Central banks remained focussed on consolidation, but encouraging smaller banks may be the way to push economic growth
The International Monetary Fund (IMF) gave out some good news this week. They told us that the crisis was over. Well sort of. The Fund predicted that the strong economic growth in the US and the UK would prevent a global recession. But there the good news stopped. It warned that the world faced “years of slow and subpar growth”. In a world with ultra-low interest rates, why is growth so slow? Where is all that money going?
The answer is rather simple. It is going to speculators. While down playing the risks, the IMF did point out a few danger points. These issues all have a common denominator. They exist because the massive amount of money printed by central banks is going into risky assets. The central banks have been successful in creating “liquidity driven” markets, but failed in creating “growth-driven” markets.
The low interest rates have created an enormous demand for unsafe assets. The indicators are everywhere. Junk bond yields are close to record lows. Equity markets are at all-time highs. Price/ earnings ratios in the US are among the highest decile of reported values since 1881. Nobel Laureate Robert Shiller’s Cyclically Adjusted Price Earnings ratio (CAPE) is at 26. The historic norm is 16.5. Another indicator created by a Nobel Laureate, Tobin’s q, indicates that the US market is 70% over valued. Margin debt in New York is at a historic record of $466 billion.
Meanwhile, the search for yield has created a field day for borrowers. Lending standards are deteriorating. Debtors can now demand money with few strings. New deals have few covenants to protect lenders (cov-lite loans). Repayments can be made in kind (payment in–kind- PIK loans), that is in new debt or preferred shares rather than cash.
The demand for the riskiest assets by speculators reveals the main flaw in the central bank thesis that more stimulus equals more growth and jobs. The reason for the flaw is the central banks are relying on the wrong intermediaries. They provide large bank with huge amounts of cash, which usually goes to speculators or the largest corporations. Lending to individuals and smaller businesses often requires smaller banks and more flexibility, but that is the problem.
In the US, deregulation in the 80’s and 90’s allowed mergers across state lines. This led to a wave of consolidation. In the past 30 years, the number of banks in the US has halved to about 6,000. So now there are fewer small banks. Worse, according to the IMF, large banks have a major competitive advantage. They are too big to fail. Since they have the implicit backing of taxpayers, investors see them as having less risk. So they lend them money at a lower rate. This rate subsidy is estimated globally at $590 billion.
Large banks and small banks have distinctly different business plans. Small banks internalise their risks. They make smaller loans at higher rates for shorter periods. But because they have better knowledge of their customers, they experience only 70% of the defaults that hit larger banks. They also keep their deposits and so are less reliant on interbank loans or even worse, foreign loans.
Even though well-run smaller banks can be safer than large urban ones, they are often punished by banking regulations. In the US, the Dodd Frank bill was supposed to reform abuses perpetrated by large money center banks. Its unintended consequence has been an adverse effect on smaller banks.
The problems of government regulation are not limited to the US. Different countries have different problems. As I wrote last week, the Chinese rural banks issues are not government regulations but their relations with local governments.
In India, the regional rural banks (RRBs) were set up to help channel funds and provide banking services to poor agricultural workers and farmers in the country. But since they are a creature of government regulation, they are subject to restrictions that often make them uncompetitive. They have to follow procedures of scheduled commercial banks when making loans and taking deposits. Their village customers find these complicated, confusing and unnecessary especially considering the amounts involved. The RRBs charge the statutory 14% interest. But borrowers will always prefer the commercial banks if they are available, because they charge only 4%.
Both India and Indonesia have similar problems of regulating smaller rural banks. In India, the National Bank for Agriculture and Rural Development (NABARD) has complained about the Rs100 crore increase in the amount of fraud at the state cooperative banks, district central cooperative banks and RRBs.
In Indonesia, there are 1,641 rural banks, locally known as Bank Perkreditan Rakyat (BPR), operating throughout the archipelago. During its existence, the eight year old Indonesian watchdog, the Insurance Deposit Corporation (LPS) has closed a total of 53 banks, 52 of them have been in rural areas. Rural banks also have non-performing loan ratios of 5.2% well above the national average of 1.9%.
