tag:blogger.com,1999:blog-71825764300456560622024-03-14T06:24:38.218+05:30Candid Unheard Voice of Indian MicrofinanceRamesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.comBlogger385125tag:blogger.com,1999:blog-7182576430045656062.post-13832304402907957572016-04-06T09:26:00.004+05:302016-04-06T09:26:46.448+05:30The Governance of Compensation: Lessons From The 2007/2008 Financial Crisis!<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Ramesh S Arunachalam </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Compensation
is indeed a very sensitive and critical aspect in the governance of banks and
financial intermediaries and in my opinion, it is one factor that perhaps
accelerated and/or led to the 2007/2008 financial crisis. The </span><b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Bold-OV-QKYGCA;">Financial Crisis Inquiry Commission (FCIC) Final
Report<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn1" name="_ednref1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Bold-OV-QKYGCA; mso-fareast-language: EN-US;">[i]</span></b></span></span></span></a>
(Dated January 2011) also concurs and i</span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">ndeed states compensation as one factor, among
many, that contributed to the financial crisis of 2007/2008 in the United
States and elsewhere! And I quote the relevant sections from the FCIC report
below:</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">“Both
before and after going public, investment banks typically paid out half their
revenues in compensation.</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
For example, Goldman Sachs spent between </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">44%</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
and </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">49% </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">a year between </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2005</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
and </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2008</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">, when Morgan Stanley allotted between </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">46%</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> and </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">59%</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">. Merrill paid out similar
percentages in </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2005</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> and </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2006</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">, but gave </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">141%</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
in </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2007—</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">a year it suffered dramatic losses.<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn2" name="_ednref2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[ii]</span></span></span></span></a></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">As the scale, revenue, and
profitability of the firms grew, compensation packages soared for senior
executives and other key employees. John Gutfreund, reported to be the
highest-paid executive on Wall Street in the late </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">1980</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">s, received </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$3.2</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> million in </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">1986</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> as CEO of Salomon
Brothers.<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn3" name="_ednref3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[iii]</span></span></span></span></a>
<i style="mso-bidi-font-style: normal;">Stanley O’Neal’s package was worth more
than </i></span><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$91</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
million in </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2006</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">, the last full year he was CEO of Merrill Lynch.<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn4" name="_ednref4" style="mso-endnote-id: edn4;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[iv]</span></b></span></span></span></a></span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> <b style="mso-bidi-font-weight: normal;">In </b></span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2007</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">,
Lloyd Blankfein, CEO at Goldman Sachs, received </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$68.5</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
million;<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn5" name="_ednref5" style="mso-endnote-id: edn5;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[v]</span></b></span></span></span></a></span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> Richard Fuld, CEO of Lehman Brothers, and Jamie
Dimon, CEO of JPMorgan Chase, received about </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$34
</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">million and </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$28</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> million, respectively.<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn6" name="_ednref6" style="mso-endnote-id: edn6;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[vi]</span></span></span></span></a>
That year Wall Street paid workers in New York roughly </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$33</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> billion in year-end
bonuses alone.<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn7" name="_ednref7" style="mso-endnote-id: edn7;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[vii]</span></span></span></span></a>
Total compensation for the major U.S. banks and securities firms was estimated
at </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">$137</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
billion.<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn8" name="_ednref8" style="mso-endnote-id: edn8;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA; mso-fareast-language: EN-US;">[viii]</span></span></span></span></a>”
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">(FCIC Report)</span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"></span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">In effect, what was
happening was</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> that, in all these firms, the
focus was on the short-term performance, incentives, and compensation when, in
reality the risks (which existed) were mostly, medium and/or long-term.</span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> And of course, the regulator and
law/policy makers sat and watched as compensation soared way beyond acceptable
levels and firms started paying as high as 50% of their revenues in
compensation. </span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Did not
the regulators and policy/law makers find it strange that:</span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <i style="mso-bidi-font-style: normal;">a) </i></span><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">Goldman Sachs spent between </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">44%</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
and </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">49%
of its revenue a year on compensation (during the years 2005</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
to </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2008)</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">;
b) Morgan Stanley allotted between </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">46%</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> and </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">59%</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">;
and c) Merrill paid out similar percentages in </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2005</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> and </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2006</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">,
and more importantly, gave as high as </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">141%</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;"> in </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Arial Unicode MS";">2007 (</span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">a
year it suffered dramatic losses).</span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-RKYGCA;">
What, on earth, were the regulators and policy/law makers doing? </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><br />
The above are just few instances, and as we have moved through the financial crisis
of 2008 (but are still recovering from its aftermath), there are several
important lessons here with regard to the governance of compensation in the
larger financial sector that we all need to understand and come to terms with.
I will try and articulate some of these here for their benefit of various
stakeholders. <br />
<br />
<b>Lesson #1: Lack of arm's-length decisions and negotiations: </b>The
governance of remuneration and incentive systems seems to have (apparently)
failed because decisions and negotiations (carried out) were not been at arm's
length. Conflicts of interest at various levels have aided such improper
decision-making and negotiation and much of this is applicable to remuneration
and incentive systems for a range of senior management personnel and not just the
CEO or managing director or chairman of the board. While there are several
examples from the 2007/2008 financial crisis, the paragraphs cited from The FCIC
offer good factual insights. <br />
<br />
<b>Lesson #2: Inordinate level of influence of senior management in establishing
remuneration schemes: </b>In my opinion, senior management generally appears to
have had far too much influence over the level and conditions (including
measures) set for performance based remuneration. On the other hand, boards were
often unable to or, sometimes, even incapable of exercising objective,
independent judgement. Here again, there were serious conflicts of interest,
which certainly exacerbated this whole issue - in fact, this has been one of
the most important reasons for inaction by the board against inappropriate
remuneration proposals of senior management at many of the institutions at the
centre of the 2007/2008 financial crisis.<br />
<br />
<b>Lesson #3: Medium and long-term risks are not taken into account: </b>In many
cases that I have closely observed, the relationship between performance and
remuneration has been rather tenuous and, sometimes, even difficult to
establish, especially given the nature of the operations. A very critical
aspect here is that medium as well as long-term risks were rarely factored into
the whole process - something that should have been done naturally. How can the
rewards be in the short-term, when the risks are medium-long term?<br />
<br />
<b>Lesson #4: Complicated and opaque remuneration schemes: </b>The remuneration
schemes have also been fairly complicated and also opaque in terms of shrouding
actual conditions in the operation of the scheme and the consequences. What I
am saying is that these (operational conditions and terms) are perhaps not
clear and obvious to the naked eye of an unassuming observer. These conditions
also tended to encourage excessive and mindless (growth and) risk-taking and
especially with a short-term orientation. <br />
<br />
<b>Lesson #5: Mere disclosure is not transparency: </b>While transparency (in
some cases) did exist in terms of disclosure, several institutions couched the
main characteristics of their performance related remuneration programs in
verbose technical language and thereby made it very difficult for comprehension
to the normal reader. In fact, it was very difficult to get comprehensive information
on (a) The total cost of the remuneration program to the institution; (b) The
specific performance criteria and measures along with their conceptual and
operational definitions; and (c) The manner in which remuneration has been
adjusted for relevant risks-especially, medium- and long-term risks (which is
so relevant today). That from a shareholder’s perspective was <u>NOT</u> ideal
by any means!<br style="mso-special-character: line-break;" />
<br style="mso-special-character: line-break;" />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Without
question, institutions will surely need to have remuneration and incentive
systems that focus and encourage at least the medium-term, if not long-term
performance. This, in turn, means that they must choose to reward their senior
management after some actual performance has been realised and that has not
usually been the case - there are several examples of high front-loaded bonuses
paid to senior management executives and the results are there for everyone to
see. In fact, this single minded focus on the short-term incentives and
compensation needs to be changed to reflect the medium- and/or long-term
performance and operations. That is very critical going forward!<br />
<br />
Also, remuneration at many of these institutions does <u>NOT</u> seem to have
been established through an explicit governance process where the roles and
responsibilities of all stakeholders involved, including committee members,
consultants, risk managers and others, were clearly defined and separated
(without conflict of interest). The roles given to non-executive independent
board members in the process - although they may seem somewhat appropriate -again
appear to be laden with serious conflicts of interest. And finally, while
remuneration policies are sometimes submitted to the annual meeting and
subjected to shareholder approval, much of this seems to be a routine matter,
with minimal (informed) discussion because of aspects mentioned earlier. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><br />
Therefore, as has been often mentioned, <i style="mso-bidi-font-style: normal;">"Compensation
is one factor among many that contributed to the financial crisis that began in
2007. Official action to address unsound compensation systems must therefore be
embedded in the broader financial regulatory reform program, built around a
substantially stronger and more resilient capital and liquidity framework.
Action must be speedy, determined and coherent. Urgency is particularly
important to prevent a return to the compensation practices that contributed to
the crisis.”<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn9" name="_ednref9" style="mso-endnote-id: edn9;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[ix]</span></b></span></span></span></a></i>
<br />
<br />
I sincerely hope that the regulators and supervisors (worldwide) focus on this
aspect and ensure that the same compensation practices and incentives that
(adversely) affected institutions in the United States in 2007/2008, do not
impact the larger financial sector in the future again!</span></div>
<div class="MsoNormal">
<br /></div>
<div style="mso-element: endnote-list;">
<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="edn1" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref1" name="_edn1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[i]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf</span></a><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US;"></span></div>
</div>
<div id="edn2" style="mso-element: endnote;">
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref2" name="_edn2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[ii]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">Goldman Sachs, 2006 and 2009 10-K; Morgan Stanley,
2008 10-K; Merrill Lynch, 2005 and 2008 10-K.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn3" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref3" name="_edn3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[iii]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">“Gutfreund’s Pay Is Cut,” </span><i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-It-OV-QAZGCA;">New York Times, </span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">December
23, 1987.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn4" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref4" name="_edn4" style="mso-endnote-id: edn4;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[iv]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">Merrill Lynch, “2007 Proxy Statement,” p. 38.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn5" style="mso-element: endnote;">
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref5" name="_edn5" style="mso-endnote-id: edn5;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[v]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">Goldman Sachs, “Proxy Statement for 2008 Annual
Meeting of Shareholders,” March 7, 2008, p. 16: Blankfein received $600,000
base salary and a 2007 year-end bonus of $67.9 million.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn6" style="mso-element: endnote;">
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref6" name="_edn6" style="mso-endnote-id: edn6;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[vi]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">Lehman Brothers, “Proxy Statement for Year-end
2007,” p. 28; JP Morgan Chase, “2007 Proxy</span></div>
<div class="MsoEndnoteText">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">Statement,” p. 16.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn7" style="mso-element: endnote;">
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref7" name="_edn7" style="mso-endnote-id: edn7;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[vii]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">New York State Office of the State Comptroller,
“New York City Securities Industry Bonus Pool,”</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">February
23, 2010. The bonus pool is for securities industry (NAICS 523) employees who
work in New</span></div>
<div class="MsoEndnoteText">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">York City.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn8" style="mso-element: endnote;">
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref8" name="_edn8" style="mso-endnote-id: edn8;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[viii]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">“Banks Set for Record Pay, Top Firms on Pace to
Award $145 Billion for 2009, Up 18%, WSJ Study</span></div>
<div class="MsoEndnoteText">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: MinionPro-Regular-OV-SAZGCA;">Finds,” WSJ.com, January
14, 2010.</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"></span></div>
</div>
<div id="edn9" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref9" name="_edn9" style="mso-endnote-id: edn9;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[ix]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> Quoted from BIS
paper on Compensation and Corporate Governance, 2010.</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 9.0pt; mso-ansi-language: EN-US;"></span></div>
</div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-50428597978690831852016-04-05T16:08:00.001+05:302016-04-05T16:08:05.448+05:30Effective Control Systems at Investment/Commercial Banks and Other Financial Intermediaries: The Key to Accountable and Responsible Operations<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Ramesh S Arunachalam</span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The importance of having properly
functioning (effectively implemented) internal control systems<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn1" name="_ednref1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[i]</span></span></span></span></a>
at investment and commercial banks and other financial intermediaries needs to
be strongly emphasized, especially in the context of what happened in the lead
up to the 2008 financial crisis. In fact, self-regulation, as a much touted and
effective mechanism, miserably failed primarily because ‘internal controls’
were either absent or compromised at the major investment/commercial banks and
financial intermediaries concerned (FCIC Report, 2011). </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">While specific examples of such
internal control failures will be dealt with in a separate post, this one (in a
series of posts) takes a look at such control systems and provides practical
(starter) suggestions to investment/commercial banks/financial intermediaries<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn2" name="_ednref2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[ii]</span></span></span></span></a>,
regulators, policy makers, and other stakeholders on how (best) to structure
such systems so as to achieve the goal of accountable and responsible
operations in real time.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Having said that, let us now move on
to substantive issues related to the control system. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The formality of any control system
will depend largely on an INSTITUTION’s size, the scale and complexity of its
operations, its risk profile and so on. Less formal/structured internal control
systems at smaller INSTITUTIONS can be as effective as highly formal/structured
internal control systems at larger (and complexly structured) INSTITUTIONS. <b><i>But
the key is that every ‘INSTITUTION’ should have an internal control system,
this system should be commensurate with the size, scale and complexity of its
operations and most importantly, the system should actually work on the ground
in real time.</i></b> </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Many of the problems with investment/commercial
banks/financial intermediaries<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn3" name="_ednref3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[iii]</span></span></span></span></a>
could have (perhaps) been avoided in the lead up to the 2008 financial crisis,
if and only if, the concerned INSTITUTIONS had an effective and appropriate
internal control system operational in the first place—<i>one that did not
merely exist on paper but was rather implemented in reality. </i>This is
something that the concerned INSTITUTIONS (be it investment/commercial
banks/financial intermediaries) will have to self-assess, with regard to their
respective organizations and bring about the necessary changes.
Regulators/supervisors and other stakeholders could also enable these INSTITUTIONS
to assess the quality<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn4" name="_ednref4" style="mso-endnote-id: edn4;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[iv]</span></span></span></span></a>
of their control systems and make the necessary changes.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">That said, what then are the key
components of such a system?</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">In my opinion, an effective control
system (at any INSTITUTION) should have five key elements:</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">An appropriate <b>control
environment,</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Supported by a proper <b>risk
management system,</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">With <b>control activities</b>
commensurate with the size, scale and complexity of operations,</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Aided by a <b>transparent and
accurate accounting, information, and communication system, </b>and</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Backed by dispassionate, objective and
independent <b>self-assessment/monitoring.</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Having set the context, let us now
look at what each of these elements mean in reality through a series of posts.
And in this first post, I focus on the strategic element of the <b>“appropriate
control environment”</b>, an issue that is seldom thought about in practice but
one that I believe is very (if not most) crucial to the long-term survival of
the INSTITUTION. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Why should each and every INSTITUTION
have an appropriate control environment? </span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This is because the control
environment is the foundation on which the institution’s control system is (to
be) built. Basically, it reflects the board’s<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn5" name="_ednref5" style="mso-endnote-id: edn5;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[v]</span></span></span></span></a>
(and also senior management’s) commitment to strong and effective internal
control at the INSTITUTION. In other words, it provides the <i>discipline</i>
and <i>structure</i> to the entire (internal) control system. <i>Without this
commitment by the board of directors (and senior management) to strong and
effective controls, no (internal) control system (however well designed and
structured) can actually work on the ground.</i> <b>And this commitment must
clearly be visible throughout the INSTITUTION—for all staff to see and emulate.
Let us be clear on that as otherwise accountable and responsible operations can
never be the order of the day! </b><span style="mso-bidi-font-weight: bold;">Just
look at the 2008 financial crisis which is replete with examples where board
and senior management themselves showed scant respect for the control system
that was (to be) in place at their INSTITUTIONS. They were equally guilty of
‘control system’ breaches due to their aggressive risk posture (s) caused by a
compensation system that hugely rewarded short terms gains, when the risks were
in fact medium to long term. </span></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">And who has to play a crucial role
in establishing this at an INSTITUTION? </span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">At a very basic level, it is an INSTITUTION’s
board of directors (perhaps along with and through senior management) who must
assume responsibility for establishing and maintaining an effective internal
control system that: a) meets statutory and regulatory requirements (if any);
b) protects the INSTITUTION, its assets, operations, investors and other
stakeholders; and c) responds to changes in the INSTITUTION’s
environmental conditions. <b style="mso-bidi-font-weight: normal;">They need to
ensure that the control system operates as it is intended to and is also
modified (appropriately) when circumstances so dictate. Again, there are
so many examples from the 2008 financial crisis that tell us that at many so
called big and supposedly well run INSTITUTIONS in the United States, this sadly
did <u>NOT</u> happen! </b>And in India, the case of the erstwhile SATYAM
COMPUTER’s is a great example where highly reputed independent directors<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn6" name="_ednref6" style="mso-endnote-id: edn6;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[vi]</span></span></span></span></a>
merely sat on the board, watching the fraud that was being perpetuated by the
founder promoter<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn7" name="_ednref7" style="mso-endnote-id: edn7;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[vii]</span></span></span></span></a></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">And for discharging the above
duties, the board of directors must fully understand the risks that the INSTITUTION
could face, set the acceptable limits for these risks, and ensure that senior
management takes the steps necessary to identify, monitor and control these
risks. In turn, the senior management must then take the responsibility to
implement the strategies approved by the board, to set appropriate internal
control process/procedures, and to monitor the effectiveness of these process/procedures.
<b>There can be no substitute for this. And not to sound like a broken record
but the fact of the matter is that this did not happen in the lead up to the
2008 financial crisis at many of the big institutions!</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This makes it quite clear where the
main responsibility for control rests and that is fairly and squarely on the
strategic shoulders of the INSTITUTION’s board of directors (along with the
senior management)—not on the <i>compliance and audit departments.</i> <b style="mso-bidi-font-weight: normal;">Please note this critical issue. </b>However,
having said that, everyone in an institution should share the responsibility to
some extent and that is where the board (through the senior management) must
play a catalytic role in shaping a positive control culture throughout the
entire organization so that all stakeholders within the INSTITUTION respect the
control system and act in accordance with it. <b>Thus, a key task for the board
(through senior management) is to establish the right culture within the INSTITUTION—</b><i>a
culture in which the importance of internal controls is STRONGLY stressed, and
high ethical and integrity standards are promoted and adhered to. </i><b>And
this culture cannot be determined simply by what the board or top levels of
management (merely) say in their policy pronouncements - it will have to be judged
more importantly by what they (actually) do in real time?</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">For example, <i>do the INSTITUTION’s
policies (remuneration etc) reward risk-taking at the expense of accountable
and responsible operations?</i> For example, the pressure (at INSTITUTIONs) to achieve
faster growth through highly innovative financial products have been known to
be associated with remuneration policies that reward (immense) short term risk
taking by individuals within INSTITUTIONs. And a related issue here is the
question of <i>whether the board/senior management displays a casual attitude
towards breaches of (control) limits? Do they encourage the right attitude
towards regulatory and/or control system compliance? Is there backing and
respect at board/senior management levels for the internal audit and compliance
functions? </i></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Thus, the response of the
board/senior management of the INSTITUTION to these kinds of issues will
clearly determine how other staff (at the INSTITUTION) actually behave in
practice, including their attitude to control issues and the overall control
environment. <b style="mso-bidi-font-weight: normal;">This point needs emphasis
here! If the board and senior management are casual towards control system
breaches, then, managers and others down the line will behave in a similar or
worse fashion, showing total disregard for control system limits. This is what
happened at many big institutions in the 2008 financial crisis!</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">In summary, it is the responsibility
of the board (along with senior management) to see that there are no differences
between policy statements and actual implementation with regard to controls.
This will go a long way in building a positive control culture at the INSTITUTION,
which is a very necessary and integral component for building a proper internal
control system, which, in turn, is very vital for accountable and responsible
operations in real time. </span></div>
<div class="MsoNormal">
<br /></div>
<div style="mso-element: endnote-list;">
<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="edn1" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref1" name="_edn1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[i]</span></span></span></span></span></a><span lang="EN-US"> The term control system is used synonymously with the word internal
control system</span></div>
</div>
<div id="edn2" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref2" name="_edn2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[ii]</span></span></span></span></span></a><span lang="EN-US"> The term INSTITUTION is used to refer to commercial banks,
investment banks and other kinds of financial intermediaries, as defined in
common parlance!</span></div>
</div>
<div id="edn3" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref3" name="_edn3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[iii]</span></span></span></span></span></a><span lang="EN-US"> Please see FCIC Report (2008)</span></div>
</div>
<div id="edn4" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref4" name="_edn4" style="mso-endnote-id: edn4;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[iv]</span></span></span></span></span></a><span lang="EN-US"> Judging the quality will require not merely the examination of
whether or not an appropriate internal control system exists on paper but
rather studying if indeed what is said on paper actually works on the ground.
That is the key to making inferences about quality.</span></div>
</div>
<div id="edn5" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref5" name="_edn5" style="mso-endnote-id: edn5;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[v]</span></span></span></span></span></a><span lang="EN-US"> Board = Board of Directors or Equivalent as may be as per the legal
form of the institution as per the relevant laws in the country of
incorporation.</span></div>
</div>
<div id="edn6" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref6" name="_edn6" style="mso-endnote-id: edn6;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[vi]</span></span></span></span></span></a><span lang="EN-US"> A separate article on independent directors will be posted!</span></div>
</div>
<div id="edn7" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref7" name="_edn7" style="mso-endnote-id: edn7;" title=""><span class="MsoEndnoteReference"><span lang="EN-US"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[vii]</span></span></span></span></span></a><span lang="EN-US"> The first court pronounced the founder promoter of Satyam
(Ramalinga Raju) guilty, in line with his own famous confession dated Jan 2009.
