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Wall Street - The Business Angle

“Well Pat, I think there is some problem in your logic. I think I know this software pretty well. I have been working on it for quite sometime now”, says Subir. “Subir, I have been working on this software since time when you were not even born”, was the reply over the phone.

Subir was surprised to hear her say that. He had imagined Patricia, or Pat as she is famously known in India, to be a lady somewhere around 25 to 30 years of age. But to his surprise, Patricia is the name of a lady working in American Express, USA for years, and her age being 65 years! But it was not his fault. Any young person in this part of the world can not imagine a lady of that age to be working at high positions in companies like American Express. In India, people are not known to work for long after they reach an age of say 60 to 65 years. In fact, India has a very different work environment compared to the Western world.

In India, the employed population is in constant search for growth opportunities. The youth of today would like to see growth patterns available to them in their new jobs, the kind of challenges the job presents and the kind of success ladder one can climb in the company and that too in the minimum possible time. In fact, this is one of the most important reasons for the increasing attrition rates in almost all the industries. The industry attrition rates reflect the ever increasing ambitions of the Indian employees. But the fact of the matter is that in the West patience holds the key for people’s success. One needs to be patient to be successful in life. In fact, here one is likely to leave the job if one keeps on working on the same post for more than a couple of years and is not promoted. But the West has seen the sun rising in a different color. In fact, when the Global Heads of these companies visit India, they stress a lot on patience. Job satisfaction is not always derived from growth and increasing pay. It is the work culture and work-life balance which affect one’s future curve. That probably is the reason why Patricia is still with American Express and is satisfied with her job.

One often gets illusion by the high pay packages of companies abroad and we are forced to see them in good light because of the fact that one is able to buy a house, a car and other accessories from his first salary itself if one goes to work there. But we forget the fact that it is a standard there and one cannot compare those countries with India. If one look at what one gains by working there, then one should compare oneself with the other individuals working there and not with his counterparts in India. In fact, we often see the high package offered to B-school graduates in foreign countries making news but this is not a phenomenon there because of the standards. The media is equally responsible for transforming the youth in that fashion. The media should compare those high packages with people working in that company in that part of the world instead of comparing with the Indian counterparts. That would present a better and truer picture in front of all. In fact, that would make the Indian employee more committed towards his job and help him realize the importance of job satisfaction in alignment with other factors like growth and pay scales.

Written By: Anubhav Jain, IIM Indore

The next wave of growth in India will come from the rural markets. Presently India is facing a crisis in the infrastructure sector. Once the growth story embraces this sector, the biggest gainer will be the Indian villages. Government policies and employment generation programs will also improve the standard of living of rural masses by enhancing their per capita income. How can an ordinary, presently low-income earner, Indian become rich? The answer to that question is as simple as it is routine: Start by saving and investing something regularly, even modest amounts, in anticipation of big returns in the future. If an Indian villager will look for big returns it cannot come from the traditional sources like bonds or insurance. Any investment instrument which can be offered needs to be linked with the equity market but the returns have to be assured. There must be no risk to the capital invested. Looking at all these aspects a special type of mutual fund has to be designed for the rural Indian market. The per capita income is below Rs.50 per day for a huge chunk of the population. So keeping their standard of living, risk profile, awareness towards such instruments, etc. the concept has to be very unique. It’s very difficult on their part to accept any instrument which can require even an iota of their wealth. The device needs to be backed up by some assurance from a trustworthy sponsor like the government or reputed business houses like Birla or Tata. For a player who has low recognition in the rural market it is difficult for the rural masses to accept it.

In the initial stage, the mutual fund can be introduced for as low as Rs. 200 to join; this variant of mutual fund can be targeted to daily wage laborers and landless farmers as they have the ability to pay that small sum up front when they get their wages or remuneration. They have surplus cash whenever they get their pay and will be willing to invest it if the terms and conditions are simple. To keep the depositor involved and interested in the process of making money from the savings, the mutual fund needs to bring in the option of adding to their investment in increments as small as Rs. 20 and as frequently as daily or weekly.

