WOW (War on Waste) - A Business Idea?
Our WOW initiative made me to thing on some business plan.
First things first; Waste management with Indian context has no meaning. We tend to throw away the Waste as per our wish and there is no proper management of that Waste.
For example, Waste collection in Western countries happen systematically, where the paper, plastic, glass are collected separately and handled separately. Also, there Waste collection is so systematic, that you will not find more garbage on the streets. Also the recycling facilities are of higher standards there by ensuring the garbage is being cycled properly.
Cut to India, only 14% of the Waste in India is properly collected and recycled, compared to 70% in the west. The result we see all over the streets!
The main issue is, our wastage collection is not managed properly and India Inc has not noticed the potential of this opportunity. If managed as corporate it can be monetized. Our wastage collection is loosely spread and there is no management in that.
Indian paper industry imports Waste from West to produce the required paper and Waste collected in India feeds only 17% of the demand of this Industry. (Rest all is either imported or supplied through tree cutting) So, look at the opportunity!!
So, if a Pan India company can manage the Waste all over the country and streamline the operations, it will be a huge industry. Also, it will serve the benefit of environment as garbage collection will be clean, there by reducing the diseases spreading because of bad environment.
Sunday, March 29, 2009
Sunday, March 22, 2009
One Man Marketing Army
I thought of shifting a bit and discuss a non-corporate profile; who thinks like a corporate.
I am talking about Amirkhan, one of the people who I like because of his hard work and dedication and passion (Other person I like is Sachin Tendulkar, because of his sheer ability to improvise his game). Amir seems to do his homework completely before he gets on to shooting and classic example is Tare Zameen Par, where this homework was quite evident.
Have you noticed marketing effort around Ghajani? First there was a youth campaign around with his trendy hairstyle and then there was a serious of releases of Samsung mobiles, which he has used in the movie. The result? Gajani was run away success and this marketing effort was successful in creating the much required hype about the movie.
Also, Amir believes in quality and it is said he never endorses any brand if he doesn’t believe in its quality. His involvement is so much; it is said that you will see him using Titan watch, having Coca-Cola during breaks, having Tata Sky at home for watching TV, talking in Samsung mobile! (These are the brands he endorses) This is sheer dedication towards one brand and living what he says.
Let me not try to get in to review of his movies, my intention was to point out the marketing ability he has mastered recently and his involvement in making this marketing machinery works. And perhaps it appears that he does it single handedly and doesn’t involve any marketing research firm.
This amazes me!
I am talking about Amirkhan, one of the people who I like because of his hard work and dedication and passion (Other person I like is Sachin Tendulkar, because of his sheer ability to improvise his game). Amir seems to do his homework completely before he gets on to shooting and classic example is Tare Zameen Par, where this homework was quite evident.
Have you noticed marketing effort around Ghajani? First there was a youth campaign around with his trendy hairstyle and then there was a serious of releases of Samsung mobiles, which he has used in the movie. The result? Gajani was run away success and this marketing effort was successful in creating the much required hype about the movie.
Also, Amir believes in quality and it is said he never endorses any brand if he doesn’t believe in its quality. His involvement is so much; it is said that you will see him using Titan watch, having Coca-Cola during breaks, having Tata Sky at home for watching TV, talking in Samsung mobile! (These are the brands he endorses) This is sheer dedication towards one brand and living what he says.
Let me not try to get in to review of his movies, my intention was to point out the marketing ability he has mastered recently and his involvement in making this marketing machinery works. And perhaps it appears that he does it single handedly and doesn’t involve any marketing research firm.
This amazes me!
Sunday, March 15, 2009
It is Hero Honda vs. Honda now!
Honda Motorcycles and Scoters Ltd (HMSI) the fully owned Honda subsidiary, is now relatively small player in Indian motorcycle market with 14 percent share, selling mostly large engine capacity bikes. It also sells more scoters than bikes and it’s Activa scoter is a run away success.
This is changing fast. For, HMSI is taking on its own long-term partner in India, Hero Honda (In which Honda has 26 percent stake) and in the latter’s key area of dominance, the 100 cc mobike market. The Honda company is working on to get in to the same segment and hopes to get the market capture quickly, with it’s focus on quality. HMSI wants to make sure, the bike sales is more than its scoter sale. Which would be a big change from its current mix, where scoters are 65% of its entire sale.
