The Lady who changed many lives:
Ms Shashi Rajagopalan left a void behind her on the fateful day of the 5th August 2011. When I first met her almost thirty years back, when the Cooperative Development Foundation - the SAMAKHYA as was known, she was helping late Mr. E.V.Ramreddy, and Mr M. Rama Reddy, present President in putting forth funding proposals, advocacy materials on cooperatives of the then new genre - the true cooperatives. She strived hard to influence all the people she worked with to a discipline in thinking and approach. Accountability and transparency, true to their words, were her imprint. Extension work in cooperatives and cooperative advocacy - she took to a logical conclusion by making nine States formulate a new legislation on cooperatives which is now familiarly known as Mutually Aided Cooperative Societies Act (MACS Act). She never hesitated calling a spade a spade. She is a forceful speaker on MACS. I had an interesting experience. She requested me to accompany to Lucknow to address a crowd of women interested in forming SHGs. Both of us were not very familiar with Hindi lingual. We had to speak in Hindi only if we were to carry our message. We mixed Hindi with English and in the end we noticed that we were understood! She has indomitable courage at facing issues. She never compromised small details. I had the unique experience of working with her on the CDF Board for a decade and the papers for the Board Meetings had her thorough scrutiny. Any mistake she never hesitated owning up. Very few can match her as a tall leader in cooperative movement in our country.
Tuesday, September 6, 2011
Tuesday, August 23, 2011
What is BlogThis! ? - Blogger Help
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Wednesday, July 6, 2011
Does capital cap it all?
Does Capital, cap it all?
Basel II new Operational Risk Guidelines a threat or opportunity?
Yerram Raju and Rao N. Venuturupalle*
‘Wholesale banking in India is set for a period of sharp growth. Revenues from wholesale banking activities are likely to more than double over the next five years as infrastructure investment, expansion by Indian companies overseas, and further “Indianization” of multinational businesses, among other trends, drive new business. Foreign players and the country’s domestic banks, however, will find themselves in a tough com¬mercial environment and must overcome a range of challenges if they are to maintain, or assume, a leading position in the market. (Akash Lal and Naveen Tahilyani, McKinseys 2011) In the context of globalization and shadow banking, there is a genuine concern on the part of regulators that the operational risks would be on the rise and that they need to be provided for in the banks’ balance sheets adequately. It is this ‘adequacy’ that is likely to upset the applecart of commercial banks’ expectations, more so, when multiple channels and universal banking are embraced. The global risk scenario remains icing on the cake although between 2008 and 2011, there is considerable improvement. This article would like to deal with the emerging financial system in India in the first part and the concerns arising out of the recently put out Basel document on the Management and Supervision of Operational Risk: governance, risk management environment and the role of disclosure. Part II examines the principles and various aspects of OR management vis-à-vis the prevailing operational processes and practices in some of the major Indian banks. The paper also presents the challenges, potential costs and benefits in implementing the proposed best practices.
Part I
Indian Financial System (IFS) has its generic novelties and complexities. It embraces cooperative banks under two streams – urban and rural with a three-tier structure; commercial banks comprising of public sector banks; private sector banks (old and new generation); regional rural banks including local area banks; and foreign banks. It proved resilient under the recent global recession era thanks to the robust regulatory system that took care of capital adequacy concerns with the twin instrumentality of Statutory Liquidity Ratio and Cash Reserve Ratio among others and a low leveraging. These five streams of banking in India have wide-ranging variances in adoption of technologies – primitive in the cooperatives to the most advanced in globally placed banks like the State Bank of India, ICICI Bank and foreign banks. The most virtuous aspect of regulation has been the compliance discipline of these institutions. In line with the ongoing supervisory and multiple regulator concerns, a Financial Super Regulatory Board had been set up and the central bank was entrusted with the coordination role. The central bank started releasing the financial stability reports (FSR) at frequent intervals commencing from March 2010 to reflect the health of the Indian Financial System. The latest FSR states that the ‘Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment. Growth is slackening in most parts of the world, even as the risks from global imbalances and sovereign debt crises in Europe continue to hover. The uncertainties in global environment with persistently high energy and commodity prices have contributed to a slight moderation in India’s growth momentum as well. The macroeconomic fundamentals for India, however, continue to stay strong, notwithstanding the prevailing inflationary pressures and concerns on fiscal fronts.’ India is among the sizzling top seven emerging market overheating index of the Economist (London – June 2011), measured in terms of six indicators - inflation, spare capacity, labour markets, excessive credit expansion, real rate of interest, and widening current account deficit. In the short-term, Fitch has lowered the growth rate at 7.7 percent (June 2011) in this background whereas Standard & Poor predicted a robust inflow of FII and FDI resources into the economy. The growth projections of Indian Banking even in the wake of overall uncertain economic growth, is intriguing.
Last two years witnessed an increasing trend of frauds, misappropriations, embezzlements, ATM robberies, technology security failures in quite a few centres in the entire banking spectrum and all of them fall under the band of Operational Risk. RBI directs Banks to report every fraud above Rs.1lakh to their Boards promptly; frauds by employees for amounts exceeding Rs.10000 to the local police; cases involving more than Rs.7.5cr to the Banking Security and Fraud Cell of the Economic Offences wing of the CBI; and cases of cheating involving Rs.1crore and above to the CBI. Latest RBI guidelines (April 29, 2011) on banks’ technology governance, information security, audit, outsourcing and cyber fraud as a possible reaction to the surfacing of operational risks in increasing measure lately, are a pointer to further investments in those areas to mitigate Operational Risk.
Even in the backdrop of rising systemic risks in the banking ecosystem in Euromarkets leaving little hope, the RBI Governor succinctly summarized the concerns of Basel III and exuded confidence that the Indian banks would be able to meet up with the capital expectations. But does capital cap it all? - Is the question.
Part II
The earliest Basel Committee publication on Operational risk was a compilation of information on management of operational risk at thirty major banks from different member-countries. We are of the opinion that awareness of operational risk as a separate risk category and processes for measurement of the same was then at a nascent stage. However, a series of high profile incidents at Barings Bank, Daiwa Bank and Allied Irish Bank (to name a few) in the late 1990s heightened the need for regulation of operational risk. In India, the State Bank of India and Punjab National Bank – both in the public sector, take such credit in the second half of the first decade of the current millennium.
Operational risk was first recognized as sensitive to capital adequacy and given explicit treatment under Basel II Accord. Together with The Sound Practices for the Management and Supervision of Operational Risk(2003), the Accord laid down principles for effective management of operational risk, best practices for governance, identification and assessment, monitoring and reporting, control & mitigation etc. Besides these, the Accord also covered approaches for calculation of regulatory capital for operational risk. In response to these regulatory developments and prevention of operational failures, banks and supervisors have expanded their knowledge and experience in implementing ORM framework – loss data collection, modeling capital requirements, implementation of governance structure and other steps. For instance, formation of ORX (Operational Risk data eXchange), a repository of external operational risk loss events, is an initiative that would aid in exploring adequacy or weaknesses of internal controls, operational risk modeling and capital calculations etc.
Despite these developments, the fundamental reason for recent credit crisis was operational inefficiencies – lax underwriting standards, unbridled risk taking etc. – that eventually brought the interconnected world economy into a recession the likes of which was last seen only during the Great Depression.
