Its all about Money

It’s all about Money!

It is August. In a small town on the South Coast of France, holiday seasonis in full swing, but it is raining so there is not too much businesshappening. Everyone is heavily in debt. Luckily, a rich Russian touristarrives in the foyer of the small local hotel. He asks for a room and putsa Euro100 note on the reception counter, takes a key and goes to inspectthe room located up the stairs on the third floor.
The hotel owner takes the banknote in hurry and rushes to his meat supplierto whom he owes E100.
The butcher takes the money and races to his wholesale supplier to pay hisdebt.
The wholesaler rushes to the farmer to pay E100 for pigs he purchased sometime ago.
The farmer goes quickly to the hotel, as he owed E100 the hotel for usinghotel room for some family function in past.
At that moment, the rich Russian is coming down to reception and informsthe hotel owner that the proposed room is unsatisfactory and takes his E100back and departs.
There was no profit or income. But everyone no longer has any debt and thesmall town people look optimistically towards their future.
COULD THIS BE THE SOLUTION TO THE Global Financial Crisis?

Satire: How to rule the stock mkts !!!

a bit old but really gud!

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for Rs10.
The villagers seeing that there were many monkeys around, went out to the forest and started catching them
The man bought thousands at Rs10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs20. This renewed the efforts of the villagers and they started catching monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at Rs50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. Look at all these monkeys in the big cage that the man has collected I will sell them to you at Rs35 and when the man returns from the city, you can sell it to him for Rs50."
The villagers squeezed up with all their savings and bought all the monkeys.
Then they never saw the man nor his assistant, only monkeys everywhere!!!
Welcome to the "Stock" Market!!!!!

Warren Buffet: Berkshire Hathaway Shareholders meeting at Omaha 2008

Hello Friends

I just got this article forwarded through my friends. I found it really good and would like to share it.

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I had the good fortune to attend the 2008- Berkshire Hathaway Shareholders meeting at Omaha, Nebraska a few weeks back.
It was a wonderful experience listening to and learning from the Master Investor- Warren Buffett himself and all I can say is that he stands alone as the reigning deity of financial world's Mt Olympus!
The degree of humility and composure he exhibited, although he is the richest and most well respected human is stunning!
I tried to take some notes and would like to share with you some of the best questions and answers which came across during the conversation between we mortals and God.
Having read about him, observed him and worshipped him for a few years now, I think it is reasonable to believe that this guy is exactly what he seems: a plain-speaking, tee totaling man of uncrackable integrity who works really, really hard and sticks to his investing and management principles through boom and bust which makes him a freak of nature since he is above normal human tendencies. He is like a comet streaking through the heavens every 75 years or so.
The questions the shareholders threw at him for 7 continuous hours ranged from finances, life, religion, career, politics, sports and several other streams. And he answered everything with a Zen like calm and confidence.
Even if you are least bothered about investments and finances, I insist, Pl read on.
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What does it take to become a successful investor? Brilliance or Smartness?
Neither, Success in investing doesn't correlate with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that gets other people into trouble in investing.
When do you deicide to invest in a firm?
The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they're on the operating table. (Mr. Buffett bought Coke when it had its biggest fiasco after launching New Coke; he bought American Express when it went through a loss making phase in the early 60's)
What do you look for in people when they come to sell their firms to you?
I don't look for the usual credentials such as an MBA, a pedigree (Harvard, Wharton), or cash reserves or market cap of their firm. What I look for is just a passion in their eyes; I think that's the key. A person who is hungry will always do well. I prefer it when people even after selling stay on and work for the firm; they are people who can't wait to get off their bed to get to work. Passion is everything; there is no replacement for innate interest.
Mr. Buffett, you told us that Berkshire Hathaway has $ 45 Billion in cash. Why aren't you investing?
Up until a few years back I had more ideas than money. Now I have more money than ideas.
When do you plan to retire?
I love my job; I love it so much that I tap dance to work. Mrs. B, the founder of Nebraska Furniture Mark worked until she was 104, she died within 6 months of her retirement, that's a lesson to all my managers, don't retire! I personally am going to work 6-7 years after I die, probably that's what they mean when they say- "Thinking out of the Box"!!
Why do stock market crashes happen?
Because of human nature for greed and insecurity. The 1970s were unbelievable. The world wasn't going to end, but businesses were being given away. Human nature has not changed. People will always behave in a manic-depressive way over time. They will offer great values to you."
What are the things that are taught wrong in Business school and the corporate world?
I like such open ended questions, I think Business schools should refrain from teaching their wards about profit making and profit making alone, it gives a sense of 1 dimensional outlook to the young students that loss is a curse. In reality, in the corporate world, failure and loss making are inevitable. The capital market without loss is like Christianity without hell. I think they should teach the student on how to buy a business, how to value a business? Not just on how to determine the price of a business. Because price is what you pay, value is what you get.
Do you still hate Technology stocks?
With Coke I can come up with a very rational figure for the cash it will generate in the future. But with the top 10 Internet companies, how much cash will they produce over the next 25 years? If you say you don't know, then you don't know what it is worth and you are speculating, not investing. All I know is that I don't know, and if I don't know, I don't invest."
How to think about Investing?
The first investment primer was written by Aesop in 600 B.C. He said, 'A bird in the hand is worth two in the bush.' Aesop forgot to say when you get the two in the bush and what interest rates are; investing is simply figuring out your cash outlay (the bird in the hand) and comparing it to how many birds are in the bush and when you get them."
How do you feel after donating $ 40 Billion to the Bill and Melinda Gates foundation? You are a hero to us!

