There has been a lot of talk about futures trading in recent months. Seeing that there have been many rumours going around that futures trading is a legit way of making money online, we took the time to find out whether or not this is true. Before we move on, it is important to understand what this form of trading entails. This trading like any other trading is about predicting in which direction the market will move. Based on whether or not your predictions were correct, you will see yourself making a decent profit. Now there is no doubt that the internet is not
short on having hundreds if not thousands of these online programs that claim to make you money. However there is a big difference when it comes to this form of trading.
Futures trading is not a get rich scheme that promises to make you a millionaire over night. If you do a bit of research on where futures trading originated, you will be able to find out that this is the same form of trading that happens in some of the most prestigious investment firms today. For many years the question of how come bankers get paid high bonuses has circled the news for decades and we finally know how. Investing in various markets is the way to making real money which is now
available through futures trading.
Seeing that technology has advanced so much from say ten years ago, is the main reason that futures trading can easily be found on every home computer. There is no rocket science about it but plain, simple common sense. The markets that are being offered through futures trading include currency, wheat, beef, gold, oil etc. Even though some of these commodities may sound remote in terms of investment, that does not take away its profitability.
If you do decide to go ahead with this futures trading, then there are a few things that you want to keep in mind. Even though futures trading offer a wide range of markets to choose from, this does not mean that all of them are as profitable as
the other. For this reason it is very important that one takes the time to research each market carefully before you decide to invest. At the end of the day, the only reason you will go ahead with this form of trading is all to do with making money. For this reason we highly recommend carefully outlining each market as to the percentage of profit that you can expect from each. Do keep in mind that this will be live trading and there are chances where you can see yourself having a loss from time to time. For this reason it is even more important that you also consider the market that offers the limited loss possible for your investment.
Futures trading is the way forward for the future. With these tough economical times, I’m sure we can all make some use with some extra money through futures trading.
Introduction
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
Derivative products initially emerged, as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously both in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives.
Even small investors find these useful due to high correlation of the popular indices with various portfolios and ease of use. The lower costs associated with index derivatives vis-vis derivative products based on individual securities is another reason for their growing use.
The following factors have been driving the growth of financial derivatives:
1. Increased volatility in asset prices in financial markets,
2. Increased integration of national financial markets with the international markets,
3. Marked improvement in communication facilities and sharp decline in their costs,
4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and
5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets, leading to higher returns, reduced risk as well as trans-actions costs as compared to individual financial assets.
EXECUTIVE SUMMARY
The rise of retail lending in emerging economies like India has been of recent origin. Asia Pacific’s vast population, combined with high savings rates, explosive economic growth, and underdeveloped retail banking services, provide the most significant growth opportunities for banks. Banks will have to serve the retail banking segment effectively in order to utilize the growth opportunity.
Banking strategies are presently undergoing various transformations, as the overall scenario has changed over the last couple of years. Till the recent past, most of the banks had adopted fierce costcutting measures to sustain their competitiveness. This strategy however has become obsolete in the new light of immense growth opportunities for banking industry. Most bankers are now confident about their high performance in terms of organic growth and in realising high returns. Nowadays, the growth strategies of banks revolve around customer satisfaction. Improved customer relationship management can only lead to fulfilment of long-term, as well as, short-term objectives of the bankers. This requires, efficient and accurate customer database management and development of well-trained sales force to develop and sustain long-term profitable customer relationship.
The banking system in India is significantly different from that of the other Asian nations, because of the country’s unique geographic, social, and economic characteristics. Though the sector opened up quite late in India compared to other developed nations, like the US and the UK, the profitability of Indian banking sector is at par with that of the developed countries and at times even better on some parameters. For instance, return on equity and assets of the Indian banks are on par with Asian banks, and higher when compared to that of the US and the UK.
Banks in India are mainly classified into Scheduled Banks and Non-Scheduled Banks. Scheduled Banks are the ones, which are included in the second schedule of the RBI Act 1934 and they comply with the minimum statutory requirements. Non-Scheduled Banks are joint stock banks, which are not included in the second Schedule of the RBI Act 134, on account of the failure to comply with the minimum requirements for being scheduled.
STRENGTH
• Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
• Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks.
• Bank lending has been a significant driver of GDP growth and employment.
• Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.
• The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
• In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.
• India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
• Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.
WEAKNESS
• PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital.
• Old private sector banks also have the need to fundamentally strengthen skill levels.
• The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies.
• Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus.
• Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.
• Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.
OPPORTUNITY
• The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations.
• banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks.
• With increased interest in India, competition from foreign banks will only intensify.
• Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.
• New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity
• Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset.
• reach in rural India for the private sector and foreign banks.
• With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.
• the Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.
• Liberalisation of ECB norms: The government also liberalised the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.
• Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.
THREATS
• Threat of stability of the system: failure of some weak banks has often threatened the stability of the system.
• Rise in inflation figures which would lead to increase in interest rates.
• Increase in the number of foreign players would pose a threat to the PSB as well as the private players.
SIEMENS, the 55% Indian subsidiary of Siemens AG, Germany is a leader in the electrical and electronic engineering sector. It offers products, systems, solutions and services in power generation, power transmission and distribution, automation and drives, industrial solutions and services, transportation systems, enterprise communications, mobile phones and medical solutions. Siemens AG holds a 54.6% stake in SIEMENS. The company was established in 1957.
The company has a wide presence across the country; its operations include 15
Manufacturing plants and 16 sales offices. Siemens`s Worli plant makes medical equipment. The three Kalwa units make motors, switchgear, and switchboards. The Nashik unit makes industrial automation products, controllers, PLCs and UPS. Joka works makes control boards and switchboards. Aurangabad makes switchgear and photovoltaic modules. Goa makes medical equipment.
SIEMENS derives 33% of its revenues from the automation and drives division, followed by 24% from the power division, 18% each from Siemens Information Systems (SISL) and healthcare/other services divisions. During fiscal 2005, it acquired Siemens VDO Automotive, Demag Delaval Industrial Turbo machinery, and 51% interest in Pimac Engineers and Services.
SIEMENS has a vast global network of 461,000 people, operating in over 190
countries. In India, SIEMENS mirrors the portfolio of Siemens AG, except that Siemens VDO Automotive, and Siemens Public Communication Networks operate as separate companies. SISL, another group company, is now a 100% subsidiary of SIEMENS, and Siemens Building Technologies (SBT) has already been merged into Siemens.
