Synopsis

A STUDY ON “RISK MANAGEMENT IN BANK”

BY
GIRISHA T.G
Registration number: 08DVCM6114
Under the guidance of
Dr. Rajasulochana
Director of MBA Department

BRINDAVAN COLLEGE
BANGALORE
Title of the study:
A study on “Fluctuations in the Indian Currency against US Dollar” with reference
to TMP Worldwide India Pvt. Ltd, Bangalore.

Statement of the problem:

The global devaluation of the U.S. dollar against other currencies is a major cause of concern for
the outsourcing industry all over the world. The impact of the weakening of the dollar against
currencies of major outsourcing destinations, particularly India, has actually overshadowed other

serious concerns like wage inflation, variation in the Accounts Receivable and Payable . In the
present market conditions & with the huge subsidy to the Indian firms, and high tax rate
from the parent country, there is a huge competition which will affect the survival of the
firm, if the risk is not properly managed. The fluctuation risk can be Market risk which
arises due to economic factors like Inflation, Balance of Payments Position, Monetory &
Fiscal Policies of the Government, Demand & Supply of products & services etc. The
study focuses mainly on the above risks & its management. The study is carried out from
the point of view of management of liquidity position due to fluctuation in the value of
currency.
Objectives of the study:
1. To understand the concept of fluctuations of Indian currency value with reference
to TMP Worldwide India Pvt. Ltd.
2. To analyze the factors which causes risk in managing liquidity position.
3. To study the control mechanisms adopted by TMP Worldwide India Pvt. Ltd. to
manage liquidity position.
4. To study the impact of current financial crisis and risk management system of
TMP Worldwide India Pvt. Ltd.

Research Methodology
The methodology adopted here is descriptive research. The research undertaken is aimed
at studying Currency Risk causing factors for TMP Worldwide India Pvt. Ltd. The
research conducted in Bangalore, India. The study analyses the control mechanism
adopted by the firm to reduce the currency risk.
Sources of data:
The data is collected from both primary and secondary sources

Primary data:
Primary data is the first collected through induction manuals, department of manual
books and internet.

Secondary data:
Secondary data is collected through survey method.

Sample Size:
The various samples collected from the staff members and management of the firm and
Economists , the sample size is 20

Limitations:
1. Due to lack of time, the study is restricted only for a period of 6 weeks.
2. Study is conducted only in the city of Bangalore.
3. Availability of complete information is another limitation of the study.
4. Awareness about the venture capital and its slow growth is also a limitation of the
study.
5. Outcome of the dissertation is purely based on the information provided by the
respondents.
Reference:
1. K. Seethapathi Risk management in banks 1st edition, Icfai book publications, ICFAI
University, 2002.
2. David E. Bell and Arthur Schleifer, Risk management international student edition,
vikas publishing house
3. Books, manuals and reports available in Tmp World wide Indira nagar, Bangalore.