It is quite evident that, this entry might give a sleepless night for Hero Honda, which enjoys 80% of the market share in 100 cc segment. And this segment also accounts about 60% of Hero Honda’s entire sales.
At the moment, both the players are not affecting each other and infact both are eating in to Bajaj’s market share. Recent data shows that Hero Honda’s sale was up 24 percent (Decent job considering the current economy and one of few companies who reported Q-o-Q increase in sales, how they did it is pretty interesting) and HMSI reported a jump of 14 percent.
Quite interesting!
Actually this is a clear example as how transparency works for benefit of both the parties. Each other are not affected because they know which segment they are targeting. Also, two companies have a committee which knows in advance what the other is planning to launch in India market, so that clashes can be avoided.
Notable point is 100 cc market has many segments and they would operate in areas where their partners do not. If we divide 100 cc segment in to parts starting from entry level to deluxe level, there is potential in every segment. And HMSI and Honda have clear demarcation as who will be in which segment. This helps to avoid competition among them selves and thus they are eating on Bajaj’s market share.
Personally speaking, there is lot of learning in this strategy if I apply this to our business operations. And I guess, we are in middle of similar situation and we need to appreciate moral of this strategy and see how all will be benefited.
This is changing fast. For, HMSI is taking on its own long-term partner in India, Hero Honda (In which Honda has 26 percent stake) and in the latter’s key area of dominance, the 100 cc mobike market. The Honda company is working on to get in to the same segment and hopes to get the market capture quickly, with it’s focus on quality. HMSI wants to make sure, the bike sales is more than its scoter sale. Which would be a big change from its current mix, where scoters are 65% of its entire sale.
It is quite evident that, this entry might give a sleepless night for Hero Honda, which enjoys 80% of the market share in 100 cc segment. And this segment also accounts about 60% of Hero Honda’s entire sales.
At the moment, both the players are not affecting each other and infact both are eating in to Bajaj’s market share. Recent data shows that Hero Honda’s sale was up 24 percent (Decent job considering the current economy and one of few companies who reported Q-o-Q increase in sales, how they did it is pretty interesting) and HMSI reported a jump of 14 percent.
Quite interesting!
Actually this is a clear example as how transparency works for benefit of both the parties. Each other are not affected because they know which segment they are targeting. Also, two companies have a committee which knows in advance what the other is planning to launch in India market, so that clashes can be avoided.
Notable point is 100 cc market has many segments and they would operate in areas where their partners do not. If we divide 100 cc segment in to parts starting from entry level to deluxe level, there is potential in every segment. And HMSI and Honda have clear demarcation as who will be in which segment. This helps to avoid competition among them selves and thus they are eating on Bajaj’s market share.
Personally speaking, there is lot of learning in this strategy if I apply this to our business operations. And I guess, we are in middle of similar situation and we need to appreciate moral of this strategy and see how all will be benefited.
Sunday, March 08, 2009
Mahabharata, Psychology and Need for living right.
More I watch Mahabharata, more I hear from Krishna’s character in that, I become emotional about life and teachings of our Vedic scriptures.
This weekend, I started thinking about important of being correct and living a correct life, without harming any one. It is important to pass on that knowledge or ‘Sanskar’ to our kids.
Life is complex and there is no easy shortcut for it. You have to face through all the issues; but where we tend to do mistakes is of not understanding the importance of values in our lives. We take our life granted, there by creating problems for ourselves.
I know, it is a bit of emotional, philosophical and spiritual; but right now my mind is full of life’s lessons, given by our Vedic scripts.
Is there any better gift to next generation than this?
This weekend, I started thinking about important of being correct and living a correct life, without harming any one. It is important to pass on that knowledge or ‘Sanskar’ to our kids.
Life is complex and there is no easy shortcut for it. You have to face through all the issues; but where we tend to do mistakes is of not understanding the importance of values in our lives. We take our life granted, there by creating problems for ourselves.
I know, it is a bit of emotional, philosophical and spiritual; but right now my mind is full of life’s lessons, given by our Vedic scripts.
Is there any better gift to next generation than this?