An appeal court is said to have however suspended the sentence however but the
case is on-going. Nevertheless, it must be remembered that the founder promoter
(Ramalinga Raju) himself self confessed to perpetrating a major fraud at the
erstwhile Satyam Computers.</span></div>
</div>
</div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-89429417350702415912016-03-23T09:39:00.001+05:302016-03-23T09:39:20.331+05:30Financial Crisis, Corruption and Conflicts of Interest: What Central Banks Need to Understand in Regulating and Supervising the Financial Sector!<div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Ramesh S Arunachalam </span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">If one
looks closely at many of the past financial crisis situations </span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">(like
the 2008 global financial crisis fuelled by the US sub-prime), <b>it is clear
that they can be linked to lax and laissez-faire regulatory and supervisory
frameworks </b><i style="mso-bidi-font-style: normal;">that had either been
developed by industry insiders with commercial interests and/or been created
with significant input from such insiders </i><b>- both with a view to benefit
the overall financial industry concerned! </b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">In other
words, these regulatory and supervisory frameworks created had serious “conflict
of interest situations” that led to such lax and laissez-faire regulatory and
supervisory frameworks being developed in the first place! This was corruption
at its best indeed and there can be no two doubts about that. </span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt;">Despite all that has happened, even today, there is a puzzling
lack of attention given to the role played by conflicts of interest in the
corruption saga and especially with regard to the larger financial sector. Look
at the United Nations Convention Against Corruption (UNCAC). Even the UNCAC only
makes a fleeting mention about the role played by conflicts of interests,
despite it being very important to understanding and unearthing corruption
worldwide.</span><b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Nevertheless,
it is my humble opinion that conflicts of interest are of significant
importance to regulatory ethics and this is something that all central banks
need to note with urgency because if not eliminated, these conflict of interest
situations could spell disaster for the larger financial sector as they could (result
in corruption and) ultimately, lead to financial crisis caused by <b>laissez-faire
regulation and supervision</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">First,
let us look at what is meant<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn1" name="_ednref1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[i]</span></span></span></span></a>
by “conflict of interest”?</span></div>
<div class="CM13" style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: 42.65pt; margin-right: 42.9pt; margin-top: 0in; text-align: justify;">
<br /></div>
<div class="CM13" style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: 42.65pt; margin-right: 42.9pt; margin-top: 0in; text-align: justify;">
<i><span lang="EN-US" style="font-size: 14.0pt;">A ‘conflict of interest’ is a conflict
between the duty, roles and responsibilities and private interests of any
official, which could improperly and unfairly influence the performance of
his/her official roles and responsibilities. </span></i><span lang="EN-US" style="font-size: 14.0pt;"></span></div>
<div class="Default">
<br /></div>
<div class="Default">
<span lang="EN-US" style="color: windowtext; font-size: 14.0pt;">By
private interests I mean the following…</span></div>
<div class="Default" style="margin-left: .5in;">
<br /></div>
<div class="Default" style="margin-left: .5in;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="color: windowtext; font-size: 14.0pt;">Private interests include
financial, pecuniary and other interests<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn2" name="_ednref2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[ii]</span></b></span></span></span></a>
which generate a direct personal benefit to the public official as also
personal affiliations, associations, and family ties, that could (practically
be considered as likely to) improperly and unfairly influence the official’s
performance of his/her roles, duties and responsibilities. </span></i></div>
<div class="Default" style="margin-left: .25in;">
<br /></div>
<div class="Default">
<span lang="EN-US" style="color: windowtext; font-size: 14.0pt;">Defined
in this way, conflict of interest has the potential to undermine the proper
functioning of institutions (public, private, not-for-profit), governments and
the like by: </span></div>
<div class="Default">
<br /></div>
<div class="Default" style="margin-left: .5in; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<span lang="EN-US" style="color: windowtext; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">•<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span lang="EN-US" style="color: windowtext; font-size: 14.0pt;">Weakening adherence by officials to the ideals of
impartiality, objectivity, fairness and legitimacy, in decision-making, and </span></div>
<div class="Default" style="margin-left: .5in; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<span lang="EN-US" style="color: windowtext; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">•<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span lang="EN-US" style="color: windowtext; font-size: 14.0pt;">Distorting the rule of law, the development and application
of policy, the functioning of organizations and markets, as well as the
allocation of resources.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">And
what indeed is the difference between conflict of interest and corruption? </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">Conflicts
of interest situations exist where officials <i><u>could</u> </i>abuse their position
(s) for personal and private gain. On the other hand, corruption exists where
officials <i><u>have</u> </i>abused their position (s) for personal and private
gain. Put differently, conflicts of interest situations DO <u>NOT</u> always
lead to corruption. However, where there is corruption, you can be sure that conflicts
of interest INDEED exist!</span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">OK, Why do
we need to attach so much importance to conflicts of interest with regard to
regulation and supervision in the financial sector? This is because if it is
not entirely eliminated and/or at least properly reduced, the conflicts of
interest can lead to corruption in regulation and supervision and thereby even
threaten the entire financial system. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">At least,
this is what past crises situations have taught us. In fact, if there is a
single most recurring theme in financial crises and scandals globally, it is
the failure to manage conflicts of interest. And here are some examples:</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Let us
look this with regard to the larger financial sector in the United States and
India, which provide very useful learning with regard to conflicts of interest
and their relationship to crisis situations. They hold very important lessons
for Central Banks globally! </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">As </span><a href="http://www.sec.gov/news/testimony/testarchive/1995/spch029.txt" target="_blank"><span style="color: blue; font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">described</span></a><span style="color: blue; font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">by former SEC Chairman Arthur
Levitt, <i>“Bank involvement in the securities markets came under close
scrutiny after the 1929 market crash. The Pecora hearings of 1933, which
focused on the causes of the crash and the subsequent banking crisis, uncovered
a wide range of abusive practices on the part of banks and bank affiliates. <b>These
included a variety of conflicts of interest; </b>the underwriting of unsound
securities in order to pay off bad bank loans; and "pool operations"
to support the price of bank stocks.”</i></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">In fact,
as Levitt has further </span><a href="http://www.sec.gov/news/testimony/testarchive/1995/spch029.txt" target="_blank"><span style="color: blue; font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">argued</span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">, it is the significant revelations
of ‘uncontrolled conflicts of interest’ <i>(please note this carefully)</i>
that provided the basis and rationale for the passing of many subsequent
regulations - <b>the Securities Act (1933), the Securities Exchange Act (1934),
and the Glass-Steagall Banking Act (1933). </b>In fact, it appears that
conflicts of interest were also the major reason for the enactment of the <b>Investment
Company Act (1940) and the Investment Advisor Act (1940).</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Closer to
the 1990s, when I lived in the United States for several years, I personally
saw numerous examples of conflicts of interest leading to a crisis:<br />
</span></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The insider trading scandals
(such as, the Ivan Boesky and Dennis Levine scandals in the 1980s), the
closure of Drexel Burnham Lambert (the investment bank) and the associated
(criminal) conviction of its famous employee (Michael Milken) are still
fresh in my memory.</span></li>
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">And then there were more
financial scandals in the early 2000s – for example, the internet bubble
in 2000/2001 exposed problems with dubious high flying research analysts
(with very significant conflicts of interest) whose reports were in fact
influenced by their own institutions’ investment banking interests. This,
in fact, led to specific provisions in the Sarbanes-Oxley Act that dealt
with <b>conflicts of interest among research analysts. </b></span></li>
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">And just about a decade ago,
in 2003, SEC found that the use of brokerage commissions to facilitate the
sales of fund shares [was] widespread among funds that relied on
broker-dealers to sell fund shares. This led to the adoption of new rules
to prohibit funds from this practice<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn3" name="_ednref3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[iii]</span></span></span></span></a>.</span></li>
</ul>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">And then,
we had the mother of all financial crises in the recent times—<b style="mso-bidi-font-weight: normal;">the global financial crisis of 2008</b>,
which was again based on significant conflicts of interest in many areas such
as the production and sale of mortgage-backed securities, rating of these
instruments and so on.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">As noted
in the 2007 </span><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf" target="_blank"><span style="color: blue; font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">report</span></a><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> of the Financial Crisis Inquiry
Commission (“FCIC”), conflicts of interest that existed among rating agencies
in evaluating collateralized debt obligation (“CDO”) deals was investigated by
the SEC which subsequently issued a report in June 2008 that stated that <b>conflicts
of interest at Moody’s was indeed a very, very major issue</b>. And I quote
from this report:</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">“We introduce some of the most
arcane subjects in our report: securitization, structured finance, and
derivatives—words that entered the national vocabulary as the financial markets
unravelled through 2007 and 2008. Put simply and most pertinently, structured
finance was the mechanism by which subprime and other mortgages were turned
into complex investments often accorded triple-A ratings by <b>credit rating
agencies whose own motives were conflicted. </b>This entire market depended on
finely honed computer models—which turned out to be divorced from reality—and
on ever-rising housing prices. When that bubble burst, the complexity bubble
also burst: <b>the securities almost no one understood, backed by mortgages no
lender would have signed 20 years earlier, were the first dominoes to fall in
the financial sector.” </b>(Page 28)</span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Just as an aside, I would like to state there are
huge problems with securitisation in the Indian micro-finance sector as well
and hope India’s central bank, the RBI, takes note of the same.</span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Getting
back to the FCIC report, it cited several other conflicts underlying the crisis
such as: a) underwriters assisting CDO managers in selecting collateral; and b)
hedge fund managers selecting collateral from their funds to place in CDOs that
they offered to other investors. The FCIC report notes in the above connection
that:</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">“The SEC investigated the rating
agencies’ ratings of mortgage-backed securities and CDOs in 2007, reporting its
findings to Moody’s in July 2008. The SEC criticized Moody’s for, among other
things, failing to verify the accuracy of mortgage information, leaving that
work to due diligence firms and other parties; failing to retain documentation
about how most deals were rated; allowing ratings quality to be compromised by
the complexity of CDO deals; not hiring sufficient staff to rate CDOs; pushing
ratings out the door with insufficient review; failing to adequately disclose
its rating process for mortgage-backed securities and CDOs; and allowing
conflicts of interest to affect rating decisions.” (Page 212)</span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Yet
another conflict cited in the report was about Citigroup offering “liquidity
puts” that gave it significant fees in the short term but placed significant
financial risk on it in the long term. And I quote the following on Citigroup
from the report –</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">“There is a potential conflict of
interest in pricing the liquidity put cheep [sic] so that more CDO equities can
be sold and more structuring fee to be generated.” The result would be losses
so severe that they would help bring the huge financial conglomerate to the
brink of failure, as we will see.” (Page 139)</span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Another
high profile example of conflict of interest in the recent years is the
settlement that the SEC reached with Goldman Sachs, in which that firm paid
$550 million to settle charges filed by the Commission, and <i>acknowledged
that disclosures made in marketing a subprime mortgage product contained
incomplete information as they did not disclose the role of a hedge fund client
who was taking the opposite side of the trade in the selection of the CDO. </i>And
I quote</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">“2. Goldman acknowledges that the
marketing materials for the ABACUS 2007-ACI transaction contained incomplete
information. In particular, it was a mistake for the Goldman marketing
materials to state that the reference portfolio was "selected by" ACA
Management LLC without disclosing the role of Paulson & Co. Inc. in the
portfolio selection process and that Paulson's economic interests were adverse
to CDO investors. Goldman regrets that the marketing materials did not contain
that disclosure. (</span></i><a href="http://www.sec.gov/litigation/litreleases/2010/consent-pr2010-123.pdf"><i><span style="color: blue; font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">http://www.sec.gov/litigation/litreleases/2010/consent-pr2010-123.pdf</span></i></a><i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> , Page 2, point 3)”</span></i><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">After the
2008 financial crisis, there are a couple of examples of problems that arose
from poorly controlled conflicts of interest. One is the famous case of
Barclays Bank, which acknowledged misconduct related to <b><i>‘possible
collusion’</i></b> to <b>artificially set LIBOR</b> (the London Interbank
Offered Rate). As all of us know, LIBOR is a very significant benchmark that is
used to set short-term interest rates on different financial instruments
including derivates.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Second is
the 2010 Andhra Pradesh (AP) micro-finance crisis which is again a classic
example of the conflict of interest problem! In the 2010 AP crisis, the lax
regulation and laissez-faire supervision of the NBFC MFIs (done at the behest
of the micro-finance industry at large and NBFCs in particular and RBI’s own
misplaced trust in NBFC MFIs as Dr Y V Reddy, former Governor has admitted) led
to the eventual crisis on the ground.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">To
summarise, what needs to be emphasized here is the fact that the <b>‘broad
industry of financial services’ </b>which needs to be regulated surely cannot
decide on its own regulation. In fact, many of the past crisis situations given
earlier, can be linked to lax and laissez-faire regulatory/supervisory
frameworks that had either been developed by industry insiders with commercial interests
and/or been created with significant input from such insiders - both with a
view to benefit the overall industry concerned! </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">And
central banks must guard against this and specifically, they must attempt to protect
<u>independent</u> committees (an instrument often used by central banks) that
are looking into regulation/supervision of the larger financial sector <i>from
the influence of the companies (institutions) operating in the same financial
markets. This </i>is a strong prerequisite to ensure effectiveness of the <b>regulatory
architecture being developed.</b> </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Otherwise,
the threat arises that, instead of being guided by public and larger client
interests, such so-called independent committees (at central banks) will
promote the interests of those companies and institutions whose activities are
supposed to be regulated and supervised in the first place, which, in the
long-term may lead to the collapse of the entire financial system (as it
happened in 2008). <b style="mso-bidi-font-weight: normal;">And central banks (globally)
can ignore this important fact at their own peril!</b></span><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">Thank
You and have a nice day!</span></div>
<div style="mso-element: endnote-list;">
<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="edn1" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref1" name="_edn1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[i]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN-US;">These
definitions have been compiled from several sources including OECD and other
material found on the web, which are far too numerous to quote. These are
gratefully and sincerely acknowledged.</span></div>
</div>
<div id="edn2" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref2" name="_edn2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[ii]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> The negotiation of future
employment by an official (for himself/family/friends) prior to his leaving his
present office is one example here and there is many more examples that I could
provide. This is like negotiating a job with a vendor. For example, an official
may say, <i style="mso-bidi-font-style: normal;">“I will make rules governing X
and Y situations very lenient provided you make my nephew the CEO in another
project of yours.”</i> </span><span lang="EN-US" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN-US;"></span></div>
</div>
<div id="edn3" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref3" name="_edn3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[iii]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Please see </span><a href="http://www.sec.gov/rules/final/ic-26591.pdf"><span style="color: blue; font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">http://www.sec.gov/rules/final/ic-26591.pdf</span></a><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> - Prohibition on the Use of Brokerage Commissions
to Finance Distribution, Investment Company Act Release 26591 (Sept. 2, 2004),
69 Fed. Register 54728, 54728 (Sept. 9, 2004).</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN-US;"></span></div>
</div>
</div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-24939348826235137862016-03-21T10:48:00.001+05:302016-03-21T10:48:16.374+05:30Digital Financial Inclusion and Violation of Client Rights in India: Time to Have An Independent Client Protection Agency?<div dir="ltr" style="text-align: left;" trbidi="on">
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<h3 style="text-align: left;">
<b>Ramesh S Arunachalam</b></h3>
<br />
<div style="margin-bottom: .0001pt; margin: 0in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-size: 14.0pt;"></span></b></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">If
you look at the structure of what’s happening in digital financial inclusion,
you are seeing a large number of stakeholders get involved and these are not
necessarily financial institutions. TELCOS, merchants, intermediaries, agents and
a whole range of other NEW stakeholders are getting involved in the delivery of
(digital) financial inclusion services. That is fine but what is very important
and also needs to be noted is that none of them have serious regulatory/supervisory
oversight and because of that client rights are being violated!</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Let
me give a few examples of what happened to a friend to illustrate what I am
saying. This friend recently started using a digital wallet (through his
mobile) to top up air time and also buy small things. On several occasions, his
complaint was that due to poor network connectivity and/or some other
(technical) reason, the money had been debited from his digital wallet account
but the purchase did not go through. Now he claimed that this is also happened
in the case of his recently acquired credit card and he offers these two
instances. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">First,
when he tried to top up his mobile, a transaction for Rs. 500/- (about US $
7.5) through the digital wallet, the money got debited from his digital wallet account
but then the TELCO did not top up air time. He called their customer care department
(with great difficulty as there was a long list of options to go through and
choose from to reach a customer service staff) and the staff were extremely
rude. When he told the staff about the problem, they said they would check and
revert and soon enough, he got a message from the TELCO saying that due to
technical reasons the top up did not happen. It is important to note that he
did not get any message initially but got this only after he spoke to the
customer service staff. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">He
again called their customer care and told them that his money had been debited
already for which the customer service staff said it will take at least 5
working days for the money to reflect back in his digital wallet. The key point
to note here is that apart from not getting the airtime top up, which my friend
required at that point in time, he was also poorer by Rs 500 (about US $ 7.5)
for a few days. Technically that was his money and it should not have been
parked with someone else – either the Digital Wallet owner and/or TELCO to whom
it did not belong. In this case, the digital wallet was owned by the TELCO and
so, the money was essentially with the TELCO. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">The
flip side is that if several such transactions occurred in a day, imagine the
money that the digital wallet company and/or TELCO would be holding (unfairly).
This is one serious issue with (digital) financial inclusion and needs to be
noted by the regulators. And when this happens, while the amounts may be small
for the individual clients, the aggregated amounts can be large on a PAN India
basis for the digital wallet company and/or TELCO. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Second,
the friend related a similar happening in the case of an airline booking
thorough the mobile using his recently acquired credit card. Now that’s again
using a digital financial inclusion service where my friend used his SMART credit
card through his mobile and the money for the transaction was debited and went
into the account of the airline (and/or merchant) but the ticket was not
issued. </span></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-size: 14.0pt;">“The booking could not completed successfully was the
message that flashed on my friend’s mobile and yet his money had been debited!”</span></b></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Is
this not unfair to my friend, the customer? Now there are serious issues here
too. Also, for the money to come back to my friend’s credit card, it took more
than 3 weeks. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Now,
imagine that 500 rupees (about US $ 7.5) or, 10,000 rupees (about US$150) or
15,000 rupees (about US$225) are lying somewhere in between <i style="mso-bidi-font-style: normal;">heaven and earth</i> with somebody to whom they
don’t belong because the service/product was not sold. Without doubt, this is legitimately
clients’ money which is lying elsewhere and it takes more than 2/3 weeks to
come back. Imagine the digital wallet company or airline or intermediary or
merchant whose is making money out of this! How to regulate this is again a
very serious issue for the regulators? And what happens to my friend and
thousands of others like him whose accounts have been debited but who have not
received the services that they desired? Have they not been unfairly treated?
Who protects them now? </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Three
issues need to be answered given the above:</span></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; text-indent: -.5in;">
<span style="font-size: 14.0pt;"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-size: 14.0pt;">If educated and
technology savvy customers (like my friend) themselves find it a huge problem
to deal with such issues, what can low income and bottom of pyramid clients do,
provided the same aspect happens when they use a (digital) financial inclusion
product/service? Who, specifically, will provide them redressal and who,
specifically will protect their very hard earned money (which in relative terms
could make all the difference to their daily living)?</span></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; text-indent: -.5in;">
<span style="font-size: 14.0pt;"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-size: 14.0pt;">How does a
regulator/supervisor (presently, the RBI) sitting in Mumbai or for that matter
a state capital reach out to customers and assure them that their money is safe
under such circumstances? Specifically, how can the regulator even know that
this is happening on the ground especially, when low income and bottom of
pyramid clients are involved (as these clients have no real means to get back
to the regulator who is presently, the RBI)? Intimidation aspects apart, there
are logistic and livelihood issues which prevent low income and bottom of
pyramid clients from getting back to regulators like the RBI.</span></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; text-indent: -.5in;">
<span style="font-size: 14.0pt;"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-size: 14.0pt;">What about the
money (in an individual and aggregate sense) unfairly gained by the TELCO or
the digital wallet company at the expense of a customer? What happens to that
money? Let us not underestimate this amount as small change. Having been an
enterprise architecture person for over 25 years and having been involved in
development and implementation of core banking and ERP systems for a long, long
time, “aggregation of small change” can indeed be very big. This is analogous
to the “rounding off” phenomenon in core banking and ERP systems. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">There
are many more issues and examples that I can give you with regard to (digital)
financial inclusion but the larger point is that when this can happen to highly
literate customers, imagine the plight of low-income and bottom of pyramid
clients. And most importantly, how can we expect bottom of pyramid and
low-income clients to deal with these issues and who will ultimately protect
them and their hard earned money? </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">That
is why we need a specialized client protection agency focussing exclusively on (digital)
financial inclusion as newer products/services using newer technologies are
being delivered through newer stakeholders through newer processes. Innovation
is fine but cannot come at the expense of client rights and these need to be
protected! On a daily basis, client rights are INDEED being violated even as we
rake up innovations through digital financial inclusion and that needs to be
squarely addressed! </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Treating
the client fairly is a very critical component of any service and that is sadly
missing in much of India’s digital financial inclusion space in real time! As
noted above, I can provide innumerable examples but the key point is that the
Reserve Bank of India doesn’t have wherewithal to look at all of this. And I
don’t think clients (educated or low income or BoP) have the tenacity, ability and
time to approach the Reserve Bank of India for redressal as some of these
violations happen regularly. </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">And
as I noted earlier in another post, I am very sorry to say this but given the past
poor experiences of clients trying to contact people in the Reserve Bank of
India for client protection issues, getting in touch with the banking ombudsman
or other such stakeholders will indeed prove extremely difficult! Therefore,
given the fast pace of innovations and given the burgeoning rate at which clients
(including low income and bop clients) are being acquired in the digital
financial inclusion space in India, it is about time that we set up an
exclusive agency for client protection <span style="mso-spacerun: yes;"></span>immediately!</span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-49980764909884617582016-03-20T23:23:00.002+05:302016-03-20T23:23:30.870+05:30(Digital) Financial Inclusion and Microfinance: The Need for An Independent Client Protection Agency! (PART 1)<div dir="ltr" style="text-align: left;" trbidi="on">
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</o:shapelayout></xml><![endif]--><span style="font-size: 14.0pt;">Ramesh S Arunachalam</span><br style="mso-special-character: line-break;" /><span style="font-size: 14.0pt;"></span><br />
<div align="center" style="margin-bottom: .0001pt; margin: 0in; text-align: center;">
<span style="font-size: 14.0pt;">
<br style="mso-special-character: line-break;" />
</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Financial
inclusion and digital financial inclusion are the new buzz words in the
financial sector industry. Indeed there has been a lot of innovation in the
area of financial inclusion and digital financial inclusion and the number of
products on offer as well as the stakeholders who have deliver these products
have increased significantly - both of which have contributed to immensely
enhancing the complexity of financial inclusion and digital financial inclusion
products and services. So, it’s naturally follows that protection of the end
user clients - of financial inclusion and digital financial inclusion products
and services - becomes very necessary. There can be no two doubts about that!<br />
<br />
Now if you look at financial inclusion, traditionally, the suppliers of these products/services
have been MFIs, banks and other institutions, some of which are regulated and
supervised and others are not. Thus, while some of these institutions come
under the purview of the central bank, others do not. However, when digital
financial inclusion services come into play, service providers typically include
TELCOS and a whole range of merchants, agents and intermediaries. Technically,
while these stakeholders come under RBI REGULATIONS in India, their supervision
is most certainly not as it SHOULD be, especially from a client protection
perspective. Therefore, for both financial inclusion and digital financial
inclusion services, it would be appropriate to argue that, at best, client
protection services and client redressal mechanisms are at their infancy.</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">This
is because if you look at central banks (like the Reserve Bank in India),
especially in large diverse countries like India, even for the fewer
institutions that they regulate/supervise, they don’t have the wherewithal to
provide dispersed, decentralised and grass-roots level client redressal
mechanisms and client protection services, which is very much required for
low-income and bottom of pyramid (BoP) clients. And mere delegation of
supervision and client protection issues to SELF-REGULATORY ORGANIZATONS (SROs)
does not and will not work as self-regulation is an oxy-moron. Member
controlled SROs cannot self-regulate and we have innumerable examples over the
last 11 years, since the Krishna district crisis of 2005. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">That
being the case, the only feasible option is for clients to approach the banking
ombudsman and use other existing mechanisms. However, the transactions
costs associated with going to a banking ombudsman can be huge and prohibitive
for the low income and BoP clients. I am saying this with strong conviction
because even somebody like me who is educated and “tech savvy” and belongs to
what we call as the middle class (in an economic sense in India) found it very
difficult to approach the banking ombudsman. Believe me when I say it is indeed
very difficult to reach the banking ombudsman. I did try some years ago and in
fact, I needed all kinds of references before I could even get an official
audience with the regional director of RBI, who also happened to be the banking
ombudsman in my area! So, not to sound like a broken record but low income and
BoP clients will almost find it impossible to reach the banking ombudsman...let
us be absolutely clear on that aspect...<br />
<br />
And then of course you have other frameworks that attempt to protect the end
user customers like the customer protection act or the outdated MRTP or the
competition commission which has replaced MRTP and so on<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[1]</span></span></span></span></a>.
Accessing these is also extremely difficult, even for a person like me. I am therefore
certain that low-income and BoP clients will find it extremely difficult to access
these bodies and avail their services. Thus, the larger point that I am trying
to make is the huge difficulty that low income and/or BoP clients face in
accessing currently available client redressal mechanisms, whether be it the
banking ombudsman scheme and/or other alternatives that presently exist.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">The sum and substance of my argument is
that low income and/or BoP clients </span></b><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">-
like the ones I have reported about from eastern UP, Bihar and Madhya Pradesh
and similar places -</span></i><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"> face huge
hurdles in reaching out to concerned people who POSSESS the executive powers to
take action </span></b><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">against
those financial inclusion/digital financial inclusion stakeholders, who, may
have violated consumer protection norms and guidelines in the first place.<br />
<br />
Another aspect that has to be kept at mind is that India is a great country for
legislative enactment and framing of rules and regulations but when it comes to
actual implementation of laws/regulations/rules in real time, the record is
rather poor. And implementation of laws/regulations/rules gets poorer and
weaker, the more distant and remote the place is - like for example, eastern
UP, Bihar and Madhya Pradesh. So, when you are talking of remote districts in
Eastern UP, Bihar and Madhya Pradesh (and similar places) which are now
experiencing burgeoning growth of (digital) financial inclusion services and
where huge violations of client rights are taking place, the question that
arises is <i style="mso-bidi-font-style: normal;">“How do clients living in these
areas protect themselves and how can they access client redressal mechanisms
easily and quickly?”</i></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">And
as it stands, the truth of the matter is that it is going to be very, very
difficult for the Reserve Bank of India or any present regulator to even know
the client protection violations that are happening on the ground. And unless
they are aware that violations are occurring and the specific nature of these
violations, they will not be able to regulate because I think the ability of
low-income or bottom of pyramid clients to bring client protection issues back
to the regulator (sitting in a faraway place and/or even state capital) is
almost next to impossible. And there is of course, the issue of intimidation
that these low income and BoP clients face for various reasons, because of
which they are less likely to approach a far away located regulator.<br />
<br />
So I think the case for having an INDEPENDENT client protection regulator (with
a deeply entrenched grass-roots network) becomes very strong. With all due
respect, I think that the Reserve Bank of India should regulate financial
institutions with regard to prudential and non prudential norms and also look
at institutional/organisational issues and other aspects. However, when it
comes to the issue of client protection, just as it happened in the case of
2010 Andhra Pradesh microfinance crisis, somebody else will have to take charge
of that. In (erstwhile) Andhra Pradesh in 2010, it was the state government
which took on client protection because there was no such (national client
protection) agency available. However, I feel that a state government taking on
the client protection role is certainly not the most desirable option, just as
we saw in (erstwhile) Andhra Pradesh where the state government intervention
led to chaos on the ground and ultimately, turned out to be counter-productive.
<br />
<br />
So I think client protection requires a new PAN India independent agency
(regulator) with a strong grass-roots presence. And it must be an agency which is
neither involved in the development of (digital) financial inclusion and microfinance
nor concerned with regulating other aspects of these (digital) financial
inclusion/microfinance stakeholders. In other words, this client protection
agency (regulator) should have a single minded focus on customer protection and
look at everything from the perspective of the end user clients with regard to
(digital) financial inclusion/microfinance. This single minded focus is
required and only then will this regulator be able to do justice and ensure
client protection at the grass-roots, which has far ranging and far reaching
consequences for the (digital) financial inclusion and microfinance industry in
the long-term! </span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Will
that happen in India anytime soon? Your guess is as good as mine and this is a
question that time only can answer...</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-size: 14.0pt;">Have
a great start into the week! </span></div>
<div class="MsoNormal">
<br /></div>
<div style="mso-element: footnote-list;">
<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="ftn1" style="mso-element: footnote;">
<div class="MsoFootnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[1]</span></span></span></span></a>
Then you have draft proposals like in the Financial Sector Legislative Reforms
Commission, which I am sure will not see the light of the day, anywhere in the
near future!<span lang="EN-US" style="mso-ansi-language: EN-US;"></span></div>
</div>
</div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-86448561420616456622016-03-20T10:53:00.001+05:302016-03-20T10:53:14.412+05:30Governance and End User Client Protection: The “Revolving Door” Regulatory Conundrum for (Digital) Financial Inclusion and Microfinance<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">Ramesh S Arunachalam </span></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;"> </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">People have often asked me
as to why the regulation and supervision of micro-finance and financial
inclusion and especially, protection of end user clients has generally been weak
in India. I attribute the same to the following reasons.</span></div>
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<br /></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">First is the near seamless
shift of key people from the private financial sector to regulatory and
supervisory bodies through the “reverse revolving door” phenomenon. </span></div>
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<br /></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">I have known top executives
of large financial conglomerates (very interested in financial inclusion and
microfinance) and representatives of special interest groups including
lobbyists, who have built up extremely close (working) relationships with the
regulators/supervisors - in particular those who oversee or regulate the financial
inclusion/microfinance sector. </span></div>
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<br /></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">Specifically, these key
people from the private financial sector, with a deep interest in financial
inclusion and microfinance, <i>have then been appointed to the governing
boards, expert committees and/or senior management at regulatory and supervisory
bodies </i><span style="mso-bidi-font-style: italic;">(whose mandate also
includes the regulation and supervision of the financial inclusion and micro-finance
sector). </span></span></div>
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<br /></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt; mso-bidi-font-style: italic;">Often
called as the <b style="mso-bidi-font-weight: normal;">reverse revolving door</b>
phenomenon, these people have established a very strong pro-financial inclusion
and microfinance </span><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">bias in policy formulation and regulatory enforcement by
regulators and supervisors that oversee their (former) industry, former employers
and/or related institutions. When I talk of regulatory enforcement, I am especially
talking of end user client protection issues, which have not got the kind of attention
that they require and deserve, especially given what happened in Andhra Pradesh
in 2010!</span></div>
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<br /></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">And given the huge end
user client protection and other risks that are prevalent in (digital) financial
inclusion and micro-finance products and delivery processes, I am simply amazed
at what is going on...indeed...especially, after what I have seen in eastern
UP, Bihar and Madhya Pradesh as well as other contexts in recent times...</span></div>
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<br /></div>
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<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt; mso-fareast-font-family: ZapfDingbats; mso-themecolor: text1;">Second, I have seen the </span><i><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">shift of
key people from government institutions to the private (financial inclusion and
microfinance) sector through the </span></i><b style="mso-bidi-font-weight: normal;"><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt; mso-bidi-font-style: italic;">normal revolving door phenomenon.</span></b><i><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;"> I am
taking of the case where key people from regulatory and supervisory bodies,
DFIs and other government lenders and institutions have moved (either through a
permanent and/or temporary relationship) </span></i><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">to lucrative
private-sector positions (in financial inclusion and microfinance). Again,
irrespective of whatever happens, end user client protection cannot and must
not suffer but that is what is happening in real time (sadly)!</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">And interestingly, these
people use their regulatory/government experience and long standing connections
to benefit their new employer and/or industry directly as well as indirectly (<i>e.g.
</i><span style="mso-bidi-font-style: italic;">through the </span>drafting of a
supportive regulatory policy, in public procurement and so on and so forth). This
has not only led to a lax regulatory environment and poor supervision by their former
colleagues (with regard to the financial inclusion and microfinance sector) but
also resulted in the drafting/framing of policies hugely supportive to the
financial inclusion and microfinance industry, and <b style="mso-bidi-font-weight: normal;">especially at the expense of end user client protection/well being. Again,
this is not at all acceptable under any circumstances!</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">While I can easily name
people and institutions, my objective is not that but rather to isolate reasons
for lack of improvement in the regulatory/supervisory environment for financial
inclusion and microfinance, especially with regard to end user client protection.