Closer home, the systemic impact of credit crisis was much less because of timely interventions by the central bank, the RBI, by way of reining-in the economy using macro-economic variables CRR and SLR. However, this does not mean there are no operational inefficiencies in the Indian banking system. Most banks’ approach has primarily been compliance to regulation with minimal or no importance to imbibing a risk culture seeping through the entire organization. Risk evaluation is integral to everything that individuals do. Yet organizations often treat risk as an adjunct added on at the end of the process – ‘Let us do a risk assessment and see where we are.’ Such an approach is wholesomely inadequate. Instead, risk must be factored in at the beginning of an initiative and should remain a focus throughout the entire process. Given the expected growth in the Indian economy during the Twelfth Plan at an average of ten percent, and the concomitant growth in the banking industry, cultivating risk culture becomes imperative for the industry.
Based on the developments with respect to regulation and upheavals in the banking industry the world over in little over a decade, it can be concluded that the operational risk discipline is still evolving.
Collection of loss incidents data
Loss data collection (either internal or external) provides meaningful insight into effectiveness of internal controls, modeling of operational risk and capital calculations, and could provide information about previously unidentified risk exposures. For this to be effective, banks must have comprehensive documented procedures for capturing loss incidents data –
i) mapping of activities along various business lines
ii) define loss thresholds for each business line for the purpose of identifying those events that could have material impact on the bank’s balance sheet
iii) mapping loss data to appropriate business line (and sub-categories) and event types
iv) tracking of Internal loss data collection
It is generally observed that majority of the public sector banks in India have material business in around five of the eight business lines recognized by BCBS. Availability and reliability of loss event data in these business lines deserves lot of attention and much needed action, for, a branch that has not reported any loss data cannot be construed as functioning excellently. In order to improve internal data collection, clarity on collection of loss events data and their assignment to appropriate business lines is essential. Additionally, clarity on potential losses, near misses, attempted frauds, etc. where no loss has actually been incurred by the bank will go a long way in strengthening internal systems and controls. Active involvement of the Risk Management Committee of the bank could very well help in providing direction to this very important aspect of operational risk management.
OR governance and risk management function
Sound internal governance is fundamental to effective operational risk management framework that is fully integrated into the bank’s overall governance structure in risk management. The board of directors together with the senior management should lead the Governance processes to establish a strong risk culture. An industry best practice for internal governance is to have in place a 3-tiered structure:
i) business line management – responsibility of identification and management of risks inherent in a bank’s products, services and activities rests with the business units
ii) a functionally independent corporate operational risk function complementing the business line’s operational risk management activities and responsible for the design, maintenance and ongoing development of operational risk management framework within the bank.
iii) an independent unit performing review and challenging the bank’s operational risk management controls, processes and systems, typically, an audit function
A general observation in the Indian Banking industry is that the business lines and risk management departments are compartmentalized with no clear objective and direction from the senior leadership to bring these to work supportively towards a common objective of improving operational processes and shareholder value. The Risk Management department should be directly reporting to the Risk Management Committee of the Board instead of reporting to the CEO so as to ensure that revenue targets are pursued within the boundary of risk processes controls.
The role of the Board of Directors as mentioned under Principle (3) seems to be far-fetched and impractical especially in Indian Public Sector Banks. It is not possible for the non-executive directors to go into the detail required to ensure the firm is managing “operational risks associated with new strategies, products, activities, or systems, including changes in risk profiles and priorities”. This responsibility is more appropriate to senior management of the bank with the Board as an overseer.
Reporting and monitoring of operational loss data
Operational data – both qualitative and quantitative – could provide valuable insights into effectiveness of ORM framework, weaknesses in policies and procedures and measures needed to plug these, risk profiles, deviations from risk appetite, capital requirements and lot other information. Given the breadth and complexity of data, business intelligence tools can be used to present this data in the form of reports and pictorial dashboards to provide meaningful information to senior management and board.
For the Indian banks, there are a number of reasons that clearly justify the need to adopt business intelligence and data analytics tools:-
a) The 8.0% plus economic growth observed in the past decade and projected in the future
b) The recent economic crisis has shown that markets the world over are interconnected.
c) RBI’s mandate for an inclusive growth
d) Huge customer base in India
These tools will certainly help in proactive risk management and timely availability of reports to the senior management and the board.
Importance of audits
One of the sound industry practices for operational risk governance is setup of an independent audit unit that reviews and challenges the bank’s controls, processes and systems. The internal audit should not only be testing compliance to approved policies and procedures but should also be evaluating whether the ORM Framework meets organizational needs and supervisory expectations.
In general, the Indian banks have an audit department but lack importance and management oversight. These departments mostly perform transactional audits but gaps in underlying processes are never identified. Moreover, closure of audit findings continues to happen mechanically and there is no trail of audit compliance. Consequently, such a practice exposes the bank to loss of revenue, customer confidence and reputation.
Risk education, training and staff with required skills
An ORM framework is effective only when all departments implementing and evaluating the framework are staffed with required training and skills along with a continuous focus on education in risk. To this end, the board of directors and senior management must provide the required support and oversight.
There is a general feeling both among the regulators and the individual banks that the professional directors like the Chartered Accountants would take care of the risk management oversight better than the rest. Yes; only to a degree. Several Chartered Accountants also require intense knowledge and skills in the discipline of risk management. The ICAI has to put in place such arrangement, if necessary, by coordinating with knowledge providers of global repute like the Professional Risk Managers’ International Association (PRMIA) or GARP. When APRM, PRM, and FRM get premium attention in the placements and promotions to staff to handle the risk management function, there would be scope for professional directors to perform the risk management function more skillfully.
The budgets for risk training and education were inadequate. All employees in general and audit department, in particular, must be appropriately staffed with required training and skills along with a continuous focus on education in risk. To this end, the board of directors and senior management must provide the required support and oversight.
Implementation of proposed framework – costs and capital considerations
i) Operational risk cannot be treated as residual risk after accounting for credit and market risk. A leading public sector bank, capital at a maximum of 5 percent of the total risk weight assets is set aside for operational risk. This is certainly short of required adequacy for a bank of its size. Appropriate OR processes must be in place to enable calculation of required OR capital.
ii) The cost of implementation of the OR framework – particularly in regard to data collection and data analytics – is considered onerous and such costs cannot be passed on to the customers as is done in the areas of credit risk and market risk. The Central Bank could consider treating such costs differently and provide enough cushions for competitiveness. The Central Banks should incentivize banks which adopt data collection and data analytics tools for mitigating operational risks or capturing near misses by way of tax benefits or other subventions.
Timelines for implementation of AMA approach
Banks in India would be requiring time until 31st March 2014 to be in preparedness for adopting the AMA when alone it would be possible to secure high integrity data for the past 20 quarters under all data requirements. A step in the right direction is the formation of CORDEX (Compilation of Operational Risk Loss Data Exchange) initiated by Indian Banks’ Association. Such industry level data could very well be used for scenario and stress testing. However, this is in its formative stages and the Central Bank may itself take two years to validate the system.
Conclusion
Operational risk management is receiving immense importance and focus from all stakeholders – regulators, senior management & board and investors. Whereas credit and market risk management have matured considerably in the last couple of decades, operational risk management is still an evolving discipline.
Many banks world over have made considerable progress with respect to implementing an ORM Framework. Indian banks, however, have made some progress but this has been seen more as mandate for compliance than as a need for driving a risk management culture throughout the organization that will eventually reduce operational losses and improve shareholder value. In this respect, board and senior management oversight is the need of the hour.