Sunday, March 01, 2009
Indian IT: Trouble Today, but Optimism for the Long Term
Knowledge@Wharton has an article on National Association of Software and Service Companies (NASSCOM) India Leadership Forum held in Mumbai in mid-February.
This is abstract of what was being discussed in that forum.
This is certainly good news for Indian IT industry that long term looks good. But, the article also talks about need for business model innovation and ability to adapt to the change. Off course that comes with lot of risks.
Long one, but lot of 'gnyan' .
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4354
This is abstract of what was being discussed in that forum.
This is certainly good news for Indian IT industry that long term looks good. But, the article also talks about need for business model innovation and ability to adapt to the change. Off course that comes with lot of risks.
Long one, but lot of 'gnyan' .
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4354
"The Cable Guy"
I watched a movie this weekend, The Cable Guy. This is the story of a cable person; who’s growing up as a child was a problem. This movie resolves around social issues if upbringing of a child is not proper.
The movie unfolds around a person, Steven, who happened to meet this cable guy and starts talking to him as friend. Cable guy didn’t understand what is friendship means and starts crossing the limit.
It is very good movie and gives lot of insights of why upbringing of a child is most important.
The movie unfolds around a person, Steven, who happened to meet this cable guy and starts talking to him as friend. Cable guy didn’t understand what is friendship means and starts crossing the limit.
It is very good movie and gives lot of insights of why upbringing of a child is most important.
Sunday, February 22, 2009
Indian Aviation completes it’s full circle.
In 1995, Singapore Airlines and Tatas came together and proposed to start domestic airline. The idea was to invest jointly and have few airplanes to begin with, and expand eventually.
But this idea ran in to troubled waters as both home grown domestic players and government opposed this idea. The reason; the international carriers (Like Singapore airlines) have deep pockets and world class experience and domestic carriers can’t compete with them.
Fast forward fourteen years; Indian aviation seems to have completed its circle. With recent FDI changes, government has proposed to open investments from foreign airlines; which was being pushed by domestic airlines for some time now.
The reason seems to be obvious. Private carriers, without any foreign airline competition; have been burning the cash. The cumulative looses of these private players sums up to about $2 Billion. And they are in need of additional funding to keep the things moving. Given the global market situation; it is impossible to raise fresh funds; so these players are desperate for funding.
With most of the airports being run by private operators, who have collaboration with international players, it doesn’t make sense to draw the line. In case of airport operators, even 100% direct investment is allowed.
More importantly; in the recent part, almost all countries have opened up the direct investment in airlines industry. One of the arguments in 1995 was that not most of the countries have this liberalized policy.
I tend to draw parallels between aviation and telecom sectors in India. Kind of telecom revolution we are experiencing was possible mainly because of international players like SingTel and Vadafone among others, who took equity stakes in Indian players and helped the industry grow. Telecom has 74% direct investment policy.
Lets hope direct investment in India in aviation sector brings up required competition and revolution; so that common people like you and me can fly easily, without hurting the purse!
But this idea ran in to troubled waters as both home grown domestic players and government opposed this idea. The reason; the international carriers (Like Singapore airlines) have deep pockets and world class experience and domestic carriers can’t compete with them.
Fast forward fourteen years; Indian aviation seems to have completed its circle. With recent FDI changes, government has proposed to open investments from foreign airlines; which was being pushed by domestic airlines for some time now.
The reason seems to be obvious. Private carriers, without any foreign airline competition; have been burning the cash. The cumulative looses of these private players sums up to about $2 Billion. And they are in need of additional funding to keep the things moving. Given the global market situation; it is impossible to raise fresh funds; so these players are desperate for funding.
With most of the airports being run by private operators, who have collaboration with international players, it doesn’t make sense to draw the line. In case of airport operators, even 100% direct investment is allowed.
More importantly; in the recent part, almost all countries have opened up the direct investment in airlines industry. One of the arguments in 1995 was that not most of the countries have this liberalized policy.
I tend to draw parallels between aviation and telecom sectors in India. Kind of telecom revolution we are experiencing was possible mainly because of international players like SingTel and Vadafone among others, who took equity stakes in Indian players and helped the industry grow. Telecom has 74% direct investment policy.