I feel nothing. I haven't sacrificed anything in life. I have had a good life. I donated after I turned 75. I think I admire those people who sacrifice their time, share their food and home, as the people to be emulated not me. Besides, what is money before a man's life?
What do you think are the pitfalls in donation?
I have never donated a dime to churches or other such organizations; I need to believe in something before I end up doing that. I have been observing the Bill & Melinda Gates foundation for years now and I am confident they will do a fantastic job of making use of the money. I am a big believer in Outsourcing, others believed in me as an Investor and gave their hard earned money to invest. I believe in Bill Gates, he is a better donor than me.
Why do you work from Omaha and not Wall Street, New York?
Wall Street is the only place where people alight from Rolls Royce to get advised by people who use the Public transportation system.
You seem to be so well read, tell us how it all started.
My father was a stock broker, so we had all these financial books in our library. He introduced me to those classics and I got into them. I am lucky that my father was not a fan of Playboy! Reading is the best habit you can get. Well, you can learn from teachers too, and have mentors but there are so many constraints attached- they will talk fast, talk slow, they might talk like a pro or they might be terrible communicators. Books are a different animal altogether, I love reading! The beauty about reading and learning is that the more you learn the more you want to learn.
People who join Berkshire Hathaway seldom leave. How do you get along well with all your executives?
I try to get quality people. I always say - Hire someone in your organization who is better than you are. If you do that, you build a company of giants. If you get people worse than yourself, you build a company of dwarfs. And do not try to do everything yourself. Delegate the jobs and look out of the window. The results will come. That's how you build institutions. It happens only when you empower others, believe in others. Iam an investor, Iam very secured at that, I have no clue how to make Coca-Cola or how to dole out credit cards (Mr. Buffett owns 8% of Coca-Cola and 13 % of American Express). I understand the wisdom of the aphorism that you cannot please all the people all the time. Of Course, you will always find qualities that you don't like in people around you, but if you observe carefully the love of the work unites you both. There is no point in being obsessive about a bad quality in a person, whom you otherwise respect.
I am a small time businessman from Dallas, Texas, what do I need to do to hit big time?
Be patient, Achieving your financial goals and dreams will not happen overnight. As much as we would all really love to accomplish our goals in a few years, this is an ongoing process. Defining your financial goals is not a one-time task; you need to keep adding new plans at different stages in your life. We all admire the skills of Olympic ice skaters, pro golfers, and concert pianists. But do we remember that they didn't acquire their skills overnight? They had to practice hours on end for years to achieve their dreams. The key to success is to continue learning throughout your life with a voracious appetite.
I think it is marvelous that you have had a golden run with investing, how did you do that?
My rule is to be fearful when others are greedy, and be greedy when others are fearful. Besides, I call investing the greatest job in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. Stay dispassionate and be patient. You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with drinking Coke, you should be OK. First the crowd is boozy on optimism and buying every new issue in sight. The next moment it is boozy on pessimism, buying gold bars and predicting another Great Depression, most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
Mr. Buffett you have seen so many crashes and recessions, your take on facing recessions and stock market crashes?
If past history was all there was to the game, the richest people would be librarians. Every scenario is different. But always remember, Tough times do not last. Tough people do.
What is the 1 biggest advice you would impart to a young investor like me?
Think for a moment that you are given a car and told this is the only car you would get for the rest of your life. Then you would make sure that you car is taken care of well, it is oiled and detailed every now and then. You would make sure that it never gets rusted, and you would garage it. Think of yourself as that car. You just get 1 body, 1 mind and 1 soul. Take care of it well. Invest in yourself that would be my advice.
You personally know many of the Financial executives who are engineers of the current turmoil in the financial world, surprisingly even after record losses, those executives receive astronomical salaries and bonuses and arrogantly declare that they deserve it, why dint you advice them from making such decisions and what's your view on their justification for their pay?
I like sharing my ideas but don't like imposing my ideas on anybody. It doesn't make sense and is a waste of time. If somebody has decided that they know everything that is there to know, nobody can help them. The best way to learn and succeed is to know that we know nothing. There is an entire universe out there and still some of us think we can know everything. In the world of investing a few people after making some money tend to imagine they are invincible and great. This is the worst thing that could happen to any investor, because it surely means that the investor will end up taking unnecessary risks and end up losing everything – arrogance, ego and overconfidence are very lethal. Personally I don't feel too comfortable with too much extravagance, because I always think like an investor. My thought process doesn't see a lot of value in a fancy car or a designer suit. Thinking like an investor always is very important to bring in a sense of discipline and focus. Before reading balance sheets and investing you need to make sure your outlook and mindset is that of an investor. Never let ego, arrogance and over-confidence control you - not just as an investor but also as a human being. You will never have internal peace if you are unable to look at everybody around you with love, compassion and understanding. Irrespective of who the person is, he or she can teach you something you don't know. I have learnt so much from people all around me and I wouldn't have been able to learn all these wonderful things if I had not spoken to them with a smile. To quote Sir Isaac Newton- If I have seen farther than others, it is because I have stood on the shoulders of giants.