The next point of concern lies in redistribution of the returns as they understand simple things like the value of their money doubling in 5 years. This is possible considering a modest return of 14-15 % compounded annually over a horizon of 5 years. The money can be tripled in less than 9 years at the same interest rate. They can understand this concept better than the complicated NAV for MF. Generating this kind of returns will not be a daunting task for the expert fund managers who are at presently generating much higher return than that.

For this MF, information technology will play the most vital part. Instead of making it too complicated by involving paper work, chip embedded cards can be issued to all the investors. The rural population is familiar with such cards like Kisan credit card, etc. These cards will store all the information regarding the investor and all the addition to the fund can be easily made without any paper work. The investor should be allowed to check the value of his/her investment. Different schemes can be made based on the requirement of the investor. The minimum time period for exit should be 3 to 5 years for any scheme. The people who start investing for the marriage of the son/ daughter or retirement planning, etc can remain invested for a longer period of time.

There should not be any entry load for the fund but exit load of around 3-5% should be imposed. We can make this instrument a unique one where the investor can see his money grow and be encouraged to invest more money. The surplus money is generally wasted because it is difficult for them to find rational avenues for spending this money or to invest them in a cogent manner. The investment opportunity should be made as trouble-free and effortless as possible.

People in rural areas should be educated about such instruments with the help of Gram Panchayats and other influential people in rural areas.

There are many complexities involved in the model. Keeping in mind the basic framework suggested above we can work upon the idea of such a MF by presenting the idea among the people who have crystal clear knowledge about the conditions prevailing in the rural market and those who are competent enough to chalk out the intricacies of the MF. I am sure this mutual fund has the potential to see the light of day and also show the rural Indians some light at the end of the long tunnel.

Written By: Vineet Patawari, IIM Indore

The announcement of 2005 as year of micro-credit by UN and subsequently awarding noble peace prize, 2006, to Professor Muhammad Yusuf, founder of Gramin bank has made Microfinance a revolution. Editorials of leading newspapers and magazines are flooded with it; several books and research papers have been published elucidating how microfinance will empower poor. Microcredit refers to the non-collateralized small loans to lowest-income people who are otherwise ineligible for traditional bank loans. The model seems quite simple and sustainable, provide credit to the poor and it will ensure their development. And in this process of development creditor can expect an annual return of 20-25%. But if we think over it some fundamental questions will arise. Is the credit a solution for poverty, a symbol of empowerment? Can it ensure the development of local economies and subsequently those associated with it. Is it not that this whole concept works on the optimistic assumption of entrepreneurial abilities in uneducated, socially and economically weaker masses? Recent critical studies on Microfinance have come up with some issues.

Firstly, Shift of borrowers from primary producer to market consumer. Most of the beneficiaries from south Asia are small farmers and studies show that soft loans have lead to increase in cyclical consumption with no or limited investment in agricultural inputs.

The intense marketing by FMCG companies in association with MFIs and SHGs easily make the money disappear in the channel itself. And what is left are debt traps!! You won’t be surprised to see Johnson and Johnson (J&J) as a major sponsor of Micro-credit summits. In India at many places project Shakti of HLL is carried out by SHGs who also distribute credits. With rural India as the next big target of consumerism wave by FMCGs, MFIs have provided an easy channel.

Even if the model is correct, does it reach to poorest of the poor? Bonded labors constitute a major part of this category. A recent study by International Labor Organization summarizes four reasons of bondage viz. Social exclusion, Asymmetry of information about legal rights, Debt, Monopoly in labor market. Large number of MFIs has an inefficient credit delivery mechanism. SHGs constitute better off (socially or economically) people from villages and they seldom provide loans to poorest of poor where the repayment risk is considered high. In fact some NGOs in Africa have further traded freedom of these labors by giving soft loans. And it may surprise that many of these loan giving firms do not provide facility of savings account.

Thirdly, high interest rates also play a major role. Normally loans are given at a rate of 10-12% to SHGs who further distribute making the effective rates to go as high as 25-30%. Several theories propounding the absence of ceiling in interest rates have come up with open support from big lending corporations.

Finally, big corporations lending money to MFIs are pushing their products (low quality fertilizers, seeds etc.) as was the case with Monsanto Corporation, global life sciences company, in Bangladesh.