Risk management is the human activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources.
The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.
Some traditional risk managements are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments.
Objective of risk management is to reduce different risks related to a pre-selected domain to the level accepted by society. It may refer to numerous types of threats caused by environment, technology, humans, organizations and politics. On the other hand it involves all means available for humans, or in particular, for a risk management entity (person, staff, organization).
In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled.
Intangible risk management identifies a new type of risk - a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example, when deficient knowledge is applied to a situation, a knowledge risk materialises. Relationship risk appears when ineffective collaboration occurs. Process-engagement risk may be an issue when ineffective operational procedures are applied. These risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality. Intangible risk management allows risk management to create immediate value from the identification and reduction of risks that reduce productivity.
Risk management also faces difficulties allocating resources. This is the idea of opportunity cost. Resources spent on risk management could have been spent on more profitable activities. Again, ideal risk management minimizes spending while maximizing the reduction of the negative effects of risks.
Steps in the risk management process
Establish the context
Establishing the context involves
0. Identification of risk in a selected domain of interest
1. Planning the remainder of the process.
2. Mapping out the following: the social scope of risk management, the identity and objectives of stakeholders, and the basis upon which risks will be evaluated, constraints.
3. Defining a framework for the activity and an agenda for identification.
4. Developing an analysis of risks involved in the process.
5. Mitigation of risks using available technological, human and organizational resources.
Identification
After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself.
* Source analysis Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport.
* Problem analysis Risks are related to identified threats. For example: the threat of losing money, the threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholders, customers and legislative bodies such as the government.
When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; privacy information may be stolen by employees even within a closed network; lightning striking a Boeing 747 during takeoff may make all people onboard immediate casualties.
The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or the development of templates for identifying source, problem or event. Common risk identification methods are:
* Objectives-based risk identification Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk. Objective-based risk identification is at the basis of COSO's Enterprise Risk Management - Integrated Framework
* Scenario-based risk identification In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk - see Futures Studies for methodology used by Futurists.
* Taxonomy-based risk identification The taxonomy in taxonomy-based risk identification is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire is compiled. The answers to the questions reveal risks. Taxonomy-based risk identification in software industry can be found in CMU/SEI-93-TR-6.
* Common-risk Checking In several industries lists with known risks are available. Each risk in the list can be checked for application to a particular situation. An example of known risks in the software industry is the Common Vulnerability and Exposures list found at http://cve.mitre.org.
* Risk Charting This method combines the above approaches by listing Resources at risk, Threats to those resources Modifying Factors which may increase or reduce the risk and Consequences it is wished to avoid. Creating a matrix under these headings enables a variety of approaches. One can begin with resources and consider the threats they are exposed to and the consequences of each. Alternatively one can start with the threats and examine which resources they would affect, or one can begin with the consequences and determine which combination of threats and resources would be involved to bring them about
Assessment
Once risks have been identified, they must then be assessed as to their potential severity of loss and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated guesses possible in order to properly prioritize the implementation of the risk management plan.
The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for immaterial assets. Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of information. Nevertheless, risk assessment should produce such information for the management of the organization that the primary risks are easy to understand and that the risk management decisions may be prioritized. Thus, there have been several theories and attempts to quantify risks. Numerous different risk formulae exist, but perhaps the most widely accepted formula for risk quantification is:
Rate of occurrence multiplied by the impact of the event equals risk
Later research has shown that the financial benefits of risk management are less dependent on the formula used but are more dependent on the frequency and how risk assessment is performed.
In business it is imperative to be able to present the findings of risk assessments in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial terms. The Courtney formula was accepted as the official risk analysis method for the US governmental agencies. The formula proposes calculation of ALE (annualised loss expectancy) and compares the expected loss value to the security control implementation costs (cost-benefit analysis).
Potential risk treatments
Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories: (Dorfman, 1997) (remember as 4 T's)
Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions.
Another source, from the US Department of Defense Defense Acquisition University, calls this ACAT, for Accept, Control, Avoid, and Transfer. The ACAT acronym is reminiscent of the term ACAT (for Acquisition Category) used in US Defense industry procurements.
Risk avoidance
Includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the liability that comes with it. Another would be not flying in order to not take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.
Risk reduction
Involves methods that reduce the severity of the loss. Examples include sprinklers designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy.
Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a single iteration. A current trend in software development, spearheaded by the Extreme Programming community, is to reduce the size of iterations to the smallest size possible, sometimes as little as one week is allocated to aniteration.
Risk retention
Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.
Risk transfer
Means causing another party to accept the risk, typically by contract or by hedging. Insurance is one type of risk transfer that uses contracts. Other times it may involve contract language that transfers a risk to another party without the payment of an insurance premium. Liability among construction or other contractors is very often transferred this way. On the other hand, taking offsetting positions in derivatives is typically how firms use hedging to financially manage risk.
Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.
Outsourcing is another example of Risk transfer where companies outsource IT,BPO,KPO etc. In IT, some companies will outsource only development work and product is made at offshore locations where as business requirements are handled at onshore/client site. This way, companies can concentrate more on business development rather than managing large group of IT development team.
Create the plan
Decide on the combination of methods to be used for each risk. Each risk management decision should be recorded and approved by the appropriate level of management. For example, a risk concerning the image of the organization should have top management decision behind it whereas IT management would have the authority to decide on computer virus risks.
The risk management plan should propose applicable and effective security controls for managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing anti virus software. A good risk management plan should contain a schedule for control implementation and responsible persons for those actions.
According to ISO/IEC 27001, the stage immediately after completion of the Risk Assessment phase consists of preparing a Risk Treatment Plan, which should document the decisions about how each of the identified risks should be handled. Mitigation of risks often means selection of Security Controls, which should be documented in a Statement of Applicability, which identifies which particular control objectives and controls from the standard have been selected, and why.
Implementation
Follow all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the rest.
Review and evaluation of the plan
Initial risk management plans will never be perfect. Practice, experience, and actual loss results will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with the risks being faced.
Risk analysis results and management plans should be updated periodically. There are two primary reasons for this:
1. to evaluate whether the previously selected security controls are still applicable and effective, and
2. to evaluate the possible risk level changes in the business environment. For example, information risks are a good example of rapidly changing business environment.
Limitations
If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that are not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources that could be used more profitably. Unlikely events do occur but if the risk is unlikely enough to occur it may be better to simply retain the risk and deal with the result if the loss does in fact occur.