Websites:
www.google.com
www.tmpworldwideindia.com
www.tmp.com

Introduction
For quite some time now, the lure of rural India has been the subject of
animated
discussion in corporate suites. And there is a good reason too. With
urban markets getting saturated for several categories of consumer
goods and
with rising rural incomes, marketing executives are fanning out and
discovering
the strengths of the large rural markets as they try to enlarge their
markets. Today, the idea has grown out of its infancy and dominates
discussions
in any corporate boardroom strategy session. Adi Godrej, chairman of
the Godrej group that is in a range of businesses from real estate and
personal
care to agri-foods, has no hesitation proclaiming, It is a myth that rural
consumers are not brand and quality conscious. A survey by the
National
Council for Applied Economic Research(NCAER), India's premier
economic
research entity, recently con_rmed that rise in rural incomes is keeping
pace
with urban incomes. From 55 to 58 per cent of the average urban
income
in 1994-95, the average rural income has gone up to 63 to 64 per cent
by
2001-02 and touched almost 66 per cent in 2004-05. The rural middle
class is
growing at 12 per cent against the 13 per cent growth of its urban
counterpart.
Even better, the upper income class those with household incomes of
over Rs one million [$22,700] per annum is projected to go up to 21
million
by 2009-10 from four million in 2001-02. It will have a 22 to 23 per
cent
rural component. Higher rural incomes have meant larger markets.
Already,
the rural tilt is beginning to show. A study by the Chennai-based
Francis
Kanoi Marketing Planning Services says that the rural market for FMCG
is worth $14.4 billion, far ahead of the market for tractors and agri-
inputs
which is estimated at $10 billion. Rural India also accounts for sales of
$1.7
billion for cars, scooters and bikes and over one billion dollars of
durables.
In total, that represents a market worth a whopping $27 billion. It is no
wonder that even MNCs have cottoned on to the idea of a resurgent
rural
India waiting to happen. Four years ago, Coke ventured into the
hinterland.
Now Coke's rural growth of 37 per cent far outstrips its urban growth of
24
per cent. Coke is not the _rst MNC to have cottoned on to the rural
lure.
Its global rival Pepsico took a wider approach to the business when it
was
3
given permission to set up shop in India in the late 1980s and
investment
in food processing and farming was a pre-condition for entry. The
company
imported a state-of-the art tomato processing plant from Italy to
Punjab.
In _ve years, productivity improved from 16 tonnes to 52 tonnes per
hectare
and there was a tomato glut in the state. Farmers weren't complaining
because
even though prices fell, their incomes increased because of the huge
jump in productivity. Pepsi is now heralding a citrus plantation drive in
the
state and other parts of the country for its brand of Tropicana fruit
juices,
to replace imported fruit. Hindustan Lever Ltd, the $2.3 billion Indian
subsidiary
of Unilever, the country's largest FMCG company, has also got on the
bandwagon. It's Project Shakti uses self-help groups across the country
to
push Lever products deeper into the hinterland. Its four-pronged
programme
creates income-generating capabilities for underprivileged rural
women; improves
rural quality of life by spreading awareness of best practices in health
and hygiene; empowers the rural community by creating access to
relevant
information through community portals and it also works with NGOs to
spread literacy. There are currently over 15,000 Shakti entrepreneurs,
most
of them women, in 61,400 villages across 12 states. By the end of
2010,
Shakti aims to have 100,000 Shakti entrepreneurs covering 500,000 of
India
s 640,000 villages, touching the lives of over 600 million people. With
such
an emphasis on rural marketing, consumption patterns are changing
and it
signals a change in the regulatory environment. Vertical integration of
the
food market from farm to _rm to fork becomes the best way to achieve
e_-
ciency and serve the interest of every stakeholder in the chain the
farmer, the
processor, the retailer and the consumer. As Ashok Gulati of the US-
based
International Food Policy Research Institute put its, The future of Indian
agriculture in general and the farmer in particular depends on the how
soon
they can become globally competitive. Indian economic policy realises
this.
Between the 8th (1992-97) and the 10th (2002-07) Five Year Plans,
successive
governments have tripled the spending on rural development from
$6.82
billion to $20.2 billion.
All this potential has got India's big business houses rushing to enter
and expand rural businesses. Telecom giant Sunil Mittal, chairman of
the $2
4
billion mobile telephony major Bharti Tele- Ventures, is another
unabashed
ag-bearer of the 'go rural' strategy. He is con_dent that the next
'explosive'
phase of demand for cellular connections is going to come from the
villages. In an interesting business diversi_cation, he has tied up with
the
legendary Rothschilds of Europe for a $51 million food processing
venture
and export of fruits and vegetables. We can replicate our pre-eminence
in IT
agriculture and transform the country into a global food basket, he
points
out. Mittal's initial investments include an agriculture research centre
and
model farm in Punjab. If the hinterland has caught the attention of
Mittal,
among the country's most recent entrants to the ranks of big business,
it has
also not escaped the radar of the oldest business house, the $17 billion
Tata
group, which has consolidated its rural operations. The group's two
companies,
Tata Chemicals and Rallis India, ran separate rural initiatives till 2003.
Tata Chemicals ran a chain called Tata Kisan Kendra, which o_ered
farmers
a host of products and services ranging from agriinputs to _nancing to
advisory services. Rallis, on the other hand, was partnering ICICI Bank
and
Hindustan Lever in o_ering deals to farmers that covered operations
from the
pre-harvest to post-harvest stage. In 2004, the two operations were
merged
and Tata Kisan Sansar, a network of onestop shops providing
everything from
inputs to know-how to loans, was launched. Today, the Tata Kisan
Sansar
has 421 franchisee-run centres in three states and reaches out to over
3.6 million
farmers. Like the Tatas, the $2.6 billion Mahindra group has
successfully
established a synergy between its current businesses and the planned
rural
forays. Its agship, Mahindra & Mahindra Ltd is India's largest farm
equipment
company. Its subsidiary, Mahindra Shubhlabh Services, has operations
in 11 states, and leverages the strong Mahindra brand, the 700,000-
strong
Mahindra tractor customer base and the 400-plus dealer network, to
provide
a complete range of products and services to improve farm
productivity and
establish market linkages to the commodity market chain. Its retailing
arm,
Mahindra Krishi Vihar, has been instrumental in increasing the
groundnut
yield in Rajasthan through a new seed sourced from the state of
Maharashtra,
and it has also introduced a new variety of grapes in Maharashtra.
Says
Vikram Puri, head of Mahindra Shubhlabh Services, Almost 80 per cent
of
5
the farmers registered with us have less than _ve acres land. We are
making
farming an attractive proposition through three basic guiding steps
growing
what the market requires, improving the crop yield and decreasing the
cost
of crop production. The activities of Mahindra Shubhlabh Services have
attracted
the attention of the International Finance Corporation, the _nancial
arm of the World Bank, which recently picked up a 27 per cent stake in
the
company. Rural India accounts for a market worth $27 billion. No
wonder
even MNCs have cottoned on to the idea of a resurgent rural India.
2 Strategies
2.1 BY COMMUNICATING AND CHANGING QUAL-
ITY PERCEPTION
Companies are coming up with new technology and they are properly
communicating
it to the customer. There is a trade-o_ between Quality a customer