It was a 7 hour conversation and I could just capture some of the best questions and answers. As 37,000+ dazed, amazed and grateful shareholders trooped out of the stadium after the meeting, I found myself recalling one of my favorite quotes-
"A man has to learn that he cannot command things, but that he can command himself; that he cannot coerce the wills of others, but that he can mold and master his own will: and things serve him who serves truth; people seek guidance of him who is master of himself".

DEPRECIATING VALUE OF THE DOLLAR AND THE GATES THAT IT IS OPENING

This article has been written by Sudeep Bhargava of Globaladroit (www.globaladroit.com)

The depreciating value of dollar in comparison to the major currencies across the globe is a matter of great discussion. Indian software industries and the exporters are feeling the pressure because of the depreciating value.

The value of dollar which was as high as 49.5 rupees per dollar a few years ago, has now come down to around 39.5 rupees per dollar. This marks over 18% degradation in the value.

Is this some way a boon for the Indian business system? I feel YES. I firmly believe that this is an opportunity which has been bestowed to the Indian business to INNOVATE. This is time to rethink about the current business models that are being followed.

This gives an opportunity to look into your business models and shell off the “non value adding” steps which are unnecessarily eating into your operational costs. In other worlds, this could be the time to go “lean”. Applying simple lean principles can give the Indian industry the competitive edge that they badly want to be competitive in the world market.

Improving the “way you work” and not only the quality of the final product or service would see the Indian business develop the competitive advantage. Probably there is no better time than this to apply the principles of Six Sigma and Lean which have given excellent results to the Fortune 500 companies.

One key question to ask is how to develop other sources of competitive advantage, such as building high-level capabilities which cannot easily be replicated by competitors, or how to change the mix of activities carried out in India versus other countries.

In order to do this, we will have to change their mindset: We will have to stop thinking of themselves as Indian companies and think more like global companies of Indian origin.
Indian companies will need to analyze their portfolio of costs and move production to where it makes the best economic sense. Already, the Indian IT firms are trying to address rising wage costs by moving production within India to lower cost regions like Kolkata or Bhubaneswar and to Tier-II and Tier-III towns.

The challenge that the Indian economy faces is not that of an economic bubble burst but of moving on to the next growth trajectory and economic development. Going by the model proposed by Porter, India has to embark on a journey that needs sowing the seeds for catapulting India into an innovation driven economy unique value.

India will have to definitely accelerate its reform processes and start working to become an innovation driven economy, as that would determine whether the country would become a developed nation by the year 2020. The focus should be on building processes that would be driven by innovation; this would make the economy resistant to external shocks and vagaries of economic cycles and currency fluctuations.

The bottom line is, our policies should concentrate on enhancing our capability in manufacturing, promote entrepreneurship, and provide incentives for innovation.

INDIA-An Attractive Investment Option for Hedge Funds:

INDIA-An Attractive Investment Option for Hedge Funds:

ECONOMIC FORCES:
India is the largest market for single stock futures in the world and has a well developed derivatives market in index futures and options. This gives hedging possibilities
not available in other emerging markets. There is also enough liquidity in the big stocks for domestic investors to sell short. Even though there are restrictions, these are less binding than in other emerging markets.

INFRASTRUCTURE:

In comparison to China, where stock markets are not well developed and company information is relatively opaque, India has much of the necessary institutional framework for hedging, including a regulatory regime and good information disclosure standards. Investors look at multiple markets around the world. There is a sense that the changes taking place in India are going to result in superior performance in the economy, and that the corporate sector will be a big beneficiary. Now, obviously the Chinese economy is larger, but the capital markets are better developed in India.

RISK MINIMIZATION:
Hedge fund companies can take advantage of the expanding phase of the Indian business cycle. They are going there with the idea that they'll get extraordinary returns, and of course with India being a growth story, those returns are definitely possible.



INDIAN BUSINESS ENVIRONMENT

Culture:

India is a relationship-based society. If you want to do deals, you need to know the
people. In places like India it is best if a hedge fund company has someone on the
ground there in order to get a sense of how business is run in India, and to get local
information. Ideally the fund should hire people who have worked in corporate India.

Red Tapism:

The SEBI and RBI are posing restrictions on the operation of hedge funds in
India. Whereas SEBI has introduced various parameters for selective entry of
hedge fund companies, RBI, in the monetary policy review has shown concern
over the arrival of hedge funds in the country.

Strategies for Investment-Fundamental Analysis:

In the U.S., fundamental analysis, where you study a firm closely, decide it may
be undervalued, and then take 10% equity, hold and sell --is largely dying out,
and the amount of money to be made is limited. However, in India, people feel
there are still a lot of fundamental plays, since the market is more inefficient.
That is predominantly the form of investment that everyone does. It is essentially
all about who is a better stock picker.