Lets hope direct investment in India in aviation sector brings up required competition and revolution; so that common people like you and me can fly easily, without hurting the purse!
Sunday, February 15, 2009
End of Indian Retail??
Subhiksha, one of the leading Indian retail stores, which re-invented the retail business model with its no-frill store formats, is in news in recent months/weeks. It has not paid salary to its employees since October, vendors have not been paid and the operation is standstill.
With absolutely no encouraging news from any of Indian retail stores (Future group has been better comparatively) many have already started writing off Indian retail phenomenon. In my opinion it is not a correct thing to do, and we need to keep some fundamental things in mind before we re-evaluate Indian retail opportunity.
Firstly, India is still experiencing strongest economic growth since last 60 years, with 7 percent GDP in 2008-09 and perhaps between 6 to 7 in 2009-10. This growing economy throws many new opportunities. Secondly, modern retain still accounts only around 7 per cent of the total retail channel in India, still dominated by pop-and-mom stores. Thirdly, the consumer spending pattern is consistently shifting and mall mania has started creeping in. So Indian retail story is intact.
Having these factors; why Subhiksha (And by large retail players) ran in to problems?
Though, Subhiksha had tailor made business plan, but the biggest mistake probably was not building efficient supply chain and super-efficient retail operations organization. This is pretty much required to compete with next door Kirana shops and more even it is margin game. There was no financial and management investment in this area.
Also, Subhiksha tried to grow very fast. In this quest of growth, the basic paradigm of retail seems to be forgotten. Be it supply chain efficiency, optimized store location, store rentals or enhanced customer service which makes customers loyal.
I will go back to basic of what has been taught in B-school, keeping the fundamentals correct in business. There should be a close co-relation between operation and expansion and if we try to focus on only one thing at any given point in time, it is for sure we will run in to troubled waters.
With absolutely no encouraging news from any of Indian retail stores (Future group has been better comparatively) many have already started writing off Indian retail phenomenon. In my opinion it is not a correct thing to do, and we need to keep some fundamental things in mind before we re-evaluate Indian retail opportunity.
Firstly, India is still experiencing strongest economic growth since last 60 years, with 7 percent GDP in 2008-09 and perhaps between 6 to 7 in 2009-10. This growing economy throws many new opportunities. Secondly, modern retain still accounts only around 7 per cent of the total retail channel in India, still dominated by pop-and-mom stores. Thirdly, the consumer spending pattern is consistently shifting and mall mania has started creeping in. So Indian retail story is intact.
Having these factors; why Subhiksha (And by large retail players) ran in to problems?
Though, Subhiksha had tailor made business plan, but the biggest mistake probably was not building efficient supply chain and super-efficient retail operations organization. This is pretty much required to compete with next door Kirana shops and more even it is margin game. There was no financial and management investment in this area.
Also, Subhiksha tried to grow very fast. In this quest of growth, the basic paradigm of retail seems to be forgotten. Be it supply chain efficiency, optimized store location, store rentals or enhanced customer service which makes customers loyal.
I will go back to basic of what has been taught in B-school, keeping the fundamentals correct in business. There should be a close co-relation between operation and expansion and if we try to focus on only one thing at any given point in time, it is for sure we will run in to troubled waters.
Sunday, February 08, 2009
A tiring tale
It has been really a tiring week, last two weekends I have been traveling, which added to my physical tiring. This week has been an emotional roller coaster as well.
Tough times through up great challenges and really tests you are a leader and mentor. No, I am not only talking about your life in business, but it checks in your personal life as well.
Question is, how you can lead your family, who look at you as source of inspiration, in difficult times? How you can continue being an encouragement source for your kid?
Point is to look at positive things of life and wait for correct time.
Tough times through up great challenges and really tests you are a leader and mentor. No, I am not only talking about your life in business, but it checks in your personal life as well.
Question is, how you can lead your family, who look at you as source of inspiration, in difficult times? How you can continue being an encouragement source for your kid?
Point is to look at positive things of life and wait for correct time.
Monday, January 26, 2009
Operational Efficiency
As all the companies getting tighter on cost and seeing where they are spending each dollar; the question that come to me is operational efficiency and profitability.