perceives and a company wants to communicate. Thus, this positioning
of
technology is very crucial. The perception of the Indian about the
desired
product is changing. Now they know the di_erence between the
products
and the utilities derived out of it. As a rural Indian customer always
wanted
value for money with the changed perception, one can notice
di_erence in
current market scenario.
2.2 BY PROPER COMMUNICATION IN INDIAN
LANGUAGE
The companies have realized the importance of proper communication
in
local language for promoting their products. They have started selling
the
concept of quality with proper communication. Their main focus is to
change
the Indian customer outlook about quality. With their promotion, rural
customer started asking for value for money.
6
2.3 BY TARGET CHANGING PERCEPTION
If one go to villages they will see that villagers using Toothpaste, even
when
they can use Neem or Babool sticks or Gudakhu, villagers are using
soaps
like Nima rose, Breeze, Cinthol etc. even when they can use locally
manufactured
very low priced soaps. Villagers are constantly looking forward
for new branded products. What can one infer from these incidents, is
the
paradigm changing and customer no longer price sensitive? Indian
customer
was never price sensitive, but they want value for money. They are
ready to
pay premium for the product if the product is o_ering some extra utility
for
the premium.
2.4 BY UNDERSTANDING CULTURAL AND SO-
CIAL VALUES
Companies have recognized that social and cultural values have a very
strong
hold on the people. Cultural values play major role in deciding what to
buy.
Moreover, rural people are emotional and sensitive. Thus, to promote
their
brands, they are exploiting social and cultural values.
2.5 BY PROVIDING WHAT CUSTOMER WANT
The customers want value for money. They do not see any value in
frills
associated with the products. They aim for the basic functionality.
However,
if the seller provide frills free of cost they are happy with that. They are
happy with such a high technology that can ful_ll their need. As
"Motorola"
has launched, seven models of Cellular Phones of high technology but
none
took o_. On the other hand, "Nokia" has launched a simple product,
which
has captured the market.
7
2.6 BY PROMOTING PRODUCTS WITH INDIAN
MODELS AND ACTORS
Companies are picking up Indian models, actors for advertisements as
this
helps them to show themselves as an Indian company. Diana Hyden
and
Shahrukh Khan are chosen as a brand ambassador for MNC quartz
clock
maker "OMEGA" even though when they have models like Cindy
Crawford.
2.7 BY ASSOCIATING THEMSELVES WITH INDIA
MNCs are associating themselves with India by talking about India, by
explicitly
saying that they are Indian. M-TV during Independence Day and
Republic daytime make their logo with Indian tri-color. Nokia has
designed
a new cellular phone 5110, with the India tri-colour and a ringing tone
of
"Sare Jahan se achcha".
2.8 BY PROMOTING INDIAN SPORTS TEAM
Companies are promoting Indian sports teams so that they can
associate
themselves with India. With this, they inuence Indian mindset. LG has
launched a campaign "LG ki Dua, all the best". ITC is promoting Indian
cricket team for years, during world cup they have launched a
campaign
"Jeeta hai jitega apna HindustanIndia India India". Similarly, Whirlpool
has also launched a campaign during world cup.
2.9 BY TALKING ABOUT A NORMAL INDIAN
Companies are now talking about normal India. It is a normal tendency
of
an Indian to try to associate himself/herself with the product. If he/she
can
visualize himself/herself with the product, he /she becomes loyal to it.
That
is why companies like Daewoo based their advertisements on a normal
Indian
family.
8
2.10 BY DEVELOPING RURAL-SPECIFIC PROD-
UCTS
Many companies are developing rural-speci_c products. Keeping into
consideration
the requirements, a _rm develops these products. Electrolux is
working on a made-for India fridge designed to serve basic purposes:
chill
drinking water, keep cooked food fresh, and to withstand long power
cuts.
2.11 BY GIVING INDIAN WORDS FOR BRANDS
Companies use Indian words for brands. Like LG has used India brand
name
"Sampoorna" for its newly launched TV. The word is a part of the
Bengali,
Hindi, Marathi and Tamil tongue. In the past one year, LG has sold one
lakh
20-inch Sampoorna TVs, all in towns with a population of around
10,000.
By the end of 1999, roughly 12Thats Rs 114 crore worth of TV sets sold
in
the villages in a year.
2.12 BY ACQUIRING INDIAN BRANDS
As Indian brands are operating in India for a long time and they enjoy a
good reputation in India. MNCs have found that it is much easier for
them
to operate in India if they acquire an Established Indian Brand.
Electrolux
has acquired two Indian brands Kelvinator and Allwyn this has gave
them
the well-established distribution channel. As well as trust of people, as
people
believe these brands. Similarly Coke has acquired Thumps up, Gold
Spot,
Citra and Limca so that they can kill these brands, but later on they
realized
that to survive in the market and to compete with their competitor
they have
to rejuvenate these brands.
2.13 BY EFFECTIVE MEDIA COMMUNICATION
Media Rural marketing is being used by companies. They can either go
for
the traditional media or the modern media. The traditional media
include
9
melas, puppetry, folk theatre etc. while the modern media includes TV,
radio,
e-chaupal. LIC uses puppets to educate rural masses about its
insurance
policies. Govt of India uses puppetry in its campaigns to press ahead
social
issues. Brook Bond Lipton India ltd used magicians e_ectively for
launch of
Kadak Chap Tea in Etawah district. In between such a show, the lights
are
switched o_ and a torch is ashed in the dark(EVEREADYs tact). ITC's
e-chaupal (chaupal is the common place where villagers gather) has
been the
most elaborate and extensive venture in this _eld so far. Conceived by
ITC's
international business division and launched in 2000, the e-chaupal
project
has since grown to around 2,700 chaupals covering a population of
around
1.2 million in _ve states { Madhya Pradesh, Karnataka, Andhra
Pradesh,
Uttar Pradesh and Maharashtra.
Rural marketing requires the understanding of the complexities and
this
article reviews some of the key issues. Indian agricultural industry has
been
growing at a tremendous pace in the last few decades. The rural areas
are
consuming a large number of industrial and urban manufactured
products.
The rural agricultural production and consumption process plays a
predominant
role in developing the Indian economy. This has designed a new way
for
understanding a new process called Rural Marketing. The concept of
rural
marketing has to be distinguished from Agricultural marketing.
Marketing is
the process of identifying and satisfying customers needs and
providing them
with adequate after sales service. Rural marketing is di_erent from
agricultural
marketing, which signi_es marketing of rural products to the urban
consumer or institutional markets. Rural marketing basically deals with
delivering
manufactured or processed inputs or services to rural producers, the
demand for which is basically a derived outcome. Rural marketing
scientists
also term it as developmental marketing, as the process of rural
marketing
involves an urban to rural activity, which in turn is characterised by
various
peculiarities in terms of nature of market, products and processes.
Rural
marketing di_ers from agricultural or consumer products marketing in
terms
of the nature of transactions, which includes participants, products,
modalities,
norms and outcomes. The participants in case of Rural Marketing
would also be di_erent they include input manufacturers, dealers,
farmers,
10
opinion makers, government agencies and traders. The existing
approach
to the rural markets has viewed the markets as a homogeneous one,
but in
practice, there are signi_cant buyer and user di_erences across regions
as well
as within that requires a di_erential treatment of the marketing
problems.
These di_erences could be in terms of the type of farmers, type of