FINANCIAL SERVICES

Whate are they? In simple terms, they are services offered by organizations relating to financial sector

Types of services offered / objectives
1.Fund raising: raise required funds from investors,individuals,etc
2.Deployment of funds: array of financial services for deployment
3. Specialized services like factoring, credit rating,etc
4. Saving mobilization and eco. Growth: mobilization of savings of a cross section of people, for purpose of channeling them into productive investments.

Major constituents of Fin. Service Market
1.Service providers / institutions
2.Service buyers
3.Financial instruments
4.Specialised institutions
5.Regulatory institutions

SERVICE PROVIDERS
NBFC(Non Banking Financial Company)

According to RBI, NBFC is an institution or a company whose principle business is to accept deposits under any scheme or arrangement or in any other manner and to lend in any manner.
Mainly they are
--->Fund Based, NBFCs
--->Service Based, NBFCs


Importance of NBFCs

Provides finance to those sectors who are unable to access banks
Provides financial services to individuals and corporate
Satisfy specialised credit requirements
Mobilisation of deposits
Creates competitive environment
Other services like banks

Based on ur comments I will put in more data regarding the same.

HEDGE FUNDS

A few years ago, hedge funds could hardly be noticed in the Indian marketplace, and they were highly secretive investment vehicles even in the U.S. Today, India is being looked upon as a potential investment ooportunity.The stock market in India is booming and so are the investments from abroad in the form of FDIs and FIIs.
With a number of deals being struck in the country, hedge fund players are ready to experiment with the kind of upside that might be possible in this market.

What is a Hedge Fund?

A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
Some features of hedge funds include:
Alfred Winslow Jones started the first known hedge fund in 1949
Only high net worth individuals and institutional investors invest through them
The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

Some of the hedging strategies available to hedge funds:
Selling short - selling shares without owning them, hoping to buy them back at a future date at a lower price in the expectation that their price will drop.
Using arbitrage - seeking to exploit pricing inefficiencies between related securities - for example, can be long convertible bonds and short the underlying issuers equity.
Trading options or derivatives - contracts whose values are based on the performance of any underlying financial asset, index or other investment.
Investing in anticipation of a specific event - merger transaction, hostile takeover, spin-off, exiting of bankruptcy proceedings, etc.
Investing in deeply discounted securities - of companies about to enter or exit financial distress or bankruptcy, often below liquidation value.

Depositary Receipts or Global Depositary Receipts

We all read about depositary receipts these days. It’s an important tool through which the foreign companies invest in the market. It is a negotiable financial security which is traded on the local stock exchange and usually as equity. These are issued by the companies listed in foreign exchange. This provides the facility to the investors to invest in equity of other countries.
The American Depository receipts are in circulation since 1920. They have gradually evolved into GDR (Global Depositary Receipts). Other popular depositary receipts are
European DRs and International DRs. The GDRs are commonly traded on the European stock exchanges. The GDRs are traded on the validity of the currency in the stock exchanges. The GDRs are usually created to list the already issued securities and debt shares in the other foreign exchanges across the globe. The laws of the country guide the procedure of listing the security on the exchange. IPO is also eligible for issuing GDR.
DRs are instruments of increasing the foreign trade. It not only helps in transferring the money but also the transfer of resources like technology, market procedures and increase transparency. Both the countries are benefited by the mutual transactions. The investors can invest in the global market from their own country. The risks associated are high but so are the returns. The investors don’t face the problem of going into to unfamiliar market for trade. But still the risks of foreign exchange or currency exchange are there. The company has multiple benefits by issuing the GDRs. The benefits are 1. Raising the Capital from world market help the company to attain global status. 2. Increase in the liquidity of the shares. 3. Opportunity for the foreign and the expatriate’s investors based abroad. 4. Solves the problem of barriers on the entry of foreign capital. Thus the company can raise the capital from the world market for its current procedures. The only risks associated with it are the foreign exchange rates.

Author : Ela Johri

The Growth Prospects & The Role of Non-Banking Finance Companies (NBFCs) in financing commercial vehicles/ construction equipments-Continued

To view the previous sessions on the topic click on the following
Session 1
Session 2

I understood why he failed and became a defaulter. He failed because he chose wrong vehicle for his transport business. But the question is – how an experienced transporter like him could make a mistake in choosing a vehicle? I tried to find out the answer from him. He told me that Tata Dealer had given huge discount on this vehicle and Tata Finance had financed 90% and took 10% only towards down payment. Probably the discount given by the dealer lured him to buy the vehicle. Dealer certainly had achieved its sales target by selling the vehicle to this transporter but what Tata Finance got from this business transaction? In my opinion, Tata Finance failed to appraise the loan proposal and they themselves converted one of their good customers into a defaulter.

I decided to finance this transporter on one condition that he will buy the vehicle, which I will select for him. He had no option but to agree. When I financed this transporter, many of my friends in NBFCs including Tata Finance were surprised. In fact, the Tata Finance official when he met me in our association meeting asked me how I could finance a sick party. I told him that the transporter did not look like a “Sick Party” to me. I considered the transporter as “Sikh Party” and therefore approved the loan. My assessment about this transporter proved correct later on. This transporter not only paid all instalments on time, he took loan for four more vehicles from us. I helped him grow from a small transporter to a large fleet owner while we made profit all along. Later on Tata Finance approached him and offered him loan at lower rates with 90 days moratorium period but the transporter refused to accept the offer. I would like to draw your attention to the learning outcome of this case. If you want to do the business with customer then you must understand customer’s business first. Please remember if you provide your customer a “win-win” situation, you will never fail in your business. You will grow with your customers.

