Interest rate futures launch

On 31st (Monday) morning, interest rate futures trading will start at NSE for the second time. Watch me on the CNBC TV18 website on interest rate futures. I had a blog post on this recently; Mobis Philipose has an article in Mint; Financial Express has an editorial. In Economic Times today, Mayur Shetty interviews B. Prasanna of ICICI Securities PD, and Gaurav Pai has some worrisome reportage about possible regulatory problems that might come in the way.

NSE has setup a nice web page on interest rate futures which is the same as what they have for currency futures.

From ivory tower to ground zero

I have a column in Financial Express today about Ben Bernanke, titled From ivory tower to ground zero.

5th research meeting of the NIPFP DEA Research Program

On the website of the NIPFP DEA Research Program, there is a checklist of the papers and speakers of the 5th research meeting, which is scheduled for 16 and 17 September. This URL will show a full fledged conference program, with timeslots and discussants, in a few days.

Postcard from the edge

NSE has announced that on 31 August, they will trade interest rate futures. I believe BSE will also be in this fray soon thereafter.

After the Percy Mistry and Raghuram Rajan reports, there was a bad RBI committee report in August 2008. This led into a `RBI/SEBI Standing Technical Committee report' which spent ten months doing product design. This is central planning at its worst; every detail about the product is specified by the government, through a committee which has nobody from the private sector. And we went from bad to worse: while the `bad RBI committee report' talked about a short-dated interest rate futures contract, that product vanished in the RBI/SEBI Standing Technical Committee report.

With all these problems, it is a step forward. The product will trade right alongside currency futures at NSE. The glass is half full in that the government has not forced the creation of one more silo, one more separate segment.

So this long bond futures will trade in isolation, without the short-dated contract. Yet, I think it will work. The reason is that in India, the bond market is in such bad shape, that there is really only one rate. There isn't much of a yield curve to speak of, there is no yield curve arbitrage, etc. So a one-factor model -- parallel shifts of the yield curve -- captures the bulk of the action. There is relatively little else going on.

For an analogy, we know that in fledgling emerging markets, on the stock market, the market model has a high R2. In other words, there isn't much information production on a per-stock level; it's all macroeconomics and politics. As we get to a less stunted world, idiosyncratic risk surfaces, and each stock does its own thing. In similar fashion, given the stunted Indian bond market, all that happens really is parallel shifts. It would be possible to trade these using the interest rate futures at NSE/BSE. This will be a big step forward.

Economic reform in India is about winning political battles against the license-permit raj. The last time interest rate futures trading was attempted in India, RBI sabotaged this by banning bank participation. When currency futures trading started, RBI banned participation by FIIs and NRIs, while FIIs continue to have full access to the non-transparent and vulnerable OTC market. These bans continue to be in force today (!). RBI continues to ban elementary things like currency options or currency futures for non-dollar currencies on exchanges, even though these are acceptable to RBI on the (non-transparent and vulnerable) OTC market. With these kinds of mistakes starkly visible, it is generally safe to make modest assumptions about economic knowledge and sensible policy-making capability at RBI. Starting from these low expectations, it is remarkable to see that FIIs and banks will be able to trade the interest rate futures (after a fashion).

It's a halting, stumbling, bad way to make progress. But it feels nice to occasionally get progress, and progress this is.

For the domestic financial industry, this is a game changer. The dynamic part of Indian finance -- the securities firms -- have traditionally been kept out of the SGL club. They are now being given a chance to do currencies and interest rates. If you ask me which are the NSE/BSE firms which will thrive in the next ten years, my answer will be: the firms who are in the top 25 ranking by activity in currency futures and interest rate futures in 2009-10. These are the firms who will have done the most in terms of growing up beyond their equity market roots, to turn themselves into full fledged financial firms.

