterfeit banknotes detected during the year were higher in magnitude on account of heightened awareness amongst banks and increased use of note sorting machines," the RBI noted in its annual report. Around 90% of the counterfeit notes identified were detected at bank branches, reflecting the increased use of note sorting machines. By April end, there were around 4,000 such machines installed. According to industry watchers, to avoid counterfeits, notes should have strong security features so that it becomes difficult to copy them. "Indian notes do not have enough security features compared to those in developed economies," said Sunil Udupa, CEO, AGS Transact Technologies. AGS has so far installed over 10,000 ATMs for banks across the country. "We also need to increase the number of fake notes detecting machines in India significantly," said Udupa. "Banks are continuously increasing the number of note sorting machines in branches, which will arrest the rise in circulation of fake notes," said an official of a public sector bank. "The general public should also be aware while using high value notes."
HT
RBI fines coop bank in Halol
The Reserve Bank of India (RBI) has penalised Shri Janata Sahakari Bank Limited, Halol in Panchmahal district in Gujarat with a monetary fine of Rs 1 lakh for failing to meet RBI guidelines with regard to Anti Money Laundering (AML) guidelines. The apex bank stated, "The bank has imposed a monetary penalty of Rs one lakh on Shri Janata Sahakari Bank Limited, Halol, district Panchmahal,”"After considering the facts of the case and the bank's reply as also personal submissions in the matter, the RBI concluded that the violations were substantiated and warranted imposition of the penalty," the statement said.
BS
Chambers ask RBI to refrain from further rate hikes
NEW DELHI: Concerned over slowing economic growth, India Inc on Tuesday urged the Reserve Bank of India (RBI) to refrain from further hike in key policy rates at its monetary policy review next month. "CII would urge the RBI to refrain from hiking interest rates in the forthcoming policy, taking note of the weakness in the economy," The Confederation of Indian Industry Director General Chandrajit Banerjee said. Indicating slowdown, GDP growth rate for the April-June period slipped to 7.7 per cent, the lowest level in six quarters. The Indian economy grew by 8.8 per cent in the corresponding period a year ago. During the quarter ended June 30, 2011, growth in the manufacturing sector, which accounts for 16 per cent of GDP, dipped to 7.2 per cent from 10.6 per cent in the corresponding period of 2010-11. The mining and quarrying sector grew by just 1.8 per cent during the quarter under review, as against 7.4 per cent growth in the first quarter of the previous fiscal. In its analysis of the GDP number, industry chamber FICCI said going forward industry growth rates are unlikely to be better and overall growth for the fiscal might be below 8 per cent. "If the current trends are any indication, FICCI estimates that the GDP growth in the current fiscal may be in the lower band of 7.5-8 per cent with some significant downside risks," FICCI said. Industry players argue that high interest rates regime is affecting output by way of project delays on account of slowing investments. The RBI has already hiked policy rates 11 times since March 2010 by a cumulative 325 basis points to control inflation. Industry chamber Assocham Secretary General D S Rawat said the GDP figures show that the government's monetary policy has started yielding results with inflation and demand showing signs of compression.
ET
Tuesday, August 30, 2011
Reducing leverage of NBFCs operating with public funds is the aim: Usha Thorat
A holiday in Turkey is the wrong time to interrupt anyone on official matters. Still, when the Reserve Bank of India released the report of its working group on the NBFC sector this morning, one had no choice but call Ms Usha Thorat, Chairperson of the group for her insights. Ms Thorat, a former Deputy Governor of the RBI, is currently Director, Centre for Advanced Financial Research and Learning (CAFRAL). Ms Thorat was just about to take a cruise down the picturesque Bosphorus strait in Istanbul that divides Asia and Europe, but graciously gave a few minutes to explain the approach of her panel and what they tried to achieve in their report. Despite the noise (one could hear some announcements on a loudspeaker in the background), she readily answered a number of questions and was able to recall the highlights and intricate details of the report from memory. Asked about this, she said with a laugh, “We have been steeped in this for the last eight months.”