The difficulty of rural access to banks exists in the Philippines. One third of the Philippines 9,000 bank branches are located in the greater Manila area. To address this issue, the government has created rural banks designed to serve the needs of farmers and fishermen far from the cities. Since 2012, 80 of these 560 rural banks could not meet capital requirements and 24 were closed. The Philippines’ solution to this problem was to invite in foreign investors to help increase the banks efficiency and capital.
Small banks in both rural and urban areas can provide enormous social and economic benefits to both their communities and their countries. To function properly, the regulatory environment must encourage and enhance their strengths rather than restrict them. It also must end subsidies to the largest banks. Most of all governments should attempt to restrict their activities to limiting risk rather than using their powers to encourage it.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)
The nation’s largest forensic expert college will sell its forensic accounting division, following a series of investigations by ProPublica and Frontline
This story was co-published with Frontline
There's been a major shake-up in one of the largest organizations that certifies forensic experts.
The group, the American College of Forensic Examiners Institute (ACFEI), quietly put up for sale its forensic accounting division — one of its most prominent programs — prompting the unanimous resignation of that division's entire advisory board. The volunteer accounting board oversaw ACFEI's certification program for experts in financial investigations.
The upheaval at ACFEI comes in the wake of a series of reports that have raised questions about the credibility of the organization's certification programs, notably the FRONTLINE/ ProPublica joint investigation, The Real CSI, which examined the organization's rigor in certifying forensic experts.
Three of the board members who resigned say their efforts to bolster their division's credibility were being stymied.
"I don't think we were getting the support that we needed to carry out our duties. And from an ethical standpoint, the right thing to do is leave your position when you can't do what you're basically hired to do," said Michael Kessler, a past chair of the accounting board and member of ACFEI since 1994. Kessler and two other board members said they were never consulted about the sale and were left with no other choice but to resign in protest.
In a statement, ACFEI said it planned to spin off the forensic accounting program for reasons "related to organizational efficiency" and pledged to only sell it to a buyer that would maintain rigorous credentialing standards.
"The company can only develop excellence in so many directions at the same time and is transferring ownership of the credential to accounting professionals to further strengthen it," the statement said.
ACFEI offers certification courses in various other aspects of forensics, including nursing, social work and criminal investigation, and the group has also established related associations offering coursework in other disciplines, including psychotherapy and integrative medicine. One of the associations, the American Board for Certification in Homeland Security, has garnered support from the U.S. Navy in recent years, which has paid more than $12 million for more than 10,000 sailors to obtain certifications from the ACFEI-affiliate since 2008.
It appears that troubles between ACFEI and the accounting division had been building for some time.
Last year, board members say they were surprised to learn that ACFEI had lost the rights to use a longstanding aspect of its brand, the acronym "Cr.FA" — which signifies Certified Forensic Accountant — as the result of a trademark lawsuit.
According to documents filed with the U.S. Patent and Trademark Office, ACFEI had failed to actively defend its ownership of the title, and essentially let it slip away.
After discovering the loss of the trademark six months after the fact, board members rushed to advise hundreds of forensic accountants around the country to remove the acronym from resumes and business cards. ACFEI did not respond to FRONTLINE's repeated requests for comment on the trademark litigation.
As FRONTLINE and ProPublica reported in The Real CSI, there are no national standards for forensic experts. Credentials such as the ones offered by ACFEI are voluntary, but they are often relied upon as a shortcut to assess the credibility of an expert witness at trial.
"It's up to the judge whether a witness is qualified as an expert — which is true —but when you take a look at the dockets, they're jammed," said Suzanne Hillman, a CPA who often testifies in financial fraud cases in the Washington, D.C. area. "You see certification, it gives you a little bit of a feeling of comfort."