Also, the ORM Framework must be periodically reviewed to ensure controls in response to material & non-material losses are implemented. Investments have to be made in training and education, and data analytics and business intelligence solutions as these will help in spreading a risk culture of highest quality throughout the bank and enable proactive risk management. Banks also have to make considerable investments for collection of loss data and for putting in place policies, procedures and controls before they can adopt AMA approach for calculation of operational risk capital.
The foregoing analysis clearly reveals that mere provisioning of capital of a high order does not insulate the banks from all the risks and the 2007 recession has proved beyond doubt that neither the size of the bank nor the size of the provisioning has insulated the bank from the catastrophic downfall. Robust processes are more important than mere provisioning of capital to take care of the commonly arising risks. These apart, the ORM is yet to capture the reputation risk as its measurability has some issues to debate. In essence, all the eleven principles highlighted in the Basel II document of December 2010 provide an opportunity to sprucing up the banks’ risk management platforms marginalizing the threat to adequacies of capital provisioning.
References
1. ‘Sound Practices for the Management and Supervision of Operational Risk’, Basel Committee on Banking Supervision, December 2010.
2. ‘Round Table on Sound Practices for Management and Supervision of Operational Risk’, PRMIA Hyderabad Chapter, January, 2011.
* Dr B. Yerram Raju is an economist and Regional Director, PRMIA, Hyderabad Chapter and Mr Rao N. Venuturupalle is Dy. Regional Director, PRMIA, Hyderabad Chapter and Lead Consultant, HSBC, Hyderabad. The views expressed are personal.
Basel II new Operational Risk Guidelines a threat or opportunity?
Yerram Raju and Rao N. Venuturupalle*
‘Wholesale banking in India is set for a period of sharp growth. Revenues from wholesale banking activities are likely to more than double over the next five years as infrastructure investment, expansion by Indian companies overseas, and further “Indianization” of multinational businesses, among other trends, drive new business. Foreign players and the country’s domestic banks, however, will find themselves in a tough com¬mercial environment and must overcome a range of challenges if they are to maintain, or assume, a leading position in the market. (Akash Lal and Naveen Tahilyani, McKinseys 2011) In the context of globalization and shadow banking, there is a genuine concern on the part of regulators that the operational risks would be on the rise and that they need to be provided for in the banks’ balance sheets adequately. It is this ‘adequacy’ that is likely to upset the applecart of commercial banks’ expectations, more so, when multiple channels and universal banking are embraced. The global risk scenario remains icing on the cake although between 2008 and 2011, there is considerable improvement. This article would like to deal with the emerging financial system in India in the first part and the concerns arising out of the recently put out Basel document on the Management and Supervision of Operational Risk: governance, risk management environment and the role of disclosure. Part II examines the principles and various aspects of OR management vis-à-vis the prevailing operational processes and practices in some of the major Indian banks. The paper also presents the challenges, potential costs and benefits in implementing the proposed best practices.
Part I
Indian Financial System (IFS) has its generic novelties and complexities. It embraces cooperative banks under two streams – urban and rural with a three-tier structure; commercial banks comprising of public sector banks; private sector banks (old and new generation); regional rural banks including local area banks; and foreign banks. It proved resilient under the recent global recession era thanks to the robust regulatory system that took care of capital adequacy concerns with the twin instrumentality of Statutory Liquidity Ratio and Cash Reserve Ratio among others and a low leveraging. These five streams of banking in India have wide-ranging variances in adoption of technologies – primitive in the cooperatives to the most advanced in globally placed banks like the State Bank of India, ICICI Bank and foreign banks. The most virtuous aspect of regulation has been the compliance discipline of these institutions. In line with the ongoing supervisory and multiple regulator concerns, a Financial Super Regulatory Board had been set up and the central bank was entrusted with the coordination role. The central bank started releasing the financial stability reports (FSR) at frequent intervals commencing from March 2010 to reflect the health of the Indian Financial System. The latest FSR states that the ‘Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment. Growth is slackening in most parts of the world, even as the risks from global imbalances and sovereign debt crises in Europe continue to hover. The uncertainties in global environment with persistently high energy and commodity prices have contributed to a slight moderation in India’s growth momentum as well. The macroeconomic fundamentals for India, however, continue to stay strong, notwithstanding the prevailing inflationary pressures and concerns on fiscal fronts.’ India is among the sizzling top seven emerging market overheating index of the Economist (London – June 2011), measured in terms of six indicators - inflation, spare capacity, labour markets, excessive credit expansion, real rate of interest, and widening current account deficit. In the short-term, Fitch has lowered the growth rate at 7.7 percent (June 2011) in this background whereas Standard & Poor predicted a robust inflow of FII and FDI resources into the economy. The growth projections of Indian Banking even in the wake of overall uncertain economic growth, is intriguing.
Last two years witnessed an increasing trend of frauds, misappropriations, embezzlements, ATM robberies, technology security failures in quite a few centres in the entire banking spectrum and all of them fall under the band of Operational Risk. RBI directs Banks to report every fraud above Rs.1lakh to their Boards promptly; frauds by employees for amounts exceeding Rs.10000 to the local police; cases involving more than Rs.7.5cr to the Banking Security and Fraud Cell of the Economic Offences wing of the CBI; and cases of cheating involving Rs.1crore and above to the CBI. Latest RBI guidelines (April 29, 2011) on banks’ technology governance, information security, audit, outsourcing and cyber fraud as a possible reaction to the surfacing of operational risks in increasing measure lately, are a pointer to further investments in those areas to mitigate Operational Risk.
Even in the backdrop of rising systemic risks in the banking ecosystem in Euromarkets leaving little hope, the RBI Governor succinctly summarized the concerns of Basel III and exuded confidence that the Indian banks would be able to meet up with the capital expectations. But does capital cap it all? - Is the question.
Part II
The earliest Basel Committee publication on Operational risk was a compilation of information on management of operational risk at thirty major banks from different member-countries. We are of the opinion that awareness of operational risk as a separate risk category and processes for measurement of the same was then at a nascent stage. However, a series of high profile incidents at Barings Bank, Daiwa Bank and Allied Irish Bank (to name a few) in the late 1990s heightened the need for regulation of operational risk. In India, the State Bank of India and Punjab National Bank – both in the public sector, take such credit in the second half of the first decade of the current millennium.
Operational risk was first recognized as sensitive to capital adequacy and given explicit treatment under Basel II Accord. Together with The Sound Practices for the Management and Supervision of Operational Risk(2003), the Accord laid down principles for effective management of operational risk, best practices for governance, identification and assessment, monitoring and reporting, control & mitigation etc. Besides these, the Accord also covered approaches for calculation of regulatory capital for operational risk. In response to these regulatory developments and prevention of operational failures, banks and supervisors have expanded their knowledge and experience in implementing ORM framework – loss data collection, modeling capital requirements, implementation of governance structure and other steps. For instance, formation of ORX (Operational Risk data eXchange), a repository of external operational risk loss events, is an initiative that would aid in exploring adequacy or weaknesses of internal controls, operational risk modeling and capital calculations etc.
Despite these developments, the fundamental reason for recent credit crisis was operational inefficiencies – lax underwriting standards, unbridled risk taking etc. – that eventually brought the interconnected world economy into a recession the likes of which was last seen only during the Great Depression.