"....high capital requirements, regulatory limits on raising debt from foreign sources and foreign equity limitations constrains MFIs", this is from the recent report of World Bank where it condemns the Indian regulatory framework for the slow growth of MFIs in India and propose to replicate the models of Bangladesh and Indonesia. Well a 20% return isn’t bad after all....

Written By: Sourabh Tripathi, IIM Indore

Tttrrrrrrnnnnggg …. Yes, it's the wake up call….but not to wake you up early in the morning to do the daily chores but to wake you up to safeguard the traditional industries of India, to protect the artisans and their arts, their handicrafts. The time has come again to save the Indian economy from the foreign goods which are flooding the Indian markets. During the freedom struggle, foreign goods had been boycotted and Swadeshi goods adopted to give a boost to the indigenous industries. Today the scenario is somewhat similar.

After liberalization and globalization, MNCs got easy access to the Indian markets. Initially it proved to be advantageous as it enabled domestic companies to acquire modern technology and helped them reduce costs and improve quality and customer convenience. However with the entry of many MNCs, Indian firms started facing (1) takeover threats, (2) subordinate position in joint ventures and (3) unequal battle in general. Today many companies are being forced to close down because they cannot stand the competition from the technically advanced MNCs. For example, Weston, a major player in the early days with over 18% market share lost out heavily to competition from imported products. Its market share became almost negligible by 1995-96 and its turnover slid from Rs. 99 crore in 1991-92 to Rs. 50 crore in 1995-96. Now the company has become almost unknown in CTV market.

All this is deteriorating the country's technological base. People are captivated by the machine-made goods which is having a detrimental effect on the handicraft industry, causing unemployment.

The Kerala Government has set up an example for the entire India by discarding the use of Microsoft software in 12500 high schools and switched to Linux. The government can reserve certain goods for the cottage industry for their upliftment. Easy availability of loans to the industries struggling due to heavy competition from a foreign company is another solution. Handicrafts need to be promoted and publicized. People need to realize the exclusivity of hand-made goods in this mechanized world so that the artisans get their due respect and also the price they deserve for their goods. This shall help minimize poverty. Therefore it is required that today people wake up to this clarion call of the dying industries of rural India and adopt Swadeshi goods so that the Indian economy blooms, progresses and prospers.

Written By: Neha Baid, Std. XII, Birla High School, Kolkata

“Responsibility's like a string we can only see the middle of. Both ends are out of sight.”

With increasing globalization and companies going multinational, there is an increasing demand for disclosure of their stand towards the corporate world’s recent buzzword Corporate Social Responsibility or social, environmental and economic performance from the various stakeholders of these companies. The result is implicit – more and more companies have come forward to share information about the economic, environmental and social impacts of their processes and have published reports describing the same. But mere reporting is not what follows. These companies also face the challenge of improving the content of these reports, i.e., the quality and acceptability of these reports.

Corporate Social Responsibility is regarded as a prerequisite to sustainable development by some analysts. Sensitivity and awareness towards environment and ethical issues as a whole has increased and laws are framed to target any deviation from maintaining a balance of these. In fact, according to the World Business Council for Sustainable Development,

“Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.”

The adoption of Corporate Social Responsibility would provide a competitive edge to the companies in all their endeavors. It has numerous advantages and can reshape the whole functioning of an organization. There is a need to realize the importance of Corporate Social Responsibility both towards other companies and towards the external environment and society. For example, recent years have witnessed a numbers of mergers and acquisitions but very few have been successful enough because of the adverse effects they have on the productivity, behavior and creativity of the employees. Safeguarding employee rights must be an integral part of any such activity but seldom do things happen the way they should.

Another angle from which one can view Corporate Social Responsibility is how companies respond and behave outside their boundaries at the local, national or international levels. Local markets provide companies with labor and also a market for their goods or services, thus make it all the more important to maintain good relations with the local settings. Companies develop networks of distribution and sales all round the country and thus need to concentrate on their responsibility towards the nation’s environment, legal framework and society. Moreover, companies have been able to increase their supply chains by transcending the national frontiers and moving to international arena. This automatically incurs the need to follow a minimum code of conduct at the global level for all the companies going global at a rapid pace.