Interesting readings

• An editorial in Financial Express on recent efforts to snarl up `minor' ports, which are the hotbed of progress in India's ports.
• Writing in Foreign Affairs, Christian Le Miere proposes a way for China to deal with its problems in Tibet and Xinjiang. In similar fashion, Sri Lanka has problems with the Tamil regions.
  I have a suggestion for a well-tested approach that could help forge a union out of diverse provinces: the federal structure of the Indian Constitution. Some of these ideas could be ported to these new settings. As an example, I believe the Indian idea of the Finance Commission has been used to some extent in the design of the South African Constitution.
• Some people in the Indian policy establishment are smugly basking in the glory of having blocked securitisation in India, given that securitisation got into trouble in the West. Jayanth Varma has an article in Financial Express which is most interesting. One key point is that when bank assets get into trouble, the difficulties are first visible in transparent assets such as securitisation paper. He ends saying: We must also remember the US home owner gets a bargain that is available to few home owners elsewhere in the world : a 30-year fixed rate home loan that can be repaid (and refinanced) at any time without a prepayment penalty. This is possible mainly through securitisation and deep derivative markets that allow lenders to manage the interest rate risks.
  In India by contrast, the home owner gets a much worse deal: most home loans are of shorter maturity (20 years or less) and are usually either floating rate or only partially fixed rate. The few `pure fixed rate' loans involve stiff prepayment penalties when they are refinanced. It would be sad if we keep things that way because of an irrational fear of securitisation.
  On a related note, see K. Vaidyanathan in Financial Express on CDS.
• Tim Harford in Financial Times on the remarkable fact of poor people in India choosing to pay for private education or healthcare services when government alternatives exist and are free.
• Watch Raghuram Rajan and Bibek Debroy on Ila Patnaik's TV show.
• Sunil Jain in Business Standard on the role of ad campaigns in winning public policy arguments.
• Meghnad Desai in Financial Express on the evolution of ideas on stabilisation, and the outlook for the `new orthodoxy' of macroeconomic policy.
• One of the more egregious forms of protectionism that afflicts india.

The end of the beginning

The Bank of Israel has become the first central bank worldwide to raise interest rates in this downturn.
 
A few weeks ago, I wrote an elongated blog post titled Does unconventional monetary policy and unusual fiscal policy presage an upsurge in inflation?. This was partly motivated by the concerns of the time (this was in mid-June) about the exit strategy of central bankers. I had argued that inflation targeting gave the right framework for all three phases: the sharp drop in the policy rate, the shift to quantitative easing when the short rate fell to zero, and the eventual rise of interest rates. It is not surprising that the first mover on the exit process is an inflation targeting central bank.

A Taylor rule with an inflation coefficient of 1.5 and an output coefficient of 0.5 gives us a rough approximation to the thinking of inflation targeting central banks. The puzzle then lies in forecasting the extent to which inflation will exceed the target and forecasting the extent to which output will be below the target. These two forecasts are hard to make. But as I said in the above article:

As the financial system comes back to life, as the money multiplier comes back to normal values, the intellectual framework of inflation targeting will shape the responses of the central banks. There will obviously be some mistakes in forecasting inflation, given that the parameter estimates in our models are driven by normal times. But one can expect an average error of zero in the sequencing through which unconventional monetary policy is withdrawn. And when mistakes are made, when de jure inflation targeting is in place, the bond market will know that these are mistakes of execution and not a change in strategy.

Comments to discuss

Maps vs. map data: appropriately drawing the lines between public and private

Comment by Anonymous:

OSM is a good effort, but it's license is flawed. It should be a pure public domain license, and it is not - they selected CC-by-SA. To their credit, they have been discussing this fascinating issue on their website. (See http://www.opengeodata.org/?p=262)

The other issue is that their data is still not good enough - it will take some time to get there, but throwing money is not the solution. users / volunteers will do a better job here!

Re: Survey of India / GOI The GOI continues to view Maps data as a strategic asset, important from the defense perspective - and hence restricted. That makes it much harder for the survey to be open about high resolution data, and compete in this space.