Hillman said she sought ACFEI's Certified Forensic Accountant credential because, "I knew I had a wealth of experience and was seeking to add the credential that would, in essence, summarize that quickly." Hillman also joined ACFEI's forensic accounting board, but resigned at the end of 2013, similarly disillusioned with the organization.
Hillman has since removed Certified Forensic Accountant from her title.
She believes the lack of regulation on certifying experts damages the entire justice system. "To the judges, jurors and lawyers, I don't think the message has totally gotten out to them that there's problems with some of these credentials," Hillman said.
Jeannette Koger, vice president of member specialization and credentialing for the American Institute of CPAs said the lax standards also make it harder for people to know the quality of the experts they are hiring, often at a high price.
"This causes confusion in the marketplace and can potentially cause consumers great harm," Koger said in an email. "If they receive unqualified or poorly qualified representation their expert can be challenged in the courtroom, resulting in an adverse judgment."
The enthusiastic endorsement of illegal UIDAI and its inexplicable eagerness to merge electoral photo identity card -EPIC numbers and electoral database, with the Aadhaar biometric database that faces robust legal challenge, merits probe
“I have a file on you.”
- MK Narayanan’s routine threat to his adversaries as National Security Adviser (NSA) quoted in Sanjay Baru's book 'The Accidental Prime Minister: The Making and Unmaking of Manmohan Singh'
“One way to ensure that the unique identification (UID) number is used by all government and private agencies is by inserting it into the birth certificate of the infant. Since the birth certificate is the original identity document, it is likely that this number will then persist as the key identifier through the individual’s various life events, such as joining school, immunizations, voting etc.”
- A confidential document of UIDAI titled ‘Creating a unique identity number for every resident in India’, leaked by Wikileaks on 13 Nov 2009
The proponents of world's biggest citizen identification scheme aims to converge electoral photo identity card (EPIC) numbers of electoral database, the UID/Aadhaar number database called Central Identities Data Repository (CIDR) and the National Population Register (NPR). In their myopia, political parties in particular and citizens in general have failed to fathom its ramifications for voting by electors in a democracy.
A bizarre situation is emerging where citizens chose a government that was supposed to represent them but their government is undertaking the task of biometrically authenticating whether or not those it represents are indeed those who they claim to be.
In a letter dated 7 June 2011, the Director General and Mission Director of Unique Identification Authority of India (UIDAI) wrote to Chief Election Commissioner saying, “The Election Commission of India (ECI) may also like to leverage Aadhaar infrastructure in cleaning/ updating their existing electoral data base. Aadhaar numbers issued by the UIDAI can also be included in the list of valid proof of identity (POI) and proof of address (POA) documents of the Election Commission during the polls for identity verification.”
The file notings by ECI on the UIDAI’s letter reads: “How can Aadhaar number used as proof of address”. The reply from ECI dated 17 June 2011 on the letter from UIDAI sought following information before taking any further action:
• Whether UIDAI has the provision to update the address in the database, whenever there is a change in address, to use Aadhaar number as proof of address?
• Whether any process has been defined to use Aadhaar numbers on electoral roll database?
• Whether UIDAI can include EPIC numbers in Aadhaar database?
Responding to these question, in its letter dated 11 July 2011 UIDAI wrote, “Aadhaar has the provision to update the demographic or biometric information of the resident in CIDR from time to time to ensure that the CIDR data is up-to date and accurate all the time. The tool is currently under testing and should be widely available shortly.” The CIDR stands for Central Identities Data Repository of the Aadhaar numbers. Has the “tool” promised July 2011 available now? This reply is far from the truth.
It further wrote, Aadhaar numbers can be seeded into EPIC and electoral roll databases to clean those databases and also to bring standardisation and uniformity in the Election Commission’s databases across the country. UIDAI does provide necessary technical and financial support under its information and communications technology (ICT) infrastructure scheme for integration of Aadhaar number with database of concerned Ministries/ Departments to make them UID compliant. However, the process and schemes to use Aadhaar numbers for their applications are to be defined by the concerned Departments themselves.”
