Lessons from the world financial crisis

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)
By D. H. Pai Panandiker
The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.

Source: http://in.reuters.com/article/economicNews/idINIndia-42327820090909?sp=true

India stk fund inflows drop as entry fee ban bites

Net collections by Indian stock funds turned negative for the first time in four months in August, a month after the market regulator banned entry fees by mutual funds, limiting their ability to pay distributors.
The Securities and Exchange Board of India in July directed mutual funds to abolish front-end or entry fees from August 1, a move aimed at cutting costs for investors and to discourage aggressive selling.
However, the step has irked distributors, who bring more than 90 percent of the business to money managers and have threatened to stop selling mutual funds, given the potential loss in fees.
"Under the new norms, distributors are no longer likely to get higher commission from AMCs and, therefore, mutual fund business, especially sale of equity funds, has become an unattractive proposition," said Chintamani Dagade, a senior research analyst with Morningstar.
He said equity markets trading at higher levels would have also held investors back from investing.
Indian stock funds recorded a 1.18 billion rupees net outflow in August, the sharpest monthly decline in 2009, after three straight months of robust flows on back of a strong rebound in domestic shares.
Inflows into existing funds dropped by more than a third to its lowest since April.

Source: http://in.reuters.com/article/domesticNews/idINBOM44046320090911