crops and
other agro-climatic conditions. One has to understand the market
norms
in agricultural input so as to devise good marketing strategies and to
avoid
unethical practices, which distort the marketing environment. Many of
the
inputs used for production process have implications for food, health
and
environmental sectors. Rural marketing needs to combine concerns for
pro_t
with a concern for the society, besides being titled towards pro_t. Rural
market for agricultural inputs is a case of market pull and not market
push.
Most of the jobs of marketing and selling is left to the local dealers and
retailers.
The market for input gets interlocked with other markets like output,
consumer goods, money and labour. The importance of rural marketing
can
be understood from the fact that today modern inputs i.e. diesel,
electricity,
fertilisers, pesticides, seeds account for as much as 70Green
Revolution
areas. Further the percentages were higher at 81of land. Strategic
aspects
Rural marketing in India is not much developed there are many
hindrances
in the area of market, product design and positioning, pricing,
distribution
and promotion. Companies need to understand rural marketing in a
broader
manner not only to survive and grow in their business, but also a
means to
the development of the rural economy. One has to have a strategic
view of
the rural markets so as to know and understand the markets well. In
the
context of rural marketing one has to understand the manipulation of
marketing
mix has to be properly understood in terms of product usage. Product
usage is central to price, distribution, promotion, branding, company
image
and more important farmer economics, thus any strategy in rural
marketing
should be given due attention and importance by understanding the
product
usage, all elements of marketing mix can be better organised and
managed.
11
2.14 BY ADOPTING LOCALISED WAY OF DIS-
TRIBUTING
Proper distribution channels are recognized by companies. The
distribution
channel could be a Big scale Super markets, they thought that a
similar
system can be grown in India. However, they were wrong, soon they
realized
that to succeed in India they have to reach the nook and the corner of
the country. They have to reach the "local Paan wala, Local Baniya"
only
they can succeed. MNC shoe giants, Adidas, Reebok, Nike started with
exclusive stores but soon they realized that they do not enjoy much
Brand
Equity in India, and to capture the market share in India they have to
go the
local market shoe sellers. They have to reach to local cities with low
priced
products.
2.15 BY ASSOCIATING THEMSELVES WITH IN-
DIAN CELEBRITIES
MNCs have realized that in India celebrities enjoyed a great popularity
so they now associate themselves with Indian celebrities. Recently
Luxor
Writing Instruments Ltd. a JV of Gillette and Luxor has launched 500
"Gajgamini" range of Parker Sonnet Hussain special edition fountain
pens,
priced at Rs. 5000. This pen is signed by Mr. Makbul Fida Hussain a
renowned painter who has created "Gajgamini" range of paintings.
Companies
are promoting players like Bhaichung Bhutia, who is promoted by
Reebok, so that they can associate their name with players like him
and get
popularity.
2.16 MELAS
Melas are places where villagers gather once in a while for shopping.
Companies
take advantage of such events to market their products. Dabur uses
these events to sell products like JANAM GHUTI(Gripe water). NCAER
estimates that around half of items sold in these melas are FMCG
products
12
and consumer durables. Escorts also displays its products like tractors
and
motorcycles in such melas.
2.17 PAINTINGS
A picture is worth thousand words. The message is simple and clean.
Rural
people like the sight of bright colours. COKE, PEPSI and TATA traders
advertise their products through paintings.
3 Case Studies-1: AKASHGANGA
This case study is about a product and service named Akashganga sold
by a
small, entrepreneurial business named Shree Kamadhenu Electronics
Private
Ltd. (SKEPL). Akashganga is for diary farmers and it is intended to
enable
to them to increase their e_ciency and productivity. The Indian diary
industry
is plagued by several problems, the major ones being low productivity
of Indian cows, the delays in processing milk, low quality caused by
manual
handling, corruption and mismanagement, and, of course, endemic
dilution
of milk with water. Akashganga attempts to alleviate some of these
issues.
Akashganga is a computerized system. When a farmer gets milk into
the
collection point, it's weighed and the amount of fat measured and
immediately
an entry is made on the farmer's swipe card. The money can be
collected immediately. This is marked contrast to the previous system
where
the _nancial calculation was done later to avoid holding up the queue
of
farmers ready for milking; the calculation was done by hand and was
somewhat
complicated. With the new system, calculation is done automatically
which makes it possible to pay the farmer on the spot rather than
having
him wait for a couple of days. Also the potential for cheating is
reduced. An
entry is made electronically on the farmer's swipe card.
When SKEPL wanted to market this service, it ran up against the
skepticism
of the Indian rural people against unproven technology. This is the
classic
catch-22 situation as the farmer does not trust the tool till he tries it,
and is
reluctant to try it till he trusts it. SKEPL got around this problem by
o_er-
13
ing free trials and delayed payment schemes stretching up to several
months.
The company also provided responsive and e_cient after-sales service.
It
established a service network covering the rural areas, and typically
would
attend to a compliant within a few hours of receiving it.
It's important to note that the company's local presence whether for
marketing,
sales or service helped tremendously, since the villagers would not be
disposed to make a journey to a town or city to learn about their
products.
The company also used a name Akashganga that Indian villagers can
relate
to. This helped earn the trust of the villagers.
Also, Shree Kamadhenu Electronics used local people for marketing,
sales,
service, etc. This was a very important factor that helped the farmers
relate
to and trust the company.
Of course, the company had a solution that was superior in terms of
time,
transparency, fairness, etc, and that played a big role in their success.
As a result of these factors, SKEPL gained a threshold in this large
market
and earned respect among farmers.
4 Case-Study 2: ITC e-Choupal
4.1 About ITC-IBD
ITC is one of India's foremost private sector companies with a market
capitalisation
of over US $14 billion and a turnover of US $3 billion. ITC has a
diversi_ed presence in Cigarettes, Hotels, Paperboards & Specialty
Papers,
Packaging, Agri-Business, Packaged Foods & Confectionery, Branded
Apparel,
Greeting Cards and other FMCG products. Its International Business
Division (ITC IBD) was created in 1990 as an agricultural trading
company;
it now generates US $150 million in revenues annually.
Initially, the agricultural commodity trading business was small
compared
to international players. By 1996, the opening up of the Indian market
had
brought in international competition. Large international companies
had
better margin-to-risk ratios because of wider options for risk
management
14
and arbitrage. For an Indian company to replicate the operating model
of
such multinational corporations would have required a massive
horizontal
and vertical expansion. In 1998, after competition forced ITC to explore
the
options of sale, merger, and closure of IBD, ITC ultimately decided to
retain
the business. The ITC-IBD taken the challenges to use information
technology
to change the rules of the game and create a competitive business
that
did not need a large asset base. Today, IBD is a US $150 million
company
that trades in commodities such as feed ingredients, food-grains,
co_ee, black
pepper, edible nuts, marine products, and processed fruits.
4.2 ITC e-Choupal and the Strategy
