A Hundred Small Steps: Creating Liquid and Efficient Markets

This blog post is in continuation of my series of blog posts on RBI Governor Raghuram Rajan's report titled "A Hundred Small Steps" published when he was with the Planning Commission of India.

This post focuses on Chapter 5 of the report, which deals with establishing Efficient and Liquid Markets. This section of the report delves into what could be changed in the structure of the financial markets in India to make them more resilient and liquid. I will try to describe the contents of the report here, with my analysis where possible.

First the definitions. Market efficiency is the degree to which information and forecasts about the future are impounded into financial prices. Liquidity pertains to the ability to transact with low transaction costs. Liquidity has 3 aspects: immediacy, depth, and resilience. Immediacy refers to the ability to execute trades of small size immediately without moving the price adversely (also called low impact cost). Depth refers to the impact cost suffered when doing large trades. Resilience refers to the speed with which prices and liquidity of the market revert back to normal conditions after a large trade has taken place.

The concepts of efficiency and liquidity are linked. In order for markets to be efficient, market participants who obtain information have to be able to trade on that basis and impound that information into the prices. For economic agents to have an incentive to expend resources in information processing and forecasting, markets must be liquid, else any profits from the activity will be dissipated in transaction costs alone. Expensive or infeasible transactions reduce the profits from successful forecasting.  This (in turn) inhibits the investments made in information processing and forecasting. Market liquidity is thus a critical precondition for market efficiency. In turn, market efficiency assures uninformed participants that market prices are up to date and reflect fundamentals, so they can trade safely. This in turn provides volumes that ensure liquidity.

The below table highlights the state of the Indian markets from the 3 aspects of liquidity:

A particularly important point to note here is the lack of progress. In the period from 2003 to 2008, 3 elements have come through the onset of immediacy with near money options on index and liquid stocks, the onset of immediacy and depth on the interest rate swap market, and the onset of immediacy on some commodity futures products. 

The main reason why so many markets are illiquid and inefficient are listed as follows: 

1. Banning of products and markets: Currency futures and commodity options are banned in India. A missing market can hamper the efficiency of other markets also. The absence of interest rate futures can hurt the treasury market. 

2. Rules that impede participation of firms and individuals in certain markets for reasons other than sophistication. eg. domestic individuals cannot participate in currency markets (outright ban), banks are prohibited from adopting long positions in interest rate futures (regulatory restrictions on some kinds of activities), all FIIs put together have to keep their ownership of corporate bonds below $1.5 billion (quantitative restriction)

3. Inadequacies of financial firms arising out of their ownership, size and other reasons. The institutional structure of market participants is shaped by the forces of competition and regulation. When firms face competition from market share, they are forced to find new ways of serving customers. It is this pressure that, over time, creates highly competitive companies that are able to bring down costs through technological innovation and better management of resources. The inadequacies of Indian financial institutions can be traced at least partly to the forces that restrict competition. 

State ownership of financial institutions is a major factor that inhibits competition. A second factor is restrictions on ownership and shareholding. This applies especially to banks and exchanges, clearing corporations, and depositories. Limits on how many shares an individual can hold and limits on foreign ownership make it difficult for new institutions to be started. This reduces the competition pressure on incumbents, and slows down the pace of development of market institutions. 

In short, the deficiencies in Indian financial markets stem from missing markets and missing actors. The way to address this issue is to open the markets, equalize market rules for all participants, and in removing rules that ban specific players only from certain activities. The second problem is deeper and requires more long term efforts, that of improving the capabilities of financial firms. The way to do this is to increase the competitive pressures in the market ecosystem by removing constraints in the way of entry of new players.

4. A silo model of regulation  and the structure, incentives, and staffing, of regulatory institutions that results in barriers to innovation and competition.

There are 2 factors of consequence here: 

1.  India uses a silo model where financial markets are broken up across 3 agencies: SEBI, RBI and FMC. There are are hard constraints that separate firms and players in one silo from operating in other silos. These constraints reduce competition, hamper economies of scale and scope, and impede the flow of successful institutional arrangements and ideas from one part of the financial markets to the other. 

2. Steep barriers to innovation are in place. New ideas are banned unless explicitly permitted. A great deal of what would be considered ordinary activities in the world of global finance is incompatible with existing laws and subordinate legislation. 

5. Frictions caused by taxes:

Different tax treatment is applied to different types of investments and transactions. Taxation plays an important role in determining the returns generated by trading. When transaction taxes are high, liquidity disappears when the markets go down. 

Suggested reforms:

To achieve true economic benefits, we need:

1. The availability of complete markets where agents are able to trade and hedge all the risks that they need to manage, and the existence of adequate liquidity in all these markets.

