NIVESHAK

THE INVESTOR VOLUME 3 ISSUE 5 May 2010

FIN-Q PG.26 Financial inclusion through m- banking Pg.23

FROM EDITOR’S DESK
Dear Niveshaks
Have we ever given a thought on why do we, “The investors”, invest in vari-
Niveshak ous financial instruments? Well yes. Most of us know the obvious reasons of sav-
ings, returns and reducing tax liabilities; which in turn garner our financial health.
Volume III
One financial instrument which has gained popularity off late is ULIP (Unit linked
ISSUE 5 Insurance Plan). But the recent turmoil in the insurance industry caused due to the
May 2010 turf war between market regulator SEBI and insurance regulator IRDA has raised
a question before us that whether ULIPs are good or not for our financial health
Faculty Mentor as well as for the whole insurance industry per se. While we are familiar with the
Prof. S.S Sarkar benefits, some of the facts about it do throw light on the other side of the coin.
Many investors complain about ‘misselling’ and report that insurance agents
guide them towards ULIPs. However, this is not true. Agents’ behavior is driven by
EDITORIAL TEAM the commissions paid on various products. In order to avoid compliance with SEBI’s
low cost and high transparency regime, insurers dress up market linked products
as insurance products by adding a small percentage of insurance to it. An article in
Editor this issue delves deep into this topic to provide you the finer details and intricacies of
Bhavit Sharma this bone of contention between the two regulatory bodies. Whether the govern-
ment will come to the rescue of ULIP victims or whether the powerful insurance
industry will succeed in maintaining the status quo remains to be seen. However,
Sub-Editors regardless of what happens, I see the recent events as a great step forward for the
Durgesh Nandini Mohanty Indian investor.
Hitesh Gulati Our Sensex and other major global indices took a hit few days back when
Sumit Kedia Greece’s economic crisis sent shivers of apprehension across the globe over con-
Tanvi Arora cern that it could spread like wildfire through Europe and beyond. This crisis makes
Upasna Agarwal us ponder over a point that whether fiscal deficits do matter or not given the fact
that India has run fiscal deficits of up to 10% of GDP for three decades, yet has
enjoyed record growth. On the other hand, European countries that ran high fis-
Designers cal deficits in good times, and went for even bigger deficits to provide a Keynesian
Bhavya Aggarwal stimulus out of the Great Recession — Greece, Portugal, Spain, Ireland and Italy —
Swarnabha Mukherjee are in serious trouble. Our cover story gives a comprehensive coverage of this crisis
including its origin, spread, debt restructuring and the impact on the euro.
For the current issue, I, on behalf of the whole team Niveshak, welcome Mr.
Rajeev Karwal, CEO and Founder Director of the venture catalyst firm “Milagrow”.
Known for his strategic abilities and excellent execution, Mr. Rajeev has worked on
startups, turnarounds and more in a career spanning over 25 years. His contribu-
tion to the start-ups of Onida, LG and Reliance Retail has given the world a peek
All images, design and artwork into his scale-up and start-up expertise. Winner of India’s Young Manager Trophy
are copyright of 2001, awarded by Confederation of Indian Industry, he has many such laurels un-
IIM Shillong Finance Club der his belt. In the interview with Team Niveshak, he talks of how did he come up
with the idea, philosophy and mission of Milagrow. To know more about his views
on Micro, small and medium enterprises and their roles in the economic growth of
©Finance Club a country, turn to “HeSpeakth” section.
Indian Institute of Management
Shillong Stay invested with us!!
Bhavit Sharma
www.iims-niveshak.com
(Editor-Niveshak)

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
CONTENTS
Niveshak Times
04 The Quarter That Was
He Speaketh
15 Mr. Rajeev Karwal

Cover Story
18 The Greece Debt Crisis
Finsight
Faltering Acropolis
23 Financial Inclusion
Through M - Banking

finlounge
26 Fin-Q

Article of the Month

12 SEBI - IRDA Tussle
 Niveshak Times www.iims-niveshak.com

The Quarter That Was

Banking
Upasna agarwal
Team Niveshak

After grappling with the impact of recession the ber 2009 to 16.9% in March 2010. Banks have also in-
Indian banking sector has recovered unscathed. The creased their deposit rates signaling a reversal in the
results of the current quarter have been declared trend of reduction in deposit rates
and there has been marked improvement in perfor- According to RBI, “banks investment in SLR securi-
mance compared to the previous quarter. ties increased (y-o-y) by 18.5% as of Mar 26 (PY: 20.0%).
The credit growth rate has picked up and is The effective SLR percentage maintained is around
expected to remain strong with improved economic 30.62% of NDTL, well above the statutory requirement
conditions and better consumer confidence. Accord- of 25%.”
ing to the RBI data, the average credit deposit that However banks have to take a look at their asset
hovered about 69.6% in the previous quarter shot up quality. According to Crisil banks will find it difficult to
to 72.2% in the month of March 2010. comply with the minimum requirements of 70% provi-
Amongst the private sector banks Net profits of sion coverage ratio.
IndusInd Bank, Axis Bank, HDFC Bank and ICICI Bank The fact that
grew at 93 per cent, 32 per banking sector
cent, 32 per cent and 35 per has outperformed
cent respectively showing the entire market
commendable performance. is clear from the
IndusInd bank is being tout- fact that while
ed as the turnaround story CNX Bank Index
in the new private banking has doubled from
space. Net interest margins its April 2009
have improved substantially level, Nifty has
for most of the banks as risen by half in
banks have cut down their reliance on bulk depos- the same period. Banking sector was the worst affected
its. Low costs deposits have increased substantially by the economic downturn and has in turn be a direct
for most of the banks which has resulted in higher beneficiary of the improvement in the market. However
profits for the sector. ICICI Bank, HDFC Bank, Corpo- whether the sector will be able to revisit its previous
ration Bank, IndusInd Bank, Axis Bank all saw performance is a question. Though most analysts feel
higher low costs deposits. that with credit expansion and improved economy the
As stated earlier sector will continue to affect the banking sector posi-
credit growth has tively there are some who feel that other economic fac-
improved. Non tors may not leave the picture so rosy. Restructured as-
food credit sets might turn into NPAs while increasing inflation may
also improved affect bond yields directly impacting treasury income.
steadily in the There have been large slippages in restructured loans
second half lately and hence need to be considered as an important
of the year factor while considering the sector’s profitability. In to-
recovering tality, the sector needs to be watched, for as they say,
from 10.3% in Octo- “The buck stops here”.

4 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

 Niveshak Times www.iims-niveshak.com

The Quarter That Was

Information Technology
Sumit kedia
Team Niveshak

The IT sector was one of the worst recession af-

fected Indian sectors owing to the huge dependency
on the US markets. As per NASSCOM, the IT-BPO sec-
tor revenue contributes 6.1% to GDP as compared to
1% in 2000 signifying the importance of the sector.
The performance and the margins of all the compa-
nies of the industry was reeling and the share prices
were heading south. But in the quarter ending on
March 31 2010, all the top and mid tier IT firms have
posted gains and have been either near or above the
fact that it has sustained for quite sometime is rais-
market expectations. The BSE IT index has outper-
ing concerns for all the IT players. Every 1% appreci-
formed the SENSEX over the past quarter by gaining
ation decreases the net profit by 1.6% on an average
around 7% as compared to 5.2%.
for an IT firm (Source: livemint.com) thus huge focus
The revenue growth in each of the top tier needs to be given on managing profitability through
firms has been quite good in the past quarter. The cost control and efficient handling.
increased revenue has resulted from a healthy
The guidance for 2010-11 by the firms has been
growth across all industry segments and especially
pretty cautious owing to the higher wages, signifi-
in the pickup of software and PC sales. One major
cant rupee appreciation, consolidation and the tax
differentiating factor from previous quarter was the
rates. But with government launching various new
high rate of employee addition and the same being
e-govt plans like UIADI program and also the sig-
projected for coming quarters, which on an average
nificant scope in the banking and educational sector
is going to be around 15-20% clearly signaling that
for computerization along with a major makeover
recovery is well on track. No doubts the total size
of railways being due in the recent times, huge IT
of the Indian IT market is slated to increased from
projects galore in the domestic space. Companies
$15.4bn in 2010 to $28.1bn by 2014.
need to focus on strengthening their base, reduc-
The current P/E ratio of the IT industry is ing the high attrition rates (huge wage hikes have
around 20.5 with an upward bias and with all top been promised in all quarterly results) and efficient
players trading at a ratio above it shows that the implementation of these projects.
mid caps are lagging behind. In terms of financial
performance the mid caps are touted to under-per-
form in the near term, to a recent report on IT sector
by Credit Susisse, mid cap stocks have outperformed
large caps in high growth periods, something similar
to the recovery being seen now. So, some mid caps
may reap in benefits but the quarterly results show
them still trading well below the industry average
as shown.
However, a major macroeconomic concern for
the industry has been the sharp rupee appreciation
which has been impinging on the margins and the