Let me make it clear, I am not debating on if cost cutting is good or bad; it is certainly good to cut un-necessary cost, irrespective of good or bad times. I am thinking on operational efficiency.
In my opinion, there is a limit to which you can reach in operational efficiency; beyond that it is impossible to grow that number. It doesn’t make sense to try improving it any further. We should concentrate only so much on improving the efficiency, and there is no point in beating that any more. On the contrary, focusing on the business revenue and customer acquisition should be main focus and this focus has to be sharper during recession. There seems to be absolutely no alternative for this.
So, lets not get it wrong; it is business acquisition should be the prime focus of every company. If we put together a decent operational engine in place; that company becomes unbeatable.
Look at Wal-Mart, they have efficient supply and distribution system in place, a must have for any retail company. But rather than trying to make this system more efficient they have been focusing on increasing the business. Other examples are Big Bazar and ICICI bank. Both might not have state of the art and efficient operational excellence, but both seem to have focus on its customers.
It is DNA of a company which defines all such things and that is what we call as “Company Culture”. And this is precisely why some companies do well and some companies just can’t compete.
Any takers?
Let me make it clear, I am not debating on if cost cutting is good or bad; it is certainly good to cut un-necessary cost, irrespective of good or bad times. I am thinking on operational efficiency.
In my opinion, there is a limit to which you can reach in operational efficiency; beyond that it is impossible to grow that number. It doesn’t make sense to try improving it any further. We should concentrate only so much on improving the efficiency, and there is no point in beating that any more. On the contrary, focusing on the business revenue and customer acquisition should be main focus and this focus has to be sharper during recession. There seems to be absolutely no alternative for this.
So, lets not get it wrong; it is business acquisition should be the prime focus of every company. If we put together a decent operational engine in place; that company becomes unbeatable.
Look at Wal-Mart, they have efficient supply and distribution system in place, a must have for any retail company. But rather than trying to make this system more efficient they have been focusing on increasing the business. Other examples are Big Bazar and ICICI bank. Both might not have state of the art and efficient operational excellence, but both seem to have focus on its customers.
It is DNA of a company which defines all such things and that is what we call as “Company Culture”. And this is precisely why some companies do well and some companies just can’t compete.
Any takers?
Sunday, January 18, 2009
Stay Hungry Stay Foolish-Connecting Dots
Steve Jobs' 2005 Stanford Commencement Address
Drawing from some of the most pivotal points in his life, Steve Jobs, chief executive officer and co-founder of Apple Computer and of Pixar Animation Studios, urged graduates to pursue their dreams and see the opportunities in life's setbacks -- including death itself -- at the university's 114th Commencement on June 12, 2005
Drawing from some of the most pivotal points in his life, Steve Jobs, chief executive officer and co-founder of Apple Computer and of Pixar Animation Studios, urged graduates to pursue their dreams and see the opportunities in life's setbacks -- including death itself -- at the university's 114th Commencement on June 12, 2005
Sunday, January 11, 2009
Satyam Saga
I can’t even stop of thinking Satyma and its sudden collapse through entire this week.
Several magazines have written reams together on this story; TV/Internet media has covered this story so extensively that by now we know minute by minute details.
But I am with some other thing. My mind can’t even stop thinking about Satyam’s employees and the mental trauma they might be going through. We make financial plans and investments thinking about the projected salary and cash flow; and here they go, entire plan got toppled and they are not even sure if they will get this month salary.
This is tough time.
May god bless all of us!
Several magazines have written reams together on this story; TV/Internet media has covered this story so extensively that by now we know minute by minute details.
But I am with some other thing. My mind can’t even stop thinking about Satyam’s employees and the mental trauma they might be going through. We make financial plans and investments thinking about the projected salary and cash flow; and here they go, entire plan got toppled and they are not even sure if they will get this month salary.
This is tough time.
May god bless all of us!
Monday, December 29, 2008
No tears for 2008
We are about to send off yet another year in to history. Perhaps most dramatic year!
We saw almost everything in this year, high and crash of stock market; financial system melt down; manufacturing sector reaching it’s bottom; inflation high/lows. In summary, we have seen all, which literally created liquidity problems to working and business community. Arguably this termed as worst year industry ever seen; where impact was seen across all industries.
