What's behind international financial crises

Most of the international financial crises that have occurred over the last 200 years were the result of strains created by the recycling of capital from countries with high savings to those with low savings. The current European crisis is a case in point. For nearly a decade, capital from high-savings countries like Germany flowed to low-savings countries like Spain. The resulting build-up in debt created its own constraints,and now Europe's economy is forced to rebalance.

If the rebalancing takes place only in Spain and other low-savings countries, the result, as John Maynard Keynes warned 80 years ago, must be much higher unemployment. Whether unemployment remains confined to countries like Spain, or eventually migrates to those like Germany, depends on whether the former remain in the euro.

Although the relative savings positions of Germany and Spain seem to confirm cultural stereotypes, national savings rates have little to do with cultural proclivities. Instead, they largely reflect policies at home and abroad that determine household consumption rates.

A country's overall consumption rate is, of course, the flip side of its savings rate. Apart from demographics, which change slowly, three factors largely explain differences in national consumption rates.

First and foremost is the share of national income that households retain. In countries like the United States, where households keep a large share of what they produce, consumption rates tend to be high relative to GDP. In countries like China and Germany, however, where businesses and the government retain a disproportionate share, household consumption rates may be correspondingly low.

The second factor is income inequality. As people become richer, their consumption grows more slowly than their wealth. As inequality rises, consumption rates generally drop and savings rates generally rise.

Finally, there is households' willingness to borrow to increase consumption, which is usually driven by perceptions about trends in household wealth. In Spain, for example, as the value of stocks, bonds, and real estate soared prior to 2008, Spaniards took advantage of their growing wealth to borrow to increase consumption.

But this is not the whole story. Consumption rates can also be driven by foreign policies that affect these three factors. For example, an agreement in the late 1990s among the German government, corporations, and labour unions, which was aimed at generating domestic employment by restraining the wage share of GDP, automatically forced up the country's savings rate. Germany's large trade deficits in the decade before 2000 subsequently swung to large surpluses, which were balanced by corresponding deficits in countries like Spain.

As Spain's tradable-goods sector contracted in response to the expansion in Germany, it could respond in one of only three ways. First, Spain could refuse to accept the trade deficits, either by implementing protectionist measures or by devaluing its currency. Second, it could absorb excess German savings by letting unemployment rise as local manufacturers fired workers (because rising unemployment forces down the savings rate). Finally, Spaniards could borrow excess German savings and increase consumption and investment.

Of course, Spain could not legally choose the first option, owing to its EU and eurozone membership, and, not surprisingly, was reluctant to choose the second. This left only the third option. Spaniards borrowed heavily prior to the crisis to increase both consumption and investment, with much of the latter channelled into wasteful real estate and infrastructure projects.

This continued until 2007/08, when Spanish debt levels became excessive. But, as long as Germany does not absorb its excess savings and accommodate the desired rise in Spanish savings, Spain is still faced with the same options. Once borrowing is no longer possible, Spain must either intervene in trade - which implies leaving the eurozone - or accept many more years of high unemployment until wages are driven down sufficiently to produce the equivalent of currency devaluation.

This is the key point. Low-savings countries cannot easily adjust without an equivalent adjustment in high-savings countries, because their low-savings rates may have been caused by high savings abroad. After all, savings and investment must be in balance globally, and if policy distortions cause savings in one country to rise faster than investment, the reverse must occur elsewhere in the world.

In other words, savings rates in Spain and other deficit countries in Europe had to drop once policy distortions forced up Germany's savings rate. In theory, excess German savings could have left Europe; but given high Asian savings that already had to be absorbed, mainly by the US, and the constraints imposed by the euro, it was almost inevitable that excess German savings would be exported to other European countries.

Germany should care about Spain's difficulty in adjusting, because the resulting rise in European unemployment will be absorbed mostly by Spain unless the Spanish government accelerates the adjustment process by leaving the eurozone and devaluing. In that case, Germany would bear the brunt of the rise in unemployment.

There should be nothing surprising about this. Once deficit countries take aggressive measures , it is usually trade-surplus countries that suffer the most from international crises caused by trade and capital flow imbalances. As political tensions in low-savings countries grow, so will the risk of these countries abandoning the euro, causing the price that Germany will pay for its distorted savings rate to rise.

