Reporting on the financial sector

Swaminathan S. Aiyar

Non-experts can do financial stories

• You need not be a financial expert• But you must know financial experts. Identify

and quote them. This provides depth, credibility.• Don’t quote just one expert. Quote 2-4 experts

with differing views for major stories. Gives you reputation for fairness, impartiality.

• Cultivate experts all year, keep quoting them. They love it. Create relationships where they quickly return your calls, well before your deadline.

Develop your own expertise• Attend press conferences, seminars, lectures, NGO

meetings on financial sector.• Read financial stories and analyses in local and global

press. The Economist, The Financial Times, Wall Street Journal.

• Track major government and central bank reports; corporate and stock markets reports of financial companies; periodic data relating to the financial sector.

• Scams and crises are good occasions to develop expertise: lots of experts hold forth (Asian financial crisis, IT bubble in stock markets).

Experts in Govt. sector

• Ministry officials• Central bank officials• Regulators (capital markets, insurance

etc)• Government banks/insurance Cos.• Retired officials of Finance Ministry/central

bank. These tend to be very talkative and well-informed.

Experts outside govt.

• Private banks/insurance companies, stockbrokers, mutual fund managers.

• University academics.• Think tanks.• Multilateral institutions (WB, IMF, ADB)• Lawyers• Retired judges.

Borrowers

• Industry associations (small and large industry, transport, software etc)

• Farmers’ associations.• Microfinance institutions.• Home-owners (for mortgages), credit card

users, buyers of consumer durables in installments.

Other important sources

• Opposition parties.• Trade unions.• Man in the street.• Housewives.• The police (for scams)• Internet: Search engines (eg. Google),

Wikipedia.

Monitor financial service delivery

• Monitor access of private sector, poor and middle class to financial services.

• Monitor regulation of banks, markets? How good is their health? Many stories, get you big headlines.

• Monitor provision of savings outlets, credit and insurance to the poor: to middle class: to farmers: to business.

• Monitor contract enforcement. • Monitor progress of capital markets, mutual funds,

pension funds.• Monitor progress of mortgages, consumer credit, ATMs,

smart cards, fast computerised delivery.• Major problems? Lack of competition? Excessive/poor

regulation? Poor market development? Solutions?

Make international comparisons

• Compare Sri Lanka’s performance with others (India, Pakistan, ASEAN).

• Get ideas from successes/problems in neighboring countries.

• Sources for comparisons: World Development Indicators (worldbank.org); Global Development Finance (worldbank.org); International Financial Statistics (imf.org).

India: useful comparator

• Largest remittances in world ($ 25b ?)• Stock market success: $ 11 b. inflow.• Big bank networks: over 95% population

within 5 km of bank branch.• Substantial insurance penetration.• Experiments in access for farmers, poor,

SMEs to financial services.• Explosive growth of microfinance

Pre-reform bank problems

• Near-monopoly for govt in banks, financial institutions, insurance, mutual funds.

• Up to 70% of bank deposits pre-empted by govt, public sector

• Directed lending. 40% to priority sector• Financial repression. Low interest rates• Huge bad debts, not recognised• Non-computerised, poor service, strong

unions

Bank reforms after 1990

• No privatisation: new private banks enter; limited freedom for foreign banks. Govt banks still have 75% of all bank assets

• Interest rates liberalised. First shot up, then fell• Less pre-emption by govt. But directed lending

continues.• Basel norms adopted, 90-day recognition of

overdues, provision for bad debts• Scams: Stock market, NBFCs, Co-op banks

Good outcomes• Surge in bank profitability: NPAs down from 8.1% in

1998 to 2% today; capital adequacy ratio 12%; banks can raise fresh capital from market, meet Basel norms

• Insurance: new private companies, 49% FDI.• Explosive growth of consumer credit, mortgages, mutual

funds, fee income• Competition, better services, computerisation.• Banks keen to lend to agriculture, SMEs, microfinance.

Contract farming, 56 m. kisan credit cards. 1.9 m. SHGscumulative credit $ 2b., aim for 3 m. SHGs and $ 3 b. loans by 2008.

Capital market: pre-reform problems

• Bombay Stock exchange: malpractices, price rigging, front running, high transaction costs. UTI

• Controller of Capital Issues. Now abolished.• Paper shares, one-tenth bogus.• Settlement problems. • Poor corporate governance, cooked books,

weak supervision. Stock market scam 1992• No futures and options. No commodity futures.

Capital market reforms

• National Stock Exchange. Electronic, state-of-art. Now extended to bond market. Cuts rigging

• SEBI: better supervision, governance• FIIs enter; dematerialisation, derivatives, T+2

settlement. Mutual funds expand.• Sensex up from 1000 (1990) to 11,000 (2006).• In 2005, 823 FIIs, inflow $ 11 b.; stock market

turnover $ 1.3 tr (derivatives nearly). • Commodity futures, turnover $ 300 b.

Warehousing receipts proposed.• Pension funds proposed.

Major benefits of capital market reform

• Primary markets: companies raise $ 6.5 b. new issues in 2005.

• ADRs and GDRs. Indian MNCs arise, raise billions for takeovers abroad (Tata, Reliance, Bharat Forge)

• Example: Tata Motors convertible yen notes: $ 100 m, zero interest, redeemed at 15% discount or converted to equity at 30% price premium!

• Commodity futures: can encourage contract farming, agro-processing, exports.

Access of poor to services• Bank nationalisation: rural branches; DRI. Yet banks

keep poor out: high transaction costs. Kisan credit cards.• Integrated Rural Development Program• Post Office accounts.• Microfinance. Hundreds of NGOs, NBFCs. An MFI can

reach 50,000-100,000 poor women in 5 years• Self Help Groups (SHGs). Velugu in Andhra Pradesh. • NABARD creates bank-SHG linkage. Now 1.9 million

SHGs, $ 2 b loans.• Big foreign inflows for microfinance. High interest rates

still a problem. Smart cards can cut transactions costs.• Rural internet kiosks: 100,000 by 2008. Commodities, e-

governance. Can deliver financial services.

Better access for middle class

• Mortgage finance; Hugely increases access to housing.

• Financing durables: auto, bike, TV, white goods, education, foreign travel

• Credit card growth• Problems in payments: strong arm enforcement?• Health insurance, mutual funds, new issues

(retail quota)• Private pension funds? Portable pensions?.

Ability to enforce contracts

• No bank has ever managed to seize mortgaged land of farmers

• Rare to seize assets of defaulting corporations• Bankruptcy cases: take 10-50 years• New Securitsation Act: defaulters to deposit 50%

of dues if they wish to appeal. Easier to recover dues. Has helped improve bank credit to SMEs

• Asset Reconstruction Company India Ltd; banks can sell their bad debts.

Remittances

• Overseas remittances up from $ 2.8 b. in 1990-91 to possibly $ 25 b in 2005-06

• Black market premium on dollar ends• Formal system charges 5-6%, hawala 2-

3%. In UP, 50% remittances via hawala.• Promote rural cellphones: delivery device• Attract bank deposits: they may stay

Group exercise

• In the light of the two presentations, suggest two ways in which Sri Lanka can improve access of the poor to financial services (just one para, please).

• Name three academics (in universities, think tanks, multilateral institutions etc) and three people in public life (politicians, NGOs, bureaucrats etc.) whom you could quote in such an analysis

Individual exercise (by e-mail)

• In the light of today’s presentations, mention two ways in which Sri Lanka can improve its capital markets (max. two paras).

• Where would you look for sources to be quoted in such a story? Name four relevant sources.

• E-mail a reply to me at swamiaiyar@yahoo.com