ITC followed a di_erent media/communication strategy which is more
elaborate
and extensive in rural marketing so far, which bene_ts both the
farmers
and the organization. The strategy is use the Information Technology
and
bridge the information and service gap in rural INDIA which gives an
edge to
market its products like seeds, fertilizers and pesticides and other
products
like consumer goods. With this strategy it can also enhance its
competetiveness
in global market for agri exports.
A pure trading model does not require much capital investment. The e-
Choupal model, in contrast, has required that ITC make signi_cant
investments
to create and maintain its own IT network in rural India and to identify
and train a local farmer to manage each e-Choupal.
The company has initiated an e-Choupal e_ort that places computers
with
Internet access in rural farming villages; the e-Choupals serve as both
a social
gathering place for exchange of information (choupal means gathering
place
in Hindi) and an e-commerce hub. The computer, typically housed in
the
farmers house, is linked to the Internet via phone lines or, increasingly,
by
a VSAT connection, and serves an average of 600 farmers in 10
surrounding
villages within about a _ve kilometer radius. Each e-Choupal costs
between
US $3,000 and US $6,000 to set up and about US $100 per year to
main-
15
tain. Using the system costs farmers nothing, but the host farmer,
called a
sanchalak, incurs some operating costs and is obligated by a public
oath to
serve the entire community; the sanchalak bene_ts from increased
prestige
and a commission paid him for all e-Choupal transactions. The farmers
can
use the computer to access daily closing prices on local
mandis(governmentmandated
markets), as well as to track global price trends or _nd information
about new farming techniqueseither directly or, because many farmers
are
illiterate, via the sanchalak (the village farmer who runs the e-Choupal
and
acts as ITCs representative in the village). In addition they can also
know
about weather forecast(local) and best practices in the world from e-
Choupal
website. They also use the e-Choupal to order seed, fertilizer, and
other
products such as consumer good from ITC or its partners, at prices
lower
than those available from village traders; the sanchalak typically
aggregates
the village demand for these products and transmits the order to an
ITC
representative. At harvest time, ITC o_ers to buy the crop directly from
any farmer at the previous days closing price; the farmer then
transports his
crop to an ITC processing center, where the crop is weighed
electronically and
assessed for quality. The farmer is then paid for the crop and a
transport fee.
Launched in June 2000, 'e-Choupal', has already become the largest
initiative
among all Internet-based interventions in rural India. 'e-Choupal'
services today reach out to more than 3.5 million farmers growing a
range of
crops - soyabean, co_ee, wheat, rice, pulses, shrimp - in over 31,000
villages
through 5200 kiosks across six states (Madhya Pradesh, Karnataka,
Andhra
Pradesh,Uttar Pradesh, Maharashtra and Rajasthan).
16
Figure 1: Transactional costs under Mandi & e-Choupal system
4.3 Operational costs and comparision with Mandis
Fixed Cost of Equipment at e-Choupal (in Rs.)
Printer Power related VSAT PC Total
2001-02 7000 19000 90000 39000 155,000
2002-03 7000 15000 70000 30000 122,000
2003-04 7000 15000 70000 30000 122,000
2004-05 6000 14000 60000 27000 107,000
2005-06 6000 12000 50000 24000 92,000
4.4 Vision and Planning Behind the e-Choupals
Implementing and managing e-Choupals is a signi_cant departure from
commodities
trading. Through its tobacco business, ITC has worked in Indian
17
agriculture for decades, from research to procurement to distribution.
ITCs
translation of the tactical and strategic challenges it faced and its
social
commitment into a business model demonstrates a deep
understanding of
both agrarian systems and modern management. The principles
followed in
implementing the e-Choupals are
_ Re-engineer, Not Reconstruct
Present Mandi system have some success factors in it. ITC decided to
build e-Choupal on existing system. Already ITC has trading agents in
local mandis for its tobacco business. It retained the e_cient providers
and created roles for ine_cient people. It recruites and engages
members
of landscape thereby making their expertise available to ITC. With
this principle ITC can avoid the reinventing the system in areas where
it can add no value with its presence i.e., in areas where e_cient agents
are there.
_ Address the Whole, Not Just One Part
The farmers various activities range from procuring inputs to selling
produce. Currently, the village trader services the spectrum of farmers
needs. He is a centralized provider of cash, seed, fertilizer, pesticides,
and also the only marketing channel. As a result, the trader enjoys two
competitive bene_ts. First, his intimate knowledge of the farmer and
village dynamics allow him to accurately assess and manage risk.
Second,
he reduces overall transaction costs by aggregating services. The
linked transactions reduce the farmers overall cost in the short term,
but create a cycle of exploitative dependency in the long-term.
Rural development e_orts thus far have focused only on individual
pieces rather than what the entire community needs. Cooperatives
have tried to provide agricultural inputs, rural banks have tried to
provide
credit, and mandis have tried to create a better marketing channel.
These e_orts cannot compete against the traders bundled o_er.
Functioning
as a viable procurement alternative, therefore, must eventually
address a range of needs, not just the marketing channel.
18
ITC e-Chopal provide services as a bundle what the entire agricultural
community needs.
_ An IT-Driven Solution
Delivery of real-time information independent of the transaction. In the
mandi system, delivery, pricing, and sales happen simultaneously, thus
binding the farmer to an agent. E-Choupal was seen as a medium of
delivering critical market information independent of the mandi, thus
allowing the farmer an empowered choice of where and when to sell
his
crop.
_ Risk analysis & challenges
{ Radical shifts in computing access will break community-based
business models.
{ The sanchalaks are ITCs partners in the community, and as their
power and numbers increase, there is a threat of unionization and
rent extraction.
{ The scope of the operation: the diversity of activities required of
every operative and the speed of expansion create real threats to
e_cient management.
{ If ITC fails to ful_ll the aspirations of farmers, they will look
elsewhere for satisfaction.
4.5 Strategies to be followed
(1). Adopt the ability to determine the grades of the crop(grains) in the
_eld which commands the price premium for the crop.
e.g: Wheat
(2). Build the concept of traceability into the supply chain which will
allow
to address the food safety concerns.
e.g: For perishables such as shrimps, which decays quickly with in
short
19
period of time, it need to de_ne standards of production and product
quality.
(3). Provide the service as market-place for commodities where ITC is
not
a sole buyer. It will reduce the operational cost of e-Choupal such as
IT infrastructure and transaction costs.
e.g: co_ee grains.
(4). Marketing value added products and services to rural INDIA , in
addition
to marketing agri inputs, through e-Choupal system.
(5). Sourcing IT-enabled services from rural INDIA. Telemedicine,
ecotourism
, traditional medicine and traditional crafts are some of the
services that can be sourced from rural INDIA.
4.6 Conclusion
ITC e-Choupal, an innovative strategy which is elaborative and
extensive
in rural markets sofar. Critical factors in the apparent success of the
venture
are ITCs extensive knowledge of agriculture, the e_ort ITC has made
to retain many aspects of the existing production system, including
retaining
the integral importance of local partners, the companys commitment
to
transparency, and the respect and fairness with which both farmers
and local
partners are treated.
20