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

 Niveshak Times www.iims-niveshak.com

The Quarter That Was

Oil and Gas

Bhavit sharma
Team Niveshak
The oil and gas industry has been influential in earnings will continue over the near term. Also, the
fuelling the rapid growth of the Indian economy. India government’s focus on controlling the deficit and infla-
has total reserves of 775 million metric tonnes (MT) of tion could result in a low level of subsidy support. Kirit
crude oil and 1074 billion cubic metres (BCM) of natural Parikh committee’s recommendations provide a good
gas as on April 1, 2009, as per the Ministry of Petro- framework for oil-pricing reform. However, implement-
leum. ing them will involve raising the consumer prices of all
Looking at the production figures, we see that the the sensitive products – petrol, diesel, kerosene and LPG
refinery capacity is expected to reach 240.96 MMTPA (liquefied petroleum gas). Thus the government is likely
by the end of the Eleventh Plan. Crude oil production to find it difficult to hike prices given the elections in
during 2009-10 was 33.68 MT, compared to 33.50 MT in key states in 2011. The increase in petrol and diesel
2008-09. Refinery production in terms of crude through- prices in the budget has been widely criticized, with
put was 160.03 MT in 2009-10. The production of natural calls for the rises to be reversed.
gas went up to 47.57 billion cubic metres tonnes (BCM)
in 2009-10 from 32.84 BCM in 2008-09.
The last two months has seen the price of oil stay-
ing steadily in the high $80s, and though this is a long
way still from the $147 peak we experienced in 2008,
it is a clear sign of the market stabilizing as the world
economy improves.
Last quarter saw majority of Oil and Gas compa-
nies coming up with positive quarterly results. Energy
major Reliance Industries posted a 30% rise in quarter-
ly profit but lagged estimates as lower-than-expected
refining margins offset gains from higher gas output
off India’s east coast. Reliance, with interests in petro-
chemicals, refining, oil and gas exploration, and retail,
posted January-March net profit of Rs 4,710 crore ($1.1
billion) versus Rs 3,630 crore a year earlier. Margins at
Reliance’s flagship refining business stood at $7.5 a bar-
rel for the quarter, but lagged market estimates of $8.3
a barrel. Markets expect margins to rise as the global
economy recovers. The outcome of a long-running gas
dispute with Reliance Natural, led by Mukesh’s younger
brother Anil, will also have positive effect on the future
expected earnings of RIL. RNRL losing a legal battle in
the Supreme Court with RIL for cheap gas, made RNRL
share price fall down by 25%.
In addition to this, Union Budget has reduced the
chances of the petroleum-pricing issue being resolved.
Thus, the uncertainty about downstream companies’

6 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

 Niveshak Times
The Quarter That Was
FMCG
Indian FMCG sector:
The FMCG sector, as known, is a defensive sec-
tor. In times of a Bull market it does not match the
returns of the market, but in a bearish market it has
been found to outperform the market as is evident
from the recent recession. The demand for products
has remained throughout the year and with the per
capita income still low, there is potential for further
increases corresponding to the increases in the GDP.
The FMCG sector performance is collectively in-
dicated by the BSE FMCG index which comprises of
twelve firms. FMCG sector in India is growing at a
sales growth of 20%. The market potential for FMCG
in India is in excess of $25 billion at present and is
expected to nearly double in the next 5 to 7 years.
The major sub-sectors in the FMCG category are:
• Food & Beverages
• Household care
• Personal care
FY10 outlook for FMCG companies:
The low penetration of products and low per
capita consumption in India makes this sector very
attractive. Companies targeting to increase their
level of penetration have focused on launching
Low Unit Packs (LUP) and Popularly Priced Products
(PPP). These which come in at Rs. 2, Rs. 5 and Rs. 10
have helped the companies’ growth in their top line.
Also with the food price inflation easing, this would
only affect the companies positively. With players
like Nestle, HUL and Dabur who are the major con-
sumers of Milk, wheat and sugar, the decreasing
prices would help them boost their bottom lines. But
however with competition increasing in every sub-
sector, companies might be forced to increase their
advertising spends causing downside pressure on
the bottom-line. As of now companies are mainly fo-
cused on volume based growth but price led growth
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
www.iims-niveshak.com
Pradeep Sekar
IIM Shillong
can be seen after about three quarters.
Company Focus – Nestle India Ltd.
The sales growth of Nestle and similar compa-
nies are mainly focused on volume growth to drive
their sales revenues. It has the leadership position
in baby foods, instant noodles and instant coffee.
Its major advantage has been the association that
it has with its parent company Nestle S.A. With the
parent company spending a lot on Research & De-
velopment, Nestle India has been able to tap into
this R&D support. It also can launch products of its
parent company as they become attractive for the
Indian masses.
Although it is the market leader in the noo-
dles category, GSK & HUL have recently entered the
noodles market which will lead to margin pressure.
Nestle has a good product portfolio in all its seg-
ments with sufficient market share in each of them.
With a strong distribution network in India and its
trademark milk district model for milk supply, it is
best poised for future growth as more people enter
the middle class category and increasing incomes.
Innovative products and new product launches hold
the key for future growth.
7
 Niveshak Times
The Quarter That Was
Real Estate
Tanvi Arora
Team Niveshak
The real estate sector plays a major role in the
Indian economy. The real estate sector is second
only to agriculture in terms of employment genera-
tion and contributes heavily towards the gross do-
mestic product (GDP). The housing sector contrib-
utes to almost 5% of the country’s GDP.
The last quarter of FY’10 did not bring many
smiles for this sector. Barring a few, the stock pric-
es for major players like DLF and Unitech Ltd. etc
plunged down. The realty index also slid down by
15% from 3855 points on Sensex from the last quar-
ter. As compared to last year, this result is better
because Q4 of FY’09 saw a downward movement of
around 31%.
The major reason for this year’s decrease could
be the wheeling asset prices. Last year, Reserve
Bank of India had relaxed provisioning norms for
banks, thus allowing the restructuring of loans. As
against the expectation, second restructuring may
not be possible due to soaring asset prices. This may
prompt developers to clear their inventory through
reduced price. From a banker’s perspective, repeat-
8 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010
www.iims-niveshak.com
ed restructuring is not the remedy - the only way left
is to make properties affordable and saleable.
The P/E reflected the similar trend as the in-
dex movement on SENSEX. The quarter ended at P/E
value of 41.39. As per CREDAI reports, 60% of realty
development in India is through unauthorized chan-
nels. This has been reflected in the price movements
in last few months.
Rationalization and standardization of stamp
duty structure continues to be a key issue for the
home buyers. Further, putting in place an exclusive
Realty Regulator can also bring in better transpar-
ency in this sector.
Recently, some relief was brought in by the
budget for 2010-2011 which has some major implica-
tions concerning realty sector. Service tax on con-
struction of residential complexes and Commercial
& Industrial Construction Services would now make
Builders and Developers liable for service tax. Also,
levying service tax on renting was a sign of positiv-
ism for developers. Another move by government in
exempting transmission of electricity would protect
the Realty Developers operating in the commercial
space, from an overzealous Service Tax Department.
Also, the cost of construction for the Sector might
go up due to the increase in the central excise
duty on cement, clinker and other materials to 10%
apart from the increase in the fuel prices. The ma-
jor change would come across by the increase in
the MAT rate to 18%, resulting in an overall effective
rate of 19.93% on the book profits, after considering
the reduction in the surcharge rate to 7.5%, effective
from FY 2010-11, as against the current overall effec-
tive rate of only 16.995%., resulting in a rather steep
increase by 2.93%.
With government taking measures, hoping for
some better performance in this sector in next quar-
ter!
 Niveshak Times
The Quarter That Was
Telecom
The telecom sector is one of the sectors of prime
importance for the socio economic development of the
nation. With over 430 million connections is the third
largest in the world. With a mammoth untapped con-
sumer potential, this sector is undoubtedly becoming
one of the most attractive.
The Union Budget had its own bag of news for
the telecom sector. It is believed that the union Budget
2010-11 neglected the telecom industry’s special de-
mands. Telecom companies were looking at a rational-
ization of tax and levies, uniform license fee of one per
cent of the AGR. Telcos wanted a re-look at direct tax,
tax holidays and section 81 (A), a re-look at licenses
and indirect taxes. As far as infrastructure products
are concerned, operators were hoping for a boost in
telecom infrastructure and wanted telecom to be in-
cluded as part of infrastructure, so that all tax holidays
applicable to infrastructure are applicable to telecom.
The players in the telecom industry wanted the Finance
Minister to remove bank guarantees for telecom
Despite these slight disappointments, the sector
welcomed several initiatives by the government that
will assist the country to see more investments and im-
provement in GDP growth. The reduction in Corporate
Surcharge would provide a minor relief, but at the same
time the increase in MAT from 15% to 18% was a major
are of concern. The increase in Central excise duty from
8% to 10% is another area of concern and would lead to
an increase in cost of service. The continuation of ex-
emption from basic, CVD and special additional duties
(SAD) granted to their parts, components and accesso-
ries of mobile phones was accepted with optimism and
it was opined that it would help towards penetration of
affordable mobile service especially to rural areas.
One of the most landmark events in the previous
quarter was the auction of the 3G spectrum. 3G has
the scale to drive down the cost of a wide range of de-
vices – from mobile phones, data cards and embedded
laptops today, to wireless consumer electronics devices
in the future. The government of India had tremendous
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
www.iims-niveshak.com
Durgesh nandini Mohanty
Team Niveshak
expectations from these auctions. As per the data col-
lected after fifth round of 3G auctioning, the total earn-
ing of the government has reached Rs. 62,253.83 crore.
This revenue along with the government’s other ambi-
tious disinvestment plans is to be used to cut down on
the fiscal deficit of the economy.
Considering the big shots in the industry, Anil
Ambani-led Reliance Communications (RComm) has wit-
nessed 20% decline in its net profit to Rs1,220 crore for
the quarter ended Match 31, 2010, compared with Rs
1,516 crore in same quarter last year. Profit for the year-
ended March 31, 2010, dipped 23% to Rs 4,655 crore
compared with Rs 6,045 crore, the previous year. How-
ever, on a sequential basis, the company showed an
improvement of 10% compared with a profit of Rs 1,108
crore in December 2009 quarter.
Coming next to Bharti Airtel, it consolidated rev-
enues at Rs.41829 Crs for FY 10 and at Rs.10739 Crs for
the quarter. The company added a 34 million subscribers
during the year and had 130.69 mn overall subscribers
at the end of FY 2010. There was over 35% increase in
the mobile subscriber base over the year. The company
had an EPS of Rs.24.13 for FY 2010 and has declared a
final dividend of 20%. During the year Bharti Airtel ac-
quired 70% stake in Warid Telecom of Bangladesh and
the entire African assets of Zain Telecom, thus strength-
ening its international presence
9
 Niveshak Times www.iims-niveshak.com

