Current Affairs: Economic Issues: 28 Nov- 5 Dec 0’9 by DialogueIndia

CAG Weekly
(Current Affairs & GK)
By Om Prakash (goldy sir) 
Dubai rattles the world with its loan rescheduling program

• Dubai World, the government investment company with $59 billion of liabilities, sought to delay repayment on much of its debt.
• The announcement sent shockwaves throughout the financial and political world.
• Credit-default swaps tied to debt sold by Dubai rose as much as 131 basis points to 571.
• For India, which has tens of thousands of its citizens living and working in the emirate, the concerns are more direct: thousands of its expats staring at job losses and the economy, sharply reduced trade.
• India, which gets nearly a quarter of the remittances from the United Arab Emirates and has lakhs of labourers working in the region, could be worse off than most other nations if the crisis escalates into a full-blown one like the Russian or Argentinean crises of the past. India's exports to the UAE stood at $23.92 billion in FY09.

The Economic Crisis

• The south-east Asian financial crisis of 1997, which engulfed Indonesia and South Korea, started in Thailand.
• In 2001 it was Argentina.
• Last year's problems first bubbled to the surface in Iceland and Ireland.

RBI to ask banks to furnish exposure details

• Banks on Friday said they had an exposure of Rs. 5,000-6,500 crore in the Middle East city, and said the debt repayment crisis in Dubai might not have major impact on their balance sheets.
• Bank of Baorda, the largest Indian lender in the United Arab Emirates (UAE), said it had an exposure of Rs. 5,000 crore in Dubai.
• "We have only a 7-8 per cent of our total loan-book in the entire Gulf region, which amounts to Rs. 10,000-crore. These accounts are well maintained and is unlikely to cause any kind of impact on the balance-sheet," Bank of Baroda Chairman and Managing Director M. D. Mallya said.

Bank consolidation: pitfalls of a hasty decision financial scene

• After a period of relative quiet, the subject of consolidation in the Indian banking industry is back in focus.
• While no policy statements have come from either the government or the Reserve Bank of India, reports of a meeting that the chairmen of the five top public sector banks had with officials of the Finance Ministry have evoked renewed interest in the subject.
• New government stance- PSBs should look at consolidation as a serious option but the initiatives should come from the banks themselves. In other words, the Finance Ministry will not drive the mergers but will play a supportive role if proposals do emanate from banks.
• The latest policy stance is in sharp contrast to the one that prevailed earlier, when the government wanted mergers to take place within a fixed timeframe.
• Consolidation has been on the policy agenda ever since the Narasimham II Committee's report on financial sector reform (1997) recommended the creation of four or five large banks in place of the 27 PSBs.
• Enhanced capital adequacy was touted as one of the benefits.
• However, if the government is to retain at least 51 per cent of the equity capital in any PSB, identifying a merger partner becomes extremely difficult.This is because barring two, all the PSBs are listed on the stock market with varying degrees of non-government shareholding.
• The following factors suggest that any such merger will be neither voluntary nor free from glitches.
• One is the ownership structure of the PSBs all of which have the government as the majority shareholder. Despite the Finance Minister's assertion that mergers will not be dictated, boards of individual banks and their chairmen will be only too eager to please the powers that be. Such attitude is extremely difficult to shake off if past experience is any guide.
• Two, the government being the majority shareholder does not mean that it can ignore the interests of minority shareholders. Guidelines of the Securities and Exchange Board of India and stock exchanges will have to follow.
• Three, it is difficult to see synergies accruing from such mergers.
• For instance, seeking a geographical or cultural fit between two banks is only theoretically possible. All government-owned banks have acquired an all India character even though in their private sector days they have regional in character. A merger will entail duplication of branch network especially in towns and metros.
• Synergy in technology application will be equally elusive given that the banks are in different stages of technology absorption and use different platforms.
• A more difficult task is to achieve a cultural fit post-merger. Though all of them are government-owned, each has certain unique cultural strengths that cannot be retained after the merger. In their pre-nationalisation days, some of the banks had affinities with specific business activities and groups. These have continued under government ownership. For instance, Bank of India and Bank of Baroda have had a strong stock market tradition, which has flourished well into their public sector days.
• There is a real possibility that such strengths will be dissipated after merger with a bank with little exposure to the stock markets.
• Four, a successful merger implies a reasonably smooth integration of staff and human resources related systems.
• This will be, by far, the biggest challenge. By their very nature, bank or financial service entities are people-centric. It is not clear whether those who advocate mergers as an easy option are aware of the strengths of such human capital.
• There are many other reasons why a merger between PSBs will neither be easy nor beneficial.
• Some of the world's biggest banks, the Citigroup notably, which relied heavily on mergers and acquisitions to grow phenomenally, have been rapped on the knuckles by the regulators and are realising that such stupendous inorganic growth has come at a price.
• Again in the U.S. the intense pace of bank consolidation that followed the federal inter-state banking legislation in 1994 has not been beneficial for small businesses, which are the major job creators.
• According to a study conducted on behalf of the U.S. Small Business Administration Office and Advocacy, their access to credit has been sharply curtailed.

UNIDO all set to launch $7 million energy efficiency project in India

• The United Nations Industrial Development Organization (UNIDO) is all set to launch a major initiative costing $7 million to promote energy efficiency in selected energy intensive micro, small and medium enterprises (MSME) clusters across india .
• The objective was to enhance energy efficiency and increase the share of renewable energy in these sectors.
• The project, to be spread over a period of four years, is funded by the Global Environment Facility (GEF) and is part of the country programme of cooperation between India and UNIDO.
• The nodal agency for execution of this project is Department of Industrial Policy & Promotion (DIPP).
• It has selected 12 prominent cities,The clusters selected included Khurja, Thangarh and Morbi (ceramics), Jalandhar, Nagaur, Tumkur (hand tools), Belgaum, Coimbatore and Indore (foundries), Jagadhri and Jamnagar (brass clusters) and dairy in Gujarat.

3G offers higher capacity and enhanced network functionalities

• mood on two counts — first on the feat of India achieving 500 million telephones well ahead of the target in November 2009, second on the timely introduction of 3G mobile service in the country.
• 3G is a term coined by global cellular community to indicate the next generation of mobile service capabilities (higher capacity and enhanced network functionalities) that allow advanced services and applications including Multimedia.3G in the mobile network is a basket of good services and facilities for the customers.

IT professionals asked to move up the value chain
Narayana Murthy, Chairman and chief mentor, Infosys, speaks at the World Newspaper Congress in Hyderabad.

• the global sourcing industry, which is pegged at $500 billion at present, was expected to triple by 2020, of which India's share was likely to be anywhere between $175 billion and $300 billion.
• Unlike the previous decade where 75 per cent of the revenues to India came from Fortune 500 companies, small and medium business were expected to contribute at least 50 per cent share — between $90 billion and $150 billion — in the coming years.
• While the U.S. and the U.K. contributed a major share of 80 per cent of revenues, 50 per cent of the revenues (anywhere between $90 billion and $150 billion) was expected to come from BRIC (Brazil, Russia, India and China) countries.
• The contribution from the banking, financial services, insurance, telecom and manufacturing segments, which now stood at 75 per cent, would come down as public sector companies, healthcare, media, utilities and other sectors were set to take 50 per cent share, he said.

Courtesy: DIALOGUE INDIA

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Malvaniya Prashant
MBA, S V I M, Kadi
http://malvaniyaprashant.wordpress.com