India Factoring and Finance Solutions — a joint venture NBFC between Punjab National Bank, Malta-based credit institution, FIM Bank Group, Italy-based Banca IFIS and Blend Financial Services of Mumbai — is in the business of ‘factoring' - providing trade finance services for small and medium enterprises (SMEs) and small-scale industries with a special focus on the ever-increasing international (export and import) and domestic factoring.India Factoring CEO Sudeb Sarbadhikary talked to BW's Tanushree Pillai about what ails the SME sector and what needs to be done.Excerpts from the interviewHow did India Factoring come into being?Ours is a Joint Venture between FIM Bank, with 49 per cent stake, Punjab National Bank with 30 per cent stake and other minor investors (Banca – with 10 per cent stake), Blend Financial with 1 per cent. The rest 10 per cent is held in Employee Stock Options (ESOPs).The MoU was first signed in 2009 and we went to the RBI for a license in March 2010 and we have been in the business since October 2010. India Factoring operates its business from Delhi, Mumbai, Chennai, Bangalore, Kolkata, Ahmedabad and Hyderabad.What is it that India Factoring does?We do what is called ‘factoring' – which is essentially receivable financing. In a B2B environment, typically, there are credit invoices (across the table payments are rare). Large corporate procure from smaller vendors and the vendors mostly get paid about 3-4 months later.Effectively, the receivables are assigned to us and we finance these suppliers and we collect the money from the final buyers. These small vendors mostly have small balance sheets and do not have the adequacy to get banking finance. With us in the picture, they get the flexibility to raise resources. That's the principal benefits for these small vendors and hence, our aim is to provide liquidity to the SME sector, although our risk is on the larger corporate.SMEs are always challenged for funds and have to raise funds from elsewhere. This sector plays a vital role in the growth of our economy by contributing 45 per cent of the industrial output, 40 per cent of exports. It also provdes 42 million jobs. Less than 20 per cent of bank finance goes in to the SME sector, so there is a huge lacuna there.The interest is charged from the SME. We are pre-paying the invoices. Sometimes, there are deductions – like a back up cover (typically 20 per cent). We currently have 100 clients on a pan-India basis. Our focus will remain on the SME sector and we aim to triple our client base by March 2012. Our stockholders give us a committed capital as and when we hit different milestones.We are investigating possibilities of reaching geographical areas where there is a huge SME presence – like Coimbatore, Pune, Chandigarh. We recently forayed into Punjab and Haryana as well.What is the basis of this geographical area selection? For us it was important to have a pan-India presence from the beginning. My client could be in Mumbai, but it could be providing receivables to his client in the south. We recently received permission to do export factoring, which will help SME exporters. We are also part of IFG – International Factoring Group – we can use their skill sets to assess buyers in different countries - which helps us support Indian export to these countries.Most of our clients are from the manufacturing side, although we do have exposure in auto, textile, IT, hardware and software companies. Our association with PNB has helped us a lot in reaching out to clients in rural India too.How big is the factoring industry here?Current turnover for the India factoring industry would be about Rs 200 crore. There are five independent companies, and some banks are also present.There is SBI Global, Canbank (Canara Bank subsidiary), IFCI Factors, Bibby Factors (UK based), along with India Factoring. HSBC, DBS and Standard Chartered banks too have an embedded factoring desk within the bank.There isn't much awareness about factoring here. Currently, there is a bill that is being tabled in Parliament. We are hoping once the bill goes through, there will be more players, more education.Globally, factoring is a huge industry. About 60-70 per cent of procurement for big retail brands is through factoring. The reason why this industry is so huge in developed markets is because of laws clearly defining the industry. For a factoring company, the biggest challenge is whether it has a right on the receivables. Here, in India, there no clear laws which explain what a factory company can do in the event of a non-payment.What happens when no payment is made to the factoring company?In that event, we would recourse it back to the SME – which is the reason we are not aggressively pitching to extremely small enterprises. We need to be comfortable about the fact that the SME will pay us even if there is no final buyer in the end. This in a way has inhibited the growth of SMEs. What is forfaiting?Vendor forfaiting is a trade finance where financing is done on a completely non-recourse basis. It involves purchasing of credit instruments like letters of credit etc on a non recourse basis from the seller of goods.These instruments are supported by buyer's bank and hence have an obligor risk which is mainly a bank/financial institution risk. The forfaiter deducts interest (in form of discount) and pays the residual proceeds to the seller on non-recourse basis.How it works is that the seller ships/provides goods/services as per its contract and submits necessary documentation to us or to our bankers. Trade documents are transmitted to the importer's bank for acceptance and/or assignment of proceeds to us. On receipt of such confirmation, we pay discounted proceeds to the seller on a non-recourse basis and we assume payment risk of the importer's bank.The letter of credit is the responsibility of a third party. This product is engineered for exporters who typically work with developing countries. Forfaiting is a service-based business and it's mostly our factoring clients who use the service.