The Quarter That Was

Power
Hitesh Gulati
Team Niveshak

Current Power Scenario veloper. In addition, considering the high financial stake
involved through private investments, delay in pay-
Generation
ments has put severe pressure on developers/suppliers
India has the fifth largest generation capacity in to meet the performance commitments.
the world with an installed capacity of 152 GW, which is
It is evident that the deficit in power availability
about 4 percent of global power generation. The Indian
in India is a significant impediment to the smooth de-
government has set ambitious goals in the 11th plan
velopment of the economy. In this context, bridging the
for power sector owing to which the power sector is
gap in demand and supply has become critical and con-
poised for significant expansion.
sequently, large projects are being undertaken in differ-
Transmission ent segments of the sector; Generation, Transmission
The current installed transmission capacity is only and Distribution.
13 percent of the total installed generation capacity. Leading Power Corporations
The Ministry of Power plans to establish an integrated Company EPS P/E Industry P/E
National Power Grid in the country by 2012 with close (TTM) (TTM) (TTM)
to 200,000 MW generation capacities and 37,700 MW of NTPC 10.7 14.93 27.03
inter-regional power transfer capacity. Power Grid
5.01 21.57 24.11
Corporation
Distribution Neyveli
6.10 25.0 27.03
While some progress has been made at reduc- Lignite
ing the Transmission and Distribution (T&D) losses, Tata Power 47.83 28.36 27.03
these still remain substantially higher than the global Reliance
1.14 127.68 27.03
benchmarks, at approximately 33%. Reforms have been Power
undertaken through unbundling the State Electricity BHEL 76.58 31.05 31.24
Boards into separate Generation, Transmission and Dis- Major Power Financing Institutions
tribution units and privatization of power distribution
has been initiated either through the outright privatiza- Company EPS P/E Industry P/E
tion or the franchisee route. (TTM) (TTM) (TTM)
Power Finance
20.52 14.18 14.85
Industry Brief Corporation
Rapid build up of the generation capacity is be- Rural Electrification
18.52 14.79 14.85
Corporation
ing aided by setting up of Ultra Mega Power Projects
(UMPPs) each of which is 4000 MW. However, the execu- Investment Plans
tion of the Ultra
The corporate sector has been gearing to grab the
Mega Power Projects (UMPP) is a significant chal- opportunities in the power sector.
lenge as India has not witnessed an execution of such
Few significant examples are:
a large scale power project before. Furthermore, with
• Reliance Power plans to invest $12.5bn in the
each UMPP costing above INR 16,000 crore, financing
next five years to add 15,000 MW of capacity.
such a large project is a critical constraint for any de-

10 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

 Niveshak Times www.iims-niveshak.com

The Quarter That Was

• Videocon plans to invest $5.21bn in setting up Equipment Shortage

5,000MW thermal power projects Equipment shortages have been a significant rea-
• Lanco plans to invest $3.75bn in setting up son for India missing its capacity addition targets for the
3000MW hydro- -power project by 2015 10th 5 year plan. While the shortage has been primarily
in the core components of Boilers, Turbines and Genera-
• Essar plans to invest $1bn in setting up a
tors, there has been lack of adequate supply of Balance
1200MW of power project
of Plant (BOP) equipment as well.
• Bharat Heavy Electricals (BHEL) in collabora-
tion with Bharat Electronics plans to invest $1.23bn in
setting up an integrated photovoltaic facility

Challenges and Risks

As the Indian power sector is embarking on in-
creasing the generation and transmission capacities,
key challenges lie ahead which also resulted the his-
torical underperformance.

Project Execution
India has historically failed to meet its power

sector targets by a significant margin and with tre-

mendous opportunities ahead; the power sector con-
tinues to be affected by the shortfall both on genera-
tion as well as transmission side.

Fuel Availability
While additional gas supply from KG Basin has
eased shortage to a limited extend, supply constraints
for domestic coal remain and are expected to continue
going forward. Consequently, public and private sec-
tor entities have embarked upon imported coal as a
means to bridge the deficit.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 11

 SEB RDA Tussle
Ankur Saxena & Shabbir H. Rahim
NITIE, Mumbai
Last month Securities and Ex- mutual fund. The ULIPs provide a
This is the ultimate change Board of India (SEBI) barred very flexible investment and switch-
clash of titans. With 14 insurance companies from sell- ing options between the allocation
the giant regulatory ing, launching or advertising new of investment amount to equity and
bodies like SEBI and Unit-Linked Insurance Products debt.
(ULIPs), while allowing schemes in But ULIPs have been in news
IRDA engaged in
existence before April 9 to continue, for all the wrong reasons for a very
a tussle that is as- till they obtain the requisite certifi-
AoM

long time because of miss-selling

suming alarming cate of registration from SEBI. The (promising of returns, selling it as
proportions in the order has rubbed another regula- a short term investment) by agents
national media, the tory authority Insurance Regulatory especially because of the fact that
and Development Authority (IRDA), agents are not receiving commission
business of fourteen which has the sole dominion over on the sale of mutual fund products.
Life Insurance com- insurance companies, in a wrong Also, with a higher first year charges
panies who make way. IRDA rejected the initial order in range of 15-20%, an investor has
profits by selling of banning all ULIPs and ordered in- to continue in the scheme for a lon-
stead the 14 insurance companies to ger time to cover for higher initial
ULIPs is at stake. The
do the business as usual. With the charges. A user cannot opt out of a
Finance Ministry has intervention of finance ministry IRDA ULIP even if the scheme performs
intervened to make accepted the toned down version badly because it has an insurance
peace and the mat- from SEBI which restricts only offer- component to it which will be lost
ter awaits the verdict ing and launching of new ULIPs. Both in case of discontinuation. Over that
the regulatory authorities have now the portfolio disclosures are also not
of law. accepted Ministry of Finance pro- frequent making it non-transparent.
posal to maintain status quo before
Unit Linked busi- Non-Linked Busi-
the SEBI order and to obtain a legal ness (%) ness (%)
binding mandate from an appropri- 2005- 2006- 2007- 2005- 2006- 2007-
06 07 08 06 07 08
ate court of law.
Private 82.3 88.75 90.33 17.70 11.25 9.67
ULIPs LIC 29.76 46.31 62.31 70.24 53.69 37.69
Ind. 41.77 56.91 70.30 58.23 43.09 29.70
It is a financial product that of-
fers life insurance as well as an in- The fourteen Life insurance
vestment like a mutual fund, which companies involved in the contro-
issue units to the investors and pro- versy are SBI Life, ICICI Prudential,
vide exit at net asset value of the un- Tata AIG, Aegon Religare Life, Aviva
derlying portfolio. Launched in 2001, Life, Bajaj Allianz, Bharti AXA, Birla
they are sold aggressively by most Sunlife, HDFC Standard Life, ING Vy-
insurers. In fact, it accounts for more sya Life, Kotak Mahindra Old Mutual
than 85% of the first year business Life, Max New York Life, Metlife In-
premium in the industry. The popu- dia and Reliance Life. The pie chart
larity of this financial instrument can shows the market share of the insur-
be measured by the rapid growth ance companies for ULIPs.
in business generated by ULIPs as
Different perspectives
shown in table. The products are
heavily skewed on investment front 1) SEBI – The SEBI act requires
as only 5% of the premium amount that all the products with exposure
goes for insurance cover while the to securities market come under its
rest is invested in securities like a jurisdiction. It views ULIP as a hybrid