Prioritizing too highly the risk management processes could keep an organization from ever completing a project or even getting started. This is especially true if other work is suspended until the risk management process is considered complete.
It is also important to keep in mind the distinction between risk and uncertainty. Risk can be measured by impacts x probability.
Areas of risk management
As applied to corporate finance, risk management is the technique for measuring, monitoring and controlling the financial or operational risk on a firm's balance sheet. See value at risk.
The Basel II framework breaks risks into market risk (price risk), credit risk and operational risk and also specifies methods for calculating capital requirements for each of these components.
Enterprise risk management
In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the Enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment. In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management market risk, and operational risk.
In the more general case, every probable risk can have a pre-formulated plan to deal with its possible consequences (to ensure contingency if the risk becomes a liability).
From the information above and the average cost per employee over time, or cost accrual ratio, a project manager can estimate
* the cost associated with the risk if it arises, estimated by multiplying employee costs per unit time by the estimated time lost (cost impact, C where C = cost accrual ratio * S).
* the probable increase in time associated with a risk (schedule variance due to risk, Rs where Rs = P * S):
o Sorting on this value puts the highest risks to the schedule first. This is intended to cause the greatest risks to the project to be attempted first so that risk is minimized as quickly as possible.
o This is slightly misleading as schedule variances with a large P and small S and vice versa are not equivalent. (The risk of the RMS Titanic sinking vs. the passengers' meals being served at slightly the wrong time).
* the probable increase in cost associated with a risk (cost variance due to risk, Rc where Rc = P*C = P*CAR*S = P*S*CAR)
o sorting on this value puts the highest risks to the budget first.
o see concerns about schedule variance as this is a function of it, as illustrated in the equation above.
Risk in a project or process can be due either to Special Cause Variation or Common Cause Variation and requires appropriate treatment. That is to re-iterate the concern about extremal cases not being equivalent in the list immediately above.
Risk management activities as applied to project management
In project management, risk management includes the following activities:
* Planning how risk management will be held in the particular project. Plan should include risk management tasks, responsibilities, activities and budget.
* Assigning a risk officer - a team member other than a project manager who is responsible for foreseeing potential project problems. Typical characteristic of risk officer is a healthy skepticism.
* Maintaining live project risk database. Each risk should have the following attributes: opening date, title, short description, probability and importance. Optionally a risk may have an assigned person responsible for its resolution and a date by which the risk must be resolved.
* Creating anonymous risk reporting channel. Each team member should have possibility to report risk that he foresees in the project.
* Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of the mitigation plan is to describe how this particular risk will be handled – what, when, by who and how will it be done to avoid it or minimize consequences if it becomes a liability.
* Summarizing planned and faced risks, effectiveness of mitigation activities and effort spend for the risk management
Risk management and business continuity
Risk management is simply a practice of systematically selecting cost effective approaches for minimising the effect of threat realization to the organization. All risks can never be fully avoided or mitigated simply because of financial and practical limitations. Therefore all organizations have to accept some level of residual risks.
Whereas risk management tends to be pre-emptive, business continuity planning (BCP) was invented to deal with the consequences of realised residual risks. The necessity to have BCP in place arises because even very unlikely events will occur if given enough time. Risk management and BCP are often mistakenly seen as rivals or overlapping practices. In fact these processes are so tightly tied together that such separation seems artificial. For example, the risk management process creates important inputs for the BCP (assets, impact assessments, cost estimates etc). Risk management also proposes applicable controls for the observed risks. Therefore, risk management covers several areas that are vital for the BCP process. However, the BCP process goes beyond risk management's pre-emptive approach and moves on from the assumption that the disaster will realise at some point.
The Indian Steel industry is almost 100 years old now. Till 1990, the Indian steel industry operated under a regulated environment with insulated markets and large scale capacities reserved for the public sector. Production and prices were determined and regulated by the Government, while SAIL and Tata Steel were the main producers, the latter being the only private player. In 1990, the Indian steel Industry had a production capacity of 23 MT. 1992 saw the onset of liberalization and the Indian economy was opened to the world. Indian steel sector also witnessed the entry of several domestic private players and large private investments flowed into the sector to add fresh capacities.
Steel Industry in India is on an upswing because of the strong global and domestic demand. India's rapid economic growth and soaring demand by sectors like infrastructure, real estate and automobiles, at home and abroad, has put Indian steel industry on the global map. According to the latest report by International Iron and Steel Institute (IISI), India is the seventh largest steel producer in the world.
The origin of the Indian steel industry can be traced back to 1953 when a contract for the construction of an integrated steelworks in Rourkela, Orissa was signed between the Indian government and the German companies Fried Krupp und Demag AG. The initial plan was an annual capacity of 500,000 tonnes, but this was subsequently raised to 1 million tonnes. The capacity of Rourkela Steel Plant (RSP), which belongs to the SAIL (Steel Authority of India Ltd.) group, is presently about 2 million tonnes. At a very early stage the former USSR and a British consortium also showed an interest in establishing a modern steel industry in India. This resulted in the Soviet-aided building of a steel mill with a capacity of 1 million tonnes in Bhilai and the British-backed construction in Durgapur of a foundry which also has a million tonne capacity.
The Indian steel industry is organized in three categories i.e., main producers, other major producers and the secondary producers. The main producers and other major producers have integrated steel making facility with plant capacities over 0.5 MT and utilize iron ore and coal/gas for production of steel. The main producers are Tata Steel, SAIL, and RINL, while the other major producers are ESSAR, ISPAT and JVSL. The secondary sector is dispersed and consists of:
(1) Backward linkage from about 120 sponge iron producers that use iron ore and non-coking coal, providing feedstock for steel producers;
(2) Approximately 650 mini blast furnaces, electric arc furnaces, induction furnaces and energy optimizing furnaces that use iron ore, sponge iron and melting scrap to produce steel; and
(3) Forward linkage with about 1,200 re-rollers that roll out semis into finished steel products for consumer use.
Till the 1990s, the reserve money creation process predominantly originated from the RBI’s financing of government and the instruments of monetary control were essentially reserve requirements, interest rate controls and direct credit controls. Against the backdrop of tight capital controls, exchange rate policy was governed by the preoccupation of conserving foreign exchange and maintaining India’s competitiveness in international markets. In other words, there was only limited interaction between monetary policy and exchange rate policy. With the gradual relaxation of controls in the domestic financial sector beginning in the early 1990s, there has been move away from reserve requirements, interest rate controls and other direct controls and increasing reliance on market related instruments.