She was at pains to emphasise that her panel has tried to address both regulatory as well as the industry's concerns. Ms Thorat allayed misgivings expressed by a section of the NBFC industry, which wondered whether the proposed ‘regulations' would do them in. She said, this was clearly not the intention. She said NBFCs had played an important role in the economy, especially in improving last mile connectivity. Asked if the higher norms on capital adequacy (Tier-1 capital to be 12 per cent in three years) were not too stringent, she said the aim was to reduce leverage that an NBFC enjoyed today with public funds. Currently, an NBFC can borrow up to 12 times its own funds. This would come down to about eight times when the proposals come into force. Asked if NBFCs would not find it difficult to meet this requirement if their profit-generating capacity was also hampered, she said that their return on equity (RoE) and return on assets (RoA) were quite high and this was attracting a lot of capital into those sectors. While conceding that there may be a temporary difficulty for NBFCs in terms of costs of funds, the former Deputy Governor of the RBI pointed out that the regulations proposed were over a three-year timeframe and expressed confidence that they would be able to find the resources. Ms Thorat said that the attempt of her panel was to minimise scope for regulatory arbitrage and plug the gaps that were currently there. She pointed out that in the case of lending for margin financing, stock brokers have to abide by SEBI guidelines, while banks have to abide by RBI guidelines. But for NBFCs there are no regulations. Further, she said, “We have addressed certain important issues such as ‘concentration risk' and ‘funding risk'. There are many NBFCs which are basically single product companies — whether it is truck financing or gold loans or equipment financing — and these face concentration risks. “And there are NBFCs which are into capital markets business or real estate business which lend long-term on the basis of short-term borrowings. We have addressed the concentration risk issue by prescribing higher capital adequacy norms and funding risks by bringing in asset liability management (ALM) guidelines.” Elaborating, she said that the working group had recommended a liquidity ratio for NBFCs to act as a buffer in the event of any kind of stress up to a period of 30 days — in the first instance. So, all NBFCs, both deposit taking and non-deposit taking, should hold cash or government securities equal to the gap between their total inflows and outflows up to the 30-day period. Beyond that period, there would be time to arrange appropriate resources or liquidate necessary assets in the event of a crunch, she said.
HBL
Katrina or Kareena?
Who’s better looking, Kareena Kapoor or Katrina Kaif? It’s not some film-glossy that’s asking the question, but RBI Governor D Subbarao. Yup! While making a presentation on the macro-economic situation, the dull powerpoint suddenly brightened up with pictures of the two actresses. It seems Subbarao’s intention was not to get the audience to focus on just the generous dose of skin. It’s easy to go along with the dominant view—which Subbarao said was that Kareena was more beautiful—the RBI Governor said, but if someone has a different view (that Katrina is better looking), he or she should express it. A different view, he said, would help policymakers firm their view on things. Subbarao would do well to read the beginning of Raghuram Rajan’s book. Rajan points out that when, in 2005, he expressed scepticism at Jackson Hole about whether the world was riskier now—this was when the economists were gathered to toast Ben Bernanke’s sage leadership at the Fed!—he felt like Daniel with the lions.
FE
Practise economics as people matter: Subbarao
 |
The Finance Minister, Mr Pranab Mukherjee, flanked by the RBI Governor, Dr D. Subbarao, and the Deputy Chairman, Planning Commission, Mr Montek Singh Ahluwalia, at the Golden Jubilee Celebrations of the Indian Economic Service in the Capital on Monday |
The Reserve Bank of India (RBI) Governor, Dr D Subbarao has outlined five principles that economists in the Government must keep in mind while shaping economic policy. Addressing the inaugural function of the golden jubilee celebrations of the Indian Economic Service (IES) here, Dr Subbarao highlighted that the global financial crisis of 2008 was in many ways a wake-up call for economists to introspect on their profession, on their scholarship and on their professional conduct. The first principle, he said, that economists need to remember is to practice economics as a people matter, which is other way of saying that economics is not physics. “Economists should remember that they deal with world of people. Economics is not like physics because it deals with real world of people, its laws are not immutable and knowledge progression in economics is one way street”, Dr Subbarao said. The second principle is that when economists build models, they should fit it to the real world and not the real world to the models. “The models that have been built by economists are dictated by convenience and not conviction. Economists model what they can and not what they should”. Dr Subbarao said that macroeconomics is not aggregation of microeconomics as models assume. The other principles that economists would do well to remember is that economic policy making is more than straight application of text book knowledge, need to apply judgement, avoid group think and have a sense of history. “The stereotype reply from economists is that they didn’t see the crisis coming because the world had changed. It’s very important to have a sense of history in order not to repeat mistakes, at least learn from them. You can never prevent another crisis but at least you can mitigate the chances of a crisis blowing up or indeed if a crisis were to occur you will be well equipped to handle it”, Dr Subbarao said.
HBL
Subscribe to:
Posts (Atom)