Improving wireless bandwidth

Comment by satya:

I have been a customer Sify--->Bsnl--->Tata Wimax ---> Airtel

Tata Wimax was good for the line of sight solutions they are offering , there customer care was pathetic, switched to Airtel on first instance Airtel got into our colony.

Still i am waiting for something like http://www.railwire.in/, even with 1:4 ratio tariff plans looks unbelievable.Still havent got a feedback about there Network and Support.

Grassroots strategy for mobile phone based payments, sighted in Africa

Comment by Bipin Preet Singh:

Hi, We are working towards something similar with our mobikwik balance. Please check it out at www.mobikwik.com

Where is India in Internet adoption?

Where is India in terms of usage of the Internet? One way to think about this question is to look at specific application areas. I saw three fragments of evidence:

Online trading

Writing in Hindu Business Line, Rajalakshmi Sivam has interesting information about the share of online trading on NSE:

	2006	Today
Number of trades	20%	33%
Rupee turnover	15%	25%

Railway tickets

Writing in Business Standard, Sharmishtha Mukherjee says that 34% of the tickets sold by Indian Railways were sold online.

Banking transactions

Business Standard has an article with some facts about the shift away from that barbarian relic, cheques.

Ordinarily we might have thought that the rich trade on the stock market, and have better Internet connectivity. So one might have expected a bigger share for Internet commerce with online trading. But it's quite striking to see the proportion of online trading at NSE (33%) line up almost exactly with the proportion of online ticketing at IR (34%). IR users are likely to not have broadband at home: they're probably using Internet cafes. Two other areas are of interest:

• Does someone know about the extent to which airline tickets are purchased over the net. Speaking for me, perhaps 80% of my air travel gets done through cleartrip. 
  
• Is there traction with craigslist in India? The few times that I have looked, I've not been impressed at the liquidity.

Turning to supply side concerns, there are two problems. The first is bandwidth. India does fairly badly on broadband, owing to policy impediments. We're all waiting for the 3G rollout to get a quantum leap in bandwidth.

The data above, for NSE trading and Indian Railways, is the picture that we're seeing in pre-broadband India. I think that in the coming five years, a full quarter of the households of India will have a broadband connection (either through a computer or through a smartphone), and that will generate profound change.

The second constraint is development talent. By and large, most websites done in India are just bad. I can think of two possible explanations:

• It seems that computer programmers in India do not get the Internet. There's probably too much of mechanical use of tools and techniques learned on Windows PCs; there's probably too much Microsoft in the formative years of young people. More study of good quality systems is called for [link]. Recruiters should be looking for people who do not have a worldview shaped by the Windows desktop. Extensive experience around Windows should be viewed as a negative qualification when putting together product teams today.
• While there is a lot of services work going on in the domestic computer industry, there is very little product development going on. The typical staffperson has spent his life implementing someone else's spec. When he is thrust into the role of building the very concept of a product, the outcomes are often bad. The idea of a dedicated product team, which obsesses on how users are interacting with a product and how things can be improved, is not mainstream. Basic concepts of usability are lacking in the people who build products.

The best role model that I show all software developers, about a decent e-commerce website, is cleartrip. A bunch of people who get this need to start a hall of shame for badly designed web systems and e-commerce systems in India. My suggestion for the first case study to write up there is: `Bhuvan' by ISRO.

Scott Adams illustration for a column of mine, with a lag of 11.3 years

Ganesh Varadarajan pointed out that on 22 August 2009, Scott Adams made a perfect cartoon for my Business Standard column titled Two great investment strategies of 22 April 1998. For a gloomy perspective on the difficulties of the fund industry in countries like India, see Section 10.11 of this book.

Responding to the new direct tax code

Mukul Asher & Amarendu Nandy and S. Narayan have interesting responses on the new direct tax code. I have two areas of disagreement with the new direct tax code: on the treatment of capital income and on the issue of non-interference with globalisation.