12 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010


product serving dual need of insurance and invest-
i) The approval/registration from one regula-
tory authority does not exempt the entity from com-
plying with other applicable laws administered by
relevant regulators.
ii) Not all the units of mutual funds are trans-
ferable. “In the case of open ended mutual fund
schemes the investor subscribes to and redeems
units from the mutual fund directly at prevailing
NAV. Therefore, the units of an open ended mutual
fund scheme are not transferable”.
The SEBI-IRDA tussle has left insurance com-
panies in a catch-22 situation as the orders issued
by two regulators are of exact opposite nature. One

AoM
ment. Now, since it has an investment component, solution with the insurance companies is to appeal
it is similar to mutual fund and should be regulated against the orders in court or other appropriate fo-
and registered with the market regulator. ULIP has rum like Securities Appellate Tribunal (SAT) in case
exposure to the securities market as there is invest- of SEBI.
ment risk associated with security investment which Also, IRDA was concerned that if the order of
is entirely borne by the investor. SEBI is given effect to, it will cause the stoppage of
2) IRDA - According to IRDA, insurance law all renewals of insurance policies already invested
permits the insurance companies to peg investment by the insuring public, may result in the forced pre-
component with the insurance and LIC has been do- mature surrender of insurance policies causing sub-
ing it for years. Also, it says that since insurance stantial loss to the policyholder and to the insurers.
companies are registered with it and have approval, The effective stoppage of the sale of the ULIPs will
the companies need to follow directive given by cause a near complete drying up of the new revenue
their regulator IRDA. flows to the insurance companies which could dis-
3) Insurance companies in their defense ap- rupt the normal operations of insurance companies
pealed: like payment of benefits on maturity, on death and
i) They have followed the due procedures in on other admissible claims, exposing the policyhold-
obtaining requisite permission from IRDA. er and the general public to irrecoverable financial
loss. The financial position of the insurers will be
ii) Units issued under ULIPs are not freely seriously risked which in turn could destabilize the
transferable or have transferability for limited pur- market, and upsetting financial stability.
pose; they are not units of mutual funds.
4) General Public – The duel has left the general
iii) Unlike a mutual fund, a ULIP is not estab- public confused regarding the state of their policy.
lished in the form of a trust. “ As required under Is It valid or not? Do they have to pay premiums or
the Insurance Act the fund is held by the insurance not? People started withdrawing money from their
company itself. Support features such as fund man- ULIP plans therefore suffering loss on that account,
agement charges, fund management etc, are alone all because of the hysteria created by the public spar
not sufficient criteria to transform a life insurance between two regulators. Had this duel continued for
product into a mutual fund scheme. A ULIP is an long, the stability of the insurance companies would
insurance contract between an insurance company have been jeopardized owing to withdrawal of mon-
and a insurance cover seeker falling within the am- ey by investors.
bit of life insurance business.
When elephants fight, the grass takes the worst
Few of the appeals were overruled by SEBI cit- damage. In the present case, insurance companies,
ing that

When elephants fight, the grass takes the worst damage. Here, insurance companies, their cus-
tomers and the markets have been roped in as unwilling extras cast as flattened flora.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 13

 their customers and the markets have been roped
in as unwilling extras cast as flattened flora. But the
better sense prevailed and with interference of fi-
nance ministry the process to break the strangle-
hold is on the right course with the best interest of
market, insurance companies and public at its core. FIN-Q Solutions
There is nothing unfortunate about this devel-
opment. This can contribute to betterment of finan-
cial markets and regulations in the country. This will
April 2010
present a case in Indian landscape where an inde-
pendent regulator would be willing and able to carry
out the mission laid down in its statute, without 1. 12%
worrying about whether its actions would offend an-
other regulator. Its primary loyalty should be to its 2. StreetTRACKS Gold Shares,
AoM

regulatory mandate and not to any supposed con- iShares Silver Trust
viviality of regulators. Equally, if a regulator intrudes
on the mandate of another, the other regulator or its
regulatees should have the right and no compunc- 3. UK
tions in challenging it in a court of law.
With the focus on the ULIPs, hopefully, selling 4. Money Laundering
of ULIPs will become more stringent and will be sold
to investors after providing complete information
about the cost structure and risk associated with it
5. Indian Overseas bank
as it is with mutual funds regulated by SEBI. ULIPs
definitely represent an overlap between the turfs 6. Centurion Bank
supervised by IRDA and SEBI. Therefore, a solution
in all probability will be one that will be acceptable
7. John Bogle
to both involved regulators. If so happens then ULIP
will become more flexible, cost-effective and trans-
parent. 8. Merrill Lynch
The duel seems on course for a congenial set-
tlement between the parties involved but the ripples 9. Greece
it created in markets for targeting hugely popular in-
vestment instrument cannot be neglected. High Lev-
el committee on Capital Markets, the coordinating
10. 25 basis points
body of all financial sector regulators should have
sorted out the disagreement between the insurance
regulator IRDA and markets regulator SEBI before the
fight was brought to public domain. Solution to this
problem should encompass building a process road-
map to settle dispute in future between regulators
which is bound to happen in an evolving financial
market like India’s.

A user cannot opt out of a

ULIP even if the scheme
performs badly because it has
an insurance component to it
which will be lost in case of
discontinuation.

14 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

 Cover Story
Rajeev Karwal
CEO, Milagrow Business & Solutions
Founder & CEO of Milagrow Business & Knowledge Solutions, Mr. Rajeev Karwal, has a
career spanning over 25 years working across startups and turnarounds like Electrolux, Sam-
sung, LG, Onida. His passion for excellence and impeccable track record has fetched him many
titles and awards. He is also considered one of the greatest brand builders in India.

Mr. Karwal’s mission is to make Milagrow ‘the destination for Growth Seeking Business’, and
to partner with these aspiring enterprises as a Venture Catalyst to build best-in-class manage-

AoM
rial and organizational capabilities in them.

Niveshak: Milagrow Businesses Mr. Karwal: There comes a time in

partners MSMEs in various ways your life when you want to do some- Rajeev Karwal, in
by consulting and institutional- thing worthwhile. That calling came this interview with,
izing the solutions. What role, in to me and at that point in time I Team Niveshak

your opinion, do MSMEs play in
the economic growth of a coun-
He
Perspective
decided that I must do something
talks about his jour-
which can change the society and
ney till the time he

try?
Mr. Karwal: MSMEs are the most im-
portant segment of the business
sector of the economy. They con-
tribute almost 45% of the industrial
output of the country. They have
always grown at a higher rate than
Speaketh
can give me an opportunity to create
stories for my grandchildren. Also, I founded Milagrow
wanted to earn enough money to be which has been
able to do a good job of whatever
playing a significant
I am doing and probably, reinvest
back in my business. I did not want role in the devel-
to depend on anybody else’s money opment of Indian
and as can be seen we at Milagrow MSMEs. His views