<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt; mso-fareast-font-family: ZapfDingbats; mso-themecolor: text1;">Third, </span><i><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt; mso-themecolor: text1;">I have also
seen situations where former </span></i><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt; mso-themecolor: text1;">decision
makers (including policy makers and executive decision makers</span><span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">) have become
paid advocates and use their knowledge of and connections with governmental
agencies and regulators and supervisors to advance the interests of (corporate)
microfinance and financial inclusion companies. <span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">Especially, this category
of people are involved in lobbying a generalist view on the public good nature
of financial inclusion and microfinance services when in fact there is so much
harassment of end user clients that is taking place at the grass-roots and a
whole lot of money is being made illegally (especially at the local level) at
the expense of low income and bottom of pyramid clients. The agents who rule at
the grass-roots make it very expensive – whether monetarily and/or physically
for the low income and bottom of pyramid clients. Why are the regulators and
supervisors turning a blind eye? Do not the end user clients matter in the
larger scheme of things? These and other questions continue to run through my
mind, even as I write this post!</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;">
<span style="color: black; font-family: "Arial","sans-serif"; font-size: 16.0pt;">The larger point that I
want to make from all of this is that grass-roots reality is very different
from what is being portrayed and there is hardly any regulation/supervision and
client protection that is going on in real time (especially at the grass-roots)!
And I am not talking of interest rates here but the fact that a whole lot of
money is being made at the grass-roots (in the financial inclusion and
microfinance sector) through mechanisms that are illegal, unethical and client
unfriendly. And it is my humble belief that this calls for a serious effort to
create a <b style="mso-bidi-font-weight: normal;">truly independent end user client
protection regulator </b>for (digital) financial inclusion and microfinance with
a STRONG grass-roots presence and executive powers so that end user client
protection indeed becomes a reality and can be ensured in real time always!
Thank You!</span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-29164916139058369192016-03-18T18:04:00.001+05:302016-03-18T18:04:18.778+05:30Governance of Central Banks: Imperatives Dictated by (Digital) Financial Inclusion!<div dir="ltr" style="text-align: left;" trbidi="on">
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<h3 class="Default" style="text-align: left;">
<span lang="EN-US">Ramesh S Arunachalam </span></h3>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">Serving the larger
public and societal interest is the key mission of governments and its public
institutions and every nation’s CENTRAL BANK is no exception to this dictum.
Citizens indeed expect (individual) CENTRAL BANK <b style="mso-bidi-font-weight: normal;">board members and officials </b>to perform their duties with <i style="mso-bidi-font-style: normal;">integrity, objectivity, honesty and in a
fair and unbiased manner, without fear or favor!</i> And it is also strongly
expected that CENTRAL BANK <b style="mso-bidi-font-weight: normal;">board members
and officials</b> will not allow their private interests<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn1" name="_ednref1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[i]</span></span></span></span></a>
and affiliations to compromise their official work which includes not just
policy setting but also decision-making, rule framing, compliance facilitation
and so on and so forth. </span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">While the above is the
general expectation especially given that CENTRAL BANKS are the guardians of the
economy in a larger sense, these aspects become all the more important when we
consider newer and increased roles for CENTRAL BANKS, including those in an <i style="mso-bidi-font-style: normal;">eclectic </i>area like (DIGITAL) FINANCIAL
INCLUSION. Without question, this <i style="mso-bidi-font-style: normal;">avant-garde</i>
discipline places huge and special demands on CENTRAL BANKS, in terms of the
functions, roles and duties to be performed as well as stakeholders to be
regulated and supervised! Let us be clear on that! </span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">Given the above
context, two issues assume great importance regarding <b style="mso-bidi-font-weight: normal;">Governance of CENTRAL BANKS and management</b> of <i style="mso-bidi-font-style: normal;">conflicts of interest</i> at CENTRAL BANKS and these are discussed in
sequential fashion hereafter.</span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-size: 14.0pt;">First, from a governance perspective, let us look at
CENTRAL BANK board<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn2" name="_ednref2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[ii]</span></b></span></span></span></a>
appointments. </span></b><span lang="EN-US" style="font-size: 14.0pt;">If there is
one important lesson from the global finance crisis of 2008, it is the fact
that CENTRAL BANKS should ensure that the industry that is being regulated and
supervised by them<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn3" name="_ednref3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[iii]</span></span></span></span></a> - <i style="mso-bidi-font-style: normal;">the broader financial sector</i> - does not have representation on the
CENTRAL BANK board. In other words, there should be no one - <i style="mso-bidi-font-style: normal;">from the larger financial sector</i> -
appointed to the board of a CENTRAL BANK as an independent director, so as to
prevent conflicts of interest<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn4" name="_ednref4" style="mso-endnote-id: edn4;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[iv]</span></span></span></span></a>.
This precaution, which is usually considered as a modern day necessity, if
taken, will ensure that individuals with past and/or current (close) ties to
the (regulated) financial sector are <u>NOT</u> appointed as independent
directors to the CENTRAL BANK board. That is absolutely fine and indeed should
be the case, where it is not already followed by a CENTRAL BANK<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn5" name="_ednref5" style="mso-endnote-id: edn5;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[v]</span></span></span></span></a>!
But the above strategy is simply not enough when one talks of (digital) <i style="mso-bidi-font-style: normal;">financial inclusion </i>which is fast
dominating the financial landscape of many CENTRAL BANKS globally.</span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">As we all know,
(digital) financial inclusion brings in a much, much wider set of stakeholders
into play. Apart from banks, NBFIs, cooperatives, credit unions, NGOs, and
other financial intermediaries, a <b style="mso-bidi-font-weight: normal;">whole
new set of stakeholders</b> – ranging from TELCOS to a wide range of <i style="mso-bidi-font-style: normal;">Agents, Intermediaries, Merchants and Others</i>
- are involved in (digital) financial inclusion and they participate in the
design and delivery of these financial (inclusion) services in real time. </span></div>
<div class="Default">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">OK, in line with the
earlier arguments, we may therefore say that representatives of (and/or people
closely connected with) all of these <b style="mso-bidi-font-weight: normal;">new
set of stakeholders<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn6" name="_ednref6" style="mso-endnote-id: edn6;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[vi]</span></b></span></span></span></a>
</b>must be kept out of a CENTRAL BANK board as they are “interested persons”
and as their presence on the board of a CENTRAL BANK could result in <i style="mso-bidi-font-style: normal;">“Conflicts of Interest”</i>. </span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">That is fine but <i style="mso-bidi-font-style: normal;">who exactly are these stakeholders? </i>This
is where the difficulty lies and it requires every CENTRAL BANK to have a clear
and comprehensive <b style="mso-bidi-font-weight: normal;">(interoperable) </b>framework
on (DIGITAL) FINANCIAL INCLUSION in terms of definition of these services
(including their breadth, depth and scope), the stakeholders involved in design
and delivery, the intermediary and end user clients<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn7" name="_ednref7" style="mso-endnote-id: edn7;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[vii]</span></span></span></span></a>
and so on and so forth! Until and unless you have all of the above from a
CENTRAL BANK perspective, it would be impossible to define, identify and manage
associated conflicts of interest. And as noted above, that is just one part of
the problem. </span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">A second related issue
is also important here and this concerns the conflicts of interest that may be
associated with a CENTRAL BANK official <i style="mso-bidi-font-style: normal;">(staff
but not board members). This would typically include the Governor, Deputy
Governors/Equivalent and others in the CENTRAL BANK hierarchy. </i></span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">Thus, to reiterate, as
noted earlier, while a conflict of interest is not corruption <i style="mso-bidi-font-style: normal;">per se</i>, conflicts between the public
duties of CENTRAL BANK board members/officials and their private interests (if
these exist), if inadequately managed, can INDEED RESULT in corruption. And, as
noted above, this needs to be dealt with through an appropriate definitional
and scoping framework with regard to (digital) financial inclusion and an
associated conflicts of interest policy, especially given the huge set of
stakeholders who are (and who could get) involved (digital) financial
inclusion. </span></div>
<div class="CM13">
<br /></div>
<div class="CM13">
<span lang="EN-US" style="font-size: 14.0pt;">Thus, two tangible
outputs need to be URGENTLY created at every CENTRAL BANK: </span></div>
<div class="Default">
<br /></div>
<div class="Default" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-size: 14.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span lang="EN-US" style="font-size: 14.0pt;">A
definitional and scoping framework on (DIGITAL) FINANCIAL INCLUSION SERVICES
that outlines the nature of such services (including their breadth, depth and
scope), the stakeholders involved in design and delivery of these services, the
intermediary and end user clients and so on; and</span></div>
<div class="Default" style="margin-left: .5in;">
<br /></div>
<div class="Default" style="margin-left: .5in; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-size: 14.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span lang="EN-US" style="font-size: 14.0pt;">A
conflict of interest policy with regard to board members and officials in the
CENTRAL BANK that clearly articulates how conflicts of interest are (to be) defined
(with examples) as well as identified/managed<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_edn8" name="_ednref8" style="mso-endnote-id: edn8;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[viii]</span></span></span></span></a>,
especially, given a CENTRAL BANK’s increased focus on (DIGITAL) FINANCIAL
INCLUSION SERVICES. </span></div>
<div class="Default">
<br /></div>
<div class="Default">
<span lang="EN-US" style="font-size: 14.0pt;">While a larger
objective of an effective Conflicts of Interest policy is the simple
prohibition of all private-capacity interests on the part of CENTRAL BANK board
members and/or officials, the more relevant and immediate objective should be
to maintain the integrity of the official CENTRAL BANK policy, its
administrative decisions, public management functions and so on. That indeed is
the need of the hour, if public confidence and trust in CENTRAL BANKS is to
remain high, as is the case in many countries today!</span><span lang="EN-US"> </span><span lang="EN-US" style="font-size: 14.0pt;"></span></div>
<div class="MsoNormal">
<br /></div>
<div style="mso-element: endnote-list;">
<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="edn1" style="mso-element: endnote;">
<div class="Default">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref1" name="_edn1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[i]</span></span></span></span></span></a><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"> </span><span lang="EN-US" style="color: windowtext; font-family: "Arial","sans-serif"; font-size: 10.0pt;">Where
a private interest has <i>in fact </i>compromised the proper performance of a
board member and/or public official’s duties and responsibilities, it would
indeed be appropriate for that specific situation to be regarded as an instance
of misconduct or ‘abuse of office’, or even instance of corruption, rather than
as a ‘conflict of interest’.</span><span lang="EN-US" style="font-size: 10.0pt;"></span></div>
</div>
<div id="edn2" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref2" name="_edn2" style="mso-endnote-id: edn2;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[ii]</span></span></span></span></span></a><span style="font-family: "Arial","sans-serif";"> I am talking of the Governing board
here and not any committee/equivalent that deals with monetary policy but the
same arguments/principles apply to any such CENTRAL BANK committee(s)</span></div>
</div>
<div id="edn3" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref3" name="_edn3" style="mso-endnote-id: edn3;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[iii]</span></span></span></span></span></a><span style="font-family: "Arial","sans-serif";"> Either individually by them and/or in
tandem with other regulators/supervisors</span></div>
</div>
<div id="edn4" style="mso-element: endnote;">
<div class="CM13" style="margin-right: 42.9pt; text-align: justify;">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref4" name="_edn4" style="mso-endnote-id: edn4;" title=""><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[iv]</span></span></span></span></span></a><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"> A
conflict of interest is not corruption <i style="mso-bidi-font-style: normal;">per
se. <span style="mso-bidi-font-style: italic;">A ‘conflict of interest’ involves
a conflict between the public duty and private interests of a CENTRAL BANK
board member and/or public official, in which the board member/public official
has private-capacity interests which could improperly influence the performance
of their official duties and responsibilities. </span></i></span><span lang="EN-US" style="font-size: 10.0pt;"></span></div>
</div>
<div id="edn5" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref5" name="_edn5" style="mso-endnote-id: edn5;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[v]</span></span></span></span></span></a><span style="font-family: "Arial","sans-serif";"> <b style="mso-bidi-font-weight: normal;">Readers
may be interested in the following articles that I wrote with regard to India’s
CENTRAL BANK - </b></span><a href="http://www.moneylife.in/article/how-the-rbi-can-be-made-more-accountablemdash-part-3/35110.html" target="_blank"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-bidi-font-family: Arial;">How the RBI can be made
more accountable— Part 3</span></b></a><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";">, </span></b><a href="http://www.moneylife.in/article/how-the-rbi-can-be-made-more-accountable-ndash-part-2/34996.html" target="_blank"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-bidi-font-family: Arial;">How the RBI can be made
more accountable – Part 2</span></b></a><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";"> and</span></b><a href="http://www.moneylife.in/article/should-the-rbi-be-made-more-accountable-mdashpart1/34926.html" target="_blank"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-bidi-font-family: Arial;"> Should the RBI be made
more accountable? —Part1</span></b></a></div>
</div>
<div id="edn6" style="mso-element: endnote;">
<div class="CM13">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref6" name="_edn6" style="mso-endnote-id: edn6;" title=""><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[vi]</span></span></span></span></span></a><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"> This matter gets
even more complicated when we consider the fact that despite being involved in
the design and delivery of (digital) financial (inclusion) services, these
newer set of stakeholders - i.e., TELCOS and a wide range of agents,
intermediaries, merchants and others - are neither regulated not supervised in
any serious fashion by the CENTRAL BANK and/or any other regulator/supervisor
for that matter.</span></div>
</div>
<div id="edn7" style="mso-element: endnote;">
<div class="CM13">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref7" name="_edn7" style="mso-endnote-id: edn7;" title=""><span class="MsoEndnoteReference"><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span lang="EN-US" style="color: black; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[vii]</span></span></span></span></span></a><span lang="EN-US" style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"> It is often argued
that the end users of (digital) financial inclusion services tend to be those
who have been traditionally excluded from the formal financial sector and/or
bottom of pyramid (bop) clients but that may not necessarily be the case, as
real life experiences have indicated!</span></div>
</div>
<div id="edn8" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref8" name="_edn8" style="mso-endnote-id: edn8;" title=""><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif";"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[viii]</span></span></span></span></span></a><span style="font-family: "Arial","sans-serif";"> Here, it must be recognized that <b style="mso-bidi-font-weight: normal;">unresolved conflicts of interest MAY </b>result
in abuse of a public office/official position, by a CENTRAL BANK board and/or
staff member!</span></div>
<div class="MsoEndnoteText">
<br /></div>
<div class="MsoEndnoteText">
<span style="font-family: "Arial","sans-serif";">This article draws on a number of resources in the Governance area from
the web and elsewhere including OECD resources and other governance
material. They are far too numerous to acknowledge individually and so, I
collectively (gratefully) acknowledge them. The application to the
CENTRAL BANK and (DIGITAL) FINANCIAL INCLUSION SPACE has however been
done by the author! </span><span style="font-family: "Arial","sans-serif"; font-size: 8.0pt;"></span></div>
</div>
</div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-72283684146267988452016-03-17T07:34:00.003+05:302016-03-17T07:34:41.931+05:30Competing Roles and Conflicting functions of SROs like MFIN – Will it Work in Real TIME?<div dir="ltr" style="text-align: left;" trbidi="on">
Ramesh S Arunachalam <br />
<br />
Look at an SRO (Self Regulatory Organisation) like Micro-Finance
Institution Network (MFIN), India. It has a range of functions and it is
important that these are complementary and not potentially in conflict.
What I am saying is that the performance of one function by MFIN should
not even appear to limit and/or compromise, its ability to discharge
the other functions (including its admittedly very important
self-regulatory role). That is where the problem lies with what has been
recommended by the Malegam Committee Report (MCR), which is under
implementation. I explain why this is the case? <br />
<br />
When a quasi (self) regulator like MFIN is involved in both, industry
development and (self) regulatory functions, such as the supervision of
MFIs on behalf of the regulator, it is likely to reduce the quasi
regulator’s effectiveness in both functions and reduce public confidence
in the institution. <strong>For these and other reasons, combing a
development role with a quasi-regulatory and/or supervisory role should
be avoided at all costs. There can be no two doubts with regard to this!</strong> <br />
<br />
The effective and impartial regulation of the microfinance industry
in the larger (public) interest can increase consumer confidence in the
industry and contribute to its long-term development. This is a fact
that cannot be disputed! However, MFIN’s function such as the
development/promotion of the microfinance industry generates material
conflicts, as has been observed through a number of cases which I have
documented (Please see the following article - <a href="http://microfinance-in-india.blogspot.in/2011/10/has-mfin-one-of-self-regulatory-bodies.html" rel="nofollow" target="_blank">http://microfinance-in-india.blogspot.in/2011/10/has-mfin-one-of-self-regulatory-bodies.html</a> <br />
<br />
For example, whether MFIN will vigorously pursue non-compliance by
some of its member MFIs (microfinance industry participants), and alert
consumers to this noncompliance is a serious question that I continue to
have after having visited Eastern UP, Bihar and Madhya Pradesh. What
ever happened to the enquiries that were ordered by MFIN in the
aftermath of the 2010 AP crisis? <br />
<br />
<strong>In my humble opinion, MFIN’s ability to place end user
clients before its member associations THEREFORE appears to be in
serious doubt! </strong><br />
<br />
While vigorous pursuit of non compliance may have an adverse effect
on the microfinance industry’s reputation in the short-run, it is indeed
necessary to achieve a consumer safety objective and long term health
of the microfinance industry.<strong> Why is that not being acknowledged globally? </strong>I have my reasons for the same and will talk about it in my next post! <br />
<br />
Combining the functions of service delivery of industry development
with enforcement of regulatory standards can also present conflicts,
particularly when the same/related staff carry out both functions and
report to the same decision-maker, and therefore should be avoided.
This, I believe is the case at MFIN where the super-boss is the same
person as is the board, which comprises mainly of member MFIs! With all
due respect to the present CEO of MFIN, I am not raising a personal
issue here but rather a <strong>substantive conflict of interest issue and it must be looked at in this manner!</strong><br />
<br />
One last caveat is in order! Whenever I have raised such substantive
issues, people think I am attacking the microfinance Industry and its
constituents in a personal manner. That is hugely unfair and untrue! <strong>Let
me assure all of you that what I am saying is certainly leading the
thought development process in setting the highest standards of
Governance in the microfinance Industry globally.</strong> In fact, I
have now received a lot of feedback on the fact that my live blogging
during the AP crisis in 2010 and prior/subsequent writing have indeed
contributed in some (small) measure to changing the microfinance
Industry globally, for the better! That alone makes me happy! Thanks and
Have a Nice Day!</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-8375197643032644082016-03-15T20:50:00.002+05:302016-03-15T20:50:24.570+05:30How can Indian Microfinance Salvage LOST Ground? (PART 1)<div dir="ltr" style="text-align: left;" trbidi="on">
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">Ramesh S Arunachalam</span></b></div>
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<br /></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">As someone who has been involved with
what is now called the microfinance industry, for around 28 years, I must say
that all is not lost. Indian MFIs and microfinance can salvage the lost ground,
but they need to put clients first. For this, they must get back to the basics
and do some of the following if indeed they are to rebuild their (lost)
credibility and revive the industry. </span></div>
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<br /></div>
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<strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 18.0pt;">First, MFI’s must build (lasting) client
relationships </span></i></strong><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 18.0pt; font-weight: normal; mso-bidi-font-weight: bold;">and let me outline what I mean by this!</span></i></strong><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;"></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">In the initial years of microfinance,
some 3 decades ago, the MFIs that existed had great social acceptability and
local support, because their first and foremost task was getting to know
clients rather than mere lending. <i style="mso-bidi-font-style: normal;">MFIs field
staff spent quality time with the clients but unfortunately, we seem to have lost
our way in this regard. </i>Today, our assembly line approach has led to MFI’s
getting farther and farther away from clients. <i style="mso-bidi-font-style: normal;">Servicing of clients by MFIs has also become poorer as the dictates of
the MFI assembly line have gained in prominence.</i> </span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">The use of process mapping, 6 sigma and
the like have really shortened group meetings and reduced the quality of information
that used to come through from the grass-roots. As economists have always
argued, information is POWER and MFIs have increasingly lost that access to superior
grass-root information – which means that their knowledge about the client is
poorer. And of course, CGAP courses on delinquency will always tell you – “THERE
ARE NO BAD BORROWERS, ONLY BAD LOANS!”</span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">Agreed that people are busier but is it
not a recipe for disaster when an MFI lends to someone whom it hardly knows
(processed mapped group meeting routine OF 15/20 MINUTES hardly is used) and/or whom it does not
know at all (centre leader/group leader acting as the agent disburses and
recovers loans). And in the latter case of agent led microfinance, the lack of rigorous,
independent and objective internal audits means that the MFI does not EVEN know
whether its credit policy is really being implemented on the ground!</span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">Therefore,
MFIs must get back to the basics and create a process by which they can know their
clients better! MFIs must also start to view low-income people not just as mere
clients who borrow, but rather respect them as producers of goods (micro-entrepreneurs)
and services specialists who make a significant contribution to the growth of
the country and its economy.</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;"> In fact, the contribution of the
informal sector to the economy of a country like India is indeed already huge.