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As the interest rate cycle appears to have peaked, N Sethuram Iyer, chief investment officer, Daiwa Asset Management, feels this would be the right time for investors to move into short and medium term bond funds. Talking to Businessworld, he said 2012 appeared to be a year for investing in fixed income rather than equity, as one could look at returns of around 10 per cent or higher in fixed income funds over the next one year. Confident that this is a time for a gradual shift to longer maturities in debt funds and increasing the mark-to-market component in portfolios, Iyer also feels the uncertainty in equity market will continue and a defensive portfolio in FMCG, pharmaceutical, telecom and IT will be the preferred bets at this point of time.Excerpts from the interviewWhat has been your analysis of the Reserve Bank of India's (RBI) monetary policy? And why? RBI Policy review was on expected lines with no rate action in any of the reference rates. RBI has also indicated that future monetary policy responses will take into account the risks to growth. The emphasis has therefore shifted from inflation targeting to managing downward pressures on growth. The clear indication is that there would be no further rate hikes.On the liquidity side, RBI has clearly indicated that open market operations (OMO) would be the route taken to manage the liquidity position.Globally countries are cutting rates. How do you see the interest rate cycle panning out in India and why? Will RBI wait to cut rates till inflation falls below 6 per cent?There is a clear indication that interest rate easing would depend on the economic growth numbers that will emerge in the future. RBI has indicated that while inflation would moderate, it may remain above the comfort zone for some time. We believe that RBI could consider rate cuts even before inflation gets into the comfort zone of below 6 per cent. We feel that if the growth numbers continue to remain weak, action could be taken in cutting rates within a few months if the inflation continues to have a downward trajectory.Despite increasing the FII window in G-Sec and corporate bonds, why aren't we seeing inflows coming into these market? Surprisingly, on a risk adjusted basis, they can make a risk free return of 3-3.5 per cent.The restrictions relating to minimum period lock-in in respect of G-Sec and corporate bonds are being relaxed and we will be seeing very active interest from FIIs to participate in the Indian debt market papers.Going forward, where do you see the 10-year government securities and why? Will 10-year cross 9 per cent? Are you buying G-Sec? Which maturities are you favouring and why?Yields on 10-year government securities had very likely peaked at around 8.85 per cent levels witnessed a few weeks back. We believe that the yields would gradually come down in tandem with the RBI action relating to short-term interest rates. The yield curve which indicates inversion in the short-term securities would likely realign over the short term and we would gradually witness a parallel downward shift in the yield curve. This is clearly a time to go for longer maturities where the returns would be significantly higher over the next 6–9 months.What is your take on the 1-year, 2-year, 3-year, 5-year and 10-year yields in corporate bonds? Will you be a buyer in corporate bonds and what would be the tenure?In respect of corporate bonds, we expect a significant downward drift in yields at the shorter end, which would be more liquidity driven, while we do not see major shift in the yield pattern in long maturity bonds.It's been seen that the market is favouring Certificate of Deposits rather than corporate bond. Why is that?Certificate of Deposits have better liquidity and that would be the primary reason for CDs being preferred to corporate bonds. Also, so far the preference has been in the very short maturity papers where yields have been high due to liquidity in the system remaining tight.Why is commercial paper languishing in the market? Commercial papers are less liquid as compared with CDs. Besides, with the slowing of the economy and the rising incidence of NPAs in the banking sector, credit risks in companies issuing CPs would be scrutinized in greater detail.In times of uncertainty, where will you advice investors to invest? Currently where are you investing your money? And why?As the interest rate cycle appears to have peaked, this is a good opportunity for investors to gradually move into short and medium term bond funds, which can benefit for slightly longer maturity securities as and when the interest rate cycle is reversed. It would make sense to gradually shift from Liquid Funds to Short term and medium term bond funds over the next two to three months.Is the fund house seeing an inflow of money? How much of it is coming into fixed income and how much into equities and in which schemes? 2012 clearly looks to be a year for investing in fixed income as compared to equity. One can look at returns of around 10 per cent or higher in fixed income funds over the next one year.As a fund manager how are you managing the money in your portfolio and where are you investing in this market (both equity and debt)?This is clearly a time for a gradual shift to longer maturities in Debt Funds and increasing the mark-to-market component in portfolios. The equity market continues to look uncertain and a defensive portfolio (FMCG, pharma, IT, telecom) are the preferred bets at this point of time.Where do you see the equity markets in the short and medium term and why? Is it a good time to buy equities?Equity markets are likely to remain range bound in the short and medium term with a slightly negative sentiment. Third quarter earnings are likely to be under pressure on account of input costs going up and also on account of currency weakening and other factors. One needs to wait for clear indications both on the reform front and definitive actions from RBI in respect of interest rates before getting comfortable that growth can rebound. We would advise investors to have caution in equity investments in the very short term.