FinGyaan
the GDP of last 3or 4 decades. And if are a self sufficient organization. We
you were to look at them a bit dif- on holistic financial
don’t have a single penny of anyone
ferently, they form the base of the else. All our people are on advanced inclusion and UIDAI
pyramid of the corporate ladder and salary. We don’t have to pay any (Aadhar) are what
that is what probably Dr. Prahalad one. In fact, they have to pay back this interview has
talked about. If inclusive growth is to the company. According to me,
to happen in the country, it can only also to offer.”
that philosophy of doing something
happen by involving these MSMEs. If for the society by doing social well is
you were to add traders and farmers at the heart of the company. We fol-
as business entities, which we nor-
FinSight
low this 100 percent. And this is why
mally don’t do, then 99% of the en- I want the people joining Milagrow
terprises in the country are MSMEs. to believe in the spirit, the value
There is so much of change happen- system and the mission of Milagrow.
ing in our economy and ways of do- It is almost a kind of missionary we
ing business that if they are not en- are running. And I think that is what
abled and if they are not protected in Milagrow is all about.
some way (protection in the sense of
enablement and then making themAlso, I think, today in India funding
is not as difficult to get as it was a
strong enough to withstand changes
couple of years ago. But what is very
around them) then the country will
have lot of problem indeed. difficult is to ensure that the people
of an organization, who have not
Niveshak: In your journey of seen what a world class is, are able
working with all the big names to see that. And consulting organi-
like Electrolux, Samsung etc., zations, more often than not, fail in
how did “Milagrow” happen? making any impact on their clients.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 15

 Because they give the strategies, they give the ad-
vice, point out their mistakes and move on but no-
body hand holds them. So when we called ourselves
venture catalyst, we felt that we will hand hold them
and catalyze their ventures into the new growth or-
bit and that is the difference between Milagrow and
anybody else. There will always be one or two small
organizations that would be able to do the same but
on a corporatized level there is no one like Milagrow.
And it is a very difficult model to replicate because
you are actually spending your time probably chas-
ing smaller individual opportunities and that is why
most of the companies and consulting organizations
don’t concentrate on smaller organizations. They
would rather say putting same amount of efforts
somewhere else would bring them much greater
benefits where as our only focus is only on MSME.
Also, what they cannot give individually, probably,
by serving them collectively and exhaustively with
enabling services of IT, finance, marketing, HR, prod-
uct development, lean manufacturing and also pro-
He Speaketh
viding them the solution of no cost or lowest cost
across the spectrum, across every nook and corner
of the country we would be able to make it. It is
intent, it is difficult but we are well on to our path.
Niveshak: The RBI and the Finance Ministry are
working overtime for a holistic Financial Inclu-
sion. What do you have to say towards all these
efforts and the role that MFI’s and SME’s will
play in the same?
Mr. Karwal: If we look at MFIs, there are lots of pre-
tenders of social change. But behind, they are very
smart financial brains working on very high returns
which otherwise they can not generate from oth-
er projects. There is transparency and cleanliness
which should be there in MFIs is missing in our
country. So the large ones are exploiting and the
smaller ones want to become big to exploit. Apart
from the fact that they may be dealing with NGOs,
they themselves are not NGOs to commercialize.
Probably they are catering and exploiting the un-
banked or the unorganized sector. With RBI, the new
policy in the next five year plan will definitely show
bank branches and ATMs increasing, new initiatives
being taken. When it comes to public sector bank, I
feel that there will be much more honest approach
even as they themselves want to be self sufficient,
Consulting organizations, more often than not, fail in making any impact on their clients
because they give the strategies, they give the advice, point out their client’s mistakes and move
on but never hand holds them.
16 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010
profit making body. But yet Government by nature
when they function, they function much more hon-
estly because of their inherent nature. So I think
there would be a good change but I don’t expect
private sector to do a better job than government
companies.
Niveshak: Planning commission of India has
been working on the project Aadhar to issue a
unique identification number (UID) that can be
verified and authenticated in an online, cost-
effective manner. How do you think the dream
project of UIDAI (Aadhar) will help in the cause
(of financial inclusion)?
Mr. Karwal: I don’t think that you can relate these two
things. I think it is the action after the UID that needs
to be taken for financial inclusion. Just because you
are a pan-card holder or a passport holder, finance
doesn’t come to you. You have to be creditworthy
to avail those loans. There have been lots of initia-
tives in past like kisaan card, artisans’ card etc, but
I don’t think it has made much of a difference.
Niveshak: Initial capital investment is a major
problem for people starting new venture. From
the entrepreneur’s point of view what are the
options available to them to get the lowest
possible cost of capital?
Mr. Karwal: There are lots of options which govern-
ment have come out with but most of the times
people are not aware of them. In the last two years,
we ourselves have conducted the survey to test the
efficacy of government policies. Awareness itself is a
big issue. Now whether it is DC’s office under MSME
ministry or some scheme by NSIC or by state govern-
ment, people are not aware. Also, they are some-
times not equipped to do the documentation part.
I think if that awareness and enablement is created
then these schemes maybe able to be advantageous
for its users.
Niveshak: What are the other major barriers in
the growth of MSMEs?
Mr. Karwal: Marketing, competent people, technology
availability and infrastructure are a big issue. But
primarily if finance is tackled along with marketing
and HR, the people would be able to get good pro-
cess and technology. Government must do a lot from
this point of view so that finance reaches out to peo-
ple in adequate and timely manner. In whatever way
government can help these people to sufficiently
market themselves, it should be done. Employability
is definitely a major issue. Skill building and voca-
tional training is a big challenge which I don’t think
we as a nation have cracked it. And it continues to
be disorganized.
by the time they opened their eyes we were all over
India. We worked very hard and we worked at a very
fast pace. The team which was built was competent
and we took good care of them, stayed with us. It
provided us entrepreneurial zeal in a professional
and large organization (a difficult thing to do). Even
at Milagrow I am trying to empower and motivate
the people to take their business verticals in their
own hands and encourage them to take the risks.

Niveshak: Over the years the mentality of people
has changed towards entrepreneurship, gener-
ally for MBA students. What is your take on
that?
Mr. Karwal: Through the financial options available in
form of venture capitalists, private equity and also
the facilities of incubation centres etc, the govern-
ment of India wants to encourage the young stu-
dents. There was a time when government was the
major employer and private sector also did not pay
Niveshak: Any message for our readers?
Mr. Karwal: The hidden jewels of India are the smaller
businesses and when you get an opportunity to work
with them you will have the maximum learning. So
don’t ignore small companies just because they are
not paying you well. Look at the opportunity you
get by working with them. My own example: when I
joined Onida in 1984, which was a 2 and half to three
crore kind of a company and went on to become a
big hit. I stayed there long enough for about nine

very well, the risk taking ability was limited. Today,
with the economy growing, the taboo which was as-
sociated with the loss of failing is no longer there
because if you have competence and patience, you
can make it really big. Students and younger genera-
tion is understanding that and taking advantage of
it. Opportunities to raise finance and opportunities
to cater to the growing market are also increasing.
That is a big thrust which did not prevail earlier.
Niveshak: You were the man behind bringing LG
to the country. Any experience of it which you
would like to share with our readers.
Mr. Karwal: There is lots of learning which I can share
on LG with everyone. But there are one or two things
which I would like to talk about. At LG, when I ex-
perimented with myself and my team I had brought
in two more elements to marketing than the 4 Ps of
Kotler - Pace and People orientation. That people ori-
entation made sure that the team did not leave us.
So marketing is not just about cutting edge results in
the market space but it is about moving at the pace
where your competitors are completely flabbergast-
ed as to what exactly is happening. Even before any-
body realized I was able to take the company across
the country. Samsung, which had entered India four
years before LG, was still not a national player. And
He Speaketh
and a half years, is an example where I stayed and
I learned a lot. The company succeeded and so did
I. Also, later on when people look back at me and
say “oh yes, you also contributed to Onida’s suc-
cess”, I feel that I stayed their enough to contribute
to the company. Young people should understand
that longevity is increasing. If I am living a life of
80 years, you would live it for 100 years. And if my
career is for say 40 years your working life would
be for 60 years. So 5 or 10 years of learning and
improving your skill set, even at the lower salary
should not be a problem. Don’t just be guided by
money at the initial stage of your career. Get guided
by the opportunity which comes through. If you can
improve the quality of your work and the intrinsic
ability, these are which will be there with you for
your life. The crucial initial phase which you make in
an organization only doing the donkey’s work with
very little stand or little independence of creativity
which it gives you, then you have probably build a
blockage in your mind forever. And after some time
you are not as receptive as you are at the time of
leaving college. You are like a sponge at that time,
you want to learn everything. So experiment with
yourself early on in life.

Today, the taboo which was

associated with the loss of fail-
ing is no longer there because
if you have competence and
patience, you can make it
really big.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 17

 Faltering Acropolis
Cover Story

Sumit Kedia & Upasna Agarwal

Team Niveshak

With the world just witnessing the worst global economic crisis
ever, the surfacing up of Greek debt crisis has posed certain
resistances on the recovery path. The various reasons of how
the Greek crisis surfaced and the condition of EU for the same
have been discussed. Along with it the huge impact on Euro
and a slightly sluggish effect outside eurozone have been fur-
ther highlighted to see where this is heading to.