How NABARD Revolutionized Co-op Banks Using Cloud Computing

Vaishali, a district in Bihar, is known as the birthplace of Bhagwan Mahavir, the 24th Jain Thirthankara. But its historical significance aside, not many know that it’s one of India’s most backward districts.
Despite its backward status, you will be amazed to find that Vaishali houses a District Co-operative Central Bank (DCCB) which runs its banking operations on a cloud-based core banking solution.
So how such a small district co-operative bank with only six branches manage to get on to such a latest technology platform–is nothing less than a wonder.
Enter National Bank for Agricultural and Rural Development (NABARD), a financing agency that looks after providing investment as well as production credit for promoting various developmental activities in rural areas.
It is also one of those organizations that regulates and refinances financial institutions such as state co-operative agriculture and rural development banks, state co-operative banks, regional rural banks, commercial banks, and other financial institutions approved by RBI that provide financial help to rural folk.
Bumpy Road Ahead
Three and half years ago, NABARD commenced the last leg of its ambitious financial literacy and inclusion programme. Its aim was to improve financial awareness and make banking products available in rural areas. There were 201 state and central co-operative banks with 6,940 branches in 16 states and three UTs that were operating either in a manual or a partially computerized environment. This reduced efficiency.
“We wanted to make sure that these financial institutions have proper IT systems in place which will help them improve their everyday banking business and market the launch of new banking products,” says K.R. Bhat, GM-IT, NABARD.
Initially, NABARD gave these 201 state and central co-operative banks an option to select their own IT system—a banking solution—which would streamline their processes and systems. “For a bank to invest in a core-banking solution is a huge cost that involves buying the software, paying licenses, owning a datacenter, and a disaster recovery solution, as per RBI guidelines,” says Subrata Gupta, CGM, NABARD.
And, even if a bank buys the software, it needs to pay an annual maintenance cost to the solution vendor. So, the question is whether a small bank like Vaishali DCCP with just six branches could afford such a solution? Not really.
Also, all of the 201 state and central co-operative banks weren’t prompt in submitting their half-yearly and annual financial reports to NABARD.
As per Section 29 and 30 of the Banking Regulation Act, 1949, the state and district central co-operative banks are required to prepare their balance sheets and P&L accounts and get the same audited by statutory auditors.
The banks are also required to submit their balance sheets along with the auditor’s report and its copies need to be furnished as returns to the RBI as well as NABARD within six months from the end of the financial year (that is, by September 30). However, these banks were taking about six months to complete audit.
And thus began NABARD’s IT excursion to regulate the banking operations of 201 state and district co-operative banks by helping the co-operative banking sector move to a single cloud-based core banking solution. It was also one of its biggest initiatives towards institution-building where both business and IT teams collaboratively made decisions for its success.
Greener Pastures
In order to ensure that it’s successful, NABARD’s IT team had to identify the right solution which was not only scalable but also accessible by all 6,940 branches from 16 states and three UTs. For 103 banks, the team selected one vendor while for the other 98 banks, the software is managed by another vendor. The infrastructure facilities within their branches, head office, and other service equipment such as PCs, printers, branch servers, UPS, LAN, and switches, along with regular maintenance are handled by the co-operative banks, themselves. A certain amount of language localization was also necessary. Therefore, NABARD gave banks the option between two languages: One regional and Hindi or English.
“We chose an opex model barring the branch infrastructure in order to give these state and district co-operative banks access to a cloud-based platform on a minimum monthly subscription fee,” says Gupta.
Despite maintaining an outcome-based SLA with the vendors, NABARD wanted to get rid of a few apprehensions. One of the major concerns NABARD had was warranting bandwidth availability and data connectivity at the banks. At certain remote places, where lease lines weren’t available, NABARD wanted to ensure that the vendor was able to provide either VSAT or CDMA connectivity.
The other concern was IT support. NABARD guided the banks towards obtaining specifications of infrastructure facilities such as LAN, PCs, UPS etcetera.
“Every bank would identify a local IT staff that would be trained by the vendor on simple skills such as locally running backup, and performing day-start and day-end processes among others,” says Bhatt.
Cash Cow
As of today, NABARD has managed to bring 200 banks and 6,939 branches on the CBS platform. This includes 114 new branches which were directly opened on the CBS platform. “It was one of the biggest cloud implementations in India, when it started and continues to function even when some districts and states are in darkness,” says Bhat.
“One of the biggest benefits of the project is that it ensured data transparency, regular settlement and balancing of books of account, as well as improvement in data quality,” says Bhat. The reports are generated automatically by the systems and as a result, almost all the co-operative banks are able to submit their annual reports within 10 days of annual closing in March. Additionally, Bhat says that the shifting of deposits and remittances to commercial banks is avoided and the credits are available to beneficiaries immediately.
Instead of finding their own solution, the banks can utilize services offered by NABARD. “By adopting the CBS platform, the co-operative banks have saved huge costs, and as a result, the banks will now have more time and money for finding business in rural areas and attracting new customers,” says Gupta.
NABARD has ensured that even smaller banks that could not afford to have their own solution now have access to basic banking facilities such as Any Branch Banking, NEFT, RTG, mobile services and ATMs, thanks to CBS.
For instance, today, a DCCB in Etawah in Uttar Pradesh can provision distribution of salaries of school teachers at the same time. This has automatically improved efficiency and created customer delight. In Chattisgarh, whenever money gets credited to a farmer’s bank account from the sale of paddy, the farmer receives an SMS as soon as the money gets transferred to his account. In Uttarakhand, when a district co-operative bank’s branch was washed out in the floods, the CBS platform ensured that it did not lose a single day’s data, all the accounts were operative from the bank’s other branch next day onwards.
“We are happy that the CBS project has taken us closer to our goal of financial inclusion in rural India,” says Bhat.

