The Faulty Lines of credit creating cracks on eggshell

One obvious flaw with the system is that no one has incentive to strictly check the credit worthiness of a borrower. You will be given fee to bring a customer and not to reject one. Right from the broker who brings the customer to the loan approval body, the cracks start. This percolates to the bottom of securitization process and to the rating agencies. Ultimately the risk that is transferred to buyer of the security is offset by one more abetting product Collateral Debt Obligation (Insurance for security).

Understanding the dire importance and different operational motive of rating agencies, it is suggested that the government should regulate them differently. Current norms say that a loan above 5Cr needs a credit rating from a authorized agency. The figure 5 crs might have arrived after many long brain storming sessions, but one reason for such a figure might be the sky rocketing fee charged by rating agencies.

To my little understanding, a rating agency, if gives bad rating to more and more customers, lose them in a long run though they might get an edge on the credibility side. They try to strike a balance between the both. For the same reason, there should not be any competition among rating agencies. In fact they should not be a profit making bodies.

Some regulatory body like RBI, SEBI or IRDA should come up to erase the faulty lines developed by the principal agency problem between the systems.

New Lessons in the Old bottle of Economics

With the surge in inflow of funds, Regulatory authorities have become wary. Ask a question to any optimist, all he needs is

1) Free capital movement in the economy which encourages growth

2) Stable exchange prices, which backs stability

3) An independent monetary policy to control inflation to comfortable levels

Hitting us back to “Impossible Trinity”, only two of the three of the above needs are possible at any point of time. The futile experiments of authorities that are rubbing the corners of the triangle are still going on.

Financial inclusion can be a solution for many problems in ideal conditions. If you give me 1000rs it increases my spending power. If you give 1000rs to 1000 people, the spending power hardly gets affected. So I can fix the variable 3. Now I can possibly control 1 & 2.

On practical grounds, as C.B.Bhave said “India is not ready for financial inclusion in equities market.” It’s a noble goal and a Holy Grail. A poor man’s life time saving of 50000 can’t make him afford to invest in a MF market and sustain the volatility. I agree that, when there is more inclusion in markets, volatility decreases. But things do not happen like rubbing aladin’s lamp and there can be many sufferers in course of journey. Again a “New lesson in the Old bottle of Economics”.

The Hot Money!! Is something smelling fishy?

$600 million pumped into the US economy to improve the liquidity position. I seriously doubt how far this push would increase the employment in the US economy. The money that Fed pumps with open market operations goes into the pockets of the elite group who has excellent market information to catch arbitrage opportunities.

With raising interest rates in India and keeping in mind the recent RBI reactions in liquidity control to tame inflation, if I am the investor, India would be my choice. The reasons being

1) Fast Growing economy and the market

2) Abundance of the dollar might decrease its value

3) The gut feeling and the sentiment on the stable policies (??!! There should be some reason for this)

I have become a big fan of Dr.Subbarao for taking such a proactive measure (There might be many reasons for this) and I hope they should be able to achieve inflation targets on demand side. Supply side is left to the monsoon which is positive, and to the government spending which is again encouraging. The financial end is so far so good. My friend expects the index to cross its all time high. I expect things accelerate without any bubbles.

Oh! Not again an injection with air bubbles! Do we need a regulation on hot money or does this sentiment lasts long?? Lets wait and watch….