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AFN Afghanistan Afghanis 1.0045155777 0.9955047211
ALL Albania Leke 2.2112346875 0.4522360316
DZD Algeria Dinars 1.5709244948 0.6365678321
ARS Argentina Pesos 0.0836229475 11.9584399951
AUD Australia Dollars 0.0241763173 41.3627926843
BSD Bahamas Dollars 0.0216723972 46.1416423032
BHD Bahrain Dinars 0.0081712633 122.3800977557
BDT Bangladesh Taka 1.4981048387 0.6675100261
BBD Barbados Dollars 0.0434890100 22.9943151124
BMD Bermuda Dollars 0.0216723972 46.1416423032
BRL Brazil Reais 0.0391933865 25.5145086560
BGN Bulgaria Leva 0.0314497304 31.7967749626
XOF CFA BCEAO Francs 10.5460874768 0.0948218951
XAF CFA BEAC Francs 10.5460874768 0.0948218951
CAD Canada Dollars 0.0226886917 44.0748199719
CLP Chile Pesos 11.3834234453 0.0878470352
CNY China Yuan Renminbi 0.1480441475 6.7547418597
COP Colombia Pesos 41.6847088834 0.0239896122
XPF Comptoirs Français du Pacifique Francs 1.9185449541 0.5212283391
CRC Costa Rica Colones 11.8699708304 0.0842462053
HRK Croatia Kuna 0.1167148892 8.5678871525
CZK Czech Republic Koruny 0.4164245116 2.4013956241
DKK Denmark Kroner 0.1196716021 8.3562013222
DOP Dominican Republic Pesos 0.7812901243 1.2799342637
XCD East Caribbean Dollars 0.0566733050 17.6449917506
EGP Egypt Pounds 0.1189489526 8.4069676808
EEK Estonia Krooni 0.2515573950 3.9752359495
EUR Euro 0.0160774067 62.1990858165
FJD Fiji Dollars 0.0426781980 23.4311673857
XAU Gold Ounces 0.0000194580 51,392.871621681
2
HKD Hong Kong Dollars 0.1682659762 5.9429720888
HUF Hungary Forint 4.3284548405 0.2310293250
XDR IMF Special Drawing Rights 0.0141862092 70.4909949035
ISK Iceland Kronur 2.7994159661 0.3572173668
INR India Rupees 1.0000000000 1.0000000000
IDR Indonesia Rupiahs 200.578133287 0.0049855883
4
IRR Iran Rials 214.014943965 0.0046725709
4
IQD Iraq Dinars 25.2548470548 0.0395963594
ILS Israel New Shekels 0.0822443107 12.1588957574
JMD Jamaica Dollars 1.9342607576 0.5169933764
JPY Japan Yen 1.9335335410 0.5171878216
JOD Jordan Dinars 0.0153494775 65.1487976100
KES Kenya Shillings 1.6682365131 0.5994353871
KWD Kuwait Dinars 0.0062741583 159.3839295616
LBP Lebanon Pounds 32.5844575301 0.0306894782
MYR Malaysia Ringgits 0.0733502376 13.6332210034
MUR Mauritius Rupees 0.6675038795 1.4981186338
MXN Mexico Pesos 0.2762093493 3.6204422571
MAD Morocco Dirhams 0.1799068595 5.5584317496
NZD New Zealand Dollars 0.0311478008 32.1049953778
NOK Norway Kroner 0.1293195658 7.7327819169
OMR Oman Rials 0.0083352042 119.9730650140
PKR Pakistan Rupees 1.8454044476 0.5418866316
XPD Palladium Ounces 0.0000496206 20,152.921954549
2
PEN Peru Nuevos Soles 0.0622430883 16.0660408685
PHP Philippines Pesos 0.9969323523 1.0030770871
XPT Platinum Ounces 0.0000139993 71,432.160760851
3
 PLN Poland Zlotych 0.0633333800 15.7894620418
QAR Qatar Riyals 0.0788766942 12.6780161182
RON Romania New Lei 0.0658169040 15.1936651330
RUB Russia Rubles 0.6505656538 1.5371238769
SAR Saudi Arabia Riyals 0.0812675440 12.3050353244
XAG Silver Ounces 0.0013168576 759.3835431636
SGD Singapore Dollars 0.0304998778 32.7870165897
ZAR South Africa Rand 0.1663840420 6.0101917710
KRW South Korea Won 25.1393027908 0.0397783506
LKR Sri Lanka Rupees 2.4830065419 0.4027375615
SDG Sudan Pounds 0.0483142756 20.6978162855
SEK Sweden Kronor 0.1567410186 6.3799508833
CHF Switzerland Francs 0.0235438064 42.4740155732
TWD Taiwan New Dollars 0.6949255791 1.4390030100
THB Thailand Baht 0.7129351586 1.4026521038
TTD Trinidad and Tobago Dollars 0.1371862033 7.2893627465
TND Tunisia Dinars 0.0302980152 33.0054623277
TRY Turkey Lira 0.0335106772 29.8412351549
AED United Arab Emirates Dirhams 0.0795972971 12.5632406644
GBP United Kingdom Pounds 0.0145428156 68.7624752341
USD United States Dollars 0.0216723972 46.1416423032
VEF Venezuela Bolivares Fuertes 0.0931913080 10.7306144891
VND Vietnam Dong 403.215220596 0.0024800651
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How to deal with currency fluctuation issues: The
beauty of split pay
Last updated: 22 July 2008