Closer home, the systemic impact of credit crisis was much less because of timely interventions by the central bank, the RBI, by way of reining-in the economy using macro-economic variables CRR and SLR. However, this does not mean there are no operational inefficiencies in the Indian banking system. Most banks’ approach has primarily been compliance to regulation with minimal or no importance to imbibing a risk culture seeping through the entire organization. Risk evaluation is integral to everything that individuals do. Yet organizations often treat risk as an adjunct added on at the end of the process – ‘Let us do a risk assessment and see where we are.’ Such an approach is wholesomely inadequate. Instead, risk must be factored in at the beginning of an initiative and should remain a focus throughout the entire process. Given the expected growth in the Indian economy during the Twelfth Plan at an average of ten percent, and the concomitant growth in the banking industry, cultivating risk culture becomes imperative for the industry.
Based on the developments with respect to regulation and upheavals in the banking industry the world over in little over a decade, it can be concluded that the operational risk discipline is still evolving.
Collection of loss incidents data
Loss data collection (either internal or external) provides meaningful insight into effectiveness of internal controls, modeling of operational risk and capital calculations, and could provide information about previously unidentified risk exposures. For this to be effective, banks must have comprehensive documented procedures for capturing loss incidents data –
i) mapping of activities along various business lines
ii) define loss thresholds for each business line for the purpose of identifying those events that could have material impact on the bank’s balance sheet
iii) mapping loss data to appropriate business line (and sub-categories) and event types
iv) tracking of Internal loss data collection
It is generally observed that majority of the public sector banks in India have material business in around five of the eight business lines recognized by BCBS. Availability and reliability of loss event data in these business lines deserves lot of attention and much needed action, for, a branch that has not reported any loss data cannot be construed as functioning excellently. In order to improve internal data collection, clarity on collection of loss events data and their assignment to appropriate business lines is essential. Additionally, clarity on potential losses, near misses, attempted frauds, etc. where no loss has actually been incurred by the bank will go a long way in strengthening internal systems and controls. Active involvement of the Risk Management Committee of the bank could very well help in providing direction to this very important aspect of operational risk management.
OR governance and risk management function
Sound internal governance is fundamental to effective operational risk management framework that is fully integrated into the bank’s overall governance structure in risk management. The board of directors together with the senior management should lead the Governance processes to establish a strong risk culture. An industry best practice for internal governance is to have in place a 3-tiered structure:
i) business line management – responsibility of identification and management of risks inherent in a bank’s products, services and activities rests with the business units
ii) a functionally independent corporate operational risk function complementing the business line’s operational risk management activities and responsible for the design, maintenance and ongoing development of operational risk management framework within the bank.
iii) an independent unit performing review and challenging the bank’s operational risk management controls, processes and systems, typically, an audit function
A general observation in the Indian Banking industry is that the business lines and risk management departments are compartmentalized with no clear objective and direction from the senior leadership to bring these to work supportively towards a common objective of improving operational processes and shareholder value. The Risk Management department should be directly reporting to the Risk Management Committee of the Board instead of reporting to the CEO so as to ensure that revenue targets are pursued within the boundary of risk processes controls.
The role of the Board of Directors as mentioned under Principle (3) seems to be far-fetched and impractical especially in Indian Public Sector Banks. It is not possible for the non-executive directors to go into the detail required to ensure the firm is managing “operational risks associated with new strategies, products, activities, or systems, including changes in risk profiles and priorities”. This responsibility is more appropriate to senior management of the bank with the Board as an overseer.
Reporting and monitoring of operational loss data
Operational data – both qualitative and quantitative – could provide valuable insights into effectiveness of ORM framework, weaknesses in policies and procedures and measures needed to plug these, risk profiles, deviations from risk appetite, capital requirements and lot other information. Given the breadth and complexity of data, business intelligence tools can be used to present this data in the form of reports and pictorial dashboards to provide meaningful information to senior management and board.
For the Indian banks, there are a number of reasons that clearly justify the need to adopt business intelligence and data analytics tools:-
a) The 8.0% plus economic growth observed in the past decade and projected in the future
b) The recent economic crisis has shown that markets the world over are interconnected.
c) RBI’s mandate for an inclusive growth
d) Huge customer base in India
These tools will certainly help in proactive risk management and timely availability of reports to the senior management and the board.
Importance of audits
One of the sound industry practices for operational risk governance is setup of an independent audit unit that reviews and challenges the bank’s controls, processes and systems. The internal audit should not only be testing compliance to approved policies and procedures but should also be evaluating whether the ORM Framework meets organizational needs and supervisory expectations.
In general, the Indian banks have an audit department but lack importance and management oversight. These departments mostly perform transactional audits but gaps in underlying processes are never identified. Moreover, closure of audit findings continues to happen mechanically and there is no trail of audit compliance. Consequently, such a practice exposes the bank to loss of revenue, customer confidence and reputation.
Risk education, training and staff with required skills
An ORM framework is effective only when all departments implementing and evaluating the framework are staffed with required training and skills along with a continuous focus on education in risk. To this end, the board of directors and senior management must provide the required support and oversight.
There is a general feeling both among the regulators and the individual banks that the professional directors like the Chartered Accountants would take care of the risk management oversight better than the rest. Yes; only to a degree. Several Chartered Accountants also require intense knowledge and skills in the discipline of risk management. The ICAI has to put in place such arrangement, if necessary, by coordinating with knowledge providers of global repute like the Professional Risk Managers’ International Association (PRMIA) or GARP. When APRM, PRM, and FRM get premium attention in the placements and promotions to staff to handle the risk management function, there would be scope for professional directors to perform the risk management function more skillfully.
The budgets for risk training and education were inadequate. All employees in general and audit department, in particular, must be appropriately staffed with required training and skills along with a continuous focus on education in risk. To this end, the board of directors and senior management must provide the required support and oversight.
Implementation of proposed framework – costs and capital considerations
i) Operational risk cannot be treated as residual risk after accounting for credit and market risk. A leading public sector bank, capital at a maximum of 5 percent of the total risk weight assets is set aside for operational risk. This is certainly short of required adequacy for a bank of its size. Appropriate OR processes must be in place to enable calculation of required OR capital.
ii) The cost of implementation of the OR framework – particularly in regard to data collection and data analytics – is considered onerous and such costs cannot be passed on to the customers as is done in the areas of credit risk and market risk. The Central Bank could consider treating such costs differently and provide enough cushions for competitiveness. The Central Banks should incentivize banks which adopt data collection and data analytics tools for mitigating operational risks or capturing near misses by way of tax benefits or other subventions.
Timelines for implementation of AMA approach
Banks in India would be requiring time until 31st March 2014 to be in preparedness for adopting the AMA when alone it would be possible to secure high integrity data for the past 20 quarters under all data requirements. A step in the right direction is the formation of CORDEX (Compilation of Operational Risk Loss Data Exchange) initiated by Indian Banks’ Association. Such industry level data could very well be used for scenario and stress testing. However, this is in its formative stages and the Central Bank may itself take two years to validate the system.
Conclusion
Operational risk management is receiving immense importance and focus from all stakeholders – regulators, senior management & board and investors. Whereas credit and market risk management have matured considerably in the last couple of decades, operational risk management is still an evolving discipline.
Many banks world over have made considerable progress with respect to implementing an ORM Framework. Indian banks, however, have made some progress but this has been seen more as mandate for compliance than as a need for driving a risk management culture throughout the organization that will eventually reduce operational losses and improve shareholder value. In this respect, board and senior management oversight is the need of the hour.