The notification of 28 January 2009 that set up UIDAI, provides the terms of reference (TOR) for its work. There is no reference to the collation of UID number database with electoral database in the TOR. But the TOR does refer to “collation and correlation with UID and its partner databases.” If this reference to ‘partner database’ included electoral database, the UID/ Aadhaar enrolment form never revealed it and took Indian residents for a ride.
Notably, UIDAI was constituted in pursuance of the fourth meeting of the Empowered Group of Ministers (EGoM) headed by the then External Affairs Minister, Pranab Mukherji held on 4 November 2008. Shivraj Patil, the then union home minister and A Raja, the then minister for IT and Communications, HR Bhardwaj, the then law minister and Mani Shankar Aiyar, the then panchayati raj minister, were members of the EGoM wherein Montek Singh Ahluwalia, deputy chairman of Planning Commission was an invitee.
UIDAI argued, “Aadhaar database is restricted to the name, date of birth, gender, address, facial image, ten fingerprints and iris of the resident. The data fields are based on the recommendation of the Demographic and Data field Verification Committee headed by N Vittal, former chief vigilance commissioner (CVC). Since Aadhaar database contains absolute minimum information of a resident necessary to establish identity, it is not possible to include EPIC numbers in the Aadhaar database. However, the ECI should seed Aadhaar numbers in the electoral database as clarified above.”
Prior to this KM Chandrasekhar, cabinet secretary, Government of India (GoI) wrote a letter dated 25 April, 2011 addressed to VK Bhasin, secretary, legislative department stating, “Aadhaar can be treated as a valid Proof of Identity (PoI) and Proof of Address (PoA).”
The Election Commission in its letter dated 4 March 2013 to UIDAI on the subject of “Seeding of Aadhaar number in Electoral Database” wrote that “Commission feels that it would be better that EPIC no. is collected at the time of enrollment for Aadhaar and put in the Aadhaar database…ECI has already issued instructions that Aadhaar cards can be used as alternative identity documents at polling station…It may be mentioned here that Ministry of Home Affairs has also agreed to print EPIC no. on smart card as issued by Registrar General of India…Under the circumstances, it is once again requested that EPIC no. may be made mandatory for enrollment in Aadhaar.” In its letter dated 29 October 2012, the ECI had argued that “including EPIC no. as mandatory field in UIDAI database would enable better integration between UIDAI database and electoral database, which will make Aadhaar numbers more useful.”
This enthusiastic endorsement of illegal UIDAI’s database and its inexplicable eagerness to merge EPIC no. and electoral database with a database that faces robust legal challenge merits probe.
In a letter dated 16 April 2012, RK Singh, the then secretary, ministry of home affairs (MHA) wrote to Dr SY Quraishi, the then Chief Election Commissioner (CEC), with reference to latter’s letter dated 4 April 2012 “regarding inclusion of Electoral Photo Identity Card -EPIC number in the Aadhaar database.”
The secretary, MHA wrote, “The Office of the Registrar General and Census Commissioner, India is in the process of creating the National Population Register (NPR) in the country. The NPR, when completed will be a register of all usual residents of the country, which would have the Aadhaar number besides the demographic and biometric data. The Government is also considering a proposal to issue Resident Identity (smart) Cards to all usual residents above the age of 18 years. The scheme is already making good progress and is likely to be completed in the next two years.”
The combination of the office of Census Commissioner and RGI creates a legal conflict of interest that is required to be examined because Census Act requires that data of residents of India has to be kept confidential. But RGI created under Citizenship Act admittedly puts the data in public domain. Besides this MHA has also feigned ignorance about the illegality of biometric data collection under NPR, a fact pointed out by BJP’s Prime Ministerial candidate, Narendra Modi. The then secretary of MHA is now fighting parliamentary election on BJP’s ticket.