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Anil Kapur, MD - South & South-East Asia, Western Union explains to BusinessWorld's Tanushree Pillai how the remittances business works and how it helps in financial inclusion.How old is Western Union in India?We are about 17 years old in India now. We started around 1993-94, when we signed our first agent. We signed our agreement with India Post in the year 2000. In late 2001-early 2002, we had fewer than 3000 locations (agent locations include standalone retail, banks, post offices, money changers, travel agencies, jewelers) in India. Today, we have over 80,000 locations in India. We have outlets at about 7,000 post offices, 30,000 bank branches (mostly nationalized). These outlets are more than all bank branches put together and that puts us in a position to help in financial inclusion.Our typical customers here are from Low Income Groups who are receiving money from family members working abroad and about 70-80 per cent of the income earned is sent back to India. Our service reaches out to the smallest villages in India.Western Union started about 160 years ago in US and is listed at NYSE. How does Western Union typically work?Typically one would have to walk into a Western Union outlet and deposit the money with the agent (plus a fee). The agent then passes this money onto Western Union, which passes it onto the agent where the money is collected. The actual transfer of money is, of course, happening through the banking system.Here, someone who is receiving the money would have to any Western Union outlet and fill out a form, show a 10-digit number that would have been given to you by the person sending you money. Once you are identified correctly, the cash is handed to you.The model is ideal for those who live in rural areas where money transfer through a bank account could take longer or for those who do not have a bank account to start with.What happens if one walks into an outlet where the agent is short of cash?Our clear intention is to have agents who can easily dispense cash. Agents are required to keep Rs 3-5 lakh at any point of time. The same is needed for post offices too, as those in rural areas might not have huge amounts of underlying cash. A large number of our people are constantly training post office and bank staff. There are also some private NBFCs (full-fledged money changers) who appoint small retail outlets as sub-agents. These employees are constantly in touch with the agents and customers too. We have what we call NRI meetings, where these employees go to a village and gather all the visiting NRIs and explain to them how Western Union works. We do grassroots programs, road shows to provide knowledge.What happens once a customer walks in an outlet to receive cash?The basic requirement for a WU agent is a computer. But now, we do have a model where in the absence of a computer, you can operate with the help of a fax machine. The transaction can be faxed into a computer model (the Hub and Spoke model – a system for network routes). So the agent looks in to the software that we have, looks at your details, the code you have been provided, checks for identify. The person depositing the money would need to fill in the personal details of the person receiving the cash. Once the transaction is complete, the software generates a signal to our entire network that this transaction is now complete. (RBI only allows receiving money)Over US $76 billion were moved worldwide in 2010 and our global market share in the remittance business is about 17 per cent. In India, we had 10 million receivers in 2010. The big markets for us are in Punjab, Tamil Nadu, Kerala, while new markets are UP and Bihar.What's the biggest advantage of remitting money through WU?The fact that one doesn't need a bank account for the same. Many of our customers, from rural areas – with no bank account - walk in to a post office or bank to receive cash from their relatives and the bank asks them to open an account so that they can opt to keep some of the money in the account for future use. A bank account is created in the process, which helps in financial inclusion.The charges that the sender pays are determined by us, but the receiver doesn't have to pay to receive the remittance. There can however, be only 12 transfers in a year and one cannot receive more than US$2500 per transaction.Interestingly, there is a village in Punjab where one of the cross-roads is called ‘Western Union Chowk' as almost the people living in the vicinity receive their remittance through Western Union.What are your future plans?We are currently sending our agents to the US, Canada, France and Germany to meet with leaders there to open ethnic outlets. Indians abroad are typically more open to the idea of remitting money through Indian agents at grocery stores. We are banking on that tendency to open ethnic outlets so more and more Indians can easily remit money without hassles.We are currently in over 200 countries globally and 4,85,000 locations around the world.