Currency fluctuations and exchange rates are key issues that can
IN THIS ARTICLE
have a tremendous impact on the cost of living allowance
provided by companies to their expatriates. For these reasons,
How the exchange rate
determining the currency in which to pay the expatriate’s salary is
is affecting the
always a delicate exercise.
expatriate’s salary

How inflation is According to Mercer's International Assignment survey,

affecting the slightly under one in four (24.4%) companies usually split the
expatriate’s salary salary payment between the home and the host country currency.
European and Asian companies are more likely to split pay than
The core principle: “no their US counterparts who very often pay the whole salary in the
gain, no loss” home country currency. Finally, a quarter of the companies
(26.3%) prefer to pay the salary in the host country currency.
Assessing the different
payment approaches
How the exchange rate is affecting the
The solution: a flexible expatriate’s salary
split pay approach
Let’s take the example of an employee relocated from Paris to
Exceptions to the rule New York. If we assume that the salary is paid in the host
currency and the US dollar is weakening against the Euro, the
amount paid to the expatriate is going to increase. Inversely, if the Euro devaluates, the
amount paid in US dollars the expatriate in New York will be reduced.

Let’s now take into account the cost of living index: if the home currency strengthens
compared to the host currency, the index will react immediately and go down to compensate
for the exchange rate fluctuation. The spendable income in the host currency will remain
stable. If on the contrary the host currency strengthens compared to the home currency the
index will increase and, again, the expatriates will retain a comparable spendable income in
the host currency.

The focus should be on the spendable income and not on

the fluctuations of the index
Expatriates sometimes monitor the fluctuation of the cost of living index and are concerned
when the index decreases, fearing that they will lose purchasing power. This is not the case as
explained above. The index might fluctuate to compensate for exchange rates changes but
spendable income in the host currency remains fairly stable. The table below illustrates the
fluctuation of the spendable income compared to the evolution of the cost of living index. This
comparison demonstrates that a decreasing cost of living index is not necessarily synonymous
with a lower spendable income in the host currency.

Example: Transfer from Paris to New York

Dates Exchange COL Spendable Goods Spendable Spendable

rate 1 index Income and Income Income
EUR = EUR Services Adjusted Adjusted
USD Allowance EUR USD
 EUR

March 2002 0.866 1.36 100'000 36'000 136'000 117,729

September 2002 0.985 1.19 100'000 19'000 119'000 117,207

March 2003 1.104 1.08 100'000 8'000 108'000 119,232

September 2003 1.103 1.08 100'000 8'000 108'000 119,126

March 2004 1.242 0.96 100'000 -4'000 96'000 119,240

How inflation is affecting the expatriate’s salary

The impact of the inflation on the cost of living index follows a similar logic as for the
exchange rate. The cost of living index will react immediately to inflation rate changes: if the
inflation is higher in the home country than in the host country, the index will go down. If, on
the contrary, the inflation increases in the host location, the index will rise.

The following example, based on a transfer between Hong Kong and Buenos Aires,
demonstrates that the cost of living index takes into account the variation of the inflation and
that the spendable income in the host currency follows the inflation rates.

Example: Transfer between Hong Kong and Buenos Aires

Dates Exchange COL Spendable Spendable Spendable 6 Month 6 Month

rate1 index Income Income Income Inflation Inflation
HKD = HKD Adjusted Adjusted Hong Buenos
ARS HKD ARS Kong Aires

March 2001 0.12827 0.85 100'000 85'000 10'903 -1.50% -1.00%

September 0.12808 0.85 100'000 85'000 10'887 -0.75% -0.50%

2001

March 2002 0.28078 0.47 100'000 47'000 13'197 1.50% 16.75%

September 0.46474 0.43 100'000 43'000 19'984 -3.50% 33.25%

2002

The core principle: “no gain, no loss”

The expatriate compensation package can be split in two parts: one is used in the host
country for day-to-day living expenses. This is usually called the “spendable income”. The
remaining part of the salary is for savings and other expenses such as furniture, education,
holidays and housing. It could also include the mobility premium and hardship allowance paid
by the company. This remaining amount, called “non-spendable income”, would mainly be
spent or kept in the home country but some of it might be used in the host location (e.g.
hardship allowance, holidays).

The cost of living index is usually applied on the spendable income. Since the index
automatically reacts to exchange rate fluctuations and inflation, this part of the salary is
protected against currency fluctuation and high inflation. Some companies apply the cost of
living index on the full net amount but does it make sense? By definition the savings are spent
at home and there is no reason to adjust this part of the salary for cost of living. This results
in unnecessary spending for the company if the cost of living index is high.

We have to remember that the purpose of your policy is to preserve your expatriate
purchasing power in the host country. The expatriate should not be allowed to gain on
exchange rate. Neither should purchasing power be lost. It might not seem to be a problem if
the expatriate gain a little on exchange but six months later when the trends reverses, this
formerly happy expatriate will complain bitterly about his decreased package and will seriously
question the validity of your system. What employees are looking for is stability. Psychology is
the key here: your expatriates won’t feel conformable with your policy if they have the
impression that their package can be adversely affected by currency fluctuations and inflation
- even if they have not themselves been victim of a purchasing power loss. “No gain/ no loss”
should be the core principle of a cost of living allowance policy.

Assessing the different payment approaches

Let’s assess the different approaches when it comes to paying the salary:

Approach Currency Risk

Host Currency Spendable Income Host No risk / protected by

COL index

Remaining amount Host Risk

Home Currency Spendable Income Home limited Risk if converted

abroad

Remaining amount Home No risk if spend at

home
Limited risk if spent
abroad

Split Pay Spendable Income Host Host No risk /

protected by COL
index

Remaining amount Home No risk if spent at

home Limited risk if
spent abroad

The first option is to pay the whole salary in the host currency. This might be the most risky
option. The Spendable income part of the salary is protected by the cost of living adjustment
but the remaining part of the salary is exposed to currency fluctuations that might result in
loss and gains for the expatriate. There is also something flawed in this logic: by definition, a
large part of the non-spendable income amount (savings) are used in the home country and it
does not really make sense to provide this part of the salary entirely in the host currency.

