Financial Innovation

Aniruddha M Godbole

28-Aug-2010 New Horizon Leadership Institute Bengaluru

I am a student of Finance and this seminar reflects my current state of understanding of this subject. The objective of this seminar is provoke fundamental thinking in the area of Finance…

All standard disclaimers apply.

Functions of the Financial Economy

• To improve resource allocation among a variety of needs in the real economy at the same time point and also across time.

• Achieved by money (medium of exchange & store of value functions) and claims on money i.e. financial instruments

Money

• Traditional Money : positive interest rates…competitive economy…– But may not lead to co-operation– Medium of exchange function may be

compromised

• Complimentary Currencies: “The Future of Money” by Bernard Lietaer

SCOPE of this seminar

We shall focus on innovations in financial instruments in this seminar.

Good Financial Innovations

• Improves the functions of the financial economy.– Resource allocation based on risk profile of

varying needs …

Few Good Financial Innovations

1. Insurance (Life, Health, vehicle, crop,...)2. ATM ?3. Phone banking4. Reverse mortgage5. Inflation indexed bonds

Few Good Financial Innovations

6. Carbon credits. 7. Preference shares8. Non voting shares9. Bank Guarantees10. Group lending (as practised in microfinance)

Few Good Financial Innovations

11. Shanxi solution for ownership of banks ( non-voting expertise shares—daily mgmt decisions, capital shares—voting in 3 -4 yrs and can change allotment of expertise shares, dead shares---expiry, non-voting; insurance against fraud, contracts permitted the enslavement of managers’ wives and children)

This is not an exhaustive list.

How many of these are recent?1. Insurance (Life, Health, vehicle, crop,...)2. ATM (although a technology tool, it certainly deserve mention)3. Phone banking4. Reverse mortgage5. Inflation indexed bonds6. carbon credits7. Preference shares8. Non voting shares9. Bank Guarantees10. Group lending (as practised in microfinance)11. Shanxi solution for ownership of banks

How many of these are from India?1. Insurance (Life, Health, vehicle, crop,...)2. ATM (although a technology tool, it certainly deserve mention)3. Phone banking4. Reverse mortgage5. Inflation indexed bonds6. carbon credits7. Preference shares8. Non voting shares9. Bank Guarantees10. Group lending (as practised in microfinance)11. Shanxi solution for ownership of banks

Indian Psyche?

• More real estate?• More Gold?

Some ideas

• Priority Sector Lending Certificates• Inflation indexed bonds…inflation indexed

annuities• Gold denominated loans• Domestic Sovereign Wealth Fund• Special Food Vouchers

Enabling Environment

1. Allow experimentation…leads to some sacrifice in stability in addition to possible drop in efficiency.2. Engineer a one-time real estate crash by a massive supply side intervention bidirectional relationship between real economy and financial economy?

My professional weblog is hosted at:http://www.prmia.org/Weblogs/General/A_Godbole/

You can write to me with your comments/suggestions and/or ask for a copy of this presentation at:

godboleaniruddha@yahoo.com