2. A regulatory structure that protects customers from fraud, but without imposing undue costs and without creating barriers to entry, innovation, and competition.

The reforms that would achieve these objectives have 3 broad elements:

1. Reforms within existing legal and institutional framework.

2. Capital account liberalization.

3. Merger of regulatory and supervisory functions for all organized financial trading into SEBI and strengthening the legal foundations of market regulation.

4. Implement the Debt Management Office.

I will describe these proposals in the upcoming blog posts.

Link to the previous blog post in this series: A Hundred Small Steps: Part 7

Next blog post in this series: A Hundred Small Steps: Part 9

DRUPAL CAMP PUNE

The DRUPAL CAMP PUNE was organized here today where we saw participants from many businesses that provide software services around the open source content management platform DRUPAL.

We had SRIJAN technologies, who provide web development services to businesses who would like an online presence and online channel to reach their customers. They use the DRUPAL platform to build their software solutions and have the ZEE TV network in India amongst their customers. They follow the principles of lean and agile software development and have offices in Bengaluru, Goa, and Delhi.

ACQUIA was the other company present at the DRUPAL CAMP. They provide a platform for cloud based hosting of Content Management Systems. The ACQUIA Developer's Cloud is amongst the most highly ranked platforms for developing applications on the DRUPAL platform. Many eminent companies host their web services on the ACQUIA platform including Pinterest and SunEdison.

QED42, AXELERANT and CLARION are the other DRUPAL based service providers, who were present at the DRUPAL CAMP. As stated by the representative from QED42, the companies all consider themselves to be a community even though they compete in the same market on a similar business model.  AXELERANT has helped develop the web CMS for RedHat LINUX.

The camp hosted a job fair and workshops on DRUPAL 8. I attended one of the workshops on DRUPAL development and this one described how to deploy DOCKER instances on the AMAZON AWS cloud and run applications within them. 

You can follow the events of the DRUPAL community on their Twitter account of DRUPAL CAMP PUNE  @drupalcamppune (camp2015.punedrupalgroup.com) 

To be Keynesian or not.. That's the question.

The Keynesian Economics have come in for significant attacks from the right because of what has happened to Greece. I think that here things need to be clarified that America is not Greece and the Keynesian Economics of low rates and high borrowing by the government will, in fact, create sustainable growth. 

This could happen if the money is actually borrowed by the businesses that create the jobs in place of the government. And we are seeing that happen. If the government yield rates go up, the businesses will see less demand for their debt and this may not bid well for the economy. America has seen a large number of startups in technology and non-tech sectors and this is not to be seen in Greece. 

So it seems that the Keynesian economics are not to be blamed here. On the flip side, I do feel that a socialist government model wherein the center can take a more proactive role in the economy by building businesses and other projects such as railways would be better in the long run.

IT STRATEGY CASE STUDY FOR STEEL INDUSTRY IN INDIA

     

How and Why TATA STEEL……..??

·   Tata Steel Limited which was formerly known as TISCO i.e. Tata Iron & Steel Company Limited is an Indian Multinational steel-making company headquartered in Mumbai, Maharashtra, India and is a subsidiary of TATA Group – the most trusted & valuable group in India.

·   It is the 11^th largest steel company in world according to worldsteel.org with annual crude steel capacity of 26.2 million tonnes (Mt).

·       It is the 2^nd largest private-sector steel company in India after SAIL.

Background & History of TATA STEEL

·  Established in 1907 as Asia's first integrated private sector steel company, Tata Steel Group is among the top-ten global steel companies with an annual crude steel capacity of over 29 million tonnes per annum.

·       Founded by Dorabji Tata

·       CEO – T. V. Narendran

·  It is now the world's second-most geographically-diversified steel producer, with operations in 26 countries and a commercial presence in over 50 countries.

·       The Tata Steel Group, with a turnover of Rs.1,48,614 crores in FY’14, has over 80,000 employees across five continents and is a Fortune 500 company.

·   Tata Steel’s larger production facilities comprise those in India, the UK, the Netherlands, Thailand, Singapore, China and Australia.

·  Operating companies within the Group include Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), Tata Steel Singapore and Tata Steel Thailand. 

·  The Tata Steel Group’s vision is to be the world’s steel industry benchmark in “Value Creation” and “Corporate Citizenship” through the excellence of its people, its innovative approach and overall conduct.

· Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency. 

·       In 2008, Tata Steel India became the first integrated steel plant in the world, outside Japan, to be awarded the Deming Application Prize 2008 for excellence in Total Quality Management.