The second approach is to pay the entire remuneration in home currency. This approach,
favored by many American companies, has some advantages. The nonspendable income paid
in the home currency and spent in the home country is protected. There might be slight risks
though. The expatriate will have to convert the spendable income in the host currency to pay
for his daily expenses. But he might also keep some money in the home currency and convert
this amount at a later date. If the exchange rate fluctuates in the meantime there might be a
potential gain or loss.

The third approach, the split pay approach, appears to be the most logical option: the
expenses abroad are paid in the host currency and the non-spendable income spent at home
in the home currency.

The solution: a flexible split pay approach

In an ideal world, the company would set a percentage of spendable income that matches
exactly the needs of the expatriates. This means the spendable income will exactly reflect
what the employee will need in the host location and that the remaining part of the salary will
be spent only in the home country. In reality, while consumption patterns can be identified, it
would be impossible to match exactly the requirements of each individual expatriate. A better
option might be to leave to the employee the flexibility to decide the percentage of the salary
that will be paid in the host currency. However, this percentage might not match the
spendable income amount determined by the company.

Let’s take the example of a company that uses a spendable income of 50% for American
expatriates but give the option to have between 20 and 70% of the salary paid in the host
currency. Let assume one of the American employees decides that he prefers to receive 70%
of his salary in the host currency. The 30% paid in the home currency and used at home do
not create any problem. The cost of living index is applied on the 50% of the salary. The
spendable income is thus protected from fluctuations by the index. What about the remaining
20% paid in the host currency but not affected by the cost of living index? The employee can
potentially win or lose on this amount due to exchange rate fluctuations, and some kind of
mechanism is necessary to prevent that.

In this case a good approach would be to guarantee this 20% of the salary against
fluctuations: for example if the fluctuation is more than 10%, the difference will be paid by the
company (if there is potential loss) or kept by the company (potential win).

Ideal scenario Spendable Income in host No risk / protected by COL

currency index

Remaining amount in home Designed to be spent at home

currency only

Flexible policy Spendable Income in host No risk / protected by COL

currency index

Remaining amount in home Spent at home / no risk

currency

Remaining amount in host Spent abroad but no gain/no

currency loss guaranteed

Exceptions to the rule

There are exceptions: When setting your payment policy you have to take into account
country laws and currency transfer restrictions. Like for many expatriation issues there is no
perfect solution that will fit all situations. However, a clearly defined split pay policy will
reassure your employees and make your job easier.

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The Basics of Currency Fluctuations

Hide links within articlesShow links within articles

by Roger Wohlner (Write for us!)
(Click on the links within the article to get definition of that word)
An international investment's total return is based on
two factors - the investment's return in local currency plus currency fluctuations. For
example, suppose you purchase a British stock whose price increases 10% in one year in
terms of British pounds. If, during that same year, the British pound increases in value by
5% compared to the U.S. dollar, your total return would be 15% - 10% from the
investment's return plus 5% from currency fluctuations. However, if the British pound
decreased in value by 5%, your total return would be 5%.

When the U.S. dollar declines compared to the other currency, your investment increases
in value since more dollars are then required to purchase the investment. An increase in
the U.S. dollar compared to the other currency means your investment decreases in value.
Most countries use a system of managed floating exchange rates. Supply and demand
factors set the exchange rates most of the time, as international banks, investors, tourists,
consumers, and multinational companies buy and sell foreign
currencies and goods. Governments typically only intervene to prevent
massive fluctuations in exchange rates.

Demand for a particular currency is determined by many factors, including a country's

inflation, interest rates, political and economic outlook, monetary policies, and
speculation. The U.S. dollar does not move uniformly against all currencies - it can be
rising against one currency while it is declining against another.

In general, a rising dollar makes it less expensive for Americans to travel abroad, to
import foreign goods, and to purchase foreign investments. However, U.S. companies
may suffer since cheaper imported goods hurt sales of domestic products. When the
dollar is declining, it becomes more expensive for Americans to travel abroad and to
import foreign goods, but U.S. goods become more competitive in international markets.

When considering international investments, consider

these tips about currency fluctuations:

What Is Your Pain Threshold?

Lower Your Costs
For a $982 hedging cost, you can avoid risking $108,750 to foreign currency fluctuations. Find out
how in the following scenario.
If you conduct business in foreign currencies without a forex hedging plan, you are rolling the dice on your
profits. As currency rates fluctuate, by the time you need to conclude a transaction you could see great
gains...or great losses.
Recent EUR/USD foreign exchange rates have fluctuated greatly, with 30-day volatility hovering around
9%. This volatility may increase or decrease the value of your receivable by 9%. Are you willing to take the
risk if your account receivable falls by 9% or future payment goes up by 9%?
A Scenario
Suppose your USD reporting company has a EUR 750,000 receivable asset in 45 days at a recorded
exchange rate of 1.45000 (EUR/USD rate), for a recorded amount of USD 1,087,750.
What if the rate changes in 45 days when you collect your euro receivable? Roll the dice...
A 10% increase in the EUR/USD rate causes a $108,750 GAIN.
A 10% decrease in the EUR/USD rate causes a $(108,750) LOSS and disappearing profits.
Are you betting on future rates? Are you comfortable with a potential $108,750 loss?
Hedging Foreign Currency
Why roll the dice and risk losing money? For the above scenario, your company could guarantee that it
receives the USD amount of $1,087,750 in 45 days with a hedge cost of only USD 982. (See the cost
breakdown.)
Forex hedging acts like an insurance policy: the 0.09% of the asset value you spend on hedging
protects your asset from a negative shock. A hedging strategy helps you reduce currency exposure and
the risk associated with currency movement.
Forex hedging is easy to do, easy to understand (once it has been explained), and relatively inexpensive. If
you had a USD$1 million foreign asset to be realized in 45 days, what is $982 worth to you? It’s probably
less than the sales staff spent to win that sale. Are you willing to gamble that future exchange rates will be
favorable to you, when $982 would remove this risk?