Also, the ORM Framework must be periodically reviewed to ensure controls in response to material & non-material losses are implemented. Investments have to be made in training and education, and data analytics and business intelligence solutions as these will help in spreading a risk culture of highest quality throughout the bank and enable proactive risk management. Banks also have to make considerable investments for collection of loss data and for putting in place policies, procedures and controls before they can adopt AMA approach for calculation of operational risk capital.
The foregoing analysis clearly reveals that mere provisioning of capital of a high order does not insulate the banks from all the risks and the 2007 recession has proved beyond doubt that neither the size of the bank nor the size of the provisioning has insulated the bank from the catastrophic downfall. Robust processes are more important than mere provisioning of capital to take care of the commonly arising risks. These apart, the ORM is yet to capture the reputation risk as its measurability has some issues to debate. In essence, all the eleven principles highlighted in the Basel II document of December 2010 provide an opportunity to sprucing up the banks’ risk management platforms marginalizing the threat to adequacies of capital provisioning.
References
1. ‘Sound Practices for the Management and Supervision of Operational Risk’, Basel Committee on Banking Supervision, December 2010.
2. ‘Round Table on Sound Practices for Management and Supervision of Operational Risk’, PRMIA Hyderabad Chapter, January, 2011.
* Dr B. Yerram Raju is an economist and Regional Director, PRMIA, Hyderabad Chapter and Mr Rao N. Venuturupalle is Dy. Regional Director, PRMIA, Hyderabad Chapter and Lead Consultant, HSBC, Hyderabad. The views expressed are personal.
Saturday, June 11, 2011
Credit Rating Agencies and SME sector in India
CREDIT RATING AGENCIES AND SME SECTOR IN INDIA
B. Yerram Raju*
Credit rating agencies (CRA) are organizations that rate the creditworthiness of a company or a financial product, such as a debt security or money market instrument. CRAs attracted the ire of the investors in the context of the global financial crisis and the Securities Exchange Commission of US also reformed them after long debates in the Senate. Alive to such ongoing debates, SEBI’s disclosure norms relating to rating agencies in 2010 received wide appreciation. These would apply to corporate credit ratings. When we have integrated with the financial system globally, we need to see what reforms are round the corner in making assembly line credit flows to the corporates and SMEs, more effective.
Lakhs of crores involved in scams notwithstanding, the economy is on the growth trajectory clocking 8.25 percent growth with a seesaw growth in manufacturing sector. Micro, Small and Medium Enterprises have a special dispensation at the hands of the regulators and there is a Ministry at the Centre dedicated to this sector to ensure its development mainly because of its potential to contribute to the job growth and growth of the economy. Growth of this sector always outstripped the growth in manufacturing sector. After redefining the sector in the MSME Development Act 2006, there is enough evidence to show that Banks moved to medium enterprises swiftly. SIDBI, the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. Equating micro finance with finance to micro and small enterprises is a fallacy. RBI’s published statistics for 2009-10 show that the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. This could mean two things: there is migration of the small sector to medium sector – and if it happens, it is the best thing to happen for the economy. The other, Banks started distancing from the micro and small, because lending to them involves higher transaction costs and greater supervision. This is not good for the economy, as these are the seedbeds of entrepreneurship and employment. Medium enterprise credit is rating driven, thanks to the Basel norms.
The Chartered Financial Analysts did a global survey in 2009 to confirm that the ratings are not useful instruments to take investment decisions, irrespective of who delivers Fisch, Moodys, Standard & Poor etc. Although debt rating started late in India, and these rating agencies with their compatriots, CRISIL, ICRA etc., were only rating investments in the past, they are the most respected rating agencies recognized by the regulator, RBI even in India.
Most Banks, which are wont to go by the advisory of the RBI, have now come to swear by them. Most Indian Banks also moved to template lending or Assembly line approach to lending through the Centralized Processing Platforms redefining their approaches to do due diligence of the enterprises they finance. Speed has become the essence of the game of competition among banks. Now that the futures markets and derivative markets have become more active than before, and their late entry into debt rating is more by patronage of the Banks and FIs, it is important that the other regulator – RBI- also looks at the Report Card on rating agencies and resolve certain inherent conflicts. The Credit Information Services are at a nascent stage, CIBIL being the first to start such service with collaboration from Dun & Bradstreet and many commercial banks. Transparency in client information is a long way to go, as unshared data is more than the shared data both about individuals and institutions. In this scenario, the RBI also should consider issuing detailed instructions on rating agencies, their ways of assessment, forms and reports in the public domain. In any case, it is desirable that until the credit information repositories scale up in size and efficiency in providing the required data to reduce the information asymmetry, the rating instrumentality application to the SME sector has to be put on a low key.
In India, the track record of the Rating Agencies may not have much to show up in favour or against them. There is no evidence of any of the rating agencies reducing the ratings to any large industrial enterprise on the ground that they owe monies to their vendor SMEs for more than the contracted period for all payments of more than Rs.2lakhs as required under the Companies Act, 2000. The RBI should actually insist on different rating agencies for rating the Corporates and their related SME vendors. It is also desirable that the payment for rating agencies should come from the institutions that seek rating. It is a different matter if such amount is later recovered from the liability firm.
In essence, there should be a mechanism to evaluate the performance of Rating agencies. Further, the method of payment also needs to be linked to the extent possible to evaluation. Their services have value but to what extent one should depend on their rating also needs to be quantified. There should be a recompense clause and the rating agencies should be made to compensate may be, not to the full extent, but by way of penalty for wrong ratings or variance in rating on a large scale. Their rating performance over a period has to be made transparent for the benefit of investors and for every one connected to evaluate.
It is time that the Banks go back to basics and do due diligence and seek support from the CRA just as yet another support for their credit decision until full scale reforms in credit information and credit rating take off in the financial sector.
------------------------------------------------------------------------------------------------------------*Dr.B. Yerram Raju is an economist and Regional Director, Professional Risk Managers’ International Association (PRMIA), Hyderabad Chapter. Can be reached at yerramr@gmail.com
B. Yerram Raju*
Credit rating agencies (CRA) are organizations that rate the creditworthiness of a company or a financial product, such as a debt security or money market instrument. CRAs attracted the ire of the investors in the context of the global financial crisis and the Securities Exchange Commission of US also reformed them after long debates in the Senate. Alive to such ongoing debates, SEBI’s disclosure norms relating to rating agencies in 2010 received wide appreciation. These would apply to corporate credit ratings. When we have integrated with the financial system globally, we need to see what reforms are round the corner in making assembly line credit flows to the corporates and SMEs, more effective.
Lakhs of crores involved in scams notwithstanding, the economy is on the growth trajectory clocking 8.25 percent growth with a seesaw growth in manufacturing sector. Micro, Small and Medium Enterprises have a special dispensation at the hands of the regulators and there is a Ministry at the Centre dedicated to this sector to ensure its development mainly because of its potential to contribute to the job growth and growth of the economy. Growth of this sector always outstripped the growth in manufacturing sector. After redefining the sector in the MSME Development Act 2006, there is enough evidence to show that Banks moved to medium enterprises swiftly. SIDBI, the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. Equating micro finance with finance to micro and small enterprises is a fallacy. RBI’s published statistics for 2009-10 show that the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. This could mean two things: there is migration of the small sector to medium sector – and if it happens, it is the best thing to happen for the economy. The other, Banks started distancing from the micro and small, because lending to them involves higher transaction costs and greater supervision. This is not good for the economy, as these are the seedbeds of entrepreneurship and employment. Medium enterprise credit is rating driven, thanks to the Basel norms.