Implications of a bad monsoon for monetary policy

The progress of the 2009 monsoon seems to be 29% below normal. This may be adversely affecting food prices. In the latest available data, inflation based on CPI-IW has surged back to values near 10%. (This is the three-month moving average of the rate of change of seasonally adjusted CPI-IW).

Ila Patnaik has an article in Indian Express analysing the implications of this situation for monetary policy.

India really needs an `inflation report' institution.

Improving financial regulation in India

Somasekhar Sundaresan has written in Business Standard on the proposed Financial Services Appellate Tribunal (FSAT). Deepshikha Sikarwar has written in Economic Times on the proposed movement towards Regulatory Impact Assessment (RIA). These ideas come from the Mistry and Rajan reports.

These words -- financial services appellate tribunal; regulatory impact assessment -- sound like true bureaucratese, and these kinds of issues tend to get ignored by both practitioners and economists. However, this is where the rubber hits the road, this is where economic reform actually gets done.

Interesting readings

• Amy Yee has an article in Financial Times on the New Pension System. On NPS, you might like to also see two articles: this and this.
• Ila Patnaik on present business cycle conditions.
• When we were robots in Egypt a poem by Jo Walton.
• Read Mark Hulbert describe new work by Lasse H. Pederson on the challenge of buying and holding financial assets.
• The case of the Chinese mayor who wasn't there by Tom Mitchell in Financial Times.
• A smart omission of commission by Megha Patnaik in Financial Express. Gautam Bhardwaj on the implications of EET taxation as envisioned in the draft direct tax code. And, the editorial in Indian Express on the direct tax code.
• Building resilence to shocks by Hugo Banziger in Financial Times is a sensible set of ideas on how to make finance more resilient. It's striking how far this international discourse is from RBI's notions of `safety'.
• Watch Pratap Bhanu Mehta on Ila Patnaik's TV Show.
• Deep thinking about the monsoon failure: Shekhar Gupta, Mahesh Vyas.
• Devangshu Datta on `Bhuvan', a product which should not have been released.
• John Taylor in Financial Times on proposals for new powers to be given to the Fed on systemic risk.
• Robert Fisk in The Independent on the puzzle that the Middle East.

Impressive piece of work

I am ordinarily gloomy about the public policy process in India. But for a welcome change, the quality of staff work in the draft direct tax code, which has been put out for discussion, is outstanding.

Acute need for debt management office

One element of responding to the fiscal stress that India is now facing consists of the creation of the Debt Management Office. I have an article in Financial Express titled What is the right time to build a DMO?, and there is one in Economic Times by Siddharth Shah, Chittaranjan Datar and Nirvaan Gupta titled Is India ready for debt management office?. Also see this editorial in Financial Express on the new Cash Management Bills.

Improving wireless bandwidth

Peter Wayner has a story about a WiMax rollout in Baltimore in the US. They seem to be getting 6 Mb/s download and 1 Mb/s upload. This is termed a `4G' network (which might just be marketing speak).

In India, Thomas K. Thomas has an article on price cuts by Airtel. My sense is that we're in for a big crash in prices of bandwidth through a combination of improvements in prices of wired services and the rollout of 3G which is now a credible alternative to land lines.

The exciting new development on mobile bandwidth is the CDMA EVDO devices being sold by Reliance and Tata Indicom. Last night I did a bulky upload and it worked at 350 kb/s without interruptions. Naman Pugalia and Alok Parekh are measuring the performance of Reliance and Tata Indicom at locations all over India. The picture so far is that EVDO is a lot better than dialup (or CDMA 1.x) but it ain't really fast.

Business cycle measurement page

At http://www.mayin.org/cycle.in we've started doing some work on business cycle measurement. This has been getting updated every monday. E.g. it was updated earlier today. In addition to doing seasonal adjustment of a few monthly series, now there are some quarterly series such as GDP also.

