MoneyLIFE-Citibank Seminar on Individual Credit Rating
The biggest asset on the balance sheet of banks today is the ignorance of customers about their rights and their reluctance to fight for them,” said Dr Sujatha E Prasad, general manager, consumer services, RBI (Reserve Bank of India) and that succinctly encapsulated the raison d’etre of the MoneyLIFE-Citibank workshop on ‘Individual Credit Ratings – Consequences of Negative Ratings and How to Deal with Them’. The workshop saw the participation of a wide cross-section of readers, borrowers, lenders, rating agencies, banks and credit counsellors such as Abhay (set up by Bank of India) and Disha (of ICICI Bank).
In the lively discussion that followed the presentations, participants raised three important issues. First, banks often fail to inform customers when they are reported to the defaulters’ list. Customers discover the fact only when their loan and credit card applications are repeatedly rejected.
Second, when there is a problem, usually related to wrong billing, bank officials are never available for a discussion and individuals are pushed from one call-centre executive to another, without a resolution of the issue. Meanwhile, the disputed sums continue to be billed at exorbitant interest.
Third, there were brazen cases like those of a Pune-based consumer who was put on the defaulter list after having ‘pre-paid’ his loan in full. Worse, the bank failed to correct the Credit Information Bureau (India) Limited (CIBIL) record after informing the RBI that it had rectified its mistake.
The responses from the panellists offer crucial lessons to borrowers and credit-card users. PS Jayakumar, country business manager, Citibank, pointed to the multiple channels of communication opened by Citibank to deal with the accessibility issue. His advice to credit-card borrowers was that if they had a problem with one item of billing or an interest charge, they must clear the undisputed part of the bill and write to the bank. This keeps interest charges from ballooning and establishes the customer’s willingness to pay. Jayakumar’s excellent and detailed presentation encompassed all issues leading to defaults and the recovery process. He also pointed out that the lender is often willing to help a borrower in distress in multiple ways – a short moratorium on repayment, extension of repayment period, consolidation of multiple borrowings and, in desperate situations, settlement of the loan (if a substantial portion is already paid) by waiving the rest. The key here is for the borrower to initiate a dialogue with the lender rather than hiding and evading calls.
Arun Thukral, CIBIL’s managing director, pointed out that CIBIL cannot correct the data made available to it by lenders. However, RBI’s new rules provide a 30-day window in which customers could have their credit history corrected by writing to the lender. He said that the credit provider alone could validate the customer’s contention but would need to justify its stand in writing, giving the customer a chance to prove its inaccuracy.
Dr Sujatha E Prasad pointed to a key issue: individual credit history remains impaired if a person closes a dispute after a settlement with the bank, where she pays less than the sum due. Dr Prasad also said that all banks do not necessarily reject individuals with negative credit histories. They can take a call on whether to take the risk and lend to these individuals. She also said that, over time, those with clean credit histories will be entitled to better rates while those with a patchy record may have to pay higher interest rates.
The 30-day window that allowed borrowers to contest negative ratings raised the question of what happens when multiple credit bureaus are licensed to operate. Incidentally, executives from High Mark and Experian (two of CIBIL’s possible competitors) also participated in the workshop. Would the borrower have to contest the negative rating separately with each new credit bureau? Mr Thukral pointed out that the customer would have to obtain a fresh declaration from the lender correcting the credit entry to remove her from the defaulter’s list, but there is no clarity as yet on whether the borrower would have to make sure that every credit bureau updates her record. This gave rise to another question. What is the need to have multiple credit bureaus? According to Jayakumar, each credit bureau tends to specialise in different aspects of the business. Experience from the developed nations shows that competition would help customers with a good credit record to access better credit terms over a period of time.