The Chartered Financial Analysts did a global survey in 2009 to confirm that the ratings are not useful instruments to take investment decisions, irrespective of who delivers Fisch, Moodys, Standard & Poor etc. Although debt rating started late in India, and these rating agencies with their compatriots, CRISIL, ICRA etc., were only rating investments in the past, they are the most respected rating agencies recognized by the regulator, RBI even in India.
Most Banks, which are wont to go by the advisory of the RBI, have now come to swear by them. Most Indian Banks also moved to template lending or Assembly line approach to lending through the Centralized Processing Platforms redefining their approaches to do due diligence of the enterprises they finance. Speed has become the essence of the game of competition among banks. Now that the futures markets and derivative markets have become more active than before, and their late entry into debt rating is more by patronage of the Banks and FIs, it is important that the other regulator – RBI- also looks at the Report Card on rating agencies and resolve certain inherent conflicts. The Credit Information Services are at a nascent stage, CIBIL being the first to start such service with collaboration from Dun & Bradstreet and many commercial banks. Transparency in client information is a long way to go, as unshared data is more than the shared data both about individuals and institutions. In this scenario, the RBI also should consider issuing detailed instructions on rating agencies, their ways of assessment, forms and reports in the public domain. In any case, it is desirable that until the credit information repositories scale up in size and efficiency in providing the required data to reduce the information asymmetry, the rating instrumentality application to the SME sector has to be put on a low key.
In India, the track record of the Rating Agencies may not have much to show up in favour or against them. There is no evidence of any of the rating agencies reducing the ratings to any large industrial enterprise on the ground that they owe monies to their vendor SMEs for more than the contracted period for all payments of more than Rs.2lakhs as required under the Companies Act, 2000. The RBI should actually insist on different rating agencies for rating the Corporates and their related SME vendors. It is also desirable that the payment for rating agencies should come from the institutions that seek rating. It is a different matter if such amount is later recovered from the liability firm.
In essence, there should be a mechanism to evaluate the performance of Rating agencies. Further, the method of payment also needs to be linked to the extent possible to evaluation. Their services have value but to what extent one should depend on their rating also needs to be quantified. There should be a recompense clause and the rating agencies should be made to compensate may be, not to the full extent, but by way of penalty for wrong ratings or variance in rating on a large scale. Their rating performance over a period has to be made transparent for the benefit of investors and for every one connected to evaluate.
It is time that the Banks go back to basics and do due diligence and seek support from the CRA just as yet another support for their credit decision until full scale reforms in credit information and credit rating take off in the financial sector.
------------------------------------------------------------------------------------------------------------*Dr.B. Yerram Raju is an economist and Regional Director, Professional Risk Managers’ International Association (PRMIA), Hyderabad Chapter. Can be reached at yerramr@gmail.com
Credit for Agriculture and MSEs on the decline in 2010-11
FALLING CREDIT FOR AGRICULTURE AND MSEs – NOBODY’S CONCERN
B. YERRM RAJU*
The dwindling share of agriculture in the nation’s GDP, now oscillating between 16 and 17 percent notwithstanding, people dependent on agriculture continue to be hovering round 60-62 percent. Agriculture sector recorded a 5.7% growth within the overall 8.6% GDP growth. Growth in manufacturing sector continues to be a concern although the growth in MSME sector exceeded the growth in manufacturing. Growth in employment improved in the services but it continues to be a concern in manufacturing sector. In this scenario, the RBI’s annual monetary policy chose to bypass the falling credit in agriculture and MSE sectors by telling that the sectoral growth moderated while the commercial growth picked up. It also mentioned that the “credit conditions generally remained supportive of economic activity”. When agriculture production and small enterprise production increased as reflected in their growth rates, if credit for these credit-sensitive sectors declined, the deficits are made up obviously through some other channels. The private moneylenders are active and before there is another spate of suicides, these deficits should serve as a wake up call. Analysis of the factors responsible and actions necessary are worthy to enquire.
Farmers are on the streets, but not without reason. There is increasing demand for inputs in the context of favourable monsoon during the last two seasons. We witness farmers crying over the inundated paddy stocks in market yards in Andhra Pradesh as the storage godowns fall short of the demand. The other day, valuable chilly stocks were fully burnt out in the cold storages in Guntur. Cotton farmers bemoan of traders holding seize of the markets to deny them the due price. Lack of planning stares at us in every area concerning agriculture, from production to marketing.
The Banks show up the mandated 18% credit to agriculture in figures. UCO Bank claimed Rs.4000crores given to Rural Electric Corporation as credit to agriculture. The RBI was quick to instruct the bank to correct the classification. There are many banks camouflaging the figures whereby the corporate credit is shown under credit to direct agriculture and claim having met the mandated requirement. RIDF any way shields the shortfall. Both NABARD and RBI stopped monitoring the flow of credit to small and marginal farmers and tenant farmers. Investment credit for agriculture – direct has been progressively on the decline during the last ten years, indicating fall in private capital formation in the sector. The latest statistics of RBI relating to flow of credit to agriculture are very revealing. Year-on-year variation for agriculture and allied activities even after all the window dressing by the banks has crest-fallen from 22.9% in 2009-10 to 10.6% in 2010-11. This actually represents the fall in stock as the variance is in terms of outstanding credit. Quarter to quarter variation in farm credit between December and March in any year, does not make much sense as this period mostly accounts for recoveries barring a few cash crops like sugarcane.
For a change, let me look at another area of the priority sector – the micro and small enterprise credit portfolio. This is a sector where guidelines were issued to cover at least five new units per branch per annum. There is no evidence that this guideline has ever been monitored by the RBI. SIDBI the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. During the year, 2009-10 the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. The job oriented and production intensive micro and small enterprises also took a beating at the hands of the dexterous and enthusiastic bankers. Similarly, one will be astonished at growth in financing to NBFCs by Banks, which has increased from 14.8% in 2009-10 to 54% in 2010-11. This is nothing but lazy banking. Quite likely, that the NBFCs are financing the Agriculture and MSE sectors at high rates of interest. This needs a deeper probe.
Sector Variation (Y-o-Y)
In Outstanding credit
2009-10 2010-11
% %
Non-food Credit 16.8 20.6
Agriculture & Allied Activities 22.9 10.6
Industry (Micro & Small, Medium and Large ) 24.4 23.6
Micro & Small 22.1 11.0
Medium 8.6 39.2
Large 27.4 24.1
Services 12.5 23.9
Source: Reserve Bank of India May 2011, p626.
Let the Government, the owner of 85% of the banking system, look into the underperformance of Banks in Agricultural Credit and Priority Sector Advances and put in place more stringent disclosure and compliance norms. Let each Bank reveal their actual credit exposure to Agricultural Credit and Priority Sector Advances in their Financial Statements published in newspapers both in terms of number of farmers and enterprises covered and amount disbursed that should stand the rigid regulatory scrutiny. Punitive action for wrong classification should follow. In any case when do we monitor the flow instead of stock of credit to farm and MSE sectors?
*The author is an economist and Member, Expert Committee on Cooperative Banking, Government of AP. The views are personal.