And imagine what will happen when this is fully harnessed through the efforts
of responsible microfinance!</span></div>
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<br /></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 18.0pt;">Continued…PART 2</span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-66116911796682026522016-03-15T08:57:00.001+05:302016-03-15T10:33:57.494+05:30Learning from What I Saw in Eastern UP, Bihar and Madhya Pradesh...<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">Ramesh S Arunachalam </span></div>
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<br />
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">My travels through Eastern UP, Bihar and Madhya Pradesh have
taught me several things and I have written them up below:</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">The
<b style="mso-bidi-font-weight: normal;">seriously flawed MFI operational model</b>
is in full flow in these areas and is being implemented by <span style="font-family: "times new roman" , "serif";">many </span>MFIs including those that have
a banking license. Let us make no mistake about that! And having seen things
for myself on the ground at close quarters, I am unwilling to buy arguments provided by my
friends sitting, mostly in Delhi<span style="font-family: "times new roman" , "serif";"> </span>or Mumbai or Hyderaba<span style="font-family: "times new roman" , "serif";">d...</span> <span style="font-family: "times new roman" , "serif";"></span> </span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">The
centre leader/group leader/equivalent is the most common type of agent, who
plays a very pivotal role in the entire credit disbursement and recovery
process. As a result, KYC is provided by these agents is and will be as good as
these agents deem it fit.A detailed post on the agent will be provided separately!</span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">In
overall terms, the same DISRUPTIVE MFI practices that were prevalent in (erstwhile)
Andhra Pradesh in terms of multiple lending, ghost lending, proxy lending,
staff loans, frauds by staff and so on are prevalent as also strong arm tactics
for recovery, which, in my opinion appears even more serious than it was in
Andhra Pradesh. <span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">In
fact, a TRULY independent VALIDATION of the credit bureau data with ground
level data should be immediately conducted in an EXHAUSTIVE manner across the
three states. Sample studies will not help and an exhaustive enumeration and
validation of the credit bureau data by a completely independent team of people
will close the debate, once and for all, on whether what happens on the ground
is indeed reflected in what is there in the credit bureau. In my humble
opinion, there is a lot that the credit bureau’s are missing in terms of actual
action on the ground...</span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">We need to understand what are the causative factors that have <span style="font-family: "times new roman" , "serif";">l<span style="font-family: "times new roman" , "serif";">ed to the </span></span>stupendous growth in loan volumes in these areas<span style="font-family: "times new roman" , "serif";"> <span style="font-family: "times new roman" , "serif";">and <span style="font-family: "times new roman" , "serif";">on what basis <span style="font-family: "times new roman" , "serif";">these increases </span>in loans have occurred? We also need to understand why and <span style="font-family: "times new roman" , "serif";">how </span></span></span>multiple<span style="font-family: "times new roman" , "serif";">, </span>ghost<span style="font-family: "times new roman" , "serif";">, proxy lending </span>have increased? <span style="font-family: "times new roman" , "serif";">Likewise, the </span></span><span style="mso-bidi-font-weight: bold;">burgeoning <span style="font-family: "times new roman" , "serif";">use </span>of agents<span style="font-family: "times new roman" , "serif";"> and increase in coercive recovery practices </span>in the MFI model<span style="font-family: "times new roman" , "serif";"><span style="font-family: "times new roman" , "serif";"> wi<span style="font-family: "times new roman" , "serif";">ll also have to be better <span style="font-family: "times new roman" , "serif";">understood! </span></span></span></span></span></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">f)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="font-family: "times new roman" , "serif";">With all due respect, s</span>o
much for the tiered regulation and supervision that came from the Malegam
Committee Report (MCR)...As I told the regulators/supervisors then<span style="font-family: "times new roman" , "serif";">, written about it later </span>and also communicated to the Hon Parliamentary Standing Committee on Finance, <span style="font-family: "times new roman" , "serif";">the MCR proposed <span style="font-family: "times new roman" , "serif";">a regulatory/supervisory structure </span></span>that SIMPLY cannot work on the
ground. I have not seen any serious regulatory activity/supervision on the ground either by the regulator/supervisor
and/or by others including the banks/SROs. <i style="mso-bidi-font-style: normal;">As I
have always mentioned, self-regulation is an OXY MORON. Period. </i>If people want
to satisfy their conscience with the presence of SRO’s, so be it but SROs by
virtue of being member associations have an innate conflict of interest. We
need to recognise that, deal with this issue and make appropriate alternative arrangements! </span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">g)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">My
observation of the KYC practices in these areas is that it is extremely poor
and primarily so because agents provide whatever KYC they can lay their hands
on...I have dead peoples’ KYC details that were given for some proxy loans taken...and there is much more on KYC which I will post separately on...MFIs
are captives with these NOTORIOUS agents who, as they did in (esrtwhile) Andhra Pradesh,
can move clients around from one MFI to another and also get clients to just
disappear from an MFI’s radar...at the blink of an eye lid! </span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-indent: -0.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;"><span style="mso-list: Ignore;">h)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">Digital
financial inclusion is at best limited to remittances/payments and the infrastructure
for the same is very, very poor as we travel the real rural interiors in
Eastern UP, Bihar and Madhya Pradesh. This is also true of much of rural India. I would be very worried in using digital
financial inclusion for SAVINGS - especially, given the nature of the lower level intermediaries
involved and the (lack of) controls prevalent therein - <span style="font-family: "times new roman" , "serif";">both of these </span>constitute<span style="font-family: "times new roman" , "serif";"> </span>a huge risk to peoples’ money including public deposits. At best, digital
financial inclusion can be an urban/peri-urban phenomenon and work among the younger
mobile/internet savvy population, where ever they exist. Pilots of course can
showcase DIGITAL FINANCIAL INCLUSION in great measure among any population/context but
the ability to scale up these (in a commercial manner) will be limited to younger mobile/internet savvy population,
where ever they exist. This is especially true in India, where the DIGITAL
divide is still huge, especially when you travel to remote rural areas, both
due to poor infrastructure as well as ability of clients to use these. A
separate FULL post on DIGITAL FINANCIAL INCLUSION will be <span style="font-family: "times new roman" , "serif";">put up </span>soon but
let us not make the mistake and think that branchless banking and digital financial inclusion
will help bring <b>“lasting and sustainable financial inclusion”</b> to the excluded
and poor clients in these areas. For this, we need to be clear on the facts...as
enumerated below </span></div>
<div class="MsoListParagraphCxSpLast">
<br /></div>
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">In <span style="font-family: "times new roman" , "serif";">many of the </span>areas I visited, many of the families had at least one person who had been included in the formal/quasi financial
system through the years but who was excluded later for a variety of reasons
including <i style="mso-bidi-font-style: normal;">poorly structured products,
almost negative returns from agriculture/rural enterprises (often caused by
imperfections in the markets for their produce/products as well as imperfections in the market for labor), imperfect delivery
systems including corruption in the financial system and so on (This is dealt
with separately). </i>Therefore, it is too much to expect DIGITAL FINANCIAL
INCLUSION to help bring <b style="mso-bidi-font-weight: normal;">“lasting and
sustainable financial inclusion” </b>to the excluded and poor clients in these
areas. Much more will be needed or else, we would be setting ourselves up<span style="font-family: "times new roman" , "serif";"> for failure at a later date! The key point that is that we need to be realistic in terms of what financial inclusion and/or digital financial inclusion can achieve on the ground and the risks/limitation<span style="font-family: "times new roman" , "serif";">s</span> <span style="font-family: "times new roman" , "serif";">inherently associated with both of these. </span></span></span><br />
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
<span style="font-family: "times new roman" , "serif"; font-size: 20.0pt; line-height: 115%;">So long friends! Stay tuned for more updates! </span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-26656562870878592282016-03-13T08:42:00.001+05:302016-03-13T08:44:32.744+05:30Down the memory lane...<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">Ramesh S Arunachalam</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">Dear Friends/Colleagues </span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">Please see the e mail I posted in the Microfinance
Practice (MFP), a popular e group for Microfinance professionals in May 2010, about
5 months before the actual 2010 AP crisis... </span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">Kindly note that the E mail precedes the 2010 AP
Crisis of September 2010 and thereafter...</span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">And I am sure we are not far away from a HUGE crisis
in Indian Microfinance in 2016 and thereafter...</span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">History after all repeats itself...and like before
there are others corroborating the facts I have stated...</span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">The
BIGGEST PROBLEM is the MFI operational model and that has not changed...agents
still dominate the scene...so much for responsible microfinance...who is to
blame for...what is happening is hard to tell...but I can tell you with strong
conviction and authority that what is going on is CERTAINLY <u>not</u>
responsible microfinance...in any significant manner...<span style="font-family: "times new roman" , "serif";">W</span>hat is worse is <span style="font-family: "times new roman" , "serif";">that <span style="font-family: "times new roman" , "serif";">all of this is happening with PUBLIC DEPOSITS...</span></span></span></b></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">Stay
tuned for more updates...</span></b></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 14.0pt; line-height: 115%;">Date: Thu, 13 May 2010 17:39:01 +0000<br />
To: <a href="mailto:MicrofinancePractice@yahoogroups.com" target="_blank"><span style="color: blue;">MicrofinancePractice@yahoogroups.com</span></a><br />
Subject: Re: Re: [MFP] Exclusive: SKS Microfinance journey to IPO - An inside
story<br />
From: <a href="mailto:r_arunachalam1@rediffmail.com" target="_blank"><span style="color: blue;">r_arunachalam1@rediffmail.com</span></a><br />
CC: <a href="mailto:r_arunachalam@hotmail.com" target="_blank"><span style="color: blue;">r_arunachalam@hotmail.com</span></a><br />
<br />
Dear Mr Manohar<br />
<br />
Thanks so much for corroborating many of the issues and especially, the aspect
of financial frauds and internal control failures. In most cases, the frauds
and internal control failures seen in the Indian MF sector can be grouped into
five categories:<br />
<br />
<b style="mso-bidi-font-weight: normal;">1) Lack of adequate management oversight
and accountability, and failure to develop a strong control culture within the
institution. <br />
</b><br />
Without exception, the cases of internal control failures and associated losses
reflect: a) management inattention to, and laxity in, the control culture of
the institution; b) insufficient guidance and oversight by boards of directors
and senior management; and c) a lack of clear management accountability through
the assignment of roles and responsibilities. These incidents also reflect lack
of appropriate incentives for management to carry out strong line supervision
and maintain a high level of control consciousness across the organisation.<br />
<br />
<b style="mso-bidi-font-weight: normal;">2) Inadequate recognition and assessment
of the risk of certain activities, whether on- or off-balance sheet. <br />
</b><br />
Many organisations that have suffered such internal control failures neglected
to recognise and assess the risks of new products and activities, or update
their risk assessments when significant changes occurred in the environment or
business conditions including growth. Many recent incidents highlight the fact
that control systems that function well for traditional or simple products are
unable to handle more sophisticated or complex products, especially in
burgeoning growth.<br />
<br />
<b style="mso-bidi-font-weight: normal;">3) The absence or failure of key control
structures and activities, such as segregation of duties, approvals,
verifications, reconciliations, and reviews of operating performance. <br />
</b><br />
Lack of segregation of duties in particular has played a major role in the
internal control failures that have occurred.<br />
<br />
<b style="mso-bidi-font-weight: normal;">4) Inadequate communication of
information between levels of management within the institution, especially in
the upward communication of problems. <br />
</b><br />
To be effective, policies and procedures need to be effectively communicated to
all personnel involved in an activity. Some internal control failures occurred
because relevant personnel were not aware of or did not understand the
policies. In several instances, information about inappropriate activities that
should have been reported upward through organizational levels was not
communicated to the board of directors or senior management until the problems
became severe. In other instances, information in management reports was not
complete or accurate, creating a falsely favourable impression of a business
(portfolio) situation..<br />
<br />
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , "sans-serif"; font-size: 22.0pt; line-height: 115%;">5) Inadequate or ineffective audit programs and
monitoring activities. </span></b><span style="font-family: "arial" , "sans-serif"; font-size: 14.0pt; line-height: 115%;"><br />
<br />
In many cases, internal audits were not sufficiently rigorous to identify and report
the control weaknesses. In other cases, even though auditors reported problems,
no mechanism was in place to ensure that management corrected the deficiencies.<br />
<br />
Thanks and I am very grateful to members of this group who would like to share
similar experiences. Thanks in advance<br />
<br />
Best Regards<br />
<br />
Ramesh<br />
<br />
<br />
On Thu, 13 May 2010 22:40:02 +0530 wrote<br />
><br />
<br />
Friends,<br />
<br />
I spent around 2 months in the summers of 2007 studying the field practices of
a loosely bound group of MFIs operating in many states of India, including
Chhattisgarh, Madhya Pradesh and Maharashtra. </span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , "sans-serif"; font-size: 18.0pt; line-height: 115%;">While I
conducted the major portion of my study in Maharashtra, the time spent in
Chhattisgarh also is enough to corroborate many of the issues raised by Mr
Arunachalam in his mail.<br />
</span></b><span style="font-family: "arial" , "sans-serif"; font-size: 14.0pt; line-height: 115%;"><br />
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , "sans-serif"; font-size: 16.0pt; line-height: 115%;">I came across and documented good number of cases
of ghost clients, involvement of mafia like middlemen, local goons and recovery
agents. Moreover, some of the goons were serving on the rolls of the MFIs and
were creating trouble both for the MFIs and their clients.</span></b><span style="font-family: "arial" , "sans-serif"; font-size: 14.0pt; line-height: 115%;"><br />
<br />
The MIS was practically non-existent: the application forms were sparingly
filled up, registers and records were incomplete and there were gross
mismatches between the figures reported by the branch offices and the head
offices.<br />
<br />
The MFIs had become so dependent on the local goons that, despite knowing that
they (the goons) were behind the ghost clients and other forgery, they(the
goons) were still kept as staff on the rolls, just in anticipation
that they would help recover some of the lost money.<br />
<br />
Moreover, the sole purpose of the operation of these MFIs, in my opinion,
appeared to be shareholders' profit maximisation, that too in short term. The
interesting thing was- some of the people leading these MFIs had very genuine
intentions, but they were unable to put proper systems and processes in place,
resulting in failures of various kinds, including financial frauds, improperly
designed products and loss of control over the employees.<br />
<br />
The need of the hour is to acknowledge the real situation and face these as
challenges. Otherwise, it would be like shutting our eyes to the fire around us
and ultimately burn down to ashes. Any action would begin with acceptance of
the problems, which exist undoubtedly.<br />
<br />
Regards,<br />
<br />
Murli Manohar<br />
<br />
--- On Thu, 13/5/10, Ramesh S Arunachalam wrote:<br />
<br />
From: Ramesh S Arunachalam <br />
<br />
Subject: Re: [MFP] Exclusive: SKS Microfinance journey to IPO - An inside story<br />
<br />
To: <a href="mailto:MicrofinancePractice@yahoogroups.com" target="_blank"><span style="color: blue;">MicrofinancePractice@yahoogroups.com</span></a><br />
<br />
Cc: <a href="mailto:r_arunachalam@hotmail.com" target="_blank"><span style="color: blue;">r_arunachalam@hotmail.com</span></a><br />
<br />
Date: Thursday, 13 May, 2010, 4:22 PM<br />
<br />
Dear Colleagues <br />
<br />
A lot has been written about the SKS IPO, the commercialisation of MF and how
the for-profit approach is superior is to other appraoches and vice versa.
Several enlightening responses have been received including discussions on
(Prof) Sriram's papers. Indeed, Sriram's papers are candid, revealing and
thought provoking and the paper by Dr Thorat and I (2005) did attempt to
highlight several issues raised in his papers. <br />
<br />
While alternative points of view are well taken and must be respected, there is
something very fundamental and serious that needs the attention of the industry
in India. I just returned from several days in the field (to several states in
India) where all the well known Large Indian MFIs are operating. Much of what I
saw in the visits and what I heard re-confirms what Dr Thorat and I wrote in
our paper for the NABARD high level policy conference in 2005. A lot of it
resonates with what Sriram wrote in a recent article. I summarise some of the
key issues below: <br />
<br />
First, there still appears to be huge fraud in the Indian MF industry. I came
across several cases of blatant internal control failures (I have documented
about 43 cases so far). From staff running away with Rs 1.39 Crores to several
other intentional and inadvertent failures, unethical practices and frauds
appear to abound in the Indian MF sector - including ghost clients, ghost
branches and ghost field officers. Dr Thorat and I said this, way back in 2005
and I am even more convinced now! <br />
<br />
Second, the collected interest rates (effective - in a sense - PUN intended)
are very different from the stated interest rates (nominal - in a sense - PUN
Intended). I do have evidence from the field which shows the huge variation in
what is stated as interest and what is collected as interest and I will share
that with this group at a later date (as I am calculating the EIR and having it
re-verified). It is amazing indeed! <br />
<br />
Third, I have seen how some of the new and fast growing MFIs are engaging in
very unethical practices including snatching clients of other MFIs - by
enticing them with larger loans and through other unethical means - like
standing outside bank branches and catching hold of members/leaders who come to
make repayment and using various means (including coercion) to make them
clients of new entrant MFIs (A new method of client targeting indeed). </span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , "sans-serif"; font-size: 16.0pt; line-height: 115%;">Clients are also on record about Goondas (thugs)
and 3rd Degree Methods being used by a new group of intermediaries allegedly
used by MFIs - the DSA (Direct Sales Agent) kind of group leaders (could be a
centre or a group leader), who apparently use local thugs to ensure that
payment comes back on time and/or that they join another MFI and/or they take a
loan, even if not required. These DSA group leaders often transfer groups from
one MFI to another for money and get new clients for MFIs and they are getting
to become district level mafia groups. I infact came across sets of DSA group
leaders in several districts, whom claimed to be exclusively switching groups
of clients between and across MFIs for a good commission as also performing
other tasks like creating ghost clients, recruiting other MFI clients, ensuring
repayments etc. </span></b><span style="font-family: "arial" , "sans-serif"; font-size: 14.0pt; line-height: 115%;"><br />
<br />
There are two other observations for now: <br />
<br />
a) it is clear from the field that clients are hugely shared and duplicated,
there is a lot of double/triple counting of clients and therefore the outreach
numbers (and scale) are hugely hugely over-estimated; b) the use of technolgy
is over hyped and most experiments (including the first ones that got awards
from CGAP/others for use of technology) are no longer operational on the ground
- simple because they are not convenient and also because, in many cases, the
base MIS is very weak. It would have been good if these organisations had leap
frogged the original technology but they have not done that either. There are
several instances where the MIS continues to be inaccurate and non-transparent,
especially at the branch and lower level. In fact, in many remote places, no
MIS exists and what the field worker says is the MIS and the same gets reported
upward - some times, all the way up to the commercial bank. Again, I have very
good evidence from AP, Orissa, Tamilnadu, Karnataka, Chattisgarh and other
states <br />
<br />
Overall, there appear to be a lot of skeletons in the Indian MF cupboard... and
it is time that cupboard is emptied and the industry gathers courage to cleanse
its stables. A key issue here (that I am raising) is that a lot seems to be
going wrong in the Indian MF sector because of the drive for scale,
commercialisation and share holder profits. What also seems clear is that this
has perhaps resulted in the Indian industry slowly forgetting its clients.
While profits, scale, share holder welfare, access and inclusion are
undoubtedly important, clients should come first and need to be remembered and
focussed upon. And of course, last but not the least, while wealth can be
created and profits can be made - it should be done in a fair, transparent and
ethical manner. I am sure every one in this group will agree to that and I
sincerely hope that all of those who are involved in MF in India, will try to
emphasise and ensure that this indeed happens - both in the short and long run.
<br />
<br />
Warm Regards <br />
<br />
Ramesh <br />
<br />
PS: I have reasonably good evidence with names of organisations, people and
places and the actual incidents, which I am writing up!</span><span style="font-family: "arial" , "sans-serif"; font-size: 14.0pt; line-height: 115%;"></span></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-83526504929317784742016-03-12T19:03:00.002+05:302016-03-12T19:08:00.819+05:30Why is a rigorous, independent and objective internal audit system critical for the well-being of MFIs, especially those desiring to practice responsible commercial microfinance? <div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-size: 16.0pt;">Ramesh S Arunachalam</span></b></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">From a larger perspective, internal audits
are perhaps the first means for well-meaning MFI boards to get <span class="ilad">regular</span> feedback on whether the concept of responsible
microfinance is being implemented on the ground. In other words, a rigorous, independent
and objective internal audit system can provide useful feedback on how
processes and procedures (to promote responsible microfinance) are supposedly
being implemented on the ground. Therefore, even before credit/social ratings
and/or any established code of compliance assessments point out any
discrepancies, it is the internal audit system that can provide and will provide
useful early warning signals for the MFIs and their boards. Without question,
just as charity begins at home, the first step in responsible microfinance is
to ensure that MFIs have a rigorous, independent and objective internal audit system
in the first place. That is yet to happen at many places in India and within many
MFIs in real time even as on date…<b>If that had happened, then, the agent led model of
microfinance would not have flourished, as it has in Indian Microfinance - unless of course,
the MFI boards themselves supported and incentivized the agent led of
microfinance! </b></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">So, what do I mean by a rigorous, independent
and objective internal audit system? Let me first set out the strategic context
of internal audits from which it will be apparent that their rigor, independence
and objectivity are critical and necessary. This strategic context clearly
determines the extent to which internal audits can become a powerful and
independent tool that boards of MFIs can use to ensure responsible microfinance
on the ground and in real time.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">Essentially, according to The Institute of
Internal Auditors (</span><span lang="EN-US"><a href="http://www.theiia.org/"><span style="font-size: 16.0pt;">www.theiia.org</span></a></span><span lang="EN-US" style="font-size: 16.0pt;">), <span class="ilad">internal auditing</span> is
defined as: </span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: .5in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">“<i>An independent, objective assurance...
activity designed to add value and improve an organization’s operations. It
helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.</i>”</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">This definition is critical because it sets
forth the parameters on which an internal audit system can be designed at the
MFIs.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">First and foremost, <i>an internal audit
system must be independent of the MFI activities being audited. </i>This
implies that internal auditors at MFIs do not report to <span class="ilad">line
management</span> and/or senior management<b>.</b> Often, at some
MFIs, which had an elaborate internal audit function, the independence of this
function was hugely compromised because the internal audit department came
under the (VERY SAME) senior management, whose very activities were also to be
assessed.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">Tell me, how can an internal audit
department that reports to the CEO or CFO (or anyone else who is part of the
line/operational management) accurately assess and provide objective feedback
on the working of processes, procedures and operations? <b><i style="mso-bidi-font-style: normal;"><span style="font-weight: normal; mso-bidi-font-weight: bold;">Therefore, MFI boards must ensure that there is an internal audit
department that reports directly (and independent of senior management) to the
board or its audit subcommittee</span></i></b><b><span style="font-weight: normal; mso-bidi-font-weight: bold;">.</span></b> This is
mandatory and this independence in functioning will facilitate greater
objectivity in the working of the internal audit department. It will also
position the internal audit department appropriately within the MFI, in terms
of its strategic context.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">Second, an additional caveat is in order
here. Many organizations including MFIs may find it tempting to get internal
auditors to design their risk management, control, and governance systems.
While it is true that internal auditors have GREAT intimate knowledge of what
systems work on the ground and why, if they are asked to design these MFI
systems, then, it is unlikely that they would be able to assess the functioning
of these systems dispassionately and objectively<i>. This means that at no
time should MFIs use their internal auditors to design the risk management,
control, and governance systems and processes. </i>At best, feedback—through
discussions with the internal auditors and/or studying of their internal audit reports—could
be taken with regard to these systems so that appropriate on-course corrections
are made. This again will ensure that the internal auditors are truly
independent of the activities and operations that they are auditing.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">A third issue is relevant here. That is the
scope of internal audits and this again is critical to understanding the
reality across the organization (i.e., MFI). Very often, the activities of the
senior management are excluded from internal audits for various reasons. <i style="mso-bidi-font-style: normal;">That should not be the case.</i> If only
this had perhaps been done at Sahayata Microfinance,<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span lang="EN-US" style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">[1]</span></span></span></span></a>
much of the damage could have been avoided. </span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">Fourth, senior management in MFIs preach
extensively about internal audits but they forget one important aspect—ensuring
its independence. Take a look at what Mr Ajay Verma, MD of Sahayata
Microfinance (in 2011), said in a promotional video for a global microfinance
consulting company:</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .6pt; margin-left: .5in; margin-right: 0in; margin-top: .6pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">“The Internal Audit (IA) function is designed to
check, whether the internal controls in the MFI are functioning as intended?
Internal controls are designed to provide reasonable assurance regarding the
efficiency and effectiveness of operations, the reliability and completeness of
financial and operational information, and the compliance with applicable laws
and regulations.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .6pt; margin-left: .5in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: .5in; margin-right: 0in; margin-top: .6pt;">
<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 16.0pt;">Ajay
Verma, CEO, and Sahayata:</span></i><span lang="EN-US" style="font-size: 16.0pt;">
In terms of internal audit and controls, you need to very clearly define what
is auditable and what is not auditable. Like what we have done, we have three
types of audit. One is the process audit which happens in the field, then
second is the branch audit. We audit all the branch documentation, which the
loan officers have to do and the branch manager has to do; and third one is the
cash and the finance audit which happens on the branch and the head office
levels.”<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftn2" name="_ftnref2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span lang="EN-US" style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">[2]</span></span></span></span></a><span style="mso-spacerun: yes;"> </span></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">All of these sound good to hear but the
Sahayata Microfinance case<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftn3" name="_ftnref3" style="mso-footnote-id: ftn3;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span lang="EN-US" style="font-family: "times new roman" , "serif"; font-size: 16.0pt; line-height: 115%;">[3]</span></span></span></span></a>
demonstrates that senior management do <i style="mso-bidi-font-style: normal;">not</i>
necessarily practice what they preach. And if only the internal audit function
had been independent, the Sahayata board would perhaps have got some early
warning signals of the impending crisis in 2011. Sadly, this independence is
never permitted by senior management, and then, internal audits become useless.
This is the case in many MFIs even in 2016 sadly!<span style="mso-spacerun: yes;"> </span></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">In short, internal audits must
(independently) cover each and every activity at the MFI with the objective of
evaluating (but not limited to) the following:</span></div>
<div class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "symbol"; font-size: 16.0pt;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Integrity,
reliability, and effectiveness (including the relevance, accuracy, and
comprehensiveness) of risk management, control, and governance processes and
related systems;</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "symbol"; font-size: 16.0pt;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span class="ilad"><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Monitoring</span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"> of legal
compliances—with extant laws and regulations—including any changing <span class="ilad">requirements from</span> regulator/supervisors; and </span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "symbol"; font-size: 16.0pt;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span class="ilad"><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Safeguarding</span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"> of all assets
of the MFI.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">Without question, the need for strong, rigorous,
independent, and objective internal audits has never been more important in the
Indian microfinance sector. I certainly hope that the boards (in MFIs)
recognize this and facilitate the adoption of well-functioning independent <span class="ilad">internal audit systems</span> that can go a long way in <b><span style="font-weight: normal; mso-bidi-font-weight: bold;">protecting their MFIs and
enhancing their reputation as <i style="mso-bidi-font-style: normal;">real</i>
practitioners of responsible microfinance in India.<i style="mso-bidi-font-style: normal;"> And this again is something that the regulatory architecture can seek
to promote as part of the minimum standards required for accreditation as an MFI,
whether NBFC, small finance bank, payment bank</i></span> or microfinance bank!</b></span></div>
<div style="mso-element: footnote-list;">
<span style="font-size: small;"><br clear="all" />
</span><br />
<hr align="left" size="1" width="33%" />
<span style="font-size: small;">
</span><br />
<div id="ftn1">
<div class="m2innerlblocktext008" style="margin: 0in 0in 0.0001pt;">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftnref1" name="_ftn1" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-family: "times new roman" , "serif"; line-height: 115%;">[1]</span></span></span></a>Award winning Sahayata Microfinance is the latest to
go astray</span></div>
<div class="m2innerlblocktext008" style="margin: 0in 0in 0.0001pt;">
<span style="font-size: small;">(<a href="http://moneylife.in/article/award-winning-sahayata-microfinance-is-the-latest-to-go-astray/21549.html">http://moneylife.in/article/award-winning-sahayata-microfinance-is-the-latest-to-go-astray/21549.html</a>),
by Ramesh S Arunachalam, November 18, 2011 and What is said at conferences
is very different from what is implemented in practice</span></div>
<div class="m2innerlblocktext003" style="margin: 0in 0in 0.0001pt;">
<span style="font-size: small;"><span lang="EN-US">(<a href="http://www.moneylife.in/article/what-is-said-at-conferences-is-very-different-from-what-is-implemented-in-practice/22124.html">http://www.moneylife.in/article/what-is-said-at-conferences-is-very-different-from-what-is-implemented-in-practice/22124.html</a>),
by Ramesh S Arunachalam, December 12, 2011.</span><span lang="EN-US"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="ftn2">
<div class="MsoFootnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftnref2" name="_ftn2" title=""><span class="MsoFootnoteReference"><span style="font-family: "times new roman" , "serif";"><span class="MsoFootnoteReference"><span style="font-family: "times new roman" , "serif"; line-height: 115%;">[2]</span></span></span></span></a><span style="font-family: "times new roman" , "serif";">Source: </span><a href="http://www.youtube.com/watch?v=ChKgQrDQUk8"><span style="font-family: "times new roman" , "serif";">http://www.youtube.com/watch?v=ChKgQrDQUk8</span></a><span style="font-family: "times new roman" , "serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="ftn3" style="mso-element: footnote;">
<span style="font-size: small;">
</span><br />
<div class="m2innerlblocktext008" style="margin: 0in 0in 0.0001pt;">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftnref3" name="_ftn3" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-family: "times new roman" , "serif"; line-height: 115%;">[3]</span></span></span></a>Award winning Sahayata Microfinance is the latest to
go astray</span></div>
<span style="font-size: small;">
</span><br />
<div class="m2innerlblocktext008" style="margin: 0in 0in 0.0001pt;">
<span style="font-size: small;">(<a href="http://moneylife.in/article/award-winning-sahayata-microfinance-is-the-latest-to-go-astray/21549.html">http://moneylife.in/article/award-winning-sahayata-microfinance-is-the-latest-to-go-astray/21549.html</a>),
by Ramesh S Arunachalam, November 18, 2011 and What is said at conferences
is very different from what is implemented in practice</span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoFootnoteText">
<span style="font-size: small;"><span style="font-family: "times new roman" , "serif";">(</span><a href="http://www.moneylife.in/article/what-is-said-at-conferences-is-very-different-from-what-is-implemented-in-practice/22124.html"><span style="font-family: "times new roman" , "serif";">http://www.moneylife.in/article/what-is-said-at-conferences-is-very-different-from-what-is-implemented-in-practice/22124.html</span></a><span style="font-family: "times new roman" , "serif";">), by Ramesh S Arunachalam,
December 12, 2011.</span></span><span lang="EN-US" style="font-family: "times new roman" , "serif"; font-size: 8.0pt;"></span></div>
</div>
</div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-33001682478568209702016-03-12T08:48:00.001+05:302016-03-12T08:48:52.765+05:302010 Andhra Pradesh Microfinance Crisis Like Symptoms in Eastern UP, Bihar and Madhya Pradesh (India)! <div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="m2innerlblocktext008" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span style="font-size: 16.0pt;">Ramesh S Arunachalam </span></div>
<div class="m2innerlblocktext008" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span style="font-size: 16.0pt;"> </span></div>
<div class="m2innerlblocktext008" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span style="font-size: 16.0pt;">The
microfinance institution (MFI) model in India has been through a (serious)
crisis over the years (since 2005 and especially in 2010) and a lot of this has
to do with the inability of the boards of MFIs to actually implement (in real
time) some of the very (high sounding) concepts and prescriptions for responsible
finance that came from various quarters.</span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">While it cannot be denied that some MFIs
were not interested in responsible microfinance, some others perhaps could not
ensure the implementation of these well-meaning concepts on a consistent basis
in real time. A classic example is the well-intentioned (Sa-Dhan) code of
conduct<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 16.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[1]</span></span></span></span></a>
in 2006, which was often waved at meetings with the <span class="ilad">AP
government</span> but rarely visible, in terms of practice, on the ground. Slowly,
perverse incentives (as Vijay Mahajan had famously noted in 2010) set in and
eventually led to what is now referred to as the 2010 Andhra Pradesh
microfinance crisis – the world’s largest crisis to date. <b>Many </b><b style="mso-bidi-font-weight: normal;">of those symptoms are now appearing in India’s most populous state
of Uttar Pradesh (UP) - Eastern UP to be precise. Similar symptoms are also
observable in Bihar and Madhya Pradesh as well. </b></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">In retrospect, a good 6 years after the
2010 crisis took shape, one can look back dispassionately and analyze what
essentially happened was a failure of the commercial microfinance —primarily
because the checks <span class="ilad">and balances</span> required for commercial
microfinance (to actually work on the ground) were almost absent. </span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;">By checks and
balances, I mean two things, including lack of (i) supervisory oversight, and
that contributed in huge measure to the crisis then, and (ii) a strong,
independent, and objective internal audit function within these MFIs. While
even a single letter from the supervisor (or regulator) could have mitigated
the scale of the problems that happened in AP in the years preceding 2010, the
absence of an independent and objective internal audit system certainly hurt
the MFIs even more. <i style="mso-bidi-font-style: normal;">It may be worthwhile
to mention that even on date, as the 2010 like crisis starts to unfold in
Eastern UP, Bihar and Madhya Pradesh, both supervisory oversight, as well as a
strong, independent, and objective internal audit function within concerned
MFIs is sadly inadequate! </i></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;"><i style="mso-bidi-font-style: normal;"><br /></i></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 16.0pt;"><i style="mso-bidi-font-style: normal;">I hope that the powers that be are able to look into and
redress the situation immediately as otherwise, the Indian microfinance sector’s
date with another (larger, nationwide) crisis is most certainly on the anvil!</i></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span lang="EN-US" style="color: #2a2a2a; font-size: 16.0pt;">A friend sent me this news from the field some time ago and
I wrote to many of the leaders in microfinance (in India and elsewhere) via e
mail on</span><span lang="EN-US" style="font-size: 16.0pt;">, Jan 18, 2016 at 12:24
PM<i style="mso-bidi-font-style: normal;"><span style="color: #2a2a2a;">. I have now
visited various places in these different states, which I also happen to know very
well because I have worked in each and every district in these three states. </span></i><span style="color: #2a2a2a;">And as things stand, they are INDEED, much, much more serious
than as noted in the article </span></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span lang="EN-US"><a href="http://thewire.in/2016/01/15/why-microfinance-is-becoming-a-bad-word-all-over-again-18937/" target="_blank"><span style="font-size: 16.0pt;">http://thewire.in/2016/01/15/why-microfinance-is-becoming-a-bad-word-all-over-again-18937/</span></a></span><span lang="EN-US" style="font-size: 16.0pt;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="color: #2a2a2a; font-family: "Times New Roman","serif"; font-size: 16.0pt; mso-ansi-language: EN-US;"><br />
When I warned the sector leaders (including bankers) many times about the 2005/6
Krishna and 2010 AP crisis (prior to the crisis), they tried to shoot the messenger. Never mind! What
is coming is worse than the 2010 Andhra Pradesh crisis and some of the leading MFIs
may be directly involved. Déjà vu! As I have repeatedly written in my blog (</span><a href="http://www.microfinance-in-india.blogspot.com/" target="_blank"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 16.0pt; mso-ansi-language: EN-US;">www.microfinance-in-india.blogspot.com</span></a><span lang="EN-US" style="color: #2a2a2a; font-family: "Times New Roman","serif"; font-size: 16.0pt; mso-ansi-language: EN-US;">) and my three books </span><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;">- </span><a href="http://www.researchgate.net/profile/Milford_Bateman/publication/263210454_How_Lending_to_the_Poor_Began_Grew_and_Almost_Destroyed_a_Generation_in_India/links/5474d3a00cf29afed60fc209.pdf" target="_blank"><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;">The
Journey of Indian Microfinance</span></a><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;"> and </span><a href="http://microfinance-in-india.blogspot.in/2014/08/milford-batemans-review-of-idea-which.html" target="_blank"><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;">An
Idea Which Went Wrong: Commercial Microfinance in India</span></a><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;"> – and – </span><a href="http://www.whereangelsprey.com/" target="_blank"><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;">Where Angels Prey</span></a><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt;"> , the
microfinance operational model is hugely flawed and it calls for many strong
changes/interventions on the part of the microfinance industry which, in my
humble opinion, has either failed to learn from the past crises situations and/or
refused to implement learning from past crisis situations like Krishna (2005/6),
Kolar (2008/9) and AP (2010).<b style="mso-bidi-font-weight: normal;"> As a
result, we are now we are headed for a nation-wide microfinance crisis in 2016!</b></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span lang="EN-US" style="font-size: 16.0pt;">Readers may recall that the crisis in Krishna district was localized. Kolar,
was a little larger and more concentrated in terms of the crisis spread. Then we
had a whole state in crisis (erstwhile AP 2010) <b style="mso-bidi-font-weight: normal;">and now it is a national microfinance crisis (spread across multiple states).