The question that now comes forward is that how to install the component of Corporate Social Responsibility in the business process of the company. For this to be done the company needs to instill it completely in its culture and structure, at virtually all the stages and in all the processes, be it decision making at managerial level or manufacturing goods at the assembly line level. This would have a favorable impact on the shareholders of the company in the long run because of the role of ethics coming forward compared to the monetary profits which have been understood to be the only goal of the shareholders. Thus, the company would be projected in good light and lead to a glorified brand image of the company apart from the company fulfilling its duties towards the environment and society. A very good example is the way ITC has implemented Corporate Social Responsibility in its processes by empowering farmers and by restoring the balance of nature by planting more trees than uprooted by the company for its activities.

In view of the growing public awareness, it becomes extremely necessary for organizations to appear altruistic. But appearances would not work for longer periods and hence only those companies which implement practices to restore citizen control and environmental balance will succeed in getting the trust of the consumers.

It is a fact that organizations are formed and then they grow fueled by the drive to continually pursue newer and broader goals in markets around the world. But this lookout for more and more resources has led to depleting levels of natural resources and hence the only way out is that the companies themselves recognize the situation at hand and follows the framework of Corporate Social Responsibility.

Ultimately, it all boils down to the people who are living in this society and breathing in this environment to understand the current scenario by analyzing the effects if such a phenomenon is allowed to grow. It is “We the people” who have to realize, who must take the responsibility on their shoulders and urge organizations to move towards the real goal – the goal of serving more and more people, and thus, to preserve public interest in light of the responsibility towards the society, the environment, and the mankind as a whole.

Written by : Anubhav Jain, IIM Indore

Indian Banking Sector: Overview
After the independence Government of India took major steps in Indian Banking Sector Reform. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India were nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. But the feature of this period was very high interest rate, limited services and no competition to name a few. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. This committee introduced many reforms in the banking sector such as delinking the entire issue of concessional credit from the issue of banking operations, reducing the SLR limits, strengthening the capital base of banks, and bringing about a general freeing of interest rates. The reforms proposed aimed at aligning the working of banks with the growth objectives of the economy. The country post 1991 is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Competition among banks is at an all time high. Banks are not only rated in terms of the interest rates and default rates but also in terms of the quality of service they provide to the consumer. At present the size of the banking sector is Rs. 36,105 billion.

Role of Banks
For each of the challenge to be met a sound Banking system is necessary. With the liberalisation of banks in India, banks have are more independent in formulating their strategy. As a part of growth in India banks are providing credits to productive sectors which are in need of investments. Also banks help the institutes in having hassle free payments, collection and remittances. This has really enhanced the efficiency of the companies as very little time is spent in taking care of financial transactions. As the companies are getting globalised, the need for foreign exchange services increases. This need is being fulfilled by the banks. Along with this banks offer several customized product for target groups which really help in solving the cash problem of a particular segment. Options like variable rate of interest and fixed rate of interest, or flexibility in payment of principal are a few examples. An important role which banks these days are playing is the role as an advisor. Investment Banks usually are the banks which act as intermediate between the investors and the corporates. They advise the company about the way in which the capital can be raised, when to raise it, mergers and acquisitions, Mezzanine financing etc. Further banks have been providing the industry with technology support like SBI has introduced Project Uptech. Further credit delivery mechanism of banks has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups. Banks have come out with special policies to step up credit to SMEs.

Future of Banking Systems in India
Consumer finance, robust industrial investment outlook, increasing internationalization of India and rural banking will drive growth in the economy in the future. Upward migration of incomes, demographic patterns and access to finance will act as change agents. The banking sector will have to gearing itself to support growth. Competition, consolidation and convergence will transform banking. Technology will be the key and drive the change. With the advent of new technologies, the banks need to be proactive in adopting the change in technology so as to serve its customers better and have a competitive advantage. Banks will have to strengthen its capital base, risk management techniques & overall skills. Also the banks need to diversify into products like insurance and mutual funds in order to gain from the booming economy.

