Some food for thought
"A hen is only an egg's way of making another egg."
—Samuel Butler (British Poet, 1835-1902)
Word for the day
Brusquerie (n)
Abruptness and bluntness in manner; brusqueness.
First thought this morning
Brexit vote in summer of 2016 marked a beginning of a
significant phase in the history of modern Europe. The recent protests in
France over higher fuel prices (popularly known as Yellow Vest Movement) may be
an important chapter in this.
The violent protests apparently enjoy wider support amongst both
urban and rural populace of France, and neighboring countries like Italy,
Belgium and Netherlands.
The global strategists, historians, and economists et. al. are
busy analyzing the genesis, implications and repercussions of these protests.
We would certainly know their views and opinion in due course. Regardless, I
would like to add my two paisa to this.
In my view, these protests are primarily the following three
sentiments:
(1) Vote of no
confidence in the ECB's 'whatever it takes" stance of monetary policy.
(2) Realization of
the fact fiscal profligacy of the pseudo socialist regimes in Europe cannot
last much longer.
(3) Discomfort of
natives about the demographic changes taking place in Europe, especially due to
immigration.
The reorganization of European Union, in my view, may not pause
with UK exiting the common market. We may either see wider reforms or more exist,
rendering the 25year old experiment mostly redundant.
I shall be keenly reading the unfolding chapters in European
history from my own lenses.
Chart of the day
Preparing for a shifting paradigm
Four noteworthy events have taken place in Indian financial
markets in recent past:
1. The market
regulator (SEBI) has issued a framework, requiring large corporate to source at
least 25% of its total long term borrowing through bonds. Large corporate for
this purpose is defined as firms rated "AA" or higher and having
outstanding of more than Rs100cr loans with a maturity of 1yr or more.
2. Both major stock
exchanges have launched online platforms for retail investors to trade in
government securities.
3. Non Banking
Financial Companies (NBFCs) and Housing Finance Companies (HFCs) have emerged
as the most important source of credit delivery.
4. Ostensibly, one
odd transaction in bond market by a mutual fund triggered a panic attack both
in the credit as well equity markets.
Collating all these four pieces in a single frame, I get the
following picture:
(a) Banks alone
cannot meet the burgeoning credit distribution needs of the country. One, most
of the banks may be limited either by reach or resources; or may be both. Two,
banks cannot serve the micro segments of the credit delivery that require high
degree of specialization, e.g., consumer electronics and household goods
funding; financing of consumption expenditure like vacations, marriages,
vocational courses; infrastructure asset funding; infrastructure construction
funding; SME working capital financing; small housing finance etc. We do
require specialized institutions for delivery of these credits.
(b) The small savings
that have been a traditional source of deficit financing may not remain viable
for long due to a variety of reasons. Sourcing of deficit financing from the
household investors directly is definitely a more efficient and sustainable
method.
(c) The government
is earnestly facilitating the deepening of financial markets for domestic
investors. IBC to ensure quick and efficient resolution of defaults; online
trading platform for better liquidity; regulatory mandate for companies to
raise more debt from markets to deepen the market make the price discovery more
efficient, are some noteworthy efforts.
Three things are however still conspicuous by their absence
in this picture, viz.,:
1. I find the
present level of understanding of debt markets at the distributor and investor
level is abysmal and totally inadequate.
2. An equitable
taxation framework. In an emerging market like India the debt investments
generally carry higher risk as compared to the equity. It would therefore only
be appropriate that tax treatment of both is equitable.
3. Some recent
episodes of questionable corporate governance at some leading corporate
highlight that our disclosure norms are not only inadequate, but poorly
implemented also. Public companies are allowed to hide substantial transactions
behind the veil of 'business compulsions' and 'contractual obligations of
secrecy'. This all needs to change.
Recently, the rating agency CRISIL has issued an interesting
study "Indian Debt Market 2018". I would like to share some of the
interesting trends and data presented in the study with my readers in subsequent
posts.
In case you are wondering why I have not taken note of the RBI
policy statement made yesterday — well frankly dear, I found nothing noteworthy
in that.
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