</b>It is indeed a time bomb that is ticking away and when it bursts, I can
assure you that a lot of money from across the world will be lost and more importantly, a lot of
FINANCIAL INCLUDED clients will have been financially excluded! So much for the INCLUSIVE FINANCE AGENDA!</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span lang="EN-US" style="font-size: 16.0pt;">While stakeholders may have tried to introduce good practices in the
intervening years, it appears that there is very little change in the
operational model of the microfinance <b>(mainly practiced by the new generation
for-profit MFIs including NBFCs and Banks) </b>which continues to grow in many
places in these three states at a very alarming rate. Self reported data by MFIs to
the Mix Market does not provide a true picture and I have warned MIX about the problems in the data that they collect. When you visit the field and
observe for yourself, you can see that the crisis could become (much) worse
than what we saw in Andhra Pradesh in 2010.</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span lang="EN-US" style="font-size: 16.0pt;">Irresponsible growth, as you all know, carries a huge price and through
this article, I am informing the Indian Microfinance Industry and its
stakeholders PUBLICLY (again) that if this irresponsible growth is unchecked and if solid
changes are not brought about in the industry, the price will be much, much
larger than what it was in Andhra Pradesh in 2010. I have nothing to gain by
stating this and I have no vested interest what-so-ever. <i style="mso-bidi-font-style: normal;">I am deeply concerned about the microfinance industry and of course,
the well being of all of its clients. This is why I have repeatedly written
about the happenings (pro bono) for almost 6 years now!</i></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<span style="font-family: "Calibri","sans-serif"; font-size: 16.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">Centre/group leaders acting as commission agents
is a practice that continues as is the incentivisation of field workers on a growth
strategy which results in continued multiple lending and the like. In many
places, days of a week in a place are shared for centre meetings with
duplication of members across MFIs. Outreach continues to be hugely
overestimated. MIS is far from satisfactory and rarely transparent. Governance
is still extremely poor and there is so much conflict of interest across the
microfinance industry in India. Ghost, multiple and over lending via agents
continues to take place and systems are being sheared across the New Generation
MFIs. KYC norms cannot be easily implemented because of the lack of a
unique primary identifier (despite the Aadhaar card being available) and the
remoteness of the physical locations, the duplicity of names across people in
villages and the like are continuing to make matters worse. And there is so
much more, but I don’t want to sound like a BROKEN RECORD...I really hope that the
Indian Microfinance industry and stakeholders who invest in it will wake up
before it is too late... </span>
<div style="mso-element: footnote-list;">
<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="ftn1" style="mso-element: footnote;">
<div class="MsoFootnoteText">
<a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="font-family: "Times New Roman","serif";"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[1]</span></span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> I have subsequently pointed out
serious flaws with code of conducts assessments in 2011 in several articles...</span><span lang="EN-US" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN-US;"></span></div>
</div>
</div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-31455563980846746202016-03-10T09:39:00.000+05:302016-03-10T09:39:01.221+05:30Sound Corporate Governance at MFIs: Can it Help Mitigate Political Risk?<div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US">Ramesh S Arunachalam</span></div>
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<br /></div>
<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US">In terms of board functioning, what can MFI
boards (themselves) do to improve the <b style="mso-bidi-font-weight: normal;">practice</b>
<i style="mso-bidi-font-style: normal;">(emphasis added) </i>of corporate
governance in reality? Here are some initial practical suggestions based on
experience and this should go a long way in mitigating political risk!</span></div>
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<br /></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Limit
the number of MFI boards on which an (independent) director may sit to not more
than three at any given point in time.</span></i></strong><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> This will
hopefully afford directors the time and space to understand how the MFIs, on
whose boards they serve as directors, are actually performing on the ground.
During and before the 2010 AP crisis in India, I had personally witnessed
directors—who were on multiple MFI boards (often exceeding three)—jumping
planes in a literal sense and having very little time to attend to their
fiduciary and other responsibilities. Many of them could not even visit the
field areas, even before the customary quarterly board review. Some of them who
served on subcommittees were even more harassed for time. <i style="mso-bidi-font-style: normal;">And let me tell you that the perceptions of the bureaucrats in Andhra
Pradesh and elsewhere in India were similar with regard to little time and
effort spent by independent directors. </i>Without any doubt, believe me, these
perceptions enhanced political risk, when it mattered! Therefore, it appears
necessary to ensure that there is a limit—in tune with physical reality—on the
number of MFI boards in which a director may sit. And three appears to be a good
permissible number but this could vary with context! My larger point is that it
makes little sense for independent directors to sit on a large number of boards
that they can do little justice towards!</span></div>
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<br /></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Separate
the functions of the chairman of the board of directors and MD (or chief
executive officer or equivalent) in MFIs, where they are together and ensure
that appropriate outsiders at least occupy one of those posts</span></i></strong><b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.</span></i></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> This
is very critical and should result in dispersed power, especially when the
founder promoter is the chairman and/or managing director. Much of the
excessive risk taking (in the form of multiple, sequential,<span style="mso-spacerun: yes;"> </span>and larger loans being given to subprime-like
clients) that occurred during the lead up to 2010 AP microfinance crisis
happened primarily because there was no one on the board to seriously question
the enthusiastic and entrepreneurial promoters, occupying one or both of these
positions. Often, this was because the promoter had, in the first place, appointed
these individuals to the board and this had caused a huge conflict of interest.
This is again an issue that was brought up in discussions during the 2010 AP
crisis, by both bureaucrats and politicians. In my opinion, conflicts of
interests were a huge issue that led to the burgeoning and unmanageable growth
of Indian microfinance, thereby, enhancing Political Risk! </span></div>
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<br /></div>
<div class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Create
a transparent board </span></i></strong><i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-weight: bold;">recruitment</span></i><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">
(or appointment) policy that clearly specifies the duties and profiles of MFI
directors, including the chairman</span></i></strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> Such
a policy must also ensure that directors have adequate skills and experience
(apart from the <span class="ilad">availability</span> of time to do their job).
The policy must also ensure that the overall <span class="ilad">composition</span>
of the MFIs’ board of directors is suitably diverse—including more women,
youth, clients (or their interest groups), and individuals with the requisite
skills (but possibly different backgrounds) in the board is perhaps a way to
improve the boards’ overall functioning and effectiveness and also perceptions
about its effective functioning and effectiveness (which in turn should reduce
Political Risk). The policy must also ensure that conflict of interest issues
are taken into account with regard to board appointments so that the
independence of the directors is not compromised. This again is very
critical so that people don’t perceive the board to be a rubber stamp board.
There were what I call as five star boards at some large MFIs but the
functioning and effectiveness of these boards was poor and the perceptions of
these five star boards were that they were rubber stamp boards. That enhanced
Political Risk considerably.</span></div>
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<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">4.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Ensure
that MFI boards develop (on their own) a formal conflict of interest policy and
an objective set of </span></i></strong><span class="ilad"><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-weight: bold;">compliance procedures</span></i></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">
and processes for implementing the same</span></i></strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> Such
a policy should ideally include: (a) an MFI director’s duty to avoid (if
possible) all activities and transactions that could either create a conflict
of interest or even the appearance of a conflict of interest; (b) a transparent
set of processes and procedures for MFI directors to follow before they engage
in certain <span class="ilad">types of activities</span> (such as agreeing to
serve on the board of another MFI or that of <span class="ilad">a lender</span>
or an investor etc.) so as to ensure that such activities will not create a
conflict of interest; (c) an MFI director’s duty to disclose any activity and
issue that may result, or has already resulted, in a conflict of interest; (d)
an MFI director’s (voluntary) responsibility to abstain from voting on any
matter where the director may have a conflict of interest or where the
director’s objectivity/ability to properly fulfill duties to the MFI may be
compromised; (e) adequate procedures and clear norms for transactions and
activities conducted with related parties on an arms-length basis; and (f)
transparent procedures by which the MFI board will deal with the issue of any
noncompliance with the (conflict of interest) policy. Ideally, it would be good
for the <span class="ilad">policy to</span> contain specific (conflict of
interest policy) examples of where and how conflicts of interest can arise when
serving as an MFI board member. This should facilitate greater understanding of
conflict of interest issues, with regard to microfinance in general and the MFI
in particular. In my humble opinion, this is one aspect that could go a very
long way in mitigating Political Risk in microfinance!</span></div>
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<br /></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">5.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Have
a compulsory formal evaluation of the functioning of the MFI’s board of
directors by an external independent evaluator</span></i></strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> This is a
critical issue and the results of this evaluation should be made available to
shareholders and supervisory authorities —officially publishing this evaluation
(on their website) is an aspect that could also be considered by the MFIs
concerned. Such a formal evaluation of the board should preferably be done in
the absence of the CEO or managing director or promoter (as applicable), so as
to ensure that the <span class="ilad">exercise</span> is a free, fair, and
independent one. The services of independent evaluators—individuals and/or
institutions who have not had (or do not have) a material relationship (as
defined in common parlance) with the MFI—could be taken in this regard. In
India, premier management institutes (such as IIMs) and others (like the College
of Agricultural <span class="ilad">Banking</span>, etc.) could be actively
involved in these (evaluation) processes and likewise, similar institutions
could be involved in other contexts. Again, this should serve to enhance the
perception that boards are indeed independent and are not likely to encourage
excessive sub-prime like risk taking by the CEO or the promoters. This again
should reduce Political Risk! </span></div>
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<br /></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">6.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Suitably
compensate MFI board members for their time but do not incentivize their
working on the basis of </span></i></strong><span class="ilad"><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-weight: bold;">stock options</span></i></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">
or other such mechanisms that invariably encourage undue or excessive “risk”
taking as was witnessed during the 2010 AP microfinance crisis</span></i></strong><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.
Even if the law permits, it seems prudent not to remunerate board members
through stock options and the like as the independence of (independent)
directors may be seriously compromised. Again, the happenings, in India, in the
run-up to the 2010 AP microfinance crisis clearly demonstrate the fact that
independent directors who had been so compensated had <i style="mso-bidi-font-style: normal;">not</i> performed their fiduciary and other duties appropriately. <i style="mso-bidi-font-style: normal;">The key issue to note here is that much of
the 2010 crisis occurred because board members and senior management were
compensated heavily (in the short term), whereas the risks of their strategies
could be known only in the medium/long term.</i> This mismatch created a huge
incentive for excessive risk taking, which, in turn, led to the 2010 AP
microfinance crisis. The parallels with the US subprime can hardly go
unnoticed. Thus, proper incentivisation of MFI board members and transparency
in this process should go a long way in mitigating Political Risk. Much of the
crisis in Andhra Pradesh 2010 emanated after an economic times article touched
on the actual bonus and kind of compensation that had been provided (5 months
earlier) to the now out of favour sacked CEO, who had led the MFI through a
spectacular IPO. That was not all! Other articles highlighted that independent
directors were compensated with (huge) stock options even as the promoter gave
himself a HUGE (as per the context) interest free loan from the MFI’s coffers.
Again, let us understand that, whether it is right or not, Political Risk stems
from perceptions about institutions, people and their actions and the larger
point here is that let us do things in a transparent manner and without
conflicts of interest!</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .5in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">7.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">Make
it mandatory for MFI boards to set up a risk committee and establish clear
rules regarding the composition and functioning of this committee</span></i></strong><b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">. </span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">In addition,
make it compulsory for one or more members of the <span class="ilad">audit
committee</span> to be a part of the risk committee and vice versa. Further,
the chairman of the risk committee should always report to the AGM and outline
the role that directors have played in shaping the MFI’s risk profile and
strategy. Also, the risk committee should frame a “risk control declaration,”
which should also be published so as to ensure its wider dissemination and
use—both within and outside the organization. This again, will go a long way in
mitigating Political Risk!</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .6pt; margin-left: .5in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .6pt; margin-left: .25in; margin-right: 0in; margin-top: .6pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">8.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><strong><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-size: 12.0pt;">And
last but not the least, create an obligation for a specific duty (“duty of
care”) to be established for the board of directors so that they take into
explicit account the interests of various stakeholders (mainly, clients) during
the decision-making procedure</span></i></strong><b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.</span></i></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> This
is especially critical and the 2010 AP microfinance crisis would (perhaps) not
have occurred, if only boards of MFIs had exercised such a duty of care that
explicitly looked after the interest of clients who were constantly
over-indebted. The desire for better operating performance at many MFIs meant
that the board of directors at these MFIs just did not bother about the impact
of their turbocharged growth on clients and their well-being. Therefore, there
is an explicit need to incorporate a duty of care—especially with regard to
clients—among MFI boards. This again, should go a long way in mitigating
Political Risk!</span></div>
<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US">To summarize, for the microfinance sector
that has undergone a deep crisis in India, corporate governance has never been
more important than now and good governance can alter perceptions and mitigate
political risk! Corporate governance is not just the responsibility of an
individual MFI. Rather, it is the collective responsibility of all individuals
who become directors on the boards of an MFI and serve together. While we can
have great sounding norms and guidelines for corporate governance,
unfortunately, they cannot be effectively enforced through regulation alone.
They need to be practiced at all times (including difficult circumstances) and
that is where the individual initiative of directors (serving on MFI boards)
does really matter. And I sincerely hope that directors on MFI boards do ensure
that this happens in real time on the ground—by enabling and facilitating their
boards to reorient their functioning in the light of some of the suggestions
made. If this happens, many of the ills plaguing the (Indian) microfinance
sector and MFIs will slowly but surely start to vanish as also the Political
Risk associated with Microfinance!</span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-12977536477017373652016-03-09T17:00:00.001+05:302016-03-09T17:00:10.694+05:30What MFI Boards Can Do to Mitigate Political Risk?<div dir="ltr" style="text-align: left;" trbidi="on">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt;">Ramesh S Arunachalam</span></b><br />
<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt;"><br /></span></b>
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<br />
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span style="font-size: 14.0pt;">MFI boards can play a major role in fostering good
governance on the ground and thereby mitigate Political Risk. In fact, several
ERUDITE politicians, with a good track record of work in Parliament/equivalent,
that I have spoken to in the last few years have all espoused the view that a
well functioning MFI’s board can go a long way in mitigating Political Risk in
micro-finance. Many of them also articulated the view that a rubber stamp five
star board cannot have the same impact. </span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span style="font-size: 14.0pt;">Accordingly, I have put together several crucial
aspects in this regard on how MFI boards can function to mitigate Political
Risk! <br style="mso-special-character: line-break;" />
<br style="mso-special-character: line-break;" />
<strong></strong></span></div>
<div style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<strong><span style="font-size: 14.0pt;">First</span></strong><b style="mso-bidi-font-weight: normal;"><span style="font-size: 14.0pt;">,</span></b><span style="font-size: 14.0pt;">
a key requirement is for MFI boards to strike the right balance between
independence and skills with regard to their directors. Boards will be able to
effectively monitor senior management at MFIs provided their directors have the
<em>skills, experience, time, willingness, objectivity, and independence</em>
to do so. And this needs to be ensured in real time. An additional aspect here
is that in order to safeguard the objectivity and independence of directors, it
is imperative for the MFI to put in place clear policies for <span class="ilad">managing
conflicts</span> of interest. And given the diversity in MFI operations,
directors must spend time in understanding the MFIs’ specific operations so
that institutional complexity does not come in the way of their effective
functioning (an argument put forth by many so-called independent directors at
MFIs during the 2010 AP crisis).<br />
<br />
<strong>Second</strong><b style="mso-bidi-font-weight: normal;">,</b> it would be
beneficial to review the level of <em>diversity</em> in the <span class="ilad">composition</span>
of MFI boards and ensure greater diversity (especially women, directors with
different socio-cultural and educational <span class="ilad">backgrounds</span>,
etc.). It is believed that diversity should contribute positively to the
overall quality of the MFI board’s actual working. </span></div>
<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 14.0pt;"><br />
<strong>Third, </strong>in view of the increasing scale of MFI operations
together with the enhanced complexity of microfinance activities, there is a
critical need to enhance the <em>efficiency</em> of MFI directors. For example,
one strategy could be to<em> limit</em> the number of MFI boards on which a
director may sit—so as to ensure that they devote the time necessary for
properly discharging their responsibilities. <br />
<br />
<em><b style="mso-bidi-font-weight: normal;"><span style="font-style: normal; mso-bidi-font-style: italic;">Fourth,</span></b></em> MFIs must put in place an
appropriate procedure (using external and independent people) for <em>evaluating
the performance of their board of directors. </em>These evaluations should also
be shared with the shareholders and other stakeholders (including supervisory
authorities)—so that there is formal and explicit understanding of the skills,
capabilities, and effectiveness of directors serving on MFI boards.<br />
<br />
<strong>Fifth, </strong>it is critical that responsibilities of the board (of
directors) at MFIs—especially with regard to its <em>role in risk supervision</em>—be
made more explicit and thereby strengthened. In other words, it would be
prudent to consider creating <em>a specialised risk supervision subcommittee</em>
within MFI boards. And it would also be critical for the MFI boards to publish
their approval of the MFIs’ overall risk strategy and profile through a
transparent (public) document—this is the equivalent of a <em>risk control
declaration</em> in common banking parlance. Such a public document should also
contribute to prudent management and supervision of risks within MFIs and this
is very important, given what happened in AP in 2010. This would go a long way
in mitigating Political Risk<br />
<br />
<em><b style="mso-bidi-font-weight: normal;"><span style="font-style: normal; mso-bidi-font-style: italic;">Sixth</span></b></em><strong><i style="mso-bidi-font-style: normal;">,</i></strong> in practice, there seems to be a lot of overlap with
regard to decision making in many MFIs. Without any doubt, greater clarity is
needed on what the respective roles and responsibilities (of the various
stakeholders) are with regard to decision making within the MFI. And this is
especially true with regard to the roles and responsibilities of the board
vis-à-vis senior management. Therefore, MFI boards must ensure that clear
accountability and responsibility structures are in place with regard to the entire
institution including subsidiaries (if any), related group entities,
regional/state offices, <span class="ilad">branches,</span> and so on.<br />
<br />
<strong>Seventh,</strong> where possible, MFI boards must seek and have
increased cooperation with the supervisory authorities so that any
substantial/systemic risks, similar to what happened in AP in 2010, are nipped
in the bud.<br />
<br />
And, last but not the least, apart from looking after shareholders’ interests,
MFI boards also need to take better account of other stakeholders’ interests.
And clients are especially important here. Especially, <b style="mso-bidi-font-weight: normal;">the creation of a specific subcommittee in MFI boards</b> to take
account of the interests of other stakeholders (such as clients and their
protection) in their decision making <b style="mso-bidi-font-weight: normal;">(“<em>duty
of care</em>”)</b> could go a long way in alleviating some of the key issues
that emanated from the 2010 AP microfinance crisis and thereby mitigate
Political Risk</span></div>
<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .6pt; margin-left: 0in; margin-right: 0in; margin-top: .6pt;">
<span lang="EN-US" style="font-size: 14.0pt;">The regulatory
framework, on its part must get the concerned MFI associations to ensure that
(NBFC) MFI boards take a proactive approach of putting into practice their
stated governance principles in real time. That again, will go a long way in
mitigate Political Risk in the microfinance marketplace. </span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-64050438453147479242016-03-08T16:33:00.000+05:302016-03-08T16:34:00.144+05:30Financial Inclusion: What Central Bankers need to do urgently?<div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Ramesh S
Arunachalam</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">We hear a
lot from central bankers on financial inclusion these days. That is welcome for
a change but there is so much that every CENTRAL BANK can do to bring
transparency to the financial inclusion process. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Let me
start with the definition of financial inclusion and data pertaining to the same,
as my first article in a series that will look at measurement of financial
inclusion and related aspects.<br style="mso-special-character: line-break;" />
<br style="mso-special-character: line-break;" />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Without a
clear definition of financial inclusion and good ground level data, much of
what we say in terms of inclusiveness in the financial sector is analogous to
writing on water. Additionally, without proper baseline data, quoting facts and
figures is meaningless as then, we would not be able to attribute whether
financial inclusion occurred because of something we did consciously or it was
simply an accident and/or act of GOD.<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Having an
internally consistent definition of financial inclusion is very critical. And
generating data based on the same is even more important. Together, these can
form the basis for our opinions and judgements, which in turn can shape policy
and subsequent implementation appropriately.<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Let me
take the Indian context and much of this applies elsewhere too. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">It follows
from the above that we first need a reliable and valid definition of financial
inclusion in terms of <i>type of products and services</i> <b>(for example, it
could be loans, savings, insurance, remittance, literacy and financial
education services, ombudsman services etc)</b> <i>accessed through different
institutions</i> <b>(Banks, Insurance Companies, SHGs, MFIs, Business
Correspondents, Cooperatives etc)</b> by <i>various kinds of mutually exclusive
individuals/households</i> from different segments of society <b>(especially,
low income and excluded groups).</b><br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Please
note that some of these financial inclusion services could be one time services
(like going to an ombudsman), others (like loans) may be repeat services and
some others like savings accounts (or pension accounts) could even be
continuous long-term services. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Likewise,
several institutions may combine to form a channel – <i>for example, I could
get a loan from an SHG that is linked to a bank which has been refinanced by a
DFI like NABARD.</i> I could also get a loan from an MFI that has borrowed from
a DFI (SIDBI) and is on-lending to me. I could also get a loan from a small
finance bank or a microfinance bank that accepts public deposits. <b style="mso-bidi-font-weight: normal;">And some this can happen digitally too!</b>
The permutations and combinations are endless here but please note that the
above distinction between channels and institutions is very important for
determining correct outreach of financial inclusion!<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">In fact,
the real outreach of our financial inclusion services through the various
channels and institutions is not transparently known today. I have said this
before and I am saying it again. This is because there is overstatement of
outreach figures through double and triple counting as sometimes data of
different institutions within a channel is added up to give an incorrect
outreach figure.<br style="mso-special-character: line-break;" />
<br style="mso-special-character: line-break;" />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Sometimes,
people have genuinely accessed services through different channels as well.
This again provides an exaggerated picture of total outreach and penetration
with regard to financial inclusion.<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Given the
above, the Reserve Bank of India’s (RBI’s) first task would be to ensure that it
puts out a proper working definition of “financial inclusion” and ensures that
all stakeholders promoting and/or looking at financial inclusion use the same
consistent definition.</span></b><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"> Otherwise, outreach figures on financial inclusion would be meaningless
and cannot be evaluated or compared in a serious manner.<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">A second
important task for RBI is ensure that proper data (which can then become a
baseline going forward) is available with regard to financial inclusion. </span></b><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Here, the priority task would be
to know ASAP:</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"><span style="mso-list: Ignore;">a.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">How many <b>mutually exclusive
individuals and mutually exclusive households</b> have been financial included
in any given financial year?</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">And when
we say financially included, we need to be able to disaggregate this figure in
terms of <b>services/products accessed </b>by these <i>mutually exclusive
individuals/families</i> through <b>different channels</b> (and their
institutions) and <i>across various regions/states</i> in India. If this basic
data becomes available, then, we can analyse the data to get better analytics
about the rural-urban divide, demographics and so on<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">As
someone who has worked in over 570 districts of India over the last 28 years, I
can say that the data with regard to SHGs needs to be more transparently and
accurately estimated. What is lacking is objectively verifiable data on the
number of well functioning SHGs, their demographics with transactions on loans
and savings, overlap of members across SHGs (many SHGs have dual membership or
in some cases, I have even seen membership in three to four SHGs) and the like.