Interesting readings

• Developments in India and China on internationalisation.
• Watch Aruna Roy and Nikhil Dey on Ila Patnaik's TV show: part 1 and part 2. [also see]
• Anne Sibert on the problems of Iceland being a small country. I would enlarge her comments, and add Dubai or Singapore into the class of countries where the (inadequate) fiscal backstop of a small government leads to somewhat reduced confidence in the international financial centre. And, her last paragraph applies equally to India:

  Many very small countries are islands, and thus isolated. It is more difficult for senior officials to travel to a neighbouring country if they live on a remote island than if they live in Luxembourg. This leads to a danger that policymakers in small and far away locations might become insular in their thinking and that they might not have access to advice that their counterparts abroad might offer. It is thus important that senior officials in out-of-the-way locations make an attempt to attend conferences and other professional gatherings abroad.

  I think staff with greater work experience with economics and economic policy in good countries would do a world of good in improving Indian policy making. Come to think of it, greater exposure to the private sector in India would do a lot of good, particularly for the agencies in India with weak HR practices.

• Jeff Hammer in Indian Express on India's brush with swine flu. And, Ila Patnaik on how to better utilise NREG funds.
• There's been an upsurge of criticism of economics, including sloppy pieces in The Economist. Robert Lucas responds.
• Eswar Prasad in Financial Times on the big opportunity for Manmohan Singh.
• Will India ever be a global aviation hub? by Ansgar Sickert, in The Wall Street Journal.
• The walking class must protest by Vivek Moorthy, in Mint. (Click on the image to see it more clearly).

Comments to discuss

India's financial markets' availability

Comment by Gangineni Dhananjhay

Sir,

I really liked your book as a researcher on Microstructure of Indian Capitalmarkets at JNTU Hyderabad. Excellent prose with empirical clarity. It felt like reading Hemingway. It reminded me of Trading & Echanges by Larry Harris.

Building a better credit policy speech

Comment by bagdu

RBI has considerable lack of transparency on its Branch expansion policy,I have tried to analyse the policy at: (http://bagdu.blogspot.com/2009/07/rbis-branch-expansion-policy.htm)

With GoI having already bough SBI stake and slated to buy NHB and Nabard's stake by December, one would hope will lead to somewhat greater transparency. Is RBI a holy cow when it comes to critiquing monetary institutions?

The scandal that is the Indian police

Comment by saravade

Anshul Chaturvedi's blog post on on the Times of India site (http://blogs.timesofindia.indiatimes.com/clicklit/entry/let-s-blame-the-damned) on this topic also seems to be generating a fair bit of discussion.

It seems everyone, but the politicians and the bureaucracy, understand what needs to be done urgently.

The scandal that is the Indian police

Comment by bagdu

Ajay another exhaustive blog post of yours on the topic:

Public goods of law and order

Would have been interesting to hear from Nandkumar himself on this topic from his vantage point as a tech savvy Top Cop.

Consequences of Air India being a zombie airline

by Ajay Shah.

Air India has got itself into serious trouble, and private airlines are also doing badly. The CMIE report on air transport for August 2009 shows a bad picture for the airline industry: from the quarter ended June 2007 onwards, in each quarter, the PAT margin was negative.

There are three interesting aspects to the present situation. The first is about the role of the State. Flying by plane is a private good and not a public good. Seats in a plane are rival and excludable. I fly in a plane, I benefit. There is, hence, no role for government to be in this area. Governments in good countries do not run airlines. The right thing to do is to privatise Air India as soon as possible, without trying to engage in a government-led restructuring. In an auction, if the highest bid is a negative number, government should pay this to get the company out of public ownership.

The next point is the cost of a bailout. NHAI highways cost roughly Rs.5 crore per kilometre. Hence, if government puts Rs.5,000 crore into Air India, this comes at the opportunity cost of 1000 km of four-lane highways.

The most interesting dimension, and one that has not been widely noticed in India, is the impact of Air India upon the woes of the aviation industry. Air India today is a `zombie airline': a firm which should be dead but isn't only because it is artificially propped up by the government. (The phrase `zombie firms' or `zombie banks' originates in the experience of Japan in the late 1980s).