With the gradual opening up of the external sector, and the relaxation of capital account controls, there has been an upsurge of capital inflows. The reliance of government on the RBI credit is now reduced and virtually the entire reserve money is externally generated. The preoccupation of monetary policy is to a large extent on managing capital flows while ensuring monetary and financial stability and meeting the real sector’s requirements for credit. The progressive integration of India into the global economy exposes the real sectors to the vicissitudes of the international economy.
Definition
Policy of government towards the level of the exchange rate of its currency. It may want to influence the exchange rate by using its gold and foreign currency reserves held by its central bank to buy and sell its currency. It can also use interest rates (monetary policy) to alter the value of the currency.
A fall in the exchange rate will mean that the price of imports will rise while exporters can choose either to lower prices for their buyers or leave them the same and increase their profit margins. As a result, domestic producers should become more internationally competitive. Import volumes should fall whilst export volumes should rise. Output at home should rise, leading to higher economic growth and a fall in unemployment. There should be an improvement in the current account of the balance of payments too as the gap between export values and import values improves. However, higher import prices will feed through to a rise in inflation in the economy.
The Exchange Rate System: Some Issues
it is now more than a decade since the world abandoned the system of fixed but adjustable exchange rates which was the center-piece of the old Bretton Woods system. That system collapsed in 1973 with no official agreement on what was to replace it, and the major currencies were set afloat in world currency markets. These arrangements, which at first had no official international sanction, were later legitimized by the Second Amendment to the Articles of Agreement of the IMF in 1978 which allowed members to adopt exchange rate arrangements of their choice.
The new system, which some have called a "non-system", is characterized by a mix of exchange rate arrangements. Major currencies float relatively freely in world currency markets. The countries forming the European Monetary System float as a group against other major currencies and maintain a form of managed floating within adjustable margins against each other, with well defined rules of intervention backed by currency swap arrangements. The developing countries have not resorted to independent floating but have ether pegged their currencies to one of the major currencies or, increasingly to a basket of currencies. Whatever the exchange rate arrangements adopted, all countries face a world in which exchange rates vary considerably and often unpredictably. In the ten years and more that the new system has been in operation, considerable experience has been gained and a degree of consensus has emerged on the functioning of the system and its short-comings. The object of this paper is to review the main elements of this consensus and to identify the outstanding issues in this area which remain on the agenda of international monetary reform.
The Experience with Floating Rates
In evaluating the experience with floating rates we must avoid the temptation to lay entirely the blame for the dismal state of the world economy in recent years on the exchange rate system. It is clear that world production and world trade grew much more rapidly under the old Bretton Woods system than they have during the period of floating rates. It is also true that developing countries on the whole have experienced much greater difficulty in almost all dimensions under the new regime. This does not however establish that the exchange rate arrangements were the prime cause of the difference in performance. There is a multitude of factors which affect world trade and production growth, and within that, the prospects and performance of the developing countries. The exchange rate system is an important part of the totality of influences on the functioning of the world economy, but it is not the only influence, and we certainly cannot assume that the world would have been a better place, ceteris paribus. if only the old fixed rate system had remained in place. On the contrary, one of the elements on which there is a wide consensus is the view that structural developments in the international economy in the two decades after Bretton Woods had made the fixed rate system unworkable. It is important to understand the reason why the fixed rate system became infeasible since any recommendation regarding exchange rate arrangements in the future must deal with these structural developments as given.
Infeasibility of Fixed Rates
The proximate cause of the breakdown of the Bretton Woods system was the inability to maintain the fixed dollar price for gold. The United States did not take effective corrective action when the dollar came under increasing pressure in the late sixties, by when the 'dollar shortage" of the fifties had been converted into a "dollar glut". This in turn has been attributed to the fundamental asymmetry in the Bretton Woods institutional arrangements in which there were no effective disciplinary instruments that could be used for surplus countries and the key reserve currency country.
The basic problem arises because the maintenance of external equilibrium with a set of fixed normal exchange rates requires that the major trading countries accept the fixed nominal exchange rates as parametric, and adjust their domestic economic policies to ensure external account viability at these rates This requires a substantial sacrifice of domestic policy objectives to uk requirements of external equilibrium. Assuming that the initial exchange rate structure corresponds to a set of equilibrium real exchange rates, for it is real exchange rate structure through stable nominal rates requires that the tales of inflation in different countries should not diverge. Since difference in economic performance and in the importance attached to different domestic economic objectives, typically reflect themselves in different rates of inflation, the requirement that inflation rates should not diverge imposes an important restriction on domestic economic management. It is a restriction that may prove extremely cumbersome under certain circumstances.
It is in these circumstances that the alternative of delinking domestic economic management from the maintenance of exchange rate stability gained intellectual acceptability. Floating rates enable countries to pursue independent domestic economic policies, making their own choices about the relative importance to be given to conflicting domestic objectives such as employment and price stability, while the requirements of external equilibrium are met by allowing nominal exchange rates to adjust to achieve the required real exchange rate configurations. In its extreme from the delinking argument could be stretched to assert that coordination of policies was simply not necessary. Paul Samuelson, participating in a seminar in late 1978 put it as follows "I have heard people say that we have to have coordinated policies under floating exchange rates. That is what we don't have to have. Germany can fight inflation if it wants to, that is its own business under a properly running floating exchange rate. If the Germans and the Swiss wish to regard us as banana republics; if our political system insists upon making compromises, which it does not insist upon making, it is precisely floating exchange rates — not the automatic gold standard, not the Bretton Woods standard — that makes this possible".
Floating Rates in Practice: Volatility
The actual experience under floating rates has belied expectations that the new system would provide an easy way of insulating domestic policy from external balance considerations. Countries have in fact followed uncoordinated macro-economic policies, but floating has not ensured a reconciliation of these policies with a satisfactory external equilibrium. There is a widespread feeling that currency swings have been excessive, that exchange rates have tended to overshoot and that there have been persistent currency misalignments. In short, there is widespread agreement that the external balance achieved under floating rates docs not constitute”equilibrium" or at any rate not a "satisfactory equilibrium".