I will now talk about the marketing strategy for how NBFCs can compete with banks. You all have studied marketing, and therefore I need not tell you how to begin. I think it would be appropriate to understand the business environment prior to formulating the marketing strategy. Cumulative sales of commercial vehicles in the domestic market for the fiscal year were 1,07,745 nos., an increase of 57.8% over the corresponding period last year. Cumulative M&HCV sales stood at 62,201 nos., an increase of 52.8% over the previous year while LCV sales for the period were 45,544 nos., an increase of 65.4% over the previous year. Export of Commercial Vehicles increased by 36% to 40,581 units in the 2005-06 as compared to 2004-05.
According to the Economic Survey of Government of India, the Automobile Industry is growing very fast. Commercial vehicle market is also likely to grow very fast. Let’s consider some of the factors that may affect the growth of commercial vehicle market. Golden Quadrilateral project, which is near completion, will certainly enhance the demand of HCVs particularly the multi-axeled heavy vehicles. On the other hand Indian Railways Freight Corridor project will reduce the demand of HCVs particularly the multi-axeled heavy vehicles. According to the proposed project plan, the first phase of freight corridor (2,800 kms) will connect New Delhi – Mumbai and New Delhi – Howrah. The proposed freight corridors of second phase are Howrah – Mumbai, Howrah – Chennai, Mumbai – Chennai and New Delhi – Chennai. If both these projects (GQ & FC) are implemented by the year 2010, what would happen to commercial vehicle market? New Delhi-Mumbai is one of the high-density transport corridors of India, and rail as well as road capacities are fully stretched on this route. On an average, a total of about 9,000 loaded trucks move over this corridor every day. The proposed dedicated freight corridor would support 15,000-tonne trains with 30-tonne axle loads. This will affect the HCVs demand adversely. However, the main constraint of the proposed system is that the freight corridor network will neither be connected to centres from where goods originate nor will it be linked to their final destination points. In other words, to be successful, the freight corridor network will need feeder services to connect it with both goods originating centres like ports or factories/ market and final destination points where the goods are consumed. Therefore, the demand for HCVs will be affected but not drastically. Freight corridor is least likely to affect the demand of LCVs & MCVs. As a matter of fact, I would like to tell you that the freight corridor project provides huge business opportunity to NBFCs to finance an “integral component" of this project and make profit but I will not go into the details of this. I think I should discuss the topic given to me.
Now, let’s come straight to the STP. Which segment NBFCs should target? Segment A - established fleet owners who have access to the bank finance or Segment B – Individual operator/ small transporters (one/two vehicles owners) who do not have access to the bank finance. NBFCs may choose to operate in a particular segment or both the segments. I think you do not need any tips from me, if NBFCs decide to operate in segment B only. If NBFCs decide to operate in segment A, then we need to discuss the strategy. How they can compete with banks? How they will position their products (loan/finance) in this segment? Can an NBFC match the rate of interest offered by the banks? The answer is NO. So, how to sell the finance/loan to segment A? I am asking you, can we use differentiation here? Can we apply the concept of “total value approach”? Yes you are right, we can, but it is not all that easy. NBFCs will have to do a lot of homework to prepare the ‘total value” of finance so that they can differentiate their offering with that of their competitors (banks). NBFCs need to identify something, which their competitors (banks) cannot do but an NBFC can. Banks can sell the finance only whereas NBFCs can sell finance as well as vehicles. When I was working with MGF I realized our core competence – our expertise to market commercial vehicles. Using our core competence we successfully created sustainable competitive advantage (SCA) in the finance (loan) market. Besides being an NBFC we were Telco dealers also. We not only marketed Tata commercial vehicles but we financed them also. In a sellers market this was a great competitive advantage for us. It takes the same amount of efforts, time, energy and cost to sell the finance (loan) and the commercial vehicle. NBFCs can become the marketing arm of the commercial vehicle/ construction equipment manufacturer through a strategic alliance. The financial gain from the manufacturers can be used to structure the offering (finance/loan) to customers at competitive rates and probably can be matched with banks rates in terms of total value. Signing an alliance agreement with a manufacturer is easy job but the implementation of this is not all that easy. NBFCs will have to develop a marketing team of professionals who can sell commercial vehicles (construction equipments/ capital goods) as well as finance in a highly competitive environment. Developing, motivating, managing (retaining), and leading a technical sales force is a highly skilled job. Selling commercial vehicle/ construction equipments finance/loan is like selling projects. One must have the knowledge of commercial vehicles/ construction equipment, its standard operating condition, cost & return, operating condition, cost & return under the given business situation, and viability in terms of ROI. Accordingly, commercial vehicles & construction equipments loan appraisal & disbursement decisions are made. I would to share with you my experience as an example that will help you understand importance of product knowledge in financing. We had financed a Tata-Hitachi excavator to a Mumbai based construction company for their project in Karnataka. This company got another Tata-Hitachi excavator financed from us for its new project (gypsum mining) in Rajasthan. Though I had approved the loan proposal, I told my branch manager that this party will have difficulties in making repayments during the period May – July and therefore he should inform the party in this regard. He got little surprised and asked me had I seen the party’s horoscope. I told him I had not seen the party’s horoscope but I had seen the excavator’s horoscope. My prediction came true and my branch manager asked me how I could predict so correctly. Then I explained him the meaning of excavator’s horoscope (i.e. operation manual). Those days Tata-Hitachi excavators were fitted with simple 697 turbo engines which had many limitations. During the period May-July temperature around the gypsum mines area (near Sikar) goes up to 48-50 C which affects the hydraulic mechanism of the excavator. Therefore this excavator can be operated at nights only during this period. Obviously, this limitation of operation had great impact on party’s earnings from this excavator. It is clear from this example that the expertise in selling excavator facilitated the loan proposal appraisal & management process. Many NBFCs (like MGF, SFL, CFL etc.) have been doing this and are successful.