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Likewise,
we lack transparent and accurate data with regard to MFIs and their clients as
well. There is so much of overlap in clients across MFIs (as evident from the
2010 AP crisis) and I have repeatedly told MIX MARKET about problems with
regard to their using MFI self-reported data. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Similarly,
clients appear to be shared significantly across the MFI, the SHG Bank linkage,
Cooperative and other models. All of these lead to significant exaggeration in
outreach data. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Further,
data on KYC, priority sector lending including to agriculture, BC models,
insurance services and pensions also have their problems and thereby contribute
to outreach exaggeration.<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Thus,
given that there is so much double and triple counting and exaggeration in the
outreach data, it is imperative that we know the real outreach in terms of <i>mutually
exclusive individuals first and as mutually exclusive households </i>next. </span></b><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">I hope the RBI will set in motion
appropriate processes so that transparent data which can lend itself to
objective field verification is publicly available. We need to know how many
mutually exclusive individuals/households have been reached by various
financial inclusion efforts and this would also entail significant coordination
with other regulators like IRDA and PFRDA, which again, the RBI, as the primary
financial services regulator, would need to ensure through appropriate
mechanisms. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l3 level1 lfo2; tab-stops: list .5in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"><span style="mso-list: Ignore;">b.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">And once we have the above basic
data, we can then get to understand whether people who were <b>financial
included in a given year continued to be included in the subsequent years</b>?</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Now we
get an interesting aspect and that is the dynamic nature of financial
inclusion! Most people assume financial inclusion is a one time or static
phenomenon. <b style="mso-bidi-font-weight: normal;">On the contrary, it is
dynamic one where people float in and float out of the financial inclusion eco
system.</b> It is very similar to concept of floating population in big metros
like Delhi or Mumbai or New York!<br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Take the
case of all the clients who had their loans waived off as part of the farmers’
loan waiver scheme some years ago! After the waiver, several of these clients
were classified as defaulters by the respective banks and hence, they could not
regain access to the formal financial services that they once had been able to
access. Likewise, as a <i style="mso-bidi-font-style: normal;">Moneylife</i> article
(<a href="http://www.moneylife.in/article/financial-inclusion-of-sugarcane-farmers-in-modern-day-india/19425.html"><span style="color: blue;">Financial inclusion of sugarcane farmers in modern-day India</span></a>)
showed, many sugar cane farmers who were once included (by virtue of having got
a bundled loan for sugarcane) were subsequently excluded for reasons mentioned
in the article. The same is the case with the 2010 AP micro-finance crisis
where most of the clients in AP who did not pay back at the height of the
crisis are now classified as defaulters (both in general terms as well as in
the credit bureau) – as a consequence, no formal or quasi formal financial
system will touch them hereafter. In fact, the erstwhile IRDP (Integrated Rural
development Program) had included millions of people way back in the 1980s but
many of these people left the financial ecosystem for various only to be
re-included through some other scheme/program later. <b>While I could give many
more examples, the key issue here is that anyone who is included financially
need not stay included always. </b><br />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">The above
also implies that the linkage cited between ‘financial inclusion’ and
‘inclusive growth’ is at best tenuous because of the following aspects:</span></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l1 level1 lfo3; tab-stops: list .5in;"><i><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Not all people who are
financially included stay that way all the time. </span></i><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">They float in and out of the
financial eco system due to circumstances beyond their control and this is
especially true of low income people in the urban informal sector and the
rural poor </span></li>
</ul>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l1 level1 lfo3; tab-stops: list .5in;"><i><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Not all financially excluded
people are poor and vulnerable.</span></i><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"> Fox example, a large number of medium sized
traders and farmers in small shanty towns tend to be excluded for the
formal financial system but they are not necessarily poor or vulnerable.
And it is such people who have a better chance of staying financially
included, once they have gained access to a formal financial service<br />
</span></li>
</ul>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">To
summarise, the larger point that I am trying to make are the following:</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l2 level1 lfo4; tab-stops: list .5in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"><span style="mso-list: Ignore;">a.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">We are in urgent need of a proper
working definition of financial inclusion that can lend itself to reliable and
valid measurement,</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l2 level1 lfo4; tab-stops: list .5in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"><span style="mso-list: Ignore;">b.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">We require data on mutually
exclusive individuals and households who have been financially included (in a
given year),</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l2 level1 lfo4; tab-stops: list .5in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"><span style="mso-list: Ignore;">c.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">We also need to have data on how
many such mutually exclusive individuals and households who were financially
included in a given year stayed included in the subsequent years, and</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l2 level1 lfo4; tab-stops: list .5in; text-indent: -.25in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;"><span style="mso-list: Ignore;">d.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">Lastly, we also need data on how
many new mutually exclusive individuals and households enter the financial
inclusion eco system in any given year?</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , "serif"; font-size: 16.0pt;">And all
of this data must be capable of disaggregation by products/services, channels
(and their institutions), states/regions and so on. Only then will we be able
to make meaningful analysis of all the hype surrounding financial inclusion.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-77767663141866895042016-03-08T09:35:00.000+05:302016-03-08T09:35:18.092+05:30WHY WE STILL NEED A TRAINING WORKSHOP ON MANAGING POLITICAL RISK IN MICROFINANCE?<div dir="ltr" style="text-align: left;" trbidi="on">
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">WHY WE STILL NEED A TRAINING WORKSHOP </span></b></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">ON MANAGING POLITICAL RISK IN MICROFINANCE?</span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The Indian microfinance market started growing in 2005/2006 and
experienced burgeoning growth by 2009/2010. And then, all of us saw what political
risk could do to Indian microfinance as evidenced by the 2010 Andhra Pradesh
(AP) Microfinance crisis. 6 large AP based MFIs were nearly wiped out and many
clients excluded! </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Given what’s happening now in many states of India including Bihar,
eastern UP and other places (see this for example and there are several other
instances… </span><a href="http://thewire.in/2016/01/15/why-microfinance-is-becoming-a-bad-word-all-over-again-18937/"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">http://thewire.in/2016/01/15/why-microfinance-is-becoming-a-bad-word-all-over-again-18937/</span></a><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">) where “2010 AP Crisis Like Symptoms” are again showing their UGLY head
again, it is very, very clear that political risk needs to be better managed by
MFIs (irrespective of legal form). This course promises to be a first step
towards that because it will set the framework for managing political risk and
in doing so, it tries to disaggregate political risk by source and then helps MFIs
to track and manage political risk.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Without any doubt, political risk requires a strategic perspective and
strategic treatment of political risk by MFIs is going to very crucial for their
long term survival as Political RISK can occur anytime. In my humble opinion,
there is no better course to learn about POLITICAL RISK from than one which
uses the 2010 Andhra Pradesh microfinance crisis and 2005/2006 Krishna crisis -
both of which had a very strong political risk component! As Prof Malcolm
Harper used to often say, crises teaches us a lot, I think it is important this
knowledge is analyzed and used for the benefit of clients, investors, bankers,
MFIs and regulators so that political risk, which can be a very destructive
mechanism, is tracked and managed right from the starters.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">So I think that why this course is very important as it will help
investors and bankers better understand political risk and make wise investment/lending
decisions. It should help MFIs better manage political risk and ensure that they
are more presentable (in terms of their products, operations and competitive
strategies) to regulators and others who could mitigate political risk. And it
is likely to help the regulators and supervisors understand the limitations of
their regulatory supervisory framework in terms of exposure to political risk
and thereby, it should contribute to bring in changes to the legal and
regulatory frameworks for the benefit of commercial microfinance that works for
clients, MFIs, investors, bankers and regulators!</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Of course, paramount to the concept of political risk is the notion of
client protection and I think no discussion of political risk can take place
without discussion on client protection and I think client protection is a
theme that’s going to be running right through the workshop and I think it will
play a very important role in mitigating political risk</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">So friends, we are here to break very new ground in microfinance and
explore a topic that hereto been explored either as the small part of the other
workshops or through their (informal/quasi formal) discussions. So having a
formal workshop and using real life situations from the world’s largest
microfinance market and world’s largest crisis situation 2010 AP microfinance
crisis is going to give us better insight in to this strange animal of
political risk and how better to manage it. Thank You and I look forward to all
of you sharing and spreading the word around!</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Thanks </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Warm regards</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Ramesh S ARUNACHALAM</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 14.0pt; mso-ansi-language: EN-US; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">rameshsa2009@gmail.com </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"></span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-81481817890484503552016-03-07T12:35:00.000+05:302016-03-07T12:35:14.675+05:30INTERNATIONAL TRAINING WORKSHOP on “How to manage political risk in microfinance?” By Ramesh S Arunachalam<div dir="ltr" style="text-align: left;" trbidi="on">
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Good Morning! </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">I am very happy to announce a 3 day INTERNATIONAL
TRAINING WORKSHOP on <b style="mso-bidi-font-weight: normal;">“How to manage
political risk in microfinance?”</b></span></div>
<div class="MsoNormal">
<br /></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">The
first edition of the workshop will be held at India Habitat Centre,
New Delhi on June 22<sup>nd</sup>, 23<sup>rd</sup> and 24<sup>th</sup>, 2016. </span></b></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Given
the huge importance of political RISK in microfinance, further editions of the
same/adapted course is likely to be held in India and globally!</span></b></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Attached is the WORKSHOP brochure and as you can see
from the workshop outline, it promises to BREAK fresh ground on managing
political risk in microfinance, which is indeed a STRATEGIC RISK that has to be
tackled properly and effectively! </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Look forward to your participation and kindly
forward this to stakeholders who may be interested.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Seats are limited and will strictly be filled on
first cum first serve basis </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">The attached brochure explains it all... </span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Thanks once again </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Have a great start into the week!</span>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">If you have any questions, please feel free to
contact me!</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Thanks </span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Kind and Warm Regards</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">Ramesh S Arunachalam</span></div>
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<br /></div>
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<a href="mailto:rameshsa2009@gmail.com"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%;">rameshsa2009@gmail.com</span></a></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-48605778714581849672016-03-05T18:45:00.005+05:302016-03-05T18:45:38.596+05:30"HOW TO MANAGE POLITICAL RISK IN MICRO-FINANCE?" <div dir="ltr" style="text-align: left;" trbidi="on">
Dear Friends/Colleagues<br />
<br />
Good evening to my friends in the
Orient and Good morning to my friends in the Occident! I am happy to
announce a new INTERNATIONAL training workshop titled, <br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirnnRNbwe2GgfhbjuCx-r0LufHwUsAYTl_jWuzM0FG553qA4_Yb0jqNVO2teVIS9msjIekcCNVfL7UvufN_Vlvp5LBOCzKSw_HS9p8S6Sxa7tad3jX9cXkami17pld3J2LlFqiqbTbyq4/s1600/MANAGING+POLITICAL+RISK%25287%2529-page-001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirnnRNbwe2GgfhbjuCx-r0LufHwUsAYTl_jWuzM0FG553qA4_Yb0jqNVO2teVIS9msjIekcCNVfL7UvufN_Vlvp5LBOCzKSw_HS9p8S6Sxa7tad3jX9cXkami17pld3J2LlFqiqbTbyq4/s640/MANAGING+POLITICAL+RISK%25287%2529-page-001.jpg" width="458" /></a></div>
<br />
<b>"HOW TO MANAGE POLITICAL RISK IN MICRO-FINANCE?" </b><br />
<br />
Without any doubt, political risk is a STRATEGIC RISK that needs to be
managed proactively and this workshop will provide a fresh, innovative
perspective based on real life situations of MFIs on “how to monitor and
manage POLITICAL RISK?” <br />
<br />
<b>The dates for the proposed training workshop are JUNE 22nd, 23rd and 24th, 2016 and it will be held at New Delhi, India. </b><br />
<br />
<i>Complete details on the training workshop will be released on March 10th 2016. Watch this space for more information!</i><br />
<br />
Thanks<br />
<br />
Kind Regards<br />
<br />
Ramesh S Arunachalam<br />
<br />
PS: BRIEF DESCRIPTION OF TRAINING WORKSHOP <br />
<br />
<b>HOW TO MANAGE POLITICAL RISK IN MICROFINANCE?</b><br /><br />
<b>Description:</b><br /><br />
• A 3 day full scale TRAINING workshop on a hitherto less understood
topic... little is KNOWN about the factors that enhance political risk
and the strategies that can be used to manage political risk... The
proposed training workshop will focus on these aspects...to facilitate
REAL WORLD PROBLEM SOLVING by MFIs...<br />
<br />
• The workshop uses the
world’s largest microfinance market, INDIA, which is witnessing
burgeoning growth and which has seen the world’s largest microfinance
crisis, as the learning laboratory...nonetheless the concepts are
applicable globally as the facilitator, Ramesh S Arunachalam, has
extensive experience of working with governments, politicians and
bureaucrats in 29 countries in the last 28 years... on diverse financial
sector development assignments... <br />
<br />
• Participants will gain
practical skills and knowledge through rigorous experiential, vicarious
and where applicable, evidence based learning...audio visual clips will
form a very important part of the workshop material...<br />
<br />
• The
Workshop will only use real life situations (through simple cases and
situational briefs disguised for confidentiality) including those from
the 2010 Andhra Pradesh microfinance crisis, which, to date, constitutes
the best example of political risk impacting microfinance!!! The
workshop will also use other examples from real life situations globally
to ensure a wide exposure to managing political risk in diverse
environments...<br />
<br />
• The workshop will provide new insights and
fresh perspectives based on a candid assessment of the ground reality,
without any conflict (s) of interest (s)...to facilitate true learning,
skill development and problem solving...<br /><br />
<b>Facilitator: </b><br /><br />
• Ramesh S Arunachalam, will be the facilitator and he has over 28
years of grass-roots and institutional experience in financial sector
development including what is today called as microfinance and financial
inclusion. <br />
<br />
• During a career spanning over 28 years, Ramesh has
completed 260 professional assignments globally. Over 100 of these
assignments have been with Governments and this has afforded him a very
unique understanding of how politicians, members of parliament,
bureaucrats and other stakeholders in Government work and perceive the
private sector. As a result, Ramesh’s exposure to factors causing
Political Risk as well as strategies to be used for Managing such
(political) Risks are well grounded in reality...<br />
<br />
• As on date,
Ramesh has worked in about 570 districts of India and also travelled and
worked extensively in about 29 countries in Asia, Africa, North
America, Europe and the Caribbean across diverse projects (in senior
positions). He is passionate about his work and brings strong
inter-disciplinary insight to his assignments. <br />
<br />
• His clients
include governments (Governments of India, St Lucia, Singapore, Malawi,
Uganda, Philippines, Afghanistan etc, several State Governments in India
and many GoI Institutions like NCRPB, SIDBI, NABARD etc), bi-lateral
agencies (DFID, USAID, DANIDA, NORAD, SIDA etc), multi-lateral agencies
(UNDP, World Bank, ADB, IFAD, The Commonwealth Secretariat etc),
international NGOs (CARE, HIVOS etc), regulators, commercial banks,
investment banks, microfinance institutions, private sector firms and
several other stakeholders globally. <br />
<br />
• He has authored numerous
reports/studies/papers as part of his assignments, several of which have
been published internationally and received global recognition. His
blog on microfinance has been very well received and he has also penned
two books - The Journey of Indian Microfinance and An Idea Which Went
Wrong: Commercial Microfinance in India – both of which, have received
critical acclaim. His latest work is an entertaining crime thriller
novel – Where Angels Prey – released globally in April 2015 through
AuthorsUpFront and has been very well received by the market.</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-84360791168504208552015-09-25T09:17:00.003+05:302015-09-25T10:12:01.558+05:30SEBI Must Recognise That Sucheta Dalal’s Drive for Investigation into “Algo Trading Issues at NSE” is EXTREMELY Important for the Overall Health and Safety of Indian Capital Markets<div dir="ltr" style="text-align: left;" trbidi="on">
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Ramesh S Arunachalam, September 25th 2015</span></b></div>
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<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">A) Algo Trading and Securities and Exchange
Board of India (SEBI):</span></b></div>
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<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">It
is with deep concern as a citizen of this country that I am writing this blog
piece as I read an interview by Chairman SEBI dated July 30<sup>th</sup> 2015
on “Algo Trading”. While I appreciated the intent as conveyed through the
interview in terms of cracking down on those misusing <b style="mso-bidi-font-weight: normal;">algorithmic trading</b><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[i]</span></span></span></span>
(in the future), I was somewhat concerned by the (SUPPOSED) self-admission in
the same interview: </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"><span style="mso-spacerun: yes;"> </span>“’If somebody is doing it deliberately, we
have a surveillance mechanism to take action against them. Whether we have
enough mechanism to stop them, I would not claim that much. But we can
certainly catch them and penalise them,’ <b style="mso-bidi-font-weight: normal;">Sinha
said.”</b> (</span><a href="http://businesstoday.intoday.in/story/sebi-to-take-stern-action-on-algo-trades-misuse-chairman/1/222241.html"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">http://businesstoday.intoday.in/story/sebi-to-take-stern-action-on-algo-trades-misuse-chairman/1/222241.html</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">)</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
the above quotation is INDEED a TRUE statement of what Mr Sinha had said, I
must say that I am very alarmed with this statement as it is imperative for
SEBI, as the capital markets regulator, to have appropriate mechanisms to catch
people misusing algorithmic trading/HFT/HST. I am sure that you all would agree
that there can be no compromises on that! <b style="mso-bidi-font-weight: normal;">The
entire purpose of regulation is to do its best to prevent failure of markets,
systems and organisations etc and I sincerely hope that SEBI develops stronger
mechanisms to catch people misusing algorithmic trading/HFT/HST. </b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">This
is because as per recent reports <b style="mso-bidi-font-weight: normal;">Algorithmic
trading/HFT/HFS</b> are said to be gaining market share and are already said to
occupy around 46% of the total trade volume at NSE and over 30% of the total
trade volume at BSE. In the USA and Europe, while they occupy very significant
amounts of trade by volume (between 75% - 80% of total trade volume in USA and
around 60% of total trade volume in Europe respectively), it is widely expected
that Asian markets like India<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[ii]</span></span></span></span> will
offer greater avenues for the growth of <b style="mso-bidi-font-weight: normal;">Algorithmic
trading/HFT/HFS in the future – something which makes the above statement even
more significant since algorithmic trading per se and the technology associated
with Algorithmic trading/HFT/HFS still have many problems as evident from the
examples given below. </b></span></div>
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<br /></div>
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<span style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Let me first deal with what has happened
in India and then dwell on the technological and other problems related to
algorithmic trading that have occurred globally over the last few years.</span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"></span></div>
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<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">B) Algo Trading: The Indian Scenario</span></b></div>
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<br /></div>
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<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">In India, where Algorithmic Trading is
growing very fast, we have had issues such as the following. </span></b><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Several other CRITICAL issues have been raised later
in this piece</span></i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">,
especially with regard to algorithmic and high frequency trading in India. </span></div>
<div class="MsoListParagraphCxSpFirst">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: 1.0in; margin-right: 0in; margin-top: 0in; mso-add-space: auto;">
<b><span style="font-size: 12.0pt;">“On May 6, four
large orders in Nifty May futures, ranging between 7,000 and 39,000 contracts,
were traded between 9:41am and 9:53am. The deals were worth Rs 1,470 crore and
the stock market crashed wiping out all gains made the year before. All of
these were algorithmic. </span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">... the benchmark Sensex and Nifty
tanked, losing over 2 percent to </span><a href="http://in.reuters.com/article/2015/05/06/markets-india-stocks-idINKBN0NR0D820150506" target="_hplink"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">wipe
out entire gains</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">
made last year. The main reason: algorithmic trading. Such mishaps have
happened before, despite SEBI </span><a href="http://www.thehindu.com/business/markets/sebi-tightens-algorithmic-trading-norms/article4736556.ece" target="_hplink"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">tightening
its rules</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">
for algo-trades, as traders call them. This form of high-speed trading rose 12
percent on the Bombay Stock Exchange, to account for almost 30 percent of total
trades. Its share is higher in the National Stock Exchange, with nearly 46
percent of trades happening on the platform. ...Since it happens at tremendous
speed, way quicker than what human traders are capable of, it is much more
efficient. However, that can also result in large trades that can swing the
market and result in significant losses for ordinary investors, like what
happened on May 6<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[iii]</span></span></span></span>.
Most investors don't stand a chance of trading in stocks that are being traded
algorithmically.”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[iv]</span></span></span></span>
</span></div>
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<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">C) Algo Trading: Global Scenario</span></b></div>
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<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">There
are many issues with <b style="mso-bidi-font-weight: normal;">algorithmic
trading/HFT/HFS </b>as espoused by the following global events of the last few
years - <i style="mso-bidi-font-style: normal;">whether the flash crash of May 6<sup>th</sup>
2010 where over an estimated trillion dollars were lost within a couple of
hours</i> <b style="mso-bidi-font-weight: normal;">or </b><i style="mso-bidi-font-style: normal;">the Knight Capital case (August 2012) where a single company is said to
have lost around 441 million US $ within an hour. </i>While in the flash crash,
HFT’s caused and exacerbated the already depressed markets in response to an
algorithm selling a specific product, the Knight Capital case was that of an
algorithm going ROGUE. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Likewise,
<b style="mso-bidi-font-weight: normal;">because of technology and related
aspects, the following incidents occurred: </b><i style="mso-bidi-font-style: normal;">the </i></span><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">NASDAQ OMX </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">FACEBOOK IPO glitch (of May 2012) where several
millions were apparently lost<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[v]</span></b></span></span></span></span></i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> <b style="mso-bidi-font-weight: normal;">or</b> <i style="mso-bidi-font-style: normal;">the
</i></span><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">BATS’s IPO which was scuttled by a computer glitch
in March 2012</span></i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <b style="mso-bidi-font-weight: normal;">or</b> <i style="mso-bidi-font-style: normal;">The
Madrid-based Bolsas y Mercados Espanoles which suffered a glitch that halted
trading at the stock market for more than four hours in August 2012</i> <b style="mso-bidi-font-weight: normal;">or</b> The Tokyo Stock Exchange Group’s
second major system error in seven months that halted derivatives trading for
about 95 minutes in August 2012 and so on. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"></span></div>
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<br />
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">D) Architecture of Capital Markets Globally,
Technology and Associated Problems: </span></b></div>
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<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">As
noted above, it is quite troubling and perplexing to witness the technology
mishaps that have occurred recently in the world of capital markets and the key
point is that if it can happen in the most advanced market of the world, the
USA, <i style="mso-bidi-font-style: normal;">India is no less vulnerable. </i>For
more than two decades, technology has shaped and continues to define the
architecture of capital markets globally; hence, it is imperative at this stage
in the evolution of the markets to come to certain realizations about the
inherent risk that lies in this dependency on information technology for the
industry overall.</span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
problems emanating from the technology employed by the new kids on the block
for investing are best summarised as follows: </span></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
<span class="section-lead">“In the four years since</span>
the <a href="http://edition.cnn.com/2008/BUSINESS/09/15/lehman.merrill.stocks.turmoil/index.html" target="_blank">collapse of Lehman Brothers</a> drove the global financial
system to the brink of oblivion, new technologies have changed Wall Street
beyond recognition. Despite efforts at reform, today's markets are wilder, less
transparent, and, most importantly, faster than ever before. Stock exchanges
can now execute trades in less than a half a millionth of a second—more than a
million times faster than the human mind can make a decision. Financial firms
deploy sophisticated algorithms to battle for fractions of a cent. </div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
Designed by
the physics nerds and math geniuses known as quants, these programs exploit minute
movements and long-term patterns in the markets, buying a stock at $1.00 and
selling it at $1.0001, for example. Do this 10,000 times a second and the
proceeds add up. Constantly moving into and out of securities for those tiny
slivers of profit—and ending the day owning nothing—is known as high-frequency
trading.’</div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
Computer programs send and cancel orders
tirelessly in a never-ending campaign to deceive and outrace each other, or
sometimes just to slow each other down. They might also flood the market with
bogus trade orders to throw off competitors, or stealthily liquidate a large
stock position in a manner that doesn't provoke a price swing. <b style="mso-bidi-font-weight: normal;">It's a world where investing—if that's what
you call buying and selling a company's stock within a matter of seconds—often
comes down to how fast you can purchase or offload it, not how much the company
is actually worth.”</b> <span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[vi]</span></span></span></span></div>
<br />
<span class="section-lead"></span><br />
<span class="section-lead">Consider the following which illustrates very
vividly as to what technology mishaps can (un) do in the capital markets:</span><br />
<div style="margin-left: 1.0in;">
<span class="section-lead">“At 9:30 A.M. on August 1,</span>
a software executive in a spread-collar shirt and a flashy watch <a href="https://exchanges.nyx.com/en/new-york-stock-exchange/vringo-celebrates-merger-innovateprotect" target="_blank">pressed a button</a> at the New York Stock Exchange, triggering
a bell that signalled the start of the trading day. Milliseconds after the
opening trade, buy and sell orders began zapping across the market's servers
with alarming speed. The trades were obviously unusual. <b style="mso-bidi-font-weight: normal;">They came in small batches of 100 shares that involved nearly 150
different financial products, including many stocks that normally don't see
anywhere near as much activity. Within three minutes, the trade volume had </b><a href="http://dealbook.nytimes.com/2012/08/03/trading-program-ran-amok-with-no-off-switch/" target="_blank"><b style="mso-bidi-font-weight: normal;">more than doubled</b></a><b style="mso-bidi-font-weight: normal;"> from the previous week's average.</b></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
<b style="mso-bidi-font-weight: normal;">Soon
complex computer programs deployed by financial firms swooped in. They bought
undervalued stocks as the unusual sales drove their prices down and sold
overvalued ones as the purchases drove their prices up. The algorithms were
making a killing, and human traders got in on the bounty too.</b></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
Within minutes, a wave of urgent email alerts
deluged top officials at the Securities and Exchange Commission. On Wall
Street, NYSE officials scrambled to isolate the source of the bizarre trades.