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Currently Ipsos (a French company) is the world's third largest market research firm with a strong presence in advertising, marketing, media research, public opinion. In July this year it announced the acquisition of Synovate from Aegis Media, which would further help strengthen its presence in the Asian markets, especially India. David Richardson, MD, Ipsos APAC talks about business in emerging markets and how larger companies globally are depending on research in newer geographies more than ever in an interview with Businessworld's Suneera Tandon.With the global acquisition of Synovate from Aegis Media a few months back, how are you leveraging the existing capabilities of Synovate to Ipsos?In terms of the two companies, they are quite complimentary to each other. Ipsos remains very strong in advertising research, innovation and product development. Synovate brings to Ipsos strong product testing capabilities and strong tools in customer loyalty research which very well match the innovation tools that IPSOS has had. Synovate also brings a strong approach in the custom health care research space, especially in Asia, where it remains a leading player in this area. It has a strong network around the world, that combined with the connections Ipsos already had, gives us a strong position in health-care custom research. Geographically, Synovate has been very strong in Asia, while Ipsos was strong in North East Asia, but weak in South East Asia and India. So the combination of the two companies will allow us to double our business in Asia.So then Asia becomes will become a very strong market for you, is that strategy arising from the volatility the western world is facing?Ipsos was already doing business in developing markets, but this helps get there a bit faster. Ipsos is the largest custom research company in Lat Am (Latin America) and has a strong base there. But emerging markets have always been important. Ipos has been strong in Lat Am but weak in South East Asia and with Synovate, it has been the opposite. So the combination of the two companies is complimentary with both having a degree of presence in Asia, Middle East and Africa. This will increase our share of business from the emerging markets of the world and take it to about 20 per cent.With the volatility in the western world right now, how are brands tackling the situation?The world is a little bit nervous vis-vis the global economy. I think everyone knows that the focus is on emerging markets. Now it's a matter of what the difference is between what companies are going to do in the emerging markets and what they are doing already. There used to be a broad based desire to treat all countries in Asia as somewhat similar and attractive but that practice went away. Then everybody shifted their focus on BRIC. Now people realise that just because you understand China doesn't mean you understand India as well. So it's gone back to the fundamentals that you have to understand each country differently. The world is really focused on China, India and Brazil right now. The amount of business done across Asia has not increased. As companies get stronger in Asia, they don't need to source research from outside the continent, they are spending more money in Asia. So spending is increasing in China and other Asian countries which means it's decreasing everywhere else. Are these global or domestic brands that are focusing on these markets?The global brands are always very focused and they will continue on developing this opportunity. Everyone is talking about focusing on the next billion consumers. At the same time you see the emergence of multinationals that are operating in different parts of Asia, which are beginning to develop scale. Ten years ago you would have called Samsung one of those mini MNC and now you won't. So you can't predict which is going to be the next big MNC, but there will be a lot of countries - based in India or China- that will develop and increase their multi-national presence. There is also a shift increasingly from our global partners towards global businesses working locally. We've got big India based businesses who are taking their business outside India and that's a great opportunity for us. Our clients in India vary from FMCG, automotive, (several key Indian brands such as Tata, Hero) healthcare, telecom etc.How important is research in today's time and date?There are two perspectives on the need of research. Firstly if you are an international company, based let's say in Europe and you've identified that for your company's future you have to understand and perform better in the far-off lands that are culturally very far from you, you need research to fulfil the promises to share-holders because why should they promise to do a great job if they don't understand these markets\people. This is equally true for companies here in India who want to spread their wings and do more to grow in another part of the region of this country; so they need research to expand beyond their comfort zone.The other dimension is that India is a very young country where a lot of changes are taking place. Even well experienced businesses are trying to track what's going to happen next, what are the change the growing youth population is going to bring in terms of behaviour, consumerism and social outlook. But there must be challenges in functioning in a market like India?The Indian research industry faces a major handicap right now. Prices (to clients) have been exceptionally low. There is no reason for places like Indonesia, Vietnam and Philippines to be five times more expensive in terms of price charged to clients. It's not like India is 1\5th the value of consumers in other countries, but prices in marketing research have been fixed and haven't risen in a decade even though salaries have gone up a lot. The industry is at that turning point where companies realise that they need to invest more in research. Now companies are starting to invest in technology to innovate and move towards digital data-collection. Even clients, for the first time, in a decade are signalling to pay more. There are companies willing to pay to up to 50 per cent more for our services, in the past six months. Now that is a radical change.