Internationally, this year saw meltdowns like Lehman Brothers, narrow escapes of GM, Ford, Citi. Officially entire world is in to recession. Bad numbers poured in from US, Europe, Japan, India, Russia and China.
In general, we are not yet out of recession; we still need to deal with its impact.
It was large belief that BRIC countries (Brazil, Russia, India and China) are largely insulated from what happening in US and Europe, this year proved that concept wrong. No body in insulated and it impacts all alike.
From social front, we saw worst terror attacks, which took entire world shocking.
Though, silver line being Indian sports; this year we have been on high. We also saw premier sports event, Olympics being conducted with at most precision.
So, there will be no tears in saying good bye 2008. Let’s hope we will have better 2009; where the happiness and energy in the industry comes back.
Wish you a happy and safe new year ahead.
We saw almost everything in this year, high and crash of stock market; financial system melt down; manufacturing sector reaching it’s bottom; inflation high/lows. In summary, we have seen all, which literally created liquidity problems to working and business community. Arguably this termed as worst year industry ever seen; where impact was seen across all industries.
Internationally, this year saw meltdowns like Lehman Brothers, narrow escapes of GM, Ford, Citi. Officially entire world is in to recession. Bad numbers poured in from US, Europe, Japan, India, Russia and China.
In general, we are not yet out of recession; we still need to deal with its impact.
It was large belief that BRIC countries (Brazil, Russia, India and China) are largely insulated from what happening in US and Europe, this year proved that concept wrong. No body in insulated and it impacts all alike.
From social front, we saw worst terror attacks, which took entire world shocking.
Though, silver line being Indian sports; this year we have been on high. We also saw premier sports event, Olympics being conducted with at most precision.
So, there will be no tears in saying good bye 2008. Let’s hope we will have better 2009; where the happiness and energy in the industry comes back.
Wish you a happy and safe new year ahead.
Sunday, December 14, 2008
“Stay Hungry, Stay Foolish”
This is the book I just completed reading. It is about 25 IIM graduates; who choose to find their own ways by rejecting corporate offers.
Reading stories of Sanjeev Bikchandani (Naukri.com), R.Subramanain (Subhiksha), Jerry Rao (Mphasis), Nirmal Jain (India Infoline) gives immense motivation and inspiration.
Couple common things I observed out of all these 25 profiles;
Risk Taking: Entrepreneurs are born risk takers. In each of these profiles, we get to see about this fact. They don’t hesitate to take the risks.
Hardworking and persistent: Once they dream; they constantly follow that to make it happen. Though there would be difficulties on the way. They are not losers!
One thing for sure; these guys are from different ring of the Saturn!
Sunday, November 16, 2008
How Mortgage Crisis in US Pushed The Whole World in to Depression.
Let me share you what I felt about this topic.
While we are getting ready to deal with ‘depression’ which has spread across the whole world now and saw some big names tumbling; the question comes up is, how in the first place a visibly simple mortgage crisis in US couple of years back turned to be a depression? Affecting the whole world?
The search leads to one word ‘derivatives’.
Derivatives are financial instruments that are used to reduce financial risk, just as a fire insurance policy is used to reduce the risk of a fire by compensating possible damage in the event of one. Why did, then, Warren Buffett, whose financial acumen is legendary, describe them recently as “weapons of mass destruction”?
Wikipedia definition of derivative is; these are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (eg commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (eg interest rates, exchange rates, stock market indices, consumer price index (CPI) — see inflation derivatives), or other items (eg weather conditions, or other derivatives). Credit derivatives are based on loans, bonds or other forms of credit.
The main types of derivatives are: forwards (which if traded on an exchange are known as futures); options; and swaps.
Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation.
It is not hard to see why such “derived” securities or “derivatives” have become so popular. A bank that makes a loan, for example, for a house, faces many different types of risk. The borrower, for instance, may not be able to return the loan on due date. Or, he may not be able to keep up with interest payments. Or, the market interest rate may rise far above the rate the bank has given the loan, leaving the bank stuck with a loan at a low interest rate. Or an earthquake might hit the area demolishing the borrower’s business. Or, high inflation may reduce the value of the loan by the time it gets repaid. Derivatives are a way to “hedge” against these risks. For example, a housing loan to a borrower in, say, Pune can be combined with a housing loan in Mumbai and another one in Bangalore under one common instrument and this combined “derivative” can be sold to an investor. This combination reduces the risk of disparate housing markets such as Pune, Mumbai and Bangalore all suffering downturns at the same time. The investor in this derivative rightly believes that the instrument he holds has a balanced risk.