·    In 2012, Tata Steel became the first integrated steel company in the world, outside Japan, to win the Deming Grand Prize 2012 instituted by the Japanese Union of Scientists and Engineers.

Case of IT Strategy

·       Tata Steel was initial facing the challenges of –

o   The technology that Tata was using was a simple replication of manual system.

o   It operated as individual islands of information & technology was outlived its lifetime and was completely obsolete.

o   Employees & Management faced a cumbersome task exchanging & retrieving information from the system.

o   Moreover reliability of information obtained was questionable because of inconsistency and duplication of data from different departments.

o   No built-in integrity check for various data sources.

o   Several cases of information missing.

o  The management at Tata Steel wanted the software to seamlessly integrate with its existing information system and further provide compatibility with its future implementations. 

How it was implemented….?

·       Tata Steel adopted ERP technology to take a lead in the competitive steel industry and through constant learning, innovation and refinement of its business operations, has transited seamlessly from a production-driven company to a customer-driven one.

·       They re-designed the two-core business processes, Order Generation & Fulfilment and the Marketing Development processes, to improve customer focus facilitating better credit control and reduction of stocks.

·       After an in-depth study of functionality, cost, time, compatibility, esteem, operability, support and future organizational requirements was done, SAP topped the list of contenders.

·       The implementation of SAP software was associated with certain strategic goals in mind.

·       With this implementation, TISCO wanted to bring forth a culture of continuous learning and change. This would enable TISCO to achieve a world-class status for its products and services and strengthen its leadership position in the industry.

·       Besides this, TISCO also wanted the software to result in quick decision-making, transparency and credibility of data and improve responsiveness to customers across all areas.

·       “Implementing any ERP system is a challenge for an organization because of the declining success rate of ERP implementations world-wide. The challenge is compounded if the ERP provider is a world leader” - SAP.

·       At Tata Steel, however the challenge did not lie in successfully implementing SAP or in rolling it out to 46 odd geographic locations across the country under a big bang approach in just eight months.

·       It was inspiring to know that TEAM ASSET with support from Pricewaterhouse Coopers and SAP successfully lived up to our axiom and truly demonstrated leadership skills by going live across 46 locations within a record time frame of eight months.

·       In January 99 the team from TISCO was decided and christened 'TEAM ASSET' an acronym for Achieve Success through SAP Enabled Transformation.

·       The TEAM ASSET had two simple axioms:

o   Go-Live date - 1st November 1999

o   There are only 24 hours a day

·       Preparatory task forces activities were conducted and core business processes were mapped to SAP modules.

·       Also another parallel activity called 'Change Management' was initiated within the company. The prime objective of 'Change Management' was to reach out to people involved non-directly in the project to apprise them of the developments taking place.

·       Tata Steel planned a big-bang approach of going live with all the modules at the same time, in just a span of eight months.

·       Driven against the speed of time, the pace of implementation was fast with all activities backed by a lot of thought process and meticulous planning.

·       On 1st November 1999 Tata Steel pulled off a big bang implementation of all SAP modules at one go across 46 countrywide locations, as per the set deadline.

USP’s of IT Strategy

·       USP is just-in-time delivery, made possible through efficient processes imbibed from other company.

·       The location of processing plants and warehouses, and the installation of SAP at every point forms the hardware.

·       The software team consists of people who are highly trained and customer focused. Their main job is to keep track of customer’s inventories and needs on a daily basis and ensure that the company’s supply chain is balanced.

·       Among the top ten global steel companies with an annual crude steel capacity of over 28 million tonnes per annum.

Key Outcomes of the IT Strategy

·       The introduction of SAP solutions within Tata Steel led to efficient business processes, enhanced customer service, reduced costs, improved productivity, accelerated transaction time, workflow management and reduction in the number of credit management errors.

·       “Post the introduction of the SAP solution, the results have been terrific. The company has spent close to Rs 40 crore on SAP implementation, and has already saved Rs 33 crore”.

·        The manpower cost has reduced from over $ 200 per ton two years ago, to about $140 per ton in 2000.

·        The overdue outstanding was brought down from Rs.5170 million in 1999 to Rs.4033 million by June 2000.

·       The inventory carrying cost was drastically deflated from Rs.190 per ton to Rs.155 per ton.

·       To add to this, there had been significant costs savings through management of resources with the implementation of SAP.

·       With SAP's solution Tata Steel can now update their customers on a daily basis and provide seamless services across the country improving customer management.

·       The availability of online information has facilitated quicker and reliable trend analysis for efficient decision-making.

·       Besides the streamlined business process reduces the levels of legacy system and also provides consistent business practices across locations and excellent audit trail of all transactions.