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Uncertainty prevailing in the Euro-zone has seen Nick Cringle, global co-CIO, RBS Wealth Management, cutting his client exposure in equities by 40-50 per cent for investors — both conservatives and risk takers. Instead, he has been parking their money in safe havens like Swiss Franc, gold, US dollar and US bonds. Talking to BusinessWorld's Mahesh Nayak, he said the European crisis would see risk assets (equities) moving further south and market momentum and sentiment would return only if sustainable policy measures like aggressive quantitative easing and short-term fiscal stimulus are introduced in the US and Europe along with credible medium-term fiscal consolidation plans. As for the Indian market, he expects it to move in line with the global markets.Excerpts from the conversation:What is your view on Indian and global financial markets?Recent events have reinforced our cautious view on risk assets as game-changing policy is still not evident and valuations are yet to reach compellingly attractive levels. We continue to be cautious due to the high level of political risk, especially in Europe, and increasing evidence of a globally synchronised slowdown. In such circumstances, it is often the case that markets only bottom when valuations become compellingly attractive, or there is some sort of positive policy hammer blow that convincingly changes the direction of markets. So far we have not seen either. We expect the Indian markets to move in line with the global markets, even though valuations appear attractive. The prevailing volatility in global markets combined with domestic high inflation, rates and earning downgrades could contribute to domestic pessimism.When do you see the clouds of uncertainty getting clear?Market momentum and sentiment will only turn if some sustainable policy measures are introduced. These would include aggressive quantitative easing in the US and Europe; a shift to explicit inflation targeting in the US; short-term fiscal stimulus in the US and Europe combined with credible medium term fiscal consolidation plans and/or a combination of monetary and fiscal stimulus in China and material currency appreciation.In the absence of such concerted policy action, risk assets can be expected to weaken further in the coming months. At some point, valuation will kick in as a driver, but before it does, risk assets will fall further in price.What are the major challenges and concerns for the markets — Indian and global?In the recent weeks, the European crisis has entered an even more serious phase, with Italian and Spanish bond yields reaching around 7 per cent level, prevented from going higher still only by ECB bond buying in the secondary market. Also, it is difficult to see how the EFSF bailout fund can remain credible. Perhaps even more worrying, the crisis has moved right into the core of the Euro Zone with the spread between German and French 10-year bond yields hitting 200 bps. Political risk at a European level is still very high, with Germany and France in open disagreement about the extent to which the ECB should intervene in government bond markets. In addition, the newly appointed technocratic governments in Italy and Greece could face immense difficulties and opposition in reforming their economies. In addition, the Euro Zone is tipping into recession, making fiscal consolidation that much harder for periphery and core Euro Zone countries alike. Leading indicators suggest the Euro Zone is already slipping into a substantial recession driven by banks' deleveraging, fiscal consolidation and the shock to business and consumer confidence that the European financial crisis has created. It is not inconceivable that one of the smaller Euro Zone countries such as Greece should attempt to leave the Euro Zone in the next twelve months as domestic populations rise up against years of fiscal austerity. Such an event would quickly lead to contagion to other European periphery markets and increase financial stresses further.Even if the ECB does eventually relent, and engage in full-blown quantitative easing (QE), this will no longer be the silver bullet that it could have been 6 or 12 months ago. Put simply, despite some improvement in the US outlook, the risks to the global economy lie firmly to the downside because of the escalating crisis in Europe. This policy coordination may have to include not only ECB QE, but also outright reversal and pursuit of fiscal stimulus in major economies like the US and China in particular.In case of India, growth is tempered by high cyclical inflation and rates combined with delay in policy decisions. Further, with heightened risks of slowing global economic growth, Euro Zone's debt crisis and concerns of contagion effects have kept the markets volatile in sync with the global equity markets and also kept external investors guarded. However, India's resilience, reflected by over 8 per cent GDP growth during the global slowdown is the re-iteration of its strong fundamentals driven by domestic consumption and investments and its minimum dependence on external trade. While this inward nature of the market would insulate partly the economic growth, we expect moderation in growth at 7.5 per cent in FY12.What would you advice investors to do in the current environment?Due to the risk factors highlighted above we believe that there will be increased volatility in equity markets going forward, with a downside bias. We have already taken action to de-risk our global portfolios in light of the above mentioned risks. From an overweight Indian equities in March'11, we have turned to underweight in three phases from Aug'11 on the back of global developments. We like defensives namely Health care and Consumer Staples, while we are underweight cyclicals namely Materials and Industrials.This would be a great opportunity for Indian investors to increase fixed income allocations, to benefit from the prevailing cyclical high yields & our belief that Interest rates are close to peaking out. Clients should look at investing in a mix of accrual & duration strategy to take advantage of this interest rate cycle.
