Learning from Siegmund Warburg

The signs have been there for the past two decades: existing financial institutions needed to change and new ones had to emerge. The past 20 years have been very significant in demonstrating the need for new kinds of financial entities, and their fairly large significance in providing financial services.

From the rise in the early 1990s of NBFCs (non-bank finance companies), who first raised their heads when it was discovered they were collecting deposits and not managing to maintain the value of the their holding; to the new private sector banks, who grew quite rapidly, migrating customers quite impatient with the pace of change and service at the large public sector banks, we have seen the landscape change quite dramatically.

Now we have two full service banks, IDFC and Bandhan, and another 21 payment and small banks going to be entering the market in the next few years. Serving the corporate market though are a whole range of investment banks and specialised debt syndication entities, prominent among them are entities such as Edelweiss.

Running parallel to this market is the securities industry and its most visible avatar — the mutual fund industry. Two others of significance are the insurance companies, and mutual funds and their assets under management.

Both of them have reached a fairly critical size and many agencies now raise almost ₹6,000 crore annually for investment.

Combine this with three new regulators: The Securities and Exchange Board of India (SEBI), the Insurance Regulation and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA). Driving all of these entities in the right direction and ensuring their proper management informed by the right principles and structures is going to require a very large body of leaders to emerge, who can not only keep an eye on both maintaining and building these assets, but also ensuring the institutions move in the right direction.

Intermediation of capital is increasing in leaps and bounds, and arguably in becoming efficient, across time and space. The diversity in the demand, and the management of this process, calls for a depth of knowledge and experience that is not going to be matched by the training that is available in our educational institutions.

This is not new to India, and has been witnessed in the rise of financial capitals across the world: New York and London most of all. Instructive to this debate, though, would be the approach that has marked the rise of these financial cities and the stalwarts who shaped them.

Siegmund Warburg, is one of those who contributed to turning London from a post-war bombed capital to the centre of finance which it remains to this day.

Following the war, most existing industries were hungry for capital. Products and services needed to move away from a war-economy. Capital was going to be required for making those investments for production and expansion.

There was little or no knowledge of how progress was going to be made in making this capital available. Bonds and bond markets did not exist at that time; equity was there, but had limited sources, concentrated largely around the state and a few families. Into that scenario Warburg and sons made steady and astounding progress, characterised by three approaches.

Fundamentally, Warburg recognised that investment banking was going to be uncertain territory. Not only were deals going to be different from one another, capital demand was also going to be varied. Hence within his bank and within the deals that they participated, attention to detail in capturing the nuances of each of the deals were predominant. Detailed notes captured discussions and decisions that were made.

These were supplemented by the establishment of different committees and groups that served to whet these discussions and scrutinise details. This was especially so as they progressed towards building the bond market, and seeking international capital, especially from America.

Clearly, as these diverse set of institutions and regulators in India not only seek capital, but also innovate in expanding services, products and supervision of their new found customers; systematic and focussed examination of demand and services will go a long way in refining the principles and service that should characterise this demand.

Fuelling this work were people, who Warburg both sought out and recruited to this task. Recognising that a broader approach and interest were important to approaching and analysing the economy, Warburg sought out people who had a broad reading and interest.

In his choice of men, he preferred those who had a wider sense of the world and were not narrowly restricted to reading only books on finance.

Joshua Sherman when being interviewed admitted to reading Thomas Mann and Franz Kafka, and fearing that it might reduce his chances of getting the job, when that is exactly what Warburg was looking for.

The ability to examine a vast range of businesses and arrive at an understanding of the core, can only be the result of approaches which are very diverse

Finally, and true for organisations dominated by men, patronising attitudes becomes informed by flattery and hollow description. Warburg, found this to his chagrin in his family firm in New York and thought that such a culture led to the establishment of hollow weakness, which could be undoing of his firm.

He was strongly of the opinion that such cultures could cloud independent decision making so crucial in the financial sector as it sought out merits on which to allocate capital.

Closer home, as we seek to build these new institutions, it will be important for the leaders as they build these organisations to exercise these choices that will potentially determine the nature of the hand they hold, when building institutions that are going to shape the future of the new financial intermediation that is going to characterise this country.

The writer is a consultant with The Market and Ecosystem Advisory

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