If market forces were allowed to work, then Air India would go into liquidation. This would lead to somewhat higher prices for air travel since competition would be reduced. In addition, it would lead to somewhat lower prices for staff (since erstwhile Air India staff would be looking for jobs) and somewhat lower prices for planes (since erstwhile Air India aircraft would be available for purchase or lease).

Other firms in the industry would thus obtain somewhat higher revenues and face somewhat lower costs.

Conversely, when a government steps in to create a zombie firm in an industry, it damages profitability and investment amongst the healthy firms of that industry. If this process goes on for a while, then otherwise healthy firms in an industry will become sick. This was the experience in Japan, when the `zombie firms' supported by the government led to sickness spreading amongst other firms and led to a extended period of reduced private corporate investment.

In summary, one reason why the private airline industry as a whole is in the doldrums is that Air India is being artificially kept alive.

Good news on exports that you did not know

See Ila Patnaik and Giovanni Veronese in Financial Express (on the 6th).

Maps vs. map data: appropriately drawing the lines between public and private

I write an article in Financial Express about maps and map databases titled New thinking on a traditional public good.

See excellent responses on this on the India mailing list of openstreetmap: by B V Pradeep and by Satyaakam Goswami. And, see Want to map your hometown? Throw a party by Poornima Mohandas in Mint. For background on openstreetmaps, see this this article by Gary Richmond from October 2008.

The people running the show

Writing in The Hindustan Times, Ramchandra Guha worries about the people running the show in India.

The scandal that is the Indian police

The most basic public good of all, which should be the first priority of the government, is law and order. If you think of the principal-agent relationship between citizens and State, citizens would want to tie down the State to first focus on law and order, and deliver results on law and order, before embarking on mission creep. One of the unhappy consequences of India's socialist adventure was a breakdown of this principal-agent relationship, and a loss of focus on this core function. See a recent column by Avinash Persaud in Financial Express.

Today, Human Rights Watch has released a top quality and incredibly depressing report on India's police. (Via Nandkumar Saravade). We need to reorient government -- as in financial resources and top management time -- towards the police and judiciary.

Also see Bibek Debroy in Indian Express, and my blog post on the Bombay attacks.

Interesting readings

• Fresh faces in government by Manish Sabharwal in Mint, about the appointments process in the Indian government.
• See the nice map of the market on the NSE website, which helps you visualise the sources of returns on Nifty.
• Watch Ashok Gulati on Ila Patnaik's TV show.
• There has been a lot of interest in the wonderful world of algorithmic trading. The Economist does the reporting, and here's a more interesting description, and then you should turn to Eric Falkenstein and Kid Dynamite for the insights.
• Spencer Jakab in Financial Times on calls for the blood of bankers.
• Go paint your roof reflective..
• Improve your time management by listening to Paul Graham's advice.

An upsurge in concern about China

• The Economist points out that the Chinese current account surplus has started shrinking. The aspect of Chinese rebalancing where change has not begun is consumption.
• Prieur du Plessis talks about a Hugh Hendry video clip on a real estate bust that might be underway in China.
• China: Bogus boom? by John H. Makin.
• Washington risks taking China too seriously by David Pilling in Financial Times.
• Brace for a decade of lower Chinese growth by Michael Pettis in Financial Times.
• The China Bubble's Coming -- But Not the One You Think by Vitaliy Katsenelson in Foreign Policy.
• Yves Smith on China's construction boom on RGE Monitor.
• It's not easy to internationalise China's yuan by Philip Bowring.
• An old problem on China's new frontier by Konstanty Gebert.
• China could use some honest talk about race by Howard W. French.

Financial reforms are now critically about laws

I have an article titled Flying on one engine in the August 2009 issue of Pragati: The Indian National Interest Review. Here's the pdf file for this issue of the magazine, and here it is as a web page.