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Looking back, Rashesh Shah's aspirations of making Edelweiss India's Goldman Sachs seem like a slightly distant dream (Goldman Sachs itself is here anyway). "Things change," he says; and how they have changed. The financial services industry wields the most influence on our stockmarkets. In an interview with Businessworld's Srikanth Srinivas, Shah acknowledges that banks are a big part of that. Excerpts: After a spectacular opening, Edelweiss stock hasn't done particularly well. Why do you think the market has taken that view? What do your investors think?Stock price is always a tricky one. Ideally you should offer an IPO in the middle of a growth phase, so that you have demonstrated growth behind and created headroom for more growth. After our IPO, the world got hit by a huge credit crisis. Until then, the entire financial services sector was enjoying 50-60 per cent growth and most of us conservatively expected a 20-30 per cent growth to follow. But things changed after 2008. I think the Indian capital market business — scale and profitability — has not come back post the crisis. The current activity levels and profit pools are half to one third of 2007-8.Secondly, we have embarked on a process of restructuring of Edelweiss' business model — from a capital market company to a broad based financial services company. This has required investments, which will produce results in the future.Going retail is a big shift, even a risky one under the circumstances. What's the rationale for this strategy?The simple answer is that's where the next big opportunity, and it's a really big one. Imagine the total financial savings — roughly $400 billion a year - as being poured into the mouth of the funnel; think of large savings going in and large investments resulting from these. What comes out of the stem at the bottom as the pool of financial products? The $400 billion that is poured into the funnel goes through a series of pipes: products and services such as bank deposits, insurance, mutual funds etc.Going retail would involve focusing on the amounts that go into the mouth of the funnel, and the pipes through which they flow through to the bottom of the stem. That's a different scale, and a hugely different set of opportunities. That's what we are aiming for when we go retail; the next big growth opportunity or set of opportunities is there. That's why we are going into retail broking, insurance, housing finance, etc. Financial services companies like yours may have started off at different points, but almost all of them are building businesses along the lines you are. What makes yours different?You are right; financial services can be, and are being, commoditised. A firm creates a product, and very soon, others imitate and copy it. The same is true of services; what one bank offers, for instance, is almost identical to what others offer. Businesses - asset management, insurance, housing finance - have the same economics, even if they have different business models. So the replicability of such businesses is a given. Or in other words, product differentiation is not the only answer.But take a look at GE, or IBM: what makes them different is the organisation; that is what makes them the brand they are, that's why there is only one GE in the world, and one IBM. Organisational differentiation is the hardest thing to do: it's a combination of values, mission, business ethics and the way you conduct your business. That's what I —and my senior-most management team — spend lots of time on: how do we build Edelweiss one of the trusted brands among financial services organisations? Sooner or later, banks will probably end up having the lion's share of all the other the financial services business as well. How do you think the non-banking financial companies (NBFCs) and others respond? Currently if you look at revenue pools, banks are approximately 75 per cent of financial services; the other 25 percent a combination of NBFCs, insurance companies and capital market players. I don't think the 75:25 ratio will change significantly in the next 5-10 years. One reason is that banks still have a long runway to expand the reach of banking products for the next 10 years. A 25 per cent pool of a growing financial services market is not small.A GDP growth of 8-9 per cent and a savings rate of 33-35 per cent means that by 2020, our financial savings would be four times what we as Indians have saved in the last 40 years. So the size is enormous and will have enough room for all forms of financial services - from banks, NBFCs, Insurance companies to MFs to grow.Given your approach - creating the holding company structure, for example — is seeking a bank license the next step?A holding company in financial services is inevitable for a broad based player. As I said before, we are in the process of restructuring our business model. Currently, we are investing in our housing and life insurance businesses. This will keep us busy for the next 2-3 years, and it may not be prudent to change the business model again so suddenly. But banking is a good and large business opportunity, and every financial services firm which wants to grow, have breadth and scale will look at banking at some point; the key is doing it at the right time.