18 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

 “This is shock and awe part II and in 3-D, with bond. Hence a primary deficit of 3-4% could be easily
a much bigger budget and a more impressive ar- maintained without any pressure on the resources.

ray of special effects,” said Marco Annunziata, chief
economist at UniCredit Group in London as the Eu-
ropean Union along with IMF rolled out their plan
to rescue Greece. Any action no matter how funda-
mentally sound needs to be substantiated by the
market. As it has been oft been said, ‘It is not so
much the fundamentals as it is the unwillingness
of the market to fund you’, it becomes important to
explore the various forces that interplay with each
other to gauge whether the market will accept the
bailout package and save the country from faltering.
With the turmoil in Greece having effect on
Euro, one of the most powerful contenders of Dollar,
it becomes imperative to realize where the fear is
stemming from. How can a country half the size of
Germany and one of the late entrants has impacted
the euro so much that there are possibilities ema-
nating of its demise. The risk has spread from Euro
to other countries like Portugal Spain Ireland and
even Italy.
The scenario unfolding
Years of unrestrained spending, cheap lend-
ing and failure to implement financial reforms left
Greece badly exposed when the global economic
downturn struck. Presently, National debt, put at
€300 billion ($413.6 billion), is bigger than the coun-
try’s economy, with some estimates predicting it will
reach 120 percent of gross domestic product in 2010.
The country’s deficit at present is 12.7 percent of
the GDP. The panic about the spiraling budget deficit
had put the credibility of Greek bonds into question.
The yield in February on ten-year Greek government
bonds was as high as 7.1% about 4% higher than the
safest German bonds in the European area. It was
the endorsement by the European Commission of
the Greek government’s plan cut the deficit to 3% of
GDP by 2012 that finally abated the fear.
The sustainability of public finance is possible
only when growth rate is higher than interest rate.
In this case the government can run primary deficit
such which are as large as the difference between
the two yet keep the debt to GDP ratio constant sus-
tainability of public finances. Till 2007, till the boom
phase the economy grew at 7.4% while the cost of
public debt was around 4.1% on 10 year Government
Cover Story
However with the bust, the Greek economy had to
pay premium on its bonds thus increasing the cost
of debt to 7% while growth of GDP came down to
about 1.5%. Which means a primary surplus is now
required to keep the debt to GDP ratio constant.
Keeping primary deficit now means that the debt to
GDP ratio will explode and hence become unsustain-
able.
Within the European Union
It was claimed that the woe would befall soon-
er or later given that the countries joining the club
were so disparate in nature. With different fiscal
conditions that the countries had it would definitely
make fiscal consolidation difficult so as to put them
on the same platform. According to the European
Commission Greece in 2009 had a debt of 112.6% of
the GDP, Ireland 65.8%, Italy 114.6% Portugal 77.4%
and hence all these countries come in wraps when
the crisis unfurls. A stable currency is the edifice on
which the country’s economy stands. This in turn
depends on faith in the sovereign of the country.
Hence in case of Euro area, the faltering of one coun-
try will lead to shocks across the area. Greece has
apparently had a history of financial crisis having
spent half of the past two centuries in default.
The interesting feature is that when Greece
joined the euro its debt was more than the GDP
making people skeptical of the country when it
joined the euro. However stability of euro helped the
country immediately recover from the woes it was
facing. Since its monetary policy was no longer in-
dependent, it was safe from the worried of inflation
and devaluation. This helped enhance credibility in
the country helping the nation refinance its debt at
lower Interest rate. An article in Economist says
that “The ratio of net interest costs to GDP fell by 6.5
percentage points in the decade after 1995. Lower
interest rates also spurred a spending splurge. The
economy grew by an average of 4% a year until 2008.
However, as Krugman points out in his column
in the New York Times, Greece, Portugal and Spain,
3 years ago were not in trouble. Not only did all the
three attract huge financial inflows, Spain actually
ran a budget surplus. Krugman claims with the finan-
cial crisis developing money dried up from the three

There is no mechanism to
“internalize” the crisis by auto-
matically organizing transfers
to the country experiencing
debt problems

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 19

 countries, causing a sudden reduction in income.
Cover Story
Bringing about your costs back in line is never an
easy task. With an independent monetary policy this
could have been speeded up with currency devalu-
ation but in the present condition the countries are
left bereft of that option. Hence presently the only
option with Greece is to do it through a procedure
of slow deflation while Germany undergoes inflation
to get the pries back in line. Giving up the ability to
adjust exchange rate essentially caused the policy
makers to give up two of the three instruments from
the trinity of exchange rates, monetary policy and
fiscal policy. Thus now the only possible solution for
the Greece economy was to control its fiscal instru-
ments. Hence it will be a slow painful process to get
the economy back on track on its own.
The Bailout
Since the directors of European Union did not
foresee such a situation to arise in the hear future
they did not build in their design a method to save a
country from sovereign debt default. Some countries
like Germany did not want to bail out Greece for they
believed that it would set a precedent to flout the
rules. While certain countries like France believed in
intervention that will lead to a much stronger Union.
The loan however comes from the urgent need to
curtail the contagion effect, preventing the crisis to
spread across the vulnerable union countries like
Portugal and Spain.
In order to get the bailout package of ap-
proximately $ 1 trillion Greece has to impose harsh
austerity measures, including slashing salaries and
pensions and increasing taxes and regulating gov-
ernment expenditure. However the package will be
spread out over a period of three years with only a
20 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010
portion being given today. The bailout package as
it stands today means that Germany which till now
had denied any help will have to contribute 22.3
billion pounds to bailout Greece. This will be borne
by the German taxpayers and hence protest against
the package can now be heard on the streets of
Germany.
The rescue plan sent some ripples in the mar-
ket as there were renewed hopes that country will
not default on the bonds to mature n 19th May. DJIA
increased by 3.9% and yield on Greece’s two year
bonds fell to 8.7% with the reassurance that the
country will not default on it short term debt. De-
spite concerted efforts to not involve the IMF in the
crisis, the latter had to interfere. EU has failed re-
peatedly to ensure that the limits it sets are adhered
to as countries have repeatedly exceeded their defi-
cit limits.
The Government has promised the following
steps in order to get the rescue package. The steps
are expected to save the state 30 billion pounds
through 2013. Unions have vowed strikes to protest
the deal.
1. Cut budget deficit by 11% of GDP by 2013,
through spending cuts valued at 7% of GDP and rev-
enue increases valued at 4% of GDP.
2. Reduce budget deficit to ‘well below’ 3% of
GDP by 2014.
3. Reduce debt-to-GDP ratio from 2013, with
primary budget surpluses of at least 5% of GDP up
to 2020.
4. Cut public-sector pay and pensions.
5. Raise average retirement age.
6. Increase value-added taxes and excise du-
ties.
7. Deregulate the labor market and industries.
8. Privatize some state industries.
9. Cut public investment.
10. Crack down on tax evasion.
With the much needed bailout, have come a
slew of austerity measures that have created havoc
in Greece. Primarily it involves the necessity that
Greece cuts down its fiscal deficit to 3 % till 2014.
Since the country only has control of its fiscal policy
it will have to do it by reducing Government expen-
diture and increasing taxes. However higher taxes
implies that the rate of growth of GDP will be much
lower and hence will lead to lower tax collections in-
creasing the deficit. Curtailing the deficit in this sce-
nario will not be easy and hence will lead to a slow
painful process of lower income growth. Such results
will when invariably lead to social unrest when citi-
zens being used to higher income will have to deal
with such a change of fate. But such conditions are lead other countries like Poland and Spain to also
necessary to be imposed as without them one or the default. The default will also directly impact the