B. YERRM RAJU*
The dwindling share of agriculture in the nation’s GDP, now oscillating between 16 and 17 percent notwithstanding, people dependent on agriculture continue to be hovering round 60-62 percent. Agriculture sector recorded a 5.7% growth within the overall 8.6% GDP growth. Growth in manufacturing sector continues to be a concern although the growth in MSME sector exceeded the growth in manufacturing. Growth in employment improved in the services but it continues to be a concern in manufacturing sector. In this scenario, the RBI’s annual monetary policy chose to bypass the falling credit in agriculture and MSE sectors by telling that the sectoral growth moderated while the commercial growth picked up. It also mentioned that the “credit conditions generally remained supportive of economic activity”. When agriculture production and small enterprise production increased as reflected in their growth rates, if credit for these credit-sensitive sectors declined, the deficits are made up obviously through some other channels. The private moneylenders are active and before there is another spate of suicides, these deficits should serve as a wake up call. Analysis of the factors responsible and actions necessary are worthy to enquire.
Farmers are on the streets, but not without reason. There is increasing demand for inputs in the context of favourable monsoon during the last two seasons. We witness farmers crying over the inundated paddy stocks in market yards in Andhra Pradesh as the storage godowns fall short of the demand. The other day, valuable chilly stocks were fully burnt out in the cold storages in Guntur. Cotton farmers bemoan of traders holding seize of the markets to deny them the due price. Lack of planning stares at us in every area concerning agriculture, from production to marketing.
The Banks show up the mandated 18% credit to agriculture in figures. UCO Bank claimed Rs.4000crores given to Rural Electric Corporation as credit to agriculture. The RBI was quick to instruct the bank to correct the classification. There are many banks camouflaging the figures whereby the corporate credit is shown under credit to direct agriculture and claim having met the mandated requirement. RIDF any way shields the shortfall. Both NABARD and RBI stopped monitoring the flow of credit to small and marginal farmers and tenant farmers. Investment credit for agriculture – direct has been progressively on the decline during the last ten years, indicating fall in private capital formation in the sector. The latest statistics of RBI relating to flow of credit to agriculture are very revealing. Year-on-year variation for agriculture and allied activities even after all the window dressing by the banks has crest-fallen from 22.9% in 2009-10 to 10.6% in 2010-11. This actually represents the fall in stock as the variance is in terms of outstanding credit. Quarter to quarter variation in farm credit between December and March in any year, does not make much sense as this period mostly accounts for recoveries barring a few cash crops like sugarcane.
For a change, let me look at another area of the priority sector – the micro and small enterprise credit portfolio. This is a sector where guidelines were issued to cover at least five new units per branch per annum. There is no evidence that this guideline has ever been monitored by the RBI. SIDBI the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. During the year, 2009-10 the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. The job oriented and production intensive micro and small enterprises also took a beating at the hands of the dexterous and enthusiastic bankers. Similarly, one will be astonished at growth in financing to NBFCs by Banks, which has increased from 14.8% in 2009-10 to 54% in 2010-11. This is nothing but lazy banking. Quite likely, that the NBFCs are financing the Agriculture and MSE sectors at high rates of interest. This needs a deeper probe.
Sector Variation (Y-o-Y)
In Outstanding credit
2009-10 2010-11
% %
Non-food Credit 16.8 20.6
Agriculture & Allied Activities 22.9 10.6
Industry (Micro & Small, Medium and Large ) 24.4 23.6
Micro & Small 22.1 11.0
Medium 8.6 39.2
Large 27.4 24.1
Services 12.5 23.9
Source: Reserve Bank of India May 2011, p626.
Let the Government, the owner of 85% of the banking system, look into the underperformance of Banks in Agricultural Credit and Priority Sector Advances and put in place more stringent disclosure and compliance norms. Let each Bank reveal their actual credit exposure to Agricultural Credit and Priority Sector Advances in their Financial Statements published in newspapers both in terms of number of farmers and enterprises covered and amount disbursed that should stand the rigid regulatory scrutiny. Punitive action for wrong classification should follow. In any case when do we monitor the flow instead of stock of credit to farm and MSE sectors?
*The author is an economist and Member, Expert Committee on Cooperative Banking, Government of AP. The views are personal.
Time for Restructuring State Ministry of Agriculture
TIME FOR RESTRUCTURING AGRICULTURE REGULATORY COORDINATION
B. YERRAM RAJU*
It is heartening to listen to the CM Kiran Kumar Reddy at Bangalore on the State’s prospect of posting a 6.5 percent growth and the State’s economy to leapfrog to 9.5 percent. There is also a goal for the State to reach 300mn tones of food production by the end of the Twelfth Plan. The State needs such optimistic thinking and approach at this critical juncture. But when one looks at the serpentine queues of the farmers for the seeds of any crop right at the sowing time, poor management of the farm sector stares at us. This is not the first year that the State has this predicament. In the marketing season, farmers bemoan of lack of space to store, and nobody to deliver the price for their season’s hardship. We just witnessed in most market yards the paddy bags under sheets of water; not enough gunny bags to store; not even enough tarpaulins to store; no storage space in the existing godowns. Chilly farmers got their crop washed out in the untimely rains or burnt in well-designed cold storage warehouse disasters. The tenant farmers’ rejoice at their right for institutional credit through the recently announced ordinance hopefully results in the intended benefits – the only silver lining in this farm season, to site a good beginning. Why are all these happening for the last few decades? Why should farmers take to streets to fight for their basic production rights? Are there no remedies? Do these questions not beg of us to look at the fundamentals of administrative architecture of this most important sector on which 60 percent of the population still depends for their livelihood?
Like nowhere else in the world, farm and allied sectors are looked after by at least fourteen ministries and a host of organizations heavily bureaucratized: Ministry of Agriculture; Ministry of Animal Husbandry, Dairy Development, Fisheries; Ministry of Major and Medium Irrigation; Ministry of Cooperation; Ministry of Revenue, Relief and Rehabilitation; Ministry of Finance; Ministry of Food & Civil Supplies; Ministry of Marketing & Warehousing – at the State level and Ministry of Agriculture and Cooperation, Ministry of Food Processing; Ministry of Finance; Ministry of Forests & Environment; Ministry of Commerce and Trade; Ministry of Food and Civil Supplies at the Central Government level. There is State Planning Board and the Union Planning Commission at the helm to decide on many issues that concern all these ministries. Each Ministry has its regulatory strings to apply on the farmer because each is an empire unto itself and there is no coordination among them at the beginning of the agriculture season. Planning Commission long back seized to be a coordination agency. It is content with preparing grandiose plans and allocating limited resources through discussions at the National Development Council. Exigencies of politics predominate over economic necessities.