At the outset, it is important to recognize that exchange rate stability under floating rates can at best be understood in terms of stability in the real (price adjusted) exchange rates. Once an equilibrium real exchange rate structure, consistent with the basic stance of macro-economic policy, is achieved we can expect that nominal exchange rates will change in response to inflation differentials to maintain the equilibrium real exchange rate. There can be no presumption of stability in nominal exchange rates as long as inflation rates are not the same and they are surely not likely to be the same if the switch to floating rates has been necessitated precisely because macro-economic policy could not be effectively coordinated.
Another extremely important factor that militates against the achievement of "equilibrium" real effective exchange rates in the traditional sense discussed above is the increased importance if not dominance of capital account transactions in the determination of exchange rates. The removal of capital movement restrictions combined with the enormous expansion in the volume of offshore funds held in world financial markets, has meant that capital account transactions among currencies arising from portfolio switches, can dwarf the size of current account transactions and exert a dominant influence on exchange rate movements. The factors which determine these asset choice decisions include the overall macro-economic policies and prospects of different countries, and expectations of changes in these policies. Expectations are necessarily subject to considerable uncertainty. The possibility of random destabilizing movements is further increased because information available on a day to day basis is often of a tenuous kind, yet it can have a substantial effect in terms of the volume of funds moved in the market.
Having established that the operation of a floating rate system is likely to lead to exchange rate instability ,it is necessary to consider whether these phenomena are quantitatively important, and if so, what costs they entail. It is useful in this context to distinguish between volatility and misalignment.
Distinguish between Volatility & Misalignment
Volatility refers simply to fluctuations either from period to period or around some trend level and these fluctuations may be measured either in terms of nominal or real exchange rates. Misalignment refers to divergence of the exchange rate from some notional equilibrium level. Volatility does not necessarily imply misalignment since the exchange rate may be volatile because the equilibrium rate is volatile in which case there is no misalignment as such (although this is unlikely to occur in practice). Misalignment also does not necessarily imply volatility since exchange rates may be relatively stable but persistently misaligned in terms of their equilibrium levels.
Volatility is measured by the average absolute value of day-to-day percentage changes. Figures in brackets are adjusted for the trend factor during the period and thus indicate the degree of "excessive" movements.
This brings us to the question: Does volatility matter? The existence of volatility in the sense of random fluctuations adds to uncertainty in foreign trade transactions. The uncertainty can be reduced by hedging in forward markets but this does not solve the problem. In the first place hedging involves costs and these costs may be measured by the bid-offer spreads in the forward markets. It is interesting to note that these spreads have risen sharply since 1979 itself a reflection of the increase in uncertainty in world exchange markets. Secondly, and this is very important, hedging is possible only over a relatively short period, typically six months and at most a year. While this is adequate for trade payments lags, it is not adequate for longer period contractual payments obligations as for example on debt servicing. At present no effective mechanisms exist to hedge against exchange rate movements over longer periods as many countries may wish to do especially in so far as debt obligations are concerned. Finally developing countries typically do not find it easy to engage in forward market activity so that the effective scope for hedging available to economic agents in developing countries are relative limited.Thus volatility has a cost and the cost has increased as the extent of volatility has increased. The cost is larger for developing countries than for developed countries. For the developed countries the consensus of opinion thus far seems to be that the costs of volatility are on the whole not large enough to have disrupted the level and pattern of trade. For developing countries there is some evidence that volatility in real exchange rates has had adverse effects (Goes 1981 on Brazil and Diaz-Alejandro 1976 on Colombia) but it appears that in these cases the real exchange rate uncertainty arises from erratic pegging practices and not the erratic market movements of a floating rate. This has relevance for the question of how developing countries should manage their exchange rates in a world of floating rates—a point we return to later in this paper.
These are very large magnitudes and it is interesting to note that the misalignments have continued over a fairly prolonged period. There can be no doubt that the would have a quantitatively significant impact on both the level and pattern of world trade. The costs of misalignment are many and varied. They give the wrong price signals leading to misallocation of resources. Because of adjustment costs they involve loss of potential production and employment for the economy since resources cannot in fact move as much as required by misaligned exchange rate. Most dangerous of all they give intellectual respectability to protectionist pressures especially since the industries affected are not only those that should naturally be phased out but also those suffering purely from exchange rate misalignment. William- son makes the important point that while protectionist pressures increase in countries where the currency is overvalued this is not likely to be offset by comparable pressures to liberalise where the currency is undervalued. On the contrary there may be over investment in export or import competing industries on the strength of the undervaluation of the exchange rate which, when the misalignment is removed, will have to be abandoned. In short, sequences of overvaluation and undervaluation may ratchet up the degree of protectionism with clear economic costs
Some other Policy Issues
The above review of the functioning of the floating rate system indicates that the system has not functioned as smoothly as its proponents had expected. Floating rates have certainly not made the world immune from the adverse consequences of uncoordinated micro-economic policies. On the contrary, inappropriate micro-economic policies are often at the root of the serious misalignments that have emerged under the system. These difficulties focus attention on a number of policy issues that are relevant in designing a better exchange rate system. In this section we comment briefly on each of these.
Target Zones
Since fixed exchange rates are infeasible and floating rates have not solved the problems, there has been our understandable search for intermediate solutions and one of these is the concept of "target zones". The term is extensively used but is not always precisely defined. The basic idea seems to be that national authority, instead of taking the view that the exchange rate can settle where it will, should instead declare some sort of commitment of managing the exchange rate so that it stays at or near an equilibrium real effective rate. Instead of the narrow band of permissible variation allowed under the old Bretton Woods system the intention seems to be to allow wider variation and also to have soft margins.6 Since the target zone is in terms of real effective rates, the nominal exchange rate band is expected to be continually adjusted to take account of inflation differentials. The target zone should be published and it should be understood that monetary policy and sterilised intervention would be used to keep the exchange rate within the target zone as far as possible.
It is difficult to be confident about how a system of target zones would work in practice. On the one hand the proposed width of the zone and the existence of the soft margins suggests that a significant degree of instability and misalignment would still arise. However the implicit commitment to manage the exchange rate by using monetary policy and sterilised intervention can be expected to dampen these tendencies. In effect the "target zone" approach could provide mechanical signals from the exchange markets to domestic policy management to counter any excessive departure of exchange rates from fundamental equilibrium. The knowledge that such contracting policy would be triggered would also help to stabilise expectations in currency markets.