Since consumer experiences with different lenders differ, a participant suggested that there must be a rating agency for banks that would enable customers to decide on which is the best in terms of customer service. RBI officials pointed out that the banking ombudsman’s website provides a list of all banks with the exact number of complaints against them for every hundred thousand credit cards issued. This list was an excellent benchmark to choose the better lender. Ms Surekha Marandi, banking ombudsman, Mumbai, outlined at length RBI’s effort to “build confidence in the financial system by providing an easy, inexpensive and reasonably fast grievance redressal system for the customers of banks.” Ms Marandi explained the nature of the scheme provided for summary proceedings; it did not allow elaborate oral evidence and complicated cases. Details about the working of the ombudsman, scope of its actions, procedure for filing of complaints and data on grievance redressal are available at www. bankingombudsman.rbi.org.in. Essentially, a customer must attempt to have her complaint resolved by the lender before approaching the ombudsman. A complaint can be filed on plain paper or on email or in the prescribed form, but must be logged in within a year of the cause of action. Her advice to bank customers was to document their issues with the lender and ensure that they file complete complaints with the ombudsman’s office to ensure quick redressal. She also said that the ombudsman attempts to resolve issues through a process of conciliation and mediation. The ombudsman can reject complaints that she considers frivolous, vexatious, malafide or without sufficient cause or if they have not been pursued reasonably diligently by the complainant. Or, if the banking ombudsman believes that no loss, damage or inconvenience was caused to the complainant.
Dr Prasad’s presentation made it clear that RBI is fully cognisant of all the tricks played by lenders as well as borrowers and the extent to which both sides were responsible for issues that went up to the regulator for redressing. She outlined every mischief in selling a financial service as well as all the tricks employed by borrowers to avoid repayment.

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The Slime and Grime of Hedge Funds
At the mention of the name Barton Biggs, my first recollection is the cover of the Forbes magazine of July 1993. He posed in it dramatically, dour-faced and wearing the attire of a bear, complete with paws from which nails stuck out. The cover theme was how Biggs was bearish on the US economy and markets under the presidency of Bill Clinton. He was quoted as saying: “We want to get our clients’ money as far away from Bill and Hillary Clinton as we can. The President is a negative for the US market. I’m embarrassed that I voted for him and contributed money to his campaign.” The S&P500 was 450 at that time. By March 2000, after Clinton’s two terms were over, it was over 1,500.
The second recollection I have of Biggs was an article in Fortune (possibly) where he was quoted recounting how he romped across China and India to discover that these were absolutely fantastic growth markets to invest in. He had led Morgan Stanley to a major expansion in emerging markets in the early 1980s. When Morgan Stanley became the first foreign company in January 1994 to launch a fund in India, Biggs was roped in for a teleconference (a novelty at that time) with the press at the office of the Videsh Sanchar Nigam Ltd. In September, the Sensex was over 4,400. By 2003, it was 2,900. Morgan Stanley’s fund became a poster boy for all that’s wrong with the fund business – more hype and overselling than performance. Morgan Stanley did not launch a fund for 14 years after that – until 2008. The monster bull market of 2003-08 eventually salvaged the performance of the first fund.
These two events play on my mind when I hear the name Barton Biggs, though these may have been isolated occurrences. After all, he has worked for 30 years at Morgan Stanley, where he started the research department and chaired the investment management division for years. His later years in the firm were spent as the chief strategist. In fact, at various times between 1996 and 2003, the Institutional Investor magazine ranked Biggs as the top US investment strategist and then global strategist. Interestingly, in 2001, he pronounced that “hedge-fund mania now grips the US and Europe” and “is rapidly assuming all the classic characteristics of a bubble.” But, in 2003, Biggs retired from Morgan and launched his own hedge fund, Traxis Partners, with Madhav Dhar also of Morgan. In 2006, he wrote Hedgehogging, his memoir-cum-treatise on the “never-ending search for investment acorns.” This is a new edition of that book.