At that time, the secretary, MHA also wrote, “As a part of the process of creating the NPR, the EPIC number is also being collected. This would enable mapping of the Aadhaar number to the EPIC number right from the beginning…Once the mapping is completed, there could be a lot of synergy between the EPIC and NPR databases.”
He pointed out that “while the registration under the NPR is mandatory under the provisions of the Citizenship Act 1955, the production of EPIC Card during the NPR enrolment and capturing the EPIC number is being done on a voluntary basis from the residents. There are, therefore, gaps in the collection of the numbers. The gap can easily be bridged as the Authorities notified for the creation of the NPR are the same as those notified under the Electoral Law and if necessary instructions are issued by the Election Commission, they could easily ensure a complete coverage.”
It is intriguing as to how Election Commission has failed to comprehend the adverse consequences of such convergence. There is nothing in public domain to suggest that implications of such merger have been examined.
The then secretary, MHA informed the CEC that there is mutual agreement between the MHA’s RGI and ECI that “there is a considerable potential to synchronise the two databases and set up a unified platform for future updating of the same and sought CEC’s advice to take it forward. Does the Election Commission realize that synchronization of the two databases is happening as per the design of Wipro’s document and is beyond the mandate given to UIDAI and RGI?
It may recalled that one of the earliest documents that refer UIDAI is a 14-page long document titled ‘Strategic Vision: Unique Identification of Residents’ prepared by Wipro Ltd for the Planning Commission envisaged the close linkage that the UIDAI’s Aadhaar would have with the electoral database. The use of electoral database mentioned in Wipro’s document remains on the agenda of the proponents of Aadhaar.
The reply of the Prime Minister’s Office (PMO) dated 1 April 2014 transferring the right to information (RTI) application to Election Commission seems to indicate that linkage of UIDAI with the Commission has already been established.
In such a backdrop, PMO’s reluctance to share all the file documents and correspondence relating to Nandan Nilekani and right up to his resignation appears quite sensitive and deserves scrutiny. The attempt to undertake convergence of all the sensitive databases of Indians and Nilekani’s confidence in the irreversibility of these efforts has thrown as yet an unmet open political challenge to the opposition parties.
Is it irrelevant to observe that the letterhead of the UIDAI’s Director General reveals his personal email ID as [email protected]. The question is who authorized the UIDAI’s Director General to use Google’s email account? UIDAI does have its own email account. After relinquishing his post to join as chief secretary, government of Jharkhand, did Mr Sharma surrender his email ID to UIDAI? This email must be investigated to ascertain all the locations around the world from which it has been accessed.
The fact that one of the senior most official of UIDAI chose to receive such sensitive information on the server of Google, a private company, is a threat to national security and privacy of Indians. This company is regulated by US laws and has been working in collusion with foreign intelligence agencies. The authorities in the US, where Gmail is headquartered, can legally access the information on the server of Google without a court warrant and without any civil and criminal liability. The Indian government will remain in dark about it. In fact US’ Cyber Intelligence Sharing and Protection Act (CISPA) make the exchange of electronic information between Internet Service Providers and the government of US possible. The use of Gmail account demonstrates the lack of professionalism of UIDAI, which has been given the task of handling the database of the personal sensitive information of Indians. This act of omission and commission merits attention. Such gullibility of ministers and IAS officers in particular and officials in general is inexcusable.
In the absence of Parliamentary scrutiny institutional accountability for defections by intelligence officials like Major Rabinder Singh, a joint secretary in Research and Analysis Wing (R&AW) who seem to have formally defected to US on 14 May 2004 with the help of the US Embassy in Kathmandu despite being under surveillance by R&AW’s Counter-Intelligence & Security Division (CI&S) for three months during the tenure of CD Sahay, who was the Head of R&AW, has not been fixed. The Manmohan Singh government that assumed office on 22 May 2004, dismissed Major Rabinder Singh from service under Article 311 (2) ( c ) of the Constitution of India on 5 June 2004. Indian intelligence agencies have consistently been poached by foreign intelligence agencies.