An important qualification on the effectiveness of the target zoning is that it is likely to be most effective only when target zones for the major currencies are determined in a mutually consistent manner. The target real effective exchange rates to be pursued by the major countries must be consistent with the patterns of current surpluses and deficits envisaged and there must be confidence that intervention will be symmetrically followed by countries at either end of the band. All this implies a high order of macro-economic coordination to which we revert later in this paper.
The Need for Reserves
An important issue arising out of the adoption of floating rates is what it does to the need for reserves The two dominant characteristics associated with the floating rate system are its equilibrating and insulating properties. As a result of the operation of both these properties, it was argued that the demand for international reserves would go down and that countries could manage with a lower order of reserves than under fixed exchange rate system. At a theoretical level the arguments in support of insularity as mentioned previously were at fault because they did not take into explicit account capital account transactions. The actual experience of floating rates has also belied the anticipation that demand for reserve would go down. Frenkel has estimated the demand function for reserves using cross section data for all the years from 1963 onwards and tested whether there was a shift, after floating, in the values of the co-efficients of the independent variables such as variability of international receipts and payments, the level of GNP and the average propensity to import. The equations showed that the demand for reserves has not been affected by the shift to floating rates. The fact that the demand equations remained unaffected implies that countries still feel the need for holding owned reserves inspite of the increased access to the capital markets and bank borrowings. Indeed the demand for reserves may have been underestimated to the extent that the actual holding of reserves by developing countries in the second period may have been less than the desired holding.
Except for the U.S., the other central banks in recent years have chosen to intervene whenever they feel there has been a misalignment in the exchange rate. Thus, the equilibrating property has not necessarily been ensured by the floating rate system. Consequently, the need for reserves has not diminished.
Under floating rate system, it is true countries acquire an extra degree of freedom in policy formulation and implementation because they do not have an exchange rate to defend.
However as stressed earlier this does not free completely domestic economic policy from external factors. This is particularly so when the frame- work has to take into account the inter-dependence, which comes from both the capital market side and the international currency side. The recent experience with the U.S. dollar provides a telling example of the situation. A high interest rate arising from unusually large budget deficits has led to large scale attraction of the capital inflows into U.S. which in turn have tended to maintain a strong dollar. The other countries, which have experienced capital outflows are not in a position to pursue independent monetary policies and let their interest rates to be determined solely by domestic considerations. Even under a fixed exchange rate system a high interest rate will attract capital inflows. But once the exchange rate has reached the top of the band, further capital inflow will be held back even if rates of interest are raised because there is always some risk of a fall in the exchange rate. However, with the floating rate, capital inflow can be accelerated by the prospect of a further appreciation of the currency. In short, a country may not have much more freedom in its monetary policy with floating exchange rate system than under fixed exchange rate system. In any case the adoption of target zones would require monetary policy to be supplemented by intervention as discussed earlier. Consequently the need for reserves to prevent the domestic economy from having to adjust too frequently to external shocks remains large.
A continued need for reserves under the floating exchange rate system needs to be emphasised because there has been a persistent opposition to the creation of new international liquidity in the form of SDRs on the ground that additional reserves are not needed. From the way floating rate system has been functioning, neither from the point of view of the developed countries nor from that of the developing countries can it be argued that additional reserves are not needed.
Implications for Developing Countries
Much of the discussion about exchange rate systems focusses on exchange rate options in the industrialised world. The issue of exchange rate options for the developing world have in general received much less attention. Developing countries clearly have a deep interest in the efficient functions of the international exchange rate system even among industrialised countries and any modifications in this area which improves the functioning of the world economy and world trade would contain significant advantages to the developing countries. Apart from this aspect, however, there are exchange rate options that individual developing countries must necessarily face.
Most developing countries have chosen to peg rather than float for a variety of reasons. The merits of this decision are not examined here—to do so would take us well beyond the scone of this paper. But it is relevant to ask, how should developing countries peg their exchange rates? Increasingly, developing countries have pegged to a blanket of currencies. In some cases the basket is tailor made, taking account of trade directions for example, and in other cases the basket is simply ready-made in the form of the SDR.
There is extensive theoretical work on what is the optional basket and how basket weights should be determined all of which is designed to ensure a change of basket which stabilises the nominal effective exchange rate at some desired level. However stabilisation of the nominal effective exchange rate is important only in circumstances in which domestic inflation rates closely follow inflation rates in trading partners. This is not likely to be the situation in most developing countries so that stabilisation of the nominal effective exchange rate will in general not stabilise the real effective exchange rate at a desired level, which is what matters.
This suggests that it is less important to worry about the design of the currency basket, which determines the extent of nominal exchange rate stabilisation, than to ensure that exchange rate policy is sufficiently activist to ensure that real effective exchange rates move in a desired fashion. It may not be possible to design a basket that ensures that this objective is automatically achieved which in turn means that whatever the basket is adopted realignments of the basket may be necessary so that real effective rates remain on target.
A second issue which is extremely relevant in a world of floating rates in which large exchange rate variations are likely over the medium-term is the currency composition of external debt. Since it is not possible to hedge over long periods, developing countries must ensure that the composition of their foreign assets and liabilities is such as to minimise risk. In general this calls for much greater diversification in the currency composition of debt with due allowance to interest rate differentials.
Coordination of Macro-Economic Policy
Whether the exchange rate system is floating, fixed or a combination of the two, there is no way that a country can insulate itself from external factors. It is an illusion to think that the floating rate system provides an escape route. This lack of insulation enforces interdependence. The more dominant an economy the more wide spread is the impact of its domestic economic policy on other countries. Therefore a satisfactory exchange rate system can emerge only if macro-economic policies of the major industrial countries are stable, mutually consistent and conducive to satisfactory performance of the world economy. In fact, the 1978 amendment to the IMF Articles recognizes this and enjoins the member countries to Endeavour to direct its economic and financial policies towards the objective of fostering orderly economic growth with reasonable price stability'. On paper, the amended articles imply a more active role for the Fund in its surveillance over exchange rate policies. The practice of course has been woefully inadequate.
In the light of the experience of the last few years, there is an increasing near universal emphasis on the need for coordination of domestic economic policies. This raises a critical institutional question. How is such coordination to be achieved and who is to participate in it? Coordination would indeed be partial if the synchronization of policies is confined to industrial countries aimed at minimising the imbalances among them. The international monetary system must remain 'international'. The goal that is sought to be achieved must be one of the optimal global welfare.