It is hard to categorise this work. It is mostly an endless whine about how institutional investors behave (rude, short-term, ruthless and often mindless). The same litany – of how it is so hard to raise money and how it is so hard to keep, whether you have had a few down years or a few great years – appears repeatedly throughout the book. The rest of the book is a mish-mash of history (Bismark’s astute timberland investment was a new thing for me), investment concepts (value vs growth, features of asset classes, behavioural finance) and short sketches of many hedge fund managers. Several of them are obsessive, fiercely competitive, somewhat deranged while the best ones are wise, well-read and well-travelled. Biggs has substituted their real names to avoid legal and social awkwardness, but that leaves you dissatisfied. A few years ago, Biggs wrote about a plumber who was too busy day-trading shares to fix his pipes. It turned out that Biggs had invented the story!
Hedge funds are a fashionable idea now and are the most favoured destination for finance students, never mind that, in 2004, 1,000 new hedge funds were formed and about 1,000 closed. Besides, every few years some star or the other ‘blows up’. Biggs reveals the intellectual slime and commercial grime behind their high-profile hedge funds. Biggs struggled to raise money for his fund, narrating his harrowing experience at Morgan Stanley’s famous hedge-fund conference at The Breakers in Palm Beach. He found “Germans with bulging eurobellies… mingle with bloated Arabs in pale suits and white shirts, their handshakes as cool and clammy as snakeskin. Former investment bankers exchange distinguished lies with portly ex-diplomats, permanently deformed by self-importance…Vastly rich investors with private jets, homes in three climates and Botox-smoothed foreheads name-drop and talk about their golf games... Wealthy divorcées and widows with artificial brightness in their unpouched eyes and hard, chiselled faces and tucked stomachs and bottoms, work the crowd. Are they looking for a man or a hedge fund? They have smiles for you like cold leftovers.”
Biggs and Dhar faced a series of rejections in their appeal to raise money and Biggs appears more like a bewildered and anguished philosopher in search of fairness in a wild, winner-take-all contest. This is more surprising because he was born with a silver investment spoon – his father was a wealthy investor who gave Biggs and his brothers an early start with a generous bunch of shares. This book is a good read for those keen to know how hedge funds work, but Biggs surely had observed much more in his 50 years on the Wall Street, the bulk of which was spent at a mainline financial firm with its own large share of scandals and funny actions all over the world, including India. Pity he has not written a book about them. – Debashis Basu

EXCERPT
Miles Moreland is an Englishman who is probably in his mid-50s. He has the horsey, aristocratic good looks and speech of someone who went to Cambridge, as he did. I first knew him when once, long ago, he labored gracefully as an institutional salesman for Morgan Stanley in New York. Rejecting this as an inferior cultural experience, he matriculated to write a charming book about walking across Europe. Subsequently he founded Blakeney Management, an investment company that focuses exclusively on Africa. Miles is a charming, very bright, unconventional man. His firm is located in London, where he lives in a houseboat on the Thames and drives a motorcycle. Miles’ theory is that the African and Middle Eastern emerging markets are the last undiscovered investment frontier, and that, if you know a great deal about what everyone else ignores, you should be able to find some amazing values.

The Washington Post called it one of the 10 best investment books of all time and the Businessweek calls it a must-read for investors. The first edition of this book (Stocks for the Long Run, Jeremy J Siegel, Tata McGraw-Hill, 380p; Rs495) came out in 1994 and the fourth edition was released late last year. It is the most eloquent argument to buy stocks to create long-term wealth. Jeremy Siegel, professor of finance at the Wharton School, University of Pennsylvania, has aggregated really long-term data from the US market, starting 1802, and used empirical analysis to settle some major investing questions. Siegel argues that stocks have earned an average 6.5%-7% per year after inflation over the past 200 years. He expects returns to be somewhat lower in the coming years. He also proves that, over a long period, stocks are less risky than bonds. In his new edition, Siegel has added a chapter on globalisation which argues that the emerging world will soon overtake the developed world. The Indian edition is reasonably priced and is an essential read for any serious investor. – D.B.

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