Statement by TATA STEEL Executive

"Now I shudder to think how we were functioning so many years without a world-renowned ERP system. Along with the hard times we had, came the rewards of the success of implementation," remarked Mr. K. V. Srinivasan, Member, Team ASSET at TISCO.

Suggested IT Strategy v 2.0 for TATA STEEL to maintain competitive advantage in future

·       In future, Web enabling of SAP R/3 should be implemented.

·       On the surface, it means it would allow anyone to access SAP R/3 over the Internet.

·       But beneath it, the implications are tremendous, as it would result in sharing of information with enterprise accounts and key customers.

·       The success in Marketing and Sales has prompted a re-visit of the existing system in the works and a detailed rollout is expected as below.

·         Phase I - To Extend SAP in Works with FI, CO, MM, PP & QM.

·         Phase II - To implement SAP modules such as Asset Management & Budget management sub-modules of FICO, Plant maintenance, Human Resources, Production Optimizer (such as SAP APO)

·         Phase III - SEM (Strategic Enterprise Management)

·       The company should also adopt the mySAP Customer Relationship Management solution to enhance its customer relationships in the near term and eventually realize its dream of a becoming the most efficient and competitive company in the world in its vertical.

Maersk Line - The Stalwarts Of Shipping Industry

Executive Summary

The maritime industry, just as other areas of human endeavors, has responded appropriately to evolve ways to ensure that river crafts and other modern equipment are developed to meet the present needs of shipping practitioners. It has also put measures in place to tackle some of the main challenges hindering the sustainable development and growth of the maritime industry. Shipping is not a local business. It is a business that transcends national boundaries with set rules and regulations respected worldwide. Indeed, the global maritime watchdog, the International Maritime Organization (IMO), has guidelines and conventions that guide the building of ships, their operations, carriage of goods, repairs, seafarers ‘welfare, navigation in coastal and international waters. Every commodity and type of goods can be loaded and carried in ‘the box’, as the container is often referred to. As a result, modern container shipping has changed the way we transport goods around the world and has played a key role in globalization.

Maersk Line operates in a competitive global industry that demands innovation to create the agile technology infrastructure we need to be a leader amongst peers. Maersk encourage open conversation with customers in order to understand and address their current and future needs and working towards maintaining industry leadership through innovation that brings customers value. Customers can expect reliable, efficient and consistent product and service solutions, providing the strongest foundation to deliver on their promises. ‘Your promise. Delivered.’ is Maersk Line’s acknowledgement and appreciation of the importance of keeping these promises and of the part we have to play in helping to deliver them. The company plays an important strategic role in Denmark’s AP Moller-Maersk Group: restoring profitability and maintaining its industry leadership position central to its strategy.

The Maersk Group

A.P. Moller – Maersk Group is a conglomerate based in Copenhagen in Denmark that was established in 1904. It is considered as the largest container ship operator and supply vessel operator in the world. The company has held that distinction since 1996. It operates 600 vessels with 3.8 million TEU. It also owns the ship Emma Maersk, considered as the largest container ship in the world. The company has a presence in 135 countries around the world. In 2009, Maersk Line vessels made around 35,000 port calls - equivalent to approximately four port calls per hour or one call every 15 minutes. World trade would not be the same without the modern container, invented in 1956. Today, Maersk Line ships around 14% of the world container trade.

The Need For IT Strategy

Mr. Skou (CEO) and his new leadership team faced the dual challenge of improving financial results in the short term while simultaneously breaking the cycle of volatility and delivering more sustainable shareholder value over the medium to long term. They quickly recognized that the best performers in the container-shipping industry created shareholder value throughout the cycles experienced by the sector. Maersk Line therefore had to identify and address the root causes of its own volatile performance. It was already handling all the cargo it can manage. But when Maersk determined that the volume of most of the goods it was shipping had not grown to full capacity, the company decided information technology outsourcing (ITO) would be a crucial part of rectifying the situation.

Implementation of Strategy

In an effort to support further business growth and increase organizational flexibility, Maersk decided to consolidate all of its data centers and server rooms operating worldwide onto a single outsourced platform. HP was already hosting some of Maersk’s IT environment, and in March 2011 Maersk initially approached HP about expanding the scope of the relationship.

The first phase, “Back to Black”, was all about short-term financial results. Its specific aim was to restore profitability within one year, which meant engineering a swing in performance representing more than $1bn. Mr. Skou’s team quickly identified a number of measures to cut costs and increase revenues. This was the easiest stage, probably because Maersk Line executives worked in a volatile industry and were used to addressing immediate performance issues.