How ING Vysya Redefined Mobile Banking with Gamification

When you hear of a bank using gamification techniques to create a mobile banking app, you know that that it’s a rare story. That’s because you know that gamification and banks are the most unlikely couple and you know that that’s what makes it interesting. And that’s the story of ING Vysya Bank.
The bank’s mobile app, designed using gamification techniques, has already swept many of its customers off their feet. A delighted customer’s review on Google Play called it “the best ever mobile banking app”, while a leading newspaper wrote: “It seems like mobile banking is finally here”.
The unique experience, says Aniruddha Paul, CIO of the bank, was made possible with a bit of calculated risk. “We wanted the app to be completely different from the run-of-the-mill banking apps available today. The UXD, we thought, would be the key differentiator. Hence, we went after a company that develops games, but has never ever designed a banking app.”
Instead of replicating the navigation methods of Internet banking, ING’s mobile app is designed contextually by placing relevant options on the screen.
For example, the creative design of the balance meter in the form of a speedometer allows the users to receive alerts when there is no minimum balance in the account. A quick glance on the ‘green zone’ and ‘red zone’ of the speedometer gives you an idea whether you are getting ‘richer’ or ‘poorer’. Interestingly, the app lets customers check their balance without even logging in. But users won’t have to worry about their critical information being exposed. “To ensure security, the devices on which the app gets downloaded are finger-printed. The app can’t be downloaded to more than two devices. In the event of losing the device, the customer can call up the bank and immediately wipe off the app. Besides, the customer can actually choose whether he wants the balance meter to be displayed or not,” says Paul.
Users can even scan a cheque and save the image in the app for future reference. A distinctive approach makes the app interactive, intuitive, visually delightful—and secure.
In a nutshell, the app facilitates true end-to-end banking, including closure of a fixed deposit.
This holistic experience wouldn’t have been possible without a rock solid back-end IT infrastructure and that was the first thing Paul ensured. “The world of digital provides a level playing field to a mid-sized bank like us and enables us to compete with much bigger banks that have thousands of branches. While the mobile app was a major front-end initiative, we simultaneously took up key projects like legacy modernization and private cloud at the back-end,” says Paul.
Though ING Vysya is the 24th largest bank in India, it is among the top 10 when it comes to overall money being processed through mobile banking. This is within six months of launching the new mobile app. Now that the bank is fully digital-ready, Paul and his team have embarked on a whole lot of digital initiatives like a Facebook app that lets you transact and an app that works on smart watches.

Banking and gamification aren’t that unlikely a couple after all!