In Agrarian States like Andhra Pradesh, a beginning could be made in reorganizing the ministries to start with and bringing the departments of agriculture, horticulture and allied activities like animal husbandry, fisheries, that deal with production, cooperation, marketing and civil supplies that deal with distribution under single Minister who should have full comprehension and empathy for the farmers. The orgnisational structure could be as follows:
This would mean that the number of ministries at the State level would be reduced to one from the existing four. At the beginning of the season, all the above functionaries would have a meeting with all the functionaries in the chart for a day or two – even now the Commissioner of Agriculture is holding a coordination meeting with the NABARD, financing institutions and cooperative banks and his department officials at the beginning of Kharif and Rabi. These meetings are not transparent and monitorable in terms of the decisions taken and officials concerned are not accountable for any lapses or shortfalls. In the above coordination meeting, the Minister presiding and the Agriculture Production Commissioner who is of the rank of Additional Chief Secretary, is expected to be fully informed of all the links in the supply chain in production and value chain management in agriculture right up to the distribution end and would be in a position to format the decision making process depending upon the various issues that come up for discussion. The Minister can also invite the principal secretary (Energy) and Principal Secretary (Information Technology) for the half-yearly meetings to take into consideration the issues and facilitation that could come from them to the farmers during and off the season. Principal Secretary (Agriculture) should be the Member-secretary for this coordination panel. He would draft the minutes within the next twenty-four hours and arrange for issuance of appropriate instructions for all these line departments to follow implicitly and the concerned departmental heads would be squarely responsible for any and all lapses in implementing them. During the week that follows, the State Level Bankers’ Committee should be convened to cause the financial arrangements to be put in place. This mechanism would expand the burden of implementation on those who are actually responsible. Transparency, Accountability and Governance would significantly improve.
Whenever the disasters occur, emergency meeting shall be held to take collective decision for coordinated implementation at the field level through the District Collectors. The Minister for Revenue would coordinate with the Minister for Agriculture in situations of natural calamities and other disasters.
These measures would make a significant departure from each department pulling in different directions making the farmers cry loud both at the beginning and end of the season. The State would also have the pride of taking leadership once it ensures success of this model. The Rythu Chaitanya Yatras, Polam Badi, Atma, AIBP would automatically be integral to the whole effort and extension would be in a position to deliver results to the farmer. This would also help in reducing unnecessary expenditure in multiple delivery points in meaningless directions. Chief Minister Kiran Kumar Reddy, young and dynamic and sportive as he is, would be able to lap up electoral benefits from the largest voting constituency, viz., the farmers and could also win the hearts of the opposition. What matters, of course, is the courage to dispense with three Ministers!!
*The Author is an economist and Member, Expert Committee of Cooperative Banking, Govt of AP. The views are personal. Can be reached at yerramr@gmail.com
B. YERRAM RAJU*
It is heartening to listen to the CM Kiran Kumar Reddy at Bangalore on the State’s prospect of posting a 6.5 percent growth and the State’s economy to leapfrog to 9.5 percent. There is also a goal for the State to reach 300mn tones of food production by the end of the Twelfth Plan. The State needs such optimistic thinking and approach at this critical juncture. But when one looks at the serpentine queues of the farmers for the seeds of any crop right at the sowing time, poor management of the farm sector stares at us. This is not the first year that the State has this predicament. In the marketing season, farmers bemoan of lack of space to store, and nobody to deliver the price for their season’s hardship. We just witnessed in most market yards the paddy bags under sheets of water; not enough gunny bags to store; not even enough tarpaulins to store; no storage space in the existing godowns. Chilly farmers got their crop washed out in the untimely rains or burnt in well-designed cold storage warehouse disasters. The tenant farmers’ rejoice at their right for institutional credit through the recently announced ordinance hopefully results in the intended benefits – the only silver lining in this farm season, to site a good beginning. Why are all these happening for the last few decades? Why should farmers take to streets to fight for their basic production rights? Are there no remedies? Do these questions not beg of us to look at the fundamentals of administrative architecture of this most important sector on which 60 percent of the population still depends for their livelihood?
Like nowhere else in the world, farm and allied sectors are looked after by at least fourteen ministries and a host of organizations heavily bureaucratized: Ministry of Agriculture; Ministry of Animal Husbandry, Dairy Development, Fisheries; Ministry of Major and Medium Irrigation; Ministry of Cooperation; Ministry of Revenue, Relief and Rehabilitation; Ministry of Finance; Ministry of Food & Civil Supplies; Ministry of Marketing & Warehousing – at the State level and Ministry of Agriculture and Cooperation, Ministry of Food Processing; Ministry of Finance; Ministry of Forests & Environment; Ministry of Commerce and Trade; Ministry of Food and Civil Supplies at the Central Government level. There is State Planning Board and the Union Planning Commission at the helm to decide on many issues that concern all these ministries. Each Ministry has its regulatory strings to apply on the farmer because each is an empire unto itself and there is no coordination among them at the beginning of the agriculture season. Planning Commission long back seized to be a coordination agency. It is content with preparing grandiose plans and allocating limited resources through discussions at the National Development Council. Exigencies of politics predominate over economic necessities.
In Agrarian States like Andhra Pradesh, a beginning could be made in reorganizing the ministries to start with and bringing the departments of agriculture, horticulture and allied activities like animal husbandry, fisheries, that deal with production, cooperation, marketing and civil supplies that deal with distribution under single Minister who should have full comprehension and empathy for the farmers. The orgnisational structure could be as follows:
This would mean that the number of ministries at the State level would be reduced to one from the existing four. At the beginning of the season, all the above functionaries would have a meeting with all the functionaries in the chart for a day or two – even now the Commissioner of Agriculture is holding a coordination meeting with the NABARD, financing institutions and cooperative banks and his department officials at the beginning of Kharif and Rabi. These meetings are not transparent and monitorable in terms of the decisions taken and officials concerned are not accountable for any lapses or shortfalls. In the above coordination meeting, the Minister presiding and the Agriculture Production Commissioner who is of the rank of Additional Chief Secretary, is expected to be fully informed of all the links in the supply chain in production and value chain management in agriculture right up to the distribution end and would be in a position to format the decision making process depending upon the various issues that come up for discussion. The Minister can also invite the principal secretary (Energy) and Principal Secretary (Information Technology) for the half-yearly meetings to take into consideration the issues and facilitation that could come from them to the farmers during and off the season. Principal Secretary (Agriculture) should be the Member-secretary for this coordination panel. He would draft the minutes within the next twenty-four hours and arrange for issuance of appropriate instructions for all these line departments to follow implicitly and the concerned departmental heads would be squarely responsible for any and all lapses in implementing them. During the week that follows, the State Level Bankers’ Committee should be convened to cause the financial arrangements to be put in place. This mechanism would expand the burden of implementation on those who are actually responsible. Transparency, Accountability and Governance would significantly improve.
Whenever the disasters occur, emergency meeting shall be held to take collective decision for coordinated implementation at the field level through the District Collectors. The Minister for Revenue would coordinate with the Minister for Agriculture in situations of natural calamities and other disasters.
These measures would make a significant departure from each department pulling in different directions making the farmers cry loud both at the beginning and end of the season. The State would also have the pride of taking leadership once it ensures success of this model. The Rythu Chaitanya Yatras, Polam Badi, Atma, AIBP would automatically be integral to the whole effort and extension would be in a position to deliver results to the farmer. This would also help in reducing unnecessary expenditure in multiple delivery points in meaningless directions. Chief Minister Kiran Kumar Reddy, young and dynamic and sportive as he is, would be able to lap up electoral benefits from the largest voting constituency, viz., the farmers and could also win the hearts of the opposition. What matters, of course, is the courage to dispense with three Ministers!!
*The Author is an economist and Member, Expert Committee of Cooperative Banking, Govt of AP. The views are personal. Can be reached at yerramr@gmail.com
Sunday, February 13, 2011
Drive against Corruption - Avineeti pi poratum
There should be a resolve not to share public platform with the corrupt and allegedly corrupt. The lobbying organizations like the FICCI,CII, FAPCCI etc should stop giving bouquets and garlending such persons.This is the most simple step one can take to express public resentment against corruption and intellectuals with integrity have a role to play in this direction.
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