The second stage, “Finish the Foundation”, involved the leadership team taking greater control of the mass of internal organizational initiatives that different parts of Maersk Line had launched to address the company’s declining performance. Mr. Skou’s goal overall was to break down silos to make planning and operating systems more integrated and coherent as part of a general effort to create a strong organizational foundation for long-term success. This phase involved hard choices about how much the leadership team should intervene in shaping a new organization, including how the business should be structured and which projects should be shelved. Ultimately, more than 40 per cent of projects were halted.

The final phase, “Sustainable Profitable Growth”, was concerned with specific actions to make Maersk Line the best-performing container-shipping company, and not just the largest. Mr. Skou and his team reflected on current and potential changes in their industry, and on what type of company they wanted to build. They identified clear “must-win battles”, the priority areas on which the leadership team would focus to address long-term underperformance.

Defining these priorities was the most difficult part of the strategy. It forced the team to consider not only how to reshape their individual areas of responsibility but also how the decisions would collectively help advance the business.

The USP of IT Strategy

Operating in 100 countries and transporting goods around the globe, at first glance it would appear Danish shipping company Maersk Line is already handling all the cargo it can manage. But when Maersk determined that the volume of most of the goods it was shipping had not grown to full capacity, the company decided information technology outsourcing (ITO) would be a crucial part of rectifying the situation.. HP was already hosting some of Maersk’s IT environment, and in March 2011 Maersk initially approached HP about expanding the scope of the relationship.

Maersk ran through a global setup. The solution took responsibility to 38,000 end users. The service desk was the first line, with significant consolidation. For the data centers, they reduced cost by making them more agile. Maersk sought a flexible solution catering to all their needs, including managed print services around the world, ease of business, on-time delivery, and affordable cost. After a planning period that lasted from March to October 2011, HP and Maersk signed a five-year agreement in November 2011 and immediately put the project into development, with delivery date.

Outcomes Of  IT Strategy

That modernity and science have changed the face of shipping worldwide are understatements. In many ways, science, especially information and communications technology (ICT), has impacted immensely on the maritime industry.  This is due to the fact that ICT has gone a long way in dictating the pace of development in the shipping world. This explains why river crafts have changed in shape and sizes over the years. The change is not limited to the river crafts and other equipment used in the maritime sector of the economy. Navigation has also been affected by ICT, as most river crafts are now operated in digital format rather in analogue. Moreover, the way and manner port facilities are built nowadays differs significantly from what was obtainable in the past.

1. Better coordination: Information exchange allows a better coordination between ships which is needed no matter for what purpose the ship is sailing. It is due to importance of coordination in marine industry that even more efforts are being made at developing an information exchange system that will allow greater coordination. Such a system would include features like Virtual Regional Maritime Traffic center, the Maritime Safety and Security Information System, the Long Range Identification and tracking and the Regional Co-operation Agreement on combating piracy and armed robbery. Such a system allows coordination in every situation from planning a transit through a narrow region to warding off a piracy attack.

2. Greater safety of ships: An effective information exchange system allows better coordination between the ships, hence greater safety of ships. In case of maritime accidents, this efficient system will allow rapid information exchange which will help reaching the ship in trouble sooner. Especially in case of maritime accidents like grounding of a ship or a pirate attack where it becomes difficult for a ship to communicate on its own, an information exchange system can be very helpful.

3. Improved trade: A better information exchange system would improve the scope of trade globally. The shared information here could include cargo information about ships leaving from various ports, connecting ships scheduling etc. which will mean ships can communicate better and trade can improve.

4. Sharing information and experiences: Through maritime information exchange, there is not only exchange of knowledge but also of valuable experience. This will allow mariners to learn from each other’s experience, getting precious details about expeditions other mariners have been on like handling various maritime accidents, running into unexpected situations etc. and add more to their knowledge. Allowing a proper threshold for such information exchange in maritime industry can open up gates for better learning experiences for mariners.

5. Better trade options: An information exchange system can be a single international organization that will regulate information and make it available to one and all, making important piece of knowledge known while keeping the other sensitive bits in safety. The main idea behind such a system is the scope of better trade options. An internationally maintained organization will be the centre point of flux of all the information and will make trading smoother. That way, ships can communicate directly, sharing their information through a single body. This can open up a lot of trading options which sometimes may not be recognized due to lack of information.

6.Discuss problems and views about current issues: Information exchange events organized all over the world are the perfect opportunity for seafarers and shipping from all over the world to discuss their problems. At a recent maritime information exchange vessel operator’s meeting, everything from marine environment to maritime accidents to specific and future threats to marine industry was discussed. This constructive flow of information surely helps all shipping companies present in terms of their future planning and present management.