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Japan's ambassador to India, Akitaka Saiki spoke to Businessworld's Shrutika Verma about the opportunities for Japanese companies in the Indian market, concerns over China's growing strength and the shift in Japan's diplomatic relationship with India focusing on cooperation in areas of defence and infrastructural development.How important is India to Japanese private sector companies. Where does it show on your priority graph?India is a growing economy and I often tell my Indian friends that this country is no longer just a 'potential' but it is a 'reality'. So we have to come into this country for business and otherwise. The number of Japanese businesses in India has almost doubled in the last three years from 365 to 725 and this number is going to increase in the coming months and years. There is a huge opportunity for Japanese to do interaction or business with this country. I am very pleased at the cooperation between the two countries at all levels in many sectors. Our two governments are operating very closely even in areas of security. We are intensifying cooperation including joint operations at the coast of Africa; our two navies are operating with each other very intensively to protect the vessels to freely travel between Africa and Asia through the Morocco state into Japan. China has always been placed higher on Japan's priority graph than India. Do you see that changing in the near future?For the time being, no, but the fact that the huge delegation from Japan business community is here indicates that they are looking at India as a very promising business partner.China is still running very fast. India too is pacing up and I am sure soon India will catch up with China because of the population growth. China may face some setback in about 15 years because of its policies. The workforce of China is going to decrease while in India, people who are in the 20s will be about 40 per cent of the population even 20 years from now and this is very important for any country or economy to sustain moving forward. I think population - young population is very important.What do you think of China's military assertiveness?We are concerned about China's military and its muscle flexing attitude in the recent months. Their naval powers are now expanding towards the south including the South China Sea and also in the neighborhood waters of India. Their active operations are a matter of concern to the countries in Asia. China insists what they are doing is clearly for their defense purpose and that they have no intentions to intimidate any of the countries in the neighbourhood but their words must be accompanied by their actions. If they want to be friends with countries in Asia, I hope they will be a little more sensitive towards the sentiments or the concerns expressed by many countries in this region including our friends here in South Asia. Does China or India as a rising power worry Japan?No, we have comparative advantage in some of the products over Chinese and Indians. Our offerings are different from theirs, so we can manage that.Japanese FDI in India is largely from auto and consumer electronics... is tough competition from Koreans in this segment a cause of concern?If you take Sony for example, they have now come back to number 1 position in the electronics market. Of course the Indian consumer firstly looks at price but they are more and more realising the importance of quality of the product. As long as we are talking about the quality of the product we are number one and we will remain number one. We have some competitive edge over Korean products and I think it is up to the consumer of India to decide what will they choose.Is Japanese economic diplomacy shifting away from consumer electronics and auto sector to other areas such as infrastructure and nuclear technology?Not necessarily. Areas such as consumer electronics we still have a lot of market share so we will continue to maintain that.Infrastructure opportunity for construction, roads, bridges and urban facilities is huge in India. There is a lot of demand for it and Japan wants to partner in constructing that infrastructure. One example is the Delhi - Mumbai industrial corridor DMIC project which with the assistance from the government in terms of ODA, Japanese private sector wants to keep participating in the project.Nuclear technology we still have the highest standard in the world. Unfortunately the Fukushima incident gave the impression that even Japan has difficulty about the safety of the nuclear power stations and we have to admit that. But we have to improve and upgrade the safety of the power stations in Japan and that I think we can still offer.Why has there been a renewed interest in India among Japanese companies?Japanese market itself is now very small and as businesses need to be expanded, they are going to the markets which are growing and India offers the best opportunity in terms of income level of people. Every year about 12 million to 15 million middle income class people are created in this country and they aspire to buy high quality electronic consumer goods and better automobiles. So we see huge opportunity. What kind of operational challenges do Japanese companies face in India? This is not just limited to Japanese investors but many foreign investors in the country face these issues. Every year a wide range of requests are sent to the government of India around the infrastructural improvements. Warehouse, port facilities, electricity and water supply are few elements need to be supplied by the host country on a stable basis. If you are engaged in manufacturing of sensitive electronic products you need to have a very stable supply of electricity. One can not work with time to time power breakdowns during factory production. An improved infrastructure will help the operations in greater roles. How big a challenge does a strong yen pose?We are concerned that yen is appreciated too highly and this is now getting reflected in fundamentals of the Japanese economy. It needs to be rectified. Yen is currently 76 - 77 to a dollar and Japanese companies are already operating around 85-90 yen per dollar. This appreciation of 10 yen is really hurting the Japanese manufacturers and that is why they have to think about shifting their manufacturing base overseas, which is going to be very negative for the Japanese employment situation. If the industries shift abroad the local employment is going to suffer. So how are we going to set the balance between the two is the challenge that the new Japanese government is facing.