If derivatives can diversify risk, as just described, what can go wrong? For one, the borrowers may have mis-represented their income. Or, the loan issuer may not have verified their incomes. Or, they may have borrowed 95 per cent of the value of their houses such that if property prices decline by, say, 20 per cent, the asset cover may become inadequate. In all of these cases, should interest rates rise sharply, from say, 6 per cent to 10 per cent, these borrowers may no longer be able to meet their monthly payments. When Greenspan, who was Chairman of the US Federal Reserve Board, was told about similar issues developing in the US mortgage securities market he believed that such problems in the housing sector would be restricted to a city and could never become a national, let alone an international problem.
This would normally have been true, but mortgaged-backed securities were sold not only nationally in the United States but also throughout Europe and Asia. When the US housing bubble burst and borrowers started defaulting on their mortgage payments, the value of the mortgage securities fell precipitously. The shock waves were transmitted throughout the world. What started as a crisis in some specific parts of the US now became a worldwide financial crisis.
While we are getting ready to deal with ‘depression’ which has spread across the whole world now and saw some big names tumbling; the question comes up is, how in the first place a visibly simple mortgage crisis in US couple of years back turned to be a depression? Affecting the whole world?
The search leads to one word ‘derivatives’.
Derivatives are financial instruments that are used to reduce financial risk, just as a fire insurance policy is used to reduce the risk of a fire by compensating possible damage in the event of one. Why did, then, Warren Buffett, whose financial acumen is legendary, describe them recently as “weapons of mass destruction”?
Wikipedia definition of derivative is; these are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (eg commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (eg interest rates, exchange rates, stock market indices, consumer price index (CPI) — see inflation derivatives), or other items (eg weather conditions, or other derivatives). Credit derivatives are based on loans, bonds or other forms of credit.
The main types of derivatives are: forwards (which if traded on an exchange are known as futures); options; and swaps.
Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation.
It is not hard to see why such “derived” securities or “derivatives” have become so popular. A bank that makes a loan, for example, for a house, faces many different types of risk. The borrower, for instance, may not be able to return the loan on due date. Or, he may not be able to keep up with interest payments. Or, the market interest rate may rise far above the rate the bank has given the loan, leaving the bank stuck with a loan at a low interest rate. Or an earthquake might hit the area demolishing the borrower’s business. Or, high inflation may reduce the value of the loan by the time it gets repaid. Derivatives are a way to “hedge” against these risks. For example, a housing loan to a borrower in, say, Pune can be combined with a housing loan in Mumbai and another one in Bangalore under one common instrument and this combined “derivative” can be sold to an investor. This combination reduces the risk of disparate housing markets such as Pune, Mumbai and Bangalore all suffering downturns at the same time. The investor in this derivative rightly believes that the instrument he holds has a balanced risk.
If derivatives can diversify risk, as just described, what can go wrong? For one, the borrowers may have mis-represented their income. Or, the loan issuer may not have verified their incomes. Or, they may have borrowed 95 per cent of the value of their houses such that if property prices decline by, say, 20 per cent, the asset cover may become inadequate. In all of these cases, should interest rates rise sharply, from say, 6 per cent to 10 per cent, these borrowers may no longer be able to meet their monthly payments. When Greenspan, who was Chairman of the US Federal Reserve Board, was told about similar issues developing in the US mortgage securities market he believed that such problems in the housing sector would be restricted to a city and could never become a national, let alone an international problem.
This would normally have been true, but mortgaged-backed securities were sold not only nationally in the United States but also throughout Europe and Asia. When the US housing bubble burst and borrowers started defaulting on their mortgage payments, the value of the mortgage securities fell precipitously. The shock waves were transmitted throughout the world. What started as a crisis in some specific parts of the US now became a worldwide financial crisis.
Sunday, October 19, 2008
`It`s excitement, not stress`-Article on Chanda Kochhar
As joint MD of ICICI Bank; Chanda Kochhar has achived a lot.