the growth prospects & the role of Non-Banking Finance Companies (NBFCs) in financing commercial vehicles/ construction equipments-Continued..

To view the first post on the same visit Session 1

Industrial slowdown and low agricultural output affected the sales of commercial vehicles adversely. Around this period CRB scam was unearthed which resulted in the downfall of NBFCs in India. People lost confidence in NBFCs and started withdrawing their deposits from them. These deposits were put with the banks though the banks were offering lower rates of interest. Many NBFCs could not refund the deposits to their customers and they disappeared suddenly. RBI intervened and set guidelines for NBFCs for refund & closing of NBFCs. Almost five lacs people working with/for NBFCs lost their jobs. Banks were flooded with funds. Eventually, Interest rates went down. Many professionals who had experience of working with NBFCs joined banks, and banks started financing commercial vehicles at lower rate of interest.

1991 Liberalization policy of Govt. of India fueled the process of industrialization in India. As a result, the demand of commercial vehicles further increased. Many automobile companies have now started manufacturing commercial vehicles. The business opportunity is so huge that a Tea Estate Company from the eastern part of country diversified and has set up manufacturing unit in Gujarat to manufacture commercial vehicles. Presently there are nine commercial vehicle manufactures in India producing a wide range of commercial vehicles. Banks have started financing the commercial vehicles in a grand way. Very few NBFCs have survived. Earlier the competition was among NBFCs, but now the competition is among the banks. Now, money lending (vehicle finance) is the main business for most of the banks.

How NBFCs can compete with the banks? The banks offer lower rates of interest, which NBFCs cannot match. Today, it is very difficult for an NBFC to sell finance to potential customers (fleet owners/ transporters) who have easy access to bank finance. Why should a transporter take finance from an NBFC at a higher rate when he is able to get the same from the bank at a lower rate? In other words, only those transporters will take loan/finance from an NBFC who are unable to take any loan/ finance from the banks. Now, the question is – if an NBFC has to continue in this business, which customer segment should it target and how it should market (sell) the loan/ finance?

I think it would be appropriate for you to first understand what is commercial vehicle financing? How does it differ from other financing say car financing for an example? Then I will talk about marketing strategy for NBFCs. Commercial vehicle finance is more or less like industrial finance. The borrower is primarily concerned with the “commercial value” of the loan/finance. Commercial vehicle or construction equipment is like an industrial unit. The borrower will make the profit first from the unit/ vehicle and then he will repay the loan/ finance from the profit. In case of car finance, the borrower repays the loan/finance from the savings. The car customer may seek “social and/or convenience value”. In business management language, a transporter takes the loan (financial resource) to buy the commercial vehicle/ construction equipment (technical resource/ machinery), and he operates the vehicle (combines these resources with his capabilities) to make money/profit. Therefore, in order to be successful in transport business, a transporter must have the adequate financial (loan/ finance), appropriate technical (vehicle/machinery) resources, adequate capabilities, and the expertise to combine the resources with his capabilities in a unique manner to make profit. We as financiers have to consider four things while appraising a loan/finance proposal for commercial vehicle/ capital equipment.

Whether the financial resources (loan/finance amount) are adequate or not?
Whether the technical resources (commercial vehicle/ capital equipment) are appropriate or not?
Whether the hirer (transporter) has the required capabilities (can operate the vehicle) or not?
Whether the hirer has the expertise (experience in transport business) to combine the resources with his capabilities in a unique manner to make profit or not?

I have practiced this method of commercial vehicle loan appraisal and I have never failed in my assessment. As an example, I would like to share with you my experience that I have on this issue of loan/ credit appraisal. There was a small transporter who had three Tata vehicles and the Tata Finance financed all these vehicles. He purchased another Tata multi-axled vehicle through Tata Finance but he was unable to pay installments in time. He became a defaulter and ultimately the Tata Finance repossessed his vehicle. He sold one of his vehicles to settle the loan account with Tata Finance. After sometime he again approached Tata Finance for loan to buy a new vehicle. Tata Finance rejected his proposal considering his track record and declared this transporter as “Sick Party”. This transporter approached other NBFCs but no one was willing to finance this transporter because of his image as a defaulter. One day he came to see me in my office. He showed me the proposal file with remark “Sick Party – Proposal rejected” written on it by the Tata Finance official. He explained to me his situation and requested me to consider his case. I appreciated his honest approach, as he did not hide anything from me. I heard him and then analyzed his case (failure to repay the loan) on the following four criteria:

1) Whether the transporter had adequate financial resources (loan amount) or not?
I found the amount of loan/finance given to him by the Tata Finance was sufficient.

