Sudip Bandyopadhyay’s Blog

Rapid economic growth over the past decade or so has had its welcome trickle-down effect in rural India , with a healthy growth in income. Better connectivity – both roads and telecom with cities and electrification have boosted productivity and brought hitherto urban-only products and services to rural doorsteps, fuelling a consumption boom that famously saved many a big-ticket marketer from the global economic crisis-led demand slowdown in cities in 2008-09. Inclusive government policies, like the rural job scheme, loan waivers and better prices for crops acted as stress mitigators wherever markets failed to deliver or were absent.  Microfinance and organized retail, currently limited in reach, have demonstrated the multiplier effect of reaching directly to rural consumers and producers in lifting rural incomes and productivity.

Financial inclusion has become a buzz word in the government and media circles.  All efforts in this area are directed towards either providing micro finance or spreading the reach of the banking sector to cater to the unbanked population in the rural areas.  However a  significant component of financial inclusion,providing adequate avenues for investment of savings, is neither available to the rural population nor is being talked about.

5,93,731 villages in India contains 815 million people comprising of 151 million households.  They represent 70% of Indian population and 56% of  national income.  Even if we exclude the population below the poverty line and rural poor ,33.4% of Indian middle class stay in villages and rural India generates 33% of national savings.  To ignore this market as irrelevant and insignificant is definitely not appropriate from the corporate India’s point of view in the medium to long term.

Unless rural India  is provided with adequate investment avenues almost at par with urban India, the vicious circle of under development  and poverty cannot be broken. Savings of Rural India needs to be deployed in productive assets which should generate handsome gains for the savers. The power of saving and compounding should start providing rural folks real good gains. Deployment of savings in Bank Deposits or Post Office Savings will not enhance their wealth. Also lure of high returns should not draw them towards dubious schemes.

There is a crying need for a conscious continuous effort to take financial services distribution to the villages in a cost effective manner to cater to this segment of the population.  The proponents of financial inclusion should definitely start taking concrete steps towards achieving this above goal.

From the time in the early 1980s when the Derivatives first started trading, in a short span of less than 30 years the derivatives market has become the biggest market in the world. At the end of last year, contracts with a face value of $636,431bn were swirling around the world’s financial system, according to the Bank of International Settlements. Just 3.4 per cent of the total were traded on exchanges. The rest – $614,674bn worth, equivalent to nearly 10 years of global economic output – were agreed and traded in private markets, under terms struck directly between the buyers and sellers.

Over the next year, an entirely new rulebook is to be drawn up for this privately traded part of the financial markets, also called over-the-counter (OTC) derivatives. President Barack Obama’s signature on the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21 started the countdown.

Under the new regulations, the derivatives world will be divided in two. On one side will be those products that are widely used, simple in structure and actively traded: standardized derivatives. Those will be pushed on to clearing houses to make the financial system less vulnerable to the default of a big derivatives dealer.

Clearing houses can reduce counterparty and systemic risks by standing in the middle of trades – though there of course remains a risk the clearing house itself may fail. The clearing house has a pool of capital and collects collateral and margin – up-front payments against possible losses. If these resources are not enough to cover a default by a member, the others are supposed to cough up.
Cleared derivatives will also have to be traded on electronic systems – although exactly how those systems will be defined, and how quickly and frequently price information has to be made public remains to be resolved. How regulators decide the clearing houses should hold the collateral against trades, and the extent to which derivatives users can offset positions against each other, will also be key.

Once regulators determine what part of the OTC derivatives or swaps markets has to be cleared, the remaining part will also be policed. No one knows what proportion will be uncleared, or what the targets are, although for all derivatives the more heavily regulated exchange-traded futures market provides the likely standard.

What also will be of significant importance is the Convergence or Divergence of the regulations between Europe, US and Rest of the World, including Japan.There is a growing risk of Regulatory arbitrage where market participants shop around for the most favourable set of rules. Markets in Hong Kong and may be Singapore can be big beneficiaries under the circumstances and strengthen their Derivatives and Clearing businesses.