Sustainable Competitive Advantage

Trade liberalization and information technology are continually advancing, national borders are increasingly disappearing and barriers to global trade are falling. As a result, global manufacturing and marketing are becoming increasingly organized. To cope with this operational environment, global firms have been searching for new production and logistics architectures as a way of gaining the advantages that come with standardized global production.In developing a global operation strategy, however, a number of issues arise which may require careful consideration.

First, since world markets are not homogeneous, there is still the need for local variation in many product categories. The growth of global brands and the growing convergence of customer preferences would enable standardized products to be marketed in similar fashion around the world. However, the reality of global operations is that there are significant local differences in customer preferences and product requirements. As such, though certain brands and preferences may be global, individual products may require varying levels of customization in order to meet specific country needs.

Second, as there is a high level of uncertainty involved in coordinating a global operations strategy, the complexity of managing global supply chains may result in higher costs. With the trend towards globalization gaining speed, the complexity of the logistics task is increasing exponentially, influenced by such factors as the increasing range of products, shorter product life cycles, marketplace growth and the number of supply chains.

What can Maersk Do?

The Shipping industry is steadily approaching a period of vast change. At a time when environmental concerns and energy prices remain high, savings on fuel can make a significant improvement to margins. Instant, accurate information on fuel consumption and routes can mean the difference between winning a customer and letting them go to a competitor. Meanwhile, increasing levels of automation and onshore vessel control are presenting opportunities to further reduce operational expenditure.

Big data has the potential to underpin these cost savings and become the bedrock of future competitive advantage for shipping companies. The question remains, what are the true costs involved in setting it up and running the required systems? And what payoff can ship owners expect to gain from it over what time-frame? Big Data & Performance Management in Shipping 2015 will investigate the industry’s experiences of utilizing the data that the shipping industry has at hand including on board systems, satellite, AIS and weather information. It will also explore the possibilities for the future such as whether we will be able to access data on activity in ports and, if so, what can we do with it?

For Maersk to tap into SMAC, Big Data & Performance Management:

1.      Find out what other ship owners are looking to get out of their data and new systems

2.     Gain a clearer picture of the business case for using big data for performance improvement

3.     Learn how on board, AIS, weather and satellite data can be analysed to reduce fuel consumption

4.     See what major shipping companies are doing with predictive maintenance and what payoff they’re seeing from it

5.     Analysis of the future potential for data use for performance optimization

IT STRATEGY CASE STUDY FOR BANKING INDUSTRY IN INDIA

This case study was prepared as a part of the IT Strategy course taught by Prof. Sanjiv Mehta at SICSR

BACKGROUND:

Industrial Credit and Investment Corporation of India was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary.

In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

CASE FOR IT STRATEGY:

Analytic technology was not relevant for the old ICICI but it is now central to the banks growth and success. In the next decade, retail banking is expected to be one of India’s fastest growing markets.  Nearly 70% of the population is under 35 years of age according to the 2003 government census and banking services are a new phenomenon for most of the population.

ICICI is aiming to be in the domestic urban and rural markets where 70% of the population lives and to be the bank of choice for Indian’s living abroad in North America and Europe. ICICI is using analytics and information technology to accelerate new customer growth and manage its risk exposure. It has positioned itself as a high tech innovator with cost effective and convenient banking through online banking, ATMs and mobile phone banking.

 

HOW WAS IT STRATEGY IMPLEMENTED:

ICICI was the first bank in India to offer internet banking. In 2008 ICICI introduced iMobile banking wherein customers connect to the internet using their mobile phones to do transactions with the bank. With the growth in e-channels, branches are now more valuable to ICICI as points of sale for products.

Credit Analytics:

When ICICI created its first in-house analytics team in 2001, there were only 25 analysts whose sole responsibility was to track market conditions and delinquencies. India did not have a credit bureau until 2005, so when ICICI began developing its first predictive models, it had no external source of data on consumer credit behavior. Moreover because ICICI was new to the consumer banking market, it also did not have internal data. Therefore the first in house score cards were constructed without data.

Now ICICI has large internal databases and has refined its internal score cards which are used in credit card services, mortgage, auto and 2-wheeler bicycle lending. Better customer segmentations increase the banks precision and agility in monitoring delinquencies and adjusting credit lines. Segmentations are also used for transactions based target marketing programs and to forecast accurate foreclosure rates. New segmentations are being developed based on consumer behavior rather than static attributes.

Analytics has also been a powerful tool for ICICI to expand pre-approved credit line offers. An ATM based overdraft service for checking accounts is one of the bank’s most novel services. ICICI has also developed scores to monitor the risk behaviors of a single customer across multiple products. ICICI and other Indian banks have an edge over the foreign global banks competing for their slice of the new urban consumer class. The domestic banks advantage is even more pronounced in rural areas. Using technology and imagination, ICICI is coming up with radically different retail services for a radically different client.