other country will always have an incentive to de-
fault. The members of the union need to know that
the conditions are strict and will be imposed so as
not to have a history repeating itself.
The austerity measures can work smoothly
only if the entire country comes forward to make
sacrifices for the greater good of the economy. Such
a spectacle was seen in South Korea where the lead-
ers could revolutionize the citizens to make such
sacrifices. Unfortunately, a state is not ruled by eco-
nomics but rather democracy. The question remains
if the Government led by Prime Minister George Pa-
pandreou will be able to evoke such a response from
his countrymen.
The draft bill according to the Finance Minis-
ter George Papaconstantinou, was necessary at this
juncture because the country was just two weeks
away from default of 8.5 billion euros maturing on
May 19.
Even after the austerity measures are put into
place, Greece future will not be easy. The debt which
stood at 115% of its GDP will surpass 140% by 2014
before it begins to decline. This shows that the cri-
sis is worse than what it was believed to be earlier.
The cuts that the government has implemented will
reduce the budget deficit by an estimated 5% from
13.6% of the GDP last year to 8.1% in this year. How-
ever the economy will contract with output falling
4% this year.
The bailout removes the worry that Greece
won’t meet its immediate funding needs—€8.5 bil-
lion in borrowings due May 19. But it introduces
fresh questions, among them whether the country
can bear the harsh budget-cutting measures that are
the price of the aid.
Impact on Euro
A currency is only as powerful as the fiscal
strength of the country. A currency is nothing but a
promise by the central government to pay the bearer
the stipulated sum of money. With the central gov-
ernment itself being under debt equaling more than
its GDP, the credibility of the government just like
any other financial institution comes under ques-
tion. The failure of one economy in the European
Union may well trigger a contagion effect that might
Cover Story
large banks of Germany and France that hold Greek
bonds as assets. Such default hence puts the Euro
itself into trouble. When Euro came into existence 10
years before, it was construed to be a currency pow-
erful enough to question dollar’s monopoly in the
world market. Hence a sudden ripple like this could
actually shatter the very foundation on which Euro-
pean Union stands. Hence despite Germany’s unwill-
ingness to help the country, the European Union has
come out with a bailout package almost as big as
the bailout for banks.
The announcement for the bailout package was
successful to stem the fears that had emanated for
a week. However the confidence again seems to be
shaken with fears of how the package will unravel
in the ensuing three years and whether it suffice to
cover the quantum of debt that Greece has got into.
The feeling currently prevailing in the market is that
even though the collapse has been avoided tempo-
rarily, it might befall in the near future.
During the banking crisis of 2007, it seemed
that the euro member countries had been able to
steer themselves out of the crisis quite maturely. But
they still lack the ability to maneuver their way out
of a sovereign debt crisis. The point in contention is
that why a country help some other country for its
own irresponsible profligacy. While on an average
the debt to gross domestic product ratio is smaller in
European union that in US, the differences between
the countries is much starker her. Greece and Italy
debt obligations are worrisome whereas the other
countries are within limits. Hence with a macroeco-
nomic perspective it seems that Greece which is just
2% of the Euro area’s GDP, could be easily saved.
But what is require to be seen here is the politi-
cal equations that make the functioning rather dif-
ficult. While in US it is rather easy to shift funds from
one state to another to even out the deficits and
surpluses, in the European union this will require a
greater effort. It requires political maneuvering for
one country has to pay for other country’s losses.
This will be reflected in higher tax collections in a
more responsible country thus propagating an era of
free riding each others economy. The only way that
a smoother transition of fund can happen is when it
evolves from a monetary union to a political union.

The government can run pri-

mary deficit such which are as
large as the difference between
the two yet keep the debt to
GDP ratio constant sustain-
ability of public finances.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 21

 In this manner the losses can be ignored for greater
benefits of a much stronger region. This view has
been extended forth by Professor Paul De Grauwe.
‘The reason is that there is no mechanism to “inter-
Cover Story
ances worsened. Now, the adjustment process being
done by only the Greece people lays a disproportion-
ate burden on them.

Spain and Ireland have also undertaken con-

nalize” the crisis by automatically organizing trans-
fers to the country experiencing debt problems.’
Impact outside Eurozone
Overall, the Asian stock markets and the spe-
cifically the Indian stock market won’t be directly
affected by the greek debt crisis and the bailout.
Though, the markets have been on the down slide
for quite few days since the crisis crept up, but this
is more to do with the trickle down effect of the
global stocks (UK and US markets) trading in red.
The India stock markets and the overall corporate
environment of the country seemed least perturbed
by this due to the small size of Greece and hence
a very limited exposure of the India Inc. with the
same. In addition to these, the Finance Ministry has
also reiterated that India could rather be seen as a
safer haven for funds in the short run and hence
might see larger inflows in the near future.
As for the commodities market, specially the
bullion market was significantly impacted by the
debt crisis and the post bail out economic uncer-
tainty which has prompted all the investors to go
for safe haven investing and hence huge amount
on investments rolling in to gold thus we saw gold
hitting record high of $1250/ounce. For Indians spe-
cifically, this season is seen with a marked increase
in demand of gold owing to the occasion of Aksha-
ya Tritya, but the record high prices were all set to
dampen the festive spirits.
tractionary monetary policies to ensure that they do
not get into a similar crisis which is directly impact-
ing real economy. These countries are condemning
themselves to a period of stagnation or declining
incomes, with all the economic and social problems
that will generate. Hence the only possible long term
solution is debt restructuring which however is not
being talked about due to the power of finance be-
ing stronger than the power of democracy.
Nostalgia
The crisis breathes of nostalgia. Such crises
have occurred over time across nations whenever
a country has not been able to maintain its expen-
diture. The trigger might be different but the funda-
mental reason was always the same. Whenever a
country was unable to muster enough political will
to rule a country and live within its means such
crises have wrecked havoc across nations disturbing
the basic equilibrium. Coming back to equilibrium is
a slow painful process and the Governments across
country need to work swiftly and in collaboration to
ensure that the situation doesn’t arise and if it does,
they have a mechanism to speed up the adjustment
process.

Debt Restructuring
Most of the economists believe that the econ-
omy will have to undergo debt restructuring despite
the package that has been extended to bail it out.
Economist Jayati Ghosh writes in The Guardian that
“If it does not happen now, it will in any case have
to happen at some time in the future, after creating
a great deal of material distress in Greece.”
Restructuring of debt despite being such an
obvious option is not being talked about because
it will directly impact the institutions that have lent
to it. During the period of boom when banks lent
irrationally without a proper credit check the imbal-

The debt which stood at 115%

of its GDP will surpass 140%
by 2014 before it begins to
decline.

22 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

Financial Inclusion
Technology has always re-
mained at the forefront to bridge
the gap between ‘Have’ and ‘Have
not’. The use of mobile phones as
a tool for reaching out to those who
have not been avail the facilities of
banking remains an untapped po-
tential especially in a country like
India which is right in the trail of
becoming third largest mobile op-
erator in the world after USA and
China. The numbers of subscriptions
are poised to touch a record 600 mil-
lion by the year 2011. Compare this
scenario with the number of people
who have access to financial institu-
tions like banks, we invariably find
a contrasting situation where even
after whole hearted efforts put by
RBI, the results have not been very
encouraging.
Almost 200 million mobile sub-
scribers have no bank accounts.
Though with the pressure put forth
by RBI and facilities like no frill ac-
count coming into picture, the num-
ber of accounts has increased sub-
stantially but most of these accounts
remain non-operated for a variety of
reasons like illiteracy of customers,
distance of the banks, little or no
saving or irregular saving etc. But
one of the significant reasons re-
mained the reluctance on the part
of the banks to see such bottom of
the pyramid (BOP) customers as un-
profitable. The poor too do not feel
comfortable to operate in such brick
and mortar banks and consider it ex-
clusively for the high income groups.
Mobile banking or m-banking
can solve a plenty of issues in this
direction and the evolving technol-
ogy makes it even more interesting
in days to come. M-banking basically
uses your mobile as a prime tool to
provide you with the financial ser-
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
through M-Banking
Nishant Kumar & Soumyasankha Maiti
XIMB
vices. The modus operandi of such a
system is simple yet the background Technology has
work needed to bring it into picture
always remained
is vast and needs involvement of
more than a single player. at the forefront to
bridge the gap be-
Methodology
tween ‘Have’ and
Here as a case in point we
have discussed the Eko’s model of ‘Have not’. The use
m-banking. Eko has been working in of mobile phones
India in this sector. Eko has collabo- as a tool for reach-
ration with some nationalised bank
ing out to those
like SBI and has got the permission
to open no frill account on behalf who have not been
of the customer at a CSP, i.e., Cus- avail the facilities of
tomer Service Point. These CSP could banking remains an
be one’s medical store, kirana store,
Pan shop or any nearby shop. At any
untapped potential.
of these shops one could open one’s Mobile banking can
account after which he will be given solve a plenty of is-
a passbook, his account number sues in this direction
and a pin number. By using them,
coupled with his mobile number and the evolving
he could either deposit the money technology makes it
in his account or withdraw it or re- even more interest-
mittance it to some other place. His
ing in days to come.
account details are SMS text to him
and thus he could keep a track of
his account without any hassle. His
mobile number and pin acts as an
electronic signature which safeguard
his money.
FinSight
Advantage over traditional
banking
The system has been so de-
signed that one does not need to
be beyond number literate to under-
stand and use this facility. Especially
in case of urban poor who has per-
haps access to banks but could not
manage his resources since his sav-
ing is significantly low to pay a visit
to the bank. If he is migrant he has
to depend upon unreliable means to
send the money to his home. With
the help of mobile banking, he can
do so by just clicking a few buttons.
23
 When we consider the cost involved in pro-
viding simple financial services to the customers
through traditional banks, it is five times than m-
banking. Every time a customer visits the bank or
an ATM, it costs bank around Rs.15which could be
high considering the amount of transaction. A simi-
lar transaction can be handled by m- banking model
at a fraction of cost.
The situation at the countryside is more adverse
and complicated since most branches are located at
the centre or periphery of the city rather than in the
village. A villager on an average has to travel more
than 5 kms to avail the facility of a bank which is a
dissuader to its regular use. Perhaps it also explains
to some extent why most no frill accounts remain
non operative. Secondly many villagers are looking
for a way to help them manage their money or cash
flow. But for these consumers, money management
is different from pure long-term savings or credit.
Its principal focus is balancing times of cash sur-
plus and cash deficits over a typical salary cycle—for
example, 30 days. Rural families, for instance, take
in large sums at harvest time. Without a vehicle for
savings and cash flow management, they generally
store harvest funds at home, and the cash gradu-
ally dwindles as it’s tapped for discretionary pur-
chases. When the time comes to plant seeds for the
next growing season, there’s not enough money on
hand to pay for them. As a result, these families
turn to informal lenders, whose rates can be quite
high. Many people often run deficits for two to three
weeks every month. The ensuing debt cycle is hard
to break. The third issue is availability of round the
clock liquidity which is the prime reason for them to
be attracted to the village lenders. Their repayment
capacity too is in varied needs and demands easy
availability of branches. Even if the branch is nearby,
they feel intimidated to use it. M-banking with its
unique advantage of cash agents can solve the is-
sues revolving impediments for financial inclusion in
rural scenario. The technology has made it possible
FinSight
for the poor, marginalised and villagers. Most micro-
finance follows the model of JLG, i.e., Joint Liability
Group for loan disbursement. JLG which consists of
5-6 members meet mostly once a week at pre des-
tined place, where the loan officers of microfinance
collects the money. This system bears two risks. First
the risk of carrying the money to the destined spot
with safety and then the money collected need to
be reached to the office safely. Secondly the money
that is saved by the customer need to be there for
some time before it can be passed to the loaner.
With the advent of mobile banking, the mem-
bers can deposit the money at any cash point and
thus do away with both the risk. The m-banking
model will also nullify the need to meet each week
by each member. Even if they meet, the meeting
will be short and officer will have more time to find
new clients and to understand the need of existing
clients.
The research by Consultative Group to Aid the
Poor (CGAP) has revealed that the rate of increase
in microfinance could be multi fold if m-banking is
rolled out since it has potential to handle key issues
which is impeding the expansion of microfinance in
rural areas.
M-banking and Social Schemes
M- Banking could revolutionise the social sec-
tor schemes like Self Help Group (SHG) and MNREGA
(Mahatma Gandhi National Rural Employment Guar-
antee Act). Considering the fact that the payment
in MNREGA has already been made through bank or
post office account, m-banking will put forth addi-
tional benefit of bringing bank to the pocket of the
poor. By coupling the schemes like MNREGA to the
m-banking, the need
for beneficiary to go to
bank can be exempted.
Similarly the process
can bypass the corrupt