The low level equilibrium of Indian finance

There is a fascinating editorial in Business World, which worries that Indian finance has `become moribund, and ... no longer promotes either growth or competition ' which ends with:

To the question about what is to be done, there are no easy answers. It is necessary for wise people to reflect, to sit together and deliberate, and to rethink the entire system. But the question is, where are the wise people? The government has encroached on all the repositories of intellect. It has politicised the universities, and its funding has given it patronage that has emasculated research institutes. Democracy is supposed to have one great advantage over dictatorship — that it creates space for divergence and debate, that it keeps boiling a cauldron of clashing positions from which the truth can emerge. It is this diversity of opinions that the country needs today.

Also see this column by Ashok Desai in The Telegraph on 28th July. Among other things there, he says:

My findings are based on a cursory analysis of easily available banking statistics. So much more could be inferred from the masses of statistics accumulated by the Reserve Bank of India. All it needs is a good, elementary economist. The RBI employs economists by the hundreds; the finance ministry gives generous grants to many more. But their minds are focused on higher matters; looking at easily available figures and calculating simple ratios would not occur to them. So we continue to have one of the world’s best documented and least analysed banking systems.

Grassroots strategy for mobile phone based payments, sighted in Africa

by Matthew Morris.

Today's mobile phones are as powerful as the computer used in Apollo 11 for the moon mission. So how can India's 400 million-plus mobile phones/NASA computers transform access to finance?

Many people have been talking about the potential of mobile phones to revolutionise payments and ultimately consumer finance. Chapter 3, `Broadening access to finance', of Raghuram Rajan's report puts a considerable emphasis on the role that mobile phone companies can have in improving financial inclusion, even though they are not traditionally seen as financial firms. [Also see].

One breakthrough came on 30 June 2009 when the RBI authorised 17 banks to introduce mobile banking services, enabling customers to carry out fund transfer between banks and accounts.

And there are signs that banks are innovating. For example, there's a Citibank pilot project, reported in the Business Standard a couple of weeks ago, that enables credit card customers to use their mobile phone for payments.

But these are only small steps. The RBI guidelines are still quite conservative, and the Citibank pilot is only for six months and for customers in Bangalore.

What about the hundreds of millions of unbanked people in India who have mobile phones?

A brilliant idea that is used in Africa, where mobile phones are used for money transfers, could be important in India. It's great for unbanked people, because it doesn't require a bank account or even a bank. And it enable small transfers to be made to help friends and family, say with school fees, medical expenses or loan repayments. It requires no cooperation from the government.

Here's how it works, for person A to send $5 to person B

1. Person A buys a $5 top-up card for his mobile phone from a street vendor or phone kiosk and scratches the card to reveal the top-up code.
   
2. Instead of keying in the top-up code, Person A sends it to Person B as an SMS message.
   
3. Person B receives the SMS and takes her phone to a local phone kiosk, and sells this top-up code to the local trader.
   
4. The local trader inserts the top-up code into his own phone to verify that the $5 top up is valid and pays Person B (a bit less than $5).
   
5. The local trader can then sell calls on his phone or use the credit for his own private use.

Essentially, a secondary market in top-up cards has been developed that enables small money transfers to be made quickly and easily.

This informal money transfer system has proved so popular that these top-up cards are now sold among the diaspora in London as a handy way of remitting money to relatives. And Western Union is now planning to roll out a mobile money scheme in Africa to avoid being left behind.

Banks here are also keen to explore the opportunities that new technology provides. Yet regulators remain cautious of the potential of mobile phones for transforming access to finance.

While the legal and regulatory issue wait to be resolved, it would be an interesting experiment to see if an informal transfer scheme, along the lines of the one described in this blog post, would work in India. It would also be interesting to hear comments on what other solutions people are using already to make the most of their pocket-sized Apollo-11 quality computers.

These are small steps, which are a grassroots effort at overcoming problems. The big leap will come when the mobile finance sector is opened more fully to competition and innovation.