Meanwhile, across the Hudson River, in the Jersey City offices of a midsize
financial firm called <a href="http://www.knight.com/" target="_blank">Knight
Capital</a>, panic was setting in. A program that was supposed to have been
deactivated had instead gone rogue, blasting out trade orders that were costing
Knight nearly <a href="http://www.bloomberg.com/news/2012-08-14/knight-440-million-loss-sealed-by-new-rules-on-canceling-trades.html" target="_blank">$10 million per minute</a>. And no one knew how to shut it
down. </div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
At this rate, the firm would be insolvent within an hour. Knight's
horrified employees spent an agonizing 45 minutes digging through eight sets of
trading and routing software before they found the runaway code and neutralized
it. By then the firm had not only lost 441 million but also caused havoc in the
market</div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
By then it was shortly after 10 a.m., and
officials from the NYSE, other major exchanges, and the Financial Industry
Regulatory Authority were gathering for an emergency conference call. It didn't
end until 4 p.m.”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[vii]</span></span></span></span></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
<i style="mso-bidi-font-style: normal;">What ever happened
in Knight’s case?</i></div>
<div class="story-bodyintroduction" style="margin-left: 1.0in;">
<br /></div>
<div class="story-bodyintroduction" style="margin-left: 1.0in;">
“Computers and clever
maths enable traders to buy and sell in the blink of an eye. But does
high-frequency trading make matters worse when things go wrong?”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[viii]</span></span></span></span>
</div>
<div class="story-bodyintroduction" style="margin-left: 1.0in;">
<br /></div>
<div class="story-bodyintroduction" style="margin-left: 1.0in;">
“At Knight, some new
trading software contained a flaw that became apparent only after the software
was activated when the New York Stock Exchange opened that day. The errant
software sent Knight on a buying spree, snapping up 150 different stocks at a
total cost of around $7 billion, all in the first hour of trading.” <span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[ix]</span></span></span></span>
<b style="mso-bidi-font-weight: normal;">The software was essentially buying high
and selling low, which humans would not do!</b></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
<b style="mso-bidi-font-weight: normal;">“Knight’s
trades were not like those of the flash crash, when stocks of some of the
world’s largest companies suddenly began trading for as little as a penny, and
no buyer could credibly claim the transaction price reflected the correct
market value.”</b><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[x]</span></span></span></span></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
“Between 9:30 a.m. and 10:00 a.m. EDT, one of <a href="http://www.bloomberg.com/news/2012-08-01/swings-in-small-cap-stocks-spur-speculation-on-computer-trading.html">Knight’s
trading algorithms</a> reportedly started pushing erratic trades through on
nearly 150 different stocks, from <span class="tickerwrap">Berkshire Hathaway (</span><a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=BRK/B">BRK/B</a><span class="tickerwrap">)</span> to <span class="tickerwrap">Nokia (</span><a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=NOK">NOK</a><span class="tickerwrap">)</span> to <span class="tickerwrap">Exelon (</span><a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=EXC">EXC</a><span class="tickerwrap">)</span>. Trading volumes soared in many of them, so much so
that the most traded stock on a typical day, the <span class="tickerwrap">SPDR
S&P 500 ETF (</span><a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=SPY">SPY</a><span class="tickerwrap">)</span>, finished the Aug. 1 session as the 52nd-most traded
stock, according to Eric Hunsader, CEO of market data service Nanex.</div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
Nanex put together this <a href="http://www.nanex.net/aqck2/3522.html">chart</a> showing what was going on
in shares of one of the most volatile stocks, Exelon. Knight’s buggy algorithm
was apparently buying high and selling low, the opposite of a competent trading
strategy. From the Nanex chart: “[A]lmost all these trades alternate between
buying at the offer and selling at the bid, which means losing the difference
in price. In the case of EXC (Exelon), that means losing about 15 cents on
every pair of trades. Do that 40 times a second, 2,400 times a minute, and you
now have a system that’s very efficient at burning money.”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[xi]</span></span></span></span></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
“It totally freaked us out,” Hunsader says. “If it
hadn’t been stopped, it would have been a total disaster.” <b style="mso-bidi-font-weight: normal;">He adds that the glitch led to 4 million extra trades in 550 million
shares that would not have existed otherwise.</b></div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
Knight operates as a market-making and trading firm
filling retail orders from such brokers as <span class="tickerwrap">E*Trade
Financial (</span><a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=ETFC">ETFC</a><span class="tickerwrap">)</span> and Fidelity Investments. According to its website,
the firm’s market-making unit executed a daily average of $19.56 billion worth
of equities in June, with a volume of 3.1 billion shares. The $440 million loss
is now bigger than the company’s market cap, which was $296 million as of
Thursday afternoon, according to data compiled by Bloomberg.</div>
<div style="margin-left: 1.0in;">
<br /></div>
<div style="margin-left: 1.0in;">
What seemed to surprise folks in the industry most
about the mishap is that Knight has cultivated a reputation as one of the best
market-making firms in the business, with trading technology that is as fast
and secure as anything else currently deployed. “Technology breaks,” Joyce said
in an interview on Bloomberg Television’s <i>Market Makers</i> program on
Thursday morning, adding: “It ain’t good. We don’t look forward to it.”</div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Says </span><a href="http://law.umkc.edu/faculty-staff/people/black-william.asp" target="_blank"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Bill
Black</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">,
a former federal regulator who helped investigate the S&L crisis of the
'80s and '90s, imagine trading algorithms causing "a series of cascade
failures"—like the domino effect that followed Lehman's collapse. <b style="mso-bidi-font-weight: normal;">"If enough of these bad things occur
at the same time," he says, "financial institutions can begin to
fail, even very large ones." It's not a question of whether this will
happen, Black warns. "It is a question of when."</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Years of
mistakes and bad decisions led to the 2008 collapse. But when the next crisis
happens, it may not develop over months, weeks, or even days. It could take
seconds.”<span class="MsoFootnoteReference"> </span><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xii]</span></span></span></span> </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“Then-SEC chair
Mary Schapiro summed up at an October market technology roundtable. ‘But we
also know that technology has pitfalls. And when it doesn't work quite right,
the consequences can be severe. Just imagine what can happen if an automated
traffic light flashes green rather than red, if a wing flap on a plane goes up
rather than down, if a railroad track switches and sends the train right rather
than left.’”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xiii]</span></span></span></span></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“So far, the
problems caused by algorithms appear to be mostly accidental. But what if
someone designed a program <i>intended</i> to wreak havoc? John Bates, a computer
scientist who, in the early 2000s, designed software behind complicated trading
algorithms, worries that the kind of tools he's created could end up in the
wrong hands. <b style="mso-bidi-font-weight: normal;">"Fears of algorithmic
terrorism, where a well-funded criminal or terrorist organization could find a
way to cause a major market crisis, are not unfounded,"</b> </span><a href="http://apama.typepad.com/my_weblog/2011/02/index.html" target="_blank"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">he wrote in 2011</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">. "This
type of scenario could cause chaos for civilization and profit for the bad guys
and must constitute a matter of national security.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Honest mistakes
are one thing, but there are also an increasing number of incidents of rogue
traders, fraud and greed-gone-wrong. Looking at this compendium of fat finger
or algorithmic errors and fraudulent or rogue trading, I think we have been
lucky so far that their impact has not been more serious. The scary thing is
that things could have gone a lot more wrong. The flash crash illustrated how
quickly things can move and how inter-related the markets are. In 2010 we have
seen incidents in equities, futures, FX and oil markets. A cross-asset “splash
crash” that cascades across multiple markets is theoretically possible –
whether it’s accidental or even premeditated.”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xiv]</span></span></span></span> </span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">And that would be disastrous and that is
why I get worried when SEBI’s chairman says that they do not have the
surveillance mechanisms to deal with issues arising from algorithmic trading
gone ‘purposely wrong’!</span></b></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">And
nobody substantiates the perils of modern day technology better than SEC’s <b>Commissioner
Luis A. Aguilar</b><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xv]</span></span></span></span><b>
and I quote,</b></span></div>
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“It’s true that modern information technology has
revolutionized the infrastructure of the nation’s capital markets in beneficial
ways.<a href="https://www.blogger.com/null" name="_ednref2"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn2" title=""><span style="mso-bookmark: _ednref2;">[2]</span><span style="mso-bookmark: _ednref2;"></span></a><span style="mso-bookmark: _ednref2;"></span> But this
technology also presents significant risks, and carries the potential for
immense harm to investors. This is particularly true as to our nation’s
equity markets, where the vast majority of trade quotations are generated by
pre-programmed, automatic algorithms.<a href="https://www.blogger.com/null" name="_ednref3"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn3" title=""><span style="mso-bookmark: _ednref3;">[3]</span><span style="mso-bookmark: _ednref3;"></span></a><span style="mso-bookmark: _ednref3;"></span></div>
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Many of these algorithms have hair-trigger settings,
and, as market crisis after market crisis has shown, they are able to unleash
massive waves of quotations the instant certain circumstances arise.<a href="https://www.blogger.com/null" name="_ednref4"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn4" title=""><span style="mso-bookmark: _ednref4;">[4]</span><span style="mso-bookmark: _ednref4;"></span></a><span style="mso-bookmark: _ednref4;"></span> Because
these automated systems execute trades at blinding speeds, humans cannot keep
up, and may not be able to intervene quickly when something goes awry.<a href="https://www.blogger.com/null" name="_ednref5"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn5" title=""><span style="mso-bookmark: _ednref5;">[5]</span><span style="mso-bookmark: _ednref5;"></span></a><span style="mso-bookmark: _ednref5;"></span></div>
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Consequently, in today’s markets, a single rogue
algorithm can trigger a cascading series of errant trades, destroying billions
of dollars of market value in the blink of an eye.<a href="https://www.blogger.com/null" name="_ednref6"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn6" title=""><span style="mso-bookmark: _ednref6;">[6]</span><span style="mso-bookmark: _ednref6;"></span></a><span style="mso-bookmark: _ednref6;"></span> This
destruction of market value and subsequent upheaval harm investors and
undermine their faith in the fair and orderly functioning of the capital
markets.<a href="https://www.blogger.com/null" name="_ednref7"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn7" title=""><span style="mso-bookmark: _ednref7;">[7]</span><span style="mso-bookmark: _ednref7;"></span></a><span style="mso-bookmark: _ednref7;"></span> Each new
market crisis increasingly jeopardizes the Commission’s mission to protect
investors, maintain fair and orderly markets, and facilitate capital formation.</div>
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Over the past several years, market disruptions have
illustrated the dangers of automated trading systems in stark relief. <b style="mso-bidi-font-weight: normal;">Exchanges are proving especially
vulnerable. </b>In fact, there have been at least 27 serious technical
malfunctions at exchanges around the world in the last three years alone.<a href="https://www.blogger.com/null" name="_ednref8"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn8" title=""><span style="mso-bookmark: _ednref8;">[8]</span><span style="mso-bookmark: _ednref8;"></span></a><span style="mso-bookmark: _ednref8;"></span> For
example, the BATS exchange has suffered three serious software mishaps in the
past two years, including a long-lived failure to provide the best price for
433,000 separate trades over a five-year period.<a href="https://www.blogger.com/null" name="_ednref9"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn9" title=""><span style="mso-bookmark: _ednref9;">[9]</span><span style="mso-bookmark: _ednref9;"></span></a><span style="mso-bookmark: _ednref9;"></span> But BATS
is certainly not unique. For example, over the last two years, several of
the largest exchanges have suffered software malfunctions, including the New
York Stock Exchange, the Chicago Board of Options Exchange, and Direct Edge.<a href="https://www.blogger.com/null" name="_ednref10"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn10" title=""><span style="mso-bookmark: _ednref10;">[10]</span><span style="mso-bookmark: _ednref10;"></span></a><span style="mso-bookmark: _ednref10;"></span>
And, in perhaps one of the most publicized mishaps, a software glitch badly
disrupted the Facebook IPO.<a href="https://www.blogger.com/null" name="_ednref11"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn11" title=""><span style="mso-bookmark: _ednref11;">[11]</span><span style="mso-bookmark: _ednref11;"></span></a><span style="mso-bookmark: _ednref11;"></span>
</div>
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Providers of stock quotes, which are known as securities
information providers (or SIPs),<a href="https://www.blogger.com/null" name="_ednref12"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn12" title=""><span style="mso-bookmark: _ednref12;">[12]</span><span style="mso-bookmark: _ednref12;"></span></a><span style="mso-bookmark: _ednref12;"></span>
are also at risk. Trading on Nasdaq was paralyzed for three hours last
year when its quotation system malfunctioned, and Nasdaq suffered a similar
mishap just two weeks later.<a href="https://www.blogger.com/null" name="_ednref13"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn13" title=""><span style="mso-bookmark: _ednref13;">[13]</span><span style="mso-bookmark: _ednref13;"></span></a><span style="mso-bookmark: _ednref13;"></span></div>
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<br /></div>
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Additionally, I am increasingly concerned about the
cybercriminals that are targeting our capital markets by attacking or
exploiting weaknesses in its technological infrastructure.
Cyber-criminals succeeded in penetrating Nasdaq’s peripheral computer
systems repeatedly in 2011, and even succeeded in planting a so-called “digital
bomb” in Nasdaq’s servers.<a href="https://www.blogger.com/null" name="_ednref14"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn14" title=""><span style="mso-bookmark: _ednref14;">[14]</span><span style="mso-bookmark: _ednref14;"></span></a><span style="mso-bookmark: _ednref14;"></span>
And, in 2012, more than half of the world’s exchanges were the subject of a
cyber-attack.<a href="https://www.blogger.com/null" name="_ednref15"></a><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121#_edn15" title=""><span style="mso-bookmark: _ednref15;">[15]</span><span style="mso-bookmark: _ednref15;"></span></a><span style="mso-bookmark: _ednref15;"></span>
It seems rare when a week goes by without some report of a cyber-attack.</div>
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<i style="mso-bidi-font-style: normal;">This dismal
catalogue of technical glitches and cyber-attacks demands a robust,
comprehensive, and thoughtful response.”<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">[xvi]</span></b></span></span></span>
</i></div>
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<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">E) Implications for Regulation and
Supervision of Capital Markets: </span></b></div>
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<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">And
as someone with close to three decades of experience in information technology
and financial services with an strong practical emphasis on control, regulation
and supervisory arrangements amongst other things, it is rather perplexing for
me to understand why the technology mishaps that have been occurring with
regular frequency in the world of capital markets (especially in recent times)
have NOT yet led us to appreciate the huge risk that technological dependence
holds for capital markets and try and simultaneously address the same. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Ever
since the most rudimentary form of electronic trading started in America in the
mid-late 1970s and gained popularity in the late 1980s, there is no doubt that
for over the last twenty five years now and still counting, technology
continues to define the overall structure and evolution of global capital
markets. There are obviously many (huge) benefits from this but at the same
time, there are huge problems as well which we need to recognise ASAP so that
they can be mitigated (if not completely redressed). Please note that any
problems that are not recognised cannot be mitigated</span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Especially,
given the various happenings of the last 5 years (that were enumerated above),
where technology has either caused or exacerbated problems of great magnitude
in the capital market, it is about time we recognise the basic fact that there
is an enormous inherent (technology) risk which lies in this dependency on
information technology for the capital market industry overall. And there is no
doubt what-so-ever that this critical risk needs to be addressed with renewed
vigour, dynamism and eclectic strategies in a continuous manner as otherwise
the capital markets will continue to remain vulnerable and at risk. </span></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">As noted above, not only the capital
markets but also stock exchanges are at huge risk because of the perils of
technology.<span style="mso-spacerun: yes;"> </span></span></i></div>
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<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">F) Vulnerability of Stock Exchanges in
Changing Scenario: </span></b></div>
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<br /></div>
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<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
vulnerability of exchanges is especially critical as they are vehicles that
transform <i style="mso-bidi-font-style: normal;">‘hard earned savings of people’</i>
into ‘<i style="mso-bidi-font-style: normal;">investments’ </i>through stock
market and related services which form a very important part of the overall
economic milieu of our country. In fact, the <b style="mso-bidi-font-weight: normal;">Order (dated 23.06.2011) </b>of the <b style="mso-bidi-font-weight: normal;">COMPETITION COMMISSION OF INDIA</b> (<b style="mso-bidi-font-weight: normal;">in</b> <b>CASE NO. 13/2009 between </b><b style="mso-bidi-font-weight: normal;">MCX Stock Exchange Ltd and National Stock Exchange of India Ltd and
DotEx International Ltd)</b><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xvii]</span></span></span></span><b style="mso-bidi-font-weight: normal;"> </b>nicely highlights the importance of
stock market services and stock exchanges for the economy of India and the same
is briefly summarized below: </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“1.5 <b style="mso-bidi-font-weight: normal;">Stock exchanges are enmeshed in the economy of a nation and are the
most important mechanism of transforming savings into investments. Over the
ages, as economies developed, industrialization occurred and markets became
more organized, a need for permanent finance was felt world over. Entrepreneurs
needed money for long term whereas investors also required liquidity. The
answer was development of the institution of stock exchanges.</b></span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">1.6 A stock exchange is an entity
that provides services for stock brokers and traders to trade stocks, bonds,
and other securities or derivatives. Stock exchanges also provide facilities
for issue and redemption of securities and other financial instruments, and
capital events including the payment of income and dividends. Securities traded
on a stock exchange include shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds. To be able to trade a
security on a certain stock exchange, it must be listed there. Usually, there
is a central location at least for record keeping, but trade is increasingly
less linked to such a physical place, as modern markets are electronic
networks, which gives them advantages of increased speed and reduced cost of
transactions. Trade on an exchange is by members only. There is usually no
compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be <span style="mso-bidi-font-style: italic;">off exchange </span>or over-the-counter.
This is the usual way that derivatives and bonds are traded. Increasingly,
stock exchanges are part of a global market for securities.”</span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Thus,
it is VERY clear from the above that the <i style="mso-bidi-font-style: normal;">public
utility, role and importance </i>of S<b style="mso-bidi-font-weight: normal;">TOCK
EXCHANGES </b>- which are indeed an integral part of the Indian economy -<b style="mso-bidi-font-weight: normal;"> cannot therefore be understated! </b>Without
any doubt, stock exchanges are key institutions in the economy and they not
only need to be <b style="mso-bidi-font-weight: normal;">efficient</b> (doing
things the right way) but also <b style="mso-bidi-font-weight: normal;">effective</b>
(doing the rights things), <b style="mso-bidi-font-weight: normal;">adaptive</b>
(satisfy needs of their existing and potential users with technology and
innovation), <b style="mso-bidi-font-weight: normal;">accountable</b> (to the
country as whole, its citizens and their immediate users), <b style="mso-bidi-font-weight: normal;">transparent</b> (provide appropriate and timely disclosure on products,
processes and the like) and <b style="mso-bidi-font-weight: normal;">well
governed</b> (without any conflicts of interest)! </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">All
of the above also make the <b style="mso-bidi-font-weight: normal;">regulation
and supervision of stock exchanges </b>very critical and herein, the role of
the capital market regulator such as SEBI and other regulatory authorities
assumes tremendous significance as stock exchanges are akin to public
authorities/bodies<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xviii]</span></span></span></span>
that transform “savings” into “investments”. As a result, there is a huge
public responsibility on the part of the regulator (s) to ensure that these
hard earned savings are not lost as savings form the backbone of any modern
economy like India.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">G) Whistle Blower’s Letter to SEBI and
Investigation of the Same by SEBI:</span></b></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Given
the above context, I have recently also come across in the public domain, a
letter<span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-IN; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[xix]</span></span></span></span> addressed
to Shri B K Gupta, DGM, Market Regulation Department, Division of Market
Supervision, SEBI, BKC, Mumbai. This is the address given in the said letter
which can be found at the links given below.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Please
KINDLY see copy of the letter at </span><a href="http://www.naavi.org/uploads_wp/nse_manipulation.pdf"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">http://www.naavi.org/uploads_wp/nse_manipulation.pdf</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">. Amongst other
things, the (WHISTLE BLOWER’s) letter alleges several wrong doings at NSE and
requests SEBI to investigate the matter. </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
following news item (</span><a href="http://m.livemint.com/Industry/F3LUvGix8dPhzDtHZotvqL/Moily-panel-seeks-Sebi-report-on-alleged-malpractices-at-NSE.html"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">http://m.livemint.com/Industry/F3LUvGix8dPhzDtHZotvqL/Moily-panel-seeks-Sebi-report-on-alleged-malpractices-at-NSE.html</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">) says that SEBI
has initiated an investigation but NSE supposedly denies the same (as per the
same news report). The question here is how can an investigation concerning NSE
be done without NSE’s knowledge? This is very confusing therefore and hence, this
article and am specifically looking for answers to the questions given
hereafter. </span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">H) SEBI’s Investigation of The Whistle
Blower’s Letter – Some General Questions: </span></b></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">My general questions to SEBI as a
concerned citizen are as follows:</span></i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> </span></div>
<div class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Whether
any such investigation has been initiated by SEBI on the basis of the whistle
blower’s letter given in the links above?</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
yes, what is the status of this investigation and what are the findings? Based
on the investigation findings, are the allegations levelled in the Whistle
Blower’s letter true? </span></div>
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<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">PLEASE KINDLY
NOTE THAT I AM ASKING SEBI TO LET ME KNOW (BASED ON THE INVESTIGATION FINDINGS)
AS TO WHETHER THE ALLEGATIONS LEVELED IN THE WHISTLE BLOWER’S LETTER (GIVEN IN
LINK ABOVE) ARE INDEED TRUE! </span></div>
<div class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
the investigation is on-going, when is it likely to be completed?</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Who
are the people investigating the issues mentioned in the letter? Do they have
any (inherent) conflicts of interest in terms of investigating potential/plausible
lapses in their own duties and functions? This is very critical!</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">What
is the subject of the investigation? What are the terms of reference? Does it
cover all aspects alleged in the above WHISTLE BLOWER’s letter? Are all levels
of analysis (SEBI internal level, NSE level, other market participant level
etc) that are required to be covered in such an investigation being covered? </span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">f)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Who
and which people (in specific), what processes and which events are being probed
and investigated? It must be noted that some of the people who were in a
position of responsibility at various organisations in different positions at several
levels (for the years concerned – i.e., 2009 to date) may have left the service
of the concerned organisations. In that case, have they as well as their
successors been called for the enquiry? </span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l2 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">g)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Have
all documents and resources including all computer logs of all servers
including backup servers pertaining to the above period been examined? If so,
what do they indicate with regard to the various specific issues mentioned in
the Whistle Blower’s letter?</span></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">As
noted above and reemphasized here, it is pertinent to note that as per an available
news report, the NSE denies any investigation - <span style="mso-spacerun: yes;"> </span>(</span><a href="http://m.livemint.com/Industry/F3LUvGix8dPhzDtHZotvqL/Moily-panel-seeks-Sebi-report-on-alleged-malpractices-at-NSE.html"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">http://m.livemint.com/Industry/F3LUvGix8dPhzDtHZotvqL/Moily-panel-seeks-Sebi-report-on-alleged-malpractices-at-NSE.html</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">). </span></div>
<div class="MsoListParagraph" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .25in; margin-right: 0in; margin-top: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
the above news item is true and there has been no investigation so far, why has
there been no investigation as yet? This is especially a critical question NOT
ONLY in the light of the WHISTLE BLOWER’s letter but also on the basis of SEBI
Chairman’s statements dated July 30<sup>th</sup> that <i style="mso-bidi-font-style: normal;">sufficient surveillance mechanisms do not exist (as on date) with SEBI
with regard to taking action against people who deliberately misuse algorithmic
trading</i>. <b style="mso-bidi-font-weight: normal;">Please see paragraph #1 given
above (in this piece) and SEBI Chairman’s (SUPPOSED) own quote reproduced
therein.</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Also,
is it not SEBI’s duty to investigate any potential and/or plausible issues with
regard to High Frequency Trading (HFT) - or Algorithmic Trading - that has caused
extensive damage worldwide? I can relate many instances where HFT or Algorithmic
trading has led to and/or has exacerbated huge shocks in the market and caused huge
losses to the tune of several billion dollars. Therefore, in my humble opinion,
I feel it is imperative for SEBI to investigate and get to the root of the
matter and determine whether what has been alleged in the WHISTLE BLOWER’s letter
is true or not? </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">I) SEBI’s Investigation of The Whistle
Blower’s Letter - Specific Questions for SEBI:</span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">I also have several specific questions (SEBI
and Supervisory level) which are outlined below and would like SEBI to provide
me answers to as I am very concerned as a citizen of the country:</span></i></div>
<div class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Did
any of the following departments at SEBI - </span><a href="http://www.sebi.gov.in/cms/sebi_data/about_us/OrgChart.html#MIRSD"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Market
Intermediaries Regulation and Supervision Department (MIRSD)</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">, </span><a href="http://www.sebi.gov.in/cms/sebi_data/about_us/OrgChart.html#SEC"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Special
Enforcement Cell (SEC)</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">, </span><a href="http://www.sebi.gov.in/cms/sebi_data/about_us/OrgChart.html#IVD"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Investigations
Department (IVD)</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">,
</span><a href="http://www.sebi.gov.in/cms/sebi_data/about_us/OrgChart.html#MRD"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Market
Regulation Department (MRD)</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">, </span><a href="http://www.sebi.gov.in/cms/sebi_data/about_us/OrgChart.html#ISD"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Integrated
Surveillance Department (ISD)</span></a><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> – find anything unusual in terms of
patterns and behaviour with regard to HFT and Algorithmic trading during the
period 2009 – 2014? </span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Given
that SEBI Chairman himself admits that surveillance mechanisms are
insufficient, what does SEBI propose to do to safeguard and protect India’s
wealth and people from the ills of HFT or Algorithmic trading, which are
experiencing burgeoning growth worldwide?</span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
what has been alleged in the WHISTLE BLOWER’s letter has been found to be true
by SEBI’s own investigation, what lessons can be learned regarding the existing
supervisory mechanisms (within SEBI and across its departments) as well as
controls (at various levels including at stock exchanges) in terms of their
effectiveness and ability to prevent (such) undesirable events and behaviour
with regard to algorithmic trading in the future? <b style="mso-bidi-font-weight: normal;">What changes in the supervisory mechanisms and controls (at various
levels) would be required in the immediate future to protect the Indian economy
and ensure its financial stability?</b> </span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
what is alleged in the WHISTLE BLOWER’s letter has been found to be true by SEBI’s
own investigation, were any of the above departments (and/or NSE) aware of these
happenings as they unfolded? Specifically, if they were aware and did not act, were
there any conflicts of interest that prevented the people concerned from doing
their duties?</span></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">And
if the above is indeed true as per point’s <b style="mso-bidi-font-weight: normal;">c</b>
and <b style="mso-bidi-font-weight: normal;">d </b>(given above), what does SEBI propose
to do in terms of future course of action? </span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">J) SEBI’s Investigation of The Whistle
Blower’s Letter - Specific Questions for SEBI/NSE:</span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">I
also have several specific questions (NSE level) which are outlined below and
would like SEBI/NSE to provide me answers to as I am very concerned as a
citizen of the country:</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">a)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">As
per SEBI’s investigation, did a sophisticated market manipulation occur at NSE
for several years at NSE Collocation data centre with active collaboration of
NSE data centre staff as alleged in the Whistle Blower’s letter? </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">b)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
the above is true on the basis of SEBI’s investigation, did NSE Management ever
get to know of this? What does SEBI’s investigation say with regard to this?</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">c)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If
as per SEBI’s investigation, the matter did come to knowledge of NSEs
management team, what did they do? Did they take action against the people
concerned? Or did they choose to ignore or keep quiet about it? </span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">d)<span style="font: 7.0pt "Times New Roman";">
</span></span></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Does SEBI’s investigation suggest that the market
manipulation - <i style="mso-bidi-font-style: normal;">that the Whistle Blower is
alleging in his letter </i>– <b style="mso-bidi-font-weight: normal;">enabled
certain vested brokers to get market price information ahead of the rest of the
market?</b> In other words, specifically, does SEBI’s investigation suggest <b style="mso-bidi-font-weight: normal;">some vested brokers were enabled to front
run rest of the market? This is very critical!</b></span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">e)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Specifically,
did SEBI’s investigation involve inspection of all the logs from (all) the main
and back up servers at NSE (NSE collocation and data centre)? What do they
indicate in terms of who logged in on a daily basis to which server? Is there a
pattern whereby certain vested brokers were always found to have logged in the
earliest and also on the lowest load servers? Specifically, do the logs also indicate
that specific brokers logged on immediately after the servers were switched on
and especially, to the lowest load and strongest performing servers? Was this a
daily feature? What about highly volatile days? Is there a pattern to this in
terms of specific brokers always logging on to such systems? If yes, as per SEBI’s
investigation, who were the specific brokers who benefitted and what does each
of their individual (payment) settlements indicate? </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">f)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">As
per SEBI’s investigation, did any of these specific brokers have any specific
linkages to any of the staff at NSE including those at the data centre,
co-location centre and/or elsewhere at NSE including the operational and
management staff at various levels?</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">g)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">As
per SEBI’s investigation, did any of the NSE staff join the payrolls of the any
of the above mentioned type brokers? If yes, who were these staff, what
positions had they occupied at NSE and which brokers did they ultimately join
and in what capacities? Have they been called for the investigation? What are SEBI’s
findings?</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">h)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">In
other words, does SEBI’s investigation reveal that some specific brokers were
privy to the information as to which server would be started at what time so
that they could be the first one to connect and enjoy all the advantages of
logging in first and especially on to the lowest load servers? </span></div>
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<br /></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">i)<span style="font: 7.0pt "Times New Roman";">
</span></span></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">In terms of quantification, would this superior and
earlier access advantage (for some vested brokers) make access to crucial price
information several (say, 100) times faster than the average person on
collocation? What about non collocation persons?<span style="mso-spacerun: yes;"> </span>Were they never in the picture? Put
differently, the manipulations aside, did collocation itself provide a huge
unfair advantage vis-à-vis others? Were non collocation people analogous to
those who never even reached the stadium by the time the race was to start? <b style="mso-bidi-font-weight: normal;">What does this suggest about co-location in
terms of in providing unfair advantages to a relative few as compared to the
larger market? What are the implications for co-location from the perspective
of anti-trust laws? </b></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">j)<span style="font: 7.0pt "Times New Roman";">
</span></span></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The WHISTLE BLOWER notes in his letter that </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“<i style="mso-bidi-font-style: normal;">there is globally a practice of time synchronisation
across all exchange servers and all servers at collocation synchronise themselves
with the exchange clock (down to milli second). Though the device costs only a
few thousand dollars, it was surprisingly missing from the exchanges
infrastructure.” </i></span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Does SEBI’s investigation reveal this to
be true and if yes, which brokers took advantage of this and for how long? <b style="mso-bidi-font-weight: normal;">And if the above is true, does SEBI’s investigation
pin the blame for such a serious lapse at NSE on anyone specifically? What are
the implications for SEBI’s supervision of the stock exchanges? This is again a
very critical issue!</b></span></div>
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<br /></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">k)<span style="font: 7.0pt "Times New Roman";">
</span></span></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">What does your investigation say with regard to
following alleged assertion in the Whistle Blower’s letter which notes that: </span></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“When Umesh Jain
joined as CTO in Oct 2012 he started off by meeting a lot of players in the
system and when he discovered this most common issue was TBT servers he setup a
simple solution in a couple of months. Being a new person willing to listen he
found himself flooded with logs indicating the high differential between
multiple servers. Latency difference of 50 ms across servers was common. He
realized this needed to be fixed. He dismantled the system of TBT allocation
and to ensure fairness put in what is called a load balancer. The load balancer
would be the server to which everyone would need to connect and in turn it
would dynamically decide which TBT server the application would connect
internally based upon the overall load so that load is evenly distributed. This
change clearly represented the biggest challenge to the model of those who were
trying to game the system. Omnesys suddenly found it had lost the edge in IOC
servers and saw a drift away from its managed services. OPG then figured out
there should be a way to outsmart the system. Once more the obliging data
centre staff came in handy. While the system had an automated allocation of TBT
servers they still had the backup servers which were to be connected only in
case the primary went down though they were equally powerful. They figured out
if they let OPG connect to the Backup servers with zero load he would still be
getting far better latency. They obliged and the cycle continued.” </span></i></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Has the above
been established by SEBI’s investigation? <b style="mso-bidi-font-weight: normal;">Again,
does SEBI’s investigation pin the blame for such a serious lapse (the lack of a
load balancer for servers) at NSE on anyone specifically? What are the
implications for SEBI’s supervision of the stock exchanges? This is again a
very critical issue!</b></span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">l)<span style="font: 7.0pt "Times New Roman";">
</span></span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">What does SEBI’s
investigation reveal with regard to this assertion by the Whistle Blower who
notes that</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">:
</span></div>
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<br /></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“Around this
time coincidentally a couple of global players went live with their servers at
NSE collocation. The local guys could not figure out the working but the global
players clearly had more exposure of what was happening. One more improvement
which the new CTO brought was the ability to sync servers with the exchange
clock. Suddenly the cat was out of the bag (for a select few who understood
what happening). It was now possible to see what time the exchange generated
the price broadcast, what time it was received by the different servers and
what time the trade got executed. Since it often got filled before the
broadcast was received by the market it was obvious something was amiss.