Following is the link appeared in Business Standard; it gives a lot of insights.
http://www.business-standard.com/india/storypage.php?autono=337265
She call stress as excitement!
Following is the link appeared in Business Standard; it gives a lot of insights.
http://www.business-standard.com/india/storypage.php?autono=337265
She call stress as excitement!
Sunday, September 14, 2008
Business Around Entertainment Channels
There are so many entertainment channels which are coming out in
Sunday, September 07, 2008
Go Kiss the world!
This is the auto-biography of Subrato Bagchi; which I just completed reading.
The pinnacle of my career at Wipro brought with it the opportunity to work directly for Azim Premji. Mitta had taught me to be a good human being before trying to be a leader. From Ashok Soota, I learnt what it takes to be a good leader. It was by observing Azim Premji from close quarters that I learnt about leadership from an entrepreneurial standpoint. Premji was acutely aware of the challenges that lay ahead for Indian companies in a progressively open economy. I learnt my final lesson on leadership on my last day at Wipro. He wanted me to stay back. I told him that one of my reasons for leaving was that we were very different people, we thought differently. He answered: “That is the reason we should work together.”
Sunday, August 31, 2008
Should we start teaching Mandarin to our kids?
After seeing spectacular closing ceremony at the Beijing Olympics and feeling the vibrations of Chinese drummers; one question we need to ask; how did China managed to put together such a spectacular show? And what it means to the rest of the world?
One thing is sure; China didn’t build this overnight; there is a hard work of 7 years (It was decided in July-2001 that China will hoist these games), there is a meticulous planning, spectacular management. Entire China has been preparing for this moment.
Let’s reflect on how China and USA have spent last seven years; China has been preparing for Olympics and USA has been preparing for al-Qaida. China has been investing in sports infrastructure/nation building and USA has been investing in installing metal detectors and security processes. I am not saying, what USA was/is doing wrong, probably it was required to fight terrorism. And as a country USA was supposed to respond to 9/11.
But, results are there to see for all of us. Lets look at the infrastructure China has built up, super speed electromagnetic trains; ultra modern airports, spectacular high-ways and great industry revolution. On the contrary USA seems to have missing the ‘Nation Building’ activities; for which America has been famous for.
For argument, we can say, though cities have good infrastructure; but rural China is like old; lacking proper facilities; in fact no one knows more about how China is! But point I am making is; under the banner of 2008 Olympics, China started a domestic revolution and a nation building process and I am sure; they will only stop when entire nation building process is complete. Now they have a proven process in hand.
I think, entire world need to take a note of it; though it is too early to say any thing. There could be a competition to US in technology, engineering, education and infrastructure.
It might be a good idea to start teaching Mandarin to our kids! Probably they might have to go to China to see future as we are seeing our future in US!
Who knows?
One thing is sure; China didn’t build this overnight; there is a hard work of 7 years (It was decided in July-2001 that China will hoist these games), there is a meticulous planning, spectacular management. Entire China has been preparing for this moment.
Let’s reflect on how China and USA have spent last seven years; China has been preparing for Olympics and USA has been preparing for al-Qaida. China has been investing in sports infrastructure/nation building and USA has been investing in installing metal detectors and security processes. I am not saying, what USA was/is doing wrong, probably it was required to fight terrorism. And as a country USA was supposed to respond to 9/11.
But, results are there to see for all of us. Lets look at the infrastructure China has built up, super speed electromagnetic trains; ultra modern airports, spectacular high-ways and great industry revolution. On the contrary USA seems to have missing the ‘Nation Building’ activities; for which America has been famous for.
For argument, we can say, though cities have good infrastructure; but rural China is like old; lacking proper facilities; in fact no one knows more about how China is! But point I am making is; under the banner of 2008 Olympics, China started a domestic revolution and a nation building process and I am sure; they will only stop when entire nation building process is complete. Now they have a proven process in hand.
I think, entire world need to take a note of it; though it is too early to say any thing. There could be a competition to US in technology, engineering, education and infrastructure.
It might be a good idea to start teaching Mandarin to our kids! Probably they might have to go to China to see future as we are seeing our future in US!
Who knows?
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