BASEL BEVEL... ...the next move

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As the cut-off date for implementing the Basel II Accord draws closer, Indian banks are gearing up fast to be at par with their international peers. Are they on track? 4Ps B&M’s Manish k Pandey finds the answer...

“If Basel I could be compared with an old bi-plane, then Basel II represents an advanced jet, designed to transport its passengers in utmost comfort irrespective of the turbulence and extremes of weather outside,” says a White Paper on Basel II by PricewaterhouseCoopers (PwC). Certainly, considering the rewards of the accord that include introduction of new complex financial products, improvement in risk management system, availability of a range of options for estimating regulatory capital, et al, in the Indian banking arena, the statement by PwC, no doubt, marks out the real future of banking in India or rather banking across the globe. But what really confuses and haunts one is this perplexed transition – from the age-old bi-plane to a shimmering advanced jet.

Will it be a smooth one? Are the players ready for it? These are certainly some of the questions that need apposite answers as Indian banks enter the final lag of this transition matrix. No doubt, as the cut-off date for implementing the accord draws closer, Indian banks are gearing up fast to be at par with their international peers. But are they really on track considering that it’s just a month (April 1, 2009) before the new jet finally takes off? “Yes, the implementation is on track for Indian banks, within the context of the relaxation that the RBI has implemented in light of the ongoing crisis, such as reduction in risk weights. Majority of the banks are not facing any capital shortage at present and those public sector banks (PSBs) that need capital infusion, have already been promised the same by the government,” avers Vaibhav Agrawal, Sr. Research Analyst, Angel Broking. No doubt, so far, most of the banks are comfortably placed even after switching on to the Basel II accord in FY 2008. Though some of them have reported a reduction in the total capital to risk-weighted assets ratio (CRAR) or commonly known as capital adequacy ratio (CAR – the ratio of a banks capital to its assets) by around 30 to 80 basis points, primarily on account of operational risk, there are many who have reported a capital relief. All thanks to higher exposure to better rated corporates as well as savings on the regulatory retail portfolio.

In fact, if one goes by the latest numbers, the Indian banks already seem to have conquered this long row to hoe. According to a recent report on “Trends and Progress of Banking in India 2007-08” by the RBI, “the overall capital adequacy of all scheduled commercial banks (SCBs) was at 13% as on March 31, 2008, well above the Basel II norm of 8% and the stipulated norm of 9% for banks in India. Even on an individual bank basis, the CAR of as many as 56 banks was over 12%, of 21 banks was between 10-12%, while those of the remaining two banks was between 9% and 10%.” This is indeed comparable with most of the banks in emerging markets and developed economies where CAR varied between 10% and 28.7% in FY 2008.

However, if one goes by the desired level of CAR by the government, which is 12%, the situation seems to be a little tense for as many as 14 commercial banks (11 public sector banks and 3 private sector banks). In fact, a combined capital infusion in excess of Rs.50 billion is what is needed to shove them up to that level. No doubt, banks can use the capital market route to meet the capital requirements or can use private placement to garner the additional capital but then turning to capital markets to raise funds at a time when the markets are bleeding and investors are wary of planting money into them the option really doesn’t seem to be viable at all, particularly for the small and medium sized banks.

But, overall, out of 41 banks that migrated to Basel II Accord last March, 40 banks had CAR of more than 10% and one bank had close to 10% even at the time of transition. So considering this, no doubt the Indian banks are faring well as of now, but then going deeper into the Basel II matrix, one can easily figure out that the matrix is not just about CAR. The framework has three components or ‘Pillars’. While Pillar one relates to minimum capital requirements, Pillar two is the supervisory review process (SRP) and Pillar three is all about market discipline. Moreover, it is Pillar 2 that makes the Basel II Accord more comprehensive as it aims at eying the overall risk of an institution. But if one goes by Moody’s latest report on Indian Banking then the stress surely seems to be testing Indian banks. As per the report, while financial strength rating (BFSR) of most of the Indian banks was between C- and D+, baseline credit assessment (BCA) rating too ranged between Ba1 and Baa3.

Therefore, as it’s said by many critics that “fundamental to the successful implementation of the Basel II norms is an inconvenient but necessary marriage of two of unmatched horoscopes – qualitative tools and quantitative standards,” the task of implementing the accord surely appears to be a tough one for the Indian banks. In fact, this was the main reason for the delay in implementing Basel II Accord in the country (originally set for March 31, 2007). Though foreign banks and Indian banks with overseas presence have already incorporated Basel II Accord with effect from March 31, 2008, its full execution still remains a major challenge for them – all in terms of procedures, infrastructure requirement and capacity building.