A former special secretary of the R&AW and author of “Escape to Nowhere: Story of an Espionage Agent”, Amar Bhushan says, “It’s the charter of every intelligence organisation to infiltrate and subvert other intelligence agencies.” It has now been revealed that Major Rabinder Singh could not be caught red handed because he had been transmitting the information and documents using voice over internet protocol (VoIP) meant for the delivery of voice communications and multimedia sessions over IPl networks through his laptops, which had imprints of 23,100 files. Thus, a database of 23, 100 files of R&AW has been transferred to US agencies without putting any remedial mechanism in place. Are our intelligence agencies really so naïve that they did not know that data can be transferred with VoIP? Can these agencies be trusted with the data of Indians?
Hasn’t all the data collected by Census, UIDAI, RGI and ECI been transmitted to foreign countries through companies L1 Identity Solutions, Accenture and Mongo DB?
It has now come to light from Sanjay Baru's book 'The Accidental Prime Minister: The Making and Unmaking of Manmohan Singh' that the Prime Minister declined “to take a daily briefing from chiefs of both the Intelligence Bureau and the Research and Analysis Wing (R&AW) who were told to report to the National Security Advisor (NSA)”. MK Narayanan, as NSA, claimed that he had a file on his adversaries but he and his ilk does not seem to realize that National Security Agency of US and its Five Eyes Alliance have a file on them too. It appears that the Prime Minister accepted the fait accompli of all the Indians including him being subjected to surveillance by imperial powers with collaborators giving a field day.
In the 41 page long Wikileaked document titled ‘Creating a unique identity number for every resident in India’ that declared itself to be a ‘Confidential- property of UIDAI’ states, “The Unique ID or UID will be a numeric that is unique across all 1.2 billion residents in India. The UID number will not contain intelligence. In older identity systems, it was customary to load the ID number with information related to the date of birth, as well as the location of the person. However, this makes the number susceptible to fraud and theft, and migration of the resident quickly makes location details out of date. The UID will be a random number.”
While the Election Commission, cabinet secretary, home secretary and UIDAI have accepted UID/Aadhaar as “proof of address”, this Wikileaked document reveals that making it a proof of location was not part of its conceptual design. It is a puzzle as how agencies after agencies started accepting biometric Aadhaar as proof of address?
In fact each new born infant is a suspect. There is a file being created to track and profile him for good.
Like Indian NSA’s threat to his adversaries about having a file on them, having a UID/Aadhaar number automatically creates a file of the Indian residents in question. Even infants are not spared in this scheme of things.
The confidential document reveals that from day one the Prime Minister wanted to create a file on each of “1.2 billion residents”, the division of work between MHA’s NPR and UIDAI was merely an attention diversion tactics to outwit political scrutiny. The merger of the electoral database with UID/number debunks UIDAI’s claim that UID number “will not contain intelligence” and “the location of the person.”
From these disclosures, it appears that PMO has adopted an adversarial role vis-à-vis Indians and acting beyond their legal mandate to pander to the interests of the commercial czars, non-state actors and foreign intelligence companies.
Why is India’s officialdom and political class blind to subversion of national interest by unelected officials of PMO under the leadership of Nero like Prime Minister through bartering of citizen’s databases?
In a country where, no intelligence chief or official has held accountable for the assassination of two of its Prime Ministers and for betraying nation’s secrets, can it be hoped that all those who compromised India’s data security will made liable for their treacherous acts?
Is it the case that the database scam is bigger than all the scams of Indian National Congress led Government? There is no reason for the PMO to deny information under RTI, which it admittedly is in possession of.
Post election, there is a compelling logic for setting up a High Powered Commission of Inquiry to probe the goings in the PMO and intelligence agencies that engineered and bulldozed the database project by compelling various government departments and States including Election Commission to comply with the dictates of illegal UIDAI.
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(Gopal Krishna is member of Citizens Forum for Civil Liberties (CFCL), which is campaigning against surveillance technologies since 2010)