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There has always been an aura around the guys who know their numbers! Look at the fan-following for stock market gurus & the leading bulls whose tips are lapped up by hungry followers. There is a whole industry (well, almost) built on tracking Rakesh Jhunjhunwala's stock market moves! And, even inside organizations, the Finance function has always been considered the 'special ones' with an inside track to the C-Suite business decisions, thereby causing some awe & a lot of fear in other lesser organizational mortals.
Nowhere has this been witnessed more than in the Banking & Financial Services Industry (BFSI). BFSI members are the movers & shakers of any country's economy. They receive a lot of airtime in the media & appear knowledgeable about emerging trends & make predictions of how the markets will move in the coming days.
However, in recent times, many adverse incidents in the global economy have damaged reputations & landed a series of crushing blows to the titans of the BFSI sector.
Things began to unravel in 2008 when the bottom fell out of the global finance industry with one after the other firms considered 'too big to fail' displaying unexpected & unforeseen hollowness. When the sophisticated veneer of respectability fell-off, all one could see was a unholy mess of deceit, fraud & greed. The malfeasance, misfeasance & nonfeasance of Banks & other financial firms on both sides of the Atlantic triggered fatal down-turns in all the economies of the world. With hundreds, nay thousands, of innocent victims of the financial tsunamis, what was sad to note was that the largest number of those affected was the lower & middle income classes. Sure, a few billionaires turned millionaires but the larger numbers affected by the Housing market collapse were those who literally lost their houses & investments. And, when the financial tide receded what was left in the wash were a few very rich bankers who hired fancy lawyers to plea bargain, pay fines and escape with short period punishments.
The funny part also is that many spend relatively short time in a penitentiary, get released on grounds of good behavior and write a best-seller on their misdemeanors. Their wages of sin are paid back soon enough and they seem to make a quick return to their favorite haunts & watering holes. Soon enough, it seems, to be able to make money and whitewash their past and gain respectability again. While this seems like an American tale, even in India, this show has been played out often enough, the only difference being that the jail terms are temporary judicial custody periods, given the fact that financial cases never fully get completed (cases in point, the Satyam saga, Kingfisher, Sahara, et al).
However, like a bad dream, and rather like the product recalls in the auto industry, despite claims of being value driven, transgressions continue to mount up. The recent travails of Wells Fargo Bank in the United States and Deutsche Bank in Europe, are only the latest episodes of what seems like long-running soap operas where CEOs guiltily parade in public, mouth mea culpa & claim 'systems failure' for gross ethical breaches and walk away with fines. The bruise to their reputation is usually very temporary but the galling fact is that they saunter away with substantial personal wealth despite having destroyed the collective wealth of many innocent depositors who fell victim to their guiles and misguidance in the name of financial innovations. This venal disease of personal aggrandizement has not even spared the micro-finance sector which also has witnessed dubious transactions fueled by financier's greed couched in the garb of social good.
In the name of financial innovation, much has been attempted over the years. Typically, financial innovations are classified as either Financial system or Institutional innovations; or, as Process Innovation; or, as Product Innovation. While all three are necessary in emerging markets like India, the fact is that regulators are always late in the game. While it is true that excessive and overbearing governmental regulations stifle the growth of financial markets, the absence of controls has led to unbridled exploitation of the gullible through 'get-rich quick' schemes which keep flooding the market.
Be that as it may, the need for financial innovation of all the above three types cannot be stressed enough. And, leveraging the power of technology for delivering financial access to the under-privileged has been the biggest boon to create financial inclusion in the economy. So also other steps like mobile banking, asset restructuring, micro-finance, crowd-funding, angel investing, etc. More of these would be welcome but careful regulation is also necessary to filter the bad elements from ruining or diluting the positive benefits to the customer. It would be wise to heed the words of the former Governor of the Reserve Bank of India, Raghuram Rajan, who mentions in his seminal work, 'Fault Line: How Hidden Fractures Still Threaten the World Economy' (where he studied the triggers to the great economic collapse of 2008), that, 'The problem was not that no one warned about the dangers; it was that those who benefited from an overheated economy - which included a lot of people - had little incentive to listen.'
So, a judicious mix of prudence with innovation is what the doctor would advise any growing economy.
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