2) Whether the transporter had appropriate technical resources (commercial vehicle) or not?
I found that the Tata vehicle that transporter had purchased was not meant/ suitable for the application transporter had used for. Commercial vehicles are designed for specific applications and therefore careful selection of right vehicle is very important for the success in transport business.

3) Whether the transporter had the required capabilities (can operate the vehicle) or not?
I found that the transport belonged to a community, which dominates transport business in India. People belonging to this community usually have high entrepreneurial skills.

4) Whether the transporter had the expertise (experience in transport business) to combine the resources with his capabilities or not?
I found that the transporter had the expertise to manage the transport business.

Next Session(Session 3)

The Growth Prospects & The Role of Non-Banking Finance Companies (NBFCs) in financing commercial vehicles/ construction equipments

I am publishing the excerpts of a speech by Prof B Raj on his permission and recommendation.

About the Author:
Mr. B. Raj has worked with leading NBFCs and automobile companies in India & abroad. He has done extensive research (at doctorate level) in the area of marketing (automobile consumer behaviour). He has been associated with leading business schools in India & abroad.

The Article:
I have seen closely and felt the rise and fall of NBFCs in India. There was a time (in the ‘80s) we used to lend money at 40% IRR and operated in a sellers market i.e. there was acute shortage of commercial vehicles and non-availability of finance from the banks. Those days the credit appraisal was limited to assessing the hirer’s ability to make the down payment (usually 20% of value) only. Customers (hirers) would sign blank agreements, pay hefty service/ finance charges, and were made to visit the financier’s office to collect the D.O. (Delivery Order) everyday. After making a numbers of visits, customer would get the D.O. from the financier’s office. This was the time when banks were reluctant to lend money to the transporters. NBFCs had taken full advantage of this situation and made above average profits by financing commercial vehicles. I would like to mention at least two NBFCs, MGF in New Delhi and GNB in Kolkata (Calcutta), which could identify this opportunity and developed expertise to make money by taking calculated risks in financing commercial vehicles. The supply and demand gap and the resulting price hike helped these NBFCs to set off their risk in lending money to transporters (mainly the one/two vehicle owners). If a hirer became a defaulter, the NBFC would repossess the vehicle and refinance it to another customer or would sell the vehicle to recover its dues. NBFCs never incurred any losses in selling a repossessed commercial vehicle due to the shortage of vehicles in the market & price hike. Many of you will not believe what I have experienced in a sellers market. Can you imagine reputed vehicle manufacturer like Telco (now Tata Motors) could deliver the heavy commercial vehicles with four wheels and many a times without battery/fuel pump/spare wheel? The customers were at the receiving end and had no option but to accept the situation.

The two Heavy Commercial vehicle manufacturers (Tata & Leyland) both realized the situation and augmented their production capacities to meet the demand. While Telco focused on medium commercial vehicles, Leyland concentrated on heavy (multi axled) commercial vehicles. In the mid ‘80s, the arrival of Japanese LCVs in India inspired both the domestic manufacturers to produce LCVs. This not only affected the freight market, but redefined the commercial vehicles market also. The demand for medium commercial vehicles started shrinking and the demand for LCVs & HCVs started growing. Initially Telco capitalized on LCVs and Leyland on HCVs. But soon they realized their mistake. Telco introduced multi-axled vehicles (2213 range) and Leyland introduced LCVs (Cargo series). This accelerated competition in the commercial vehicle market. Severe marketing war started between the two manufacturers to gain the leadership in commercial vehicles market.
The availability of finance/loan has always been the key factor responsible for sale of commercial vehicles. Accordingly Telco made a strategic move to make the finance/loan available to the transporters through its four channels. First, Telco started its own finance division (known as Telco-BHPC), Second Tata Finance, Third a joint venture NBFC with its leading dealers (known as TDLF), and fourth a joint venture with MGF (known as JCL) mainly to finance Tata-Hitachi excavators. This strategy worked successfully and Telco could retain the major chunk of the market share in LCV & MCV segment. On the other hand, Leyland could manage its sales through its own NBFC (known as ALFL) and its alliance with NBFCs like Sundaram & Cholamandalam finance. Leyland lost LCV & MCV competition to Telco. The market share of Leyland was not enough for Sundaram & Cholamandalam to justify their existence as NBFCs, therefore these NBFCs also started financing Tata vehicles for their own survival. Being the only manufactures of multi-axled heavy vehicles Leyland could maintain its leadership in this segment. The other technical reason for transporters preferring Leyland multi-axled vehicles was that Telco multi-axled vehicles had dummy axles, which were not popular among the transporters. Many NBFCs continued to grow during this period. I know of two senior executives of Citi Bank who left the bank and started an NBFC (known as 20th Century finance), which was also successful.
Continued in Session 2 and Session 3