The equilibrium that results from any given set of macro-policies in industrialised countries affects the whole world often in powerful ways. The persistence of a system which compels the flow of savings from developing countries to developed countries as is currently happening is surely inherently inequitable and in the long run also inefficient in the strict sense. On the contrary, the system should facilitate the flow of resources from the developed to the developing. The surveillance of the exchange rate policy of member countries has no meaning unless it seeks as Article 1 of the IMF Agreement asserted 'to contribute to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objective of the economic policy.
Conclusion
Part of the reason why countries are concerned about exchange rates is psychological, and part real. Psychological – because of headline effect of a depreciating currency – "all time low", "weak", "tumbling" creates a negative impact about the soundness of a country’s currency. For an ordinary man or woman on the street and the political leaders who represent t hem, it becomes a matter of concern as nobody wants his country’s economy or currency to be weak or tumbling. However, irrational it may be, it is a fact which has to be reckoned with by all Central Banks. It would be nice if there was a new terminology to describe movements in exchange rates which is less emotive and less sensational.
Part of the reason for concern with exchange rates is also real, as seen in East Asia, Russia and elsewhere. The contagion effect is quick and a sharp change in the currency value can affect the real economy. Exporters may suffer if there is unanticipated sharp appreciation and debtors or other corporate may be affected badly if there is a sharp depreciation, which can also lead to bank failures and bankruptcies
A fundamental change that has taken place in recent years is the importance of capital flows in determining exchange rate movements as against trade deficits and economic grow th, which were important in the old days. The latter do matter, but only over a period of time. Capital flows, on the one hand, are primary determinants of exchange rate movements on a day to day basis. For example, the US with the largest trade deficit in the world today has the strongest currency. Europe, with a massive trade surplus, on the other hand (until lately) has one of the weakest currencies. This result is explained by movements in capital flows, which is a relatively a new phenomenon. The same is happening the world over – East Asia, New Zealand, South Africa and Australia
We have tried to give you a bird’s eye view of the dilemmas the Central Banks face as well as the issues that are currently being debated internationally at the level of Finance Ministers, Central Bank Governors and Heads of International Institutions. It may be useful to remember that floating exchange rate system, and volatility associated with capital flows, are relatively new phenomena. Until the 90s, we lived in a world of fixed exchange rates with par values or, fixed but adjustable exchange rates, in response to changes in fundamentals. Floating rates, Capital volatility, massive changes in technology and integration of world wide markets across different time zones are relatively new phenomena. So, we are still on the learning curve. There are also some major structural changes taking place in the organisation of markets, for example, as a result of emergence of common European currency, whose full impact is not yet evident.
Recent changes have brought tremendous benefits to the developing world, including India. Capital constraints and technological constraints to developments are fast disappearing. As the new horizons open, we are also faced with some new challenges. With your help, support and guidance, India and other countries represented here will be able to take maximum advantage from new technological and other advances while minimizing risks.
1. PRODUCT MIX
The banks primarily deal in services and therefore, the formulation of product mix is required to be in the face of changing business environment conditions. Of course the public sector commercial banks have launched a number of policies and programs for the development of backward regions and welfare of the weaker sections of the society but at the same time it is also right to mention that their development-oriented welfare programs are not optimal to the national socio-economic requirements. A proportional contraction in the number of customers is found affecting the business of public sector commercial banks. The changing psychology, the increasing expectation, the rising income, the changing lifestyles, the increasing domination of foreign bans and the changing needs and requirements of the customers at large make it essential that they innovate their service mix and make them of worked class. The development of new generic product, especially when the business environment is regulated is found a difficult task. However, it is pertinent that banks formulate a package in tune with the changing business conditions. Against this background, we find it significant that the banking organizations minify, magnify, combine and modify their service mix.
In the formulation of service mix, the banks can follow two guidelines, first is related to the processing of product to market needs and the second is concerned with the processing of market needs to product. In the first process, the needs to the target market are anticipated and visualized and therefore, we expect the prices likely to be productive. In the second process, the banks react to the expressed needs and therefore we consider it reactive. It is essential that every product is measured up to the accepted technical standards. This is because no consumer would buy a product, which contains technical faults. Technical perfection in service is meant prompt delivery, quick disposal, and presentation of right data, right filing, proper documentation or so. If computers start disobeying, the command and the customers get wrong facts, the use of technology would be a minus point, and you don’t have any excuse for your faults.
Marketing aims not only offering but also at creating\innovating the services\schemes found new to the competitors vis-a vis- to the customers. The enhanced customer patronage would be a reward to the bank. The additional attractions, the product attractiveness would be a plus point of your mix, which would help you in many ways. This makes it essential that the banking organizations are sincere to the innovations process and try to enrich their peripheral services much earlier than the competitors. We also find the product portfolio of the banks. While formulating the services mix, it is also pertinent that the bank professionals make possible affair synchronization of core and peripheral services. To be more specific, the peripheral services need an intensive care since the core services are found by and large the same. Innovating the peripheral services thus appears to be an important functional responsibility of marketing professionals. We can’t deny the fact that if the foreign banks have been getting a positive response; the credibility goes to their innovative peripheral services. Thus, the formulation of product mix is found to be a difficult task that requires world-class professionalism.
2. PROMOTIONAL MIX:
Promotion mix includes advertising, publicity, sales promotion, word – of – mouth promotion, personal selling and telemarketing. Each of these services needs to be applied in different degree. These components can be useful in the banking business in the following ways:
Advertising
Advertising is paid form of communication. Banking organizations use this component of the promotion mix with motto of informing, sensing and persuading the customers. While advertising it is essential to be aware of key decision making areas so that instrumentally helps banks at micro and macro levels.
Finalizing the budget:
This is related to the formulation of the budget for advertisement. The bank professionals, senior executives and even the policy planners are found to be involved in the process. The business of a bank determines the scale of the advertisement budget. In addition, the intensity of competition also plays a decisive role since in the majority of cases; we find a increase in the budget due to a change in the competitor’s strategy.
Selecting a suitable vehicle:
There are a number of devices to advertise, such as broad cast media, telecast media and print media. In the face of the budgetary provisions, it is necessary to select a suitable vehicle. For promoting the banking business, the print media is found to be economic as well as effective.