Moreover, considering the technological advances and greater reliance on technology-based solutions by conventional Indian banks, a need for adequate safeguards against fraudulent activities automatically pops in and, this is an area where the Indian banks need to work the most in order to stand equal to their international peers. No doubt, the asset quality of banks in India has improved significantly in the recent years, efforts need to be made to ensure that the hard earned gains are not frittered away, particularly in the wake of the global slowdown. Further, for banks, the implementation of Basel II Capital Accord will certainly continue to be a challenge until the regulator acts as a facilitator rather than as any gregarious procrastinator. So, just watch out for the next move!

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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How about making moolah the rice, atta and daal way?

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With stock markets running out of gas, and equity becoming a property too hot – or cold – to handle, investors might see better prospect in commodity trading

When the stock markets the world over are biting dust, everyone is looking for a cover. And most of them are landing up buying gold and gilt-edged securities. No doubt, these two are the safest bets at the moment, but then they are just wealth preservers. So why not try something that can also offer you some return. Well, in this regard have you ever considered commodities? It’s true that many investors are still apprehensive in their attitude towards the commodity market, but then many others have joined the bandwagon for it’s not too different from trading in the equity market. And this is quite obvious from the fact that total monthly turnover of Multi-Commodity Exchange has almost doubled from Rs.2.1 trillion in January 2007 to Rs.4.1 trillion in January 2009.

Noted investment banker Jim Rogers tells us, “In the future, investing in commodities would be the most lucrative bet.” Reflecting this sentiment, 2008 has been a fairly good year for people who had invested in the market as commodities were the only thing moving up. However, the outlook for 2009 does not seem to be on the lines of 2008, especially if one is expecting to hedge their risks or are expecting similar returns. Arvind Bansal, Chief Investment Officer, ING Investment Management, informs 4PsB&M, “From a valuation and a price correction perspective, there has been a sharp correction in the commodity market like in real estate and equity.” The profits of various organisations have nose-dived, which has led to decreased production levels and in turn, a decline in the supply of these commodities. Therefore, much of the concepts in this market ride on how the ever illogical demand curve takes shape. With various governments trying all they can to revive the state of economy, it is expected that the demand for commodities would start to look up in the near future; and most analysts are pegging that the period post May-June might see some of the developing economies showing positive trends which would marginally shoot up the demand for commodities.

Though according to Amar Singh, the head of research at Angel Commodities, “For the year 2009, bullion will be the best bet.” Joseph Massey, CEO, MCX, accepts, “The most traded products on our exchange have been bullion, which continues to be a favourite.” But then, one must not forget agro products like sugar that yielded a good return for their investors in 2008. At the same time, investors also must be selective in picking up the commodities and become futuristic. Because living on past favourites can be deadly for them in the commodities market. Crude, perhaps, is the best example in this regard at the moment.

Having said all that, and more, allow us to sweetly warn you, whatever we write out here and in the other pages can come to nought, for though we may be smarter than what we think, the money is still yours honey.

Surbhi Chawla

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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The great brand brawl

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Attack advertisement is the latest muse for the corporates but the success boils down to consumer satisfaction and avoidance of the regulatory scanner

Ouch! That must have hurt. It surely does, when the opponent hits you ‘below the belt’. And the blows are getting increasingly fast and furious. The trend is invariably visible with a number of global marketers openly declaring war by taking a direct pick on their arch rivals through attack advertisements or in polite terms comparative advertisements.

This ‘Smack Down’ of brands has become an all-out battle amongst some of the world’s top brands. From the Pepsi challenge to the endless knockout rounds between Dunkin’ Donuts vs. Starbucks, McDonalds vs. Starbucks, Dominos vs. Subway, Mac Guy vs. PC Guy (Apple vs Microsoft) et al, the strategy has found a number of followers. This current marketing strategy is far from the traditional concept of promotion and marketing where companies highlight the benefits that a consumer would derive from usage of their products or services. The concept of attack advertisement rather has the players using the negative mechanism and splashes out the misgivings of their competitor’s goods and services, thus trying to convince the target audience of their relative superiority.