Microfinance

Microfinance
India has supported social banking for a long time. The first breakthrough emerged from policy support to enable informal self help groups(SHG) of 15-20 members (mainly women) to transact with commercial banks. The SHG promotes small savings among its members. The savings are kept with a bank. Unlike the SHGs, which tap funds from public sector banks, MFIs draw their capital mostly from private banks, SIDBI, and foreign investors. Various models of SHG-Bank Linkages are as follows
Model I: SHGs formed and financed by banks (16% of SHGs)
Model II: SHGs formed by NGOs and formal agencies, but directly financed by banks (75% of all SHGs financed)
Model III: SHGs financed by banks using NGOs and other agencies as financial intermediaries (9%)

This cost includes the prime lending rate of nationalized banks which is around 9%. Today after a decade of implementation of the “Linkage Banking “ or “Self Help Group SHG) banking”- approach, NABARD has been able to increase the outreach of banking in rural India, substantially. The linkage banking approach of providing financial services to unbanked poor now touches 1/6th of rural poor in India.

Of the total number of SHGs financed by banks so far 90% were exclusive women groups. This has every reason for us to state that linkage banking has contributed to the feminization of microfinance banking in India. It is not only the SHG-Bank Linkage-programme of NABARD that allows the SHGs to obtain loans from formal banking institutions.
The Self Help Group promoters emphasize that mobilizing savings is the first building block of financial services.

The central bank notification that lending to MFIs would count towards meeting the priority sector lending targets for Banks offered the first signs of policy flexibility towards MFIs. Microfinance programmes have rapidly expanded in recent years. Since banks face substantial priority sector targets and microfinance is beginning to be recognised as a profitable opportunity (high risk adjusted returns), a variety of partnership models between banks and MFIs have been tested.
Ø Lending wholesale loan funds.
Ø Equity investments into newly emerging MFIs.
Ø Banks and NGOs jointly promoting MFIs.
In spite of increasing focus on Micro Finance in India, wide regional disparities are visible across country. This problem needs to be addressed .

Budgets Implications on FMCG Sector

The Budget gives more focus on the agricultural/farm sector that will boost the rural income thus providing better growth prospects to the FMCG companies. With 12.2% of the world population living in the villages of India, the Indian rural FMCG market is something no one can overlook. Better infrastructure facilities will improve their supply chain. Also, with rising income and growing consumerism, FMCG sectors are likely to benefit. Growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumer's mindset and offer new generation products, they would be able to generate higher growth in the future.

Points to remember

• Farm sector has been given the top priority. Agriculture investments to go up to 2% of GDP
• Duty on edible oil has been reduced
• Excise duty exempted for all food mixes and biscuits
• Custom duty on Sunflower oil (crude and refined) reduced by 15 per cent while exempted from additional CV duty of 4 per cent Customs duty on food processing machinery and their parts is being reduced from 7.5% to 5%
• Excise duty has been fully exempted on biscuits of per kilogram
• Excise duty on food mixes, including instant food mixes, has been reduced from 16% or 8% to Nil
• Free samples and displays are exempt from the purview of FBT
• Footwear - Excise duty on parts of footwear reduced from 16% to 8%
• Venture capital investing in dairy industry will get a pass through status
• Better rural infrastructure development to be an area of focus
• Increase in dividend distribution tax from 12.5% to 15%
• 1% higher education cess to charged
• The dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds increased to 25 % for all investors
• No implementation of value-added tax (VAT) on cigarettes
• Specific excise duty on cigarettes increased by about 5%

CHANGES EXPECTED

• The focus in agriculture will benefit rural income that in turn will help FMCG companies Thrust on Increased investment in agricultural activities and rural infrastructure would be positive for the sector
• Increase in spending towards upliftment of rural populace to lead to increased demand for durables in the long term
• CST reduction expected to lower manufacturing costs of FMCG players
• Reduction of excise on food mixes is beneficial to ITC, as this segment is a new growth area
• FMCG companies spend a lot of money on advertising and brand building. Exclusion of samples and displays from FBT will help them in promoting their products
• Better infrastructure will help better access and more distribution network to the FMCG companies. It will help them improve the supply chain
• Companies have huge investments in the liquid funds, the higher tax on dividend distribution will reduce their other income. The impact of higher tax (cess) on the industry is likely to lower net margins, albeit marginally. Also all the FMCG companies will benefit from the infrastructure development funds that will boost to rural income

HLL, Marico, Dabur and ITC will benefit out of it.

1. Britannia and ITC are likely to benefit due to reduction in excise on biscuits
2. ITC will also benefit from the reduction of excise duty on instant mixes
3. Duty reduction on edible is a positive for companies like Marico
4. Positive for footwear companies like Bata, Liberty Shoes and Mirza International

Source: Indian Budget 2007-08 - Part I - Fast Moving Consumer Goods (FMCG)

Thanks Mr. Finance Minister for this hygienic budget for FMCG Sector !!

Nitin Kochhar (http://www.fmcgmarketers.com/; www.fmcgmarketers.blogspot.com)