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Starting this week we introduce a fortnightly feature on mutual fund perspectives. We will be speaking to a number of fund managers on their views on the market's direction and drivers, and the consequent impact on mutual fund investors. With uncertainty looming over financial markets sparked off by the European debt crisis and domestic concerns over rising inflation and interest rates, investors appear to be clueless. Sankaran Naren, CIO Equity at ICICI Prudential AMC, concurs with the view that overseas markets have a greater influence than domestic concerns on market movements. Talking to Businessworld's Mahesh Nayak, his advice for investors is to look at oil markets and food price inflation that have been worrying investors across markets - retail and institutional. Excerpts from the conversation:What do you make of the overall crisis in the global economy and financial market? What is your take on the Indian equity market?The European economy consists of countries that are strong, and countries where there are debt and growth concerns. We expect the periodic shocks to continue. The only potential sustainable solution seems to be the issue of a Euro Bond backed by all countries of the European Monetary Union to fund the problem of crisis countries.The Indian market correction has been primarily a result of these concerns, which have led to FII (foreign institutional investors) selling. However, the Indian market is well poised due to the benefits of good monsoons, moderating food inflation and marginal crude price reduction with the potential to mitigate fiscal burdens. It's an opportunity to invest as markets correct.As an investor what would be your strategy?We believe that in the current environment local factors have been positive coupled. We therefore recommend that rather than focusing on global concerns, focus should be on crude price direction, which if corrected significantly, provides the opportunity to further increase allocation to Indian equity. Also, we continue to believe that there exist pockets of value across sectors to be unlocked by investors through investing in funds with value strategies.Where are you investing?I am investing in short-term debt mutual funds. However with crude oil correcting I will consider investing in equities as well as hybrid funds.What call will you take on the overall portfolio of ICICI Prudential? What will be your short-term strategy?There are pockets of valuation attractiveness across sectors and market caps. For instance there are certain large cap stocks that are attractive viz a viz peers. We therefore believe that rather than pick a sector, a bottom up stock picking strategy is what will help generate alpha. Our focus therefore is on identifying good businesses at the right prices that will help add value to our portfolioIn the current market condition what is the fund house advising clients? (As what to buy or sell)We have been advising our investors to systematically increase exposure to Indian equities with due regards for overall asset allocation discipline. It is important for equity investors to maintain their absolute levels of exposure to equity throughout the correction. This implies buying more of equity as markets correct to reach back their predetermined allocation level. We have been recommending our investors value funds like ICICI Prudential Discovery given the scenario of valuation attractiveness across sectors and market caps that can be best leveraged through the value strategy.Where do you see inflation and interest rates over medium term, do you expect a further hike in interest rates in the current financial year?Inflation numbers have a base effect which was expected to be negative for August and September. The numbers that have come in are therefore in line with expectations. However, a good monsoon has resulted in the coming off of food inflation which is a positive factor. In view of the above, we believe that we are toward the peak of the tightening curve of RBI; however, it is too early to comment on when rates are expected to come down.We should also remember that administered price hikes like that has been done in petrol is clearly positive for the fiscal scenario since the under recoveries of the petroleum sector goes up. Hence while a hike in fuel prices can lead to a spike in inflation, the long term benefit to the fundamentals of the economy outweighs the problems of inflation.How do you see the flow of money in the AMC? How has it been since March 2011?We have been clearly seeing some positive trends like increase in number of SIPs and no significant redemptions during corrections. This clearly indicates that there is been some change in investor behavior whereby they rather than panicking in case of correction have been looking at it as an opportunity to invest.In your view what will be the next trigger for the Indian equity market?It is difficult to predict direction given that a lot of influencing factors are macro in nature and are beyond control. However, volatility is clearly expected to continue and should be looked at as an investment opportunity. The upside triggers for the market will be, a correction crude oil prices and inflation which will help reduce the fiscal burden. Also stability coming through on the global front will definitely help improve sentiment. However on the domestic front, a shift towards improving investment in infrastructure and focus on the investment theme will help improve sentiment as well.
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