Ravi Narain: Capital Advantage

Ravi Narain, 54, is the man who built National Stock Exchange (NSE)into a markets powerhouse. An economist from Cambridge and a Wharton MBA, Narain was pursuing a career as a policy consultant in the US before deciding to return to India in 1981. He applied to many public sector bodies and got picked up by Industrial Development Bank of India (IDBI). More than a decade later, he joined the team of legendary financial sector maven, R.H. Patil, to set up NSE. Narain succeeded Patil as NSE’s MD & CEO. He is credited with developing NSE’s popular derivatives segment.

From the earliest days of history, technology has always been a determining factor in the way we live. The ability to use metals like bronze and iron, the know-how required for agriculture, and the
developments that led to long distance seafaring are all examples of technological change that had far reaching consequences on how societies are organised. Information and Communication Technologies (ICT) are playing a similar role in our lives today. While ICT impacts us in many ways, a major channel of its impact is going to be felt through the way in which it is reshaping finance.

The institutions and markets comprising the financial system are a critical part of our lives today. They play the same role in the economy that blood circulation plays in the body. From the local moneylender to the sophisticated derivatives trader, the financial system is involved in moving resources from those who have it to those who need it. There is also a large part of the financial system that spreads risks. If it were not for the financial system’s ability to distribute risk, we would never undertake the large and complex projects required to sustain life as we know it.

Many of us are familiar with the story of how share trading was revolutionised by the use of technology during the Nineties. Before electronic trading and the use of VSATs and leased lines, equity markets were limited by geography and access. Transaction costs were high, it took a long time to get delivery of shares, and you could not be sure that what you got was real. Electronic exchanges, depositories and a new system of regulation completely changed how this market functioned, and set the stage for the flow of billions of dollars of capital into our markets.

In coming years, increasingly larger amounts of capital will come into the financial system. This capital will come from within India as well as from outside. As growth slows down in the developed world, India, China and a few other developing economies will attract a much larger portion of foreign savings. Similarly, as more people have disposable incomes, more domestic capital would be available for financing infrastructure and innovation. This increased flow of capital presents us with a unique opportunity to transform our society.

Development efforts need to focus on products as well as markets, and on retail as well as wholesale. Basic products for savings, credit and insurance have to reach a much larger population than they do now. At the other end of the spectrum, the financing, investment and risk management needs of companies and governments are growing in size and complexity, and financial institutions should have the ability to support this growth.

Technology will play an important part in this transformation, because it has the ability to break access barriers and bring down transaction costs to a fraction of what they are today. When used in the right manner, technology opens up possibilities that did not exist before. One such transformational change will come from mobile payment systems. To people with access to finance, mobile banking is only an additional channel to access the services that they already use. But for the large number of people who don’t have access to traditional channels, mobile banking will bring them into the system, and will lead to their economic engagement and progress. Mobile banking offers the chance to solve the problems that we have not been able to solve through traditional branch banking.

Technology will enable Mutual Funds to sell and service much smaller investment units and insurance companies to sell much smaller policies than they are able to do now. In the same way that mobile companies were able to enlarge their market by selling the “chhota prepaid”, and FMCG companies were able to enlarge their market through selling sachets, financial services companies will also access a far bigger market if their cost of acquiring and servicing customers comes down. Similarly, processing small loans and small insurance claims will become faster and easier, allowing more people to make use of these services. Databases with credit histories, and Unique Identification systems will allow financial institutions to reduce risk when they make loans or provide other financial services.

Another area where technology will play an important role is in providing better access to information and education. Hand held devices, cheap Internet and local language content will allow us to create systems for spreading financial literacy. With technology, we can combine online content with local delivery and create much more efficient systems. As technology and innovation starts to diffuse through society, we will see increasing adoption of financial services, leading to greater productivity and better resilience to shocks.

The impact of technology is not limited to retail financial services alone. At the core of the financial system where equity, credit, currency and other risks are traded, we need deep, liquid and resilient markets. Technology is helping these markets enormously, and playing an important role in improving efficiency of capital allocation and risk management.

Technology is a means to an end, and is only one piece in the puzzle. Without robust institutions following the highest standards of governance, we will never be able to harness the power of finance for the good of the many. Technology helps with growth when it is used to create transparent systems and a level playing field for everyone. The challenge for governments, regulators and financial institutions will be to leverage the power of technology to make markets work for the common good.