Exchange simply could not explain it away as random differences or the
abilities of the different software’s. Armed with the logs (though not
necessarily understanding why this was occurring) different firms started
approaching NSE to explain the sequence of events. While officially the stand
was variability of TBT servers and loads, someone within NSE must have started
understanding what was happening. NSE decided to go to the global standard of
multicast at collocation so that everyone would get the price concurrently. </span></i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">He further
notes: <i style="mso-bidi-font-style: normal;">“In hindsight the events which
unfolded clearly leave a trail of what most probably happened. Someone smart in
NSE must have put the complaints and the trades together. Suddenly there was a
shuffling of lower level staff at the NSE datacenter. Practically all the
operational people were changed. The issue of handling senior staff was still
there. If they were fired they could come out in the open and if they were not
moved they would again create some similar situation. The matter was quietly
hushed up. And everyone was given an honorable exit. The external parties who
understood the happenings were quietly accommodated in different ways (I will
come that near the end of my letter) and in a surprising move the data centre
incharge left to join MCXSX as data centre incharge (after the Jignesh shah
episode) so its not difficult to add up things. NSE soon started multicast…</i>”
</span></div>
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<br /></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Does
SEBI’s investigation reveal this to be true? If so, does SEBI’s investigation
pin the blame for such a serious happening at NSE on anyone specifically? What
are the implications for SEBI’s supervision of the stock exchanges?</span></b></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">m)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">What does SEBI’s
investigation reveal with regard to the comment by the Whistle Blower who notes
that</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">:
</span></div>
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<br /></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“The easiest way
to verify or throw out this complaint is to go back to the data and see if
supports the same. If NSE stores its internal order logs of order and trade
with milli second timestamp, it will be very easy to verify when did the first
trade happen which caused and abrupt price movement and when did the IOC
multileg order get fired by different members. If the latency difference
between the orders generated across members is in the range of 200 micro
seconds there is obviously not foul play, but if the difference is in the range
of 20 milliseconds you know the working explained above. As a confirmation you
may verify that this pattern exists across days or is a one off event for the
member. In case the millisecond time stamp is not available for some hard to
fathom reason NSE maintains an order number which is chronological in order of
the receipt of order by its system. For the purpose of analysis you need to
filter all the multi-legged IOC orders received by the exchange on few sample
volatile days in say 2012. If the order numbers of a selected few members are
always ahead of similar orders received from other members you can be sure of
the front running. You can also examine the fill ratio of orders across members
(i.e., how many of the IOC orders fired got traded as a percentage).Since the
working has been explained in detail above you should be able to correlate the
same with the above data. One more easy way to cross verify would be to check
which member server connected to which TBT ip of the exchange as it would
clearly indicate the load skew.” </span></i></div>
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<br /></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Does
SEBI’s investigation reveal this to be true? </span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"></span></div>
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<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l1 level1 lfo3; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">n)<span style="font: 7.0pt "Times New Roman";">
</span></span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">What does SEBI’s
investigation reveal with regard to the following comment by the Whistle Blower
who notes that</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">:
</span></div>
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<br /></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">“Coming to my
part of the interest. I was actually working for one of the Singapore based
firms and have shifted to a new HFT firm recently. The problem which we face is
that in quid pro quo for keeping quiet NSE has given certain privileges to my
earlier firm which are not available to me at the new firm. This is resulting
in degraded performance of the algos. If SEBI will take some action I am sure
the current unfair advantages would stop as NSE will be forced to be more
cautious otherwise it will be difficult for us to work in an unlevel playing
field.”</span></i></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"><span style="mso-spacerun: yes;"> </span></span></i><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Does
SEBI’s investigation reveal this to be true?</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;"> <b style="mso-bidi-font-weight: normal;">And does SEBI’s investigation pin the blame for such a serious
happening at NSE on anyone specifically? What are the implications for SEBI’s
supervision of the stock exchanges?</b></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">It
is high time that SEBI provided specific answers to the above questions in
larger public interest. </span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">K) Discussion: </span></b></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">To
summarise, <i style="mso-bidi-font-style: normal;">it seems important for SEBI to
provide the following information ASAP with regard to the allegations made in
the Whistle Blower’s letter:</i></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<ul style="text-align: left;">
<li><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Specifically, SEBI
must make public, a copy of its investigation report (with all supporting
documentation in a comprehensive manner) on the WHISTLE BLOWER’s letter and the allegations therein and provide conclusive evidence on whether the allegations are true or not? </span></b></li>
<li><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Second, if such
an investigation has not been conducted as yet, it is imperative that SEBI immediately
orders a fair and independent investigation into the issues arising from the
Whistle Blower’s letter. </span></b></li>
<li><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Third, SEBI must
also disclose to the general public on what it is doing about algorithmic
trading, high frequency trading (HFT) or high speed trading (HST) that perpetuate
a fraud on the capital markets. In other words, what is SEBI doing about algorithmic
trading, HFT, HST that make huge bogus orders and cancel them in the next
millionth of a sec. This is neither market making nor genuine trade in capital
markets – this deceptive behaviour is plain simple rigging and fixing of
capital markets and cannot be allowed to go on. </span></b></li>
<li><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Fourth, SEBI must
also inform to the public what it is doing to those users of algorithmic
trading, HFT and HFS who (may) gain undue speed and time advantages through
various corrupt practices, as has been alleged in the whistle blowers letter</span></b></li>
<li><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Fifth, SEBI must
also let the public know on whether it has instituted independent third party
audits and supervision of stock exchanges and their members/users and their
various algorithms to ensure that “ROGUE” algorithms are weeded out to the best
extent possible </span></b></li>
</ul>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">One FINAL point is in order. </span></i></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Overall,
all of the above aspects highlighted with regard to algorithmic trading/HFT/HST
- and their technology/other problems per se - raise several important
questions with regard to the ordinary investor and the protection of their
investment:</span></div>
<div style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .75in; margin-right: 0in; margin-top: 0in;">
<br /></div>
<ul style="text-align: left;">
<li>What does all of this signify for the process of
investment in capital markets whereby peoples’ hard earned savings are
converted to investment? </li>
<li>What does it mean for the ordinary investor and
their confidence in the capital markets?</li>
<li>What are the implications for investor
protection? </li>
<li>What does all of this signify for a company’s
fundamentals and buying and selling of stock based on that?</li>
<li>What does it mean for hard work that goes into
creating the value of a stock?</li>
<li>What does investing ultimately become?</li>
<li>What happens to peoples’ savings that they are
trying to convert into investment?</li>
<li>What happens to the economy that is hugely
dependent on peoples’ savings?</li>
<li>Plus many more</li>
</ul>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
Therefore, unless SEBI acts swiftly and decisively, peoples’ investments,
stocks, institutions, and the country as a whole may be at huge risk as one
fine day we may be told that all our wealth has been eroded due to <b style="mso-bidi-font-weight: normal;">a rogue algorithm</b> and a reading of SEBI
Chairman’s interview of July 30<sup>th</sup> 2015 certainly does not give me
confidence in India’s globally interlinked capital markets.<span style="mso-spacerun: yes;"> </span><br />
<br />
<span style="mso-spacerun: yes;">And it is high time that SEBI recognises the immense contribution made by Ms Sucheta Dalal and <i>Moneylife </i><b>in bringing to fore the critical issues concerning "ALGO TRADING" so that the health and safety of Indian capital markets</b> <b>can be enhanced. And without any doubt, it must be stated that when SEBI and NSE's priority must be to answer the above given substantive questions in larger public interest, it is ironical that a defamation suit and related proceedings have been filed (by NSE) against </b></span><span style="mso-spacerun: yes;"><b><span style="mso-spacerun: yes;">Ms Sucheta Dalal and <i>Moneylife. </i></span></b><span style="mso-spacerun: yes;"><i>And it goes without saying that NSE's above attempt at initiating defamation proceedings against </i></span></span><span style="mso-spacerun: yes;"><span style="mso-spacerun: yes;"><i><span style="mso-spacerun: yes;">Ms Sucheta Dalal and <i>Moneylife </i></span>is more a strategy to deflect from answering several key questions that have been highlighted above. </i></span></span><br />
<div style="mso-element: endnote-list;">
<hr align="left" size="1" width="33%" />
<div id="edn1" style="mso-element: endnote;">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref1" name="_edn1" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[i]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> H</span><span lang="EN-US" style="font-family: "Times New Roman","serif";">igh
Frequency Trading (HFT) and High Speed Trading (HST) are subsets of Algorithmic
Trading and are often seen as the primary (although not only) culprits for the
various problems and issues associated with Algorithmic Trading.</span></span></div>
<span style="font-size: small;">
</span></div>
<span style="font-size: small;">
</span><br />
<div id="edn2">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref2" name="_edn2" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[ii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> If Indian
markets stay fundamentally strong to attract global capital over the next five
years, we can see the proportion of algo trades equaling that of the US in the
next five years. Please see </span><a href="http://www.huffingtonpost.in/2015/06/07/highspeed-trading-is-skew_n_7528172.html"><span style="font-family: "Times New Roman","serif";">http://www.huffingtonpost.in/2015/06/07/highspeed-trading-is-skew_n_7528172.html</span></a><span style="font-family: "Times New Roman","serif";">. Thus,
algorithmic trading/HFT/HST may be here to stay because they are the order of
the day with advancement of technology and humankind.</span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn3">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref3" name="_edn3" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[iii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";">Call it
dark humor or whatever. May 6<sup>th</sup> seems to be dooms day as May 6<sup>th</sup>
2010 was the flash crash day and the above incident of NIFTY and SENSEX
tumbling was also on May 6<sup>th</sup> (albeit 5 years later) 2015.</span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn4">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref4" name="_edn4" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[iv]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.huffingtonpost.in/2015/06/07/highspeed-trading-is-skew_n_7528172.html"><span style="font-family: "Times New Roman","serif";">http://www.huffingtonpost.in/2015/06/07/highspeed-trading-is-skew_n_7528172.html</span></a><span style="font-family: "Times New Roman","serif";"> </span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn5">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref5" name="_edn5" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[v]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> While t</span><span lang="EN-US" style="font-family: "Times New Roman","serif";">he exact
figures of these losses may vary, the magnitude and impact of these losses are
unlikely to change. Besides, the purpose of quoting these examples is to
underscore the perils of technology and the consequent impact of algorithmic
trading rather than provide precise figures of these losses!</span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn6">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref6" name="_edn6" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[vi]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street"><span style="font-family: "Times New Roman","serif";">http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street</span></a><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn7">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref7" name="_edn7" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[vii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street"><span style="font-family: "Times New Roman","serif";">http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn8">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref8" name="_edn8" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[viii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.bbc.com/news/magazine-19214294"><span style="font-family: "Times New Roman","serif";">http://www.bbc.com/news/magazine-19214294</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn9">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref9" name="_edn9" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[ix]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.palisadeshudson.com/2012/08/every-ceos-nightmare/"><span style="font-family: "Times New Roman","serif";">http://www.palisadeshudson.com/2012/08/every-ceos-nightmare/</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn10">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref10" name="_edn10" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[x]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.palisadeshudson.com/2012/08/every-ceos-nightmare/"><span style="font-family: "Times New Roman","serif";">http://www.palisadeshudson.com/2012/08/every-ceos-nightmare/</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn11">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref11" name="_edn11" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xi]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.bloomberg.com/bw/articles/2012-08-02/knight-shows-how-to-lose-440-million-in-30-minutes"><span style="font-family: "Times New Roman","serif";">http://www.bloomberg.com/bw/articles/2012-08-02/knight-shows-how-to-lose-440-million-in-30-minutes</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn12">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref12" name="_edn12" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street"><span style="font-family: "Times New Roman","serif";">http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street</span></a><span style="font-family: "Times New Roman","serif";"> and other web sources!</span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn13">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref13" name="_edn13" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xiii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.sec.gov/News/Speech/Detail/Speech/1365171491354"><span style="font-family: "Times New Roman","serif";">http://www.sec.gov/News/Speech/Detail/Speech/1365171491354</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn14">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref14" name="_edn14" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xiv]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://apama.typepad.com/my_weblog/2011/02/index.html"><span style="font-family: "Times New Roman","serif";">http://apama.typepad.com/my_weblog/2011/02/index.html</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn15">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref15" name="_edn15" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xv]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.sec.gov/about/commissioner/aguilar.htm"><span style="font-family: "Times New Roman","serif";">http://www.sec.gov/about/commissioner/aguilar.htm</span></a><span style="font-family: "Times New Roman","serif";">. He was set to retire in June
2015 but he is still serving as commissioner until July 16<sup>th</sup> 2015 as
per the following - </span><a href="http://www.sec.gov/news/statement/benefits-of-shortening-the-securities-settlement-cycle.html"><span style="font-family: "Times New Roman","serif";">http://www.sec.gov/news/statement/benefits-of-shortening-the-securities-settlement-cycle.html</span></a>.
<span style="font-family: "Times New Roman","serif";">He may have retired from this
position by now! </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn16">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref16" name="_edn16" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xvi]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121"><span style="font-family: "Times New Roman","serif";">http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121</span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn17">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref17" name="_edn17" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xvii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><a href="http://www.cci.gov.in/May2011/OrderOfCommission/MCXMainOrder240611.pdf"><span style="font-family: "Times New Roman","serif";">http://www.cci.gov.in/May2011/OrderOfCommission/MCXMainOrder240611.pdf</span></a><span lang="EN-US" style="font-family: "Times New Roman","serif";"></span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn18">
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref18" name="_edn18" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xviii]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";">This is a
view espoused by the Hon Supreme Court as well as many of the Hon High Courts
in India as part of their judgments on stock exchanges and related issues.</span></span></div>
</div>
<span style="font-size: small;">
</span><br />
<div id="edn19" style="mso-element: endnote;">
<span style="font-size: small;">
</span><br />
<div class="MsoEndnoteText">
<span style="font-size: small;"><a href="https://www.blogger.com/blogger.g?blogID=7182576430045656062#_ednref19" name="_edn19" title=""><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif";"><span class="MsoEndnoteReference"><span style="font-family: "Times New Roman","serif"; line-height: 115%;">[xix]</span></span></span></span></a><span style="font-family: "Times New Roman","serif";"> </span><span lang="EN-US" style="font-family: "Times New Roman","serif";"><b>Nothing
in this article may be construed as defamatory because I am merely asking
questions of SEBI (and NSE). </b>I am not making any assertions regarding
the <b>Whistle Blower’s Letter</b> referred
herein, which only a free, fair and independent probe can throw light on. The <b>Whistle Blower’s Letter</b> was first
published by <i>Moneylife</i> and the same
is the part of an ongoing libel case against the defendents (<i>Moneylife, Ms Sucheta Dalal</i> and Mr
Debashish Basu). The same was dismissed at the level of a Hon Single Judge, Hon
Bombay High Court. The same is now said to be in appeal before a Hon division
bench of the Hon Bombay High Court. </span></span></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-39737972799709914912015-06-13T14:25:00.002+05:302015-06-13T14:25:27.864+05:30A Realistic Financial Thriller Loosely Inspired by Real Life in India, June 10, 2015 by D. Donovan<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This review is from: Where Angels
Prey (Paperback)</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> </span></div>
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<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Review Link:</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">
</span><span lang="EN-US"><a href="http://www.amazon.com/gp/customer-reviews/RQTV3DZJEID35/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">http://www.amazon.com/gp/customer-reviews/RQTV3DZJEID35/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371</span></a></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The world is facing one of its
greatest financial crises yet, but only in one country - India - is a boom
happening in an unlikely industry: microfinancing. It's this fact which comes
to the attention of Robert Bradlee, senior correspondent with The New York
Post, who decides to personally investigate these strange facts; only to
discover that what seems like a wonderfully successful altruistic business of
providing financial services for small business in poor or rural communities in
reality hides a deadly truth.<br />
<br />
What Robert discovers isn't financial opportunity or social grace, but a
program that holds devastating implications for India's poor.<br />
<br />
The frightening part of this story doesn't lie in the fact that this novel is a
realistic financial thriller with a global setting so much as that it's loosely
inspired by real life in Andhra Pradesh, India, and holds alarming implications
for business and social causes alike.<br />
<br />
For this reason alone (in addition to the fact that the story is an
edge-of-your-seat compelling read), Where Angels Prey is a recommended pick for
thriller readers looking for something slight different: a realistic saga which
will strike a little too close to home for many cognizant of Wall Street
involvements in the lives of Third World residents.</span></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-41914328402674942752015-06-13T14:24:00.006+05:302015-06-13T14:24:58.048+05:30Compelling. Waiting for a Sequel, June 9, 2015, by Amazon Customer<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Verified Purchase</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> </span></div>
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<b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This review is from: Where Angels
Prey (Paperback)</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> </span></div>
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<span lang="EN-US"><a href="http://www.amazon.com/gp/customer-reviews/R79MM1E1D0PQZ/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371"><i style="mso-bidi-font-style: normal;"><span style="color: windowtext; font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; text-decoration: none; text-underline: none;"><span style="mso-spacerun: yes;"> </span>Review Link:</span></i><span style="color: windowtext; font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; text-decoration: none; text-underline: none;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">http://www.amazon.com/gp/customer-reviews/R79MM1E1D0PQZ/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371</span></a></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> </span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Angels Prey is a compelling story
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The impoverished characters who
exist in a very corrupt area and must pay exorbitant usury to borrow money for
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Wealthy financial institutions sold
a bill of goods in developed nations such as Singapore and the US of micro
financing to impoverished people who would then supposedly own shares in their
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The reporters and district manager
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resulting sanctions and arrests were only partially effective in curbing the
criminal victimization of India's poor as the MFI owners simply reinvented
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<br />
The tale was riveting and well written. I would suggest a glossary of
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I found even the majority of the "evil" characters relatable in their
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<br />
Bravo. Perhaps there will be a sequel with a better outcome for the downtrodden</span></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-81941329523330546562015-06-13T14:24:00.003+05:302015-06-13T14:24:33.471+05:30This is so totally believable!!! by Sue in CT on June 9, 2015<div dir="ltr" style="text-align: left;" trbidi="on">
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Purchase</span></div>
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<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Review Link:</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">
</span><span lang="EN-US"><a href="http://www.amazon.com/gp/customer-reviews/R1KIGUJQ62TRXD/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">http://www.amazon.com/gp/customer-reviews/R1KIGUJQ62TRXD/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371</span></a></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> <span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">'Where Angels Prey' is a fantastic
name for this book by Ramesh S Arunachalam! A lot of books have fitting titles
but I was just struck with awe by how perfect the title (and cover) was for
this book when I realized that what was seen as a blessing, like an angel was
sent from heaven to save the poor in India (and other countries) which turned
out to be predators just looking for their next prey. Although I normally enjoy
action packed, thriller/suspense novels, this book had me captivated from
beginning to end. I also want to be clear about it, the cover has angle wings
on it and uses the word 'angel' in the title but it is not a religious story.
It is a fiction (based on some facts) about a microfinance companies, murder,
suicide, corruption, greed, and Robert (Bob) Bradlee who is the main character
and a senior economics correspondent with The New York Post.<br />
<br />
The author did a wonderful description for the book that you can read yourself
so I won't recap the story but to say there is so much more than even he tells
you. As I read it, I could see where it was going on many occasions but there
are definitely some surprises. For one thing, it is very detailed but not
overpowering where I was lost in all the details. I also loved hearing the
'victims' side in the first person narration which really pulled at my
heartstrings so much more than just knowing that their were many victims and
what happened to them. What was most surprising is how hard it was to remember
it is fiction and how it emotionally involved me by my feeling everything from
pure sadness to being angry at how unfair it was and no one was (or should be)
above the law no matter how rich or how much money they contributed.<br />
<br />
There are many characters in the story as it involves companies and people from
around the globe but all their information is told very clearly in the story of
who they are and how they fit in. Many times, that is all that is told so their
is no connection with them however the main and secondary characters are more
developed. I liked the main character, Bob and was rooting for him but I was
surprised I emotionally connected to the victims.<br />
<br />
I thought the book was totally believable and so were the characters. I did
notice a couple of errors in spacing between words which really didn't take
away from the story. There was no explicit sex, deaths, or foul language. I
thought it was an excellent book and recommend it to anyone who enjoys
corruption/crime stories.</span></div>
</div>
Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-67989898483277263732015-06-13T14:24:00.001+05:302015-06-13T14:24:10.080+05:30Good read, June 7, 2015, by Deborah B.<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This review is from: Where Angels
Prey (Kindle Edition)</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">
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<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Review Link:</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">
</span><span lang="EN-US"><a href="http://www.amazon.com/gp/customer-reviews/R3FBWBXQH5H1YE/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">http://www.amazon.com/gp/customer-reviews/R3FBWBXQH5H1YE/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371</span></a></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> </span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Where Angel’s Prey was a look into
how a program started out for the good can turn so horribly wrong. To try and
save the poor from loan sharks, a program is started to help them meet their
needs with “better” loans. Sounds like a good plan, right? Greed can make the
best of intentions turn sour. The new loan companies actually seem worse than
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Two journalists will work hard to
get to the bottom of the corruption and expose those at the top. It is a
conspiracy that crosses national lines and will keep the reader enthralled to
the end. There were a lot of characters that were introduced in this book;
however, it is the journalists that stand out. I loved how they were not
willing to stop until the truth came out. You could just feel their
determination to get the job done so that justice could be served.</span></div>
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I give this book 4 ****. The author wove the plot in a way that the reader was
made to feel like they were right there while it was happening. Ramesh
Arunachalam has the ability to hold your interest with the way the story flows.
The writing technique feels like you are being entertained and taught at the
same time, and I always love to learn something new. While the story is
fiction, something similar has happened in the past.</span></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0tag:blogger.com,1999:blog-7182576430045656062.post-21211673198492957462015-06-13T14:23:00.005+05:302015-06-13T14:23:43.405+05:30Not Your Typical Business Conspiracy Book!, June 7, 2015, by Charity Rowell<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Verified Purchase</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> </span></div>
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<b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This review is from: Where Angels
Prey (Kindle Edition)</span></b><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">
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<i style="mso-bidi-font-style: normal;"><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Review Link:</span></i><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">
</span><span lang="EN-US"><a href="http://www.amazon.com/gp/customer-reviews/R9KS1Z72JO3N7/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">http://www.amazon.com/gp/customer-reviews/R9KS1Z72JO3N7/ref=cm_cr_pr_rvw_ttl?ie=UTF8&ASIN=9384439371</span></a></span><span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-US" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The micro-finance industry was
intended to help poor people in poverty stricken countries get the funds that
they needed to build businesses and careers; however, two reporters discover
that micro-lenders are exploiting the people that they are supposed to be
helping.<br />
<br />
Inspired by events during the micro-finance craze in 2010, Arunachalam takes
his readers on a journey that spans the globe. Readers get a glimpse into the
lives of some of the borrowers as they struggle to make ends meet while paying
off their debts; the government officials that are fighting to put an end to
the micro-lenders' seedy practices; the people that are employed by these
micro-lenders; and the two reporters, one from the U.S. and one from India,
that are searching for evidence to bring down the micro-lending empire that has
achieved its success on the backs of the people it is supposed to be helping.<br />
<br />
Where Angels Prey by Ramesh S. Arunachalam is well-written, compelling, and
horrifying. Readers will find themselves touched by the borrowers' plights,
feel anger towards the greed exhibited by the micro-lenders in the book, and
see a ray of hope as the journalistic duo discovers more about the
micro-finance empire.<br />
<br />
Where Angels Prey is a short-read, and is difficult to put down once you get
started. It is easy to get drawn into the story and feel for the borrowers as
Arunachalam's passion for the subject is apparent and contagious. I am not
usually a fan of "business/political conspiracy" books; however, this
book is anything but your typical business conspiracy book. Where Angels Prey
focuses more on the stories of the people and communities touched by the
micro-lenders' actions and the socioeconomic consequences of corrupt
micro-lenders, rather than the micro-lenders' sketchy accounting practices; I
was surprised and pleased by this, and I am happy to make this book a permanent
fixture in my expanding ebook library.</span></div>
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Ramesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.com0