Rural Lending:

Rural lending might include loans for growing crops or buying a buffalo as well as for education, health care and mortgages. Because there is no data, ICICI has been creative in characterizing the rural segments. For example, an affluent farmer is someone who purchases hi-tech equipment and has a large land holding whereas a normal farmer owns small plots of land and is often employed by an affluent farmer. ICICI is developing its micro-finance lending for as little as $100 and terms of payment are also personalized. For example, for a farmer it might be adjusted to the milk yield of a single buffalo.

ICICI is constantly investigating other ways to proliferate their banking presence. In fact, one of the key challenges for the future is how to create more convenient and low-cost access points for rural customers. Some ideas include partnering with the Indian postal service to place ATMs within their extensive infrastructure and integrating ATMs with vending machines.

Rural Kiosks:

ICICI has now set up additional partnerships with EID Parry, n-Logue, ITC e-Choupal and BASIX to take advantage of the rural kiosk network they each have established. Each partnership is designed to build on the unique strengths of each organization and to truly leverage their experience and relationships. These partner organizations receive in return the backing of the second largest bank in India to help expand their kiosk network. ICICI envisions setting up many more partnerships with MFIs and NGOs that have the expertise and passion for serving the rural poor.

Rural ATM:

The rural ATM machine, to be placed in the kiosks, is a simplified version of a regular ATM. With a simple interface and multiple languages, the rural ATM will be accessible by all and will be the conduit through which ICICI delivers banking services to the remote Indian countryside. It is currently in development in the lab of Dr. Ashok Jhunjhunwala and is expected to cost a meagre 3000 rupees or USD 600 versus the 80,000 rupees or USD 16,000 that it costs for a normal ATM machine. ICICI envisions placing this rural ATM in the kiosks their partners have already implemented.

Mobile ATM:

ICICI also is investigating the possibility of building a mobile ATM. The ATM machine would be installed in an ICICI-branded truck that would circulate through a number of villages on a specified, pre-determined route. Rural villagers would know when the ATM was coming to their village and would be able to take care of their banking needs on that day. With the mobile ATM, ICICI could serve a number of villages with limited capital outlay.

Smart Cards:

ICICI is also researching the possibility of implementing a smart card based payment system in order to eliminate the costs associated with cash handling. “The two key challenges that must be overcome to extend banking to the rural poor population are elimination / reduction of cash handling and innovation of low cost delivery channels.”  Smart cards effectively harness the technology advances of the new economy and apply it to the old economy. “By combining the features of a handy credit / debit card with the advantages of storage capacity, the smart card provides secure identification, a store of value and an ability to function off line while maintaining an audit trail of all the transactions.”

Smart cards were launched by ICICI in October 2000 by ICICI at Infosys Campus in Bangalore and at Manipal Academy of Higher Education to create a cashless economy. However, many problems exist with smart cards, such as high cost and lack of technological infrastructure for widespread adoption. The high cost is especially amplified at the rural level. However, ICICI is watching closely what BASIX is doing currently with smart card technology to see if it is cost effective and viable.

New Rural Initiatives:

With new initiatives such as rain insurance, venture capital, mobile ATMs and derivatives, ICICI is always testing, rolling out and then scaling up innovative ways to profitably serve the BOP.

ICICI Bank Pockets:

“Pockets” is a new offering from ICICI Bank and it offers all the features of an e-wallet with some additional features as well. 'Pockets' is a mobile application, which can be used to send money, pay utility bills, book movie tickets, send gifts and share expenses. One can use this service even if one doesn’t have an ICICI Bank account. With this app, one can also open a zero-balance account.

The Reserve Bank of India (RBI) is in the process of deciding on payments bank licenses, for which it has 41 applications.

Payments banks can accept deposits up to Rs.1,00,000, offer current and savings account deposits, issue debit cards and provide internet banking.

Explaining the rationale for calling it the ‘first digital mobile bank’, Rajiv Sabharwal, executive director, ICICI Bank said, “We have called it a bank because it can do much more than what an e-wallet does. It can actually function as a bank account. Going ahead, we are going to be adding a lot more features and services that are available in a bank otherwise.”

According to RBI regulations, the maximum amount a consumer can keep in the e-wallet is Rs.10,000. The upper limit on a transaction set by the bank is Rs.5,000.

With Pockets, ICICI Bank plans to target the youth segment and first-time banking customers. Currently, 50 per cent of the bank’s customers transact via the digital medium.

Between April-October, ICICI Bank has recorded transactions worth Rs.7,400 crore on its mobile banking platform.