Written by: Abhishek Anand, IIM Indore

Have you ever purchased a newspaper with a credit card? How about doing away with all sorts of pockets and cash tills and carrying just the plastic cards carrying the names of the likes of Visa, MasterCard and American Express? Well, this is soon going to happen looking at the rate at which the usage of plastic money has risen over last 10 years. This is reflected from the fact that 10 years ago, American consumers paid in cash or though cheques for around 70% of all their purchases. According to Nilson report, today, more than 50% of all their transactions are paid for through cards. So, the day is not far when people would pay for a hamburger or a bus ticket through these plastic cards. But credit card companies have realized that the use of the age old swiping cards would not work for such small purchases. So, they have introduced a concept named “contactless cards” for purchases under $25. These cards are used by transferring data wirelessly through a tap or a wave to a receiving device with the shopkeeper. The whole process takes less than 2 seconds and retailers feel that such a concept is likely to reduce risks of thefts and also people spend more when they use plastic money. They also feel that this would reduce the effort of counting coins and smaller currency everyday and getting it exchanged from banks. In fact, many fast food giants, cinemas and sports venues have already started accepting such cards in America. The next step is the idea of embedding a credit chip in the mobile device and using it as a credit card itself.

The whole concept is not limited to just small transactions but to ones involving huge amounts of money as well. Card companies have started approaching property management companies and thus we can even hope to pay our monthly installments, rent and even down-payments through credit cards in future.

The question that might come to mind now is, “What if one does not have a bank account?” Well, these biggies have already cashed upon that idea by coming with another concept called pre-paid cards just like the debit cards loaded with money. These cards would help customers without a bank account to pay with plastic money by depositing a certain amount with the card company before making a transaction. In fact, many state governments in the US have even started paying employment benefits by depositing money in the pre-paid card accounts of the concerned persons. This makes the whole system effective and less costly. In fact, Ohio government claims to have saved more than $2 million after switching to plastic money for giving out benefits and subsidies. Some companies have even started giving out salaries by depositing money in accounts of the employees’ pre-paid card accounts. The time is near when cash would lose its charm and plastic money would be the king!

Written By: Anubhav Jain, IIM Indore (Based on an article in THE ECONOMIST, November 18-25, 2006.)

Every company adopts various means to increase productivity levels. These methods can range from varied areas such as training, feedback and remuneration. One such method is the variable pay plan which gives extra credit to the individuals who outshine others and thus, recognizes their outstanding performance. Since it is directly linked to the performance of an employee, it is also known as the “at risk” method. Unlike salary, incentives or benefits under the variable pay plan are not paid on a regular basis. It can even be cancelled in case an employee fails to meet the targets or objectives, thus, helping the company as a whole to achieve its goals in an efficient manner.

There are various forms in which a company may implement this plan in various ways. Team incentives, share in the company’s profits and individual incentives are some of the well known ones for doing so. This plan requires employees to have a clear understanding of the goals set for them and thus realizing the importance of their work towards achieving the company’s goals. Hence, for this method to be effective, it should be successful in creating a peer-pressure on the employees so that they get motivated to work for the company.

There are some precautionary measures to be taken before implementing this plan. These include the creation of a standard and uniform metrics that would help review an employee’s performance, making sure that managers are not biased towards subordinates, clearly communicating the quantum and quality of work expected from the employees, and setting up practically achievable goals.

Four of the most widely used variable pay plans are piece rate wages, bonuses, profit sharing and gain sharing. Piece rate pay plans work on the principle of paying a fixed sum for each unit of production completed by an employee. Bonuses are paid to both employees and executives depending on certain conditions and also on certain occasions. Profit sharing plans are ones that spread throughout the organization and distribute the compensation based on a certain established formula. Gain sharing pays employees in groups and is based on some formula that allocates incentives based on improvement in productivity from one period to another.

Thus a variable pay plan, if combined effectively with the business strategy can result in great results for the company.

Written By: Anubhav Jain, IIM Indore (Based on the article on Variable Pay Plans in OPPORTUNITIES, THE HINDU, 29 November, 2006.)