The Dunkin’ Donuts attack commercial against Starbucks is an apt epitome of the aforesaid statement; the former tells the consumers that more ‘hard-working’ people prefer their coffee than the high-priced ‘elitist’ coffee of the latter. “Our marketing approach evolves based on what resonates with customers and is not driven by another company’s advertising campaign. We believe what truly differentiates us from our competitors is the daily, human connection between customers and store partners,” avers unscathed Wendy Pang, Communication Manager, Starbucks Coffee, to 4Ps B&M, taking the entire fiasco as a pinch of salt. The coffee brewer has become the punching bag for Dunkin’ Donuts and McDonalds of late. It’s always easier to point out some of the failings of a competitor but clearly it’s always about establishing a point of difference. “It’s going to come more from those sectors which are being impacted by the economical downturn such as auto, electronics and parts of FMCG; nevertheless, the downturn is not the main driver of the concept but because it is persuasive, the players are using attack advertisements,” explain Stephen Byrne Director, DIFFUSION Global brand strategist and commentator.

Attack or comparative advertising does work to an extent, as it definitely draws a number of eyeballs. But then everything finally boils down to meeting the promises made and the quality of products or services delivered, leading to consumer satisfaction. “The Mac vs. PC guy has been very successful for Apple; look at the evidence from new Apple computer sales into corporate markets to see how it’s changed how people think, but more of it is due to the quality product and the after sales service deliverance,” supports Byrne.

However, the tendency to mislead consumers generally creeps into this kind of strategy. So companies should be wary of the fact that watchdogs like courts and consumer protection bodies are looking very closely at the way advertisers and brand owners use this advertising. For the punch they deliver definitely hurts, no matter which side of the belt it lands!

Ratan Lal Bhagat

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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YOU CAN CALL HIM THE ‘AXE’L BEHIND OBAMA!

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ARCHITECT OF MODERN POLITICAL ADVERTISING, DAVID AXELROD IS THE MAN CREDITED FOR OBAMA’S LARGER-THAN-LIFE IMAGE BUILD-UP

“If there’s anyone out there who still doubts that America is a place where all things are possible... tonight’s your answer.” As Barack Obama spoke these words on November 4, at the Grant Park in Chicago, Illinois, he crafted a notable moment in the history of the United States of America by becoming the first Afro-American President of the world’s most powerful country. The race was not easy for this man with a Muslim middle name. But what made his amazing feat possible were some perfect modern strategies devised by Obama’s long time friend turned Chief Strategist – David Axelrod. Having designed Obama’s campaign for the US Senate Elections in 2004, Axelrod’s camera had followed Obama like a sheep ever since, capturing all his public appearances. When Obama decided to contest for the Presidency, Axelrod was the first guy he hired for his team of strategists. With all the Axelrod accumulated footage, Obama’s first campaign was devised – a five-minute Internet video. “Throughout campaigning, Axelrod focused on Barack’s bio and people liked it,” says Rahm Emanuel, an Illinois Democrat. Axelrod’s personality-led strategy sold Brand Obama as an agent of change for the American people.

On the one hand, Axelrod focussed on building Obama’s image as a devoted family man, and on the other, as a well-read, confident leader. To win over racial prejudices, Axelrod roped in Paul Simon (an enterprising retired US Senator and a respected figure) to endorse Obama. But as luck would’ve had it, Simon died before the campaign shoot. Axelrod then convinced Simon’s daughter to appear in the commercial declaring that her father and Obama were “cut from the same cloth.” Axelrod also convinced Obama not to accept public finance for campaigning to avoid giving details of expenditure to the Election Commissioner. Obama raised close to $30 million in January alone and his total donations stood at $280,011,968 as on Oct. 15, 2008. Other approaches included community involvement, mobile marketing, product promotions, et al. Axelrod made Obama immensely popular with the youth by signing him up on social networking sites like Facebook, YouTube, MySpace, et al. “This enabled Obama to connect with all demographics of voters,” adds Emanuel.

As President-elect, while Obama will take on the task of getting the economy back on track; as his Senior Advisor, Axelrod will continue to polish his image in these turbulent times. As Obama said in his winning speech, “It’s been a long time coming, but tonight… at this defining moment, change has come to America.” God knows, that country needs it and how!

Savreen Gadhoke

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.
IIPM set to beat economic slowdown
IIPM Admission Detail
IIPM Programme :- SUPERIOR COURSE CONTENTS
IIPM INTERNATIONAL - NEW DELHI, GURGAON & NOIDA
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Why Study Abroad When IIPM Gives You 3 global Advantages!