USP OF IT STRATEGY:

The IT strategy at ICICI has been designed with the end customer in mind. They have tried to penetrate both the urban and the rural markets in India, designing specific products for both. They have been consistent first movers in the segment. They were first to offer internet banking, phone banking and mobile wallets. Their rural initiatives are also pioneering.

KEY OUTCOMES:

A product of India’s liberalization policies in 1990s, today ICICI has come a long way. ICICI is India’s largest private sector bank in market capitalization. It is India’s second largest bank in terms of assets. It is a growing international competitor with presence in 18 countries. In 2000, ICICI’s consumer banking business had a fewer than a million customers. By June 2006, that number had risen almost 10 fold to 9.5 million. Its asset base grew from around USD 2.5 million in 1996 to USD 80 billion in 2006 and to almost USD 100 billion by the end of March 2008. As of 2007, ICICI had a 30% market share overall in retail financing products including credit cards, mortgage lending and personal lending.

FUTURE IT STRATEGY:

Going in line with the customer segments that ICICI has developed, the future IT strategy could be divided into these segments:

Urban Retail Customer:

Analytics on a customer’s credit card spending could lead to a better understanding of the customer behavior and needs, helping the bank design customized credit offerings.

Rewards points on the use of credit cards could be en-cashed through petrol and diesel payment receipts (as is done by CITIBANK.)

Microcredit facilities for school and college drop-out students could help them in starting new business ventures.

 

Rural Retail Customer:

Linkages with AADHAR and RUPAY will help in reducing fraud and also in mobile payments in rural India. Government is experimenting with Direct Benefits Transfer with RUPAY linked bank accounts. This would overcome a significant hurdle in rural banking with regards to payments and receipts.

Investment Banking:

Develop algorithmic trading platforms for automated online trading based on mathematical models.

Develop high speed trading platforms for large organizations to trade.

International Markets (USA and Europe):

Explore the BITCOIN market and study its feasibility as a payment system.

OTHER TOP FIN-TECH DISRUPTORS:

HDFC Bank has started automatic loans processing through the use of machine learning and big data algorithms.

TradeLab (http://tradelab.in/)

Algorithmic trading platform, high speed trading platform and paper trading on simulated market competition

Metamako

Low latency trading platform. Metamako is a technology company that specializes in solutions for latency sensitive businesses. It was founded by Scott Newham, Dave Snowdon and Charles Thomas who have a background in ultra low-latency hardware, software and trading. 

Klarna

Klarna is one of Europe’s leading providers of payment solutions for e-commerce. 
Klarna separates buying from paying by allowing buyers to pay for ordered goods after receiving them, providing them with a safe after-delivery payment solution. Klarna also assumes all credit and fraud risk for e-stores, providing assurance to sellers that they will always receive payment. Klarna’s vision is to enable trust and to offer a frictionless buying experience to buyers and sellers across the world.

Square, Inc.

Square, Inc. is a financial services, merchant services aggregator and mobile payments company. The company markets several software and hardware products and services, including Square Register, Square Reader and Square Order. Using a free credit card reader on their iOS and Android device, Square Reader allows anyone to accept credit cards anywhere, anytime for a low transaction rate per swipe and no hidden fees. Square Register is a full point-of-sale system that allows businesses to accept payments, manage items and share menu and location information. Square Order lets people place orders for pickup from local businesses eg. shops and restaurants.

Kreditech

Kreditech uses big data and complex machine-learning algorithms to serve a simple mission: make faster, better credit decisions. Via its consumer platforms Kredito24 and Zaimo, individuals can apply online, mobile or via SMS and receive funds into their bank account, credit card or at an ATM in under 15 minutes. Kreditech's technology identifies and scores individuals in seconds based on 15,000 dynamic data points. Customers can apply for short or long-term loans and other financial products in seven countries worldwide.

Xero

Xero is the emerging leader in online accounting software, providing business owners with real-time visibility of their financial position in a way that’s simple, smart and secure. At its core Xero is an easy-to-use but powerful online accounting platform designed from the ground up for the cloud, not adapted from desktop software. For advisors such as accountants and bookkeepers, Xero forges a trusted relationship with clients through online collaboration.

REFERENCES:

1. Case study on ICICI Bank by Todd J. Markson and Michael Hokenson, University of Michigan Business School (Research Paper)

2. The Deciding Factor by John Nash and Larry Rosenberger (Book)

3.  Pockets: ICICI Bank’s answer to payments (The Business Standard)

http://www.business-standard.com/article/finance/pockets-icici-banks-answer-to-payments-banks-115021000859_1.html

4. FINTECHINNOVATORS.COM