Making possible creative:
The advertising professionals bear the responsibility of making the appeals, slogans and messages more creative. Here, creative means making the advertisement programs distinct to the competitive organizations, which are active in influencing the impulse of the customers and successful in informing and sensing the customers. This requires an in-depth knowledge of the receiving capacity of the target market for which the advertisements are designed.
Testing the effectiveness:
It bears an analogous significance that our advertisements are effective in influencing the impulse of customers by energizing persuasion. For making the process effective, it is essential to test the effectiveness before launching of the commercial advertisements.
Instrumentality of branch managers:
At micro level, a branch manager bears the responsibility of advertising locally so that the messages reach the target audience.
Characters and themes:
At apex level it is also important that while advertising the senior executives watch the process minutely and select events, characters having a regional orientation. The popular characters and sensational moments are likely to be impact generating. The theme for appeals and messages also needs due attention. Of course, they have a legitimate right of advertising but it is not meant that like the goods manufacturing organizations, the service generating organizations also start making invasion on culture. It is necessary to regulate a bias to gender, profession, region or so.
Public relations:
In the banking services the effectiveness of public Relations is found in high magnitude. It is in this context that difference is found in designing of the mix for promoting the banking services.
Telemarketing:
The telemarketing is a process of promoting the business with the help of sophisticated communication network. Telemarketing is found instrumental in advertising the banking services and the banking organizations can use this tool of the promotion mix both for advertising and selling. This minimizes the dependence of banking organizations on sales people and just a counter or center as listed in the call numbers may service multi- dimensional services.
Telemarketing is likely to play an incremental role in marketing the banking services. The leading foreign banks and even some of the private sector commercial banks have been found promoting telemarketing and they have been getting positive results for their efforts.
Word-Of- Mouth:
Much communication about the banking services actually takes place by word- of- mouth information, which is also known as word- of- mouth promotion. The oral publicity plays an important role in eliminating the negative comments and improving the services. This also helps the banker to know the feedback, which may simplify the task of improving the quality of services. This component of promotion mix is not to influence budget adversely or generate additional financial burden. By improving the quality of services and by offering small gifts to the word- of- mouth promoters, bankers can get more business command in their area.
The above facts make it clear that such kind of promotion is influenced by a number of factors. The most dominating factor is the quality of services offered. The bank professionals, the frontline staff and the senior executives should realize that degeneration in quality would make this tool effective.
3. PRICE MIX:
In the formulation of marketing mix, the pricing decisions occupy a place of outstanding significance. The pricing decisions include the decisions related to interest and fee or commission charged by banks. Pricing decisions are found instrumental in motivating or influencing the target market. The RBI regulates the rate of interest and the Indian Banks’ Association controls other charges. In our country, the price mix is more important because the banking organizations are also supposed to sub serve the interests of the weaker sections and the backward regions. Also in making the pricing decisions, the Government Of India instrumentalists or commands everything as a shadow policy maker. This also complicates the price mix for banking sector.
Pricing policy of a bank is considered important for raising the number of customers vis-à-vis the accretion of deposits. Also the quality of service provided has direct relationship with the fees charged. Thus while deciding the price mix customer services rank the top position. Banks also have to take the value satisfaction variable in to consideration. The value and satisfaction cannot be quantified in terms of money since it differs from person to person. Keeping in view the level of satisfaction of a particular segment, the banks have to frame the pricing strategies.
The banking organizations are required to frame two- fold strategies. First, the strategy is concerned with interest and fee charged and the second strategy is related to the interest paid. Since both the strategies throw a vice- versa impact, it is important that banks attempt to establish a correlation between two. It is essential that both the buyers as well as the sellers have feeling of winning.
4. THE PEOPLE
Sophisticated technologies no doubt, inject life and strength to our efficiency but the instrumentality of sophisticated technologies start turning sour id the human resources are not managed in a right fashion. We can’t deny the fact that if foreign banks are performing fantastically; it is not only due to the sophisticated information technologies they use but the result of a fair synchronization of new information technologies and a team of personally committed employees. The moment they witness lack of productive human resources even the new generation of information technologies would hardly produce the desired results. In addition to the professional excellence, the employees working in the foreign banks are generally value- based. Thus we accept the fact that generation of efficiency is substantially influenced by the quality of human resources. The quality for banking sector is an aggregation of all the properties, which are found essential for generating the efficiency and projecting a fair image. Even efficiency essentially is supported by ethical dimension, humanity and humanism.
The development of human resources makes the ways for the formation of human capital. Human resources can be developed through education, training and by psychological tests. Even incentives can inject efficiency and can motivate people for productive and qualitative work.
5. THE PROCESS
• Flow of activities: all the major activities of banks follow RBI guidelines. There has to be adherence to certain rules and principles in the banking operations. The activities have been segregated into various departments accordingly.
• Standardization: banks have got standardized procedures got typical transactions. In fact not only all the branches of a single-bank, but all the banks have some standardization in them. This is because of the rules they are subject to. Besides this, each of the banks has its standard forms, documentations etc. Standardization saves a lot of time behind individual transaction.
• Customization: There are specialty counters at each branch to deal with customers of a particular scheme. Besides this the customers can select their deposit period among the available alternatives.
• Number of stores: numbers of steps are usually specified and a specific pattern is followed to minimize time taken.
• Simplicity: in banks various functions are segregated. Separate counters exist with clear indication. Thus a customer wanting to deposit money goes to ‘deposits’ counter and does not mingle elsewhere. This makes procedures not only simple but consume less time. Besides instruction boards in national boards in national and regional language help the customers further.
• Customer involvement: ATM does not involve any bank employees. Besides, during usual bank transactions, there is definite customer involvement at some or the other place because of the money matters and signature requires.
6. THE PHYSICAL EVIDENCE
The physical evidences include signage, reports, punch lines, other tangibles, employee’s dress code etc. The company’s financial reports are issued to the customers to emphasis or credibility. Even some of the banks follow a dress code for their internal customers. This helps the customers to feel the ease and comfort
Signage: each and every bank has its logo by which a person can identify the company. Thus such signages are significant for creating visualization and corporate identity.
Tangibles: banks give pens, writing pads to the internal customers. Even the passbooks, chequebooks, etc reduce the inherent intangibility of services.
Punch lines: punch lines or the corporate statement depict the philosophy and attitude of the bank. Banks have influential punch lines to attract the customers.
Banking marketing consists of identifying the most profitable markets now and in future, assessing the present and future needs of customers, setting business development goals, making plans-all in the context of changing environment.