officials who still seek

to bypass brick and mortar model of banking for their share and hassle
these unbanked poor. beneficiaries during
payments. It will also
M-banking and Microfinance
relief banks from addi-
The role of microfinance in a developing nation tional pressure of mak-
like India has been tremendous and they are some ing small payments
of the fastest growing interface of finance especially and thus save a lot of

The role of microfinance in a

developing nation is tremen-
dous and they are some of the
fastest growing interface of
finance especially for the poor.

24 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

cost for them. The system will also put extra scruti-
nizing power to auditing officials since another layer
of authentication proof in the form of mobile ac-
counts has been added.
For SHG, except few NGOs like Pradhan which
has developed a proper system like ‘Computer Mun-
shi’ which interlinks banks with the SHG and mem-
bers do not have to bear the burden of taking money
to the bank themselves, other SHG groups struggle
to get proper interface with the banks considering
the fact that the money collection for them as a
group is on a weekly basis. Thus m-banking could
fill the vacuum and make the functioning of SHG
smoother.
Constraints
If the benefits are so obvious then why m-bank-
ing has not picked as yet? The reasons are both op-
erative as well as regulatory. On the operation front
though the technologies available for m-banking is
there for around a decade but to use it for financially
excluded group is a relatively new beginning. The
whole operative structure demands understanding
of different groups like banks, mobile operator and
road side vendors among each other. The training
of cash point vendors and their reliability has also
come as a serious block to move this model of m-
banking. But as with other new innovations things
will improve on such operative matters with time.
The m-banking will finally depend upon the readily
acceptance of customers to this new technology and
their convenience in using it. The regulations for m-
banking have been put forth by RBI. Considering that
the m-banking is a relatively new concept and deals
essentially with an important component of the
economy and with vulnerable group, regulations in-
variably are needed. But regulation itself should not
hinder the process of financial inclusion. Norms like
KYC etc are a costly affair for agencies. The address
proof and other documents needed by the bank are
not available with the poor especially in case of mi-
grants. The regulations should be pruned judiciously
considering the reach and objective of m-banking.
M-Pesa -a success story in m-banking
By far the most successful example of mobile
money is M-Pesa. M-Pesa is a joint venture between
Vodafone and Safaricom (the local mobile operator)
with the backing of Citibank and Commercial Bank
of Africa. Notably, M-Pesa, has so far registered 9
million customers. The service—launched in March
2007—has revolutionized money transfer services in
the country by providing subscribers with a fast, safe
and affordable way to transfer money by phone.
Factors behind M-Pesa’s success:
1) Trust – Trust building exercise was done
through proper selection of agents and communicat-
ing with customers a lot.
2) Relationship with the Regulator and other
Banks -- Safaricom played within the ambit of reg-
ulations. When issues of money laundering were
raised, it invited regulators for audit.
3) Pricing- Safaricom kept the pricing of the
product very transparent and lower than other al-
ternatives and also provides free registration and no
monthly fees for customers.
4) Limited KYC -- The users were required to
submit only the identity proof to get the service
started. This limited KYC helped many Kenyans es-
pecially in the rural areas where the address proofs
and other documents required by the banks are not
available with most of the Kenyans.
5) Dedicated and Quick responding Customer
Care Line - In Kenya, not everyone can read, so
sometimes people make mistakes and send money
to the wrong person, so Safaricom established back
office support to assist people get the money back
where possible.
We consider that for the m-banking to pick up
in India, all the factors need to be taken care of.
The situation of poor remains the same all over the
world be it Kenya or India. If Indian telecom and
banking Industry could muster the courage and ex-
pertise to overcome these challenges, Indian
M-banking scenario will surely pick up to
change the lives of many. The regulators are poised
on a difficult terrain since they need to take judi- FinSight
cious decision to relax guidelines for m-banking.
Lastly the success will depend on the interlink-
ing of different agencies like banks, regulators and
telecom and their understanding and accommodat-
ing of each other’s needs.

The cost involved in providing

simple financial services to the
customers through traditional
banks is five times than m-
banking.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 25

 FIN-Q
1. What does “PSC” stand for wrt the recent RIL-RNRL conflict?

2. “A” is an investment fund that selects securities based on quantitative analysis. In

“A”, the managers build computer-based models to determine whether an investment is
attractive. What is “A”?

3. What is the name of the bond that offers investors the option to reinvest coupon
payments into additional bonds with the same coupon and maturity?

4. How much loan was recently approved by Eurozone leaders as Greece aid package to
safeguard Greece’s financial stability?

5. What was the informal name given to the impact of the 1994 Mexican economic crisis
on the South American economy? This occurred because of a sudden devaluation in the
Mexican peso, which then caused other currencies in the South American region to decline.

6. What was the name of the index of stocks that Ketan Parekh ran? Mention 2 stocks
from that index?

7. How much is the largest intraday loss that has taken place at Dow Jones Industrial
Average (DJIA)? When was it?
FinLounge

8. Which company was the latest one to get listed on BSE and NSE? What was the first day
closing price?

9. What is tax on foreign exchange transactions, which was devised to cushion exchange
rate fluctuations, called? It was in news recently via the RBI Governor.

10. How many indexes come under the BSE Sector Series (90/FF)? What does “90/FF” stand
for there?

All entries should be mailed at niveshak.iims@gmail.com by 10th June, 2010 23:59 hours
One lucky winner will receive cash prize of Rs. 500/--

26 NIVESHAK VOLUME 3 ISSUE 5 MAY 2010

ANNOUNCEMENTS
ARTICLE OF THE MONTH
The article of the month winners for May 2010 are
Ankur Saxena and Shabbir Rahim
of NITIE, Mumbai
They receive a cash prize of Rs.1000/-

FINQ WINNER
The FinQ Winner for the month April 2010 is
Veena Sankaran
of IIM Shillong
She receives a cash prize of Rs.500/-
CONGRATULATIONS!!

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